Table of Contents

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 March 31, 2010
OR
 
¨ 	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934	
For the Transition Period from             to             

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

ACE LIMITED
(Incorporated in Switzerland)

Bärengasse 32
CH-8001 Zurich, Switzerland
(Address of principal executive offices, Zip Code)
Telephone +41 (0)43 456 76 00
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
                                                         YES   x                                                  NO   ¨
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
                                                         YES   x                                                  NO   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	 	x	 	 		  	Accelerated filer	 	¨	 	
Non-accelerated filer	 	¨	 	 		  	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 31.55 par value) outstanding as of May 4, 2010, was 338,660,899.

 

Table of Contents
 ACE LIMITED
INDEX TO FORM 10-Q

 	  	Page No.	
Part I.	 	FINANCIAL INFORMATION	  		
			
Item 1.	 	Financial Statements:	  		
			
	 	Consolidated Balance Sheets (Unaudited)
March 31, 2010, and December 31, 2009	  	3	
			
	 	Consolidated Statements of Operations and Comprehensive Income (Unaudited)
Three Months Ended March 31, 2010 and 2009	  	4	
			
	 	Consolidated Statements of Shareholders’ Equity (Unaudited)
Three Months Ended March 31, 2010 and 2009	  	5	
			
	 	Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2010 and 2009	  	7	
			
	 	Notes to the Interim Consolidated Financial Statements (Unaudited)	  		
	 	Note 1.	 	General	  	8	
	 	Note 2.	 	Significant accounting policies	  	8	
	 	Note 3.	 	Investments	  	9	
	 	Note 4.	 	Assumed life reinsurance programs involving minimum benefit guarantees under annuity contracts	  	17	
	 	Note 5.	 	Commitments, contingencies, and guarantees	  	18	
	 	Note 6.	 	Shareholders’ equity	  	26	
	 	Note 7.	 	Share-based compensation	  	27	
	 	Note 8.	 	Fair value measurements	  	27	
	 	Note 9.	 	Segment information	  	36	
	 	Note 10.	 	Earnings per share	  	40	
	 	Note 11.	 	Information provided in connection with outstanding debt of subsidiaries	  	41	
			
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	  	89	
			
Item 6.	 	Exhibits	  	89	
 
2

Table of Contents
ACE LIMITED
PART I FINANCIAL INFORMATION
 Item 1. Financial Statements
 ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)

 	  	March 31
2010	 	 	December 31
2009	 	
 	  	(in millions of U.S. dollars,
except share and per share data)	 	
Assets	  				 				
Investments	  				 				
Fixed maturities available for sale, at fair value (amortized cost – $39,603 and $38,985)
(includes hybrid financial instruments of $367 and $354)	  	$	40,564	 	 	$	39,525	 	
Fixed maturities held to maturity, at amortized cost (fair value – $3,433 and $3,561)	  	 	3,335	 	 	 	3,481	 	
Equity securities, at fair value (cost – $271 and $398)	  	 	316	 	 	 	467	 	
Short-term investments, at fair value and amortized cost	  	 	2,052	 	 	 	1,667	 	
Other investments (cost – $1,332 and $1,258)	  	 	1,472	 	 	 	1,375	 	
	  	 	 	 	 	 	 	 	
Total investments	  	 	47,739	 	 	 	46,515	 	
Cash	  	 	726	 	 	 	669	 	
Securities lending collateral	  	 	1,611	 	 	 	1,544	 	
Accrued investment income	  	 	517	 	 	 	502	 	
Insurance and reinsurance balances receivable	  	 	3,685	 	 	 	3,671	 	
Reinsurance recoverable on losses and loss expenses	  	 	13,335	 	 	 	13,595	 	
Reinsurance recoverable on policy benefits	  	 	303	 	 	 	298	 	
Deferred policy acquisition costs	  	 	1,517	 	 	 	1,445	 	
Value of business acquired	  	 	712	 	 	 	748	 	
Goodwill and other intangible assets	  	 	3,883	 	 	 	3,931	 	
Prepaid reinsurance premiums	  	 	1,646	 	 	 	1,521	 	
Deferred tax assets	  	 	1,174	 	 	 	1,154	 	
Investments in partially-owned insurance companies (cost – $315 and $314)	  	 	454	 	 	 	433	 	
Other assets	  	 	2,027	 	 	 	1,954	 	
	  	 	 	 	 	 	 	 	
Total assets	  	$	79,329	 	 	$	77,980	 	
	  	 	 	 	 	 	 	 	
Liabilities	  				 				
Unpaid losses and loss expenses	  	$	37,551	 	 	$	37,783	 	
Unearned premiums	  	 	6,437	 	 	 	6,067	 	
Future policy benefits	  	 	3,057	 	 	 	3,008	 	
Insurance and reinsurance balances payable	  	 	3,147	 	 	 	3,295	 	
Deposit liabilities	  	 	323	 	 	 	332	 	
Securities lending payable	  	 	1,639	 	 	 	1,586	 	
Payable for securities purchased	  	 	534	 	 	 	154	 	
Accounts payable, accrued expenses, and other liabilities	  	 	2,165	 	 	 	2,349	 	
Income taxes payable	  	 	223	 	 	 	111	 	
Short-term debt	  	 	150	 	 	 	161	 	
Long-term debt	  	 	3,158	 	 	 	3,158	 	
Trust preferred securities	  	 	309	 	 	 	309	 	
	  	 	 	 	 	 	 	 	
Total liabilities	  	 	58,693	 	 	 	58,313	 	
	  	 	 	 	 	 	 	 	
Commitments and contingencies	  				 				
Shareholders’ equity	  				 				
Common Shares (CHF 31.55 and CHF 31.88 par value, 340,158,641 and 337,841,616 shares issued, 338,610,718 and 336,524,657 shares outstanding)	  	 	10,470	 	 	 	10,503	 	
Common Shares in treasury (1,547,923 and 1,316,959 shares)	  	 	(27	) 	 	 	(3	) 	
Additional paid-in capital	  	 	5,494	 	 	 	5,526	 	
Retained earnings	  	 	3,573	 	 	 	2,818	 	
Deferred compensation obligation	  	 	2	 	 	 	2	 	
Accumulated other comprehensive income (AOCI)	  	 	1,126	 	 	 	823	 	
Common Shares issued to employee trust	  	 	(2	) 	 	 	(2	) 	
	  	 	 	 	 	 	 	 	
Total shareholders’ equity	  	 	20,636	 	 	 	19,667	 	
	  	 	 	 	 	 	 	 	
Total liabilities and shareholders’ equity	  	$	79,329	 	 	$	77,980	 	
	  	 	 	 	 	 	 	 	
See accompanying notes to the interim consolidated financial statements
 
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Table of Contents
 ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the three months ended March 31, 2010 and 2009
(Unaudited)

 	  	Three Months Ended
March 31	 	
 	  	    2010    	 	 	    2009    	 	
 	  	(in millions of U.S. dollars,
except per share data)	 	
Revenues	  				 				
Net premiums written	  	$	3,571	 	 	$	3,424	 	
Change in unearned premiums	  	 	(294	) 	 	 	(230	) 	
	  	 	 	 	 	 	 	 	
Net premiums earned	  	 	3,277	 	 	 	3,194	 	
Net investment income	  	 	504	 	 	 	502	 	
Net realized gains (losses):	  				 				
Other-than-temporary impairment (OTTI) losses gross	  	 	(50	) 	 	 	(192	) 	
Portion of OTTI losses recognized in other comprehensive income (OCI)	  	 	32	  	 	 	—  	  	
	  	 	 	 	 	 	 	 	
Net OTTI losses recognized in income	  	 	(18	) 	 	 	(192	) 	
Net realized gains (losses) excluding OTTI losses	  	 	186	 	 	 	71	 	
	  	 	 	 	 	 	 	 	
Total net realized gains (losses)	  	 	168	 	 	 	(121	) 	
	  	 	 	 	 	 	 	 	
Total revenues	  	 	3,949	 	 	 	3,575	 	
	  	 	 	 	 	 	 	 	
Expenses	  				 				
Losses and loss expenses	  	 	1,921	 	 	 	1,816	 	
Policy benefits	  	 	87	 	 	 	99	 	
Policy acquisition costs	  	 	554	 	 	 	481	 	
Administrative expenses	  	 	460	 	 	 	420	 	
Interest expense	  	 	52	 	 	 	53	 	
Other (income) expense	  	 	(4	) 	 	 	14	 	
	  	 	 	 	 	 	 	 	
Total expenses	  	 	3,070	 	 	 	2,883	 	
	  	 	 	 	 	 	 	 	
Income before income tax	  	 	879	 	 	 	692	 	
Income tax expense	  	 	124	 	 	 	125	 	
	  	 	 	 	 	 	 	 	
Net income	  	$	755	 	 	$	567	 	
	  	 	 	 	 	 	 	 	
Other comprehensive income (loss)	  				 				
Unrealized appreciation (depreciation)	  	$	583	 	 	$	(446	) 	
Reclassification adjustment for net realized (gains) losses included in net income	  	 	(129	) 	 	 	179	 	
	  	 	 	 	 	 	 	 	
	  	 	454	 	 	 	(267	) 	
Change in:	  				 				
Cumulative translation adjustment	  	 	(90	) 	 	 	(58	) 	
Pension liability	  	 	6	 	 	 	(4	) 	
	  	 	 	 	 	 	 	 	
Other comprehensive income (loss), before income tax	  	 	370	 	 	 	(329	) 	
Income tax (expense) benefit related to other comprehensive income items	  	 	(67	) 	 	 	99	 	
	  	 	 	 	 	 	 	 	
Other comprehensive income (loss)	  	 	303	 	 	 	(230	) 	
	  	 	 	 	 	 	 	 	
Comprehensive income	  	$	1,058	 	 	$	337	 	
	  	 	 	 	 	 	 	 	
Basic earnings per share	  	$	2.23	 	 	$	1.69	 	
	  	 	 	 	 	 	 	 	
Diluted earnings per share	  	$	2.22	 	 	$	1.69	 	
	  	 	 	 	 	 	 	 	
See accompanying notes to the interim consolidated financial statements
 
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Table of Contents
See accompanying notes to the interim consolidated financial statements
 
 ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the three months ended March 31, 2010 and 2009
(Unaudited)

 	  	Three Months Ended
March 31	 	
 	  	2010	 	 	2009	 	
 	  	(in millions of U.S.
dollars)	 	
Common Shares	  				 				
Balance – beginning of period	  	$	10,503	 	 	$	10,827	 	
Net shares issued under employee share-based compensation plans	  	 	70	 	 	 	68	 	
Exercise of stock options	  	 	2	 	 	 	1	 	
Dividends declared on Common Shares-par value reduction	  	 	(105	) 	 	 	(88	) 	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	10,470	 	 	 	10,808	 	
	  	 	 	 	 	 	 	 	
Common Shares in treasury	  				 				
Balance – beginning of period	  	 	(3	) 	 	 	(3	) 	
Common Shares issued in treasury, net of net shares redeemed under employee share-based compensation plans	  	 	(24	) 	 	 	2	 	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	(27	) 	 	 	(1	) 	
	  	 	 	 	 	 	 	 	
Additional paid-in capital	  				 				
Balance – beginning of period	  	 	5,526	 	 	 	5,464	 	
Net shares redeemed under employee share-based compensation plans	  	 	(68	) 	 	 	(79	) 	
Exercise of stock options	  	 	5	 	 	 	—  	  	
Share-based compensation expense	  	 	31	 	 	 	31	 	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	5,494	 	 	 	5,416	 	
	  	 	 	 	 	 	 	 	
Retained earnings	  				 				
Balance – beginning of period	  	 	2,818	 	 	 	74	 	
Net income	  	 	755	 	 	 	567	 	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	3,573	 	 	 	641	 	
	  	 	 	 	 	 	 	 	
Deferred compensation obligation	  				 				
Balance – beginning and end of period	  	$	2	 	 	$	3	 	

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Table of Contents
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (continued)
For the three months ended March 31, 2010 and 2009
(Unaudited)

 	  	Three Months Ended
March 31	 	
 	  	2010	 	 	2009	 	
 	  	(in millions of U.S.
dollars)	 	
Accumulated other comprehensive income (loss)	  				 				
Net unrealized appreciation (depreciation) on investments	  				 				
Balance – beginning of period	  	$	657	 	 	$	(1,712	) 	
Change in period, net of income tax (expense) benefit of $(105) and $78	  	 	349	 	 	 	(189	) 	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	1,006	 	 	 	(1,901	) 	
	  	 	 	 	 	 	 	 	
Cumulative translation adjustment	  				 				
Balance – beginning of period	  	 	240	 	 	 	(161	) 	
Change in period, net of income tax (expense) benefit of $40 and $20	  	 	(50	) 	 	 	(38	) 	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	190	 	 	 	(199	) 	
	  	 	 	 	 	 	 	 	
Pension liability adjustment	  				 				
Balance – beginning of period	  	 	(74	) 	 	 	(43	) 	
Change in period, net of income tax (expense) benefit of $(2) and $1	  	 	4	 	 	 	(3	) 	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	(70	) 	 	 	(46	) 	
	  	 	 	 	 	 	 	 	
Accumulated other comprehensive income (loss)	  	 	1,126	 	 	 	(2,146	) 	
	  	 	 	 	 	 	 	 	
Common Shares issued to employee trust	  				 				
Balance – beginning and end of period	  	 	(2	) 	 	 	(3	) 	
	  	 	 	 	 	 	 	 	
Total shareholders’ equity	  	$	20,636	 	 	$	14,718	 	
	  	 	 	 	 	 	 	 	
See accompanying notes to the interim consolidated financial statements
 
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Table of Contents
 ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2010 and 2009
(Unaudited)

 	  	Three Months
Ended March 31	 	
 	  	2010	 	 	2009	 	
 	  	(in millions of U.S.
dollars)	 	
Cash flows from operating activities	  				 				
Net income	  	$	755	 	 	$	567	 	
Adjustments to reconcile net income to net cash flows from operating activities	  				 				
Net realized (gains) losses	  	 	(168	) 	 	 	121	 	
Amortization of premiums/discounts on fixed maturities	  	 	30	 	 	 	2	 	
Deferred income taxes	  	 	(62	) 	 	 	(20	) 	
Unpaid losses and loss expenses	  	 	(90	) 	 	 	6	 	
Unearned premiums	  	 	394	 	 	 	339	 	
Future policy benefits	  	 	53	 	 	 	22	 	
Insurance and reinsurance balances payable	  	 	(122	) 	 	 	117	 	
Accounts payable, accrued expenses, and other liabilities	  	 	(104	) 	 	 	(68	) 	
Income taxes payable	  	 	115	 	 	 	54	 	
Insurance and reinsurance balances receivable	  	 	(65	) 	 	 	(405	) 	
Reinsurance recoverable on losses and loss expenses	  	 	172	 	 	 	60	 	
Reinsurance recoverable on policy benefits	  	 	(1	) 	 	 	(90	) 	
Deferred policy acquisition costs	  	 	(91	) 	 	 	(73	) 	
Prepaid reinsurance premiums	  	 	(139	) 	 	 	(109	) 	
Other	  	 	146	 	 	 	39	 	
	  	 	 	 	 	 	 	 	
Net cash flows from operating activities	  	 	823	 	 	 	562	 	
	  	 	 	 	 	 	 	 	
Cash flows used for investing activities	  				 				
Purchases of fixed maturities available for sale	  	 	(8,505	) 	 	 	(6,456	) 	
Purchases of to be announced mortgage-backed securities	  	 	(83	) 	 	 	(3,460	) 	
Purchases of fixed maturities held to maturity	  	 	(154	) 	 	 	(100	) 	
Purchases of equity securities	  	 	(11	) 	 	 	(152	) 	
Sales of fixed maturities available for sale	  	 	6,830	 	 	 	5,127	 	
Sales of to be announced mortgage-backed securities	  	 	83	 	 	 	3,469	 	
Sales of fixed maturities held to maturity	  	 	—  	  	 	 	1	 	
Sales of equity securities	  	 	183	 	 	 	153	 	
Maturities and redemptions of fixed maturities available for sale	  	 	814	 	 	 	821	 	
Maturities and redemptions of fixed maturities held to maturity	  	 	293	 	 	 	129	 	
Net derivative instruments settlements	  	 	(39	) 	 	 	37	 	
Other	  	 	(77	) 	 	 	(65	) 	
	  	 	 	 	 	 	 	 	
Net cash flows used for investing activities	  	 	(666	) 	 	 	(496	) 	
	  	 	 	 	 	 	 	 	
Cash flows used for financing activities	  				 				
Dividends paid on Common Shares	  	 	(105	) 	 	 	(91	) 	
Proceeds from exercise of options for Common Shares	  	 	7	 	 	 	1	 	
Proceeds from Common Shares issued under ESPP	  	 	5	 	 	 	5	 	
	  	 	 	 	 	 	 	 	
Net cash used for financing activities	  	 	(93	) 	 	 	(85	) 	
	  	 	 	 	 	 	 	 	
Effect of foreign currency rate changes on cash and cash equivalents	  	 	(7	) 	 	 	(4	) 	
	  	 	 	 	 	 	 	 	
Net increase (decrease) in cash	  	 	57	 	 	 	(23	) 	
Cash – beginning of period	  	 	669	 	 	 	867	 	
	  	 	 	 	 	 	 	 	
Cash – end of period	  	$	726	 	 	$	844	 	
	  	 	 	 	 	 	 	 	
See accompanying notes to the interim consolidated financial statements
 
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Table of Contents
 ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. General
ACE Limited (ACE or the Company) is a holding company incorporated in Zurich, Switzerland. The Company, through its various subsidiaries, provides a broad range of insurance and reinsurance products to insureds worldwide. ACE operates through the following business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life. Refer to Note 9.
The interim unaudited consolidated financial statements, which include the accounts of the Company and its subsidiaries, have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and, in the opinion of management, reflect all adjustments (consisting of normally recurring accruals) necessary for a fair statement of the results and financial position for such periods. All significant intercompany accounts and transactions have been eliminated. The results of operations and cash flows for any interim period are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the consolidated financial statements, and related notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
 2. Significant accounting policies
New accounting pronouncements
Adopted in the three months ended March 31, 2010
Consolidation of variable interest entities and accounting for transfers of financial assets
In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2009-16, Accounting for Transfers of Financial Assets (ASU 2009-16) and ASU No. 2009-17, Improvements to Financial Reporting by Enterprises Involved With Variable Interest Entities (ASU 2009-17). ASU 2009-16 amends Accounting Standards Codification (ASC) Topic 860, Transfers and Servicing , by removing the exemption from consolidation for qualifying special purpose entities. This statement also limits the circumstances in which a financial asset, or portion of a financial asset, should be derecognized when the transferor has not transferred the entire original financial asset to an entity that is not consolidated with the transferor in the financial statements being presented and/or when the transferor has continuing involvement with the transferred financial asset. ASU 2009-17 amends ASC Topic 810, Consolidation , to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. ASU 2009-16 and ASU 2009-17 were effective for interim and annual reporting periods beginning on January 1, 2010. The adoption of these provisions did not have a material impact on ACE’s financial condition or results of operations.
Fair value measurements and disclosures
In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements (ASU 2010-06). The provisions of ASU 2010-06 amend ASC Topic 820, Fair value measurements and Disclosures , (Topic 820) to require reporting entities to make new disclosures about recurring and nonrecurring fair value measurements including the amounts of and reasons for significant transfers into and out of Level 1 and Level 2 fair value measurements and separate disclosure of purchases, sales, issuances, and settlements in the reconciliation of Level 3 fair value measurements. ASU 2010-6 was effective for interim and annual reporting periods beginning after December 15, 2009, except for Level 3 reconciliation disclosures which are effective for interim and annual periods beginning after December 15, 2010.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
 3. Investments
a) Fixed maturities
The following tables present the fair values and amortized costs of and the gross unrealized appreciation (depreciation) related to fixed maturities as well as related OTTI recognized in AOCI.

 	  	March 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	  	$	3,651	  	$	53	  	$	(15	) 	 	$	3,689	  	$	—  	  	
Foreign	  	 	10,977	  	 	355	  	 	(67	) 	 	 	11,265	  	 	(31	) 	
Corporate securities	  	 	13,545	  	 	732	  	 	(107	) 	 	 	14,170	  	 	(39	) 	
Mortgage-backed securities	  	 	9,999	  	 	294	  	 	(314	) 	 	 	9,979	  	 	(249	) 	
States, municipalities, and political subdivisions	  	 	1,431	  	 	45	  	 	(15	) 	 	 	1,461	  	 	—  	  	
	  	 	 	  	 	 	  	 	 	 	 	 	 	  	 	 	 	
	  	$	39,603	  	$	1,479	  	$	(518	) 	 	$	40,564	  	$	(319	) 	
	  	 	 	  	 	 	  	 	 	 	 	 	 	  	 	 	 	
Held to maturity	  			  			  				 			  				
U.S. Treasury and agency	  	$	998	  	$	31	  	$	(1	) 	 	$	1,028	  	$	—  	  	
Foreign	  	 	25	  	 	1	  	 	—  	  	 	 	26	  	 	—  	  	
Corporate securities	  	 	311	  	 	12	  	 	(1	) 	 	 	322	  	 	—  	  	
Mortgage-backed securities	  	 	1,377	  	 	58	  	 	(8	) 	 	 	1,427	  	 	—  	  	
States, municipalities, and political subdivisions	  	 	624	  	 	8	  	 	(2	) 	 	 	630	  	 	—  	  	
	  	 	 	  	 	 	  	 	 	 	 	 	 	  	 	 	 	
	  	$	3,335	  	$	110	  	$	(12	) 	 	$	3,433	  	$	—  	  	

																		
 	  	December 31, 2009	 	
 	  	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	  	$	3,680	  	$	48	  	$	(19	) 	 	$	3,709	  	$	—  	  	
Foreign	  	 	10,960	  	 	345	  	 	(160	) 	 	 	11,145	  	 	(37	) 	
Corporate securities	  	 	12,707	  	 	658	  	 	(150	) 	 	 	13,215	  	 	(41	) 	
Mortgage-backed securities	  	 	10,058	  	 	239	  	 	(455	) 	 	 	9,842	  	 	(227	) 	
States, municipalities, and political subdivisions	  	 	1,580	  	 	52	  	 	(18	) 	 	 	1,614	  	 	—  	  	
	  	 	 	  	 	 	  	 	 	 	 	 	 	  	 	 	 	
	  	$	38,985	  	$	1,342	  	$	(802	) 	 	$	39,525	  	$	(305	) 	
	  	 	 	  	 	 	  	 	 	 	 	 	 	  	 	 	 	
Held to maturity	  			  			  				 			  				
U.S. Treasury and agency	  	$	1,026	  	$	33	  	$	(2	) 	 	$	1,057	  	$	—  	  	
Foreign	  	 	26	  	 	1	  	 	—  	  	 	 	27	  	 	—  	  	
Corporate securities	  	 	313	  	 	10	  	 	(1	) 	 	 	322	  	 	—  	  	
Mortgage-backed securities	  	 	1,440	  	 	39	  	 	(10	) 	 	 	1,469	  	 	—  	  	
States, municipalities, and political subdivisions	  	 	676	  	 	11	  	 	(1	) 	 	 	686	  	 	—  	  	
	  	 	 	  	 	 	  	 	 	 	 	 	 	  	 	 	 	
	  	$	3,481	  	$	94	  	$	(14	) 	 	$	3,561	  	$	—  	  	

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
As discussed in Note 3 c), if a credit loss is indicated on an impaired fixed maturity, an OTTI is considered to have occurred and the portion of the impairment not related to credit losses (non-credit OTTI) is recognized in OCI. Included in the “OTTI Recognized in AOCI” column 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 statement of comprehensive income. For the three months ended March 31, 2010, $63 million of net unrealized appreciation related to such securities is included in OCI. At March 31, 2010, and December 31, 2009, AOCI includes net unrealized depreciation of $156 million and $162 million, respectively, related to securities remaining in the investment portfolio at those dates for which ACE has recognized a non-credit OTTI.
The following table presents fixed maturities at March 31, 2010, and December 31, 2009, 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.

 	  	March 31
2010	  	December  31
2009	
 	  	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	  	$	1,426	  	$	1,494	  	$	1,354	  	$	1,352	
Due after 1 year through 5 years	  	 	14,468	  	 	14,940	  	 	14,457	  	 	14,905	
Due after 5 years through 10 years	  	 	10,515	  	 	10,953	  	 	9,642	  	 	10,067	
Due after 10 years	  	 	3,195	  	 	3,198	  	 	3,474	  	 	3,359	
	  	 	 	  	 	 	  	 	 	  	 	 	
	  	 	29,604	  	 	30,585	  	 	28,927	  	 	29,683	
Mortgage-backed securities	  	 	9,999	  	 	9,979	  	 	10,058	  	 	9,842	
	  	 	 	  	 	 	  	 	 	  	 	 	
	  	$	39,603	  	$	40,564	  	$	38,985	  	$	39,525	
	  	 	 	  	 	 	  	 	 	  	 	 	
Held to maturity; maturity period	  			  			  			  			
Due in 1 year or less	  	$	686	  	$	696	  	$	755	  	$	766	
Due after 1 year through 5 years	  	 	1,170	  	 	1,209	  	 	1,096	  	 	1,129	
Due after 5 years through 10 years	  	 	17	  	 	18	  	 	108	  	 	115	
Due after 10 years	  	 	85	  	 	83	  	 	82	  	 	82	
	  	 	 	  	 	 	  	 	 	  	 	 	
	  	 	1,958	  	 	2,006	  	 	2,041	  	 	2,092	
Mortgage-backed securities	  	 	1,377	  	 	1,427	  	 	1,440	  	 	1,469	
	  	 	 	  	 	 	  	 	 	  	 	 	
	  	$	3,335	  	$	3,433	  	$	3,481	  	$	3,561	
	  	 	 	  	 	 	  	 	 	  	 	 	
b) Equity securities
The following table presents the fair value and cost of and gross unrealized appreciation (depreciation) related to equity securities at March 31, 2010, and December 31, 2009.

 	  	March 31
2010	 	 	December 31
2009	 	
 	  	(in millions of U.S. dollars)	 	
Cost	  	$	271	 	 	$	398	 	
Gross unrealized appreciation	  	 	46	 	 	 	70	 	
Gross unrealized depreciation	  	 	(1	) 	 	 	(1	) 	
	  	 	 	 	 	 	 	 	
Fair value	  	$	316	 	 	$	467	 	

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
c) Net realized gains (losses)
The Company adopted provisions included in ASC Topic 320, Investments-Debt and Equity Securities , (Topic 320) related to the recognition and presentation of OTTI as at April 1, 2009. Under these provisions, when an OTTI related to a fixed maturity has occurred, ACE is required to record the OTTI in net income if the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security. Further, in cases where the Company does not intend to sell the security and it is more likely than not that it will not be required to sell the security, ACE must evaluate the security to determine the portion of the impairment, if any, related to credit losses. If a credit loss is indicated, an OTTI is considered to have occurred and any portion of the OTTI related to credit losses must be reflected in net income while the portion of OTTI related to all other factors is 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. For fixed maturities, prior to this adoption, ACE was required to record OTTI in net income unless the Company had the intent and ability to hold the impaired security to recovery. These provisions do not have any impact on the accounting for OTTI for any other type of investment.
Each quarter, the Company reviews its securities in an unrealized loss position (impaired securities), including fixed maturities, securities lending collateral, equity securities, and other investments, to identify those impaired securities to be specifically evaluated for a potential OTTI.
For impaired fixed maturities, the Company assesses OTTI based on the provisions of Topic 320 as described above. The factors that the Company considers when determining if a credit loss exists related to a fixed maturity are discussed in “Evaluation of potential credit losses related to fixed maturities” below. Prior to the adoption, when evaluating fixed maturities for OTTI, the Company principally considered its ability and intent to hold the impaired security to the expected recovery period, the issuer’s financial condition, and the Company’s assessment (using available market information such as credit ratings) of the issuer’s ability to make future scheduled principal and interest payments on a timely basis.
The Company reviews all non-fixed maturities for OTTI based on the following:
 
 	•	 	the amount of time a security has been in a loss position and the magnitude of the loss position;	
 
 	•	 	the period in which cost is expected to be recovered, if at all, based on various criteria including economic conditions and other issuer-specific developments; and	
 
 	•	 	the Company’s ability and intent to hold the security to the expected recovery period.	
ACE, as a general rule, also considers that equity securities in an unrealized loss position for twelve consecutive months are impaired.
Evaluation of potential credit losses related to fixed maturities
ACE reviews each fixed maturity in an unrealized loss position to assess whether the security is a candidate for credit loss. Specifically, ACE considers credit rating, market price, and issuer-specific financial information, among other factors, to assess the likelihood of collection of all principal and interest as contractually due. Securities for which ACE determines that credit loss is likely are subjected to further analysis to estimate the credit loss recognized in net income, if any. In general, credit loss recognized in net income equals the difference between the security’s amortized cost and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security. The specific methodologies and significant assumptions used by asset class are discussed below. All significant assumptions used in determining credit losses are subject to change as market conditions evolve.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
U.S. Treasury and agency obligations (including agency mortgage-backed securities), foreign government obligations, and states, municipalities, and political subdivisions obligations
U.S. Treasury and agency obligations (including agency mortgage-backed securities), foreign government obligations, and states, municipalities, and political subdivisions obligations represent less than $60 million of gross unrealized loss at March 31, 2010. These securities were evaluated for credit loss primarily using qualitative assessments of the likelihood of credit loss considering credit rating of the issuers and level of credit enhancement, if any. ACE concluded that the high level of credit worthiness of the issuers coupled with credit enhancement, where applicable, supports recognizing no credit loss in net income.
Corporate securities
Projected cash flows for corporate securities (principally senior unsecured bonds) are driven primarily by assumptions regarding probability of default and also the timing and amount of recoveries associated with defaults. ACE develops these estimates using information based on market observable data, issuer-specific information, and credit ratings. ACE developed its default assumption by using historical default data by Moody’s Investors Service (Moody’s) rating category to calculate a 1-in-100 year probability of default, which results in a default assumption in excess of the historical mean default rate. ACE believes that use of a default assumption in excess of the historical mean is reasonable in light of recent market conditions. The following table presents default assumptions by Moody’s rating category (historical mean default rate provided for comparison).

Moody’s Rating Category	  	1-in-100 Year
Default Rate	 	 	Historical Mean
Default Rate	 	
Investment Grade:	  			 			
Aaa-Baa	  	0.0%-1.4	% 	 	0.0%-0.3	% 	
			
Below Investment Grade:	  			 			
Ba	  	4.8	% 	 	1.1	% 	
B	  	12.8	% 	 	3.4	% 	
Caa-C	  	51.6	% 	 	13.1	% 	
Consistent with management’s approach to developing default rate assumptions considering recent market conditions, ACE assumed a 25 percent recovery rate (the par value of a defaulted security that will be recovered) across all rating categories rather than using Moody’s historical mean recovery rate of 40 percent. ACE believes that use of a recovery rate assumption lower than the historical mean is reasonable in light of recent market conditions.
Application of the methodology and assumptions described above resulted in credit losses recognized in net income for corporate securities for the three months ended March 31, 2010, of $1 million, all of which relate to below investment grade securities.
Mortgage-backed securities
For mortgage-backed securities, credit impairment is assessed using a cash flow model that estimates the cash flows on the underlying mortgages, using the security-specific collateral and transaction structure. The model estimates cash flows from the underlying mortgage loans and distributes those cash flows to various tranches of securities, considering the transaction structure and any subordination and credit enhancements that exist in that structure. The cash flow model incorporates actual cash flows on the mortgage-backed securities through the current period and then projects the remaining cash flows using a number of assumptions, including default rates, prepayment rates, and loss severity rates (the par value of a defaulted security that will not be recovered) on foreclosed properties.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
ACE develops specific assumptions using market data, where available, and includes internal estimates as well as estimates published by rating agencies and other third-party sources. ACE projects default rates by mortgage sector considering current underlying mortgage loan performance, generally assuming:
 
 	•	 	lower loss severity for Prime sector bonds versus ALT-A, Sub-prime, and Option ARM sector bonds; and	
 
 	•	 	lower loss severity for older vintage securities versus more recent vintage securities, which reflects the recent decline in underwriting standards. 	
These estimates are extrapolated along a default timing curve to estimate the total lifetime pool default rate. Other assumptions used contemplate the actual collateral attributes, including geographic concentrations, rating agency loss projections, rating actions, and current market prices. If cash flow projections indicate that losses will exceed the credit enhancement for a given tranche, then the Company does not expect to recover its amortized cost basis and recognizes an estimated credit loss in net income.
The following table presents the significant assumptions used to estimate future cash flows for specific mortgage-backed securities evaluated for  potential credit loss at March 31, 2010, by sector and vintage.
Range of Significant Assumptions Used

Sector (1)	  	Vintage	  	Default Rate (2)	 	 	Loss Severity
Rate (2)	 	
Prime	  	2004	  	15-42	% 	 	39-46	% 	
	  	2005	  	22-49	% 	 	36-56	% 	
	  	2006	  	32-64	% 	 	47-58	% 	
	  	2007	  	31-86	% 	 	52-61	% 	

ALT-A	  	2004	  	29	%  	 	50	%  	
	  	2005	  	25-51	% 	 	33-64	% 	
	  	2006	  	54-89	% 	 	60-71	% 	
	  	2007	  	32-61	% 	 	57-70	% 	

Option ARM	  	2004	  	52	%  	 	50	%  	
	  	2005	  	64-86	% 	 	61-62	% 	
	  	2006	  	72-82	% 	 	61-70	% 	
	  	2007	  	69-83	% 	 	58-69	% 	

Sub-prime	  	2004	  	59	%  	 	64	%  	
	  	2005	  	73	%  	 	78	%  	
	  	2006	  	79-81	% 	 	79-86	% 	
	  	2007	  	81-86	% 	 	55-83	% 	

(1)	Prime, ALT-A, and Sub-prime sector bonds are categorized based on credit worthiness of the borrower. Option ARM sector bonds are categorized based on the type of mortgage product, rather than credit worthiness of the borrower.	
( 2 )	Default rate and loss severity rate assumptions vary within a given sector and vintage depending upon the geographic concentration of the collateral underlying the bond and the level of serious delinquencies, among other factors.	
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
Application of the methodology and assumptions described above resulted in credit losses recognized in net income for mortgage-backed securities for the three months ended March 31, 2010, of $17 million. Given the variation in ratings between major rating agencies for the securities for which a credit loss was recognized in net income, ACE does not believe it is useful to provide the credit loss split between investment grade and below investment grade.
The following table presents, for the periods indicated, the Net realized gains (losses) and the losses included in Net realized gains (losses) and OCI as a result of conditions which caused the Company to conclude the decline in fair value of certain investments was “other-than-temporary”. The impairments recorded in net income related to fixed maturities for the three months ended March 31, 2010, were credit-related.

 	  	Three Months Ended
March 31	 	
 	  	    2010    	 	 	    2009    	 	
 	  	(in millions of U.S.
dollars)	 	
Fixed maturities:	  				 				
OTTI on fixed maturities, gross	  	$	(50	) 	 	$	(88	) 	
OTTI on fixed maturities recognized in OCI (pre-tax)	  	 	32	  	 	 	—  	  	
	  	 	 	 	 	 	 	 	
OTTI on fixed maturities, net	  	 	(18	) 	 	 	(88	) 	
Gross realized gains excluding OTTI	  	 	168	 	 	 	151	  	
Gross realized losses excluding OTTI	  	 	(69	) 	 	 	(111	) 	
	  	 	 	 	 	 	 	 	
Total fixed maturities	  	 	81	 	 	 	(48	) 	

Equity securities:	  				 				
OTTI on equity securities	  	 	—  	  	 	 	(25	) 	
Gross realized gains excluding OTTI	  	 	45	 	 	 	4	  	
Gross realized losses excluding OTTI	  	 	—  	  	 	 	(79	) 	
	  	 	 	 	 	 	 	 	
Total equity securities	  	 	45	 	 	 	(100	) 	
	  	 	 	 	 	 	 	 	
OTTI on other investments	  	 	—  	  	 	 	(79	) 	
Foreign exchange gains (losses)	  	 	(9	) 	 	 	32	 	
Investment and embedded derivative instruments	  	 	19	 	 	 	55	 	
Fair value adjustments on insurance derivative	  	 	96	 	 	 	(1	) 	
S&P put options and futures	  	 	(59	) 	 	 	25	 	
Other derivative instruments	  	 	(9	) 	 	 	(27	) 	
Other	  	 	4	 	 	 	22	 	
	  	 	 	 	 	 	 	 	
Net realized gains (losses)	  	$	168	 	 	$	(121	) 	

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
The following table presents, for the three months ended March 31, 2010, 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
March 31, 2010	 	
 	  	(in millions of U.S.
dollars)	 	
Balance of credit losses related to securities still held-beginning of period	  	$	174	 	
Additions where no OTTI was previously recorded	  	 	17	 	
Additions where an OTTI was previously recorded	  	 	1	 	
Reductions for securities sold during the period	  	 	(29	) 	
	  	 	 	 	
Balance of credit losses related to securities still held-end of period	  	$	163	 	
	  	 	 	 	
d) Gross unrealized loss
At March 31, 2010, there were 3,301 fixed maturities out of a total of 18,770 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $25 million. Credit spreads continued to tighten through the first quarter of 2010, resulting in a decrease in the gross unrealized losses in the investment portfolio. Fixed maturities in an unrealized loss position at March 31, 2010, were comprised of both investment grade and below investment grade securities for which fair value declined primarily due to widening credit spreads since the date of purchase and included non-agency mortgage-backed securities that suffered a decline in value since their original date of purchase.
The following tables present, for all securities in an unrealized loss position at March 31, 2010, and December 31, 2009 (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)	 	
March 31, 2010	  			  				 			  				 			  				
U.S. Treasury and agency	  	$	1,597	  	$	(14.8	) 	 	$	34	  	$	(1.2	) 	 	$	1,631	  	$	(16.0	) 	
Foreign	  	 	2,433	  	 	(47.2	) 	 	 	291	  	 	(20.0	) 	 	 	2,724	  	 	(67.2	) 	
Corporate securities	  	 	1,828	  	 	(26.3	) 	 	 	601	  	 	(81.3	) 	 	 	2,429	  	 	(107.6	) 	
Mortgage-backed securities	  	 	1,410	  	 	(17.6	) 	 	 	1,315	  	 	(304.8	) 	 	 	2,725	  	 	(322.4	) 	
States, municipalities, and political subdivisions	  	 	476	  	 	(12.4	) 	 	 	58	  	 	(4.1	) 	 	 	534	  	 	(16.5	) 	
	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
Total fixed maturities	  	 	7,744	  	 	(118.3	) 	 	 	2,299	  	 	(411.4	) 	 	 	10,043	  	 	(529.7	) 	
Equity securities	  	 	5	  	 	(1.0	) 	 	 	1	  	 	(0.2	) 	 	 	6	  	 	(1.2	) 	
Other investments	  	 	—  	  	 	—  	  	 	 	60	  	 	(11.6	) 	 	 	60	  	 	(11.6	) 	
	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
Total	  	$	7,749	  	$	(119.3	) 	 	$	2,360	  	$	(423.2	) 	 	$	10,109	  	$	(542.5	) 	

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

 	  	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, 2009	  			  				 			  				 			  				
U.S. Treasury and agency	  	$	1,952	  	$	(19.4	) 	 	$	21	  	$	(1.1	) 	 	$	1,973	  	$	(20.5	) 	
Foreign	  	 	2,568	  	 	(124.0	) 	 	 	363	  	 	(36.4	) 	 	 	2,931	  	 	(160.4	) 	
Corporate securities	  	 	1,222	  	 	(52.3	) 	 	 	865	  	 	(99.1	) 	 	 	2,087	  	 	(151.4	) 	
Mortgage-backed securities	  	 	1,731	  	 	(54.8	) 	 	 	1,704	  	 	(409.7	) 	 	 	3,435	  	 	(464.5	) 	
States, municipalities, and political subdivisions	  	 	455	  	 	(13.9	) 	 	 	60	  	 	(5.0	) 	 	 	515	  	 	(18.9	) 	
	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
Total fixed maturities	  	 	7,928	  	 	(264.4	) 	 	 	3,013	  	 	(551.3	) 	 	 	10,941	  	 	(815.7	) 	
Equity securities	  	 	111	  	 	(1.3	) 	 	 	—  	  	 	—  	  	 	 	111	  	 	(1.3	) 	
Other investments	  	 	81	  	 	(16.4	) 	 	 	—  	  	 	—  	  	 	 	81	  	 	(16.4	) 	
	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
Total	  	$	8,120	  	$	(282.1	) 	 	$	3,013	  	$	(551.3	) 	 	$	11,133	  	$	(833.4	) 	
	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
e) Restricted assets
The Company is required to maintain assets on deposit with various regulatory authorities to support its insurance and reinsurance operations. These requirements are generally promulgated in the statutory regulations of the individual jurisdictions. The assets on deposit are available to settle insurance and reinsurance liabilities. The Company also utilizes trust funds in certain large 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. The Company also has investments in segregated portfolios primarily to provide collateral or guarantees for LOCs and derivative transactions. Included in restricted assets at March 31, 2010, are fixed maturities and short-term investments totaling $12.3 billion and cash of $117 million. The following table presents the components of the restricted assets at March 31, 2010, and December 31, 2009.

 	  	March 31
2010	  	December 31
2009	
 	  	(in millions of U.S. dollars)	
Trust funds	  	$	8,401	  	$	8,047	
Deposits with non-U.S. regulatory authorities	  	 	2,437	  	 	2,475	
Deposits with U.S. regulatory authorities	  	 	1,326	  	 	1,199	
Other pledged assets	  	 	247	  	 	245	
	  	 	 	  	 	 	
	  	$	12,411	  	$	11,966	

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NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
 4. Assumed life reinsurance programs involving minimum benefit guarantees under annuity contracts
The following table presents income and expenses relating to guaranteed minimum death benefits (GMDB) and guaranteed minimum income benefits (GMIB) reinsurance for the periods indicated.

 	  	Three Months Ended
March 31	 	
 	  	2010	  	2009	 	
 	  	(in millions of U.S. dollars)	 	
GMDB	  			  				
Net premiums earned	  	$	29	  	$	23	 	
Policy benefits	  	$	24	  	$	44	 	
GMIB	  			  				
Net premiums earned	  	$	41	  	$	40	 	
Policy benefits	  	 	7	  	 	2	 	
Realized gains (losses)	  	 	96	  	 	(1	) 	
	  	 	 	  	 	 	 	
Gain (loss) recognized in income	  	$	130	  	$	37	 	
			
Net cash received (disbursed)	  	$	40	  	$	40	 	
Net (increase) decrease in liability	  	$	90	  	$	(3	) 	
At March 31, 2010, reported liabilities for GMDB and GMIB reinsurance were $209 million and $469 million, respectively, compared with $212 million and $559 million, respectively, at December 31, 2009. The reported liability for GMIB reinsurance of $469 million at March 31, 2010, and $559 million at December 31, 2009, includes a fair value derivative adjustment of $347 million and $443 million, respectively. Reported liabilities for both GMDB and GMIB reinsurance are determined using internal valuation models. Such valuations require considerable judgment and are subject to significant uncertainty. The valuation of these products is subject to fluctuations arising from, among other factors, changes in interest rates, changes in equity markets, changes in credit markets, changes in the allocation of the investments underlying annuitant’s account values, and assumptions regarding future policyholder behavior. These models and the related assumptions are continually reviewed by management and enhanced, as appropriate, based upon improvements in modeling assumptions and availability of more information, such as market conditions and demographics of in-force annuities.
GMDB reinsurance
At March 31, 2010, and December 31, 2009, the Company’s net amount at risk from its GMDB reinsurance programs was $3.5 billion and $3.8 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 (March 31, 2010, and December 31, 2009, 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 three to four percent.	
At March 31, 2010, if all of the Company’s cedants’ policyholders covered under GMDB reinsurance agreements were to die immediately, the total claim amount payable by the Company, taking into account all appropriate claims limits, would be approximately $1.2 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.
 
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NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
GMIB reinsurance
At March 31, 2010, and December 31, 2009, the Company’s net amount at risk from its GMIB reinsurance programs was $615 million and $683 million, respectively. For GMIB 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 (March 31, 2010, and December 31, 2009, respectively);	
 	•	 	there are no deaths, lapses, or withdrawals;	
 	•	 	policyholders annuitize at a frequency most disadvantageous to ACE (in other words, annuitization at a level that maximizes claims taking into account the treaty limits) under the terms of the Company’s reinsurance contracts;	
 	•	 	for annuitizing policyholders, the GMIB claim is calculated using interest rates in line with those used in calculating the reserve; and	
 	•	 	future claims are discounted in line with the discounting assumption used in the calculation of the benefit reserve averaging between one to two percent.	
The average attained age of all policyholders under all benefits reinsured, weighted by the guaranteed value of each reinsured policy, is approximately 66.
 5. Commitments, contingencies, and guarantees
a) Derivative instruments
Derivative instruments employed
The Company maintains positions in derivative instruments such as futures, options, swaps, and foreign currency forward contracts for which the primary purposes are to manage duration and foreign currency exposure, yield enhancement, or to obtain an exposure to a particular financial market. Along with convertible bonds and to be announced mortgage-backed securities (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, the Company purchases TBAs as part of its investing activities. These securities are included within the Company’s fixed maturities available for sale (FM AFS) portfolio.
Under reinsurance programs covering living benefit guarantees, the Company assumes the risk of GMIBs associated with variable annuity contracts. The GMIB risk is triggered if, at the time the contract holder elects to convert the accumulated account value to a periodic payment stream (annuitize), the accumulated account value is not sufficient to provide a guaranteed minimum level of monthly income. The Company’s GMIB reinsurance product meets the definition of a derivative instrument. Benefit reserves in respect of GMIBs are classified as Future policy benefits (FPB) while the fair value derivative adjustment is classified within Accounts payable, accrued expenses, and other liabilities (AP). The Company also maintains positions in exchange-traded equity futures contracts and options on equity market futures to limit equity and interest rate exposure in the GMDB and GMIB block of business.
In relation to certain long- and short-term debt issuances, the Company 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. ACE buys credit default swaps to mitigate global credit risk exposure, primarily related to reinsurance recoverable.
 
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(Unaudited)
 
The Company carries all derivative instruments at fair value with changes in fair value recorded in Net realized gains (losses) in the consolidated statements of operations. None of the derivative instruments are used as hedges for accounting purposes.
The following table presents the balance sheet locations, fair values in an asset or (liability) position, and notional values/payment provisions of the Company’s derivative instruments at March 31, 2010, and December 31, 2009.

 	  	 	  	March 31, 2010	  	December 31, 2009	
 	  	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	  	$	4	 	 	$	539	  	$	6	 	 	$	393	
Futures contracts on money market instruments	  	AP	  	 	6	 	 	 	2,782	  	 	4	 	 	 	4,711	
Futures contracts on notes and bonds	  	AP	  	 	1	 	 	 	629	  	 	(2	) 	 	 	500	
Options on money market instruments	  	AP	  	 	—  	  	 	 	1,024	  	 	—  	  	 	 	200	
Options on notes and bonds futures	  	AP	  	 	—  	  	 	 	124	  	 	(1	) 	 	 	305	
Convertible bonds	  	FM AFS	  	 	367	 	 	 	946	  	 	354	 	 	 	725	
TBAs	  	FM AFS	  	 	11	 	 	 	10	  	 	11	 	 	 	10	
	  		  	 	 	 	 	 	 	  	 	 	 	 	 	 	
	  		  	$	389	 	 	$	6,054	  	$	372	 	 	$	6,844	
	  		  	 	 	 	 	 	 	  	 	 	 	 	 	 	
Other derivative instruments	  		  				 			  				 			
Futures contracts on equities	  	AP	  	$	(19	) 	 	$	998	  	$	(9	) 	 	$	960	
Options on equity market futures	  	AP	  	 	48	 	 	 	250	  	 	56	 	 	 	250	
Interest rate swaps	  	AP	  	 	(28	) 	 	 	500	  	 	(24	) 	 	 	500	
Credit default swaps	  	AP	  	 	1	 	 	 	350	  	 	2	 	 	 	350	
Other	  	AP	  	 	13	 	 	 	30	  	 	12	 	 	 	37	
	  		  	 	 	 	 	 	 	  	 	 	 	 	 	 	
	  		  	$	15	 	 	$	2,128	  	$	37	 	 	$	2,097	

GMIB (1)	  	AP/FPB	  	$	(469	) 	 	$	615	  	$	(559	) 	 	$	683	

(1)	Note that the payment provision related to GMIB is the net amount at risk. The concept of a notional value does not apply to the GMIB reinsurance contracts.	
 
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NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
The following table presents net realized gains (losses) related to derivative instrument activity in the consolidated statement of operations for the periods indicated.

 	  	Three Months Ended
March 31	 	
 	  	2010	 	 	2009	 	
 	  	(in millions of U.S. dollars)	 	
Investment and embedded derivative instruments	  				 				
Foreign currency forward contracts	  	$	13	 	 	$	21	 	
All other futures contracts and options	  	 	8	 	 	 	14	 	
Convertible bonds	  	 	(2	) 	 	 	19	 	
TBAs	  	 	—  	  	 	 	1	 	
	  	 	 	 	 	 	 	 	
	  	$	19	 	 	$	55	 	
	  	 	 	 	 	 	 	 	
GMIB and other derivative instruments	  				 				
GMIB	  	$	96	 	 	$	(1	) 	
Futures contracts on equities	  	 	(51	) 	 	 	(13	) 	
Options on equity market futures	  	 	(8	) 	 	 	38	 	
Interest rate swaps	  	 	(9	) 	 	 	(25	) 	
Credit default swaps	  	 	—  	  	 	 	(3	) 	
Other	  	 	—  	  	 	 	1	 	
	  	 	 	 	 	 	 	 	
	  	$	28	 	 	$	(3	) 	
	  	 	 	 	 	 	 	 	
	  	$	47	 	 	$	52	 	
	  	 	 	 	 	 	 	 	
Credit risk-related contingent features
Certain of the Company’s derivative instruments contain provisions that impact the amount of collateral that ACE is required to post and that allow the contract counterparty to cancel the contract contingent on the Company’s, and in certain cases subsidiaries of the Company’s, senior debt ratings (Ratings). The aggregate fair value of derivative instruments in a liability position with credit risk-related contingent features at March 31, 2010, was $27 million. In connection with these contracts, ACE has posted collateral of $17 million at March 31, 2010. The amount of collateral that ACE is required to post under these contracts would increase should the Company’s Ratings deteriorate. At March 31, 2010, the maximum amount of collateral that the Company would be required to post in respect of these derivative instruments, based on the contractual Ratings-based scales, is $27 million. If ACE’s Ratings fall to BBB- as measured by Standard and Poor’s (S&P) or Baa3 as measured by Moody’s, the contract counterparties would be able to cancel the contracts and they would be settled at fair value on the date of cancellation.
Derivative instrument objectives
(i) Foreign currency exposure management
The Company uses foreign currency forward contracts (forwards) to minimize the effect of fluctuating foreign currencies. The forwards purchased are not specifically identifiable against cash, any single security, or groups of securities denominated in those currencies and, therefore, do not qualify as hedges for financial reporting purposes.
 
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(Unaudited)
 
(ii) Duration management and market exposure
Futures
Futures contracts give the holder the right and obligation to participate in market movements, determined by the index or underlying security on which the futures contract is based. Settlement is made daily in cash by an amount equal to the change in value of the futures contract times a multiplier that scales the size of the contract. Exchange-traded bond and note futures contracts are used in fixed maturity portfolios as substitutes for ownership of the bonds and notes without significantly increasing the risk in the portfolio. Investments in futures contracts may be made only to the extent that there are assets under management not otherwise committed. Exchange-traded equity futures contracts are used to limit exposure to a severe equity market decline, which would cause an increase in expected claims and therefore, reserves for GMDB and GMIB reinsurance business.
Options
An option contract conveys to the holder the right, but not the obligation, to purchase or sell a specified amount or value of an underlying security at a fixed price. Option contracts are used in the investment portfolio as protection against unexpected shifts in interest rates, which would affect the duration of the fixed maturity portfolio. By using options in the portfolio, the overall interest rate sensitivity of the portfolio can be reduced. Option contracts may also be used as an alternative to futures contracts in the Company’s synthetic strategy as described above. Another use for option contracts is to limit exposure to a severe equity market decline, which would cause an increase in expected claims and therefore, reserves for GMDB and GMIB reinsurance business. The price of an option is influenced by the underlying security, expected volatility, time to expiration, and supply and demand.
The credit risk associated with the above derivative financial instruments relates to the potential for non-performance by counterparties. Although non-performance is not anticipated, in order to minimize the risk of loss, management monitors the credit worthiness of its counterparties. The performance of exchange-traded instruments is guaranteed by the exchange on which they trade. For non-exchange-traded instruments, the counterparties are principally banks which must meet certain criteria according to the Company’s investment guidelines.
Interest rate swaps
An interest rate swap is a contract between two counterparties in which interest payments are made based on a notional principal amount, which itself is never paid or received. Under the terms of an interest rate swap, one counterparty makes interest payments based on a fixed interest rate and the other counterparty’s payments are based on a floating rate. Interest rate swap contracts are used occasionally in the investment portfolio as protection against unexpected shifts in interest rates, which would affect the fair value of the fixed maturity portfolio. By using interest rate swaps in the portfolio, the overall duration or interest rate sensitivity of the portfolio can be reduced. The Company also employs interest rate swaps related to certain debt 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
 
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NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
protection seller pays the protection buyer the difference between the fair value of assets and the principal amount. The Company has purchased a credit default swap to mitigate its global credit risk exposure to one of its 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. The Company purchases convertible bonds for their total return and not specifically for the conversion feature.
(iv) TBA
By acquiring a TBA, the Company makes a commitment to purchase a future issuance of mortgage-backed securities. For the period between purchase of the TBA and issuance of the underlying security, the Company’s position is accounted for as a derivative in the consolidated financial statements. The Company purchases TBAs both for their total return and for the flexibility they provide related to ACE’s mortgage-backed security strategy.
(v) GMIB
Under the GMIB program, as the assuming entity, the Company is obligated to provide coverage until the expiration of the underlying annuities. Premiums received under the reinsurance treaties are classified as premium. Expected losses allocated to premiums received are classified as future policy benefits and valued similar to GMDB reinsurance. Other changes in fair value, principally arising from changes in expected losses allocated to expected future premiums, are classified as Net realized gains (losses). Fair value represents exit price and thus, includes a risk margin. The Company may recognize a realized loss for other changes in fair value due to adverse changes in the capital markets (i.e., declining interest rates and/or declining equity markets) and changes in policyholder behavior (i.e., increased annuitization or decreased lapse rates) although the Company expects the business to be profitable. The Company believes this presentation provides the most meaningful disclosure of changes in the underlying risk within the GMIB reinsurance programs for a given reporting period.
b) Other investments
Included in Other investments are investments in limited partnerships and partially-owned investment companies with a carrying value of $949 million. In connection with these investments, the Company has commitments that may require funding of up to $669 million over the next several years.
c) Taxation
The Internal Revenue Service (IRS) completed its field examination of the Company’s federal tax returns for 2002, 2003, and 2004 during the third quarter of 2007, and has proposed several adjustments principally involving transfer pricing and other insurance-related tax deductions. The Company subsequently filed a written protest with the IRS and the case is currently being reviewed by the IRS Appeals Division. The Company expects the appeals process to be completed within the next 12 months. The IRS is currently conducting an examination of the Company’s 2005 through 2007 tax returns and the examination is expected to be completed during 2010. While it is reasonably possible that a significant change in the Company’s unrecognized tax benefits could occur in the next 12 months, the Company believes that the outcome of the appeal and the current examination will not have a material impact on ACE’s financial condition. With few exceptions, the Company’s significant U.K. subsidiaries remain subject to examination for tax years 2007 and later.
 
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(Unaudited)
 
d) Legal proceedings
(i) Claims and other litigation
The Company’s insurance subsidiaries are subject to claims litigation involving disputed interpretations of policy coverage and, in some jurisdictions, direct actions by allegedly-injured persons seeking damages from policyholders. These lawsuits, involving claims on policies issued by the Company’s subsidiaries, which are typical to the insurance industry in general and in the normal course of business, are considered in the Company’s loss and loss expense reserves. In addition to claims litigation, the Company and its subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from, or directly relate to, claims on insurance policies. This category of business litigation typically involves, amongst other things, allegations of underwriting errors or misconduct, employment claims, regulatory activity, or disputes arising from business ventures. In the opinion of ACE’s management, ACE’s ultimate liability for these matters is not likely to have a material adverse effect on ACE’s consolidated financial condition, although it is possible that the effect could be material to ACE’s consolidated results of operations for an individual reporting period.
(ii) Business practices litigation
Beginning in 2004, ACE and its subsidiaries and affiliates received numerous subpoenas, interrogatories, and civil investigative demands in connection with certain investigations of insurance industry practices. These inquiries were issued by a number of attorneys general, state departments of insurance, and other authorities, including the New York Attorney General (NYAG) and the Pennsylvania Insurance Department. Such inquiries concerned underwriting practices and non-traditional or loss mitigation insurance products.
On April 25, 2006, ACE reached a settlement with the Attorneys General of New York, Illinois, and Connecticut and the New York Insurance Department pursuant to which ACE received from these authorities an Assurance of Discontinuance. On May 9, 2007, ACE and the Pennsylvania Insurance Department (Department) and the Pennsylvania Office of Attorney General (OAG) entered into a settlement agreement. This settlement agreement resolved the issues raised by the Department and the OAG arising from their investigation of ACE’s underwriting practices and contingent commission payments. On October 24, 2007, ACE entered into a settlement agreement with the Attorneys General of Florida, Hawaii, Maryland, Massachusetts, Michigan, Oregon, Texas, West Virginia, the District of Columbia, and the Florida Department of Financial Services and Office of Insurance Regulation. The agreement resolved investigations of ACE’s underwriting practices and contingent commission payments.
In June 2008, in an action filed by the NYAG against another insurer, a New York court held that “[c]ontingent commission agreements between brokers and insurers are not illegal, and, in the absence of a special relationship between parties, defendants[s] had no duty to disclose the existence of the contingent commission agreement.” New York v. Liberty Mut. Ins. Co. , 52 A.D. 3d 378, 379 (2008) (citing Hersch v. DeWitt Stern Group, Inc. , 43 A.D. 3d 644, 645 (2007). In February 2010, the NYAG amended its agreement with the country’s three largest insurance brokers, eliminating the ban on contingent commissions that was levied in 2005.
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.
 
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NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
In the commercial insurance complaint, the plaintiffs named ACE, ACE INA Holdings, Inc., ACE USA, Inc., ACE American Insurance Co., Illinois Union Insurance Co., and Indemnity Insurance Co. of North America. They allege that certain brokers and insurers, including certain ACE entities, conspired to increase premiums and allocate customers through the use of “B” quotes and contingent commissions. In addition, the complaints allege that the broker defendants received additional income by improperly placing their clients’ business with insurers through related wholesale entities that acted as intermediaries between the broker and insurer. Plaintiffs also allege that broker defendants tied the purchase of primary insurance to the placement of such coverage with reinsurance carriers through the broker defendants’ reinsurance broker subsidiaries. The complaint asserts the following causes of action against ACE: Federal Racketeer Influenced and Corrupt Organizations Act (RICO), federal antitrust law, state antitrust law, aiding and abetting breach of fiduciary duty, and unjust enrichment.
In 2006 and 2007, the Court dismissed plaintiffs’ first two attempts to properly plead a case without prejudice and permitted plaintiffs one final opportunity to re-plead. The amended complaint, filed on May 22, 2007, purported to add several new ACE defendants: ACE Group Holdings, Inc., ACE US Holdings, Inc., Westchester Fire Insurance Company, INA Corporation, INA Financial Corporation, INA Holdings Corporation, ACE Property and Casualty Insurance Company, and Pacific Employers Insurance Company. Plaintiffs also added a new antitrust claim against Marsh, ACE, and other insurers based on the same allegations as the other claims but limited to excess casualty insurance. On June 21, 2007, defendants moved to dismiss the amended complaint and moved to strike the new parties. The Court granted defendants’ motions and dismissed plaintiffs’ antitrust and RICO claims with prejudice on August 31, 2007, and September 28, 2007, respectively. The Court also declined to exercise supplemental jurisdiction over plaintiffs’ state law claims and dismissed those claims without prejudice. On October 10, 2007, plaintiffs filed a Notice of Appeal of the antitrust and RICO rulings to the United States Court of Appeals for the Third Circuit. The parties fully briefed the appeal and argued before the Third Circuit on April 21, 2009. The court took the case under advisement, but did not indicate when it would issue a decision.
There are a number of federal actions brought by policyholders based on allegations similar to the allegations in the consolidated federal actions that were filed in, or transferred to, the United States District Court for the District of New Jersey for coordination. All proceedings in these actions are currently stayed.
 
 	•	 	New Cingular Wireless Headquarters LLC et al. v. Marsh & McLennan Companies, Inc. et al. (Case No. 06-5120; D.N.J.), was originally filed in the Northern District of Georgia on April 4, 2006. ACE, ACE American Ins. Co., ACE USA, Inc., ACE Bermuda Ins. Co. Ltd., Illinois Union Ins. Co., Pacific Employers Ins. Co., and Lloyd’s of London Syndicate 2488 AGM, along with a number of other insurers and brokers, are named.	
 
 	•	 	Avery Dennison Corp. v. Marsh & McLennan Companies, Inc. et al. (Case No. 07-00757; D.N.J.) was filed on February 13, 2007. ACE, ACE INA Holdings, Inc., ACE USA, Inc., and ACE American Insurance Co., along with a number of other insurers and brokers, are named.	
 
 	•	 	Henley Management Co., Inc. et al v. Marsh, Inc. et al. (Case No. 07-2389; D.N.J.) was filed on May 27, 2007. ACE USA, Inc., along with a number of other insurers and Marsh, are named.	
 
 	•	 	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.	
 
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NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
 	•	 	Sears, Roebuck & Co. et al. v. Marsh & McLennan Companies, Inc. et al. (Case No. 07-2535; D.N.J.) was originally filed in the Northern District of Georgia on October 12, 2007. ACE American Insurance Co., ACE Bermuda Insurance Ltd., and Westchester Surplus Lines Insurance Co., along with a number of other insurers and brokers, are named.	
Three cases have been filed in state courts with allegations similar to those in the consolidated federal actions described above.
 
 	•	 	Van Emden Management Corporation v. Marsh & McLennan Companies, Inc., et al. (Case No. 05-0066A; Superior Court of Massachusetts), a class action in Massachusetts, was filed on January 13, 2005. Illinois Union Insurance Company is named. The Van Emden case has been stayed pending resolution of the consolidated proceedings in the District of New Jersey or until further order of the Court.	
 
 	•	 	Office Depot, Inc. v. Marsh & McLennan Companies, Inc. et al. (Case No. 502005CA004396; Circuit Court of the 15th Judicial Circuit in Palm Beach County Florida), a Florida state action, was filed on June 22, 2005. ACE American Insurance Co. is named. The trial court originally stayed this case, but the Florida Court of Appeals later remanded and the trial court declined to grant another stay. The court has denied motions to dismiss, and ACE American Ins. Co. has filed an answer. Discovery is ongoing. Trial is scheduled for January 2011.	
 
 	•	 	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 will likely occur in early 2011.	
ACE was named in four putative securities class action suits following the filing of a civil suit against Marsh by the NYAG on October 14, 2004. The suits were consolidated by the JPML in the Eastern District of Pennsylvania and the Court appointed Sheet Metal Workers’ National Pension Fund and Alaska Ironworkers Pension Trust as lead plaintiffs. Lead plaintiffs filed a consolidated amended complaint on September 30, 2005, naming ACE, Evan G. Greenberg, Brian Duperreault, and Philip V. Bancroft as defendants. Plaintiffs allege that ACE’s public statements and securities filings should have revealed that insurers, including certain ACE entities, and brokers allegedly conspired to increase premiums and allocate customers through the use of “B” quotes and contingent commissions and that ACE’s revenues and earnings were inflated by these practices. Plaintiffs assert claims solely under Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act), Rule 10(b)-5 promulgated thereunder, and Section 20(a) of the Securities Act (control person liability). In 2005, ACE and the individual defendants filed a motion to dismiss. The Court heard oral argument on November 10, 2008, but did not rule on the motion. On December 16, 2008, the parties entered into a Stipulation of Settlement in which the parties agreed – contingent upon Court approval – that ACE would pay the plaintiffs $1.95 million in exchange for a full release of all claims. On June 9, 2009, the Court approved the settlement and dismissed the multidistrict litigation (including the four underlying suits) with prejudice.
ACE, ACE USA, Inc., ACE INA Holdings, Inc., and Evan G. Greenberg, as a former officer and director of AIG and current officer and director of ACE, are named in one or both of two derivative cases brought by certain shareholders of AIG. One of the derivative cases was filed in Delaware Chancery Court, and the other was filed in federal court in the Southern District of New York. The allegations against ACE concern the alleged bid rigging and contingent commission scheme as similarly alleged in the federal commercial insurance cases.
 
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Plaintiffs assert the following causes of action against ACE: breach of fiduciary duty, aiding and abetting breaches of fiduciary duties, unjust enrichment, conspiracy, and fraud. In Delaware, the shareholder plaintiffs filed an amended complaint (their third pleading effort), on April 14, 2008, which drops Evan Greenberg as a defendant (plaintiffs in the New York action subsequently dismissed Evan Greenberg as well). On June 13, 2008, ACE filed a motion to dismiss, and on April 20, 2009, the court heard oral argument on the motion. On June 17, 2009, the Court dismissed all claims against ACE with prejudice; final judgment in favor of ACE was entered on July 13, 2009. The derivative plaintiffs appealed and argument was held before a three judge panel of the Delaware Supreme Court on February 17, 2010. On February 22, 2010, the three judge panel ordered further oral argument to the Court en banc without scheduling a date. The New York derivative action is currently stayed.
In all of the lawsuits described above, plaintiffs seek compensatory and in some cases special damages without specifying an amount. As a result, ACE cannot at this time estimate its potential costs related to these legal matters and, accordingly, no liability for compensatory damages has been established in the consolidated financial statements.
ACE’s ultimate liability for these matters is not likely to have a material adverse effect on ACE’s consolidated financial condition, although it is possible that the effect could be material to ACE’s consolidated results of operations for an individual reporting period.
(iii) Legislative activity
The State of New York, as part of the 2009-10 State budget, has adopted language that requires an insurer which (1) paid to the Workers’ Compensation Board (WCB) various statutory assessments in an amount less than that insurer “collected” from insured employers in a given year and (2) “has identified and held any funds collected but not paid to the WCB, as measurable and available, as of January 1, 2009” to pay retroactive assessments to the WCB. The language, and impact, of this new law is at present uncertain because it uses terms and dates that are not readily identifiable with respect to insurers’ statutory financial statements and because the State has not promulgated implementing regulations or other explanatory materials. The Company’s understanding is that the law is intended to address certain inconsistencies in the New York State laws regulating the calculation of workers’ compensation assessments by insurance carriers and the remittance of those funds to the State. In July 2009, ACE received a subpoena from the NYAG requesting documents related to these issues, and in October 2009, ACE received a request from the WCB asking ACE to explain whether or not it was an “affected carrier” under the new law.   In addition, the New York State legislature, as part of the 2010-11 State budget, is considering language that, if enacted, would require an insurer who paid to the WCB various statutory assessments in an amount less than that insurer “collected” from insured employers for the period April 1, 2008, through March 31, 2009, to pay such “excess assessment funds” to the WCB. Although the Company cannot at this time predict the interpretation that will be afforded the language in the 2009-10 State budget, and cannot predict the outcome of the legislative process with regard to the language in the proposed 2010-11 State budget, ACE is confident that it has complied with the law governing workers’ compensation surcharges and assessments. ACE has established a contingency based on the Company’s best estimate of the potential liability that could result from the legislation or other events surrounding this topic, based on the facts and circumstances at this time. Such contingency will be increased or decreased as circumstances develop. The Company does not expect these events to have a material impact on its financial condition or results of operations.
 6. Shareholders’ equity
All Common Shares of the Company are registered common shares under Swiss corporate law. Though the par value of Common Shares is stated in Swiss francs, the Company continues to use U.S. dollars as its reporting
 
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currency for preparing the consolidated financial statements. Under Swiss corporate law, dividends, including distributions through a reduction in par value (par value distributions), must be declared by ACE in Swiss francs though dividend payments are made by the Company in U.S. dollars. For the foreseeable future, subject to shareholder approval, the Company expects to pay dividends as a repayment of share capital in the form of a reduction in par value or qualified paid-in capital, which would not be subject to Swiss withholding tax. For the three months ended March 31, 2010 and 2009, dividends declared per Common Share amounted to CHF 0.33 ($0.31) and CHF 0.30 ($0.26), respectively. The par value distribution in the three months ended March 31, 2010, is reflected as such through Common Shares in the consolidated statement of shareholders’ equity and had the effect of reducing the par value per Common Share to CHF 31.55.
Under Swiss corporate law, the Company may not generally issue Common Shares below their par value. In the event there is a need to raise common equity at a time when the trading price of the Company’s Common Shares is below par value, the Company will need to obtain shareholder approval to decrease the par value of the Common Shares.
Common Shares in treasury are used principally for issuance upon the exercise of employee stock options. At March 31, 2010, 1,547,923 Common Shares remain in treasury after net shares redeemed under employee share-based compensation plans.
 7. Share-based compensation
During 2004, the Company established the ACE Limited 2004 Long-Term Incentive Plan (the 2004 LTIP). The Company’s 2004 LTIP provides for grants of both incentive and non-qualified stock options principally at an option price per share of 100 percent of the fair value of the Company’s Common Shares on the date of grant. Stock options are generally granted with a 3-year vesting period and a 10-year term. The stock options vest in equal annual installments over the respective vesting period, which is also the requisite service period. On February 25, 2010, the Company granted 2,114,706 stock options with a weighted-average grant date fair value of $12.08. The fair value of the options issued is estimated on the date of grant using the Black-Scholes option pricing model.
The Company’s 2004 LTIP also provides for grants of restricted stock and restricted stock units. The Company generally grants restricted stock and restricted stock units with a 4-year vesting period, based on a graded vesting schedule. The restricted stock is granted at market close price on the day of grant. On February 25, 2010, the Company granted 2,187,844 restricted stock awards and 320,766 restricted stock units to officers of the Company and its subsidiaries with a grant date fair value of $50.37. Each restricted stock unit represents the Company’s obligation to deliver to the holder one Common Share upon vesting.
 8. Fair value measurements
Fair value hierarchy
The provisions of Topic 820 define fair value as the price to sell an asset or transfer a liability in an orderly transaction between market participants and establishes a three-level valuation hierarchy in which inputs into valuation techniques used to measure fair value are classified. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. Inputs in Level 1 are unadjusted quoted prices for identical assets or liabilities in active markets. Level 2 includes inputs other than quoted prices included within Level 1 that are observable for assets or liabilities either directly or indirectly. Level 2 inputs include, among other items, quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs other than quoted prices that are
 
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observable for the asset or liability such as interest rates and yield curves. Level 3 inputs are unobservable and reflect management’s judgments about assumptions that market participants would use in pricing an asset or liability. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ACE makes decisions regarding the categorization of assets or liabilities within the valuation hierarchy based on the inputs used to determine respective fair values at the balance sheet date. Accordingly, transfers between levels within the valuation hierarchy are determined on the same basis.
The Company utilizes one or more pricing services to obtain fair value measurements for the majority of the investment securities it holds. Based on management’s understanding of the methodologies used by these pricing services, all applicable investments have been valued in accordance with GAAP valuation principles. The following is a description of the valuation techniques and inputs used to determine fair values for the Company’s financial instruments carried or disclosed at fair value, as well as the general classification of such financial instruments pursuant to the valuation hierarchy.
Fixed maturities
The Company utilizes pricing services to estimate fair value measurements for the majority of its fixed maturities. The pricing services utilize market quotations for fixed maturities that have quoted prices in active markets; such securities are classified within Level 1. For fixed maturities other than U.S. Treasury securities that generally do not trade on a daily basis, the pricing services prepare estimates of fair value measurements using their pricing applications, which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. Additional valuation factors that can be taken into account are nominal spreads, dollar basis, and liquidity adjustments. The pricing services evaluate each asset class based on relevant market and credit information, perceived market movements, and sector news. The market inputs utilized 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 dependant 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.
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.
 
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(Unaudited)
 
Securities lending collateral
The underlying assets included in Securities lending collateral are fixed maturities which are classified in the valuation hierarchy on the same basis as the Company’s other fixed maturities. Excluded from the valuation hierarchy is the corresponding liability related to the Company’s obligation to return the collateral plus interest.
Other investments
Fair values for 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 the Company has used NAV as a practical expedient to measure fair value, are classified within Level 3 because either ACE will never have the contractual option to redeem the investment or will not have the contractual option to redeem the investments in the near term. The remainder of such investments are classified within Level 2. Equity securities and fixed maturities held in rabbi trusts maintained by the Company for deferred compensation plans, and included in Other investments, are classified within the valuation hierarchy on the same basis as the Company’s other equity securities and fixed maturities.
Investments in partially-owned insurance companies
Fair values for investments in partially-owned insurance companies based on the financial statements provided by those companies used for equity accounting are classified within Level 3.
Investment derivative instruments
For actively traded investment derivative instruments, including futures, options, and exchange-traded forward contracts, the Company obtains quoted market prices to determine fair value. As such, these instruments are included within Level 1.
Guaranteed minimum income benefits
The liability for GMIBs arises from the Company’s life reinsurance programs covering living benefit guarantees whereby the Company assumes the risk of GMIBs associated with variable annuity contracts. For GMIB reinsurance, ACE estimates fair value using an internal valuation model which includes current market information and estimates of policyholder behavior. All of the treaties contain claim limits, which are factored into the valuation model. The fair value depends on a number of inputs, including changes in interest rates, changes in equity markets, credit risk, current account value, changes in market volatility, expected annuitization rates, changes in policyholder behavior, and changes in policyholder mortality. The model and related assumptions are continuously re-evaluated by management and enhanced, as appropriate, based upon additional experience obtained related to policyholder behavior and availability of more information, such as market conditions and demographics of in-force annuities. Based on the quarterly reserve review, no material changes were made to actuarial or behavioral assumptions during the quarter ended March 31, 2010. The most significant policyholder behavior assumptions include lapse rates and annuitization rates using the guaranteed benefit (GMIB annuitization rate). Assumptions regarding lapse rates and GMIB annuitization rates differ by treaty but the underlying methodology to determine rates applied to each treaty is comparable. The assumptions regarding lapse and GMIB annuitization rates determined for each treaty are based on a dynamic calculation that uses several underlying factors. A lapse rate is the percentage of in-force policies surrendered in a given calendar year. All else equal, as lapse rates increase, ultimate claim payments will decrease. The GMIB annuitization rate is the percentage of policies for which the policyholder will elect to annuitize using the guaranteed benefit
 
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provided under the GMIB. All else equal, as GMIB annuitization rates increase, ultimate claim payments will increase, subject to treaty claim limits. The effect of changes in key market factors on assumed lapse and annuitization rates reflect emerging trends using data available from cedants. For treaties with limited experience, rates are established in line with data received from other ceding companies adjusted as appropriate with industry estimates. The Company views the variable annuity reinsurance business as having a similar risk profile to that of catastrophe reinsurance, with the probability of a cumulative long-term economic net loss relatively small at the time of pricing. However, adverse changes in market factors and policyholder behavior will have an adverse impact on net income, which may be material. Because of the significant use of unobservable inputs including policyholder behavior, GMIB reinsurance is classified within Level 3.
Short- and long-term debt and trust preferred securities
Where practical, fair values for short-term debt, long-term debt, and trust preferred securities are estimated using discounted cash flow calculations based principally on observable inputs including the Company’s incremental borrowing rates, which reflect ACE’s credit rating, for similar types of borrowings with maturities consistent with those remaining for the debt being valued. As such, these instruments are classified within Level 2.
Other derivative instruments
The Company maintains positions in other derivative instruments including exchange-traded equity futures contracts and option contracts designed to limit exposure to a severe equity market decline, which would cause an increase in expected claims and, therefore, reserves for GMDB and GMIB reinsurance business. The Company’s position in exchange-traded equity futures contracts is classified within Level 1. The fair value of the majority of the Company’s remaining positions in other derivative instruments is based on significant observable inputs including equity security and interest rate indices. Accordingly, these are classified within Level 2. The Company’s position in credit default swaps is typically included within Level 3.
 
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The following tables present, by valuation hierarchy, the financial instruments carried or disclosed at fair value, and measured on a recurring basis, at March 31, 2010, and December 31, 2009.

   	  	Quoted Prices in
Active  Markets
for Identical
Assets or
Liabilities
Level 1	 	 	Significant
Other
Observable
Inputs
Level 2	  	Significant
Unobservable
Inputs
Level 3	  	Total	
 	  	(in millions of U.S. dollars)	
	  				 			  			  			
March 31, 2010	  				 			  			  			
Assets: 	  				 			  			  			
Fixed maturities available for sale	  				 			  			  			
U.S. Treasury and agency	  	$	1,845	 	 	$	1,844	  	$	—  	  	$	3,689	
Foreign	  	 	246	 	 	 	10,998	  	 	21	  	 	11,265	
Corporate securities	  	 	34	 	 	 	14,003	  	 	133	  	 	14,170	
Mortgage-backed securities	  	 	—  	  	 	 	9,967	  	 	12	  	 	9,979	
States, municipalities, and political subdivisions	  	 	—  	  	 	 	1,459	  	 	2	  	 	1,461	
	  	 	 	 	 	 	 	  	 	 	  	 	 	
	  	 	2,125	 	 	 	38,271	  	 	168	  	 	40,564	

Fixed maturities held to maturity	  				 			  			  			
U.S. Treasury and agency	  	 	378	 	 	 	650	  	 	—  	  	 	1,028	
Foreign	  	 	—  	  	 	 	26	  	 	—  	  	 	26	
Corporate securities	  	 	—  	  	 	 	322	  	 	—  	  	 	322	
Mortgage-backed securities	  	 	—  	  	 	 	1,427	  	 	—  	  	 	1,427	
States, municipalities, and political subdivisions	  	 	—  	  	 	 	630	  	 	—  	  	 	630	
	  	 	 	 	 	 	 	  	 	 	  	 	 	
	  	 	378	 	 	 	3,055	  	 	—  	  	 	3,433	

Equity securities	  	 	302	 	 	 	1	  	 	13	  	 	316	
Short-term investments	  	 	1,449	 	 	 	603	  	 	—  	  	 	2,052	
Other investments	  	 	31	 	 	 	205	  	 	1,236	  	 	1,472	
Securities lending collateral	  	 	—  	  	 	 	1,611	  	 	—  	  	 	1,611	
Investments in partially-owned insurance companies	  	 	—  	  	 	 	—  	  	 	454	  	 	454	
Investment derivative instruments	  	 	11	 	 	 	—  	  	 	—  	  	 	11	
Other derivative instruments	  	 	(19	) 	 	 	20	  	 	14	  	 	15	
	  	 	 	 	 	 	 	  	 	 	  	 	 	
Total assets at fair value	  	$	4,277	 	 	$	43,766	  	$	1,885	  	$	49,928	

Liabilities:	  				 			  			  			
GMIB	  	$	—  	  	 	$	—  	  	$	469	  	$	469	
Short-term debt	  	 	—  	  	 	 	158	  	 	—  	  	 	158	
Long-term debt	  	 	—  	  	 	 	3,433	  	 	—  	  	 	3,433	
Trust preferred securities	  	 	—  	  	 	 	351	  	 	—  	  	 	351	
	  	 	 	 	 	 	 	  	 	 	  	 	 	
Total liabilities at fair value	  	$	—  	  	 	$	3,942	  	$	469	  	$	4,411	

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There were no significant gross transfers between Level 1 and Level 2 during the three months ended March 31, 2010.

 	  	Quoted Prices in
Active Markets
for Identical
Assets or
Liabilities
Level 1	 	 	Significant
Other
Observable
Inputs
Level 2	  	Significant
Unobservable
Inputs
Level 3	  	Total	
 	  	(in millions of U.S. dollars)	
December 31, 2009	  				 			  			  			
Assets:	  				 			  			  			
Fixed maturities available for sale	  				 			  			  			
U.S. Treasury and agency	  	$	1,611	 	 	$	2,098	  	$	—  	  	$	3,709	
Foreign	  	 	207	 	 	 	10,879	  	 	59	  	 	11,145	
Corporate securities	  	 	31	 	 	 	13,016	  	 	168	  	 	13,215	
Mortgage-backed securities	  	 	—  	  	 	 	9,821	  	 	21	  	 	9,842	
States, municipalities, and political subdivisions	  	 	—  	  	 	 	1,611	  	 	3	  	 	1,614	
	  	 	 	 	 	 	 	  	 	 	  	 	 	
	  	 	1,849	 	 	 	37,425	  	 	251	  	 	39,525	

Fixed maturities held to maturity	  				 			  			  			
U.S. Treasury and agency	  	 	414	 	 	 	643	  	 	—  	  	 	1,057	
Foreign	  	 	—  	  	 	 	27	  	 	—  	  	 	27	
Corporate securities	  	 	—  	  	 	 	322	  	 	—  	  	 	322	
Mortgage-backed securities	  	 	—  	  	 	 	1,424	  	 	45	  	 	1,469	
States, municipalities, and political subdivisions	  	 	—  	  	 	 	686	  	 	—  	  	 	686	
	  	 	 	 	 	 	 	  	 	 	  	 	 	
	  	 	414	 	 	 	3,102	  	 	45	  	 	3,561	

Equity securities	  	 	453	 	 	 	2	  	 	12	  	 	467	
Short-term investments	  	 	1,132	 	 	 	535	  	 	—  	  	 	1,667	
Other investments	  	 	31	 	 	 	195	  	 	1,149	  	 	1,375	
Securities lending collateral	  	 	—  	  	 	 	1,544	  	 	—  	  	 	1,544	
Investments in partially-owned insurance companies	  	 	—  	  	 	 	—  	  	 	433	  	 	433	
Investment derivative instruments	  	 	7	 	 	 	—  	  	 	—  	  	 	7	
Other derivative instruments	  	 	(9	) 	 	 	32	  	 	14	  	 	37	
	  	 	 	 	 	 	 	  	 	 	  	 	 	
Total assets at fair value	  	$	3,877	 	 	$	42,835	  	$	1,904	  	$	48,616	

Liabilities:	  				 			  			  			
GMIB	  	$	—  	  	 	$	—  	  	$	559	  	$	559	
Short-term debt	  	 	—  	  	 	 	168	  	 	—  	  	 	168	
Long-term debt	  	 	—  	  	 	 	3,401	  	 	—  	  	 	3,401	
Trust preferred securities	  	 	—  	  	 	 	336	  	 	—  	  	 	336	

Total liabilities at fair value	  	$	—  	  	 	$	3,905	  	$	559	  	$	4,464	

 
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Fair value of alternative investments
Included in the Other investments in the fair value hierarchy at March 31, 2010, and December 31, 2009, are investment funds, limited partnerships, and partially-owned investment companies measured at fair value using NAV as a practical expedient. At March 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 values and maximum future funding commitments related to these investments at March 31, 2010, and December 31, 2009.

 	  	March 31, 2010	  	December 31, 2009	
 	  	Fair
Value	  	Maximum
future
funding
commitments	  	Fair
Value	  	Maximum
future
funding
commitments	
 	  	(in millions of U.S. dollars)	
Financial	  	$	178	  	$	77	  	$	173	  	$	109	
Real estate	  	 	104	  	 	138	  	 	89	  	 	150	
Distressed	  	 	237	  	 	59	  	 	233	  	 	59	
Mezzanine	  	 	100	  	 	126	  	 	102	  	 	75	
Traditional	  	 	297	  	 	265	  	 	243	  	 	300	
Vintage	  	 	33	  	 	4	  	 	31	  	 	2	
Investment funds	  	 	317	  	 	—  	  	 	310	  	 	—  	
	  	 	 	  	 	 	  	 	 	  	 	 	
	  	$	1,266	  	$	669	  	$	1,181	  	$	695	
	  	 	 	  	 	 	  	 	 	  	 	 	
Financial
Financial primarily consists of investments in private equity funds targeting financial services companies such as financial institutions and insurance services around the world. Included in this category are investments for which ACE will never have the contractual option to redeem but receives distributions based on the liquidation of the underlying assets. The Company expects these underlying assets to be liquidated over the next 5 to 9 years. ACE does not have the ability to sell or transfer the investments without the consent from the general partner of individual funds.
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. Included in this category are investments for which ACE will never have the contractual option to redeem but receives distributions based on the liquidation of the underlying assets. The Company expects the majority of these underlying assets to be liquidated over the next 3 to 9 years. ACE does not have the ability to sell or transfer the investments without the consent from the general partner of individual funds.
Distressed
Distressed consists of investments in private equity funds targeting distressed debt/credit and equity opportunities in the U.S. Included in this category are investments for which ACE will never have the contractual option to redeem but receives distributions based on the liquidation of the underlying assets. The Company expects these underlying assets to be liquidated over the next 6 to 9 years. ACE does not have the ability to sell or transfer the investments without the consent from the general partner of individual funds.
 
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(Unaudited)
 
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. Included in this category are investments for which ACE will never have the contractual option to redeem but receives distributions based on the liquidation of the underlying assets. The Company expects the majority of these underlying assets to be liquidated over the next 6 to 9 years. ACE does not have the ability to sell or transfer the investments without the consent from the general partner of individual funds.
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, India, Asia, Europe, and the U.S. Included in this category are investments for which ACE will never have the contractual option to redeem but receives distributions based on the liquidation of the underlying assets. The Company expects these underlying assets to be liquidated over the next 3 to 8 years. ACE does not have the ability to sell or transfer the investments without the consent from the general partner of individual funds.
Vintage
Vintage consists of investments in private equity funds made before 2002 and where the funds’ commitment periods had already expired. Included in this category are investments for which ACE will never have the contractual option to redeem but receives distributions based on the liquidation of the underlying assets. The Company expects these underlying assets to be liquidated over the next 1 to 3 years. ACE does not have the ability to sell or transfer the investments without the consent from the general partner of individual funds.
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, the Company may redeem investment fund investments monthly, quarterly, semi-annually, or annually. If the Company wishes to redeem an investment fund investment, ACE 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 ACE’s investment funds range between 5 and 120 days. ACE can redeem its investment funds without consent from the investment fund managers.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
Level 3 financial instruments
The following tables present a reconciliation of the beginning and ending balances of financial instruments carried or disclosed at fair value using significant unobservable inputs (Level 3) for the periods indicated.

   	 	Balance-
Beginning
of Period	 	Net
Realized
Gains/
Losses	 	 	Change in Net
Unrealized
Gains (Losses)
Included in
OCI	 	Purchases,
Sales,
Issuances,
and
Settlements,
Net	 	 	Transfers
Into (Out
of) Level 3	 	 	Balance-End
of Period	 	Net Realized
Gains/Losses
Attributable to
Changes in
Fair Value (1)	 	
 	 	(in millions of U.S. dollars)	 	
Three Months Ended
March 31, 2010	 			 				 			 				 				 			 				
Assets:	 			 				 			 				 				 			 				
Fixed maturities available for sale	 			 				 			 				 				 			 				
Foreign	 	$	59	 	$	(1	) 	 	$	—  	 	$	—  	  	 	$	(37	) 	 	$	21	 	$	—  	  	
Corporate securities	 	 	168	 	 	—  	  	 	 	3	 	 	(3	) 	 	 	(35	) 	 	 	133	 	 	—  	  	
Mortgage-backed securities	 	 	21	 	 	—  	  	 	 	—  	 	 	(9	) 	 	 	—  	  	 	 	12	 	 	—  	  	
States, municipalities, and political subdivisions	 	 	3	 	 	—  	  	 	 	—  	 	 	(1	) 	 	 	—  	  	 	 	2	 	 	—  	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
	 	 	251	 	 	(1	) 	 	 	3	 	 	(13	) 	 	 	(72	) 	 	 	168	 	 	—  	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed maturities held to maturity	 			 				 			 				 				 			 				
Mortgage-backed securities	 	 	45	 	 	—  	  	 	 	—  	 	 	—  	  	 	 	(45	) 	 	 	—  	 	 	—  	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
	 	 	45	 	 	—  	  	 	 	—  	 	 	—  	  	 	 	(45	) 	 	 	—  	 	 	—  	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Equity securities	 	 	12	 	 	—  	  	 	 	1	 	 	—  	  	 	 	—  	  	 	 	13	 	 	—  	  	
Other investments	 	 	1,149	 	 	1	 	 	 	19	 	 	67	 	 	 	—  	  	 	 	1,236	 	 	1 	  	
Investments in partially-owned insurance companies	 	 	433	 	 	—  	  	 	 	21	 	 	—  	  	 	 	—  	  	 	 	454	 	 	—  	  	
Other derivative instruments	 	 	14	 	 	—  	  	 	 	—  	 	 	—  	  	 	 	—  	  	 	 	14	 	 	—  	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets at fair value	 	$	1,904	 	$	—  	  	 	$	44	 	$	54	 	 	$	(117	) 	 	$	1,885	 	$	1 	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Liabilities:	 			 				 			 				 				 			 				
GMIB	 	$	559	 	$	(96	) 	 	$	—  	 	$	6	 	 	$	—  	  	 	$	469	 	$	(96	) 	

(1)	Relates only to financial instruments still held at the balance sheet date.	
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

 	 	Balance-
Beginning
of Period	 	Net
Realized
Gains/
Losses	 	 	Change in Net
Unrealized
Gains (Losses)
Included in
OCI	 	 	Purchases,
Sales,
Issuances,
and
Settlements,
Net	 	 	Transfers
Into (Out
of) Level 3	 	 	Balance-
End of
Period	 	Net Realized
Gains/Losses
Attributable to
Changes in
Fair Value (1)	 	
 	 	(in millions of U.S. dollars)	 	
Three Months Ended
March 31, 2009	 			 				 				 				 				 			 				
Assets:	 			 				 				 				 				 			 				
Fixed maturities available for sale	 	$	274	 	$	(3	) 	 	$	(4	) 	 	$	(10	) 	 	$	(27	) 	 	$	230	 	$	(3	)  	
Fixed maturities held to maturity	 	 	1	 	 	—  	  	 	 	—  	  	 	 	(1	) 	 	 	—  	  	 	 	—  	 	 	—  	  	
Equity securities	 	 	21	 	 	—  	  	 	 	—  	  	 	 	4	 	 	 	(17	) 	 	 	8	 	 	—  	  	
Short-term investments	 	 	—  	 	 	—  	  	 	 	—  	  	 	 	1	 	 	 	—  	  	 	 	1	 	 	—  	  	
Other investments	 	 	1,099	 	 	(89	) 	 	 	(21	) 	 	 	38	 	 	 	—  	  	 	 	1,027	 	 	(89	)  	
Investments in partially-owned insurance companies	 	 	435	 	 	—  	  	 	 	3	 	 	 	43	 	 	 	—  	  	 	 	481	 	 	—  	  	
Other derivative instruments	 	 	87	 	 	(1	) 	 	 	—  	  	 	 	(3	) 	 	 	—  	  	 	 	83	 	 	(1	)  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets at fair value	 	$	1,917	 	$	(93	) 	 	$	(22	) 	 	$	72	 	 	$	(44	) 	 	$	1,830	 	$	(93	) 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Liabilities:	 			 				 				 				 				 			 				
GMIB	 	$	910	 	$	1	 	 	$	—  	  	 	$	2	 	 	$	—  	  	 	$	913	 	$	1 	  	

(1)	Relates only to financial instruments still held at the balance sheet date.	
 9. Segment information
The Company operates through the following business segments, certain of which represent the aggregation of distinct operating segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life. These segments distribute their products through various forms of brokers, agencies, and direct marketing programs. All business segments have established relationships with reinsurance intermediaries.
The Insurance – North American segment comprises the operations in the U.S., Canada, and Bermuda. This segment includes the operations of ACE USA (including ACE Canada), ACE Westchester, ACE Bermuda, ACE Private Risk Services, and various run-off operations. ACE USA is the North American retail operating division which provides a broad array of Property & Casualty (P&C), Accident & Health (A&H), and risk management products and services to a diverse group of commercial and non-commercial enterprises and consumers. ACE Westchester specializes in the North American wholesale distribution of excess and surplus P&C, environmental, professional and inland marine products in addition to crop insurance in the U.S. ACE Bermuda provides commercial insurance products on an excess basis to a global client base, covering exposures that are generally low in frequency and high in severity. ACE Private Risk Services provides personal lines coverages (such as homeowners and automobile) for high net worth individuals and families in North America. The run-off operations include Brandywine Holdings Corporation, Commercial Insurance Services, residual market workers’ compensation business, pools and syndicates not attributable to a single business group, and other exited lines of business. Run-off operations do not actively sell insurance products, but are responsible for the management of existing policies and related claims.
The Insurance – Overseas General segment comprises ACE International, the wholesale insurance business of ACE Global Markets, and the international A&H and life business of Combined Insurance. ACE International, the ACE INA retail business serving territories outside the U.S., Bermuda, and Canada, maintains a presence in every major insurance market in the world and is organized geographically along product lines that provide dedicated underwriting focus to customers. ACE Global Markets, the London-based excess and surplus lines
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
business that includes Lloyd’s Syndicate 2488, offers products through its parallel distribution network via ACE European Group Limited (AEGL) and Lloyd’s Syndicate 2488 . ACE provides funds at Lloyd’s to support underwriting by Syndicate 2488, which is managed by ACE Underwriting Agencies Limited. ACE Global Markets utilizes Syndicate 2488 to underwrite P&C business on a global basis through Lloyd’s worldwide licenses. ACE Global Markets utilizes AEGL to underwrite similar classes of business through its network of U.K. and Continental Europe licenses, and in the U.S. where it is eligible to write excess & surplus business. The reinsurance operation of ACE Global Markets is included in the Global Reinsurance segment. Combined Insurance distributes a wide range of supplemental accident and health products. The Insurance – Overseas General segment has four regions of operations: the ACE European Group (which comprises ACE Europe and ACE Global Markets branded business), ACE Asia Pacific, ACE Far East, and ACE Latin America. Companies within the Insurance – Overseas General segment write a variety of insurance products including P&C, professional lines (directors & officers and errors & omissions), marine, energy, aviation, political risk, specialty consumer-oriented products, and A&H (principally accident and supplemental health).
The Global Reinsurance segment represents ACE’s reinsurance operations comprising ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re Europe, and ACE Tempest Re Canada. These divisions provide a broad range of property catastrophe, casualty, and property reinsurance coverages to a diverse array of primary P&C insurers. The Global Reinsurance segment also includes ACE Global Markets’ reinsurance operations.
The Life segment includes ACE’s international life operations (ACE Life), ACE Tempest Life Re (ACE Life Re), and the North American supplemental A&H and life business of Combined Insurance. ACE Life provides individual and group life insurance through multiple distribution channels primarily in emerging markets, including Egypt, Indonesia, Taiwan, Thailand, Vietnam, the United Arab Emirates, throughout Latin America, selectively in Europe, as well as China through a partially-owned insurance company. ACE Life Re helps clients (ceding companies) manage mortality, morbidity, and lapse risks embedded in their books of business. ACE Life Re comprises two operations. The first is a Bermuda-based operation which provides reinsurance to primary life insurers, focusing on guarantees included in certain fixed and variable annuity products and also on more traditional mortality reinsurance protection. The second is a U.S.-based traditional life reinsurance company licensed in 49 states and the District of Columbia. It was decided in January 2010 to discontinue writing new traditional life mortality reinsurance business from the U.S.-based company. Combined Insurance distributes specialty individual accident and supplemental health and life insurance products targeted to middle income consumers in the U.S. and Canada.
Corporate and Other (Corporate) includes ACE Limited, ACE Group Management and Holdings Ltd., ACE INA Holdings, Inc., and intercompany eliminations. Losses and loss expenses arise in connection with the commutation of ceded reinsurance contracts that result from a differential between the consideration received from reinsurers and the related reduction of reinsurance recoverable, principally related to the time value of money. Due to the Company’s initiatives to reduce reinsurance recoverable balances and thereby encourage such commutations, losses recognized in connection with the commutation of ceded reinsurance contracts are generally not considered when assessing segment performance and, accordingly, are directly allocated to Corporate. ACE also eliminates the impact of intersegment loss portfolio transfer transactions which are not reflected in the results within the statements of operations by segment.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
For segment reporting purposes, certain items have been presented in a different manner than in the consolidated financial statements. Management uses underwriting income as the main measure of segment performance. ACE calculates underwriting income by subtracting losses and loss expenses, policy benefits, policy acquisition costs, and administrative expenses from net premiums earned. For the Life business, management also includes net investment income as a component of underwriting income. The following tables present the operations by segment for the periods indicated.
Statement of Operations by Segment
For the Three Months Ended March 31, 2010
(in millions of U.S. dollars)

 	  	Insurance –
North
American	 	 	Insurance –
Overseas
General	  	Global
Reinsurance	 	 	Life	  	Corporate
and Other	 	 	ACE
Consolidated	 	
Net premiums written	  	$	1,395	 	 	$	1,420	  	$	371	 	 	$	385	  	$	—  	  	 	$	3,571	 	
Net premiums earned	  	 	1,370	 	 	 	1,251	  	 	276	 	 	 	380	  	 	—  	  	 	 	3,277	 	
Losses and loss expenses	  	 	938	 	 	 	701	  	 	151	 	 	 	131	  	 	—  	  	 	 	1,921	 	
Policy benefits	  	 	—  	  	 	 	3	  	 	—  	  	 	 	84	  	 	—  	  	 	 	87	 	
Policy acquisition costs	  	 	156	 	 	 	283	  	 	54	 	 	 	61	  	 	—  	  	 	 	554	 	
Administrative expenses	  	 	148	 	 	 	202	  	 	12	 	 	 	58	  	 	40	 	 	 	460	 	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Underwriting income (loss)	  	 	128	 	 	 	62	  	 	59	 	 	 	46	  	 	(40	) 	 	 	255	 	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Net investment income	  	 	278	 	 	 	114	  	 	69	 	 	 	43	  	 	—  	  	 	 	504	 	
Net realized gains (losses) including OTTI	  	 	80	 	 	 	22	  	 	31	 	 	 	43	  	 	(8	) 	 	 	168	 	
Interest expense	  	 	—  	  	 	 	—  	  	 	—  	  	 	 	—  	  	 	52	 	 	 	52	 	
Other (income) expense	  	 	(5	) 	 	 	2	  	 	(4	) 	 	 	3	  	 	—  	  	 	 	(4	) 	
Income tax expense (benefit)	  	 	104	 	 	 	14	  	 	10	 	 	 	14	  	 	(18	) 	 	 	124	 	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Net income (loss)	  	$	387	 	 	$	182	  	$	153	 	 	$	115	  	$	(82	) 	 	$	755	 	

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
Statement of Operations by Segment
For the Three Months Ended March 31, 2009
(in millions of U.S. dollars)

 	  	Insurance –
North
American	 	 	Insurance –
Overseas
General	  	Global
Reinsurance	  	Life	  	Corporate
and Other	 	 	ACE
Consolidated	 	
Net premiums written	  	$	1,392	 	 	$	1,327	  	$	359	  	$	346	  	$	—  	  	 	$	3,424	 	
Net premiums earned	  	 	1,437	 	 	 	1,184	  	 	238	  	 	335	  	 	—  	  	 	 	3,194	 	
Losses and loss expenses	  	 	1,004	 	 	 	613	  	 	87	  	 	112	  	 	—  	  	 	 	1,816	 	
Policy benefits	  	 	—  	  	 	 	2	  	 	—  	  	 	97	  	 	—  	  	 	 	99	 	
Policy acquisition costs	  	 	123	 	 	 	260	  	 	51	  	 	47	  	 	—  	  	 	 	481	 	
Administrative expenses	  	 	140	 	 	 	175	  	 	12	  	 	58	  	 	35	 	 	 	420	 	
	  	 	 	 	 	 	 	  	 	 	  	 	 	  	 	 	 	 	 	 	 	
Underwriting income (loss)	  	 	170	 	 	 	134	  	 	88	  	 	21	  	 	(35	) 	 	 	378	 	
	  	 	 	 	 	 	 	  	 	 	  	 	 	  	 	 	 	 	 	 	 	
Net investment income	  	 	263	 	 	 	120	  	 	72	  	 	46	  	 	1	 	 	 	502	 	
Net realized gains (losses) including OTTI	  	 	(120	) 	 	 	7	  	 	11	  	 	9	  	 	(28	) 	 	 	(121	) 	
Interest expense	  	 	—  	  	 	 	—  	  	 	—  	  	 	—  	  	 	53	 	 	 	53	 	
Other (income) expense	  	 	4	 	 	 	4	  	 	—  	  	 	2	  	 	4	 	 	 	14	 	
Income tax expense (benefit)	  	 	96	 	 	 	46	  	 	16	  	 	6	  	 	(39	) 	 	 	125	 	
	  	 	 	 	 	 	 	  	 	 	  	 	 	  	 	 	 	 	 	 	 	
Net income (loss)	  	$	213	 	 	$	211	  	$	155	  	$	68	  	$	(80	) 	 	$	567	 	
	  	 	 	 	 	 	 	  	 	 	  	 	 	  	 	 	 	 	 	 	 	
Underwriting assets are reviewed in total by management for purposes of decision-making. Other than goodwill, the Company does not allocate assets to its segments.
The following table presents the net premiums earned for each segment by product offering for the periods indicated.

 	  	Property & All
Other	  	Casualty	  	Life, Accident
& Health	  	ACE
Consolidated	
 	  	(in millions of U.S. dollars)	
For the Three Months Ended March 31, 2010	  			  			  			  			
Insurance – North American	  	$	358	  	$	944	  	$	68	  	$	1,370	
Insurance – Overseas General	  	 	420	  	 	345	  	 	486	  	 	1,251	
Global Reinsurance	  	 	138	  	 	138	  	 	—  	  	 	276	
Life	  	 	—  	  	 	—  	  	 	380	  	 	380	
	  	 	 	  	 	 	  	 	 	  	 	 	
	  	$	916	  	$	1,427	  	$	934	  	$	3,277	
	  	 	 	  	 	 	  	 	 	  	 	 	
For the Three Months Ended March 31, 2009 	  			  			  			  			
Insurance – North American	  	$	417	  	$	960	  	$	60	  	$	1,437	
Insurance – Overseas General	  	 	420	  	 	315	  	 	449	  	 	1,184	
Global Reinsurance	  	 	146	  	 	92	  	 	—  	  	 	238	
Life	  	 	—  	  	 	—  	  	 	335	  	 	335	
	  	 	 	  	 	 	  	 	 	  	 	 	
	  	$	983	  	$	1,367	  	$	844	  	$	3,194	

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
 10. Earnings per share
The following table presents the computation of basic and diluted earnings per share for the periods indicated.

 	  	Three Months Ended
March 31	
	  		
	  	          2010           	  	          2009           	
 	  	(in millions of U.S. dollars, except share and
per share data)	
Numerator:	  			  			
Net Income	  	$	755	  	$	567	
	  	 	 	  	 	 	
Denominator:	  			  			
Denominator for basic earnings per share:	  			  			
Weighted-average shares outstanding	  	 	338,478,484	  	 	335,474,828	
Denominator for diluted earnings per share:	  			  			
Share-based compensation plans	  	 	1,386,992	  	 	640,736	
	  	 	 	  	 	 	
Adjusted weighted-average shares outstanding and assumed conversions	  	 	339,865,476	  	 	336,115,564	
	  	 	 	  	 	 	
Basic earnings per share	  	$	2.23	  	$	1.69	
	  	 	 	  	 	 	
Diluted earnings per share	  	$	2.22	  	$	1.69	
	  	 	 	  	 	 	
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 March 31, 2010 and 2009, the potential anti-dilutive share conversions were 1,115,665 shares and 2,320,117 shares, respectively.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
 11. Information provided in connection with outstanding debt of subsidiaries
The following tables present condensed consolidating financial information at March 31, 2010, and December 31, 2009, and for the three months ended March 31, 2010 and 2009, for ACE Limited (the Parent Guarantor) and its “Subsidiary Issuer”, ACE INA Holdings, Inc. The Subsidiary Issuer is an indirect 100 percent-owned subsidiary of the Parent Guarantor. Investments in subsidiaries are accounted for by the Parent Guarantor under the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are reflected in the Parent Guarantor’s investment accounts and earnings. The Parent Guarantor fully and unconditionally guarantees certain of the debt of the Subsidiary Issuer.
Condensed Consolidating Balance Sheet at March 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	  	$	24,613	 	 	$	23,079 	  	 	$	—  	  	 	$	47,739	
Cash	  	 	86	  	 	422	 	 	 	218 	  	 	 	—  	  	 	 	726	
Insurance and reinsurance balances receivable	  	 	—  	  	 	3,128	 	 	 	557 	  	 	 	—  	  	 	 	3,685	
Reinsurance recoverable on losses and loss expenses	  	 	—  	  	 	16,980	 	 	 	(3,645	)  	 	 	—  	  	 	 	13,335	
Reinsurance recoverable on policy benefits	  	 	—  	  	 	689	 	 	 	(386	)  	 	 	—  	  	 	 	303	
Value of business acquired	  	 	—  	  	 	712	 	 	 	—  	  	 	 	—  	  	 	 	712	
Goodwill and other intangible assets	  	 	—  	  	 	3,334	 	 	 	549 	  	 	 	—  	  	 	 	3,883	
Investments in subsidiaries	  	 	19,661	  	 	—  	  	 	 	—  	  	 	 	(19,661	) 	 	 	—  	
Due from (to) subsidiaries and affiliates, net	  	 	1,014	  	 	(591	) 	 	 	591 	  	 	 	(1,014	)  	 	 	—  	
Other assets	  	 	11	  	 	7,642	 	 	 	1,293 	  	 	 	—  	  	 	 	8,946	
	  	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets	  	$	20,819	  	$	56,929	 	 	$	22,256 	  	 	$	(20,675	) 	 	$	79,329	
	  	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Liabilities	  			  				 				 				 			
Unpaid losses and loss expenses	  	$	—  	  	$	30,090	 	 	$	7,461 	  	 	$	—  	  	 	$	37,551	
Unearned premiums	  	 	—  	  	 	5,397	 	 	 	1,040 	  	 	 	—  	  	 	 	6,437	
Future policy benefits	  	 	—  	  	 	2,431	 	 	 	626 	  	 	 	—  	  	 	 	3,057	
Short-term debt	  	 	—  	  	 	150	 	 	 	—  	  	 	 	—  	  	 	 	150	
Long-term debt	  	 	—  	  	 	3,158	 	 	 	—  	  	 	 	—  	  	 	 	3,158	
Trust preferred securities	  	 	—  	  	 	309	 	 	 	—  	  	 	 	—  	  	 	 	309	
Other liabilities	  	 	183	  	 	6,752	 	 	 	1,096 	  	 	 	—  	  	 	 	8,031	
	  	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total liabilities	  	 	183	  	 	48,287	 	 	 	10,223 	  	 	 	—  	  	 	 	58,693	
	  	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total shareholders’ equity	  	 	20,636	  	 	8,642	 	 	 	12,033 	  	 	 	(20,675	) 	 	 	20,636	
	  	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total liabilities and shareholders’ equity	  	$	20,819	  	$	56,929	 	 	$	22,256 	  	 	$	(20,675	) 	 	$	79,329	

(1)	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
(2)	Includes ACE Limited parent company eliminations.	
 
41

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
Condensed Consolidating Balance Sheet at December 31, 2009
(in millions of U.S. dollars)

   	  	ACE Limited
(Parent
Guarantor)	 	 	ACE INA
Holdings Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	Consolidating
Adjustments (2)	 	 	ACE Limited
Consolidated	
Assets	  				 				 				 				 			
Investments	  	$	51	 	 	$	24,125	 	 	$	22,339	  	 	$	—  	  	 	$	46,515	
Cash	  	 	(1	) 	 	 	400	 	 	 	270	  	 	 	—  	  	 	 	669	
Insurance and reinsurance balances receivable	  	 	—  	  	 	 	3,043	 	 	 	628	  	 	 	—  	  	 	 	3,671	
Reinsurance recoverable on losses and loss expenses	  	 	—  	  	 	 	17,173	 	 	 	(3,578	) 	 	 	—  	  	 	 	13,595	
Reinsurance recoverable on policy benefits	  	 	—  	  	 	 	681	 	 	 	(383	) 	 	 	—  	  	 	 	298	
Value of business acquired	  	 	—  	  	 	 	748	 	 	 	—  	  	 	 	—  	  	 	 	748	
Goodwill and other intangible assets	  	 	—  	  	 	 	3,377	 	 	 	554	  	 	 	—  	  	 	 	3,931	
Investments in subsidiaries	  	 	18,714	 	 	 	—  	  	 	 	—  	  	 	 	(18,714	) 	 	 	—  	
Due from (to) subsidiaries and affiliates, net	  	 	1,062	 	 	 	(669	) 	 	 	669	  	 	 	(1,062	)  	 	 	—  	
Other assets	  	 	18	 	 	 	7,158	 	 	 	1,377	  	 	 	—  	  	 	 	8,553	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets	  	$	19,844	 	 	$	56,036	 	 	$	21,876	  	 	$	(19,776	) 	 	$	77,980	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Liabilities	  				 				 				 				 			
Unpaid losses and loss expenses	  	$	—  	  	 	$	30,038	 	 	$	7,745	  	 	$	—  	  	 	$	37,783	
Unearned premiums	  	 	—  	  	 	 	4,944	 	 	 	1,123	  	 	 	—  	  	 	 	6,067	
Future policy benefits	  	 	—  	  	 	 	2,383	 	 	 	625	  	 	 	—  	  	 	 	3,008	
Short-term debt	  	 	—  	  	 	 	161	 	 	 	—  	  	 	 	—  	  	 	 	161	
Long-term debt	  	 	—  	  	 	 	3,158	 	 	 	—  	  	 	 	—  	  	 	 	3,158	
Trust preferred securities	  	 	—  	  	 	 	309	 	 	 	—  	  	 	 	—  	  	 	 	309	
Other liabilities	  	 	177	 	 	 	6,613	 	 	 	1,037	  	 	 	—  	  	 	 	7,827	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total liabilities	  	 	177	 	 	 	47,606	 	 	 	10,530	  	 	 	—  	  	 	 	58,313	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total shareholders’ equity	  	 	19,667	 	 	 	8,430	 	 	 	11,346	  	 	 	(19,776	) 	 	 	19,667	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total liabilities and shareholders’ equity	  	$	19,844	 	 	$	56,036	 	 	$	21,876	  	 	$	(19,776	) 	 	$	77,980	

(1)	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
(2)	Includes ACE Limited parent company eliminations.	
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
Condensed Consolidating Statement of Operations
For the Three Months Ended March 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	 	
	  				 			  				 				 				
Net premiums written	  	$	—  	  	 	$	2,227	  	$	1,344	  	 	$	—  	  	 	$	3,571	 	
Net premiums earned	  	 	—  	  	 	 	1,956	  	 	1,321	  	 	 	—  	  	 	 	3,277	 	
Net investment income	  	 	—  	  	 	 	254	  	 	250	  	 	 	—  	  	 	 	504	 	
Equity in earnings of subsidiaries	  	 	735	 	 	 	—  	  	 	—  	  	 	 	(735	) 	 	 	—  	  	
Net realized gains (losses) including OTTI	  	 	(1	) 	 	 	10	  	 	159	  	 	 	—  	  	 	 	168	 	
Losses and loss expenses	  	 	—  	  	 	 	1,316	  	 	605	  	 	 	—  	  	 	 	1,921	 	
Policy benefits	  	 	—  	  	 	 	33	  	 	54	  	 	 	—  	  	 	 	87	 	
Policy acquisition costs and administrative expenses	  	 	16	 	 	 	561	  	 	444	  	 	 	(7	)  	 	 	1,014	 	
Interest expense	  	 	(9	) 	 	 	60	  	 	(8	)  	 	 	9	  	 	 	52	 	
Other (income) expense	  	 	(28	) 	 	 	19	  	 	5	  	 	 	—  	  	 	 	(4	) 	
Income tax expense	  	 	—  	  	 	 	96	  	 	28	  	 	 	—  	  	 	 	124	 	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	755	 	 	$	135	  	$	602	  	 	$	(737	) 	 	$	755	 	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	
Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2009
(in millions of U.S. dollars)

   	  	ACE Limited
(Parent
Guarantor)	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	Consolidating
Adjustments (2)	 	 	ACE
Limited
Consolidated	 	
	  				 				 				 				 				
Net premiums written	  	$	—  	  	 	$	2,081	 	 	$	1,343	  	 	$	—  	  	 	$	3,424	 	
Net premiums earned	  	 	—  	  	 	 	1,864	 	 	 	1,330	  	 	 	—  	  	 	 	3,194	 	
Net investment income	  	 	—  	  	 	 	246	 	 	 	256	  	 	 	—  	  	 	 	502	 	
Equity in earnings of subsidiaries	  	 	569	 	 	 	—  	  	 	 	—  	  	 	 	(569	) 	 	 	—  	  	
Net realized gains (losses) including OTTI	  	 	(3	) 	 	 	(79	) 	 	 	(39	) 	 	 	—  	  	 	 	(121	) 	
Losses and loss expenses	  	 	—  	  	 	 	1,168	 	 	 	648	  	 	 	—  	  	 	 	1,816	 	
Policy benefits	  	 	—  	  	 	 	22	 	 	 	77	  	 	 	—  	  	 	 	99	 	
Policy acquisition costs and administrative expenses	  	 	10	 	 	 	499	 	 	 	400	  	 	 	(8	)  	 	 	901	 	
Interest expense	  	 	(11	) 	 	 	64	 	 	 	(9	)  	 	 	9	  	 	 	53	 	
Other (income) expense	  	 	—  	  	 	 	7	 	 	 	7	  	 	 	—  	  	 	 	14	 	
Income tax expense	  	 	—  	  	 	 	102	 	 	 	23	  	 	 	—  	  	 	 	125	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	567	 	 	$	169	 	 	$	401	  	 	$	(570	) 	 	$	567	 	

(1)	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
(2)	Includes ACE Limited parent company eliminations.	
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 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)	 	 	ACE Limited
Consolidated	 	
Net cash flows from operating activities	  	$	18	 	 	$	271	 	 	$	534 	  	 	$	823	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash flows from (used for) investing activities	  				 				 				 				
Purchases of fixed maturities available for sale	  	 	—  	  	 	 	(4,339	) 	 	 	(4,249	) 	 	 	(8,588	) 	
Purchases of fixed maturities held to maturity	  	 	—  	  	 	 	(153	) 	 	 	(1	)  	 	 	(154	) 	
Purchases of equity securities	  	 	—  	  	 	 	(4	) 	 	 	(7	)  	 	 	(11	) 	
Sales of fixed maturities available for sale	  	 	4	 	 	 	3,610	 	 	 	3,299 	  	 	 	6,913	 	
Sales of equity securities	  	 	—  	  	 	 	2	 	 	 	181 	  	 	 	183	 	
Maturities and redemptions of fixed maturities available for sale	  	 	—  	  	 	 	446	 	 	 	368 	  	 	 	814	 	
Maturities and redemptions of fixed maturities held to maturity	  	 	—  	  	 	 	229	 	 	 	64 	  	 	 	293	 	
Net derivative instruments settlements	  	 	(1	) 	 	 	(7	) 	 	 	(31	)  	 	 	(39	) 	
Advances (to) from affiliates	  	 	159	 	 	 	—  	  	 	 	(159	)  	 	 	—  	  	
Other	  	 	—  	  	 	 	(40	) 	 	 	(37	)  	 	 	(77	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash flows from (used for) investing activities	  	 	162	 	 	 	(256	) 	 	 	(572	)  	 	 	(666	) 	

Cash flows from (used for) financing activities	  				 				 				 				
Dividends paid on Common Shares	  	 	(105	) 	 	 	—  	  	 	 	—  	  	 	 	(105	) 	
Proceeds from exercise of options for Common Shares	  	 	7	 	 	 	—  	  	 	 	—  	  	 	 	7	 	
Proceeds from Common Shares issued under ESPP	  	 	5	 	 	 	—  	  	 	 	—  	  	 	 	5	 	
Advances (to) from affiliates	  	 	—  	  	 	 	2	 	 	 	(2	)  	 	 	—  	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash flows from (used for) financing activities	  	 	(93	) 	 	 	2	 	 	 	(2	)  	 	 	(93	) 	

Effect of foreign currency rate changes on cash and cash equivalents	  	 	—  	  	 	 	5	 	 	 	(12	)  	 	 	(7	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net increase (decrease) in cash	  	 	87	 	 	 	22	 	 	 	(52	)  	 	 	57	 	
Cash – beginning of period	  	 	(1	) 	 	 	400	 	 	 	270 	  	 	 	669	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash – end of period	  	$	86	 	 	$	422	 	 	$	218 	  	 	$	726	 	

(1)	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
 
44

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2009
(in millions of U.S. dollars)

 	  	ACE
Limited
(Parent
Guarantor)	 	 	ACE INA
Holdings Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	ACE Limited
Consolidated	 	
Net cash flows from operating activities	  	$	123	 	 	$	273	 	 	$	166	  	 	$	562	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash flows from (used for) investing activities	  				 				 				 				
Purchases of fixed maturities available for sale	  	 	—  	  	 	 	(4,615	) 	 	 	(5,301	) 	 	 	(9,916	) 	
Purchases of fixed maturities held to maturity	  	 	—  	  	 	 	(99	) 	 	 	(1	)  	 	 	(100	) 	
Purchases of equity securities	  	 	—  	  	 	 	(111	) 	 	 	(41	)  	 	 	(152	) 	
Sales of fixed maturities available for sale	  	 	31	 	 	 	3,973	 	 	 	4,592	  	 	 	8,596	 	
Sales of fixed maturities held to maturity	  	 	—  	  	 	 	—  	  	 	 	1	  	 	 	1	 	
Sales of equity securities	  	 	—  	  	 	 	118	 	 	 	35	  	 	 	153	 	
Maturities and redemptions of fixed maturities available for sale	  	 	—  	  	 	 	397	 	 	 	424	  	 	 	821	 	
Maturities and redemptions of fixed maturities held to maturity	  	 	—  	  	 	 	88	 	 	 	41	  	 	 	129	 	
Net derivative instruments settlements	  	 	—  	  	 	 	—  	  	 	 	37	  	 	 	37	 	
Other	  	 	—  	  	 	 	(55	) 	 	 	(10	)  	 	 	(65	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash flows from (used for) investing activities	  	 	31	 	 	 	(304	) 	 	 	(223	)  	 	 	(496	) 	

Cash flows from (used for) financing activities	  				 				 				 				
Dividends paid on Common Shares	  	 	(91	) 	 	 	—  	  	 	 	—  	  	 	 	(91	) 	
Proceeds from exercise of options for Common Shares	  	 	1	 	 	 	—  	  	 	 	—  	  	 	 	1	 	
Proceeds from Common Shares issued under ESPP	  	 	5	 	 	 	—  	  	 	 	—  	  	 	 	5	 	
Advances from (to) affiliates	  	 	—  	  	 	 	1	 	 	 	(1	)  	 	 	—  	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash flows from (used for) financing activities	  	 	(85	) 	 	 	1	 	 	 	(1	)  	 	 	(85	) 	

Effect of foreign currency rate changes on cash and cash equivalents	  	 	—  	  	 	 	(1	) 	 	 	(3	)  	 	 	(4	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net increase (decrease) in cash	  	 	69	 	 	 	(31	) 	 	 	(61	)  	 	 	(23	) 	
Cash – beginning of period	  	 	(52	) 	 	 	442	 	 	 	477	  	 	 	867	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash – end of period	  	$	17	 	 	$	411	 	 	$	416	  	 	$	844	 	

(1)	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
 
45

Table of Contents
 ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of our results of operations, financial condition, and liquidity and capital resources as of and for the three months ended March 31, 2010. 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, 2009 (2009 Form 10-K).
Other Information
We routinely post important information for investors on our website (www.acelimited.com) under the Investor Relations section. We use this website as a means of disclosing material, non-public information and for complying with our disclosure obligations under Securities and Exchange Commission (SEC) Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Investor Relations portion of our website, in addition to following our press releases, SEC filings, and public conference calls and webcasts. The information contained on, or that may be accessed through, our website is not incorporated by reference into, and is not a part of, this report.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Any written or oral statements made by us or on our behalf may include forward-looking statements that reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks, uncertainties, and other factors that could, should potential events occur, cause actual results to differ materially from such statements. These risks, uncertainties, and other factors (which are described in more detail elsewhere herein and in other documents we file with the 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), 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 following a catastrophic event; and	
 
 	•	 	complex coverage and regulatory issues such as whether losses occurred from storm surge or flooding and related lawsuits;	
 
 	•	 	infection rates and severity of pandemics and their effects on our business operations and claims activity;	
 
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 	•	 	actions that rating agencies may take from time to time, such as financial strength or credit ratings downgrades or placing these ratings on credit watch negative or the equivalent;	
 
 	•	 	global political conditions, the occurrence of any terrorist attacks, including any nuclear, radiological, biological, or chemical events, or the outbreak and effects of war, and possible business disruption or economic contraction that may result from such events;	
 
 	•	 	the ability to collect reinsurance recoverable, credit developments of reinsurers, and any delays with respect thereto and changes in the cost, quality, or availability of reinsurance;	
 
 	•	 	actual loss experience from insured or reinsured events and the timing of claim payments;	
 
 	•	 	the uncertainties of the loss-reserving and claims-settlement processes, including the difficulties associated with assessing environmental damage and asbestos-related latent injuries, the impact of aggregate-policy-coverage limits, and the impact of bankruptcy protection sought by various asbestos producers and other related businesses and the timing of loss payments;	
 
 	•	 	judicial decisions and rulings, new theories of liability, legal tactics, and settlement terms;	
 
 	•	 	the effects of public company bankruptcies and/or accounting restatements, as well as disclosures by and investigations of public companies relating to possible accounting irregularities, and other corporate governance issues, including the effects of such events on:	
 
 	•	 	the capital markets;	
 
 	•	 	the markets for directors and officers and errors and omissions (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, or the impact of acquisitions on our pre-existing organization;	
 
 	•	 	risks associated with our re-domestication to Switzerland, 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;	
 
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 	•	 	changing rates of inflation and other economic conditions, for example, recession;	
 
 	•	 	the amount of dividends received from subsidiaries;	
 
 	•	 	loss of the services of any of our executive officers without suitable replacements being recruited in a reasonable time frame;	
 
 	•	 	the ability of our technology resources to perform as anticipated; and	
 
 	•	 	management’s response to these factors and actual events (including, but not limited to, those described above).	
The words “believe,” “anticipate,” “estimate,” “project,” “should,” “plan,” “expect,” “intend,” “hope,”, “feel”, “will likely result,” or “will continue,” and variations thereof and similar expressions, identify forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
ACE Limited is the holding company of the ACE Group of Companies. ACE opened its business office in Bermuda in 1985 and continues to maintain operations in Bermuda. ACE Limited, which is headquartered in Zurich, Switzerland, and its direct and indirect subsidiaries (collectively, the ACE Group of Companies, ACE, the Company, we, us, or our) are a global insurance and reinsurance organization, with operating subsidiaries in more than 50 countries serving the needs of commercial and individual customers in more than 140 countries. We serve the P&C insurance needs of businesses of all sizes in a broad range of industries. We also provide specialized insurance products – such as personal accident, supplemental health and life insurance – to individuals in select countries. At March 31, 2010, ACE had total assets of $79.3 billion and shareholders’ equity of $20.6 billion.
Our product and geographic diversification differentiates us from the vast majority of our competitors and has been a source of stability during periods of industry volatility. Our long-term business strategy focuses on sustained growth in book value achieved through a combination of underwriting and investment income. By doing so, we provide value to our clients and shareholders through the utilization of our substantial capital base in the insurance and reinsurance markets.
We operate through the following business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life. The Insurance – North American segment includes our wholesale divisions ACE Westchester and ACE Bermuda; and our retail divisions ACE USA (including ACE Canada), 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 Europe, 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), 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 2009 Form 10-K.
 
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The following table shows a breakdown of our net premiums written for the years ended December 31, 2009 and 2008. This table augments the consolidated line of business disclosure as presented in “Consolidated Operating Results”, under Item 7 of our 2009 Form 10-K.

 	  	2009	  	2008	
Net premiums written	  			  			
Retail P&C	  	$	6,347	  	$	6,289	
Wholesale	  	 	2,222	  	 	2,426	
Reinsurance	  	 	1,038	  	 	914	
	  	 	 	  	 	 	
Property, casualty and all other	  	 	9,607	  	 	9,629	
Personal accident (A&H)	  	 	3,229	  	 	3,019	
Life	  	 	463	  	 	432	
	  	 	 	  	 	 	
Total Consolidated	  	$	13,299	  	$	13,080	
	  	 	 	  	 	 	
Market Conditions
For the quarter ended March 31, 2010, our industry experienced several significant natural catastrophes, continued impact of recession, and competitive market conditions. ACE’s losses in connection with the natural catastrophes were modest relative to estimated industry losses. We believe this demonstrates our commitment to underwriting discipline and sound risk management, as well as our underwriting decision to limit our exposure to non-U.S. catastrophe reinsurance due to inadequate pricing and, in many instances, what we believe to be a lack of credible data. For an overview of protections we have in place with respect to natural catastrophes, refer to the section entitled, “Natural Catastrophe Reinsurance Program”.
We are currently operating in a competitive insurance market and we believe that the significant industry losses associated with recent catastrophes are unlikely to change market conditions. As a result, we believe that the competitive market our industry is currently experiencing will continue. Client business exposures that we use for rating purposes decreased approximately 5-6 percent in the quarter ended March 31, 2010, particularly client sales-related exposures, and this has had an adverse impact on premium revenue. Insurance lags the broader economic activity and for our clients that renewed in the first quarter of 2010, we rated off of a base that began with their 2009 exposures.
Generally speaking for ACE, while there has been less opportunity to write new business at an acceptable return, there is still much opportunity globally nonetheless because of our geographic and product capability. In the U.S., our retail P&C insurance business, including personal lines, grew while reporting stable renewal retention ratios. However, because of our decision to invest and grow last year, particularly in numerous specialty-casualty related areas, our available renewal premium in the quarter ended March 31, 2010, was higher compared to the prior year quarter in a number of areas such as professional lines, excess casualty, environmental, and construction. Our premium growth in North America also benefited in the quarter ended March 31, 2010, from our capability to handle complex and fronted business, which added to our reported growth. Pricing for the business we wrote in the quarter ended March 31, 2010, decreased modestly in North America. In general, pricing on new business was less favorable than on renewals, and varied by line of business. On the international side, retail P&C insurance grew in constant dollars during the first quarter of 2010, and reported stable renewal retention ratios, while pricing decreased modestly, compared with the prior year quarter. Our Global Reinsurance segment reported growth in the quarter ended March 31, 2010, although it was primarily a consequence of the business we wrote in 2009.
A&H growth rates are generally stabilizing, though it varies by region and business. Growth continues to be impacted by recession globally – exhibited by among other things lower employee counts, fewer travelers, and a slow return or of return to consumer credit. Combined Insurance reported modest growth in constant dollars and we are beginning to benefit from modernizing efforts in their U.S. business. We are optimistic about the future
 
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for this U.S. business and we are adopting the model in and exporting it to other markets. For the quarter ended March 31, 2010, Combined’s other large markets, Australia and New Zealand reported growth, and Spain is beginning to exhibit signs of improvement, while the U.K. is stabilizing and Ireland continues to lag. We believe that international A&H has stabilized but is not yet demonstrating real growth. We expect both Combined Insurance and International A&H to continue to improve and resume positive and meaningful growth as 2010 progresses, particularly in the second half of the year.
Consolidated Operating Results – Three Months Ended March 31, 2010 and 2009

 	  	Three Months Ended
March 31	 	 	% change	 	
 	  	    2010    	 	 	    2009    	 	 	Q-10 vs.
Q-09	 	
 	  	(in millions of U.S. dollars)	 	 	 	 	
Net premiums written	  	$	3,571	 	 	$	3,424	 	 	4	% 	
Net premiums earned	  	 	3,277	 	 	 	3,194	 	 	3	% 	
Net investment income	  	 	504	 	 	 	502	 	 	0	% 	
Net realized gains (losses)	  	 	168	 	 	 	(121	) 	 	NM	  	
	  	 	 	 	 	 	 	 	 	 	 	
Total revenues	  	 	3,949	 	 	 	3,575	 	 	10	% 	
	  	 	 	 	 	 	 	 	 	 	 	
Losses and loss expenses	  	 	1,921	 	 	 	1,816	 	 	6	% 	
Policy benefits	  	 	87	 	 	 	99	 	 	(12	)% 	
Policy acquisition costs	  	 	554	 	 	 	481	 	 	15	% 	
Administrative expenses	  	 	460	 	 	 	420	 	 	10	% 	
Interest expense	  	 	52	 	 	 	53	 	 	(2	)% 	
Other (income) expense	  	 	(4	) 	 	 	14	 	 	NM	  	
	  	 	 	 	 	 	 	 	 	 	 	
Total expenses	  	 	3,070	 	 	 	2,883	 	 	6	% 	
	  	 	 	 	 	 	 	 	 	 	 	
Income before income tax	  	 	879	 	 	 	692	 	 	27	% 	
Income tax expense	  	 	124	 	 	 	125	 	 	(1	)% 	
	  	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	755	 	 	$	567	 	 	33	% 	

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 for the periods indicated.

 	  	Three Months Ended
March 31, 2010	 	
 	  	P&C	 	 	A&H	 	 	Total	 	
Net premiums written:	  			 			 			
Growth in original currency	  	0.8	% 	 	(0.4	)% 	 	0.6	% 	
Foreign exchange effect	  	2.4	% 	 	8.3	% 	 	3.7	% 	
	  	 	 	 	 	 	 	 	 	
Growth as reported in U.S. dollars	  	3.2	% 	 	7.9	% 	 	4.3	% 	
	  	 	 	 	 	 	 	 	 	
Net premiums earned:	  			 			 			
Growth in original currency	  	(1.8	)% 	 	0.3	% 	 	(1.3	)% 	
Foreign exchange effect	  	2.5	% 	 	8.7	% 	 	3.9	% 	
	  	 	 	 	 	 	 	 	 	
Growth as reported in U.S. dollars	  	0.7	% 	 	9.0	% 	 	2.6	% 	
	  	 	 	 	 	 	 	 	 	
Net premiums written, which reflect the premiums we retain after purchasing reinsurance protection, increased in the quarter ended March 31, 2010, compared with the prior year quarter, primarily due to a favorable foreign
 
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exchange impact in our international operations, as the U.S. dollar weakened against major currencies. We reported growth in our U.S. retail specialty casualty, national account business inclusive of our assumed loss portfolio business, professional, and personal lines operations, as well as our global reinsurance business and Life segment. Growth in the quarter ended March 31, 2010, was partially offset by a decline in crop which experienced a lower adjustment to net premiums written and earned in connection with the annual first quarter crop settlement; refer to Insurance – North American. Net premiums written and earned include $84 million and $31 million related to assumed loss portfolio business for the quarters ended March 31, 2010 and 2009, respectively. Net premium written and earned were reduced by $25 million due to reinstatement premiums expensed in connection with the catastrophe activity for the quarter ended March 31, 2010.
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 quarter ended March 31, 2010, compared with the prior year quarter, primarily due to favorable foreign exchange impact.
The following table provides a consolidated breakdown of net premiums earned by line of business for the periods indicated.

 	  	Three Months Ended
March 31	 	 	% change	 	
 	  	      2010      	 	 	      2009      	 	 	Q-10 vs.
Q-09	 	
 	  	(in millions of U.S. dollars)	 	 	 	 	
Property and all other	  	$	916	 	 	$	983	 	 	(7	)% 	
Casualty	  	 	1,427	 	 	 	1,367	 	 	4	% 	
	  	 	 	 	 	 	 	 	 	 	 	
Subtotal	  	 	2,343	 	 	 	2,350	 	 	(0	)% 	
Personal accident (A&H)	  	 	810	 	 	 	743	 	 	9	% 	
Life	  	 	124	 	 	 	101	 	 	23	% 	
	  	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	  	$	3,277	 	 	$	3,194	 	 	3	% 	

 	  	2010
% of total	 	 	2009
% of total	 	 	 	 	
Property and all other	  	 	28	% 	 	 	31	% 	 			
Casualty	  	 	44	% 	 	 	43	% 	 			
	  	 	 	 	 	 	 	 	 			
Subtotal	  	 	72	% 	 	 	74	% 	 			
Personal accident (A&H)	  	 	25	% 	 	 	23	% 	 			
Life	  	 	3	% 	 	 	3	% 	 			
	  	 	 	 	 	 	 	 	 			
Net premiums earned	  	 	100	% 	 	 	100	% 	 			
	  	 	 	 	 	 	 	 	 			
Net investment income was stable in the quarter ended March 31, 2010, compared with the prior year quarter. 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.
 
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The following table shows our consolidated loss and loss expense ratio, policy acquisition ratio, administrative expense ratio, and combined ratio for the periods indicated.

 	  	Three Months Ended
March 31	 	
 	  	2010	 	 	2009	 	
Loss and loss expense ratio	  	61.9	% 	 	59.7	% 	
Policy acquisition cost ratio	  	17.0	% 	 	15.2	% 	
Administrative expense ratio	  	13.9	% 	 	12.6	% 	
	  	 	 	 	 	 	
Combined ratio	  	92.8	% 	 	87.5	% 	
	  	 	 	 	 	 	
The following table shows the impact of catastrophe losses, reinstatement premiums, prior period development, and other significant events on our consolidated loss and loss expense ratio for the periods indicated.

 	  	Three Months Ended
March 31	 	
 	  	2010	 	 	2009	 	
Loss and loss expense ratio, as reported	  	61.9	% 	 	59.7	% 	
Catastrophe losses	  	(5.6	)% 	 	(1.3	)% 	
Prior period development excluding crop/hail results	  	1.8	% 	 	2.1	% 	
Prior period development crop/hail related	  	3.0	% 	 	0.2	% 	
	  	 	 	 	 	 	
Loss and loss expense ratio, adjusted	  	61.1	% 	 	60.7	% 	
	  	 	 	 	 	 	
The following table shows our consolidated loss and loss expense ratio, policy acquisition ratio, administrative expense ratio, and combined ratio, all excluding the impact of the prior crop-year settlements for the periods indicated.

 	  	Three Months Ended
March 31	 	
 	  	2010	 	 	2009	 	
Loss and loss expense ratio	  	65.0	% 	 	58.7	% 	
Policy acquisition cost ratio	  	15.7	% 	 	15.6	% 	
Administrative expense ratio	  	14.1	% 	 	13.3	% 	
	  	 	 	 	 	 	
Combined ratio	  	94.8	% 	 	87.6	% 	

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The table below shows the impact of the catastrophe losses by segment for the quarter ended March 31, 2010.

Catastrophe Loss Charges - By Event	  	Insurance -
North
American	 	 	Insurance -
Overseas
General	 	 	Global
Reinsurance	 	 	Consolidated	 	
 	  	(in millions of U.S. dollars, except for percentages)	 	
Gross loss	  				 				 				 	$	425	 	
					
Net loss:	  				 				 				 				
Haiti earthquake	  	$	4	 	 	$	2	 	 	$	—  	  	 	$	6	 	
Chile earthquake	  	 	5	 	 	 	22	 	 	 	7	 	 	 	34	 	
France windstorm	  	 	—  	  	 	 	5	 	 	 	5	 	 	 	10	 	
Australia storms	  	 	—  	  	 	 	15	 	 	 	17	 	 	 	32	 	
US catastrophes	  	 	43	 	 	 	5	 	 	 	2	 	 	 	50	 	
Other (1)	  	 	—  	  	 	 	15	 	 	 	1	 	 	 	16	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	52	 	 	$	64	 	 	$	32	 	 	$	148	 	
Reinstatement premiums (expensed) collected	  	 	(3	) 	 	 	(24	) 	 	 	2	 	 	 	(25	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total before income tax	  	 	55	 	 	 	88	 	 	 	30	 	 	 	173	 	
Income tax benefit	  	 	(16	) 	 	 	(7	) 	 	 	(1	) 	 	 	(24	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total after income tax	  	$	39	 	 	$	81	 	 	$	29	 	 	$	149	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Effective tax rate	  	 	29	% 	 	 	8	% 	 	 	3	% 	 	 	14	% 	

(1)	Primarily includes catastrophes in Madeira and French Polynesia.	
We experienced net pre-tax catastrophe losses of $148 million (before reinstatement premiums expensed) in the quarter ended March 31 2010, compared with net catastrophe losses of $38 million in the prior year quarter. The catastrophe losses incurred during the quarter ended March 31, 2010, were primarily related to severe weather-related events in the U.S., an earthquake in Chile, and storms in Australia.
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 $96 million and $67 million of net favorable prior period development in the quarters ended March 31, 2010 and 2009, 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 increased in the quarter ended March 31, 2010, compared with prior year quarter primarily due to the impact of the annual crop settlement, which generated higher profit-share commissions and a lower adjustment to net premiums earned, as well as the impact of reinstatement premiums expensed in connection with catastrophe activity. Our administrative expense ratio increased in the quarter ended March 31, 2010, compared with the prior year quarter, primarily due to the impact of the first quarter crop settlement, as well as the impact of reinstatement premiums expensed and increased costs in our international operations. Although the annual crop settlement generates minimal administrative expenses, it resulted in a lower adjustment to net premiums earned in 2010, compared with 2009. The increases in our administrative expense and policy acquisition cost ratios was partially offset by the impact of the increased assumed loss portfolio businesses, which generates minimal expenses.
Our effective income tax rate, which we calculate as income tax expense divided by income before income tax, is dependent upon the mix of earnings from different jurisdictions with various tax rates. A change in the geographic mix of earnings would change the effective income tax rate. Our effective tax rate on net income was
 
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14 percent in the quarter ended March 31, 2010, compared with 18 percent in the prior year quarter. The decrease in our effective tax rate was primarily due to a higher proportion of realized gains on investments being generated in low tax-paying jurisdictions.
Prior Period Development
The favorable prior period development of $96 million and $67 million during the quarters ended March 31, 2010 and 2009, respectively, was the net result of several underlying favorable and adverse movements. With respect to ACE’s crop business, ACE regularly receives reports from its managing general agent (MGA) relating to the previous crop year(s) in subsequent calendar quarters and this typically results in adjustments to the previously reported premiums, losses and loss expenses, and profit share commission. Commencing in the third quarter of 2009, prior period development for ACE’s crop business includes adjustments to both crop losses and loss expenses, and the related crop profit share commission. In the sections following the table 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 prior period development, (favorable) and adverse, by segment for the periods indicated.

Three months ended March 31	  	Long-tail	 	 	Short-tail	 	 	Total	 	 	% of net
unpaid
reserves*	 	
 	  	(in millions of U.S. dollars, except for percentages)	 	
2010	  				 				 				 			
Insurance – North American	  	$	6	 	 	$	(51	) 	 	$	(45	) 	 	0.3	% 	
Insurance – Overseas General	  	 	2	 	 	 	(39	) 	 	 	(37	) 	 	0.5	% 	
Global Reinsurance	  	 	(3	) 	 	 	(11	) 	 	 	(14	) 	 	0.6	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	5	 	 	$	(101	) 	 	$	(96	) 	 	0.4	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2009	  				 				 				 			
Insurance – North American	  	$	19	 	 	$	(29	) 	 	$	(10	) 	 	0.1	% 	
Insurance – Overseas General	  	 	—  	  	 	 	(24	) 	 	 	(24	) 	 	0.4	% 	
Global Reinsurance	  	 	(9	) 	 	 	(25	) 	 	 	(34	) 	 	1.3	% 	
Life	  	 	—  	  	 	 	1	 	 	 	1	 	 	0.5	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	10	 	 	$	(77	) 	 	$	(67	) 	 	0.3	% 	

*	Calculated based on the segment beginning of period net unpaid loss and loss expenses reserves.	
Insurance – North American
Insurance – North American experienced net favorable prior period development of $45 million in the quarter ended March 31, 2010, compared with net favorable prior period development of $10 million in the prior year quarter. The net prior period development for the quarter ended March 31, 2010, was the net result of several underlying favorable and adverse movements, driven by the following principal changes:
 
 	•	 	Net adverse development of $6 million on long-tail business, including:	
 
 	•	 	Adverse development of $30 million on excess liability coverage in report year 2007, due to development on known claims during the quarter ended March 31, 2010;	
 
 	•	 	Adverse development of $30 million in our small and middle market guaranteed cost workers’ compensation portfolios, primarily affecting the 2008 and 2009 accident years. During the 2009 calendar year, we experienced an increasing trend in claims frequency for these accident years. Our	
 
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 	prior analyses assumed flat to declining claims frequency which is consistent with industry trends. In addition, we experienced a continuation of upward trends in allocated claims expenses. Both of these were reflected in the loss reserve analysis completed in the quarter ended March 31, 2010;	
 
 	•	 	Favorable development of $40 million within Financial Solutions International (FSI) due to an agreement reached during the quarter ended March 31, 2010, to commute a specific FSI contract;	
 
 	•	 	Favorable development of $9 million in our commercial surety business primarily associated with the 2008 accident year. Loss emergence during the 2009 calendar year for the 2008 and prior accident years was lower than expected. In our prior analyses, we had anticipated higher claim costs due to the impact of the recession. These higher costs did not materialize in our portfolio and were reflected in the annual loss reserve analysis completed in the quarter ended March 31, 2010;	
 
 	•	 	Favorable development of $8 million in our construction business primarily affecting the 2005 and prior accident years. The improvement was due to lower than expected paid and incurred activity in the workers’ compensation portion of the portfolio;	
 
 	•	 	Adverse development of $5 million in our errors and omissions portfolios. Favorable development on the 2006 and prior accident years was more than offset by adverse development on the 2007 and 2008 accident years. The adverse movement on these more recent accident years was due in large part to a reassessment of exposure on a small number of large claims associated with the credit crisis;	
 
 	•	 	Favorable development of $38 million in our excess casualty businesses primarily affecting the 2004 and prior accident years. Incurred losses have continued to be favorable relative to our projections; in addition, as these accident years have matured more weight has been given to experience-based methods which have also resulted in a refinement of our estimate;	
 
 	•	 	Adverse development of $22 million in our wholesale primary casualty book, primarily in the 2004-2006 accident years, as reported incurred losses have continued to develop at a higher rate than either our historical averages or industry data;	
 
 	•	 	Adverse development of $6 million in our environmental liability product line concentrated in the 2006 and 2007 accident years. There was adverse movement on two large claims during the 2009 calendar year which prompted an increase in our estimate of ultimate loss and loss expenses when a detailed study of this exposure was completed in the quarter ended March 31, 2010; and	
 
 	•	 	Adverse development of $6 million associated with assumptions from pools, primarily the National Workers’ Compensation Reinsurance Pool. The development affected the 2007-2009 accident years.	
 
 	•	 	Net favorable development of $51 million on short-tail business, including:	
 
 	•	 	Favorable development of $41 million in our Crop Hail business associated with the 2009 and prior crop years. The $41 million is the net of improvement in the loss estimate ($86 million) and a corresponding increase in profit share commission expense ($45 million) to the MGA; and	
 
 	•	 	Favorable development of $9 million in the aerospace and aviation product lines primarily affecting the 2007-2009 accident years. Reported loss activity, both development and new claims emergence was lower than expected in our prior review.	
The net prior period development for the quarter ended March 31, 2009, was the net result of several underlying adverse and favorable movements.
 
 	•	 	Net adverse development of $19 million on long-tail business including:	
 
 	•	 	Adverse development totaling $13 million on excess liability coverage in report year 2005 in response to a court decision made during the quarter ended March 31, 2009;	
 
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 	•	 	Adverse development of $16 million in our small and middle market guaranteed cost workers’ compensation portfolios, primarily affecting the 2007 and 2008 accident years. The deterioration was a function of higher allocated claims expenses than forecast. A possible trend in higher allocated costs was first observed in mid-2008. A study of these costs was completed early in the quarter ended March 31, 2009, leading to an increase in our estimates for these accident years;	
 
 	•	 	Favorable development of $15 million in our commercial surety business primarily associated with the 2007 accident year. Our estimates of ultimate losses anticipated higher than normal levels of incurred loss development due to the impact of the recession. The actual loss activity for the 2007 accident year in calendar year 2008 was in line with historical averages despite the downturn in the economy;	
 
 	•	 	Favorable development of $10 million in our construction business primarily affecting the 2005 and prior accident years. The improvement was due to the combination of new information on accounts where we had previously projected losses to erode underlying aggregate limits as well as lower than expected incurred loss activity on these accounts;	
 
 	•	 	Adverse development of $11 million in our errors and omissions (E&O) portfolios due to higher than expected defense obligations on two large claims in the 2002 and 2004 accident years and higher than expected incurred loss activity on the 2005-2008 accident years on a portfolio of architects’ and engineers’ E&O;	
 
 	•	 	Favorable development of $10 million in our excess casualty business affecting the 2003 and prior accident years. Incurred losses have continued to be favorable relative to our projections; in addition, as these accident years have matured more weight has been given to experience-based methods, which have resulted in a refinement in estimate; and	
 
 	•	 	Adverse development of $12 million in our primary casualty book, primarily in the 2002-2004 accident years. During the quarter ended March 31, 2009, incurred losses and allocated loss adjustment expenses on this portfolio continued to develop adversely when compared to industry benchmarks and our internal historical experience.	
 
 	•	 	Net favorable development of $29 million on short-tail business including:	
 
 	•	 	Favorable development of $6 million in our crop/hail business associated with recording the bordereau primarily for the 2008 crop year; and	
 
 	•	 	Favorable development of $13 million on property business relating to reserve releases on the 2005-2008 accident years due to favorable development on known claims and lack of claims emergence.	
Insurance – Overseas General
Insurance – Overseas General experienced net favorable prior period development of $37 million in the quarter ended March 31, 2010, compared with net favorable prior period development of $24 million in the prior year quarter. The net prior period development for the quarter ended March 31, 2010, was primarily driven by the short-tail lines of fire, technical, and marine. The reserve releases were predominantly in the 2008 and 2009 accident years. These years had favorable loss emergence through year end 2009 that led to lower experience-based indications in the reviews conducted in the first quarter of 2010. The indications were provided more weight given the added credibility of an additional quarter of experience. In addition, a review of European emerging markets led to a reserve release of $17 million that was spread across short-tail P&C and A&H lines. Business in these countries started to grow in 2007, but previously had limited experience to justify changing initial expectations. Experience has now grown to sufficient credibility to support an actuarial review of losses through year-end 2009. This has led to reserve releases in the 2007-2009 accident years.
The net prior period development for the quarter ended March 31, 2009, was primarily driven by the short-tail lines of property, technical, and marine. The 2005-2007 accident years comprise $19 million of this favorable
 
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development. Given the maturity of these years, greater reliance was given to experience-based methods. The remainder of the favorable development was in the 2008 accident year. On average, most claims are usually reported before or soon after the accident period in these short-tail lines. Based on a review of the 2008 accident year losses through year-end 2008, a reserve release of $6 million was booked.
Global Reinsurance
Global Reinsurance experienced net favorable prior period development of $14 million in the quarter ended March 31, 2010, compared with net favorable prior period development of $34 million in the prior year quarter. The net prior period development for the quarter ended March 31, 2010, was the net result of several underlying favorable and adverse movements. There was net favorable development of $3 million on long-tail business primarily from the workers’ compensation catastrophe line of business across the 2005-2007 treaty years. The development was the result of a detailed reserve analysis on this line of business. In addition, there was net favorable development of $11 million on short-tail business including:
 
 	•	 	Favorable development of $7 million from credit and surety lines of business for the treaty years 2004-2007 which was the result of a detailed reserve analysis on this line of business; and	
 
 	•	 	Favorable development of $4 million from the trade credit book in 2004 and prior treaty years. The development arose as a result of a detailed reserve analysis of this line of business in the quarter ended March 31, 2010, and the continued favorable development of case incurred losses relative to the assumptions used to establish the reserves.	
The net prior period development for the quarter ended March 31, 2009, was the net result of several underlying favorable and adverse movements. There was net favorable development of $9 million on long-tail business mostly from the workers’ compensation catastrophe line of business across the 2003-2006 treaty years. The development was the result of a detailed reserve analysis on this line of business. In addition, there was net favorable development of $25 million on short-tail business including:
 
 	•	 	Favorable development of $18 million from property catastrophe and property lines of business, with the largest development being in the 2008 treaty year and was principally a result of favorable case incurred loss emergence on Hurricane Ike claims in the quarter ended March 31, 2009; and	
 
 	•	 	Favorable development of $9 million from the trade credit book in 2004 and prior treaty years. The development arose as a result of a detailed reserve analysis of this line of business in the quarter ended March 31, 2009, and favorable development of case incurred losses relative to the assumptions used to establish the reserves.	
Life
Life experienced net favorable prior period development of less than $0.5 million in the quarter ended March 31, 2010, compared with net adverse prior period development of $1 million in the prior year quarter. The net prior period development for the quarter ended March 31, 2010, was all in the short-tail line of A&H, primarily in the 2008 accident year. The net prior period development for the quarter ended March 31, 2009, was all in the short-tail line of A&H, primarily in the 2008 accident year.
Segment Operating Results – Three Months Ended March 31, 2010 and 2009
The discussions that follow include tables that show our segment operating results for the quarters ended March 31, 2010 and 2009.
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 2009 Form 10-K.
 
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Insurance – North American
The Insurance – North American segment comprises our operations in the U.S., Canada, and Bermuda. This segment includes our wholesale divisions ACE Westchester and ACE Bermuda and our retail divisions ACE USA (including ACE Canada), ACE Private Risk Services, and various run-off operations, including Brandywine Holdings Corporation (Brandywine).

 	  	Three Months Ended
March 31	 	 	% Change	 	
 	  	    2010    	 	 	    2009    	 	 	Q-10 vs.
Q-09	 	
 	  	(in millions of U.S. dollars)	 	 	 	 	
Net premiums written	  	$	1,395	 	 	$	1,392	 	 	0	% 	
Net premiums earned	  	 	1,370	 	 	 	1,437	 	 	(5	)% 	
Losses and loss expenses	  	 	938	 	 	 	1,004	 	 	(7	)% 	
Policy acquisition costs	  	 	156	 	 	 	123	 	 	27	% 	
Administrative expenses	  	 	148	 	 	 	140	 	 	6	% 	
	  	 	 	 	 	 	 	 	 	 	 	
Underwriting income	  	 	128	 	 	 	170	 	 	(25	)% 	
Net investment income	  	 	278	 	 	 	263	 	 	6	% 	
Net realized gains (losses)	  	 	80	 	 	 	(120	) 	 	NM	  	
Other (income) expense	  	 	(5	) 	 	 	4	 	 	NM	  	
Income tax expense	  	 	104	 	 	 	96	 	 	8	% 	
	  	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	387	 	 	$	213	 	 	82	% 	
	  	 	 	 	 	 	 	 	 	 	 	
Loss and loss expense ratio	  	 	68.5	% 	 	 	69.9	% 	 			
Policy acquisition cost ratio	  	 	11.4	% 	 	 	8.6	% 	 			
Administrative expense ratio	  	 	10.8	% 	 	 	9.7	% 	 			
	  	 	 	 	 	 	 	 	 			
Combined ratio	  	 	90.7	% 	 	 	88.2	% 	 			
	  	 	 	 	 	 	 	 	 			
Insurance – North American reported stable net premiums written in the quarter ended March 31, 2010, compared with the prior year quarter. In our retail division, we reported an increase in assumed loss portfolio business of approximately $50 million and also experienced growth in workers’ compensation, professional risk, and casualty risk as well as favorable foreign exchange impact on our Canadian business. Risk management business inclusive of assumed loss portfolio business was stable in the quarter ended March 31, 2010, compared with the prior year quarter. Net premiums written in our wholesale operation declined in the quarter ended March 31, 2010, compared with the prior year quarter, primarily due to the impact of the annual first quarter crop settlement, partially offset by growth in property and professional lines. During the first quarter of each calendar year, we receive the results from the previous crop year which typically require us to make adjustments to previously estimated premiums, losses and loss expenses, and profit share commission. The annual first quarter crop settlement increased net premiums written by approximately $60 million in the quarter ended March 31, 2010, compared with approximately $150 million in the prior year quarter. The impact of the crop settlement on our ratios is included in a table below. Our personal lines business reported solid growth in the quarter ended March 31, 2010, compared with the prior year quarter.
 
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The following two tables provide a line of business breakdown of Insurance – North American’s net premiums earned for the periods indicated.

 	  	Three Months Ended
March 31	 	 	% Change	 	
 	  	    2010    	 	 	    2009    	 	 	Q-10 vs.
Q-09	 	
 	  	(in millions of U.S. dollars)	 	 	 	 	
Property and all other	  	$	358	 	 	$	417	 	 	(14	)% 	
Casualty	  	 	944	 	 	 	960	 	 	(2	)% 	
Personal accident (A&H)	  	 	68	 	 	 	60	 	 	13	% 	
	  	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	  	$	1,370	 	 	$	1,437	 	 	(5	)% 	

 	  	2010
% of
Total	 	 	2009
% of
Total	 	 	 	 	
Property and all other	  	 	26	% 	 	 	29	% 	 			
Casualty	  	 	69	% 	 	 	67	% 	 			
Personal accident (A&H)	  	 	5	% 	 	 	4	% 	 			
	  	 	 	 	 	 	 	 	 			
Net premiums earned	  	 	100	% 	 	 	100	% 	 			
	  	 	 	 	 	 	 	 	 			
Insurance – North American reported a decline in net premiums earned in the quarter ended March 31, 2010, compared with the prior year quarter, primarily due to the impact of the decline in crop business, and lower wholesale casualty business. This decrease was partially offset by the increases in production for workers’ compensation, professional risk, and personal lines as well as favorable foreign exchange impact. The risk management business was stable due to the $50 million increase in assumed loss portfolio business.
The following table shows the impact of catastrophe losses, reinstatement premiums, and prior period development on our loss and loss expense ratio for the periods indicated.

 	  	Three Months Ended
March 31	 	
 	  	2010	 	 	2009	 	
Loss and loss expense ratio, as reported	  	68.5	% 	 	69.9	% 	
Catastrophe losses	  	(4.0	)% 	 	(0.3	)% 	
Prior period development excluding crop/hail results	  	0.3	% 	 	0.3	% 	
Prior period development crop/hail related	  	6.3	% 	 	0.4	% 	
	  	 	 	 	 	 	
Loss and loss expense ratio, adjusted	  	71.1	% 	 	70.3	% 	
	  	 	 	 	 	 	
The following table shows our loss and loss expense ratio, policy acquisition ratio, administrative expense ratio, and combined ratio, all excluding the impact of the prior crop-year settlement for the periods indicated.

 	  	Three Months Ended
March 31	 	
 	  	2010	 	 	2009	 	
Loss and loss expense ratio	  	75.4	% 	 	69.0	% 	
Policy acquisition cost ratio	  	8.4	% 	 	8.7	% 	
Administrative expense ratio	  	11.2	% 	 	10.8	% 	
	  	 	 	 	 	 	
Combined ratio	  	95.0	% 	 	88.5	% 	

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Insurance – North American’s net catastrophe losses were $52 million in the quarter ended March 31, 2010, compared with $4 million in the prior year quarter. Catastrophe losses for the quarter ended March 31, 2010, 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 $45 million in 2010, compared with net favorable prior period development of $10 million in the prior year quarter. Refer to “Prior Period Development” for more information.
Insurance – North American’s policy acquisition cost ratio increased in the quarter ended March 31, 2010, compared with the prior year quarter, primarily due to the impact of the annual crop settlement which generated higher profit-share commissions and a lower adjustment to net premiums earned compared with the prior year quarter. In addition, our retail units experienced a shift in mix of business towards higher commission specialty casualty business, professional, and personal lines partially offset by the increase in assumed loss portfolio business which typically generates minimal acquisition costs. Insurance – North American’s administrative expense ratio increased in the quarter ended March 31, 2010, primarily due to the impact of the first quarter crop settlement which resulted in a lower adjustment to net premiums earned compared with the prior year quarter. The annual crop settlement generates minimal administrative expenses. In addition, there were modest increases in expenses across the segment, reflecting product growth and expansion of our specialty casualty, professional and personal lines businesses, partially offset by the increase in assumed loss portfolio business.
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
March 31	 	 	% Change	 	
 	  	    2010    	 	 	    2009    	 	 	Q-10 vs.
Q-09	 	
 	  	(in millions of U.S. dollars)	 	 	 	 	
Net premiums written	  	$	1,420	 	 	$	1,327	 	 	7	% 	
Net premiums earned	  	 	1,251	 	 	 	1,184	 	 	6	% 	
Losses and loss expenses	  	 	701	 	 	 	613	 	 	14	% 	
Policy benefits	  	 	3	 	 	 	2	 	 	50	% 	
Policy acquisition costs	  	 	283	 	 	 	260	 	 	9	% 	
Administrative expenses	  	 	202	 	 	 	175	 	 	15	% 	
	  	 	 	 	 	 	 	 	 	 	 	
Underwriting income	  	 	62	 	 	 	134	 	 	(54	)% 	
Net investment income	  	 	114	 	 	 	120	 	 	(5	)% 	
Net realized gains (losses)	  	 	22	 	 	 	7	 	 	214	% 	
Other (income) expense	  	 	2	 	 	 	4	 	 	(50	)% 	
Income tax expense	  	 	14	 	 	 	46	 	 	(70	)% 	
	  	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	182	 	 	$	211	 	 	(14	)% 	
	  	 	 	 	 	 	 	 	 	 	 	
Loss and loss expense ratio	  	 	56.3	% 	 	 	52.0	% 	 			
Policy acquisition cost ratio	  	 	22.6	% 	 	 	21.9	% 	 			
Administrative expense ratio	  	 	16.1	% 	 	 	14.8	% 	 			
	  	 	 	 	 	 	 	 	 			
Combined ratio	  	 	95.0	% 	 	 	88.7	% 	 			

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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 for the period indicated.

 	  	Three Months Ended
March 31, 2010	 	
 	  	P&C	 	 	A&H	 	 	Total	 	
Net premiums written:	  			 			 			
Growth in original currency	  	1.3	% 	 	(3.2	)% 	 	(0.3	)% 	
Foreign exchange effect	  	5.3	% 	 	11.0	% 	 	7.4	% 	
	  	 	 	 	 	 	 	 	 	
Growth as reported in U.S. dollars	  	6.6	% 	 	7.8	% 	 	7.1	% 	
	  	 	 	 	 	 	 	 	 	
Net premiums earned:	  			 			 			
Growth in original currency	  	(2.5	)% 	 	(3.4	)% 	 	(2.9	)% 	
Foreign exchange effect	  	6.6	% 	 	11.5	% 	 	8.5	% 	
	  	 	 	 	 	 	 	 	 	
Growth as reported in U.S. dollars	  	4.1	% 	 	8.1	% 	 	5.6	% 	
	  	 	 	 	 	 	 	 	 	
Insurance – Overseas General’s net premiums written increased in the quarter ended March 31, 2010, compared with prior year quarter, primarily due to a strengthening of major currencies relative to the U.S. dollar. Our retail P&C business reported increases primarily due to new casualty business in the U.K., as well as growth in Europe, Asia Pacific, and Latin America. Our A&H business experienced a slight decline on a constant dollar basis as our U.K. and Asia Pacific operations reported lower net premiums written in the quarter ended March 31, 2010, compared with the prior year quarter. Our London wholesale business unit reported lower constant dollar production within most product lines as we continue to decline business submitted at prices we deem to be inadequate from an underwriting perspective. Net premiums written and earned were reduced by $24 million due to reinstatement premiums expensed in connection with the catastrophe activity for the quarter ended March 31, 2010.
Insurance – Overseas General’s net premiums earned increased in the quarter ended March 31, 2010, compared with the prior year quarter, primarily due to the favorable foreign exchange impact. On a constant dollar basis, net premiums earned decreased primarily due to lower wholesale writings, a decline in retail A&H business, and reinstatement premiums expensed in connection with catastrophe activity. Theses decreases were partially offset by increased retail property and financial lines.
 
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The following two tables provide a line of business and regional breakdown of Insurance – Overseas General’s net premiums earned for the periods indicated.

 	  	Three Months Ended
March 31	 	 	% Change	 	
 	  	    2010    	 	 	    2009    	 	 	Q-10 vs.
Q-09	 	
 	  	(in millions of U.S. dollars)	 	 	 	 	
Line of Business	  				 				 			
Property and all other	  	$	420	 	 	$	420	 	 	0	% 	
Casualty	  	 	345	 	 	 	315	 	 	10	% 	
Personal accident (A&H)	  	 	486	 	 	 	449	 	 	8	% 	
	  	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	  	$	1,251	 	 	$	1,184	 	 	6	% 	
	  	 	 	 	 	 	 	 	 	 	 	
Region	  				 				 			
Europe	  	$	537	 	 	$	531	 	 	1	% 	
Asia Pacific	  	 	214	 	 	 	176	 	 	22	% 	
Far East	  	 	112	 	 	 	114	 	 	(2	)% 	
Latin America	  	 	211	 	 	 	168	 	 	26	% 	
	  	 	 	 	 	 	 	 	 	 	 	
	  	 	1,074	 	 	 	989	 	 	9	% 	
ACE Global Markets	  	 	177	 	 	 	195	 	 	(9	)% 	
	  	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	  	$	1,251	 	 	$	1,184	 	 	6	% 	

 	  	Three Months Ended
March 31	 	 	 	 	
 	  	2010
% of
Total	 	 	2009
% of
Total	 	 	 	 	
Line of Business	  				 				 			
Property and all other	  	 	33	% 	 	 	35	% 	 			
Casualty	  	 	28	% 	 	 	27	% 	 			
Personal accident (A&H)	  	 	39	% 	 	 	38	% 	 			
	  	 	 	 	 	 	 	 	 			
Net premiums earned	  	 	100	% 	 	 	100	% 	 			
	  	 	 	 	 	 	 	 	 			
Region	  				 				 			
Europe	  	 	43	% 	 	 	45	% 	 			
Asia Pacific	  	 	17	% 	 	 	15	% 	 			
Far East	  	 	9	% 	 	 	10	% 	 			
Latin America	  	 	17	% 	 	 	14	% 	 			
	  	 	 	 	 	 	 	 	 			
	  	 	86	% 	 	 	84	% 	 			
ACE Global Markets	  	 	14	% 	 	 	16	% 	 			
	  	 	 	 	 	 	 	 	 			
Net premiums earned	  	 	100	% 	 	 	100	% 	 			

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

 	  	Three Months Ended
March 31	 	
 	  	2010	 	 	2009	 	
Loss and loss expense ratio, as reported	  	56.3	% 	 	52.0	% 	
Catastrophe losses	  	(6.1	)% 	 	(1.3	)% 	
Prior period development	  	2.9	% 	 	2.0	% 	
	  	 	 	 	 	 	
Loss and loss expense ratio, adjusted	  	53.1	% 	 	52.7	% 	
	  	 	 	 	 	 	
Net catastrophe losses were $64 million in the quarter ended March 31, 2010, compared with $15 million in the prior year quarter. Catastrophe losses in the quarter ended March 31, 2010, were primarily related to an earthquake in Chile and storms in Australia and Europe. Insurance – Overseas General experienced net favorable prior period development of $37 million and $24 million in the quarters ended March 31, 2010 and 2009, respectively. Refer to “Prior Period Development” for more information.
Insurance – Overseas General’s policy acquisition cost ratio increased in the quarter ended March 31, 2010, compared with the prior year quarter, primarily due to the impact of reinstatement premiums expensed and unfavorable foreign exchange. Insurance – Overseas General’s administrative expense ratio increased in the quarter ended March 31, 2010, primarily due to higher administrative expenses in certain of our retail operations, the impact of reinstatement premiums expensed, as well as reduced wholesale production.
Global Reinsurance
The Global Reinsurance segment represents ACE’s reinsurance operations, comprising ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re Europe, and ACE Tempest Re Canada. Global Reinsurance markets its reinsurance products worldwide under the ACE Tempest Re brand name and provides a broad range of coverage to a diverse array of primary P&C companies.

 	  	Three Months Ended
March 31	 	 	% change	 	
 	  	    2010    	 	 	    2009    	 	 	Q-10 vs.
Q-09	 	
 	  	(in millions of U.S. dollars)	 	 	 	 	
Net premiums written	  	$	371	 	 	$	359	 	 	3	% 	
Net premiums earned	  	 	276	 	 	 	238	 	 	16	% 	
Losses and loss expenses	  	 	151	 	 	 	87	 	 	74	% 	
Policy acquisition costs	  	 	54	 	 	 	51	 	 	6	% 	
Administrative expenses	  	 	12	 	 	 	12	 	 	0	% 	
	  	 	 	 	 	 	 	 	 	 	 	
Underwriting income	  	 	59	 	 	 	88	 	 	(33	)% 	
Net investment income	  	 	69	 	 	 	72	 	 	(4	)% 	
Net realized gains (losses)	  	 	31	 	 	 	11	 	 	182	% 	
Other (income) expense	  	 	(4	) 	 	 	—  	  	 	NM	  	
Income tax expense	  	 	10	 	 	 	16	 	 	(38	)% 	
	  	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	153	 	 	$	155	 	 	(1	)% 	
	  	 	 	 	 	 	 	 	 	 	 	
Loss and loss expense ratio	  	 	54.7	% 	 	 	36.3	% 	 			
Policy acquisition cost ratio	  	 	19.6	% 	 	 	21.5	% 	 			
Administrative expense ratio	  	 	4.5	% 	 	 	5.2	% 	 			
	  	 	 	 	 	 	 	 	 			
Combined ratio	  	 	78.8	% 	 	 	63.0	% 	 			

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Global Reinsurance reported increased net premiums written in the quarter ended March 31, 2010, compared with the prior year quarter, primarily due to P&C production growth in the U.S., Europe, and Canada and favorable foreign exchange impact.
The following tables provide a line of business breakdown of Global Reinsurance’s net premiums earned for the periods indicated.

 	  	Three Months Ended
March 31	 	 	% Change	 	
 	  	    2010    	 	 	    2009    	 	 	Q-10 vs.
Q-09	 	
 	  	(in millions of U.S. dollars)	 	 	 	 	
Property and all other	  	$	66	 	 	$	76	 	 	(13	)% 	
Casualty	  	 	138	 	 	 	92	 	 	50	% 	
Property catastrophe	  	 	72	 	 	 	70	 	 	3	% 	
	  	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	  	$	276	 	 	$	238	 	 	16	% 	

 	  	2010
% of
Total	 	 	2009
% of
Total	 	 	 	 	
Property and all other	  	 	24	% 	 	 	32	% 	 			
Casualty	  	 	50	% 	 	 	39	% 	 			
Property catastrophe	  	 	26	% 	 	 	29	% 	 			
	  	 	 	 	 	 	 	 	 			
Net premiums earned	  	 	100	% 	 	 	100	% 	 			
	  	 	 	 	 	 	 	 	 			
Global Reinsurance’s net premiums earned increased in the quarter ended March 31, 2010, compared with the prior year quarter, primarily due to an increase in casualty reinsurance production in our U.S. operations.
The following table shows the impact of catastrophe losses, reinstatement premiums, and prior period development on this segment’s loss and loss expense ratio for the periods indicated.

 	  	Three Months Ended
March 31	 	
 	  	2010	 	 	2009	 	
Loss and loss expense ratio, as reported	  	54.7	% 	 	36.3	% 	
Catastrophe losses	  	(11.2	)% 	 	(7.8	)% 	
Prior period development	  	4.9	% 	 	14.3	% 	
	  	 	 	 	 	 	
Loss and loss expense ratio, adjusted	  	48.4	% 	 	42.8	% 	
	  	 	 	 	 	 	
Global Reinsurance recorded net catastrophe losses of $32 million in the quarter ended March 31, 2010, compared with $19 million in the prior year quarter. Catastrophe losses in the quarter ended March 31, 2010, were primarily related to storms in Australia and an earthquake in Chile. Global Reinsurance experienced net favorable prior period development of $14 million and $34 million in the quarters ended March 31, 2010 and 2009, respectively. Refer to “Prior Period Development” for more information. The increase in the adjusted loss and loss expense ratio was due to a change in business mix which resulted in a greater proportion of casualty business production which typically generates higher loss ratios than property business.
Global Reinsurance’s policy acquisition costs ratio decreased in the quarter ended March 31, 2010, compared with the prior year quarter, primarily due to a reduction in commission accruals in our U.S. operations, partially offset by changes in business mix. The administrative expense ratio decreased in the quarter ended March 31, 2010, compared with the prior year quarter, primarily due to the increase in net premiums earned.
 
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Life
The Life segment includes ACE’s international life operations (ACE Life), ACE Tempest Life Re (ACE Life Re), and the North American supplemental A&H and life business of Combined Insurance. We assess the performance of our life business based on life underwriting income which includes net investment income.

 	  	Three Months Ended
March 31	  	%
Change	 	
 	  	    2010    	  	    2009    	  	Q-10 vs.
Q-09	 	
 	  	(in millions of U.S. dollars)	  	 	 	
Net premiums written	  	$	385	  	$	346	  	11	% 	
Net premiums earned	  	 	380	  	 	335	  	13	% 	
Losses and loss expenses	  	 	131	  	 	112	  	17	% 	
Policy benefits	  	 	84	  	 	97	  	(13	)% 	
Policy acquisition costs	  	 	61	  	 	47	  	30	% 	
Administrative expenses	  	 	58	  	 	58	  	0	% 	
Net investment income	  	 	43	  	 	46	  	(7	)% 	
	  	 	 	  	 	 	  	 	 	
Life underwriting income	  	 	89	  	 	67	  	33	% 	
Net realized gains (losses)	  	 	43	  	 	9	  	378	% 	
Other (income) expense	  	 	3	  	 	2	  	50	% 	
Income tax expense	  	 	14	  	 	6	  	133	% 	
	  	 	 	  	 	 	  	 	 	
Net income	  	$	115	  	$	68	  	69	% 	
	  	 	 	  	 	 	  	 	 	
The following table provides a line of business breakdown of life underwriting income for the periods indicated.

 	  	Three Months Ended
March 31	 	 	%
change	 	
 	  	    2010    	 	 	    2009    	 	 	Q-10 vs.
Q-09	 	
 	  	(in millions of U.S. dollars)	 	 	 	 	
Life reinsurance	  	$	44	 	 	$	26	 	 	69	% 	
Life insurance	  	 	(8	) 	 	 	(5	) 	 	(60	)% 	
A&H	  	 	53	 	 	 	46	 	 	15	% 	
	  	 	 	 	 	 	 	 	 	 	 	
Life underwriting income	  	$	89	 	 	$	67	 	 	33	% 	
	  	 	 	 	 	 	 	 	 	 	 	
Life underwriting income increased in the quarter ended March 31, 2010, compared with the prior year quarter, primarily due to favorable market movements in the life reinsurance business and increased premium retention in the North American supplemental A&H and life operations. ACE Life generated a modest underwriting loss due to on-going development costs in its businesses.
Net realized gains (losses), which are excluded from life underwriting income, relate primarily to the change in the net fair value of reported guaranteed minimum income benefits (GMIB) reinsurance liabilities and changes in the fair value of derivatives used to partially offset the risk in the variable annuity guarantee portfolio. During the quarter ended March 31, 2010, realized gains were associated with a decreasing net fair value of reported GMIB reinsurance liabilities, partially offset by a reduction in the value of hedge instruments. The residual realized gain for the quarter ended March 31, 2010, also included the impact of foreign exchange and changes in asset values.
 
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Other Income and Expense Items

 	  	Three Months Ended
March 31	 	
 	  	    2010    	 	 	    2009    	 	
 	  	(in millions of U.S. dollars)	 	
Equity in net (income) of partially-owned entities	  	$	(18	) 	 	$	(2	) 	
Noncontrolling interest expense	  	 	7	 	 	 	1	 	
Federal excise and capital taxes	  	 	3	 	 	 	3	 	
Other	  	 	4	 	 	 	12	 	
	  	 	 	 	 	 	 	 	
Other (income) expense	  	$	(4	) 	 	$	14	 	
	  	 	 	 	 	 	 	 	
Other (income) expense primarily comprises our equity in net income of investment funds, limited partnerships, partially-owned investment companies, Huatai Insurance Company of China, Limited, and Huatai Life Insurance Company of China, Limited, which are included in equity in net income of partially-owned entities. Other (income) expense also includes certain federal excise and capital taxes incurred as a result of capital management initiatives. These transactions are considered capital in nature and are excluded from underwriting results.
Net Investment Income

 	  	Three Months Ended
March 31	 	
 	  	    2010    	 	 	    2009    	 	
 	  	(in millions of U.S. dollars)	 	
Fixed maturities	  	$	514	 	 	$	480	 	
Short-term investments	  	 	7	 	 	 	13	 	
Equity securities	  	 	6	 	 	 	16	 	
Other	  	 	4	 	 	 	17	 	
	  	 	 	 	 	 	 	 	
Gross investment income	  	 	531	 	 	 	526	 	
Investment expenses	  	 	(27	) 	 	 	(24	) 	
	  	 	 	 	 	 	 	 	
Net investment income	  	$	504	 	 	$	502	 	
	  	 	 	 	 	 	 	 	
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 was stable in the quarter ended March 31, 2010, compared with the prior year quarter, as the impact of increased fixed maturities was offset by lower yields on new investments and short-term securities. The investment portfolio’s average market yield on fixed maturities was 4 percent and 6.3 percent at March 31, 2010 and 2009, respectively. Average market yield represents our net investment income divided by average cost of fixed maturities and other investments and average market value of equity securities.
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 3 c) to the Consolidated Financial Statements.
 
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Additionally, net income is impacted through the reporting of changes in the fair value of derivatives, including financial futures, options, swaps, and GMIB reinsurance. Changes in unrealized appreciation and depreciation on available for sale securities, which result from the revaluation of securities held, are reported as a separate component of accumulated other comprehensive income in shareholders’ equity.
The following tables present our pre-tax net realized and unrealized gains (losses), as well a breakdown of our OTTI and other net realized gains (losses) on investments for the periods indicated.

 	  	Three Months Ended
March 31, 2010	 	 	Three Months Ended
March 31, 2009	 	
 	  	Net
Realized
Gains
(Losses)	 	 	Net
Unrealized
Gains
(Losses)	 	 	Net
Impact	 	 	Net
Realized
Gains
(Losses)	 	 	Net
Unrealized
Gains
(Losses)	 	 	Net
Impact	 	
 	  	(in millions of U.S. dollars)	 	
Fixed maturities and short-term investments	  	$	81	 	 	$	423	 	 	$	504	 	 	$	(48	) 	 	$	(214	) 	 	$	(262	) 	
Equity securities	  	 	45	 	 	 	(24	) 	 	 	21	 	 	 	(100	) 	 	 	(28	) 	 	 	(128	) 	
Other	  	 	4	 	 	 	55	 	 	 	59	 	 	 	(57	) 	 	 	(25	) 	 	 	(82	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Subtotal	  	 	130	 	 	 	454	 	 	 	584	 	 	 	(205	) 	 	 	(267	) 	 	 	(472	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivatives	  				 				 				 				 				 				
Equity and fixed income derivatives	  	 	19	 	 	 	—  	  	 	 	19	 	 	 	55	 	 	 	—  	  	 	 	55	 	
Fair value adjustment on insurance derivatives	  	 	96	 	 	 	—  	  	 	 	96	 	 	 	(1	) 	 	 	—  	  	 	 	(1	) 	
S&P put option and futures	  	 	(59	) 	 	 	—  	  	 	 	(59	) 	 	 	25	 	 	 	—  	  	 	 	25	 	
Fair value adjustment on other derivatives	  	 	(9	) 	 	 	—  	  	 	 	(9	) 	 	 	(27	) 	 	 	—  	  	 	 	(27	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Subtotal derivatives	  	 	47	 	 	 	—  	  	 	 	47	 	 	 	52	 	 	 	—  	  	 	 	52	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Foreign exchange gains (losses)	  	 	(9	) 	 	 	—  	  	 	 	(9	) 	 	 	32	 	 	 	—  	  	 	 	32	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total gains (losses)	  	$	168	 	 	$	454	 	 	$	622	 	 	$	(121	) 	 	$	(267	) 	 	$	(388	) 	

 	  	Three Months Ended
March 31, 2010	 	 	Three Months Ended
March 31, 2009	 	
 	  	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	  	$	(18	) 	 	$	99	 	 	$	81	 	 	$	(88	) 	 	$	40	 	 	$	(48	) 	
Equity securities	  	 	—  	  	 	 	45	 	 	 	45	 	 	 	(25	) 	 	 	(75	) 	 	 	(100	) 	
Other	  	 	—  	  	 	 	4	 	 	 	4	 	 	 	(79	) 	 	 	22	 	 	 	(57	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total investment portfolio gains (losses)	  	$	(18	) 	 	$	148	 	 	$	130	 	 	$	(192	) 	 	$	(13	) 	 	$	(205	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Our net realized gains in the quarter ended March 31, 2010, included write-downs of $18 million as a result of conditions which caused us to conclude that the decline in fair value of certain securities was other-than-temporary. This compares with write-downs of $192 million in the prior year quarter. The impairments recorded in the quarter ended March 31, 2010, were related to fixed maturities on securities with below investment grade credit ratings of $1 million, and mortgage backed securities with both investment grade and below investment grade credit ratings of $17 million. Also included in net realized gains for the quarter ended March 31, 2010, was a $44 million gain on the sale of Assured Guaranty Ltd. (AGO) shares. Subsequent to the end of the first quarter of 2010, we sold all of our remaining interest in AGO.
At March 31, 2010, our investment portfolios held by U.S. legal entities included approximately $317 million of gross unrealized losses on fixed income investments. Our tax planning strategy related to these losses is based on our view that we will hold our fixed income investments until they recover their cost. As such, we have
 
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recognized a deferred tax asset of approximately $111 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 short-term funds of high credit quality with the objective of maintaining a stable principal balance. Certain investments in the money market mutual funds purchased with the securities lending collateral declined in value resulting in an unrealized loss of $28 million. The unrealized loss is attributable to fluctuations in market values of the underlying performing debt instruments held by the respective mutual funds, rather than default of a debt issuer. We concluded that the decline in value was temporary.
Investments
Our investment portfolio is invested primarily in publicly traded, investment grade fixed income securities with an average credit quality of AA (with one half invested in AAA securities), as rated by the independent investment rating service Standard and Poor’s (S&P). The portfolio is externally managed by independent, professional investment managers. The average duration of our fixed income securities, including the effect of options and swaps, was 3.7 years at March 31, 2010, and December 31, 2009. We estimate that a 100 basis point (bps) increase in interest rates would reduce our book value by approximately $1.7 billion at March 31, 2010.
We experienced net unrealized gains of $454 million in the quarter ended March 31, 2010, primarily due to continued tightening of credit spreads through the first quarter of 2010.
Our Other investments principally comprise direct investments, investment funds, and limited partnerships. Our exposure to sub-prime asset backed securities was $61 million at March 31, 2010, which represented less than one percent of our investment portfolio. We do not expect any material investment loss from our exposure to sub-prime mortgages. Our investment portfolio is broadly diversified across geographies, sectors, and issuers. We hold no collateralized debt obligations or collateralized loan obligations in our investment portfolio and we provide no credit default protection.
We have long-standing global credit limits for our entire portfolio across the organization. Exposures are aggregated, monitored, and actively managed by our Global Credit Committee, comprised of senior executives, including our Chief Financial Officer, our Chief Risk Officer, our Chief Investment Officer, and our Treasurer. We also have well-established, strict contractual investment rules requiring managers to maintain highly diversified exposures to individual issuers and closely monitor investment manager compliance with portfolio guidelines.
The following table shows the fair value and cost/amortized cost of our invested assets at March 31, 2010, and December 31, 2009.

 	  	March 31, 2010	  	December 31, 2009	
 	  	Fair
Value	  	Cost/
Amortized
Cost	  	Fair
Value	  	Cost/
Amortized
Cost	
 	  	(in millions of U.S. dollars)	
Fixed maturities available for sale	  	$	40,564	  	$	39,603	  	$	39,525	  	$	38,985	
Fixed maturities held to maturity	  	 	3,433	  	 	3,335	  	 	3,561	  	 	3,481	
Short-term investments	  	 	2,052	  	 	2,052	  	 	1,667	  	 	1,667	
	  	 	 	  	 	 	  	 	 	  	 	 	
	  	 	46,049	  	 	44,990	  	 	44,753	  	 	44,133	
Equity securities	  	 	316	  	 	271	  	 	467	  	 	398	
Other investments	  	 	1,472	  	 	1,332	  	 	1,375	  	 	1,258	
	  	 	 	  	 	 	  	 	 	  	 	 	
Total investments	  	$	47,837	  	$	46,593	  	$	46,595	  	$	45,789	
	  	 	 	  	 	 	  	 	 	  	 	 	
The fair value of our total investments increased $1.2 billion during the quarter ended March 31, 2010. The increase was primarily due to unrealized appreciation and the investing of operating cash flows.
 
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The following tables show the market value of our fixed maturities and short-term investments at March 31, 2010, and December 31, 2009. The first table lists investments according to type and the second according to S&P credit rating.

 	  	March 31, 2010	 	 	December 31, 2009	 	
 	  	Market
Value	  	Percentage
of Total	 	 	Market
Value	  	Percentage
of Total	 	
 	  	(in millions of U.S. dollars, except for percentages)	 	
Treasury	  	$	2,268	  	5	% 	 	$	2,068	  	5	% 	
Agency	  	 	2,449	  	5	% 	 	 	2,698	  	6	% 	
Corporate	  	 	14,149	  	31	% 	 	 	13,166	  	29	% 	
Mortgage-backed securities	  	 	11,406	  	25	% 	 	 	11,311	  	25	% 	
Asset-backed securities	  	 	343	  	1	% 	 	 	371	  	1	% 	
Municipal	  	 	2,091	  	4	% 	 	 	2,300	  	5	% 	
Non-U.S.	  	 	11,291	  	25	% 	 	 	11,172	  	25	% 	
Short-term investments	  	 	2,052	  	4	% 	 	 	1,667	  	4	% 	
	  	 	 	  	 	 	 	 	 	  	 	 	
Total	  	$	46,049	  	100	% 	 	$	44,753	  	100	% 	
	  	 	 	  	 	 	 	 	 	  	 	 	
AAA	  	$	23,472	  	51	% 	 	$	22,884	  	51	% 	
AA	  	 	4,003	  	9	% 	 	 	4,021	  	9	% 	
A	  	 	7,635	  	17	% 	 	 	7,461	  	17	% 	
BBB	  	 	5,024	  	11	% 	 	 	4,910	  	11	% 	
BB	  	 	3,009	  	6	% 	 	 	2,866	  	6	% 	
B	  	 	2,187	  	5	% 	 	 	2,029	  	5	% 	
Other	  	 	719	  	1	% 	 	 	582	  	1	% 	
	  	 	 	  	 	 	 	 	 	  	 	 	
Total	  	$	46,049	  	100	% 	 	$	44,753	  	100	% 	

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The table below summarizes the market value of our non-U.S. fixed income portfolio by country for non-U.S.  government securities and S&P credit rating at March 31, 2010.
Non-U.S. Fixed Income Portfolio
(in millions of U.S. dollars)

 	  	S&P Credit Rating	
 	  	AAA	  	AA	  	A	  	BBB	  	BB and
below	  	Total	
United Kingdom	  	$	1,084	  	$	—  	  	$	—  	  	$	—  	  	$	—  	  	$	1,084	
Canada	  	 	823	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	823	
Germany	  	 	584	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	584	
Japan	  	 	—  	  	 	326	  	 	—  	  	 	—  	  	 	—  	  	 	326	
Province of Ontario	  	 	37	  	 	175	  	 	—  	  	 	—  	  	 	—  	  	 	212	
Brazil	  	 	—  	  	 	—  	  	 	—  	  	 	200	  	 	—  	  	 	200	
France	  	 	122	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	122	
Province of Quebec	  	 	—  	  	 	—  	  	 	121	  	 	—  	  	 	—  	  	 	121	
Switzerland	  	 	101	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	101	
State of Queensland	  	 	96	  	 	5	  	 	—  	  	 	—  	  	 	—  	  	 	101	
Mexico	  	 	6	  	 	—  	  	 	18	  	 	70	  	 	—  	  	 	94	
Republic of Korea	  	 	—  	  	 	—  	  	 	86	  	 	—  	  	 	—  	  	 	86	
Thailand	  	 	3	  	 	—  	  	 	62	  	 	3	  	 	—  	  	 	68	
Netherlands	  	 	64	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	64	
Italy	  	 	—  	  	 	—  	  	 	57	  	 	—  	  	 	—  	  	 	57	
Taiwan	  	 	—  	  	 	53	  	 	—  	  	 	—  	  	 	—  	  	 	53	
State of Victoria	  	 	53	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	53	
Spain	  	 	—  	  	 	51	  	 	—  	  	 	—  	  	 	—  	  	 	51	
State of New South Wales	  	 	49	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	49	
Australia	  	 	47	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	47	
Austria	  	 	46	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	46	
New Zealand	  	 	45	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	45	
Greece	  	 	—  	  	 	—  	  	 	—  	  	 	42	  	 	—  	  	 	42	
Qatar	  	 	—  	  	 	34	  	 	—  	  	 	—  	  	 	—  	  	 	34	
State of Western Australia	  	 	31	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	31	
Other non-U.S. Government	  	 	128	  	 	132	  	 	86	  	 	28	  	 	30	  	 	404	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Non-U.S. Government Securities	  	 	3,319	  	 	776	  	 	430	  	 	343	  	 	30	  	 	4,898	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Non-U.S. Corporate	  	 	1,310	  	 	893	  	 	2,136	  	 	1,419	  	 	635	  	 	6,393	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
	  	$	4,629	  	$	1,669	  	$	2,566	  	$	1,762	  	$	665	  	$	11,291	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
ACE’s non-U.S. investment grade fixed income portfolios are currency-matched with the insurance liabilities of our non-U.S. operations. 87 percent of our non-U.S. fixed income portfolio is denominated in G7 currencies. The average credit quality of our non-U.S. fixed income securities is AA and 55 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. With respect to the $6.4 billion in non-U.S. corporate fixed income securities in the table above, approximately $400 million relates to investments in Spain and Italy. Investments in Ireland and Portugal total $47 million. We have inconsequential corporate fixed income exposure to Greece. Of the amounts invested in these countries, $116 million are investments in fixed income securities of banks, substantially all of which are in Spain and Italy and are highly rated.
 
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The table below summarizes our largest exposures to corporate bonds by market value and S&P credit rating at March 31, 2010.

 	  	March 31, 2010	
 	  	Market
Value	  	Rating	
 	  	(in millions of
U.S. dollars)	  	 	
General Electric Co	  	$	449	  	AA+	
JP Morgan Chase & Co	  	 	427	  	A+	
Bank of America Corp	  	 	384	  	A	
Wells Fargo & Co	  	 	306	  	AA-	
Verizon Communications Inc	  	 	302	  	A	
Citigroup Inc	  	 	285	  	A	
Morgan Stanley	  	 	278	  	A	
Goldman Sachs Group Inc/The	  	 	261	  	A	
AT&T INC	  	 	232	  	A	
HSBC Holdings Plc	  	 	192	  	AA-	
Credit Suisse Group	  	 	190	  	A	
Barclays PLC	  	 	165	  	A+	
Comcast Corp	  	 	162	  	BBB+	
Lloyds Banking Group Plc	  	 	135	  	A	
ConocoPhillips	  	 	134	  	A	
Kraft Foods Inc	  	 	128	  	BBB	
Time Warner Cable Inc	  	 	122	  	BBB	
XTO Energy Inc	  	 	122	  	BBB	
American Express Co	  	 	121	  	BBB+	
UBS AG	  	 	118	  	A+	
Telecom Italia SpA	  	 	112	  	BBB	
Pfizer Inc	  	 	105	  	AA	
Deutsche Telekom AG	  	 	91	  	BBB+	
Anheuser-Busch InBev NV	  	 	89	  	BBB+	
Rabobank Nederland	  	 	87	  	AAA	
	  	 	 	  		
Total	  	$	4,997	  		

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Mortgage-backed and Asset-backed securities
Additional details on the mortgage-backed and asset-backed components of our investment portfolio at March 31, 2010, are provided below:
Mortgage-backed and Asset-backed securities
Market Value
(in millions of U.S. dollars)

 	  	S&P Credit Rating	
 	  	AAA	  	AA	  	A	  	BBB	  	BB and
below	  	Total	
Mortgage-backed securities	  			  			  			  			  			  			
Residential mortgage-backed (RMBS)	  			  			  			  			  			  			
GNMA	  	$	495	  	$	—  	  	$	—  	  	$	—  	  	$	—  	  	$	495	
FNMA	  	 	5,575	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	5,575	
FHLMC	  	 	2,291	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	2,291	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total agency RMBS	  	 	8,361	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	8,361	
Non-agency RMBS	  	 	430	  	 	27	  	 	39	  	 	63	  	 	887	  	 	1,446	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total RMBS	  	 	8,791	  	 	27	  	 	39	  	 	63	  	 	887	  	 	9,807	
Commercial mortgage-backed	  	 	1,562	  	 	19	  	 	13	  	 	5	  	 	—  	  	 	1,599	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total mortgage-backed securities	  	$	10,353	  	$	46	  	$	52	  	$	68	  	$	887	  	$	11,406	

Asset-backed securities	  			  			  			  			  			  			
Sub-prime	  	$	20	  	$	2	  	$	1	  	$	5	  	$	33	  	$	61	
Credit cards	  	 	18	  	 	5	  	 	—  	  	 	—  	  	 	1	  	 	24	
Autos	  	 	98	  	 	—  	  	 	14	  	 	—  	  	 	1	  	 	113	
Other	  	 	141	  	 	—  	  	 	—  	  	 	—  	  	 	4	  	 	145	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total asset-backed securities	  	$	277	  	$	7	  	$	15	  	$	5	  	$	39	  	$	343	

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Mortgage-backed and Asset-backed securities
Amortized Cost
(in millions of U.S. dollars)

 	  	S&P Credit Rating	
 	  	AAA	  	AA	  	A	  	BBB	  	BB and
below	  	Total	
Mortgage-backed securities	  			  			  			  			  			  			
Residential mortgage-backed	  			  			  			  			  			  			
GNMA	  	$	478	  	$	—  	  	$	—  	  	$	—  	  	$	—  	  	$	478	
FNMA	  	 	5,410	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	5,410	
FHLMC	  	 	2,203	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	2,203	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total agency RMBS	  	 	8,091	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	8,091	
Non-agency RMBS	  	 	490	  	 	32	  	 	43	  	 	77	  	 	1,103	  	 	1,745	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total RMBS	  	 	8,581	  	 	32	  	 	43	  	 	77	  	 	1,103	  	 	9,836	
Commercial mortgage-backed	  	 	1,503	  	 	18	  	 	14	  	 	5	  	 	—  	  	 	1,540	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total mortgage-backed securities	  	$	10,084	  	$	50	  	$	57	  	$	82	  	$	1,103	  	$	11,376	

Asset-backed securities 	  			  			  			  			  			  			
Sub-prime	  	$	22	  	$	2	  	$	1	  	$	6	  	$	56	  	$	87	
Credit cards	  	 	18	  	 	5	  	 	—  	  	 	—  	  	 	1	  	 	24	
Autos	  	 	96	  	 	1	  	 	13	  	 	—  	  	 	1	  	 	111	
Other	  	 	139	  	 	—  	  	 	—  	  	 	1	  	 	7	  	 	147	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total asset-backed securities	  	$	275	  	$	8	  	$	14	  	$	7	  	$	65	  	$	369	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Our mortgage-backed securities are rated predominantly AAA and comprise approximately 25 percent of our fixed income portfolio. This compares with a 40 percent mortgage-backed weighting in representative indices of the U.S. fixed income market at the end of the first quarter of 2010. The minimum rating for our initial purchases of mortgage and asset backed securities is AAA.
Agency RMBS represent securities which have been issued by Federal agencies (Government National Mortgage Association, Federal National Mortgage Association, and Federal Home Loan Mortgage Corporation) with implied or explicit government guarantees. These represent 85 percent of our total RMBS portfolio. With respect to our non-agency RMBS, these are backed by prime collateral and are broadly diversified over 260,000 loans. This portfolio’s loan-to-value ratio is approximately 70 percent with an average Fair Isaac Corporation (FICO) score of 730. With this conservative loan-to-value ratio and subordinated collateral of 13 percent, the cumulative 5-year foreclosure rate would have to rise to 21 percent and real estate values would have to fall 20 percent from their levels at the end of the first quarter of 2010, before principal is impaired. The foreclosure rate for ACE’s non-agency RMBS portfolio was nine percent at the end of the first quarter of 2010.
Our commercial mortgage-backed securities (CMBS) are rated predominantly AAA, broadly diversified over 19,000 loans, and 86 percent of the portfolio was issued before 2006. The average loan-to-value ratio is approximately 66 percent with a debt service coverage ratio in excess of 1.6 and weighted-average subordinated collateral of 33 percent. The cumulative foreclosure rate would have to rise to 41 percent and commercial real estate values would have to fall more than 10 percent from their levels at the end of the first quarter of 2010, before principal is impaired. The foreclosure rate for ACE’s CMBS portfolio at the end of the first quarter of 2010, was approximately two percent. 
 
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Below-investment grade corporate fixed income portfolio
We invest in below-investment grade securities through investment portfolios managed by external managers, specifically dedicated to this asset class. 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 March 31, 2010, our fixed income investment portfolio included below-investment grade and non-rated securities which, in total, comprised approximately 13 percent of our fixed income portfolio. Our below-investment grade and non-rated portfolio includes approximately 500 issuers, with the greatest single exposure being $81 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. Five 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 at March 31, 2010, and December 31, 2009, is as follows:

 	  	March 31
2010	  	December 31
2009	
 	  	(in millions of U.S. dollars)	
Reinsurance recoverable on unpaid losses and loss expenses, net of a provision for uncollectible reinsurance	  	$	12,560	  	$	12,745	
Reinsurance recoverable on paid losses and loss expenses, net of a provision for uncollectible reinsurance	  	 	775	  	 	850	
	  	 	 	  	 	 	
Net reinsurance recoverable on losses and loss expenses	  	$	13,335	  	$	13,595	
	  	 	 	  	 	 	
Reinsurance recoverable on policy benefits	  	$	303	  	$	298	
	  	 	 	  	 	 	
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 decrease in net reinsurance recoverable on losses and loss expenses was primarily due to the annual crop insurance settlement and favorable foreign exchange impact during the quarter ended March 31, 2010, offset by ceded losses on catastrophe 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 future 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
 
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of expenses associated with processing and settling unpaid claims (loss expenses). At March 31, 2010, our gross unpaid loss and loss expense reserves were $37.6 billion and our net unpaid loss and loss expense reserves were $25 billion. With the exception of certain structured settlements, for which the timing and amount of future claim payments are reliably determinable, our loss reserves are not discounted for the time value of money.

 	  	Gross
Losses	 	 	Reinsurance
Recoverable (1)	 	 	Net
Losses	 	
 	  	(in millions of U.S. dollars)	 	
Balance at December 31, 2009	  	$	37,783	 	 	$	12,745	  	 	$	25,038	 	
Losses and loss expenses incurred	  	 	2,544	 	 	 	623	  	 	 	1,921	 	
Losses and loss expenses paid	  	 	(2,491	) 	 	 	(729	) 	 	 	(1,762	) 	
Other (including foreign exchange translation)	  	 	(285	) 	 	 	(79	) 	 	 	(206	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Balance at March 31, 2010	  	$	37,551	 	 	$	12,560	  	 	$	24,991	 	

(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 segregated between case reserves (including loss expense reserves) and IBNR reserves at March 31, 2010, and December 31, 2009.

 	  	March 31, 2010	  	December 31, 2009	
 	  	Gross	  	Ceded	  	Net	  	Gross	  	Ceded	  	Net	
 	  	(in millions of U.S. dollars)	
Case reserves	  	$	17,008	  	$	6,455	  	$	10,553	  	$	17,307	  	$	6,664	  	$	10,643	
IBNR reserves	  	 	20,543	  	 	6,105	  	 	14,438	  	 	20,476	  	 	6,081	  	 	14,395	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total	  	$	37,551	  	$	12,560	  	$	24,991	  	$	37,783	  	$	12,745	  	$	25,038	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Asbestos and Environmental (A&E) and Other Run-off Liabilities
Due to timing constraints associated with statutory reporting, our Form 10-Q for the quarterly period ending June 30, 2010, will present our A&E exposure at March 31, 2010. There was no unexpected A&E activity during the quarter ended March 31, 2010.
Fair value measurements
The provisions of ASC Topic 820, Fair Value Measurements define fair value as the price to sell an asset or transfer a liability in an orderly transaction between market participants and establishes a three-level valuation hierarchy in which inputs into valuation techniques used to measure fair value are classified.
The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. Inputs in Level 1 are unadjusted quoted prices for identical assets or liabilities in active markets. Level 2 includes inputs other than quoted prices included within Level 1 that are observable for assets or liabilities either directly or indirectly. Level 2 inputs include, among other items, quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves. Level 3 inputs are unobservable and reflect our judgments about assumptions that market participants would use in pricing an asset or liability. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ACE makes decisions regarding the categorization of assets or liabilities within the valuation hierarchy based on the inputs
 
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used to determine respective fair values at the balance sheet date. Accordingly, transfers between levels within the valuation hierarchy are determined on the same basis.
While the Company obtains values for the majority of the investment securities it holds from one or more pricing services, it is ultimately management’s responsibility to determine whether the values obtained and recorded in the financial statements are representative of fair value. We periodically update our understanding of the methodologies used by our pricing services in order to validate that the prices obtained from those services are consistent with 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 March 31, 2010, 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 11 percent of our liabilities that are measured at fair value and one percent of our total liabilities at March 31, 2010. During 2010, we transferred $117 million out of our Level 3 assets. Refer to Note 8 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 months ended March 31, 2010 and 2009.
Guaranteed minimum income benefits (GMIB) derivatives
Under life reinsurance programs covering living benefit guarantees, we assume the risk of GMIBs associated with variable annuity (VA) contracts. Our GMIB 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 provisions of ASC Topic 944, Financial Services-Insurance, 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 annuities through lapses, annuitization, or death). 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 GMIBs, and the resulting impact on our net income, refer to Item 3. Refer to Note 2 j) to the Consolidated Financial Statements, under Item 8 of our 2009 Form 10-K, for further description of this product and related accounting treatment.
The fair value of GMIB reinsurance is estimated using an internal valuation model which includes current market information and estimates of policyholder behavior from the perspective of a theoretical market participant. All of our treaties contain claim limits, which are factored into the valuation model. The fair value depends on a number of factors, including interest rates, current account value, market volatility, expected annuitization rates and other policyholder behavior, and changes in policyholder mortality. The model and related assumptions are continuously re-evaluated by management and enhanced, as appropriate, based upon additional experience obtained related to policyholder behavior and availability of more timely market information, such as market conditions and demographics of in-force annuities. Due to the inherent uncertainties of the assumptions used in the valuation models to determine the fair value of these derivative products, actual experience may differ from the estimates reflected in our Consolidated Financial Statements, and the differences may be material.
 
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The most significant policyholder behavior assumptions include lapse rates and annuitization rates using the guaranteed benefit (GMIB annuitization rate). Assumptions regarding lapse rates and GMIB annuitization rates differ by treaty but the underlying methodology to determine rates applied to each treaty is comparable. The assumptions regarding lapse and GMIB annuitization rates determined for each treaty are based on a dynamic calculation that uses several underlying factors.
A lapse rate is the percentage of in-force policies surrendered in a given calendar year. All else equal, as lapse rates increase, ultimate claim payments will decrease. The GMIB annuitization rate is the percentage of policies for which the policyholder will elect to annuitize using the guaranteed benefit provided under the GMIB. All else equal, as GMIB annuitization rates increase, ultimate claim payments will increase, subject to treaty claim limits.
Key factors affecting the lapse rate assumption include investment performance and policy duration. We generally assume that lapse rates increase with policy duration with a significant increase in rates after the end of the surrender charge period. As investment performance of underlying fund investments declines, and guarantees become more valuable, lapse rates are anticipated to decrease thereby increasing the expected value of claims on minimum guarantees and thus, benefit reserves and the incremental fair value liability.
Key factors affecting the GMIB annuitization rate include investment performance and the level of interest rates after the GMIB waiting period. As investment performance of underlying fund investments declines, the monthly income available to a policyholder who annuitizes their account value falls; this makes the GMIB more valuable. As the GMIB becomes more valuable, our modeling assumes that annuitization rates will increase, resulting in higher benefit reserves and fair value liability. The same is true in an environment where long-term interest rates are decreasing.
Based on our quarterly reserve review, no changes were made to actuarial or behavioral assumptions.
During the quarter ended March 31, 2010, we recorded $96 million of realized gains for GMIB reinsurance, primarily due to a rising equity market and decreased levels of equity and interest rate volatility, partially offset by the receipt of premium (which increases the fair value). This excludes realized losses of $59 million on derivative hedge instruments held to partially offset the risk in the variable annuity 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 GMIB reinsurance and the realized losses on the derivatives for the quarters ended March 31, 2010, and 2009.
ACE Tempest Life Re employs a strategy to manage the financial market and policyholder behavior risks embedded in the reinsurance of variable annuity guarantees. Risk management begins with underwriting a prospective client and guarantee design, with particular focus on protecting ACE’s position from policyholder options that, because of anti-selective behavior, could adversely impact our obligation.
A second layer of risk management is the structure of the reinsurance contracts. All variable annuity guarantee reinsurance contracts include some form of annual or aggregate claim limit(s). The exact limits vary by contract but some examples of typical contract provisions include:
 
 	•	 	annual claim limits, as a percentage of reinsured account or guaranteed value, for GMDBs and GMIBs; and	
 
 	•	 	annual annuitization rate limits, as a percentage of annuitization eligible account or guaranteed value, for GMIBs.	
A third layer of risk management is the hedging strategy which is focused on mitigating long-term economic losses at a portfolio level. ACE Tempest Life Re owned financial market instruments as part of the hedging strategy with a fair value of $29 million and $47 million at March 31, 2010, and December 31, 2009, respectively. The instruments are substantially collateralized by our counterparties, on a daily basis.
 
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We also limit the aggregate amount of variable annuity reinsurance guarantee risk we are willing to assume. The last substantive U.S. transaction was quoted in mid-2007 and the last transaction in Japan was quoted in late 2007. ACE Tempest Life Re did not quote on new or renewal variable annuity transactions in 2008, 2009, or the first quarter of 2010, and the aggregate number of policyholders is currently decreasing through policyholder withdrawals and deaths at a rate of 5-10 percent annually.
Note that GMIB claims cannot occur for any reinsured policy until it has reached the end of its “waiting period”. The vast majority of policies we reinsure reach the end of their “waiting periods” in 2013 or later, as shown in the table below.

Year of first annuitization eligibility	  	Percent of
living
benefit
account
values	 	
2010 and prior	  	<1	% 	
2011	  	<1	% 	
2012	  	7	% 	
2013	  	25	% 	
2014	  	19	% 	
2015	  	5	% 	
2016	  	6	% 	
2017	  	17	% 	
2018 and after	  	20	% 	
	  	 	 	
Total	  	100	% 	
	  	 	 	
The following table provides the historical cash flows under these policies for the periods indicated.

 	  	Three
Months
Ended
March 31	 	
 	  	2010	 	 	2009	 	
 	  	(in millions of
U.S. dollars)	 	
Death Benefits (GMDB)	  				 				
Premium	  	$	28	 	 	$	25	 	
Less paid claims	  	 	32	 	 	 	46	 	
	  	 	 	 	 	 	 	 	
Net	  	$	(4	) 	 	$	(21	) 	
	  	 	 	 	 	 	 	 	
Living Benefits (Includes GMIB and GMAB)	  				 				
Premium	  	$	41	 	 	$	39	 	
Less paid claims	  	 	—  	  	 	 	2	 	
	  	 	 	 	 	 	 	 	
Net	  	$	41	 	 	$	37	 	
	  	 	 	 	 	 	 	 	
Total VA Guaranteed Benefits	  				 				
Premium	  	$	69	 	 	$	64	 	
Less paid claims	  	 	32	 	 	 	48	 	
	  	 	 	 	 	 	 	 	
Net	  	$	37	 	 	$	16	 	
	  	 	 	 	 	 	 	 	
The amounts represent accrued past premium received and claims paid, split by benefit type.
 
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Death Benefits (GMDB)
For premiums and claims from variable annuity contracts reinsuring GMDBs, at current market levels, we expect approximately $118 million of claims and $101 million of premium on death benefits over the next 12 months.
Living Benefits (includes GMIB and GMAB)
Premiums and claims from variable annuity contracts reinsuring predominantly GMIBs and Guaranteed Minimum Accumulation Benefits (GMAB) are collectively known as “Living Benefits”. Substantially all of our living benefit reinsurance clients’ policyholders are currently ineligible to trigger a claim payment. The vast majority of these policyholders begin to become eligible in 2013. At current market levels, we expect approximately $1 million of claims and $151 million of premium on living benefits over the next 12 months.
Capital
At March 31, 2010, the capital required to support the variable annuity guaranty business was approximately $620 million.
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. On December 31, 2009, a new statutory reserve guideline adopted by the National Association of Insurance Commissioners took effect in the U.S. called Actuarial Guideline 43 that governs statutory reserve calculation for variable annuity guarantees. In many cases, this resulted in an increase to ceded statutory reserves from our U.S.-domiciled clients and the collateral ACE Tempest Life Re holds on their behalf. ACE Tempest Life Re has access to both letter of credit capacity and trust eligible assets that are sufficient (based on current estimates) to meet the funding requirements. The timing and amount of the calculation of the collateral varies by client according to the particulars of the reinsurance treaty and the statutory reserve guidelines of the client’s state of domicile.
Claim limits
Approximately 64 percent of the GMDB guaranteed value has an annual claim limit expressed as two percent of the aggregate total account value reinsured. The remainder of the GMDB guaranteed value is covered under treaties with limits calculated on other bases – either annual, aggregate, or at an individual policy level. The majority of this remainder has an annual limit calculated as a percentage of the total guaranteed value reinsured, with the percentage varying by contract from 0.22 percent to 1.8 percent.
Catastrophe management
We continue to closely monitor our catastrophe risk accumulation around the world. The following modeled loss information reflects ACE’s in-force portfolio at January 1, 2010, and reinsurance program at March 1, 2010.
The table below shows our modeled annual aggregate probable maximum loss (PML), net of reinsurance, for 100-year and 250-year return periods for U.S. hurricanes and California earthquakes. The table also shows corresponding pre-tax industry losses for each of the return periods for U.S. hurricanes and California earthquakes. For example, according to the model, for the 1-in-100 return period scenario, there is a one percent chance that ACE’s losses incurred in any year from U.S. hurricanes could be in excess of $1.11 billion (or five percent of our total shareholders’ equity at March 31, 2010). We estimate that at such hypothetical loss levels, aggregate industry losses would be approximately $136.01 billion.
 
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Modeled
Annual
Aggregate
Net PML	  	U.S. Hurricanes	  	California Earthquakes	
	  	 	  	% of Total
Shareholders’
Equity	 	 	 	  	 	  	% of Total
Shareholders’
Equity	 	 	 	
	  	ACE	 	 	Industry	  	ACE	 	 	Industry	
 	  	(in millions of U.S. dollars, except for percentages)	
1-in-100	  	$	1,110	  	5	% 	 	$	136,010	  	$	752	  	4	% 	 	$	36,762	
1-in-250	  	$	1,442	  	7	% 	 	$	197,309	  	$	877	  	4	% 	 	$	58,331	
The modeling estimates of both ACE and industry loss levels are inherently uncertain owing to key assumptions. First, while the use of third-party catastrophe modeling packages to simulate potential hurricane and earthquake losses is prevalent within the insurance industry, the models are reliant upon significant meteorology, seismology, and engineering assumptions to estimate hurricane and earthquake losses. In particular, modeled hurricane and earthquake events are not always a representation of actual events and ensuing additional loss potential. Second, there is no universal standard in the preparation of insured data for use in the models and the running of the modeling software. Third, we are reliant upon third-party estimates of industry insured exposures and there is significant variation possible around the relationship between ACE’s loss and that of the industry following an event. Fourth, we assume that our reinsurance recoveries following an event are fully collectible. These loss estimates do not represent ACE’s potential maximum exposures and it is highly likely that ACE’s actual incurred losses would vary materially from the modeled estimates.
Natural catastrophe reinsurance program
ACE’s core catastrophe reinsurance program provides protection against natural catastrophes impacting its primary operations (i.e., excluding assumed reinsurance) and consists of two separate towers.
First, for losses arising out of North America, our core traditional program renewed on January 1, 2010, and we have purchased reinsurance coverage in various layers that provide $450 million in excess of $500 million in all-risk coverage. Each layer of this core program has a single additional limit available for reinstatement post-loss event on the same terms as the original limit. In addition to the foregoing, we have in place a multi-year, peril-specific program from a major reinsurer that is backed by its credit worthiness and the issuance of fully collateralized catastrophe bonds. Under this coverage, we have $86 million part of $200 million of U.S. hurricane coverage in excess of an attachment point of approximately $575 million. While this coverage attaches at a level within our core program, any recoveries from this program shall be for ACE’s sole benefit and effectively reduce the net loss under the retention. In addition, the catastrophe bonds also provide $86 million of U.S. earthquake coverage with a territorial scope of California, the Pacific Northwest, and the central U.S. In addition, we purchased another $14 million of the same earthquake coverage as the catastrophe bonds to provide a full $100 million of earthquake coverage excess of approximately $961 million. These multi-year programs do not have a reinstatement feature. To keep the expected loss the same each year of these multi-year covers, the attachment point is adjusted annually, either up or down, based upon an independent modeling firm’s review of the exposure data underlying each program. Due to exposure reductions and model change, the attachment for the catastrophe bonds declined from $712 million to $575 million for the $86 million of wind protection and from $1.11 billion to approximately $960 million for earthquake protection. The catastrophe bonds program expires in June 2012.
While our modeled U.S. catastrophe exposure declined significantly in 2009, ACE did not reduce the catastrophe limits purchased at January 1, 2010, by the same amount. By way of comparison, the 2010 program has potentially approximately $37 million less in coverage for first event U.S. hurricane protection and $85 million less in first event California earthquake protection than the expiring program. We consider our retention to be approximately $500 million but this will depend upon the nature of the loss and the interplay between the underlying per risk programs and certain other catastrophe programs purchased by individual business units. These other catastrophe programs have the potential to reduce our effective retention below $500 million.
 
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Second, for losses arising outside of the U.S. and effective July 1, 2009, and expiring June 30, 2010, our core program is made up of two layers. Our first reinsurance layer remains $50 million in excess of a $50 million retention with two reinstatements. This layer was 67.75 percent placed with reinsurers. It is currently estimated that losses arising from the earthquake in Chile, will exhaust this layer. Consistent with our coverage terms, this layer of coverage, to the extent placed with reinsurers, has been automatically reinstated. Our second layer provides $150 million in protection in excess of $100 million with one reinstatement. It is currently estimated that losses arising from the earthquake in Chile, will partially exhaust this layer. Consistent with our coverage terms, the coverage has been automatically reinstated for such coverage that was partially exhausted by the event. This layer was 100 percent placed with reinsurers. There is further protection above this core program for specific geographic regions, being $100 million in excess of $250 million for Asia Pacific and $150 million in excess of $250 million for Europe. The Asia Pacific top layer has one free reinstatement and one at 100 percent of original premium. With respect to the top layer for Europe, the maximum reinstatement is one additional full limit. In addition, there are various underlying per risk and catastrophe treaties underlying the core program’s retention of $50 million. With respect to the July 1, 2009 to June 30, 2010, treaty period, this underlying coverage included certain regional catastrophe covers, including a $40 million in excess of $10 million layer covering ACE’s Latin American region that includes two reinstatements. It is currently estimated that losses arising from the earthquake in Chile, will exhaust this underlying layer. Consistent with our coverage terms, this coverage has been automatically reinstated. Finally, we purchased an additional treaty that provides $50 million of protection across the top of this catastrophe program with one reinstatement. However, this top layer may also be exhausted by certain risk losses so it is not certain that it will be available to us in an event. In comparison to the prior year, the core program and the specific layers for Asia Pacific and Europe provide the same amount of coverage except for the $16.1 million retained in the $50 million excess of $50 million first layer.
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 reinsurance pricing, our risk tolerance and exposures, and various other structuring considerations.
Crop insurance
We are, and have been since the 1980s, one of the leading writers of crop insurance in the U.S. and conduct that business through Rain and Hail L.L.C., an MGA. 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 book 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. During the fourth quarter of 2009 and the first quarter of 2010, the RMA released drafts of a proposed new SRA which was last negotiated in 2005 and expires in its current form on June 30, 2010. The terms of the proposed new SRA are still being negotiated. However, this SRA change applies to the 2011 Crop year, and therefore we expect no impact
 
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from a new agreement on 2010 financial results. It is still unclear what the impact, if any, there will be on our business beyond 2010.
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 quarter 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. We regularly receive reports from our MGA relating to the previous crop year(s), resulting in adjustments to previously reported premiums, losses and loss expenses and profit share commissions. The adjustments are typically more significant in the first quarter of the year (annual first quarter settlement), compared with other periods.
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 2010. Should the need arise, we generally have access to the capital markets and other available credit facilities. At March 31, 2010, our available credit lines totaled $2.5 billion and usage was $1.5 billion, which was unchanged from December 31, 2009. 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 2014 and require that we maintain certain financial covenants, all of which we met at March 31, 2010. Should any of our existing credit providers experience financial difficulty, we may be required to replace credit sources, possibly in a difficult market. There has also been recent consolidation in the banking industry which could lead to increased reliance on and exposure to particular institutions. If we cannot obtain adequate capital or sources of credit on favorable terms, on a timely basis or at all, our business, operating results, and financial condition could be adversely affected. To date, we have not experienced difficulty accessing any of our credit facilities . Refer to “Credit facilities” in our 2009 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, which are discussed below. During the first quarter of 2010, 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 quarters ended March 31, 2010 and March 31, 2009, ACE Limited did not receive any dividends from its Bermuda subsidiaries.
 
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The payment of any dividends from ACE Global Markets or its subsidiaries is subject to applicable U.K. insurance laws and regulations. In addition, the release of funds by Syndicate 2488 to subsidiaries of ACE Global Markets is subject to regulations promulgated by the Society of Lloyd’s. The U.S. insurance subsidiaries of ACE INA may pay dividends, without prior regulatory approval, subject to restrictions set out in state law of the subsidiary’s domicile (or, if applicable, “commercial domicile”). ACE INA’s international subsidiaries are also subject to insurance laws and regulations particular to the countries in which the subsidiaries operate. These laws and regulations sometimes include restrictions that limit the amount of dividends payable without prior approval of regulatory insurance authorities.
ACE Limited did not receive any dividends from ACE Global Markets or ACE INA during the quarters ended March 31, 2010 and 2009. The debt issued by ACE INA is serviced by statutorily permissible distributions by ACE INA’s insurance subsidiaries to ACE INA as well as other group resources.
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 quarters ended March 31, 2010 and 2009.
The operating cash flows reflect net income for each period, adjusted for non-cash items and changes in working capital. Our consolidated net cash flows from operating activities were $823 million in the quarter ended March 31, 2010, compared with $562 million for the prior year quarter. Net claims paid were $1.7 billion in both periods. Cash flow increased in 2010 in part due to net collections of insurance and reinsurance balances. Cash flow in 2009 was lower in part due to the return of collateral that was collected in 2008.
Our consolidated net cash flows used for investing activities were $666 million in the quarter ended March 31, 2010, compared with $496 million in the prior year quarter. Net investing activities for the indicated periods were related primarily to net purchases of fixed maturities.
Our consolidated net cash flows used for financing activities were $93 million in the quarter ended March 31, 2010, compared with net cash flows used for financing activities of $85 million in the prior year quarter. Net cash flows used for financing activities in the quarters ended March 31, 2010 and March 31, 2009, included dividends paid on our Common Shares of $105 million and $91 million, respectively.
Both internal and external forces influence our financial condition, results of operations, and cash flows. Claim settlements, premium levels, and investment returns may be impacted by changing rates of inflation and other economic conditions. In many cases, significant periods of time, ranging up to several years or more, may lapse between the occurrence of an insured loss, the reporting of the loss to us, and the settlement of the liability for that loss. We believe that our cash balances, cash flow from operations, routine sales of investments, and the liquidity provided by our credit facilities, are adequate to meet expected cash requirements.
From time to time, we utilize reverse repurchase agreements as a low-cost alternative for short-term funding needs. We use these instruments on a limited basis to address short-term cash timing differences without disrupting our investment portfolio holdings and settle the transactions with future operating cash flows. At March 31, 2010, there were no reverse repurchase agreements outstanding.
 
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Capital Resources
Capital resources consist of funds deployed or available to be deployed to support our business operations. The following table summarizes the components of our capital resources at March 31, 2010, and December 31, 2009.

 	  	March 31
2010	 	 	December 31
2009	 	
 	  	(in millions of U.S.
dollars, except for
percentages)	 	
Short-term debt	  	$	150	 	 	$	161	 	
Long-term debt	  	 	3,158	 	 	 	3,158	 	
	  	 	 	 	 	 	 	 	
Total debt	  	 	3,308	 	 	 	3,319	 	
Trust preferred securities	  	 	309	 	 	 	309	 	
Total shareholders’ equity	  	 	20,636	 	 	 	19,667	 	
	  	 	 	 	 	 	 	 	
Total capitalization	  	$	24,253	 	 	$	23,295	 	
	  	 	 	 	 	 	 	 	
Ratio of debt to total capitalization	  	 	13.6	% 	 	 	14.2	% 	
Ratio of debt plus trust preferred securities to total capitalization	  	 	14.9	% 	 	 	15.6	% 	
Total shareholders’ equity increased $969 million in the quarter ended March 31, 2010. The following table reports the significant movements in our shareholders’ equity for the quarter ended March 31, 2010.

 	  	March 31, 2010	 	
 	  	(in millions of
U.S. dollars)	 	
Balance at December 31, 2009	  	$	19,667	 	
Net income	  	 	755	 	
Dividends declared on Common Shares	  	 	(105	) 	
Change in net unrealized appreciation (depreciation) on investments, net of tax	  	 	349	 	
Cumulative translation, net of tax	  	 	(50	) 	
Pension liability, net of tax	  	 	4	 	
Other movements, net of tax	  	 	16	 	
	  	 	 	 	
Balance at March 31, 2010	  	$	20,636	 	
	  	 	 	 	
As part of our capital management program, in November 2001, our Board of Directors authorized the repurchase of any ACE issued debt or capital securities, which includes Common Shares, up to $250 million. At March 31, 2010, this authorization had not been utilized. We generally maintain shelf registration capacity at all times in order to allow capital market access for refinancing as well as for unforeseen or opportunistic capital needs. Our currently effective unlimited shelf registration statement expires in December 2011.
Dividends
We have paid dividends each quarter since we became a public company in 1993. Since the third quarter of 2008, we have paid dividends by way of a par value reduction distribution. 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 17, 2009	  	January 11, 2010	  	$	0.31 (CHF 0.32)	
March 31, 2010	  	April 12, 2010	  	$	0.31 (CHF 0.33)	
 
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For the foreseeable future, subject to shareholder approval, we expect to make distributions to shareholders as a repayment of share capital in the form of a reduction in par value (or qualified paid-in capital) rather than through ordinary dividends. The Board has recommended shareholder approval at the 2010 Annual General Meeting of payment of a dividend by the Company in the form of a distribution to shareholders through a Swiss franc par value reduction pursuant to a formula (the Board proposal).
The Board proposal calls for par value reduction in an aggregate Swiss franc amount equal to $1.32 per share, which we refer to as the Base Annual Dividend, payable in four installments, provided that each of the Swiss franc installments will be adjusted pursuant to the formula so that the actual Swiss franc par value reduction amount for each installment will equal $0.33, 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 will mean that the Swiss franc amount of each installment will be determined at the approximate time of distribution while the U.S. dollar value of the installment will remain $0.33 unless and until the Dividend Cap is reached. Par value reduction that would otherwise exceed the Dividend Cap will be reduced to equal the Swiss franc amount remaining available under the Dividend Cap and the U.S. dollar amount distributed will be the then-applicable U.S. dollar equivalent of that Swiss franc amount.
Should we determine to pay dividends other than by a reduction in par value, under Swiss law, such dividends (other than by reductions in par value) may be paid out only if the corporation has sufficient distributable profits from previous business years, or if the reserves of the corporation are sufficient to allow distribution of a dividend. The Board of Directors of a Swiss corporation may propose that a dividend be paid, but cannot itself set the dividend. The Company auditors must confirm that the dividend proposal of the board of directors conforms with Swiss statutory law. Prior to the distribution of dividends, five percent of the annual profits must be allocated to the general reserve until the amount of general reserves has reached twenty percent of the paid-in nominal share capital. Our Swiss Articles of Association can provide for a higher general reserve or for the creation of further reserves setting forth their purpose and use. Once this level has been reached and maintained, the shareholders may approve a distribution of each year’s profit within the framework of applicable legal requirements. Dividends paid from retained earnings are usually due and payable immediately after the shareholders’ resolution relating to the allocation of profits has been passed. Under Swiss law, the statute of limitations in respect of claims for dividend payments is five years.
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 2009 Form 10-K.
Reinsurance of GMDB and GMIB 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 GMIB. The benefit reserves are calculated in accordance with the provisions of ASC Topic 944, Financial Services-Insurance (Topic 944), 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 GMIB liability (FVL), which is classified as a derivative for accounting purposes. The FVL established for a GMIB 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.
 
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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 March 31, 2010, management established benefit reserves based on the benefit ratio calculated using assumptions reflecting management’s best estimate of the future performance of the variable annuity line of business. Management exercises judgment in determining the extent to which short-term market movements impact the benefit reserves. The benefit reserves are based on the calculation of a long-term benefit ratio (or loss ratio) for the variable annuity guarantee reinsurance. Despite the long-term nature of the risk, the benefit ratio calculation is impacted by short-term market movements that may be judged by management to be temporary or transient. Management’s best estimate reflected a judgment that the equity markets will exhibit sub-par growth over the next several years. Management regularly examines both quantitative and qualitative analysis and for the quarter ended March 31, 2010, determined that no change to the benefit ratio was warranted. The benefit ratio used to establish the benefit reserves at March 31, 2010, has averaged less than 1/4 standard deviation from the calculated benefit ratios, averaging the periodic results from the time the benefit ratio was changed during the first quarter of 2009 until March 31, 2010.
Topic 944 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. As an example, if, on average, the benefit ratio used at the most recent valuation date falls within 1/2 a standard deviation of the mean of the distribution of benefit ratios calculated periodically since the most recent change in benefit ratio, management may elect not to adjust the benefit ratio used to generate the benefit reserves at the quarter-end valuation date.
Further, if due to changes in equity and credit market conditions, the benefit ratio used at the most recent valuation date differs from the mean of the periodically calculated distribution of benefit ratios by less than 1 standard deviation, management will consider current market conditions when determining its expectations of future payout obligations, particularly as those market conditions relate to shorter-term payout obligations.
Finally, if due to changes in equity and credit market conditions, the benefit ratio used at the most recent valuation date differs from the mean of the periodically calculated distribution of benefit ratios by more than 1 standard deviation for a sustained and prolonged period of time, management will give substantial weight to prevailing market conditions when determining its expectations of future payout obligations. As an example, based on management’s current expectations as of the publication of this document, all else being equal, the S&P 500 index would need to remain below a level of 750 for a prolonged period of time in order for management to give substantial weight to current market conditions.
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 March 31, 2010, of the benefit reserves and FVL associated with the variable annuity guarantee reinsurance portfolio. In addition, the tables below show the
 
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sensitivity of the fair value of specific derivative instruments held (hedge value), which includes only those instruments owned at the reporting date, to partially offset the risk in the variable annuity guarantee reinsurance portfolio.

 	  	 	  	Worldwide Equity Shock	 	
Interest Rate Shock	  	+10%	 	 	Flat	 	 	-10%	 	 	-20%	 	 	-30%	 	 	-40%	 	
 	  	 	  	(in millions of U.S. dollars)	 	
+100 bps	  	(Increase)/decrease in benefit reserves	  	$	61	 	 	$	25	 	 	$	(31	) 	 	$	(110	) 	 	$	(216	) 	 	$	(356	) 	
	  	(Increase)/decrease in FVL	  	 	187	 	 	 	102	 	 	 	5	 	 	 	(103	) 	 	 	(226	) 	 	 	(369	) 	
	  	Increase/(decrease) in hedge value	  	 	(115	) 	 	 	(7	) 	 	 	103	 	 	 	215	 	 	 	328	 	 	 	444	 	
	  	Increase/(decrease) in net income	  	$	133	 	 	$	120	 	 	$	77	 	 	$	2	 	 	$	(114	) 	 	$	(281	) 	
Flat	  	(Increase)/decrease in benefit reserves	  	$	38	 	 	$	—  	  	 	$	(60	) 	 	$	(143	) 	 	$	(251	) 	 	$	(402	) 	
	  	(Increase)/decrease in FVL	  	 	109	 	 	 	—  	  	 	 	(126	) 	 	 	(289	) 	 	 	(458	) 	 	 	(624	) 	
	  	Increase/(decrease) in hedge value	  	 	(109	) 	 	 	—  	  	 	 	111	 	 	 	223	 	 	 	337	 	 	 	454	 	
	  	Increase/(decrease) in net income	  	$	38	 	 	$	—  	  	 	$	(75	) 	 	$	(209	) 	 	$	(372	) 	 	$	(572	) 	
-100 bps	  	(Increase)/decrease in benefit reserves	  	$	11	 	 	$	(31	) 	 	$	(95	) 	 	$	(188	) 	 	$	(317	) 	 	$	(488	) 	
	  	(Increase)/decrease in FVL	  	 	(44	) 	 	 	(212	) 	 	 	(391	) 	 	 	(586	) 	 	 	(780	) 	 	 	(946	) 	
	  	Increase/(decrease) in hedge value	  	 	(102	) 	 	 	8	 	 	 	119	 	 	 	233	 	 	 	348	 	 	 	465	 	
	  	Increase/(decrease) in net income	  	$	(135	) 	 	$	(235	) 	 	$	(367	) 	 	$	(541	) 	 	$	(749	) 	 	$	(969	) 	

Sensitivities to Other Economic Variables	  	A-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	  	 	35	 	 	 	(42	) 	 	 	(21	) 	 	 	17	 	 	 	(11	) 	 	 	9	 	
Increase/(decrease) in hedge value	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	4	 	 	 	(4	) 	
Increase/(decrease) in net income	  	$	35	 	 	$	(42	) 	 	$	(21	) 	 	$	17	 	 	$	(7	) 	 	$	5	 	
				
 	  	Mortality	 	 	Lapses	 	 	Annuitization	 	
Sensitivities to Actuarial Assumptions	  	+10%	 	 	-10%	 	 	+25%	 	 	- 25%	 	 	+25%	 	 	-25%	 	
 	  	(in millions of U.S. dollars)	 	
(Increase)/decrease in benefit reserves	  	$	(21	) 	 	$	22	 	 	$	28	 	 	$	(36	) 	 	$	(10	) 	 	$	12	 	
(Increase)/decrease in FVL	  	 	7	 	 	 	(7	) 	 	 	71	 	 	 	(91	) 	 	 	(26	) 	 	 	32	 	
Increase/(decrease) in hedge value	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	
Increase/(decrease) in net income	  	$	(14	) 	 	$	15	 	 	$	99	 	 	$	(127	) 	 	$	(36	) 	 	$	44	 	
The above tables assume benefit reserves and FVL using the benefit ratio calculated at March 31, 2010. Additionally, the above table assumes equity shocks impact all global equity markets equally and that the interest rate shock is a parallel shift in the U.S. yield curve. Although our liabilities have sensitivity to global equity markets, we would suggest using the S&P 500 as a proxy and although our liabilities have sensitivity to global interest rates at various points on the yield curve, we would suggest using the 10-year U.S. Treasury yield as a proxy. A change in A-rated credit spreads (A-rated credit spreads are a proxy for ACE’s own credit spreads), impacts the rate used to discount cash flows in the fair value model. The hedge sensitivity is from March 31, 2010, 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. 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,
 
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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.
 Item 4. Controls and Procedures
As of the end of the period covered by this report, the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in allowing information required to be disclosed in reports filed under the Securities and Exchange Act of 1934 to be recorded, processed, summarized, and reported within time periods specified in the rules and forms of the SEC and accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
During the quarter ended March 31, 2010, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
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ACE LIMITED
PART II – OTHER INFORMATION
 Item 1. Legal Proceedings
Our insurance subsidiaries are subject to claims litigation involving disputed interpretations of policy coverages and, in some jurisdictions, direct actions by allegedly-injured persons seeking damages from policyholders. These lawsuits, involving claims on policies issued by our subsidiaries which are typical to the insurance industry in general and in the normal course of business, are considered in our loss and loss expense reserves. In addition to claims litigation, we and our subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from, or directly relate to, claims on insurance policies. This category of business litigation typically involves, amongst other things, allegations of underwriting errors or misconduct, employment claims, regulatory activity, or disputes arising from our business ventures.
While the outcomes of the business litigation involving us cannot be predicted with certainty at this point, we are disputing and will continue to dispute allegations against us that are without merit and believe that the ultimate outcomes of the matters in this category of business litigation will not have a material adverse effect on our financial condition, future operating results, or liquidity, although an adverse resolution of a number of these items could have a material adverse effect on our results of operations in a particular quarter or fiscal year.
Information on the insurance industry investigations and related matters is set forth in Note 5 d) to our Consolidated Financial Statements.
 Item 1A. Risk Factors
Refer to “Risk Factors” under Item 1A. of Part I of our 2009 Form 10-K. There have been no material changes to the risk factors  disclosed in Part I, Item 1A of our 2009 Form 10-K.
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases by the Company of its Common Shares during the  quarter ended March 31, 2010.
Issuer’s Purchases of Equity Securities

Period	  	Total
Number of
Shares
Purchased*	  	Average Price
Paid per Share	  	Total Number of
Shares Purchased
as Part of Publicly
Announced Plan**	  	Approximate Dollar
Value of Shares that
May Yet be
Purchased
Under the Plan**	
January 1 through January 31	  	1,611	  	$	50.52	  	—  	  	$	250 million	
February 1 through February 28	  	490,056	  	$	50.37	  	—  	  	$	250 million	
March 1 through March 31	  	14,098	  	$	50.04	  	—  	  	$	250 million	
	  	 	  			  		  			
Total	  	505,765	  			  		  			

*	For the quarter ended March 31, 2010, this column represents the surrender to the Company of 505,765 Common Shares to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees.	
**	As part of ACE’s capital management program, in November 2001, the Company’s Board of Directors authorized the repurchase of any ACE issued debt or capital securities, including Common Shares, up to $250 million. At March 31, 2010, this authorization had not been utilized.	
 Item 6. Exhibits
Refer to the Exhibit Index.
 
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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	
			
May 6, 2010	 		 	/s/    E VAN G. G REENBERG        	
	 		 	Evan G. Greenberg	
	 		 	Chairman and
Chief Executive Officer	
			
May 6, 2010	 		 	/s/    P HILIP V. B ANCROFT        	
	 		 	Philip V. Bancroft	
	 		 	Chief Financial Officer	
 
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 	 	  	 	  	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	  	3	  	March 2, 2010	  	001-11778	  		
							
3.2	 	  	Articles of Association of the Company, as amended and restated	  	8-K	  	3	  	April 1, 2010	  	001-11778	  		
							
4.1	 	  	Organizational Regulations of the Company, as amended and restated	  	8-K	  	4	  	March 2, 2010	  	001-11778	  		
							
4.2	 	  	Articles of Association of the Company, as amended and restated	  	8-K	  	4	  	April 1, 2010	  	001-11778	  		
							
10.1 	* 	  	ACE Limited Description of Executive Officer Cash Compensation for 2010	  		  		  		  		  	X	
							
10.2 	* 	  	Form of Swiss Mandatory Retirement Benefit Agreement (for Swiss-employed named executive officers).	  		  		  		  		  	X	
							
31.1	 	  	Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.	  		  		  		  		  	X	
							
31.2	 	  	Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.	  		  		  		  		  	X	
							
32.1	 	  	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.	  		  		  		  		  	X	
							
32.2	 	  	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.	  		  		  		  		  	X	
							
101.1	 	  	The following financial information from ACE Limited’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 formatted in XBRL: (i) Consolidated Balance Sheet at March 31, 2010, and December 31, 2009; (ii) Consolidated Statement of Operations and Comprehensive Income for the three months ended March 31, 2010 and 2009; (iii) Consolidated Statements of Shareholders’ Equity for the three months ended March 31, 2010 and 2009; (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009; and (v) Notes to the Interim Consolidated Financial Statements.	  		  		  		  		  	X	
							
		  	* Management Contract or Compensation Plan	  		  		  		  		  		
 
91

Exhibit 10.1
ACE LIMITED
DESCRIPTION OF EXECUTIVE OFFICER CASH COMPENSATION
Set forth below are the 2010 annual base salaries of the Chief Executive Officer, the Chief Financial Officer and each of the three other most highly compensated executive officers in 2009 who were executive officers as of December 31, 2009.
Evan G. Greenberg, Chairman, President and Chief Executive Officer
2010 salary
$1,200,000
Philip V. Bancroft, Chief Financial Officer
2010 salary
$700,000
Robert Cusumano, General Counsel and Secretary
2010 salary
$550,000
Brian E. Dowd, Vice-Chairman, ACE Limited; Chief Executive Officer, Insurance-North American
2010 salary
$800,000
John Keogh, Chief Executive Officer ACE Overseas General
2010 salary
$800,000
In addition to the above, these officers receive bonuses, perquisites and other personal benefits as described in our proxy statement for our 2010 annual meeting.

Exhibit 10.2
[Date]
[Name and Title of Officer}
Re: Swiss Mandatory Retirement Benefit Agreement
Dear                                          :
This letter is to reflect your agreement with ACE Limited (the “Company”), and is effective as of July 18, 2008 .
Due to the redomestication of ACE Limited from the Cayman Islands to Switzerland, you will receive a portion of your salary and bonus for service performed in Switzerland and certain Swiss legal requirements will apply to this income. Pursuant to one such requirement, you must participate in a Swiss-based retirement savings program, which mandates employee contributions. However, you already participate in one or more retirement plans, which are based on your full salary and bonus paid from ACE Limited and all subsidiaries (“Compensation”).
As we discussed, you do not want the Swiss-based Compensation to be reduced due to participation in the Swiss retirement savings program and the Company desires to avoid providing a duplicative benefit to you. For mutual consideration and intending to be bound, you and the Company agree as follows:
1. The Company agrees to reimburse you (after an appropriate tax “gross-up”) for contributions made to the Swiss retirement savings program; and
2. You assign to the Company your entire present and future interest in the payments made under the Swiss retirement savings program attributable to the contributions that are reimbursed under paragraph 1 (the “Swiss Retirement Benefits”). However, to the extent that such assignment is not effective, you agree to pay to the Company an amount equal to the Swiss Retirement Benefits paid in any calendar year; provided that the amount due from you shall be reduced by the excess, if any, of the amount of any taxes due from you with respect to such payments minus the amount of the tax benefits to you attributable to such payments to the Company; and further provided that such payments to the Company are to be made within the first 90 days of the calendar year following the calendar year in which the Swiss Retirement Benefits are received.
The terms of our agreement set forth in this letter will be construed in accordance with the laws of the State of New York, without regard to the conflict of law provisions of any state or other jurisdiction.

If this letter reflects your understanding of the agreement between you and the Company, please sign, date, and return a copy of this letter to me.

Very truly yours,	

By:	 	Phillip B. Cole	
	 	Global Human Resources Officer	
I agree that this letter reflects my understanding
of the agreement between me and ACE Limited : 

 	
[Name of Officer]	
Date signed by Executive:                                          ,

Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Evan G. Greenberg, certify that:
 
 	1)	I have reviewed this quarterly report on Form 10-Q of ACE Limited;	
 
 	2)	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;	
 
 	3)	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;	
 
 	4)	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	
 
 	5)	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 May 6, 2010

/s/    E VAN G. G REENBERG      	
Evan G. Greenberg	
Chairman and Chief Executive Officer	

Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Philip V. Bancroft, certify that:
 
 	1)	I have reviewed this quarterly report on Form 10-Q of ACE Limited;	
 
 	2)	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;	
 
 	3)	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;	
 
 	4)	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	
 
 	5)	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 May 6, 2010

/s/    P HILIP V. B ANCROFT        	
Philip V. Bancroft	
Chief Financial Officer	

Exhibit 32.1
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned officer of ACE Limited (the “Corporation”) hereby certifies that the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, 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: May 6, 2010	 	/s/    E VAN G. G REENBERG        	
	 	Evan G. Greenberg	
	 	Chairman and Chief Executive Officer	

Exhibit 32.2
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned officer of ACE Limited (the “Corporation”) hereby certifies that the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010, 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: May 6, 2010	 	/s/    P HILIP V. B ANCROFT        	
	 	Philip V. Bancroft	
	 	Chief Financial Officer