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 September 30, 2009
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	 	¨	 	 	(Do not check if a smaller reporting company	) 	 	Smaller reporting company	 	¨	 	
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
                                                         YES   ¨                                                  NO   x
The number of registrant’s Common Shares (CHF 32.20 par value) outstanding as of November 3, 2009, was 336,418,317.

 

Table of Contents
 ACE LIMITED
INDEX TO FORM 10-Q

 	 	 	 	 	  	Page No.	
Part I.	 	FINANCIAL INFORMATION	  		
			
Item 1.	 	Financial Statements:	  		
			
	 	Consolidated Balance Sheets (Unaudited)
September 30, 2009, and December 31, 2008	  	3	
			
	 	Consolidated Statements of Operations and Comprehensive Income (Unaudited)
Three and Nine Months Ended September 30, 2009 and 2008	  	4	
			
	 	Consolidated Statements of Shareholders’ Equity (Unaudited)
Nine Months Ended September 30, 2009 and 2008	  	5	
			
	 	Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2009 and 2008	  	7	
			
	 	Notes to the Interim Consolidated Financial Statements (Unaudited)	  		
	 	Note 1.	 	General	  	8	
	 	Note 2.	 	Significant accounting policies	  	8	
	 	Note 3.	 	Investments	  	12	
	 	Note 4.	 	Assumed life reinsurance programs involving minimum benefit guarantees under annuity contracts	  	21	
	 	Note 5.	 	Debt	  	23	
	 	Note 6.	 	Commitments, contingencies, and guarantees	  	24	
	 	Note 7.	 	Shareholders’ equity	  	32	
	 	Note 8.	 	Share-based compensation	  	33	
	 	Note 9.	 	Fair value measurements	  	33	
	 	Note 10.	 	Segment information	  	41	
	 	Note 11.	 	Earnings per share	  	46	
	 	Note 12.	 	Information provided in connection with outstanding debt of subsidiaries	  	47	
	 	Note 13.	 	Subsequent events	  	52	
			
Item 2.	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	53	
			
Item 3.	 	Quantitative and Qualitative Disclosures About Market Risk	  	99	
			
Item 4.	 	Controls and Procedures	  	102	
			
Part II.	 	OTHER INFORMATION	  		
			
Item 1.	 	Legal Proceedings	  	103	
			
Item 1A.	 	Risk Factors	  	103	
			
Item 2.	 	Unregistered Sales of Equity Securities and Use of Proceeds	  	104	
			
Item 6.	 	Exhibits	  	104	
 
2

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

 	  	September 30
2009	 	 	December 31
2008	 	
 	  	(in millions of U.S. dollars,
except share and per share data)	 	
Assets	  				 				
Investments	  				 				
Fixed maturities available for sale, at fair value (amortized cost – $38,004 and $33,109) (includes hybrid financial instruments of $341 and $239)	  	$	38,559	 	 	$	31,155	 	
Fixed maturities held to maturity, at amortized cost (fair value – $3,532 and $2,865)	  	 	3,439	 	 	 	2,860	 	
Equity securities, at fair value (cost – $492 and $1,132)	  	 	546	 	 	 	988	 	
Short-term investments, at fair value (amortized cost – $1,852 and $3,350)	  	 	1,853	 	 	 	3,350	 	
Other investments (cost – $1,279 and $1,368)	  	 	1,524	 	 	 	1,362	 	
	  	 	 	 	 	 	 	 	
Total investments	  	 	45,921	 	 	 	39,715	 	
Cash	  	 	742	 	 	 	867	 	
Securities lending collateral	  	 	1,522	 	 	 	1,230	 	
Accrued investment income	  	 	517	 	 	 	443	 	
Insurance and reinsurance balances receivable	  	 	3,626	 	 	 	3,453	 	
Reinsurance recoverable on losses and loss expenses	  	 	13,689	 	 	 	13,917	 	
Reinsurance recoverable on policy benefits	  	 	345	 	 	 	259	 	
Deferred policy acquisition costs	  	 	1,413	 	 	 	1,214	 	
Value of business acquired	  	 	786	 	 	 	823	 	
Prepaid reinsurance premiums	  	 	1,727	 	 	 	1,539	 	
Goodwill and other intangible assets	  	 	3,772	 	 	 	3,747	 	
Deferred tax assets	  	 	1,234	 	 	 	1,835	 	
Investments in partially-owned insurance companies (cost – $374 and $737)	  	 	478	 	 	 	832	 	
Other assets	  	 	2,049	 	 	 	2,183	 	
	  	 	 	 	 	 	 	 	
Total assets	  	$	77,821	 	 	$	72,057	 	
	  	 	 	 	 	 	 	 	
Liabilities	  				 				
Unpaid losses and loss expenses	  	$	37,871	 	 	$	37,176	 	
Unearned premiums	  	 	6,369	 	 	 	5,950	 	
Future policy benefits	  	 	3,048	 	 	 	2,904	 	
Insurance and reinsurance balances payable	  	 	3,083	 	 	 	2,841	 	
Deposit liabilities	  	 	318	 	 	 	345	 	
Securities lending payable	  	 	1,574	 	 	 	1,296	 	
Payable for securities purchased	  	 	465	 	 	 	740	 	
Accounts payable, accrued expenses, and other liabilities	  	 	2,374	 	 	 	2,635	 	
Income taxes payable	  	 	156	 	 	 	138	 	
Short-term debt	  	 	200	 	 	 	471	 	
Long-term debt	  	 	3,321	 	 	 	2,806	 	
Trust preferred securities	  	 	309	 	 	 	309	 	
	  	 	 	 	 	 	 	 	
Total liabilities	  	 	59,088	 	 	 	57,611	 	
	  	 	 	 	 	 	 	 	
Commitments and contingencies	  				 				
Shareholders’ equity	  				 				
Common Shares (CHF 32.20 and CHF 33.14 par value, 337,770,064 and 335,413,501 shares issued, 336,280,476 and 333,645,471 shares outstanding)	  	 	10,606	 	 	 	10,827	 	
Common Shares in treasury (1,489,588 and 1,768,030 shares)	  	 	(4	) 	 	 	(3	) 	
Additional paid-in capital	  	 	5,481	 	 	 	5,464	 	
Retained earnings	  	 	1,865	 	 	 	74	 	
Deferred compensation obligation	  	 	2	 	 	 	3	 	
Accumulated other comprehensive income (loss)	  	 	785	 	 	 	(1,916	) 	
Common Shares issued to employee trust	  	 	(2	) 	 	 	(3	) 	
	  	 	 	 	 	 	 	 	
Total shareholders’ equity	  	 	18,733	 	 	 	14,446	 	
	  	 	 	 	 	 	 	 	
Total liabilities and shareholders’ equity	  	$	77,821	 	 	$	72,057	 	
	  	 	 	 	 	 	 	 	
See accompanying notes to the interim consolidated financial statements
 
3

Table of Contents
 ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the three and nine months ended September 30, 2009 and 2008
(Unaudited)

 	  	Three Months Ended
September 30	 	 	Nine Months Ended
September 30	 	
 	  	    2009    	 	 	    2008    	 	 	    2009    	 	 	    2008    	 	
 	  	(in millions of U.S. dollars,
except per share data)	 	
Revenues	  				 				 				 				
Gross premiums written	  	$	5,005	 	 	$	5,220	 	 	$	14,657	 	 	$	14,922	 	
Reinsurance premiums ceded	  	 	(1,850	) 	 	 	(1,944	) 	 	 	(4,663	) 	 	 	(4,894	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net premiums written	  	 	3,155	 	 	 	3,276	 	 	 	9,994	 	 	 	10,028	 	
Change in unearned premiums	  	 	238	 	 	 	333	 	 	 	(141	) 	 	 	(51	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	  	 	3,393	 	 	 	3,609	 	 	 	9,853	 	 	 	9,977	 	
Net investment income	  	 	511	 	 	 	520	 	 	 	1,519	 	 	 	1,541	 	
Net realized gains (losses):	  				 				 				 				
Other-than-temporary impairment (OTTI) losses gross	  	 	(169	) 	 	 	(224	) 	 	 	(666	) 	 	 	(623	) 	
Portion of OTTI losses recognized in other comprehensive income	  	 	111	 	 	 	—  	  	 	 	302	 	 	 	—  	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net OTTI losses recognized in income	  	 	(58	) 	 	 	(224	) 	 	 	(364	) 	 	 	(623	) 	
Net realized gains (losses) excluding OTTI losses	  	 	(165	) 	 	 	(286	) 	 	 	(205	) 	 	 	(366	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total net realized gains (losses)	  	 	(223	) 	 	 	(510	) 	 	 	(569	) 	 	 	(989	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total revenues	  	 	3,681	 	 	 	3,619	 	 	 	10,803	 	 	 	10,529	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Expenses	  				 				 				 				
Losses and loss expenses	  	 	1,885	 	 	 	2,369	 	 	 	5,522	 	 	 	5,843	 	
Policy benefits	  	 	79	 	 	 	91	 	 	 	256	 	 	 	243	 	
Policy acquisition costs	  	 	567	 	 	 	581	 	 	 	1,571	 	 	 	1,618	 	
Administrative expenses	  	 	451	 	 	 	457	 	 	 	1,325	 	 	 	1,293	 	
Interest expense	  	 	60	 	 	 	68	 	 	 	169	 	 	 	176	 	
Other (income) expense	  	 	51	 	 	 	6	 	 	 	44	 	 	 	(104	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total expenses	  	 	3,093	 	 	 	3,572	 	 	 	8,887	 	 	 	9,069	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income tax	  	 	588	 	 	 	47	 	 	 	1,916	 	 	 	1,460	 	
Income tax expense (benefit)	  	 	94	 	 	 	(7	) 	 	 	320	 	 	 	283	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	494	 	 	$	54	 	 	$	1,596	 	 	$	1,177	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive income (loss)	  				 				 				 				
Unrealized appreciation (depreciation)	  	$	1,985	 	 	$	(1,522	) 	 	$	2,511	 	 	$	(2,750	) 	
Reclassification adjustment for net realized (gains) losses included in net income	  	 	51	 	 	 	383	 	 	 	387	 	 	 	725	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
	  	 	2,036	 	 	 	(1,139	) 	 	 	2,898	 	 	 	(2,025	) 	
Change in:	  				 				 				 				
Cumulative translation adjustments	  	 	160	 	 	 	(155	) 	 	 	427	 	 	 	(122	) 	
Pension liability	  	 	1	 	 	 	5	 	 	 	(13	) 	 	 	6	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive income (loss), before income tax	  	 	2,197	 	 	 	(1,289	) 	 	 	3,312	 	 	 	(2,141	) 	
Income tax (expense) benefit related to other comprehensive income items	  	 	(421	) 	 	 	320	 	 	 	(611	) 	 	 	355	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive income (loss)	  	 	1,776	 	 	 	(969	) 	 	 	2,701	 	 	 	(1,786	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive income (loss)	  	$	2,270	 	 	$	(915	) 	 	$	4,297	 	 	$	(609	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Basic earnings per share	  	$	1.46	 	 	$	0.16	 	 	$	4.74	 	 	$	3.47	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted earnings per share	  	$	1.46	 	 	$	0.16	 	 	$	4.73	 	 	$	3.45	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
See accompanying notes to the interim consolidated financial statements
 
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Table of Contents
 ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the nine months ended September 30, 2009 and 2008
(Unaudited)

 	  	Nine Months Ended
September 30	 	
 	  	2009	 	 	2008	 	
 	  	(in millions of U.S.
dollars)	 	
Preferred Shares	  				 				
Balance – beginning of period	  	$	—  	  	 	$	2	 	
Preferred Shares redeemed	  	 	—  	  	 	 	(2	) 	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	—  	  	 	 	—  	  	
	  	 	 	 	 	 	 	 	
Common Shares	  				 				
Balance – beginning of period	  	 	10,827	 	 	 	14	 	
Net shares issued under employee share-based compensation plans	  	 	73	 	 	 	—  	  	
Exercise of stock options	  	 	3	 	 	 	1	 	
Dividends declared on Common Shares-par value reduction	  	 	(297	) 	 	 	(87	) 	
Common Shares stock dividend	  	 	—  	  	 	 	10,985	 	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	10,606	 	 	 	10,913	 	
	  	 	 	 	 	 	 	 	
Common Shares in treasury	  				 				
Balance – beginning of period	  	 	(3	) 	 	 	—  	  	
Common Shares issued in treasury, net of net shares redeemed under employee share-based compensation plans	  	 	(1	) 	 	 	(3	) 	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	(4	) 	 	 	(3	) 	
	  	 	 	 	 	 	 	 	
Additional paid-in capital	  				 				
Balance – beginning of period	  	 	5,464	 	 	 	6,812	 	
Net shares redeemed under employee share-based compensation plans	  	 	(79	) 	 	 	(14	) 	
Exercise of stock options	  	 	6	 	 	 	87	 	
Share-based compensation expense	  	 	90	 	 	 	93	 	
Preferred Shares redeemed	  	 	—  	  	 	 	(573	) 	
Common Shares stock dividend	  	 	—  	  	 	 	(990	) 	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	5,481	 	 	 	5,415	 	
	  	 	 	 	 	 	 	 	
Retained earnings	  				 				
Balance – beginning of period	  	 	74	 	 	 	9,080	 	
Effect of partial adoption of fair value measurements standard	  	 	—  	  	 	 	(4	) 	
Effect of adoption of fair value option standard	  	 	—  	  	 	 	6	 	
	  	 	 	 	 	 	 	 	
Balance – beginning of period, adjusted for effect of adoption of new accounting principles	  	 	74	 	 	 	9,082	 	
Effect of adoption of OTTI standard	  	 	195	 	 	 	—  	  	
Net income	  	 	1,596	 	 	 	1,177	 	
Dividends declared on Common Shares	  	 	—  	  	 	 	(186	) 	
Dividends declared on Preferred Shares	  	 	—  	  	 	 	(24	) 	
Common Shares stock dividend	  	 	—  	  	 	 	(9,995	) 	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	1,865	 	 	 	54	 	
	  	 	 	 	 	 	 	 	
Deferred compensation obligation	  				 				
Balance – beginning of period	  	 	3	 	 	 	3	 	
Decrease to obligation	  	 	(1	) 	 	 	—  	  	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	$	2	 	 	$	3	 	
	  	 	 	 	 	 	 	 	
See accompanying notes to the interim consolidated financial statements
 
5

Table of Contents
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (cont’d)
For the nine months ended September 30, 2009 and 2008
(Unaudited)

 	  	Nine Months Ended
September 30	 	
 	  	2009	 	 	2008	 	
 	  	(in millions of U.S.
dollars)	 	
Accumulated other comprehensive income (loss)	  				 				
Net unrealized appreciation (depreciation) on investments	  				 				
Balance – beginning of period	  	$	(1,712	) 	 	$	596	 	
Effect of adoption of fair value option standard	  	 	—  	  	 	 	(6	) 	
	  	 	 	 	 	 	 	 	
Balance – beginning of period, adjusted for effect of adoption of new accounting principle	  	 	(1,712	) 	 	 	590	 	
Effect of adoption of OTTI standard	  	 	(242	) 	 	 	—  	  	
Change in period, net of income tax (expense) benefit of $(555) and $317	  	 	2,648	 	 	 	(1,708	) 	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	694	 	 	 	(1,118	) 	
	  	 	 	 	 	 	 	 	
Cumulative translation adjustment	  				 				
Balance – beginning of period	  	 	(161	) 	 	 	231	 	
Change in period, net of income tax (expense) benefit of $(123) and $40	  	 	304	 	 	 	(82	) 	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	143	 	 	 	149	 	
	  	 	 	 	 	 	 	 	
Pension liability adjustment	  				 				
Balance – beginning of period	  	 	(43	) 	 	 	(58	) 	
Change in period, net of income tax (expense) benefit of $4 and $(2)	  	 	(9	) 	 	 	4	 	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	(52	) 	 	 	(54	) 	
	  	 	 	 	 	 	 	 	
Accumulated other comprehensive (loss) income	  	 	785	 	 	 	(1,023	) 	
	  	 	 	 	 	 	 	 	
Common Shares issued to employee trust 	  				 				
Balance – beginning of period	  	 	(3	) 	 	 	(3	) 	
Decrease in Common Shares	  	 	1	 	 	 	—  	  	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	(2	) 	 	 	(3	) 	
	  	 	 	 	 	 	 	 	
Total shareholders’ equity 	  	$	18,733	 	 	$	15,356	 	
	  	 	 	 	 	 	 	 	
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 nine months ended September 30, 2009 and 2008
(Unaudited)

 	  	Nine Months Ended
September 30	 	
 	  	2009	 	 	2008	 	
 	  	(in millions of U.S.
dollars)	 	
Cash flows from operating activities	  				 				
Net income	  	$	1,596	 	 	$	1,177	 	
Adjustments to reconcile net income to net cash flows from operating activities	  				 				
Net realized (gains) losses	  	 	569	 	 	 	989	 	
Amortization of premiums/discounts on fixed maturities	  	 	26	 	 	 	19	 	
Deferred income taxes	  	 	(122	) 	 	 	(30	) 	
Unpaid losses and loss expenses	  	 	289	 	 	 	1,224	 	
Unearned premiums	  	 	394	 	 	 	236	 	
Future policy benefits	  	 	105	 	 	 	123	 	
Insurance and reinsurance balances payable	  	 	219	 	 	 	(262	) 	
Accounts payable, accrued expenses, and other liabilities	  	 	(292	) 	 	 	260	 	
Income taxes payable	  	 	59	 	 	 	(83	) 	
Insurance and reinsurance balances receivable	  	 	(38	) 	 	 	47	 	
Reinsurance recoverable on losses and loss expenses	  	 	453	 	 	 	40	 	
Reinsurance recoverable on policy benefits	  	 	(96	) 	 	 	3	 	
Deferred policy acquisition costs	  	 	(254	) 	 	 	(168	) 	
Prepaid reinsurance premiums	  	 	(177	) 	 	 	(162	) 	
Other	  	 	(399	) 	 	 	(273	) 	
	  	 	 	 	 	 	 	 	
Net cash flows from operating activities	  	 	2,332	 	 	 	3,140	 	
	  	 	 	 	 	 	 	 	
Cash flows used for investing activities 	  				 				
Purchases of fixed maturities available for sale	  	 	(25,241	) 	 	 	(14,448	) 	
Purchases of to be announced mortgage-backed securities	  	 	(5,717	) 	 	 	(18,969	) 	
Purchases of fixed maturities held to maturity	  	 	(273	) 	 	 	(316	) 	
Purchases of equity securities	  	 	(314	) 	 	 	(834	) 	
Sales of fixed maturities available for sale	  	 	18,946	 	 	 	12,104	 	
Sales of to be announced mortgage-backed securities	  	 	6,085	 	 	 	18,340	 	
Sales of fixed maturities held to maturity	  	 	1	 	 	 	—  	  	
Sales of equity securities	  	 	1,102	 	 	 	1,001	 	
Maturities and redemptions of fixed maturities available for sale	  	 	2,695	 	 	 	2,212	 	
Maturities and redemptions of fixed maturities held to maturity	  	 	375	 	 	 	383	 	
Net proceeds from (payments made on) the settlement of investment derivatives	  	 	(23	) 	 	 	(15	) 	
Acquisition of subsidiary (net of cash acquired of $19)	  	 	—  	  	 	 	(2,522	) 	
Other	  	 	(73	) 	 	 	(476	) 	
	  	 	 	 	 	 	 	 	
Net cash flows used for investing activities	  	 	(2,437	) 	 	 	(3,540	) 	
	  	 	 	 	 	 	 	 	
Cash flows (used for) from financing activities 	  				 				
Dividends paid on Common Shares	  	 	(283	) 	 	 	(276	) 	
Proceeds from exercise of options for Common Shares	  	 	9	 	 	 	88	 	
Proceeds from Common Shares issued under ESPP	  	 	10	 	 	 	10	 	
Dividends paid on Preferred Shares	  	 	—  	  	 	 	(24	) 	
Net (repayment of) proceeds from short-term debt	  	 	(266	) 	 	 	(35	) 	
Net proceeds from issuance of long-term debt	  	 	500	 	 	 	1,195	 	
Redemption of Preferred Shares	  	 	—  	  	 	 	(575	) 	
	  	 	 	 	 	 	 	 	
Net cash (used for) from financing activities	  	 	(30	) 	 	 	383	 	
	  	 	 	 	 	 	 	 	
Effect of foreign currency rate changes on cash and cash equivalents	  	 	10	 	 	 	(14	) 	
	  	 	 	 	 	 	 	 	
Net decrease in cash	  	 	(125	) 	 	 	(31	) 	
Cash – beginning of period	  	 	867	 	 	 	510	 	
	  	 	 	 	 	 	 	 	
Cash – end of period 	  	$	742	 	 	$	479	 	
	  	 	 	 	 	 	 	 	
See accompanying notes to the interim consolidated financial statements
 
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 ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. General
ACE Limited (ACE or the Company) is a holding company which, until July 18, 2008, was incorporated with limited liability under the Cayman Islands Companies Law. On March 19, 2008, the Company announced that its Board of Directors (the Board) approved a proposal to move the Company’s jurisdiction of incorporation from the Cayman Islands to Zurich, Switzerland (the Continuation). On July 10, 2008, and July 14, 2008, during ACE’s annual general meeting, the Company’s shareholders approved the Continuation and ACE became a Swiss company effective July 18, 2008.
The Company, through its various subsidiaries, provides a broad range of insurance and reinsurance products to insureds worldwide. ACE operates through the following business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life. Refer to Note 10.
On April 1, 2008, ACE acquired all outstanding shares of Combined Insurance Company of America (Combined Insurance) and certain of its subsidiaries from Aon Corporation for $2.56 billion. Combined Insurance is a leading underwriter and distributor of specialty individual accident and supplemental health insurance products targeted to middle income consumers and small businesses in North America, Europe, Asia Pacific, and Latin America. ACE recorded the acquisition using the purchase method of accounting. Based on ACE’s final purchase price allocation, $882 million of goodwill and $43 million of other intangible assets were generated as a result of the acquisition. Goodwill was apportioned to the Life and Insurance – Overseas General segments in the amounts of $750 million and $132 million, respectively. The acquisition also generated $1 billion of value of business acquired (VOBA) which represented the fair value of the future profits of the in-force contracts. VOBA is amortized over a period of approximately 30 years.
The interim unaudited consolidated financial statements, which include the accounts of the Company and its subsidiaries, have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and, in the opinion of management, reflect all adjustments (consisting of normally recurring accruals) necessary for a fair statement of the results and financial position for such periods. All significant intercompany accounts and transactions have been eliminated. Certain items in the prior period financial statements have been reclassified to conform to the current period presentation. The results of operations and cash flows for any interim period are not necessarily indicative of the results for the full year. These financial statements should be read in conjunction with the consolidated financial statements, and related notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
 2. Significant accounting policies
New accounting pronouncements
Adopted in the nine months ended September 30, 2009
Accounting Standards Codification
In June 2009, the Financial Accounting Standards Board (FASB) issued The FASB Accounting Standards Codification TM embodied in Accounting Standards Codification (ASC) Topic 105, Generally Accepted Accounting Principles (the Codification). The Codification, which was launched on July 1, 2009, became the single source of authoritative nongovernmental U.S. GAAP, superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force, and related literature. The Codification establishes one level of authoritative guidance. All other literature is considered non-authoritative. The Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
Business combinations
ASC Topic 805, Business Combinations, contains certain provisions to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. These provisions establish standards that provide a definition of the “acquirer” and broaden the application of the acquisition method. They also establish how an acquirer recognizes and measures the assets, liabilities, and any noncontrolling interest in the “acquiree”; recognizes and measures goodwill or a gain from a bargain purchase; and require disclosures that enable users to evaluate the nature and financial effects of the business combination. The adoption of these provisions may have a material impact on any future business combinations consummated by ACE, but did not have any effect on previously consummated business acquisitions.
ASC Topic 805, Business Combinations , also contains certain provisions specifically related to accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies that are effective for all business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. These provisions amend practices related to initial recognition and measurement, subsequent measurement, and disclosure of assets and liabilities arising from contingencies acquired in business combinations and require acquired contingencies to be recognized at acquisition date fair value if fair value can be reasonably estimated during the allocation period. Otherwise, acquired contingencies would typically be accounted for in accordance with ASC Topic 450, Contingencies . The adoption of these provisions may have a material impact on any future business combinations consummated by ACE, but did not have any effect on previously consummated business acquisitions.
ASC Topic 350, Intangibles-Goodwill and Other, contains certain provisions related to accounting for defensive intangible assets that are effective for intangible assets acquired on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. These provisions require fair value be assigned to acquired defensive intangible assets and a useful life be assigned to a defensive intangible asset based on the period over which the reporting entity expects the asset to contribute directly or indirectly to future cash flows. The adoption of these provisions may have a material impact on any future intangible assets acquired by ACE, but did not have any effect on any previously acquired intangible assets.
Noncontrolling interests
ASC Topic 810, Consolidation, contains certain provisions effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. These provisions establish accounting and reporting standards that require that ownership interests in subsidiaries held by parties other than the parent be presented in the consolidated statement of shareholders’ equity separately from the parent’s equity; the consolidated net income attributable to the parent and noncontrolling interest be presented on the face of the consolidated statements of operations; changes in a parent’s ownership interest while the parent retains controlling financial interest in its subsidiary be accounted for consistently; and disclosure that identifies and distinguishes between the interests of the parent and noncontrolling owners. The adoption of these provisions did not have a material impact on ACE’s financial condition or results of operations. 
Disclosures about derivative instruments and hedging activities
ASC Topic 815, Derivatives and Hedging , contains certain provisions effective for fiscal years, and interim periods within those fiscal years, beginning on or after November 15, 2008. These provisions establish reporting standards that require enhanced disclosures about how and why derivative instruments are used, how derivative instruments are accounted for, and how derivative instruments affect an entity’s financial position, financial performance, and cash flows. ACE adopted these provisions effective January 1, 2009. Refer to Note 6.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
Determination of the useful life of intangible assets
ASC Topic 350, Intangibles-Goodwill and Other , contains certain provisions related to the determination of the useful life of intangible assets effective for financial statements issued for fiscal years beginning after December 15, 2008, that must be applied prospectively to intangible assets acquired after the effective date. These provisions amend the factors considered in developing assumptions used to determine the useful life of an intangible asset with the intention of improving the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset under ASC Topic 805, Business Combinations , and other applicable accounting literature. The adoption of these provisions may have a material impact on any future intangible assets acquired by ACE, but did not have a material impact on the useful lives of previously acquired intangible asset.
Financial guarantee insurance contracts
ASC Topic 944, Financial Services – Insurance, contains certain provisions that are effective for financial statements issued for fiscal years beginning after December 15, 2008, except for some disclosures about the insurance enterprise’s risk management activities. These provisions require that disclosures about the risk management activities of the insurance enterprise be effective for the first period beginning after issuance. Except for those disclosures, earlier application is not permitted. The provisions require that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. They also clarify the recognition and measurement to be used to account for premium revenue and claim liabilities, and require expanded disclosures about financial guarantee insurance contracts. ACE’s exposure to these provisions is principally through its investment in the common shares of Assured Guaranty Ltd (AGO). The adoption of these provisions did not have a material impact on ACE’s financial condition or results of operations.
Earnings per share
ASC Topic 260, Earnings Per Share , contains certain provisions effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2008. These provisions provide additional guidance in the calculation of earnings per share, and require unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) to be included in the computation of earnings per share pursuant to the two-class method. The adoption of these provisions did not have a material impact on ACE’s financial condition or results of operations.
Equity method accounting
ASC Topic 323, Investments-Equity Method and Joint Ventures , contains certain provisions that are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. These provisions provide guidance for equity method accounting for specific topics and require an equity method investor account for share issuances, and resulting dilutive effect, by an investee as if the investor had sold a proportionate share of its investment with the resulting gain or loss recognized in earnings. In connection with the adoption of these provisions, ACE recognized a $57 million pre-tax loss upon a June 2009 share issuance by AGO. Refer to Note 3 e).
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
Fair value measurements
ASC Topic 820, Fair Value Measurements and Disclosures, includes provisions that are effective for interim and annual periods ending after June 15, 2009. These provisions provide additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. The adoption of these provisions did not have a material impact on ACE’s financial condition or results of operations.
Fair value disclosures
ASC Topic 825, Financial Instruments , includes new provisions that require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. ACE adopted these provisions which were effective for interim and annual periods ending after June 15, 2009.
Other-than-temporary impairments
ASC Topic 320, Investments-Debt and Equity Securities, contains certain provisions that are effective for interim and annual periods ending after June 15, 2009 that amends OTTI guidance in existing GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of OTTI on debt and equity securities in the financial statements. The adoption of these provisions did not have a material impact on ACE’s financial condition or results of operations. Refer to Note 3.
Subsequent events
ASC Topic 855, Subsequent Events, contains certain provisions that are effective for interim and annual periods ending after June 15, 2009. These provisions set forth: 1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; 2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and 3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The adoption of these provisions did not impact ACE’s financial condition or results of operations.
To be adopted after September 30, 2009
Consolidation of variable interest entities and accounting for transfers of financial assets
In June 2009, the FASB issued Financial Accounting Standard (FAS) No. 166, Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140 (FAS 166) and FAS No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167). FAS 166 amends 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. FAS 167 amends 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. FAS 166 and FAS 167 are effective for interim and annual reporting periods beginning on January 1, 2010. ACE does not expect the adoption of these provisions to have a material impact on ACE’s financial condition or results of operations.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
Fair value of alternative investments
In September 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-12, Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent ) (ASU 2009-12). The provisions of ASU 2009-12 amend ASC 820-10, Fair Value Measurements and Disclosures – Overall , to provide additional guidance on estimating the fair value of certain alternative investments. These provisions create a practical expedient to measure the fair value of an alternative investment on the basis of the net asset value per share of the investment. These provisions also improve transparency by requiring additional disclosures about the attributes of alternative investments to enable users of the financial statements to understand the nature and risks of the investments. ASU 2009-12 is effective for interim and annual reporting periods beginning October 1, 2009. ACE does not expect the adoption of these provisions to have a material impact on ACE’s financial condition or results of operations.
 3. Investments
a) Transfers of securities
As part of the Company’s fixed income diversification strategy, ACE has decided to hold to maturity certain commercial mortgage-backed securities that have shorter term durations. Because the Company has the intent to hold these securities to maturity, a transfer of such securities with a fair value of $704 million was made during the three months ended June 30, 2009, from Fixed maturities available for sale to Fixed maturities held to maturity. The $4 million unrealized depreciation at the date of the transfer continues to be reported as a component of Accumulated other comprehensive income and is being amortized over the remaining life of the securities as an adjustment of yield in a manner consistent with the amortization of any premium or discount.
b) Net realized gains (losses)
The Company adopted provisions included in ASC Topic 320, Investments-Debt and Equity Securities , related to the recognition and presentation of OTTI as of April 1, 2009. Under these provisions, when an OTTI related to a fixed maturity security has occurred, ACE is required to record the OTTI in net income if the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security. Further, in cases where the Company does not intend to sell the security and it is more likely than not that it will not be required to sell the security, ACE must evaluate the security to determine the portion of the impairment, if any, related to credit losses. If a credit loss is indicated, an OTTI is considered to have occurred and any portion of the OTTI related to credit losses must be reflected in net income while the portion of OTTI related to all other factors is included in other comprehensive income. For fixed maturities held to maturity, OTTI recognized in other comprehensive income is accreted from accumulated other comprehensive income to the amortized cost of the fixed maturity prospectively over the remaining term of the securities. 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 newly adopted provisions do not have any impact on the accounting for OTTI for any other type of investment.
The cumulative effect of the adoption resulted in a reduction to Accumulated other comprehensive income and an increase to Retained earnings of $242 million as of April 1, 2009. These adjustments reflect the net of tax amount ($305 million pre-tax) of OTTI recognized in net income prior to the adoption related to fixed maturities held at the adoption date that have not suffered a credit loss, the Company does not intend to sell, and it is more likely than not that ACE will not be required to sell before the recovery of their amortized cost. These amounts include a $25 million adjustment ($44 million pre-tax) recorded by ACE in the third quarter of 2009. The $44 million pre-tax adjustment reflects the true-up of ACE’s prior estimate of reversals of non-credit OTTI for securities impaired prior to 2006 (Pre-2006 OTTI) for which a detailed review of securities held at the adoption
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
date of the new OTTI standards was not completed until the third quarter of 2009. Upon completion of the detailed review of securities held at the adoption date, ACE determined that fewer Pre-2006 OTTI securities were held than previously estimated, which resulted in an overstatement of the original reversal estimate of non-credit OTTI on Pre-2006 OTTI. The adjustment resulted in an increase to Accumulated other comprehensive income and an offsetting decrease in Retained earnings with no impact on net income or shareholders’ equity.
Retained earnings and Deferred tax assets as of April 1, 2009, were also reduced by $47 million as a result of an increase in the Company’s valuation allowance against deferred tax assets, which is a direct effect of the adoption. Specifically, as a result of the reassessment of credit losses required by this adoption, ACE determined that certain previously impaired fixed maturity securities had suffered credit losses in excess of previously estimated amounts, which may give rise to additional future capital losses for tax purposes. Given the amount of available capital gains against which such additional capital losses could be offset, at the date of adoption, the Company expected that a portion of capital loss carry forwards would expire unused. Accordingly, ACE determined that an additional valuation allowance was necessary given that it was considered more likely than not that a portion of deferred tax assets related to previously impaired fixed income securities would not be realized.
Each quarter, the Company reviews its securities in an unrealized loss position (impaired securities), including fixed maturity securities, securities lending collateral, equity securities, and other investments, to identify those impaired securities to be specifically evaluated for a potential OTTI.
For impaired fixed maturities, if the Company has the intent to sell the security or it is more likely than not that it will be required to sell the security, an OTTI is considered to have occurred. In cases where the Company does not intend to sell the security and it is more likely than not that it will not be required to sell the security, ACE evaluates the security to determine if a credit loss has occurred primarily based on a combination of qualitative and quantitative factors including a discounted cash flow model, where necessary. If a credit loss is indicated, an OTTI is considered to have occurred. Prior to the adoption, when evaluating fixed maturities for OTTI, the Company principally considered its ability and intent to hold the impaired security to the expected recovery period, the issuer’s financial condition, and the Company’s assessment (using available market information such as credit ratings) of the issuer’s ability to make future scheduled principal and interest payments on a timely basis. The factors that the Company now considers when determining if a credit loss exists related to a fixed maturity security are discussed in “Evaluation of potential credit losses related to fixed maturities” below.
The Company reviews all non-fixed maturity investments for OTTI based on the following:
 
 	•	 	the amount of time a security has been in a loss position and the magnitude of the loss position;	
 
 	•	 	the period in which cost is expected to be recovered, if at all, based on various criteria including economic conditions and other issuer-specific developments; 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 security in an unrealized loss position to assess whether the security is a candidate for credit loss. Specifically, ACE considers credit rating, market price, and issuer specific financial information, among other factors, to assess the likelihood of collection of all principal and interest as contractually due. Securities for which ACE determines that credit loss is likely are subjected to further analysis
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
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.
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 $30 million of gross unrealized loss as of September 30, 2009. These securities were evaluated for credit loss primarily using qualitative assessments of the likelihood of credit loss considering credit rating of the issuers and level of credit enhancement, if any. ACE concluded that the high level of credit worthiness of the issuers coupled with credit enhancement, where applicable, supports recognizing no credit loss in net income.
Corporate securities
Projected cash flows for corporate securities (principally senior unsecured bonds) are driven primarily by assumptions regarding probability of default and also the timing and amount of recoveries associated with defaults. ACE develops these estimates using information based on market observable data, issuer specific information, and credit ratings. ACE developed its default assumption by using historical default data by Moody’s Investors Service (Moody’s) rating category to calculate a 1-in-100 year probability of default, which results in a default assumption in excess of the historical mean default rate. ACE believes that use of a default assumption in excess of the historical mean is reasonable in light of recent market conditions. Default assumptions by Moody’s rating category are as follows (historical mean default rate provided for comparison):

Moody’s Rating Category	  	1-in-100 Year
Default Rate	 	 	Historical Mean
Default Rate	 	
	  			 			
Investment Grade:	  			 			
Aaa-Baa	  	0.0%-1.4	% 	 	0.0%-0.3	% 	
			
Below Investment Grade:	  			 			
Ba	  	4.8	% 	 	1.1	% 	
B	  	12.8	% 	 	3.4	% 	
Caa-C	  	51.6	% 	 	13.1	% 	
Consistent with our approach to developing default rate assumptions considering recent market conditions, ACE assumed a 25 percent recovery rate (the par value of a defaulted security that will be recovered) across all rating categories rather than using 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 September 30, 2009, of $15 million and from the date of adoption to September 30, 2009, of $49 million, substantially all of which relates to below investment grade securities.
Mortgage-backed securities
For mortgage-backed securities, credit impairment is assessed using a cash flow model that estimates the cash flows on the underlying mortgages, using the security-specific collateral and transaction structure. The model estimates cash
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
flows from the underlying mortgage loans and distributes those cash flows to various tranches of securities, considering the transaction structure and any subordination and credit enhancements that exist in that structure. The cash flow model incorporates actual cash flows on the mortgage-backed securities through the current period and then projects the remaining cash flows using a number of assumptions, including default rates, prepayment rates, and loss severity rates (the par value of a defaulted security that will not be recovered) on foreclosed properties.
ACE develops specific assumptions using market data, where available, and includes internal estimates as well as estimates published by rating agencies and other third-party sources. ACE projects default rates by mortgage sector considering current underlying mortgage loan performance, generally assuming:
 
 	•	 	lower loss severity for Prime sector bonds versus ALT-A, Sub-prime and Option ARM sector bonds, and	
 
 	•	 	lower loss severity for older vintage securities versus more recent vintage securities, which reflects the recent decline in underwriting standards. 	
These estimates are extrapolated along a default timing curve to estimate the total lifetime pool default rate. Other assumptions used contemplate the actual collateral attributes, including geographic concentrations, rating agency loss projections, rating actions, and current market prices. If cash flow projections indicate that losses will exceed the credit enhancement for a given tranche, then the Company does not expect to recover its amortized cost basis and recognizes an estimated credit loss in net income.
The significant assumptions used to estimate future cash flows for specific mortgage-backed securities evaluated for potential credit loss as of September 30, 2009, by sector and vintage are as  follows:
Range of Significant Assumptions Used

Sector (1)	  	Vintage	  	Default Rate (2)	 	 	Loss Severity
Rate (2)	 	
Prime	  	2004 and prior	  	7-29	% 	 	35-54	% 	
	  	2005	  	7-42	% 	 	45-62	% 	
	  	2006	  	18-40	% 	 	43-69	% 	
	  	2007	  	11-58	% 	 	48-71	% 	

ALT-A	  	2004 and prior	  	14	%  	 	50	%  	
	  	2005	  	5-27	% 	 	46-65	% 	
	  	2006	  	5-40	% 	 	57-67	% 	
	  	2007	  	25-42	% 	 	60-69	% 	

Sub-prime (3) 	  	2004 and prior	  	56	%  	 	63	%  	
	  	2005	  	74	%  	 	74	%  	
	  	2006	  	23-82	% 	 	73-79	% 	
	  	2007	  	25-82	% 	 	75-78	% 	

Option ARM	  	2004 and prior	  	43	%  	 	45	%  	
	  	2005	  	57-82	% 	 	55-62	% 	
	  	2006	  	72-79	% 	 	63-67	% 	
	  	2007	  	68-71	% 	 	61-63	% 	
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

(1)	Prime, ALT-A, and Sub-prime sector bonds are categorized based on credit worthiness of the borrower. Option ARM sector bonds are categorized based on the type of mortgage product, rather than credit worthiness of the borrower.	
( 2 )	Default rate and loss severity rate assumptions vary within a given sector and vintage depending upon the geographic concentration of the collateral underlying the bond and the level of serious delinquencies, among other factors.	
(3 )	The sub-prime population of securities in the portfolio is nominal. Accordingly, the default rate and loss severity rates are banded more tightly than for other sectors where the population of securities is larger and more diverse.	
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 September 30, 2009, of $24 million and from the date of adoption to September 30, 2009, of $50 million. Given the variation in ratings between major rating agencies for the securities for which a credit loss was recognized in net income, ACE does not believe it is useful to provide the credit loss split between investment grade and below investment grade.
The following table shows, for the periods indicated, the Net realized gains (losses) and the losses included in Net realized gains (losses) and Other comprehensive income as a result of conditions which caused the Company to conclude the decline in fair value of certain investments was “other-than-temporary”. The impairments recorded in net income related to fixed maturities for the nine months ended September 30, 2009, were primarily due to securities with below investment grade credit ratings and intent to sell securities in an unrealized loss position. Impairments related to all other investments were primarily due to duration and severity of decline below cost.

 	  	Three Months Ended
September 30	 	 	Nine Months Ended
September 30	 	
 	  	    2009    	 	 	    2008    	 	 	    2009    	 	 	    2008    	 	
 	  	(in millions of U.S. dollars)	 	
Fixed maturities:	  				 				 				 				
OTTI on fixed maturities, gross	  	$	(150	) 	 	$	(196	) 	 	$	(519	) 	 	$	(495	) 	
OTTI on fixed maturities included in other comprehensive income (pre-tax)	  	 	111	 	 	 	—  	  	 	 	302	 	 	 	—  	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
OTTI on fixed maturities, net	  	 	(39	) 	 	 	(196	) 	 	 	(217	) 	 	 	(495	) 	
Net realized gains (losses) excluding OTTI	  	 	38	 	 	 	(76	) 	 	 	97	 	 	 	(80	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total fixed maturities	  	 	(1	) 	 	 	(272	) 	 	 	(120	) 	 	 	(575	) 	

Equity securities:	  				 				 				 				
OTTI on equity securities	  	 	—  	  	 	 	(28	) 	 	 	(26	) 	 	 	(103	) 	
Net realized gains (losses) excluding OTTI	  	 	1	 	 	 	(98	) 	 	 	(154	) 	 	 	(64	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total equity securities	  	 	1	 	 	 	(126	) 	 	 	(180	) 	 	 	(167	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
OTTI on other investments	  	 	(19	) 	 	 	—  	  	 	 	(121	) 	 	 	(25	) 	
Net realized gains (losses) on other investments excluding OTTI	  	 	3	 	 	 	4	 	 	 	(12	) 	 	 	6	 	
Foreign exchange gains (losses)	  	 	(7	) 	 	 	15	 	 	 	(31	) 	 	 	33	 	
Investment and embedded derivative instruments	  	 	28	 	 	 	15	 	 	 	62	 	 	 	(10	) 	
Fair value adjustments on insurance derivative	  	 	(65	) 	 	 	(189	) 	 	 	218	 	 	 	(319	) 	
S&P put options and futures	  	 	(144	) 	 	 	28	 	 	 	(300	) 	 	 	40	 	
Other derivative instruments	  	 	(19	) 	 	 	15	 	 	 	(85	) 	 	 	28	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net realized gains (losses)	  	$	(223	) 	 	$	(510	) 	 	$	(569	) 	 	$	(989	) 	

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
The following table provides, for the three months ended September 30, 2009, and for the six month period from the date of adoption to September 30, 2009, a roll forward of pre-tax credit losses related to fixed maturities for which a portion of OTTI was recorded in Other comprehensive income.

 	  	Three Months Ended
September 30, 2009	 	 	Six Months Ended
September 30, 2009	 	
 	  	(in millions of U.S. Dollars)	 	
Balance of credit losses related to securities still held-beginning of period	  	$	188	 	 	$	130	 	
Additions where no OTTI was previously recorded	  	 	24	 	 	 	78	 	
Additions where an OTTI was previously recorded	  	 	15	 	 	 	21	 	
Reductions reflecting amounts previously recorded in Other comprehensive income but subsequently reflected in net income	  	 	—  	  	 	 	(2	) 	
Reductions for securities sold during the period	  	 	(10	) 	 	 	(10	) 	
	  	 	 	 	 	 	 	 	
Balance of credit losses related to securities still held-end of period	  	$	217	 	 	$	217	 	
	  	 	 	 	 	 	 	 	
c) Fixed maturities
The following tables present the fair values and amortized costs of and the gross unrealized appreciation (depreciation) related to fixed maturities as well OTTI included in Accumulated other comprehensive income.

 	  	September 30, 2009	 	
 	  	Amortized
Cost	  	Gross
Unrealized
Appreciation	  	Gross
Unrealized
Depreciation	 	 	Fair Value	  	OTTI Included in
Accumulated Other
Comprehensive Income	 	
 	  	(in millions of U.S. dollars)	 	
Available for sale	  			  			  				 			  				
U.S. Treasury and agency	  	$	3,417	  	$	85	  	$	(7	) 	 	$	3,495	  	$	—  	  	
Foreign	  	 	10,484	  	 	390	  	 	(173	) 	 	 	10,701	  	 	(29	) 	
Corporate securities	  	 	12,546	  	 	617	  	 	(201	) 	 	 	12,962	  	 	(47	) 	
Mortgage-backed securities	  	 	9,925	  	 	281	  	 	(524	) 	 	 	9,682	  	 	(261	) 	
States, municipalities, and political subdivisions	  	 	1,632	  	 	90	  	 	(3	) 	 	 	1,719	  	 	—  	  	
	  	 	 	  	 	 	  	 	 	 	 	 	 	  	 	 	 	
	  	$	38,004	  	$	1,463	  	$	(908	) 	 	$	38,559	  	$	(337	) 	

Held to maturity	  			  			  				 			  				
U.S. Treasury and agency	  	$	879	  	$	41	  	$	—  	  	 	$	920	  	$	—  	  	
Foreign	  	 	28	  	 	1	  	 	—  	  	 	 	29	  	 	—  	  	
Corporate securities	  	 	340	  	 	11	  	 	(1	) 	 	 	350	  	 	—  	  	
Mortgage-backed securities	  	 	1,495	  	 	41	  	 	(11	) 	 	 	1,525	  	 	—  	  	
States, municipalities, and political subdivisions	  	 	697	  	 	12	  	 	(1	) 	 	 	708	  	 	—  	  	
	  	 	 	  	 	 	  	 	 	 	 	 	 	  	 	 	 	
	  	$	3,439	  	$	106	  	$	(13	) 	 	$	3,532	  	$	—  	  	

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

 	  	December 31, 2008	
 	  	Amortized
Cost	  	Gross
Unrealized
Appreciation	  	Gross
Unrealized
Depreciation	 	 	Fair
Value	
 	  	(in millions of U.S. dollars)	
Available for sale	  			  			  				 			
U.S. Treasury and agency	  	$	1,991	  	$	133	  	$	(2	) 	 	$	2,122	
Foreign	  	 	8,625	  	 	278	  	 	(529	) 	 	 	8,374	
Corporate securities	  	 	10,093	  	 	89	  	 	(1,121	) 	 	 	9,061	
Mortgage-backed securities	  	 	10,958	  	 	221	  	 	(1,019	) 	 	 	10,160	
States, municipalities, and political subdivisions	  	 	1,442	  	 	38	  	 	(42	) 	 	 	1,438	
	  	 	 	  	 	 	  	 	 	 	 	 	 	
	  	$	33,109	  	$	759	  	$	(2,713	) 	 	$	31,155	
	  	 	 	  	 	 	  	 	 	 	 	 	 	
Held to maturity	  			  			  				 			
U.S. Treasury and agency	  	$	862	  	$	61	  	$	—  	  	 	$	923	
Foreign	  	 	38	  	 	1	  	 	(1	) 	 	 	38	
Corporate securities	  	 	405	  	 	2	  	 	(15	) 	 	 	392	
Mortgage-backed securities	  	 	877	  	 	11	  	 	(62	) 	 	 	826	
States, municipalities, and political subdivisions	  	 	678	  	 	9	  	 	(1	) 	 	 	686	
	  	 	 	  	 	 	  	 	 	 	 	 	 	
	  	$	2,860	  	$	84	  	$	(79	) 	 	$	2,865	
	  	 	 	  	 	 	  	 	 	 	 	 	 	
Fixed maturities at September 30, 2009, and December 31, 2008, by contractual maturity, are shown below. Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.

 	  	September 30
2009	  	December 31
2008	
 	  	Fair Value	  	Amortized
Cost	  	Fair Value	  	Amortized
Cost	
 	  	(in millions of U.S. dollars)	
Available for sale; maturity period	  			  			  			  			
Due in 1 year or less	  	$	1,173	  	$	1,157	  	$	1,047	  	$	1,047	
Due after 1 year through 5 years	  	 	14,422	  	 	13,999	  	 	9,706	  	 	9,868	
Due after 5 years through 10 years	  	 	9,791	  	 	9,344	  	 	6,867	  	 	7,330	
Due after 10 years	  	 	3,491	  	 	3,579	  	 	3,375	  	 	3,906	
	  	 	 	  	 	 	  	 	 	  	 	 	
	  	 	28,877	  	 	28,079	  	 	20,995	  	 	22,151	
Mortgage-backed securities	  	 	9,682	  	 	9,925	  	 	10,160	  	 	10,958	
	  	 	 	  	 	 	  	 	 	  	 	 	
	  	$	38,559	  	$	38,004	  	$	31,155	  	$	33,109	

Held to maturity; maturity period	  			  			  			  			
Due in 1 year or less	  	$	686	  	$	674	  	$	327	  	$	325	
Due after 1 year through 5 years	  	 	1,107	  	 	1,067	  	 	1,401	  	 	1,364	
Due after 5 years through 10 years	  	 	130	  	 	120	  	 	227	  	 	212	
Due after 10 years	  	 	84	  	 	83	  	 	84	  	 	82	
	  	 	 	  	 	 	  	 	 	  	 	 	
	  	 	2,007	  	 	1,944	  	 	2,039	  	 	1,983	
Mortgage-backed securities	  	 	1,525	  	 	1,495	  	 	826	  	 	877	
	  	 	 	  	 	 	  	 	 	  	 	 	
	  	$	3,532	  	$	3,439	  	$	2,865	  	$	2,860	

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
d) Equity securities
The fair value, cost of, and gross unrealized appreciation (depreciation) on equity securities at September 30, 2009, and December 31, 2008, are as follows:

 	  	September 30
2009	  	December 31
2008	 	
	  		  			
 	  	(in millions of U.S. dollars)	 	
Equity securities – cost	  	$	492	  	$	1,132	 	
Gross unrealized appreciation	  	 	54	  	 	74	 	
Gross unrealized depreciation	  	 	—  	  	 	(218	) 	
	  	 	 	  	 	 	 	
Equity securities – fair value	  	$	546	  	$	988	 	
	  	 	 	  	 	 	 	
e) Investment in AGO
AGO, a Bermuda-based holding company provides, through its operating subsidiaries, credit enhancement products to the public finance, structured finance, and mortgage markets. On July 1, 2009, AGO acquired Financial Security Assurance Holdings Ltd. from Dexia Holdings Inc., a subsidiary of Dexia S.A. The purchase price included approximately $546 million in cash and approximately 22.3 million AGO common shares, according to AGO’s public filings. AGO financed the cash portion of the purchase price partly through a June 2009 issuance of 38.5 million common shares before the exercise of any overallotment option (June 2009 issuance), according to AGO’s public filings. Prior to the June 2009 issuance, ACE included its investment in AGO in Investments in partially-owned insurance companies using the equity method of accounting. Effective with the June 2009 issuance, ACE was deemed to no longer exert significant influence over AGO for accounting purposes and accounts for the investment in AGO as an available-for-sale equity security. ACE accounted for AGO’s June 2009 issuance, and resulting dilutive effect, as if the Company had sold a proportionate share of the investment, and recognized a $57 million pre-tax loss in Net realized gains (losses). As of September 30, 2009, the fair value of the Company’s investment in AGO was $372 million and $37 million of unrealized gain on this investment is reflected in Accumulated other comprehensive income.
f) Gross unrealized loss
As of September 30, 2009, there were 3,741 fixed maturities out of a total of 17,981 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $28 million. The tightening of credit spreads in the six month period leading up to September 30, 2009, particularly during the three months ended September 30, 2009, resulted in a reduction to net unrealized losses. In addition, greater global demand-driven purchases of fixed income investments and a greater demand for risk-based assets contributed to this reduction. The fixed maturities in an unrealized loss position at September 30, 2009, 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.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
The following tables summarize, for all securities in an unrealized loss position at September 30, 2009, and December 31, 2008 (including securities on loan), the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position.

 	  	0 – 12 Months	 	 	Over 12 Months	 	 	Total	 	
 	  	Fair Value	  	Gross
Unrealized
Loss	 	 	Fair Value	  	Gross
Unrealized
Loss	 	 	Fair Value	  	Gross
Unrealized
Loss	 	
 	  	(in millions of U.S. dollars)	 	
September 30, 2009	  			  				 			  				 			  				
U.S. Treasury and agency	  	$	405	  	$	(7.0	) 	 	$	6	  	$	(0.2	) 	 	$	411	  	$	(7.2	) 	
Foreign	  	 	1,688	  	 	(122.1	) 	 	 	484	  	 	(51.3	) 	 	 	2,172	  	 	(173.4	) 	
Corporate securities	  	 	1,084	  	 	(74.3	) 	 	 	1,453	  	 	(128.1	) 	 	 	2,537	  	 	(202.4	) 	
Mortgage-backed securities	  	 	624	  	 	(48.0	) 	 	 	2,016	  	 	(486.8	) 	 	 	2,640	  	 	(534.8	) 	
States, municipalities, and political subdivisions	  	 	84	  	 	(0.7	) 	 	 	67	  	 	(2.9	) 	 	 	151	  	 	(3.6	) 	
	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
Total fixed maturities	  	 	3,885	  	 	(252.1	) 	 	 	4,026	  	 	(669.3	) 	 	 	7,911	  	 	(921.4	) 	
Other investments	  	 	196	  	 	(25.3	) 	 	 	190	  	 	(68.5	) 	 	 	386	  	 	(93.8	) 	
	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
Total	  	$	4,081	  	$	(277.4	) 	 	$	4,216	  	$	(737.8	) 	 	$	8,297	  	$	(1,015.2	) 	
	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
Included in the “0 – 12 Months” and “Over 12 Months” aging categories at September 30, 2009, are fixed maturities held to maturity with combined fair values of $107 million and $263 million, respectively. The associated gross unrealized losses included in the “0 – 12 Months” and “Over 12 Months” aging categories are $1 million and $12 million, respectively. Fixed maturities in a gross unrealized loss position for over 12 months principally comprise non-credit losses on investment grade securities where management does not intend to sell and it is more likely than not that ACE will not be required to sell the security before recovery. For mortgage-backed securities in a gross unrealized loss position for over 12 months, management also considered credit enhancement in concluding the securities were not other-than-temporarily impaired. Gross unrealized gains as of September 30, 2009, were $2 billion.

 	  	0 – 12 Months	 	 	Over 12 Months	 	 	Total	 	
 	  	Fair Value	  	Gross
Unrealized
Loss	 	 	Fair Value	  	Gross
Unrealized
Loss	 	 	Fair Value	  	Gross
Unrealized
Loss	 	
 	  	(in millions of U.S. dollars)	 	
December 31, 2008	  			  				 			  				 			  				
U.S. Treasury and agency	  	$	605	  	$	(2.5	) 	 	$	—  	  	$	—  	  	 	$	605	  	$	(2.5	) 	
Foreign	  	 	2,488	  	 	(335.7	) 	 	 	587	  	 	(194.4	) 	 	 	3,075	  	 	(530.1	) 	
Corporate securities	  	 	5,815	  	 	(884.2	) 	 	 	1,228	  	 	(251.3	) 	 	 	7,043	  	 	(1,135.5	) 	
Mortgage-backed securities	  	 	4,242	  	 	(880.0	) 	 	 	319	  	 	(200.1	) 	 	 	4,561	  	 	(1,080.1	) 	
States, municipalities, and political subdivisions	  	 	331	  	 	(23.1	) 	 	 	109	  	 	(20.5	) 	 	 	440	  	 	(43.6	) 	
	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
Total fixed maturities	  	 	13,481	  	 	(2,125.5	) 	 	 	2,243	  	 	(666.3	) 	 	 	15,724	  	 	(2,791.8	) 	
Equity securities	  	 	694	  	 	(217.7	) 	 	 	13	  	 	(0.5	) 	 	 	707	  	 	(218.2	) 	
Other investments	  	 	508	  	 	(175.9	) 	 	 	58	  	 	(17.3	) 	 	 	566	  	 	(193.2	) 	
	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	  	 	 	 	
Total	  	$	14,683	  	$	(2,519.1	) 	 	$	2,314	  	$	(684.1	) 	 	$	16,997	  	$	(3,203.2	) 	

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
Included in the “0 – 12 Months” and “Over 12 Months” aging categories at December 31, 2008, are fixed maturities held to maturity with combined fair values of $729 million and $105 million, respectively. The associated gross unrealized losses included in the “0 – 12 Months” and “Over 12 Months” aging categories were $59 million and $20 million, respectively. Gross unrealized gains as of December 31, 2008 were $1.1 billion.
g) Restricted assets
The Company is required to maintain assets on deposit with various regulatory authorities to support its insurance and reinsurance operations. These requirements are generally promulgated in the statutory regulations of the individual jurisdictions. The assets on deposit are available to settle insurance and reinsurance liabilities. The Company also utilizes trust funds in certain large 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. At September 30, 2009, restricted assets of $12.5 billion are included in fixed maturities and short-term investments, with the balance included in equity securities and cash. The components of the fair value of the restricted assets at September 30, 2009, and December 31, 2008, are as follows.

 	  	September 30
2009	  	December 31
2008	
	  		  		
 	  	(in millions of U.S. dollars)	
Deposits with U.S. regulatory authorities	  	$	1,201	  	$	1,165	
Deposits with non-U.S. regulatory authorities	  	 	2,524	  	 	1,863	
Other pledged assets	  	 	628	  	 	805	
Trust funds	  	 	8,376	  	 	7,712	
	  	 	 	  	 	 	
	  	$	12,729	  	$	11,545	
	  	 	 	  	 	 	
 4. Assumed life reinsurance programs involving minimum benefit guarantees under annuity contracts
The presentation of income and expenses relating to guaranteed minimum death benefits (GMDB) and guaranteed minimum income benefits (GMIB) reinsurance for the periods indicated, are as follows:

 	  	Three Months Ended
September 30	 	 	Nine Months Ended
September 30	 	
 	  	    2009    	 	 	    2008    	 	 	    2009    	  	    2008    	 	
 	  	(in millions of U.S. dollars)	 	
GMDB	  				 				 			  				
Net premiums earned	  	$	28	 	 	$	31	 	 	$	78	  	$	95	 	
Policy benefits	  	$	29	 	 	$	60	 	 	$	94	  	$	107	 	
					
GMIB	  				 				 			  				
Net premiums earned	  	$	41	 	 	$	37	 	 	$	120	  	$	109	 	
Policy benefits	  	$	6	 	 	$	(21	) 	 	$	14	  	$	(6	) 	
Realized gains (losses)	  	$	(65	) 	 	$	(189	) 	 	$	218	  	$	(319	) 	
	  	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Gain (loss) recognized in income	  	$	(30	) 	 	$	(131	) 	 	$	324	  	$	(204	) 	
					
Effect of partial adoption of fair value measurements standard	  	$	—  	  	 	$	—  	  	 	$	—  	  	$	4	 	
Net cash received (disbursed)	  	$	41	 	 	$	36	 	 	$	119	  	$	109	 	
Net (increase) decrease in liability	  	$	(71	) 	 	$	(167	) 	 	$	205	  	$	(317	) 	
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
At September 30, 2009, reported liabilities for GMDB and GMIB reinsurance were $220 million and $705 million, respectively, compared with $248 million and $910 million, respectively, at December 31, 2008. The reported liability for GMIB reinsurance of $705 million at September 30, 2009, and $910 million at December 31, 2008, includes a fair value derivative adjustment of $593 million and $811 million, respectively. Reported liabilities for both GMDB and GMIB reinsurance are determined using internal valuation models. Such valuations require considerable judgment and are subject to significant uncertainty. The valuation of these products is subject to fluctuations arising from, among other factors, changes in interest rates, changes in equity markets, changes in credit markets, changes in the allocation of the investments underlying annuitant’s account values, and assumptions regarding future policyholder behavior. These models and the related assumptions are continually reviewed by management and enhanced, as appropriate, based upon improvements in modeling assumptions and availability of more timely information, such as market conditions and demographics of in-force annuities.
GMDB reinsurance
At September 30, 2009, and December 31, 2008, the Company’s net amount at risk from its GMDB reinsurance programs was $4 billion and $4.7 billion, respectively. For GMDB reinsurance programs, the net amount at risk is defined as the present value of future claim payments under the following assumptions:
 
 	•	 	policy account values and guaranteed values are fixed at the valuation date (September 30, 2009, and December 31, 2008, respectively);	
 
 	•	 	there are no lapses or withdrawals;	
 
 	•	 	mortality according to 100 percent of the Annuity 2000 mortality table; and	
 
 	•	 	future claims are discounted in line with the discounting assumption used in the calculation of the benefit reserve averaging between three to four percent.	
At September 30, 2009, if all of the Company’s cedants’ policyholders covered under GMDB reinsurance agreements were to die immediately, the total claim amount payable by the Company, taking into account all appropriate claims limits, would be approximately $1.3 billion. As a result of the annual claim limits on the GMDB reinsurance agreements, the claims payable are lower in this case than if all the policyholders were to die over time, all else equal.
GMIB reinsurance
At September 30, 2009, the Company’s net amount at risk from its GMIB reinsurance programs was $924 million, compared with $2.1 billion at December 31, 2008. For GMIB, the net amount at risk is defined as the present value of future claim payments under the following assumptions:
 
 	•	 	policy account values and guaranteed values are fixed at the valuation date (September 30, 2009, and December 31, 2008, respectively);	
 
 	•	 	there are no deaths, lapses, or withdrawals;	
 
 	•	 	policyholders annuitize at a frequency most disadvantageous to ACE (in other words, annuitization at a level that maximizes claims taking into account the treaty limits) under the terms of the Company’s reinsurance contracts;	
 
 	•	 	for annuitizing policyholders, the GMIB claim is calculated using interest rates in line with those used in calculating the reserve; and	
 
 	•	 	future claims are discounted in line with the discounting assumption used in the calculation of the benefit reserve averaging between two to three percent.	
 
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(Unaudited)
 
The average attained age of all policyholders under all benefits reinsured, weighted by the guaranteed value of each reinsured policy, is approximately 65.
 5. Debt
The following table outlines the Company’s debt as of September 30, 2009, and December 31, 2008.

 	  	September 30
2009	  	December 31
2008	
 	  	(in millions of U.S. dollars)	
Short-term debt	  			  			
ACE INA subordinated notes due 2009	  	$	200	  	$	205	
ACE INA term loan due 2009	  	 	—  	  	 	16	
Reverse repurchase agreements	  	 	—  	  	 	250	
	  	 	 	  	 	 	
	  	$	200	  	$	471	
	  	 	 	  	 	 	
Long-term debt	  			  			
ACE European Holdings due 2010	  	$	163	  	$	149	
ACE INA term loan due 2011	  	 	50	  	 	50	
ACE INA term loan due 2013	  	 	450	  	 	450	
ACE INA senior notes due 2014	  	 	500	  	 	499	
ACE INA senior notes due 2015	  	 	446	  	 	446	
ACE INA senior notes due 2017	  	 	500	  	 	500	
ACE INA senior notes due 2018	  	 	300	  	 	300	
ACE INA senior notes due 2019	  	 	500	  	 	—  	
ACE INA debentures due 2029	  	 	100	  	 	100	
ACE INA senior notes due 2036	  	 	298	  	 	298	
Other	  	 	14	  	 	14	
	  	 	 	  	 	 	
	  	$	3,321	  	$	2,806	
	  	 	 	  	 	 	
Trust Preferred Securities	  			  			
ACE INA capital securities due 2030	  	$	309	  	$	309	
	  	 	 	  	 	 	
a) Short-term debt
The Company had executed reverse repurchase agreements with certain counterparties under which the Company agreed to sell securities and repurchase them at a future date for a predetermined price. All reverse repurchase agreements have been settled during 2009.
In September 2009, the Company repaid the $16 million ACE INA nine-month term loan.
b) ACE INA notes
In June 2009, ACE INA issued $500 million of 5.9 percent senior notes due June 2019. These notes are redeemable at any time at ACE INA’s option subject to a “make-whole” premium plus 0.40 percent. The notes are also redeemable at par plus accrued and unpaid interest in the event of certain changes in tax law. The notes do not have the benefit of any sinking fund. These senior unsecured notes are guaranteed on a senior basis by the Company and they rank equally with all of the Company’s other senior obligations. They also contain customary limitations on lien provisions as well as customary events of default provisions which, if breached, could result in the accelerated maturity of such senior debt.
 
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 6. Commitments, contingencies, and guarantees
a) Derivative instruments
Derivative instruments employed
The Company maintains positions in derivative instruments such as futures, options, swaps, and foreign currency forward contracts for which the primary purposes are to manage duration and foreign currency exposure, yield enhancement, or to obtain an exposure to a particular financial market. Along with convertible bonds and to be announced mortgage-backed securities, discussed below, these are the most numerous and frequent derivative transactions.
ACE maintains positions in certain convertible bond investments that contain embedded derivatives. In addition, the Company purchases to be announced mortgage-backed securities (TBA) as part of its investing activities. These securities are included within the Company’s fixed maturities available for sale (FM AFS) portfolio.
Under reinsurance programs covering living benefit guarantees, the Company assumes the risk of GMIBs associated with variable annuity contracts. The GMIB risk is triggered if, at the time the contract holder elects to convert the accumulated account value to a periodic payment stream (annuitize), the accumulated account value is not sufficient to provide a guaranteed minimum level of monthly income. The Company’s GMIB reinsurance product meets the definition of a derivative instrument. Benefit reserves in respect of GMIBs are classified as Future policy benefits (FPB) while the fair value derivative adjustment is classified within Accounts payable, accrued expenses, and other liabilities (AP). The Company also maintains positions in certain exchange-traded equity futures contracts and options on equity market futures to limit equity and interest rate exposure in the GMDB and GMIB block of business.
In relation to certain long- and short-term debt issues, the Company has entered into interest rate swap transactions for the purpose of either fixing or reducing borrowing costs. ACE buys credit default swaps to mitigate global credit risk exposure, primarily related to reinsurance recoverable.
The Company carries all derivative instruments at fair value with changes in fair value recorded in Net realized gains (losses) in the consolidated statements of operations. None of the derivative instruments are used as hedges for accounting purposes.
 
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The following table outlines the balance sheet locations, fair values in an asset or (liability) position, and notional values/payment provisions of the Company’s derivative instruments at September 30, 2009.

 	  	September 30, 2009	
 	  	Consolidated
Balance Sheet
Location	  	Fair Value	 	 	Notional
Value/
Payment
Provision	
 	  	(in millions of U.S. dollars)	
Investment and embedded derivative instruments	  		  				 			
Foreign currency forward contracts	  	AP	  	$	(3	) 	 	$	267	
Futures contracts on money market instruments	  	AP	  	 	4	  	 	 	5,389	
Futures contracts on notes and bonds	  	AP	  	 	1	  	 	 	389	
Options on notes and bonds futures	  	AP	  	 	(1 	)  	 	 	78	
Convertible bonds	  	FM AFS	  	 	341	  	 	 	594	
TBAs	  	FM AFS	  	 	18 	  	 	 	17	
	  		  	 	 	 	 	 	 	
	  		  	$	360	  	 	$	6,734	
	  		  	 	 	 	 	 	 	
Other derivative instruments	  		  				 			
Futures contracts on equities	  	AP	  	$	(15	) 	 	$	919	
Options on equity market futures	  	AP	  	 	64	  	 	 	250	
Interest rate swaps	  	AP	  	 	(26	) 	 	 	500	
Credit default swaps	  	AP	  	 	9	  	 	 	350	
Other	  	AP	  	 	11	  	 	 	59	
	  		  	 	 	 	 	 	 	
	  		  	$	43	  	 	$	2,078	

GMIB (1)	  	AP/FPB	  	$	(705	) 	 	$	924	

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

 	  	Three Months Ended
September 30, 2009	 	 	Nine Months Ended
September 30, 2009	 	
 	  	(in millions of U.S. dollars)	 	
Investment and embedded derivative instruments	  				 				
Foreign currency forward contracts	  	$	(6	) 	 	$	(20	) 	
All other futures contracts and options	  	 	11	  	 	 	7	  	
Convertible bonds	  	 	23	  	 	 	80	  	
TBAs	  	 	—  	  	 	 	(5	) 	
	  	 	 	 	 	 	 	 	
	  	$	28	  	 	$	62	  	
	  	 	 	 	 	 	 	 	
GMIB and other derivative instruments	  				 				
GMIB	  	$	(65	) 	 	$	218	  	
Futures contracts on equities	  	 	(111	) 	 	 	(213	) 	
Options on equity market futures	  	 	(33	) 	 	 	(87	) 	
Interest rate swaps	  	 	(6	) 	 	 	(21	) 	
Credit default swaps	  	 	(15	) 	 	 	(67	) 	
Other	  	 	2	  	 	 	3	  	
	  	 	 	 	 	 	 	 	
	  	$	(228	) 	 	$	(167	) 	

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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 September 30, 2009, was $25 million. In connection with these contracts, ACE has posted collateral of $15 million at September 30, 2009. The amount of collateral that ACE is required to post under these contracts would increase should the Company’s Ratings deteriorate. At September 30, 2009, the maximum amount of collateral that the Company would be required to post in respect of these derivative instruments, based on the contractual Ratings-based scales, is $25 million. The contract counterparties would be able to cancel the contracts if ACE’s Ratings fall to BBB- as measured by Standard and Poor’s (S&P) or Baa3 as measured by Moody’s.
Derivative instrument objectives
(i) Foreign currency exposure management 
The Company uses foreign currency forward contracts (forwards) to minimize the effect of fluctuating foreign currencies. The forwards purchased are not specifically identifiable against cash, any single security, or groups of securities denominated in those currencies and, therefore, do not qualify as hedges for financial reporting purposes. All realized and unrealized contract gains and losses are reflected in Net realized gains (losses) in the consolidated statements of operations.
(ii) Duration management and market exposure 
Futures
Exchange-traded bond and note futures contracts may be used in fixed maturity portfolios as substitutes for ownership of the bonds and notes without significantly increasing the risk in the portfolio. Investments in futures contracts may be made only to the extent that there are assets under management not otherwise committed. Exchange-traded equity futures contracts may be used to limit exposure to a severe equity market decline, which would cause an increase in expected claims and therefore, reserves for GMDB and GMIB reinsurance business. Futures contracts give the holder the right and obligation to participate in market movements, determined by the index or underlying security on which the futures contract is based. Settlement is made daily in cash by an amount equal to the change in value of the futures contract times a multiplier that scales the size of the contract.
Interest rate swaps
An interest rate swap is a contract between two counterparties in which interest payments are made based on a notional principal amount, which itself is never paid or received. Under the terms of an interest rate swap, one counterparty makes interest payments based on a fixed interest rate and the other counterparty’s payments are based on a floating rate. Interest rate swap contracts are used occasionally in the investment portfolio as protection against unexpected shifts in interest rates, which would affect the fair value of the fixed maturity portfolio. By using interest rate swaps in the portfolio, the overall duration or interest rate sensitivity of the portfolio can be reduced. The Company also employs interest rate swaps related to certain debt issues for the purpose of either fixing and/or reducing borrowing costs.
 
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NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
Credit default swaps
A credit default swap is a bilateral contract under which two counterparties agree to isolate and separately trade the credit risk of at least one third-party reference entity. Under a credit default swap agreement, a protection buyer pays a periodic fee to a protection seller in exchange for a contingent payment by the seller upon a credit event (such as a default or failure to pay) related to the reference entity. When a credit event is triggered, the protection seller either takes delivery of the assets for the principal amount or pays the protection buyer the difference between the fair value of assets and the principal amount. The Company buys credit default swaps to mitigate global credit risk exposure, primarily related to reinsurance recoverable.
Options
Option contracts are used in the investment portfolio as protection against unexpected shifts in interest rates, which would affect the duration of the fixed maturity portfolio. By using options in the portfolio, the overall interest rate sensitivity of the portfolio can be reduced. Option contracts may also be used as an alternative to futures contracts in the Company’s synthetic strategy as described above. Another use for option contracts may be to limit exposure to a severe equity market decline, which would cause an increase in expected claims and therefore, reserves for GMDB and GMIB reinsurance business. An option contract conveys to the holder the right, but not the obligation, to purchase or sell a specified amount or value of an underlying security at a fixed price. The price of an option is influenced by the underlying security, expected volatility, time to expiration, and supply and demand.
The credit risk associated with the above derivative financial instruments relates to the potential for non-performance by counterparties. Although non-performance is not anticipated, in order to minimize the risk of loss, management monitors the credit worthiness of its counterparties. The performance of exchange-traded instruments is guaranteed by the exchange on which they trade. For non-exchange-traded instruments, the counterparties are principally banks which must meet certain criteria according to the Company’s investment guidelines.
(iii) Convertible security investments 
A convertible bond is a debt instrument that can be converted into a predetermined amount of the issuer’s equity at certain times prior to the bond’s maturity. The convertible option is an embedded derivative which is marked-to-market with changes in fair value recognized in Net realized gains (losses). The debt host instrument is classified in the investment portfolio as available for sale. The Company purchases convertible bonds for their total return and not specifically for the conversion feature.
(iv) To be announced mortgage-backed securities (TBA) 
By acquiring a TBA, the Company makes a commitment to purchase a future issuance of mortgage-backed securities. For the period between purchase of the TBA and issuance of the underlying security, the Company’s position is accounted for as a derivative in the consolidated financial statements. The Company purchases TBAs both for their total return and for the flexibility they provide related to ACE’s mortgage-backed security strategy.
(v) GMIB 
Under the GMIB program, as the assuming entity, the Company is obligated to provide coverage until the expiration of the underlying annuities. Premiums received under the reinsurance treaties are classified as premium. Expected losses allocated to premiums received are classified as future policy benefits and valued
 
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(Unaudited)
 
similar to GMDB reinsurance. Other changes in fair value, principally arising from changes in expected losses allocated to expected future premiums, are classified as Net realized gains (losses). Fair value represents exit price and thus, includes a risk margin. The Company may recognize a realized loss for other changes in fair value due to adverse changes in the capital markets (i.e., declining interest rates and/or declining equity markets) and changes in policyholder behavior (i.e., increased annuitization or decreased lapse rates) although the Company expects the business to be profitable. The Company believes this presentation provides the most meaningful disclosure of changes in the underlying risk within the GMIB reinsurance programs for a given reporting period.
b) Other investments 
The Company invests in limited partnerships with a carrying value of $831 million included in Other investments. In connection with these investments, the Company has commitments that may require funding of up to $720 million over the next several years.
c) Taxation 
The Internal Revenue Service (IRS) completed its field examination of the Company’s federal tax returns for 2002, 2003, and 2004 during the third quarter of 2007, and has proposed several adjustments principally involving transfer pricing and other insurance-related tax deductions. The Company subsequently filed a written protest with the IRS and the case is currently being reviewed by the IRS Appeals Division. The Company expects the appeals process to be completed within the next 12 months. While it is reasonably possible that a significant change in the Company’s unrecognized tax benefits could occur in the next twelve months, given the uncertainty regarding the possible outcomes of the appeals process, a current estimate of the range of reasonably possible changes cannot be made. However, the Company believes that the outcome would not have a material impact on ACE’s consolidated financial condition. The IRS commenced its field examination for tax years 2005 through 2007 during the second quarter of 2008 with no adjustments proposed as of September 30, 2009. With few exceptions, the Company’s significant U.K. subsidiaries remain subject to examination for tax years 2006 and later.
d) Letters of credit
In June 2009, the Company entered into a $500 million unsecured operational LOC facility expiring in June 2014. At September 30, 2009, $165 million of this facility was utilized. This facility requires that the Company and/or certain of its subsidiaries continue to maintain certain covenants, including a minimum consolidated net worth covenant and a maximum leverage covenant.
e ) Legal proceedings 
(i) Claims and other litigation
The Company’s insurance subsidiaries are subject to claims litigation involving disputed interpretations of policy coverage and, in some jurisdictions, direct actions by allegedly-injured persons seeking damages from policyholders. These lawsuits, involving claims on policies issued by the Company’s subsidiaries, which are typical to the insurance industry in general and in the normal course of business, are considered in the Company’s loss and loss expense reserves. In addition to claims litigation, the Company and its subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from, or directly relate to, claims on insurance policies. This category of business litigation typically involves, amongst other things, allegations of underwriting errors or misconduct, employment claims, regulatory activity, or disputes
 
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(Unaudited)
 
arising from business ventures. In the opinion of ACE’s management, ACE’s ultimate liability for these matters is not likely to have a material adverse effect on ACE’s consolidated financial condition, although it is possible that the effect could be material to ACE’s consolidated results of operations for an individual reporting period.
(ii) Business practices litigation
Beginning in 2004, ACE and its subsidiaries and affiliates received numerous subpoenas, interrogatories, and civil investigative demands in connection with certain investigations of insurance industry practices. These inquiries were issued by a number of attorneys general, state departments of insurance, and other authorities, including the New York Attorney General (NYAG) and the Pennsylvania Insurance Department. Such inquiries concerned underwriting practices and non-traditional or loss mitigation insurance products.
On April 25, 2006, ACE reached a settlement with the Attorneys General of New York, Illinois, and Connecticut and the New York Insurance Department pursuant to which ACE received from these authorities an Assurance of Discontinuance. On May 9, 2007, ACE and the Pennsylvania Insurance Department (Department) and the Pennsylvania Office of Attorney General (OAG) entered into a settlement agreement. This settlement agreement resolved the issues raised by the Department and the OAG arising from their investigation of ACE’s underwriting practices and contingent commission payments. On October 24, 2007, ACE entered into a settlement agreement with the Attorneys General of Florida, Hawaii, Maryland, Massachusetts, Michigan, Oregon, Texas, West Virginia, the District of Columbia, and the Florida Department of Financial Services and Office of Insurance Regulation. The agreement resolved investigations of ACE’s underwriting practices and contingent commission payments.
In June 2008, in an action filed by the NYAG against another insurer, the New York Appellate Division, First Department, confirmed the legality of contingent commission agreements – one of the focal points of the NYAG’s investigation. “Contingent commission agreements between brokers and insurers are not illegal, and, in the absence of a special relationship between parties, defendants[s] had no duty to disclose the existence of the contingent commission agreement.” New York v. Liberty Mut. Ins. Co., 52 A.D. 3d 378, 379 (2008) (citing Hersch v. DeWitt Stern Group, Inc., 43 A.D. 3d 644, 645 (2007). 
ACE, ACE INA Holdings, Inc., and ACE USA, Inc., along with a number of other insurers and brokers, were named in a series of federal putative nationwide class actions brought by insurance policyholders. The Judicial Panel on Multidistrict Litigation (JPML) consolidated these cases in the District of New Jersey. On August 1, 2005, plaintiffs in the New Jersey consolidated proceedings filed two consolidated amended complaints – one concerning commercial insurance and the other concerning employee benefit plans. The employee benefit plans litigation against ACE has been dismissed.
In the commercial insurance complaint, the plaintiffs named ACE, ACE INA Holdings, Inc., ACE USA, Inc., ACE American Insurance Co., Illinois Union Insurance Co., and Indemnity Insurance Co. of North America. They allege that certain brokers and insurers, including certain ACE entities, conspired to increase premiums and allocate customers through the use of “B” quotes and contingent commissions. In addition, the complaints allege that the broker defendants received additional income by improperly placing their clients’ business with insurers through related wholesale entities that acted as intermediaries between the broker and insurer. Plaintiffs also allege that broker defendants tied the purchase of primary insurance to the placement of such coverage with reinsurance carriers through the broker defendants’ reinsurance broker subsidiaries. The complaint asserts the following causes of action against ACE: Federal Racketeer Influenced and Corrupt Organizations Act (RICO), federal antitrust law, state antitrust law, aiding and abetting breach of fiduciary duty, and unjust enrichment.
 
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(Unaudited)
 
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.	
 
 	•	 	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.	
 
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(Unaudited)
 
 	•	 	Office Depot, Inc. v. Marsh & McLennan Companies, Inc. et al. (Case No. 502005CA004396; Circuit Court of the 15th Judicial Circuit in Palm Beach County Florida), a Florida state action, was filed on June 22, 2005. ACE American Insurance Co. is named. The trial court originally stayed this case, but the Florida Court of Appeals later remanded and the trial court declined to grant another stay. The court has denied motions to dismiss, and ACE American Ins. Co. has filed an answer. Discovery is ongoing.	
 
 	•	 	State of Ohio, ex. rel. Marc E. Dann, Attorney General v. American Int’l Group, Inc. et al. (Case No. 07-633857; Court of Common Pleas in Cuyahoga County, Ohio) is an Ohio state action filed by the Ohio Attorney General on August 24, 2007. ACE INA Holdings, Inc., ACE American Insurance Co., ACE Property & Casualty Insurance Co., Insurance Company of North America, and Westchester Fire Insurance Co., along with a number of other insurance companies and Marsh, are named. Defendants filed motions to dismiss in November 2007. On July 2, 2008, the court denied all of the defendants’ motions. Discovery is ongoing and trial is set for August 2010.	
ACE was named in four putative securities class action suits following the filing of a civil suit against Marsh by the NYAG on October 14, 2004. The suits were consolidated by the JPML in the Eastern District of Pennsylvania and the Court appointed Sheet Metal Workers’ National Pension Fund and Alaska Ironworkers Pension Trust as lead plaintiffs. Lead plaintiffs filed a consolidated amended complaint on September 30, 2005, naming ACE, Evan G. Greenberg, Brian Duperreault, and Philip V. Bancroft as defendants. Plaintiffs allege that ACE’s public statements and securities filings should have revealed that insurers, including certain ACE entities, and brokers allegedly conspired to increase premiums and allocate customers through the use of “B” quotes and contingent commissions and that ACE’s revenues and earnings were inflated by these practices. Plaintiffs assert claims solely under Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act), Rule 10(b)-5 promulgated thereunder, and Section 20(a) of the Securities Act (control person liability). In 2005, ACE and the individual defendants filed a motion to dismiss. The Court heard oral argument on November 10, 2008, but did not rule on the motion. On December 16, 2008, the parties entered into a Stipulation of Settlement in which the parties agreed – contingent upon Court approval – that ACE would pay the plaintiffs $1.95 million in exchange for a full release of all claims. On June 9, 2009, the Court approved the settlement and dismissed the multidistrict litigation (including the four underlying suits) with prejudice.
ACE is named as a defendant in a derivative suit filed in Delaware Chancery Court by shareholders of Marsh seeking to recover damages for Marsh and its subsidiary, Marsh, Inc., against officers and directors of Marsh, American International Group Inc. (AIG), former AIG chief executive officer Maurice R. Greenberg, and ACE. The suit alleges that the defendants breached their fiduciary duty to and thereby damaged Marsh and Marsh, Inc. by participating in a bid rigging scheme and obtaining “kickbacks” in the form of contingent commissions, and that ACE knowingly participated in the alleged scheme.
ACE, ACE USA, Inc., ACE INA Holdings, Inc., and Evan G. Greenberg, as a former officer and director of AIG and current officer and director of ACE, are named in one or both of two derivative cases brought by certain shareholders of AIG. One of the derivative cases was filed in Delaware Chancery Court, and the other was filed in federal court in the Southern District of New York. The allegations against ACE concern the alleged bid rigging and contingent commission scheme as similarly alleged in the federal commercial insurance cases. Plaintiffs assert the following causes of action against ACE: breach of fiduciary duty, aiding and abetting breaches of fiduciary duties, unjust enrichment, conspiracy, and fraud. In Delaware, the shareholder plaintiffs filed an amended complaint (their third pleading effort), on April 14, 2008, which drops Evan Greenberg as a defendant (plaintiffs in the New York action subsequently dismissed Evan Greenberg as well). On June 13, 2008, ACE filed a motion to dismiss, and on April 20, 2009, the court heard oral argument on the motion. On June 17, 2009, the Court dismissed all claims against ACE with prejudice; final judgment in favor of ACE was entered on July 13, 2009. Plaintiffs recently filed an appeal; briefing on the appeal is now underway. The New York derivative action is currently stayed.
 
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(Unaudited)
 
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. Although the Company can not at this time predict the interpretation that will be afforded the language by the NYAG or the WCB, ACE is confident that it has complied with the law governing workers’ compensation surcharges and assessments. ACE has established a contingency based on the Company’s best estimate of the potential liability that could result from an adverse interpretation of the legislation or other events surrounding this topic, based on the facts and circumstances at this time. Such contingency will be increased or decreased as circumstances develop. The Company does not expect the legislation to have a material impact on its financial condition or results of operations.
 7. Shareholders’ equity
In connection with the Continuation in July 2008, the Company changed the currency in which the par value of Ordinary Shares is stated from U.S. dollars to Swiss francs and increased the par value of Ordinary Shares from $0.041666667 to CHF 33.74 (the New Par Value) through a conversion of all issued Ordinary Shares into “stock” and re-conversion of the stock into Ordinary Shares with a par value equal to the New Par Value (the Par Value Conversion). The Par Value Conversion was followed immediately by a stock dividend, to effectively return shareholders to the number of Ordinary Shares held before the Par Value Conversion. The stock dividend did not therefore have the effect of diluting earnings per share. Upon the effectiveness of the Continuation, the Company’s Ordinary Shares became Common Shares. All Common Shares are registered common shares under Swiss corporate law. Notwithstanding the change of the currency in which the par value of Common Shares is stated, the Company continues to use U.S. dollars as its reporting currency for preparing the consolidated financial statements. For purposes of the consolidated financial statements, the increase in par value was accomplished by a corresponding reduction first to retained earnings and second to additional paid-in capital to the extent that the increase in par value exhausted retained earnings at the date of the Continuation. Under Swiss corporate law, dividends, including distributions through a reduction in par value (par value distributions), must be declared by ACE in Swiss francs though dividend payments are made by the Company in U.S. dollars. For the foreseeable future, the Company expects to pay dividends as a repayment of share capital in the form of a reduction in par value or qualified paid-in capital, which would not be subject to Swiss withholding tax. For the
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
three months ended September 30, 2009 and 2008, dividends declared per Common Share amounted to CHF 0.31 ($0.31) and CHF 0.30 ($0.26), respectively. Dividends declared for the nine months ended September 30, 2009 and 2008 were CHF 0.94 ($0.88) and $0.82, respectively. Dividends declared for the nine months ended September 30, 2008 include the Company’s initial par value distribution declared in the three months ended September 30, 2008. The par value distribution in the nine months ended September 30, 2009, is reflected as such through Common Shares in the consolidated statement of shareholders’ equity and had the effect of reducing the par value per Common Share to CHF 32.20.
Under Swiss corporate law, the Company may not generally issue Common Shares below their par value. In the event there is a need to raise common equity at a time when the trading price of the Company’s Common Shares is below par value, the Company will need to obtain shareholder approval to decrease the par value of the Common Shares.
In July 2008, prior to the Continuation, the Company issued and placed 2,000,000 Common Shares in treasury principally for issuance upon the exercise of employee stock options. At September 30, 2009, 1,489,588 Common Shares remain in treasury after net shares redeemed under employee share-based compensation plans.
 8. Share-based compensation
During 2004, the Company established the ACE Limited 2004 Long-Term Incentive Plan (the 2004 LTIP). The Company’s 2004 LTIP provides for grants of both incentive and non-qualified stock options principally at an option price per share of 100 percent of the fair value of the Company’s Common Shares on the date of grant. Stock options are generally granted with a 3-year vesting period and a 10-year term. The stock options vest in equal annual installments over the respective vesting period, which is also the requisite service period. On February 26, 2009, the Company granted 2,320,620 stock options with a weighted-average grant date fair value of $12.94. The fair value of the options issued is estimated on the date of grant using the Black-Scholes option pricing model.
The Company’s 2004 LTIP also provides for grants of restricted stock and restricted stock units. The Company generally grants restricted stock and restricted stock units with a 4-year vesting period, based on a graded vesting schedule. The restricted stock is granted at market close price on the day of grant. On February 26, 2009, the Company granted 2,437,525 restricted stock awards and 322,860 restricted stock units to officers of the Company and its subsidiaries with a grant date fair value of $38.51. Each restricted stock unit represents the Company’s obligation to deliver to the holder one Common Share upon vesting.
 9. Fair value measurements
a) Fair value hierarchy
The Company partially adopted the provisions (specific provisions described below) of ASC Topic 820, Fair Value Measurements and Disclosures on January 1, 2008, and the cumulative effect of the adoption resulted in a reduction to retained earnings of $4 million related to an increase in risk margins included in the valuation of certain GMIB contracts. The Company fully adopted these provisions on January 1, 2009. The provisions 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
 
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Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
observable for assets or liabilities either directly or indirectly. Level 2 inputs include, among other items, quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves. Level 3 inputs are unobservable and reflect management’s judgments about assumptions that market participants would use in pricing an asset or liability. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
The following is a description of the valuation measurements used for the Company’s financial instruments carried or disclosed at fair value, as well as the general classification of such financial instruments pursuant to the valuation hierarchy.
Fixed maturities
Fixed maturities with active markets are classified within Level 1 as fair values are based on quoted market prices. For fixed maturities that trade in less active markets, including most corporate and municipal securities in ACE’s portfolio, fair values are based on the output of “pricing matrix models”, the significant inputs into which include, but are not limited to, yield curves, credit risks and spreads, measures of volatility, and prepayment speeds. These fixed maturities are classified within Level 2. Fixed maturities for which pricing is unobservable are classified within Level 3.
Equity securities
Equity securities with active markets are classified within Level 1 as fair values are based on quoted market prices. For non-public equity securities, fair values are based on market valuations and are classified within Level 2. As previously discussed, during the three months ended June 30, 2009, ACE’s investment in AGO was reclassified from Investments in partially-owned insurance companies to Equity securities. The fair value of the Company’s investment in AGO is based on a quoted market price and continues to be classified within Level 1.
Short-term investments
Short-term investments, which comprise securities due to mature within one year of the date of purchase, that are traded in active markets, are classified within Level 1 as fair values are based on quoted market prices. Securities such as commercial paper and discount notes are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximating par value.
Securities lending collateral
The underlying assets included in Securities lending collateral are fixed maturities which are classified in the valuation hierarchy on the same basis as the Company’s other fixed maturities. Excluded from the valuation hierarchy is the corresponding liability related to the Company’s obligation to return the collateral plus interest.
Other investments
Fair values for other investments, principally other direct equity investments, investment funds, and limited partnerships, are based on the respective net asset values or financial statements and are included within Level 3. Equity securities and fixed maturities held in rabbi trusts maintained by the Company for deferred compensation plans, and included in Other investments, are classified within the valuation hierarchy on the same basis as the Company’s other equity securities and fixed maturities.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
Investments in partially-owned insurance companies
Fair values for investments in partially-owned insurance companies based on the financial statements provided by those companies used for equity accounting are classified within Level 3.
Investment derivative instruments
For actively traded investment derivative instruments, including futures, options, and exchange-traded forward contracts, the Company obtains quoted market prices to determine fair value. As such, these instruments are included within Level 1. Forward contracts that are not exchange-traded are priced using a pricing matrix model principally employing observable inputs and, as such, are classified within Level 2. The Company’s position in interest rate swaps is typically classified within Level 3.
Guaranteed minimum income benefits
The liability for GMIBs arises from the Company’s 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 timely information, such as market conditions and demographics of in-force annuities. Based on the quarterly reserve review, no changes were made to actuarial or behavioral assumptions during the three months ended September 30, 2009. The most significant policyholder behavior assumptions include lapse rates and annuitization rates using the guaranteed benefit (GMIB annuitization rate). Assumptions regarding lapse rates and GMIB annuitization rates differ by treaty but the underlying methodology to determine rates applied to each treaty is comparable. The assumptions regarding lapse and GMIB annuitization rates determined for each treaty are based on a dynamic calculation that uses several underlying factors. A lapse rate is the percentage of in-force policies surrendered in a given calendar year. All else equal, as lapse rates increase, ultimate claim payments will decrease. The GMIB annuitization rate is the percentage of policies for which the policyholder will elect to annuitize using the guaranteed benefit provided under the GMIB. All else equal, as GMIB annuitization rates increase, ultimate claim payments will increase, subject to treaty claim limits. The effect of changes in key market factors on assumed lapse and annuitization rates reflect emerging trends using data available from cedants. For treaties with limited experience, rates are established in line with data received from other ceding companies adjusted as appropriate with industry estimates. 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.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
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.
The following tables present, by valuation hierarchy, the financial instruments carried or disclosed at fair value, and measured on a recurring basis, as of September 30, 2009, and December 31, 2008.

 	  	Quoted Prices in
Active Markets
for Identical
Assets or
Liabilities
Level 1	 	 	Significant Other
Observable
Inputs
Level 2	  	Significant
Unobservable
Inputs
Level 3	  	Total	
 	  	(in millions of U.S. dollars)	
September 30, 2009	  				 			  			  			
Assets:	  				 			  			  			
Fixed maturities available for sale	  				 			  			  			
U.S. Treasury and agency	  	$	1,491	  	 	$	2,004	  	$	—  	  	$	3,495	
Foreign	  	 	340	  	 	 	10,314	  	 	47	  	 	10,701	
Corporate securities	  	 	41	  	 	 	12,797	  	 	124	  	 	12,962	
Mortgage-backed securities	  	 	3	  	 	 	9,639	  	 	40	  	 	9,682	
States, municipalities, and political subdivisions	  	 	—  	  	 	 	1,700	  	 	19	  	 	1,719	
	  	 	 	 	 	 	 	  	 	 	  	 	 	
	  	 	1,875	  	 	 	36,454	  	 	230	  	 	38,559	

Fixed maturities held to maturity	  				 			  			  			
U.S. Treasury and agency	  	 	321	  	 	 	599	  	 	—  	  	 	920	
Foreign	  	 	—  	  	 	 	29	  	 	—  	  	 	29	
Corporate securities	  	 	—  	  	 	 	350	  	 	—  	  	 	350	
Mortgage-backed securities	  	 	—  	  	 	 	1,477	  	 	48	  	 	1,525	
States, municipalities, and political subdivisions	  	 	—  	  	 	 	708	  	 	—  	  	 	708	
	  	 	 	 	 	 	 	  	 	 	  	 	 	
	  	 	321	  	 	 	3,163	  	 	48	  	 	3,532	

Equity securities 	  	 	451	  	 	 	86	  	 	9	  	 	546	
Short-term investments 	  	 	1,259	  	 	 	584	  	 	10	  	 	1,853	
Other investments 	  	 	28	  	 	 	351	  	 	1,145	  	 	1,524	
Securities lending collateral	  	 	—  	  	 	 	1,522	  	 	—  	  	 	1,522	
Investments in partially-owned insurance companies 	  	 	—  	  	 	 	—  	  	 	478	  	 	478	
Investment derivative instruments 	  	 	1	  	 	 	—  	  	 	—  	  	 	1	
Other derivative instruments 	  	 	(15	) 	 	 	38	  	 	20	  	 	43	
	  	 	 	 	 	 	 	  	 	 	  	 	 	
Total assets at fair value 	  	$ 	3,920	  	 	$	42,198	  	$	1,940	  	$	48,058	

Liabilities:	  				 			  			  			
GMIB	  	$	—  	  	 	 	—  	  	 	705	  	$	705	
Short-term debt	  	 	—  	  	 	 	208	  	 	—  	  	 	208	
Long-term debt	  	 	—  	  	 	 	3,651	  	 	—  	  	 	3,651	
Trust preferred securities	  	 	—  	  	 	 	309	  	 	—  	  	 	309	
	  	 	 	 	 	 	 	  	 	 	  	 	 	
Total liabilities at fair value	  	$	—  	  	 	$	4,168	  	$	705	  	$	4,873	

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

 	  	Quoted Prices in
Active Markets
for Identical
Assets or
Liabilities
Level 1	  	Significant Other
Observable
Inputs
Level 2	  	Significant
Unobservable
Inputs
Level 3	  	Total	
 	  	(in millions of U.S. dollars)	
December 31, 2008	  			  			  			  			
Assets:	  			  			  			  			
Fixed maturities available for sale 	  	$	872	  	$	30,009	  	$	274	  	$	31,155	
Fixed maturities held to maturity	  	 	332	  	 	2,532	  	 	1	  	 	2,865	
Equity securities	  	 	962	  	 	5	  	 	21	  	 	988	
Short-term investments	  	 	2,668	  	 	682	  	 	—  	  	 	3,350	
Other investments	  	 	37	  	 	226	  	 	1,099	  	 	1,362	
Other derivative instruments	  	 	—  	  	 	280	  	 	87	  	 	367	
	  	 	 	  	 	 	  	 	 	  	 	 	
Total assets at fair value	  	$	4,871	  	$	33,734	  	$	1,482	  	$	40,087	

Liabilities:	  			  			  			  			
Investment derivative instruments	  	$	3	  	$	—  	  	$	—  	  	$	3	
GMIB	  	 	—  	  	 	—  	  	 	910	  	 	910	
	  	 	 	  	 	 	  	 	 	  	 	 	
Total liabilities at fair value	  	$	3	  	$	—  	  	$	910	  	$	913	
	  	 	 	  	 	 	  	 	 	  	 	 	
Level 3 financial instruments
The following tables provide a reconciliation of the beginning and ending balances of financial instruments carried or disclosed at fair value using significant unobservable inputs (Level 3) for the three and nine months ended September 30, 2009 and 2008.

 	 	Balance-
Beginning
of Period	 	Net
Realized
Gains/
Losses	 	 	Change in Net
Unrealized
Gains (Losses)
Included in
Other
Comprehensive
Income	 	Purchases,
Sales,
Issuances,
and
Settlements,
Net	 	 	Transfers
Into (Out
of) Level 3	 	 	Balance-
End of
Period	 	Change in Net
Unrealized Gains
(Losses) Relating
to Financial
Instruments Still
Held at
September 30, 2009,
included in Net
Income	
 	 	(in millions of U.S. dollars)	
Three Months Ended September 30, 2009	 			
Assets:	 			 				 			 				 				 			 			
Fixed maturities available for sale	 			 				 			 				 				 			 			
Foreign	 	$	38	 	$	—  	  	 	$	2	 	$	(5	) 	 	$	12	  	 	$	47	 	$	1	
Corporate securities	 	 	100	 	 	(2	) 	 	 	8	 	 	2	  	 	 	16	  	 	 	124	 	 	5	
Mortgage-backed securities	 	 	42	 	 	(2	) 	 	 	5	 	 	(3	) 	 	 	(2	) 	 	 	40	 	 	3	
States, municipalities, and political subdivisions	 	 	3	 	 	—  	  	 	 	1	 	 	10	  	 	 	5	  	 	 	19	 	 	—  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
	 	 	183	 	 	(4	) 	 	 	16	 	 	4	  	 	 	31	  	 	 	230	 	 	9	

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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
Other
Comprehensive
Income	 	Purchases,
Sales,
Issuances,
and
Settlements,
Net	 	 	Transfers
Into (Out
of) Level 3	 	Balance-
End of
Period	 	Change in Net
Unrealized Gains
(Losses) Relating
to Financial
Instruments Still
Held at
September 30, 2009,
included in Net
Income	 	
 	 	(in millions of U.S. dollars)	 	
Fixed maturities held to maturity	 			 				 			 				 			 			 				
Mortgage-backed securities	 	 	51	 	 	—  	  	 	 	—  	 	 	(3	) 	 	 	—  	 	 	48	 	 	—  	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
	 	 	51	 	 	—  	  	 	 	—  	 	 	(3	) 	 	 	—  	 	 	48	 	 	—  	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Equity securities	 	 	8	 	 	—  	  	 	 	—  	 	 	—  	  	 	 	1	 	 	9	 	 	—  	  	
Short-term investments	 	 	4	 	 	—  	  	 	 	—  	 	 	6	  	 	 	—  	 	 	10	 	 	—  	  	
Other investments	 	 	1,084	 	 	(37	) 	 	 	110	 	 	(12	) 	 	 	—  	 	 	1,145	 	 	(38	) 	
Investments in partially-owned insurance companies	 	 	462	 	 	—  	  	 	 	15	 	 	1	  	 	 	—  	 	 	478	 	 	—  	  	
Other derivative instruments	 	 	34	 	 	(12	) 	 	 	—  	 	 	(2	) 	 	 	—  	 	 	20	 	 	(12	) 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets at fair value	 	$	1,826	 	$	(53	) 	 	$	141	 	$	(6	) 	 	$	32	 	$	1,940	 	$	(41	) 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Liabilities:	 			 				 			 				 			 			 				
GMIB	 	$	634	 	$	65	  	 	$	—  	 	$	6	  	 	$	—  	 	$	705	 	$	65	  	

																											
 	 	Balance-
Beginning
of Period	 	Net
Realized
Gains/
Losses	 	 	Change in Net
Unrealized
Gains (Losses)
Included in
Other
Comprehensive
Income	 	 	Purchases,
Sales,
Issuances,
and
Settlements,
Net	 	 	Transfers
Into (Out
of) Level 3	 	 	Balance-
End of
Period	 	Change in Net
Unrealized Gains
(Losses) Relating
to Financial
Instruments Still
Held at
September 30, 2008,
included in Net
Income	 	
 	 	(in millions of U.S. dollars)	 	
Three Months Ended September 30, 2008	 			 				 				 				 				 			 				
Assets:	 			 				 				 				 				 			 				
Fixed maturities available for sale 	 	$	466	 	$	(5	) 	 	$	(23	) 	 	$	(30	) 	 	$	(12	) 	 	$	396	 	$	(1	) 	
Fixed maturities held to maturity	 	 	2	 	 	(2	) 	 	 	—  	  	 	 	—  	  	 	 	1	  	 	 	1	 	 	—  	  	
Equity securities	 	 	10	 	 	—  	  	 	 	—  	  	 	 	2	  	 	 	(3	) 	 	 	9	 	 	—  	  	
Other investments	 	 	1,117	 	 	—  	  	 	 	(30	) 	 	 	137	  	 	 	—  	  	 	 	1,224	 	 	—  	  	
Other derivative instruments	 	 	31	 	 	22	  	 	 	—  	  	 	 	(3	) 	 	 	—  	  	 	 	50	 	 	20	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets at fair value	 	$	1,626	 	$	15	  	 	$	(53	) 	 	$	106	  	 	$	(14	) 	 	$	1,680	 	$	19	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Liabilities:	 			 				 				 				 				 			 				
GMIB	 	$	375	 	$	189	  	 	$	—  	  	 	$	(22	) 	 	$	—  	  	 	$	542	 	$	189	  	

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

 	 	Balance-
Beginning
of Period	 	Net
Realized
Gains/
Losses	 	 	Change in Net
Unrealized
Gains (Losses)
Included in
Other
Comprehensive
Income	 	 	Purchases,
Sales,
Issuances,
and
Settlements,
Net	 	 	Transfers
Into (Out
of) Level 3	 	 	Balance-
End of
Period	 	Change in Net
Unrealized Gains
(Losses) Relating
to Financial
Instruments Still
Held at
September 30, 2009,
included in Net
Income	 	
 	 	(in millions of U.S. dollars)	 	
Nine Months Ended September 30, 2009	 				
Assets:	 			 				 				 				 				 			 				
Fixed maturities available for sale	 				 				 				 				 			 				
Foreign	 	$	45	 	$	(1	) 	 	$	2	  	 	$	(1	) 	 	$	2	  	 	$	47	 	$	—  	  	
Corporate securities	 	 	117	 	 	(2	) 	 	 	13	  	 	 	(4	) 	 	 	—  	  	 	 	124	 	 	1	  	
Mortgage-backed securities	 	 	109	 	 	(6	) 	 	 	19	  	 	 	(63	) 	 	 	(19	) 	 	 	40	 	 	(2	) 	
States, municipalities, and political subdivisions	 	 	3	 	 	—  	  	 	 	1	  	 	 	10	  	 	 	5	  	 	 	19	 	 	—  	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
	 	 	274	 	 	(9	) 	 	 	35	  	 	 	(58	) 	 	 	(12	) 	 	 	230	 	 	(1	) 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed maturities held to maturity	 				 				 				 				 			 				
Mortgage-backed securities	 	 	—  	 	 	—  	  	 	 	—  	  	 	 	48	  	 	 	—  	  	 	 	48	 	 	—  	  	
States, municipalities, and political subdivisions	 	 	1	 	 	—  	  	 	 	—  	  	 	 	(1	) 	 	 	—  	  	 	 	—  	 	 	—  	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
	 	 	1	 	 	—  	  	 	 	—  	  	 	 	47	  	 	 	—  	  	 	 	48	 	 	—  	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Equity securities	 	 	21	 	 	—  	  	 	 	—  	  	 	 	4	  	 	 	(16	) 	 	 	9	 	 	—  	  	
Short-term investments	 	 	—  	 	 	—  	  	 	 	—  	  	 	 	10	  	 	 	—  	  	 	 	10	 	 	—  	  	
Other investments	 	 	1,099	 	 	(120	) 	 	 	130	  	 	 	37	  	 	 	(1	) 	 	 	1,145	 	 	(121	) 	
Investments in partially-owned insurance companies	 	 	435	 	 	8	  	 	 	(2	) 	 	 	37	  	 	 	—  	  	 	 	478	 	 	—  	  	
Other derivative instruments	 	 	87	 	 	(64	) 	 	 	—  	  	 	 	(3	) 	 	 	—  	  	 	 	20	 	 	(64	) 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets at fair value	 	$	1,917	 	$	(185	) 	 	$	163	  	 	$	74	  	 	$	(29	) 	 	$	1,940	 	$	(186	) 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Liabilities:	 			 				 				 				 				 			 				
GMIB	 	$	910	 	$	(218	) 	 	$	—  	  	 	$	13	  	 	$	—  	  	 	$	705	 	$	(218	) 	

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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
Other
Comprehensive
Income	 	 	Purchases,
Sales,
Issuances,
and
Settlements,
Net	 	 	Transfers
Into
(Out of)
Level 3	 	 	Balance-
End of
Period	  	Change in Net
Unrealized Gains
(Losses) Relating
to Financial
Instruments Still
Held at
September 30, 2008,
included in Net
Income	 	
 	  	(in millions of U.S. dollars)	 	
Nine Months Ended September 30, 2008	  				 				 				 				 				 			  				
Assets:	  				 				 				 				 				 			  				
Fixed maturities available for sale 	  	$	601	  	 	$	(18	) 	 	$	(64	) 	 	$	(2	) 	 	$	(121	) 	 	$	396	  	$	(3	) 	
Fixed maturities held to maturity	  	 	—  	  	 	 	(2	) 	 	 	—  	  	 	 	—  	  	 	 	3	  	 	 	1	  	 	—  	  	
Equity securities	  	 	12	  	 	 	—  	  	 	 	—  	  	 	 	(1	) 	 	 	(2	) 	 	 	9	  	 	—  	  	
Other investments	  	 	898	  	 	 	(25	) 	 	 	(69	) 	 	 	420	  	 	 	—  	  	 	 	1,224	  	 	—  	  	
Other derivative instruments	  	 	17	  	 	 	38	  	 	 	—  	  	 	 	(5	) 	 	 	—  	  	 	 	50	  	 	35	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Total assets at fair value	  	$	1,528	  	 	$	(7	) 	 	$	(133	) 	 	$	412	  	 	$	(120	) 	 	$	1,680	  	$	32	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Liabilities:	  				 				 				 				 				 			  				
Investment derivative instruments	  	$	(6	) 	 	$	(5	) 	 	$	—  	  	 	$	11	  	 	$	—  	  	 	$	—  	  	$	—  	  	
GMIB	  	 	225	  	 	 	319	  	 	 	—  	  	 	 	(2	) 	 	 	—  	  	 	 	542	  	 	319	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Total liabilities at fair value	  	$	219	  	 	$	314	  	 	$	—  	  	 	$	9	  	 	$	—  	  	 	$	542	  	$	319	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
b) Fair value option
Effective January 1, 2008, the Company elected the fair value option provided within ASC Topic 825, Financial Instruments , for certain of its available for sale equity securities valued and carried at $161 million on the election date. The Company elected the fair value option for these particular equity securities to simplify the accounting and oversight of this portfolio given the portfolio management strategy employed by the external investment manager. The election resulted in an increase in retained earnings and a reduction to accumulated other comprehensive income of $6 million as of January 1, 2008. This adjustment reflects the net of tax unrealized gains ($9 million pre-tax) associated with this particular portfolio at January 1, 2008. Subsequent to this election, changes in fair value related to these equity securities were recognized in Net realized gains (losses). During the three months ended June 30, 2008, the Company sold the entire portfolio. Accordingly, the Company currently holds no assets for which this fair value option has been elected. For the three and six months ended June 30, 2008, the Company recognized net realized gains (losses) related to changes in fair value of these equity securities of $9 million and $(11) million, respectively, in the consolidated statements of operations. Throughout 2008 to the date of sale, all of these equity securities were classified within Level 1 in the fair value hierarchy.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
 10. Segment information
The Company operates through the following business segments, certain of which represent the aggregation of distinct operating segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life. These segments distribute their products through various forms of brokers, agencies, and direct marketing programs. All business segments have established relationships with reinsurance intermediaries.
The Insurance – North American segment comprises the P&C operation in the U.S., Canada, and Bermuda. This segment includes the operations of ACE USA (including ACE Canada), ACE Westchester, ACE Bermuda, ACE Private Risk Services, and various run-off operations. ACE USA is the North American retail operating division which provides a broad array of P&C, A&H, and risk management products and services to a diverse group of commercial and non-commercial enterprises and consumers. ACE Westchester specializes in the North American wholesale distribution of excess, surplus, and specialty P&C 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 risks that are generally low in frequency and high in severity. ACE Private Risk Services provides personal lines coverages (such as homeowners and automobile) for high net worth clients. The run-off operations include Brandywine Holdings Corporation, Commercial Insurance Services, residual market workers’ compensation business, pools and syndicates not attributable to a single business group, and other exited lines of business. Run-off operations do not actively sell insurance products, but are responsible for the management of existing policies and related claims.
The Insurance – Overseas General segment consists of ACE International (excluding its life insurance business), the wholesale insurance operations of ACE Global Markets, and the international A&H and life insurance business of Combined Insurance. ACE International, the ACE INA network of indigenous retail insurance operations, maintains a presence in every major insurance market in the world and is organized geographically along product lines that provide dedicated underwriting focus to customers. ACE Global Markets, the London-based excess and surplus lines business that includes Lloyd’s Syndicate 2488, offers 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 in the U.K. and Continental Europe, 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 specialty individual accident and supplemental health and life insurance products targeted to middle income consumers in Europe, Asia Pacific, and Latin America. The Insurance – Overseas General segment has four regions of operations: the ACE European Group (which comprises ACE Europe and ACE Global Markets branded business), ACE Asia Pacific, ACE Far East, and ACE Latin America. Companies within the Insurance – Overseas General segment write a variety of insurance products including property, casualty, professional lines (directors & officers and errors & omissions), marine, energy, aviation, political risk, specialty personal lines, consumer lines, A&H (principally accident and supplemental health), and life insurance.
The Global Reinsurance segment represents ACE’s reinsurance operations comprising ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re Europe, and ACE Tempest Re Canada. These divisions provide a broad range of property catastrophe, casualty, and property reinsurance coverages to a diverse array of primary P&C companies. The Global Reinsurance segment also includes ACE Global Markets’ reinsurance operations.
The Life segment includes the operations of ACE Tempest Life Re (ACE Life Re), ACE Life, and the North American A&H and life business of Combined Insurance. ACE Life Re helps clients (ceding companies) manage mortality, morbidity, lapse, and/or capital market risks embedded in their books of business. ACE Life Re
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
comprises two operations. The first is a Bermuda-based niche operation which provides reinsurance to primarily life insurers, focusing primarily 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, offering reinsurance capacity for the individual life business utilizing yearly renewable term and coinsurance structures. ACE Life develops direct insurance opportunities in emerging markets, including Egypt, Indonesia, Taiwan, Thailand, Vietnam, and the United Arab Emirates, as well as in China through a partially-owned 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. In addition, Corporate includes the Company’s proportionate share of AGO’s earnings reflected in Other (income) expense to the date that ACE was no longer deemed to exert significant influence over AGO. Included in Losses and loss expenses are losses incurred in connection with the commutation of ceded reinsurance contracts that resulted from a differential between the consideration received from reinsurers and the related reduction of reinsurance recoverable, principally related to the time value of money. Due to the Company’s initiatives to reduce reinsurance recoverable balances and thereby encourage such commutations, losses recognized in connection with the commutation of ceded reinsurance contracts are generally not considered when assessing segment performance and, accordingly, are directly allocated to Corporate. ACE also eliminates the impact of intersegment loss portfolio transfer transactions which are not reflected in the results within the statements of operations by segment.
For segment reporting purposes, certain items have been presented in a different manner than in the consolidated financial statements. Management uses underwriting income as the main measure of segment performance. ACE calculates underwriting income by subtracting losses and loss expenses, policy benefits, policy acquisition costs, and administrative expenses from net premiums earned. For the Life business, management also includes net investment income as a component of underwriting income. The following tables summarize the operations by segment for the periods indicated.
 
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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 September 30, 2009
(in millions of U.S. dollars)

 	  	Insurance –
North
American	 	 	Insurance –
Overseas
General	  	Global
Reinsurance	 	 	Life	 	 	Corporate
and Other	 	 	ACE
Consolidated	 	
Gross premiums written 	  	$	2,730	  	 	$	1,677	  	$	215	  	 	$	383	  	 	$	—  	  	 	$	5,005	  	
Net premiums written	  	 	1,374	  	 	 	1,203	  	 	206	  	 	 	372	  	 	 	—  	  	 	 	3,155	  	
Net premiums earned	  	 	1,467	  	 	 	1,317	  	 	247	  	 	 	362	  	 	 	—  	  	 	 	3,393	  	
Losses and loss expenses	  	 	1,053	  	 	 	631	  	 	80	  	 	 	121	  	 	 	—  	  	 	 	1,885	  	
Policy benefits	  	 	—  	  	 	 	—  	  	 	—  	  	 	 	79	  	 	 	—  	  	 	 	79	  	
Policy acquisition costs	  	 	142	  	 	 	316	  	 	50	  	 	 	59	  	 	 	—  	  	 	 	567	  	
Administrative expenses	  	 	146	  	 	 	204	  	 	15	  	 	 	51	  	 	 	35	  	 	 	451	  	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Underwriting income (loss)	  	 	126	  	 	 	166	  	 	102	  	 	 	52	  	 	 	(35	) 	 	 	411	  	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net investment income	  	 	278	  	 	 	121	  	 	65	  	 	 	43	  	 	 	4	  	 	 	511	  	
Net realized gains (losses) including OTTI	  	 	(25	) 	 	 	40	  	 	(11	) 	 	 	(212	) 	 	 	(15	) 	 	 	(223	) 	
Interest expense	  	 	—  	  	 	 	—  	  	 	—  	  	 	 	—  	  	 	 	60	  	 	 	60	  	
Other (income) expense	  	 	4	  	 	 	3	  	 	(1	) 	 	 	—  	  	 	 	45	  	 	 	51	  	
Income tax expense (benefit)	  	 	47	  	 	 	56	  	 	9	  	 	 	17	  	 	 	(35	) 	 	 	94	  	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	  	$ 	328	  	 	$	268	  	$	148	  	 	$	(134	) 	 	$	(116	) 	 	$	494	  	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Statement of Operations by Segment
For the Three Months Ended September 30, 2008
(in millions of U.S. dollars)

 	  	Insurance –
North
American	 	 	Insurance –
Overseas
General	 	 	Global
Reinsurance	 	 	Life	 	 	Corporate
and Other	 	 	ACE
Consolidated	 	
Gross premiums written 	  	$	2,987	  	 	$	1,678	  	 	$	174	  	 	$	381	  	 	$	—  	  	 	$	5,220	  	
Net premiums written	  	 	1,461	  	 	 	1,293	  	 	 	174	  	 	 	348	  	 	 	—  	  	 	 	3,276	  	
Net premiums earned	  	 	1,583	  	 	 	1,425	  	 	 	257	  	 	 	344	  	 	 	—  	  	 	 	3,609	  	
Losses and loss expenses	  	 	1,356	  	 	 	731	  	 	 	178	  	 	 	104	  	 	 	—  	  	 	 	2,369	  	
Policy benefits	  	 	—  	  	 	 	5	  	 	 	—  	  	 	 	86	  	 	 	—  	  	 	 	91	  	
Policy acquisition costs	  	 	160	  	 	 	329	  	 	 	44	  	 	 	48	  	 	 	—  	  	 	 	581	  	
Administrative expenses	  	 	132	  	 	 	217	  	 	 	14	  	 	 	61	  	 	 	33	  	 	 	457	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Underwriting income (loss)	  	 	(65 	)  	 	 	143 	  	 	 	21 	  	 	 	45 	  	 	 	(33 	)  	 	 	111	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net investment income	  	 	278	  	 	 	136	  	 	 	83	  	 	 	40	  	 	 	(17	) 	 	 	520	  	
Net realized gains (losses) including OTTI	  	 	(284	) 	 	 	(58	) 	 	 	(2	) 	 	 	(180	) 	 	 	14	  	 	 	(510	) 	
Interest expense	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	68	  	 	 	68	  	
Other (income) expense	  	 	3	  	 	 	6	  	 	 	1	  	 	 	2	  	 	 	(6	) 	 	 	6	  	
Income tax expense (benefit)	  	 	(7	) 	 	 	10	  	 	 	9	  	 	 	15	  	 	 	(34	) 	 	 	(7	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	  	$ 	(67 	)  	 	$ 	205 	  	 	$ 	92 	  	 	$ 	(112 	)  	 	$ 	(64 	)  	 	$	54	  	

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
Statement of Operations by Segment
For the Nine Months Ended September 30, 2009
(in millions of U.S. dollars)

 	  	Insurance –
North
American	 	 	Insurance –
Overseas
General	 	 	Global
Reinsurance	 	 	Life	 	 	Corporate
and Other	 	 	ACE
Consolidated	 	
Gross premiums written 	  	$	7,472	  	 	$	5,080	  	 	$	953	  	 	$	1,152	  	 	$	—  	  	 	$	14,657	  	
Net premiums written	  	 	4,220	  	 	 	3,795	  	 	 	894	  	 	 	1,085	  	 	 	—  	  	 	 	9,994	  	
Net premiums earned	  	 	4,319	  	 	 	3,747	  	 	 	726	  	 	 	1,061	  	 	 	—  	  	 	 	9,853	  	
Losses and loss expenses	  	 	3,054	  	 	 	1,879	  	 	 	223	  	 	 	366	  	 	 	—  	  	 	 	5,522	  	
Policy benefits	  	 	—  	  	 	 	3	  	 	 	—  	  	 	 	253	  	 	 	—  	  	 	 	256	  	
Policy acquisition costs	  	 	394	  	 	 	869	  	 	 	147	  	 	 	161	  	 	 	—  	  	 	 	1,571	  	
Administrative expenses	  	 	433	  	 	 	569	  	 	 	41	  	 	 	173	  	 	 	109	  	 	 	1,325	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Underwriting income (loss)	  	 	438 	  	 	 	427 	  	 	 	315 	  	 	 	108 	  	 	 	(109 	)  	 	 	1,179	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net investment income	  	 	816	  	 	 	355	  	 	 	210	  	 	 	132	  	 	 	6	  	 	 	1,519	  	
Net realized gains (losses) including OTTI	  	 	(242	) 	 	 	(40	) 	 	 	(47	) 	 	 	(95	) 	 	 	(145	) 	 	 	(569	) 	
Interest expense	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	169	  	 	 	169	  	
Other (income) expense	  	 	9	  	 	 	12	  	 	 	—  	  	 	 	1	  	 	 	22	  	 	 	44	  	
Income tax expense (benefit)	  	 	219	  	 	 	131	  	 	 	38	  	 	 	37	  	 	 	(105	) 	 	 	320	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	  	$ 	784 	  	 	$ 	599 	  	 	$ 	 440 	  	 	$ 	107 	  	 	$ 	(334 	)  	 	$	1,596	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Statement of Operations by Segment
For the Nine Months Ended September 30, 2008
(in millions of U.S. dollars)

 	  	Insurance –
North
American	 	 	Insurance –
Overseas
General	 	 	Global
Reinsurance	 	 	Life	 	 	Corporate
and Other	 	 	ACE
Consolidated	 	
Gross premiums written 	  	$	7,886	  	 	$	5,332	  	 	$	791	  	 	$	913	  	 	$	—  	  	 	$	14,922	  	
Net premiums written	  	 	4,332	  	 	 	4,081	  	 	 	788	  	 	 	827	  	 	 	—  	  	 	 	10,028	  	
Net premiums earned	  	 	4,302	  	 	 	4,087	  	 	 	777	  	 	 	811	  	 	 	—  	  	 	 	9,977	  	
Losses and loss expenses	  	 	3,187	  	 	 	2,039	  	 	 	403	  	 	 	214	  	 	 	—  	  	 	 	5,843	  	
Policy benefits	  	 	—  	  	 	 	10	  	 	 	—  	  	 	 	233	  	 	 	—  	  	 	 	243	  	
Policy acquisition costs	  	 	450	  	 	 	897	  	 	 	152	  	 	 	119	  	 	 	—  	  	 	 	1,618	  	
Administrative expenses	  	 	398	  	 	 	598	  	 	 	43	  	 	 	143	  	 	 	111	  	 	 	1,293	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Underwriting income (loss)	  	 	267 	  	 	 	543 	  	 	 	179 	  	 	 	102 	  	 	 	(111 	)  	 	 	980	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net investment income	  	 	829	  	 	 	387	  	 	 	235	  	 	 	95	  	 	 	(5	) 	 	 	1,541	  	
Net realized gains (losses) including OTTI	  	 	(450	) 	 	 	(199	) 	 	 	(67	) 	 	 	(302	) 	 	 	29	  	 	 	(989	) 	
Interest expense	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	176	  	 	 	176	  	
Other (income) expense	  	 	6	  	 	 	(14	) 	 	 	2	  	 	 	6	  	 	 	(104	) 	 	 	(104	) 	
Income tax expense (benefit)	  	 	222	  	 	 	95	  	 	 	24	  	 	 	25	  	 	 	(83	) 	 	 	283	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	  	$ 	418 	  	 	$ 	650 	  	 	$ 	321 	  	 	$ 	(136 	)  	 	$ 	(76 	)  	 	 	$1,177	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
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.
 
44

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
The following tables summarize the net premiums earned for each segment by product offering for the periods indicated.
													
 	  	Property &
All Other	  	Casualty	  	Life, Accident
& Health	  	ACE
Consolidated	
 	  	(in millions of U.S. dollars)	
For the Three Months Ended September 30, 2009	  			  			  			  			
Insurance – North American	  	$	496	  	$	904	  	$	67	  	$	1,467	
Insurance – Overseas General	  	 	451	  	 	366	  	 	500	  	 	1,317	
Global Reinsurance	  	 	134	  	 	113	  	 	—  	  	 	247	
Life	  	 	—  	  	 	—  	  	 	362	  	 	362	
	  	 	 	  	 	 	  	 	 	  	 	 	
	  	$	1,081	  	$	1,383	  	$	929	  	$	3,393	
	  	 	 	  	 	 	  	 	 	  	 	 	
For the Three Months Ended September 30, 2008	  			  			  			  			
Insurance – North American	  	$	551	  	$	969	  	$	63	  	$	1,583	
Insurance – Overseas General	  	 	500	  	 	376	  	 	549	  	 	1,425	
Global Reinsurance	  	 	139	  	 	118	  	 	—  	  	 	257	
Life	  	 	—  	  	 	—  	  	 	344	  	 	344	
	  	 	 	  	 	 	  	 	 	  	 	 	
	  	$	1,190	  	$	1,463	  	$	956	  	$	3,609	
	  	 	 	  	 	 	  	 	 	  	 	 	
For the Nine Months Ended September 30, 2009	  			  			  			  			
Insurance – North American	  	$	1,361	  	$	2,766	  	$	192	  	$	4,319	
Insurance – Overseas General	  	 	1,293	  	 	1,038	  	 	1,416	  	 	3,747	
Global Reinsurance	  	 	408	  	 	318	  	 	—  	  	 	726	
Life	  	 	—  	  	 	—  	  	 	1,061	  	 	1,061	
	  	 	 	  	 	 	  	 	 	  	 	 	
	  	$	3,062	  	$	4,122	  	$	2,669	  	$	9,853	
	  	 	 	  	 	 	  	 	 	  	 	 	
For the Nine Months Ended September 30, 2008	  			  			  			  			
Insurance – North American	  	$	1,214	  	$	2,903	  	$	185	  	$	4,302	
Insurance – Overseas General	  	 	1,420	  	 	1,151	  	 	1,516	  	 	4,087	
Global Reinsurance	  	 	396	  	 	381	  	 	—  	  	 	777	
Life	  	 	—  	  	 	—  	  	 	811	  	 	811	
	  	 	 	  	 	 	  	 	 	  	 	 	
	  	$	3,030	  	$	4,435	  	$	2,512	  	$	9,977	

45

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
 11. Earnings per share
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated. The current and prior period calculations have been amended due to the impact of the adoption of the previously discussed new principles included within ASC Topic 260, Earnings Per Share . The previously reported amounts for basic and diluted earnings per share for the nine months ended September 30, 2008, were $3.51 and $3.46, respectively.

 	  	Three Months Ended
September 30	  	Nine Months Ended
September 30	 	
 	  	2009	  	2008	  	2009	  	2008	 	
 	  	(in millions of U.S. dollars, except share and per share data)	 	
Numerator:	  			  			  			  				
Net Income	  	$	494	  	$	54	  	$	1,596	  	$	1,177	  	
Dividends on Preferred Shares	  	 	—  	  	 	—  	  	 	—  	  	 	(24	) 	
	  	 	 	  	 	 	  	 	 	  	 	 	 	
Net income available to holders of Common Shares	  	$	494	  	$	54	  	$	1,596	  	$	1,153	  	
	  	 	 	  	 	 	  	 	 	  	 	 	 	
Denominator:	  			  			  			  				
Denominator for basic earnings per share:	  			  			  				
Weighted average shares outstanding	  	 	337,190,828	  	 	333,632,699	  	 	336,501,257	  	 	332,539,162	  	
Denominator for diluted earnings per share:	  			  			  				
Share-based compensation plans	  	 	1,221,041	  	 	1,639,720	  	 	579,116	  	 	1,933,770	  	
	  	 	 	  	 	 	  	 	 	  	 	 	 	
Adjusted weighted average shares outstanding and assumed conversions	  	 	338,411,869	  	 	335,272,419	  	 	337,080,373	  	 	334,472,932	  	
	  	 	 	  	 	 	  	 	 	  	 	 	 	
Basic earnings per share	  	$	1.46	  	$	0.16	  	$	4.74	  	$	3.47	  	
	  	 	 	  	 	 	  	 	 	  	 	 	 	
Diluted earnings per share	  	$	1.46	  	$	0.16	  	$	4.73	  	$	3.45	  	
	  	 	 	  	 	 	  	 	 	  	 	 	 	
Excluded from adjusted weighted average shares outstanding and assumed conversions is the impact of securities that would have been anti-dilutive during the respective periods. For the three months ended September 30, 2009 and 2008, the potential anti-dilutive share conversions were 882,760 and 892,049, respectively. The potential anti-dilutive share conversions for the nine months ended September 30, 2009 and 2008, were 1,399,509 and 545,331, respectively.
 
46

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
 12. Information provided in connection with outstanding debt of subsidiaries
The following tables present condensed consolidating financial information at September 30, 2009, and December 31, 2008, and for the three and nine months ended September 30, 2009 and 2008, for ACE Limited (the Parent Guarantor) and its “Subsidiary Issuer”, ACE INA Holdings, Inc. The Subsidiary Issuer is an indirect 100 percent-owned subsidiary of the Parent Guarantor. Investments in subsidiaries are accounted for by the Parent Guarantor under the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are reflected in the Parent Guarantor’s investment accounts and  earnings. The Parent Guarantor fully and unconditionally guarantees certain of the debt of the Subsidiary Issuer.
Condensed Consolidating Balance Sheet at September 30, 2009
(in millions of U.S. dollars)

 	  	ACE Limited
(Parent
Guarantor)	  	ACE INA
Holdings Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	Consolidating
Adjustments (2)	 	 	ACE Limited
Consolidated	
Assets	  			  				 				 				 			
Investments	  	$	40	  	$	23,853	  	 	$	22,028	  	 	$	—  	  	 	$	45,921	
Cash	  	 	87	  	 	418	  	 	 	237	  	 	 	—  	  	 	 	742	
Insurance and reinsurance balances receivable	  	 	—  	  	 	3,009	  	 	 	617	  	 	 	—  	  	 	 	3,626	
Reinsurance recoverable on losses and loss expenses	  	 	—  	  	 	17,187	  	 	 	(3,498	) 	 	 	—  	  	 	 	13,689	
Reinsurance recoverable on policy benefits	  	 	—  	  	 	728	  	 	 	(383	) 	 	 	—  	  	 	 	345	
Value of business acquired	  	 	—  	  	 	786	  	 	 	—  	  	 	 	—  	  	 	 	786	
Goodwill and other intangible assets	  	 	—  	  	 	3,216	  	 	 	556	  	 	 	—  	  	 	 	3,772	
Investments in subsidiaries	  	 	17,971	  	 	—  	  	 	 	—  	  	 	 	(17,971	) 	 	 	—  	
Due from (to) subsidiaries and affiliates, net	  	 	771	  	 	(546	) 	 	 	546	  	 	 	(771	) 	 	 	—  	
Other assets	  	 	23	  	 	7,424	  	 	 	1,493	  	 	 	—  	  	 	 	8,940	
	  	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets	  	$	18,892	  	$	56,075	  	 	$	21,596	  	 	$	(18,742	) 	 	$	77,821	
	  	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Liabilities	  			  				 				 				 			
Unpaid losses and loss expenses	  	$	—  	  	$	30,038	  	 	$	7,833	  	 	$	—  	  	 	$	37,871	
Unearned premiums	  	 	—  	  	 	5,150	  	 	 	1,219	  	 	 	—  	  	 	 	6,369	
Future policy benefits	  	 	—  	  	 	2,417	  	 	 	631	  	 	 	—  	  	 	 	3,048	
Short-term debt	  	 	—  	  	 	200	  	 	 	—  	  	 	 	—  	  	 	 	200	
Long-term debt	  	 	—  	  	 	3,321	  	 	 	—  	  	 	 	—  	  	 	 	3,321	
Trust preferred securities	  	 	—  	  	 	309	  	 	 	—  	  	 	 	—  	  	 	 	309	
Other liabilities	  	 	159	  	 	6,498	  	 	 	1,313	  	 	 	—  	  	 	 	7,970	
	  	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total liabilities	  	 	159	  	 	47,933	  	 	 	10,996	  	 	 	—  	  	 	 	59,088	
	  	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total shareholders’ equity	  	 	18,733	  	 	8,142	  	 	 	10,600	  	 	 	(18,742	) 	 	 	18,733	
	  	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total liabilities and shareholders’ equity	  	$	18,892	  	$	56,075	  	 	$	21,596	  	 	$	(18,742	) 	 	$	77,821	

(1)	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
(2)	Includes ACE Limited parent company eliminations.	
 
47

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
Condensed Consolidating Balance Sheet at December 31, 2008
(in millions of U.S. dollars)

 	  	ACE Limited
(Parent
Guarantor)	 	 	ACE INA
Holdings Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	Consolidating
Adjustments (2)	 	 	ACE Limited
Consolidated	
Assets	  				 				 				 				 			
Investments	  	$	143	  	 	$	20,323	  	 	$	19,249	  	 	$	—  	  	 	$	39,715	
Cash	  	 	(52	) 	 	 	442	  	 	 	477	  	 	 	—  	  	 	 	867	
Insurance and reinsurance balances receivable	  	 	—  	  	 	 	2,944	  	 	 	509	  	 	 	—  	  	 	 	3,453	
Reinsurance recoverable on losses and loss expenses	  	 	—  	  	 	 	16,880	  	 	 	(2,963	) 	 	 	—  	  	 	 	13,917	
Reinsurance recoverable on policy benefits	  	 	—  	  	 	 	625	  	 	 	(366	) 	 	 	—  	  	 	 	259	
Value of business acquired	  	 	—  	  	 	 	823	  	 	 	—  	  	 	 	—  	  	 	 	823	
Goodwill and other intangible assets	  	 	—  	  	 	 	3,199	  	 	 	548	  	 	 	—  	  	 	 	3,747	
Investments in subsidiaries	  	 	13,697	  	 	 	—  	  	 	 	—  	  	 	 	(13,697	) 	 	 	—  	
Due from (to) subsidiaries and affiliates, net	  	 	784	  	 	 	(389	) 	 	 	389	  	 	 	(784	) 	 	 	—  	
Other assets	  	 	12	  	 	 	7,398	  	 	 	1,866	  	 	 	—  	  	 	 	9,276	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets	  	$	14,584	  	 	$	52,245	  	 	$	19,709	  	 	$	(14,481	) 	 	$	72,057	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Liabilities	  				 				 				 				 			
Unpaid losses and loss expenses	  	$	—  	  	 	$	29,127	  	 	$	8,049	  	 	$	—  	  	 	$	37,176	
Unearned premiums	  	 	—  	  	 	 	4,804	  	 	 	1,146	  	 	 	—  	  	 	 	5,950	
Future policy benefits	  	 	—  	  	 	 	2,249	  	 	 	655	  	 	 	—  	  	 	 	2,904	
Short-term debt	  	 	—  	  	 	 	471	  	 	 	—  	  	 	 	—  	  	 	 	471	
Long-term debt	  	 	—  	  	 	 	2,806	  	 	 	—  	  	 	 	—  	  	 	 	2,806	
Trust preferred securities	  	 	—  	  	 	 	309	  	 	 	—  	  	 	 	—  	  	 	 	309	
Other liabilities	  	 	138	  	 	 	5,932	  	 	 	1,925	  	 	 	—  	  	 	 	7,995	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total liabilities	  	 	138	  	 	 	45,698	  	 	 	11,775	  	 	 	—  	  	 	 	57,611	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total shareholders’ equity	  	 	14,446	  	 	 	6,547	  	 	 	7,934	  	 	 	(14,481	) 	 	 	14,446	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total liabilities and shareholders’ equity	  	$	14,584	  	 	$	52,245	  	 	$	19,709	  	 	$	(14,481	) 	 	$	72,057	

(1)	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
(2)	Includes ACE Limited parent company eliminations.	
 
48

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2009
(in millions of U.S. dollars)

 	  	ACE Limited
(Parent
Guarantor)	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	Consolidating
Adjustments (2)	 	 	ACE
Limited
Consolidated	 	
	  				 				 				 				 				
Net premiums written	  	$	—  	  	 	$	1,669	  	 	$	1,486	  	 	$	—  	  	 	$	3,155	  	
Net premiums earned	  	 	—  	  	 	 	1,943	  	 	 	1,450	  	 	 	—  	  	 	 	3,393	  	
Net investment income	  	 	1	  	 	 	262	  	 	 	248	  	 	 	—  	  	 	 	511	  	
Equity in earnings of subsidiaries	  	 	500	  	 	 	—  	  	 	 	—  	  	 	 	(500	) 	 	 	—  	  	
Net realized gains (losses) including OTTI	  	 	(14	) 	 	 	(34	) 	 	 	(175	) 	 	 	—  	  	 	 	(223	) 	
Losses and loss expenses	  	 	—  	  	 	 	1,230	  	 	 	655	  	 	 	—  	  	 	 	1,885	  	
Policy benefits	  	 	—  	  	 	 	19	  	 	 	60	  	 	 	—  	  	 	 	79	  	
Policy acquisition costs and administrative expenses	  	 	4	  	 	 	574	  	 	 	446	  	 	 	(6	) 	 	 	1,018	  	
Interest expense	  	 	(11	) 	 	 	70	  	 	 	(8	) 	 	 	9	  	 	 	60	  	
Other (income) expense	  	 	1	  	 	 	8	  	 	 	42	  	 	 	—  	  	 	 	51	  	
Income tax expense (benefit)	  	 	(1	) 	 	 	49	  	 	 	46	  	 	 	—  	  	 	 	94	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	494	  	 	$	221	  	 	$	282	  	 	$	(503	) 	 	$	494	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Condensed Consolidating Statement of Operations
For the Three Months Ended September 30, 2008
(in millions of U.S. dollars)

 	  	ACE Limited
(Parent
Guarantor)	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	Consolidating
Adjustments (2)	 	 	ACE Limited
Consolidated	 	
Net premiums written	  	$	—  	  	 	$	1,916	  	 	$	1,360	  	 	$	—  	  	 	$	3,276	  	
Net premiums earned	  	 	—  	  	 	 	2,151	  	 	 	1,458	  	 	 	—  	  	 	 	3,609	  	
Net investment income	  	 	(7	) 	 	 	273	  	 	 	254	  	 	 	—  	  	 	 	520	  	
Equity in earnings of subsidiaries	  	 	45	  	 	 	—  	  	 	 	—  	  	 	 	(45	) 	 	 	—  	  	
Net realized gains (losses) including OTTI	  	 	20	  	 	 	(243	) 	 	 	(287	) 	 	 	—  	  	 	 	(510	) 	
Losses and loss expenses	  	 	—  	  	 	 	1,443	  	 	 	926	  	 	 	—  	  	 	 	2,369	  	
Policy benefits	  	 	—  	  	 	 	35	  	 	 	56	  	 	 	—  	  	 	 	91	  	
Policy acquisition costs and administrative expenses	  	 	22	  	 	 	636	  	 	 	384	  	 	 	(4	) 	 	 	1,038	  	
Interest expense	  	 	(11	) 	 	 	68	  	 	 	3	  	 	 	8	  	 	 	68	  	
Other (income) expense	  	 	(7	) 	 	 	—  	  	 	 	13	  	 	 	—  	  	 	 	6	  	
Income tax expense (benefit)	  	 	—  	  	 	 	12	  	 	 	(19	) 	 	 	—  	  	 	 	(7	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	54	  	 	$	(13	) 	 	$	62	  	 	$	(49	) 	 	$	54	  	

(1)	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
(2)	Includes ACE Limited parent company eliminations.	
 
49

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
 
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2009
(in millions of U.S. dollars)

 	  	ACE Limited
(Parent
Guarantor)	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	Consolidating
Adjustments (2)	 	 	ACE Limited
Consolidated	 	
Net premiums written	  	$	—  	  	 	$	5,514	  	 	$	4,480	  	 	$	—  	  	 	$	9,994	  	
Net premiums earned	  	 	—  	  	 	 	5,533	  	 	 	4,320	  	 	 	—  	  	 	 	9,853	  	
Net investment income	  	 	1	  	 	 	754	  	 	 	764	  	 	 	—  	  	 	 	1,519	  	
Equity in earnings of subsidiaries	  	 	1,656	  	 	 	—  	  	 	 	—  	  	 	 	(1,656	) 	 	 	—  	  	
Net realized gains (losses) including OTTI	  	 	(67	) 	 	 	(150	) 	 	 	(352	) 	 	 	—  	  	 	 	(569	) 	
Losses and loss expenses	  	 	—  	  	 	 	3,471	  	 	 	2,051	  	 	 	—  	  	 	 	5,522	  	
Policy benefits	  	 	—  	  	 	 	61	  	 	 	195	  	 	 	—  	  	 	 	256	  	
Policy acquisition costs and administrative expenses	  	 	30	  	 	 	1,603	  	 	 	1,284	  	 	 	(21	) 	 	 	2,896	  	
Interest expense	  	 	(32	) 	 	 	198	  	 	 	(25	) 	 	 	28	  	 	 	169	  	
Other (income) expense	  	 	1	  	 	 	13	  	 	 	30	  	 	 	—  	  	 	 	44	  	
Income tax expense (benefit)	  	 	(5	) 	 	 	221	  	 	 	104	  	 	 	—  	  	 	 	320	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	1,596	  	 	$	570	  	 	$	1,093	  	 	$	(1,663	) 	 	$	1,596	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Condensed Consolidating Statement of Operations
For the Nine Months Ended September 30, 2008
(in millions of U.S. dollars)

 	  	ACE Limited
(Parent
Guarantor)	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	Consolidating
Adjustments (2)	 	 	ACE Limited
Consolidated	 	
Net premiums written	  	$	—  	  	 	$	5,475	  	 	$	4,553	  	 	$	—  	  	 	$	10,028	  	
Net premiums earned	  	 	—  	  	 	 	5,642	  	 	 	4,335	  	 	 	—  	  	 	 	9,977	  	
Net investment income	  	 	(11	) 	 	 	795	  	 	 	757	  	 	 	—  	  	 	 	1,541	  	
Equity in earnings of subsidiaries	  	 	1,183	  	 	 	—  	  	 	 	—  	  	 	 	(1,183	) 	 	 	—  	  	
Net realized gains (losses) including OTTI	  	 	38	  	 	 	(433	) 	 	 	(594	) 	 	 	—  	  	 	 	(989	) 	
Losses and loss expenses	  	 	—  	  	 	 	3,521	  	 	 	2,322	  	 	 	—  	  	 	 	5,843	  	
Policy benefits	  	 	—  	  	 	 	90	  	 	 	153	  	 	 	—  	  	 	 	243	  	
Policy acquisition costs and administrative expenses	  	 	72	  	 	 	1,681	  	 	 	1,170	  	 	 	(12	) 	 	 	2,911	  	
Interest expense	  	 	(29	) 	 	 	180	  	 	 	4	  	 	 	21	  	 	 	176	  	
Other (income) expense	  	 	(11	) 	 	 	(14	) 	 	 	(79	) 	 	 	—  	  	 	 	(104	) 	
Income tax expense	  	 	1	  	 	 	232	  	 	 	50	  	 	 	—  	  	 	 	283	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	1,177	  	 	$	314	  	 	$	878	  	 	$	(1,192	) 	 	$	1,177	  	

(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 Nine Months Ended September 30, 2009
(in millions of U.S. dollars)

 	  	ACE Limited
(Parent
Guarantor)	 	 	ACE INA
Holdings Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	ACE Limited
Consolidated	 	
Net cash flows from operating activities	  	$ 	307	  	 	$	1,385	  	 	$	640	  	 	$	2,332	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash flows from (used for) investing activities	  				 				 				 				
Purchases of fixed maturities available for sale 	  	 	—  	  	 	 	(14,312	) 	 	 	(16,646	) 	 	 	(30,958	) 	
Purchases of fixed maturities held to maturity 	  	 	—  	  	 	 	(272	) 	 	 	(1	) 	 	 	(273	) 	
Purchases of equity securities 	  	 	—  	  	 	 	(181	) 	 	 	(133	) 	 	 	(314	) 	
Sales of fixed maturities available for sale 	  	 	95	  	 	 	11,008	  	 	 	13,928	  	 	 	25,031	  	
Sales of fixed maturities held to maturity 	  	 	—  	  	 	 	—  	  	 	 	1	  	 	 	1	  	
Sales of equity securities 	  	 	—  	  	 	 	520	  	 	 	582	  	 	 	1,102	  	
Maturities and redemptions of fixed maturities available for sale 	  	 	—  	  	 	 	1,416	  	 	 	1,279	  	 	 	2,695	  	
Maturities and redemptions of fixed maturities held to maturity 	  	 	—  	  	 	 	298	  	 	 	77	  	 	 	375	  	
Net payments made on the settlement of investment derivatives 	  	 	—  	  	 	 	—  	  	 	 	(23	) 	 	 	(23	) 	
Other 	  	 	1	  	 	 	(123	) 	 	 	49	  	 	 	(73	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash flows from (used for) investing activities 	  	 	96	  	 	 	(1,646	) 	 	 	(887	) 	 	 	(2,437	) 	

Cash flows (used for) from financing activities	  				 				 				 				
Dividends paid on Common Shares 	  	 	(283	) 	 	 	—  	  	 	 	—  	  	 	 	(283	) 	
Proceeds from exercise of options for Common Shares 	  	 	9	  	 	 	—  	  	 	 	—  	  	 	 	9	  	
Proceeds from Common Shares issued under ESPP 	  	 	10	  	 	 	—  	  	 	 	—  	  	 	 	10	  	
Net proceeds from (repayment of) short-term debt 	  	 	—  	  	 	 	(266	) 	 	 	—  	  	 	 	(266	) 	
Net proceeds from issuance of long-term debt 	  	 	—  	  	 	 	500	  	 	 	—  	  	 	 	500	  	
Advances (to) from affiliates 	  	 	—  	  	 	 	1	  	 	 	(1	) 	 	 	—  	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash flows (used for) from financing activities 	  	 	(264	) 	 	 	235	  	 	 	(1	) 	 	 	(30	) 	

Effect of foreign currency rate changes on cash and cash equivalents	  	 	—  	  	 	 	2	  	 	 	8	  	 	 	10	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net increase (decrease) in cash 	  	 	139	  	 	 	(24	) 	 	 	(240	) 	 	 	(125	) 	
Cash – beginning of period 	  	 	(52	) 	 	 	442	  	 	 	477	  	 	 	867	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash – end of period 	  	$	87	  	 	$	418	  	 	$	237	  	 	$	742	  	

(1)	Includes all other subsidiaries of ACE Limited and intercompany 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 Nine Months Ended September 30, 2008
(in millions of U.S. dollars)

 	  	ACE Limited
(Parent
Guarantor)	 	 	ACE INA
Holdings Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	ACE Limited
Consolidated	 	
Net cash flows from operating activities	  	$	1,124	  	 	$	1,646	  	 	$	370	  	 	$	3,140	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash flows used for investing activities	  				 				 				 				
Purchases of fixed maturities available for sale 	  	 	(3	) 	 	 	(12,441	) 	 	 	(20,973	) 	 	 	(33,417	) 	
Purchases of fixed maturities held to maturity 	  	 	—  	  	 	 	(303	) 	 	 	(13	) 	 	 	(316	) 	
Purchases of equity securities 	  	 	—  	  	 	 	(409	) 	 	 	(425	) 	 	 	(834	) 	
Sales of fixed maturities available for sale 	  	 	—  	  	 	 	10,638	  	 	 	19,806	  	 	 	30,444	  	
Sales of equity securities 	  	 	—  	  	 	 	640	  	 	 	361	  	 	 	1,001	  	
Maturities and redemptions of fixed maturities available for sale 	  	 	—  	  	 	 	1,087	  	 	 	1,125	  	 	 	2,212	  	
Maturities and redemptions of fixed maturities held to maturity 	  	 	—  	  	 	 	290	  	 	 	93	  	 	 	383	  	
Net proceeds from (payments made on) the settlement of investment derivatives 	  	 	11	  	 	 	—  	  	 	 	(26	) 	 	 	(15	) 	
Advances (to) from affiliates 	  	 	(275	) 	 	 	—  	  	 	 	275	  	 	 	—  	  	
Acquisition of subsidiary (net of cash acquired of $19) 	  	 	—  	  	 	 	(2,522	) 	 	 	—  	  	 	 	(2,522	) 	
Other 	  	 	(3	) 	 	 	(100	) 	 	 	(373	) 	 	 	(476	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash flows used for investing activities 	  	 	(270	) 	 	 	(3,120	) 	 	 	(150	) 	 	 	(3,540	) 	

Cash flows (used for) from financing activities	  				 				 				 				
Dividends paid on Common Shares 	  	 	(276	) 	 	 	—  	  	 	 	—  	  	 	 	(276	) 	
Dividends paid on Preferred Shares 	  	 	(24	) 	 	 	—  	  	 	 	—  	  	 	 	(24	) 	
Net proceeds from (repayment of) short-term debt 	  	 	(51	) 	 	 	—  	  	 	 	16	  	 	 	(35	) 	
Net proceeds from issuance of long-term debt	  	 	—  	  	 	 	1,195	  	 	 	—  	  	 	 	1,195	  	
Redemption of Preferred Shares	  	 	(575	) 	 	 	—  	  	 	 	—  	  	 	 	(575	) 	
Proceeds from exercise of options for Common Shares 	  	 	88	  	 	 	—  	  	 	 	—  	  	 	 	88	  	
Proceeds from Common Shares issued under ESPP 	  	 	10	  	 	 	—  	  	 	 	—  	  	 	 	10	  	
Advances from (to) affiliates 	  	 	—  	  	 	 	230	  	 	 	(230	) 	 	 	—  	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash flows (used for) from financing activities 	  	 	(828	) 	 	 	1,425	  	 	 	(214	) 	 	 	383	  	

Effect of foreign currency rate changes on cash and cash equivalents	  	 	—  	  	 	 	(13	) 	 	 	(1	) 	 	 	(14	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net increase (decrease) in cash 	  	 	26	  	 	 	(62	) 	 	 	5	  	 	 	(31	) 	
Cash – beginning of period 	  	 	—  	  	 	 	310	  	 	 	200	  	 	 	510	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash – end of period 	  	$	26	  	 	$	248	  	 	$	205	  	 	$	479	  	

(1)	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
 13. Subsequent events
The Company has performed an evaluation of subsequent events through November 6, 2009, which is the date that the financial statements were issued.
 
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 ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion of our results of operations, financial condition, and liquidity and capital resources as of and for the three and nine months ended September 30, 2009. Our results of operations and cash flows for any interim period are not necessarily indicative of our results for the full year. This discussion should be read in conjunction with our Consolidated Financial Statements and related notes and our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2008 (2008 Form 10-K) and in our quarterly report on Form 10-Q for the quarters ended March 31, 2009, and June 30, 2009. In addition, readers should review “Risk Factors” set forth in Item 1A. of Part I of our 2008 Form 10-K, as well as in Item 1A. of Part II of our quarterly report on Form 10-Q for the quarters ended March 31, 2009, and June 30, 2009, and in Item 1A. of Part II of this report.
Other Information
We routinely post important information for investors on our website (www.acelimited.com) under the Investor Relations section. We use this website as a means of disclosing material, non-public information and for complying with our disclosure obligations under 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), which could affect our statement of operations, investment portfolio, financial position, and financing plans;	
 
 	•	 	general economic and business conditions resulting from recent declines in the stock markets and tightening of credit and the depth and duration of the current recession;	
 
 	•	 	losses arising out of natural or man-made catastrophes such as hurricanes, typhoons, earthquakes, floods, 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;	
 
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 	•	 	infection rates and severity of pandemics and their effects on our business operations and claims activity;	
 
 	•	 	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 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 possible reduced flexibility with respect to certain aspects of capital management and the potential for additional regulatory burdens;	
 
 	•	 	the potential impact from government-mandated insurance coverage for acts of terrorism;	
 
 	•	 	the availability of borrowings and letters of credit under our credit facilities;	
 
 	•	 	the adequacy of collateral supporting funded high deductible programs;	
 
 	•	 	changes in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers;	
 
 	•	 	material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements;	
 
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 	•	 	the effects of investigations into market practices in the property and casualty (P&C) industry;	
 
 	•	 	changing rates of inflation and other economic conditions, for example, recession;	
 
 	•	 	the amount of dividends received from subsidiaries;	
 
 	•	 	loss of the services of any of our executive officers without suitable replacements being recruited in a reasonable time frame;	
 
 	•	 	the ability of our technology resources to perform as anticipated; and	
 
 	•	 	management’s response to these factors and actual events (including, but not limited to, those described above).	
The words “believe,” “anticipate,” “estimate,” “project,” “should,” “plan,” “expect,” “intend,” “hope,”, “feel”, “will likely result,” or “will continue,” and variations thereof and similar expressions, identify forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
ACE Limited is the holding company of the ACE Group of Companies. ACE opened its business office in Bermuda in 1985 and continues to maintain significant operations in Bermuda. ACE Limited, which is now domiciled in Zurich, Switzerland, and its direct and indirect subsidiaries (collectively, the ACE Group of Companies, ACE, the Company, we, us, or our) comprise a global insurance and reinsurance organization, with operating subsidiaries in more than 50 countries serving the needs of commercial and individual customers in more than 140 countries. We serve the P&C insurance needs of businesses of all sizes in a broad range of industries. We also provide specialized insurance products such as personal accident, supplemental health, and life insurance to individuals in select countries. Our reinsurance operations include both P&C and life companies. At September 30, 2009, ACE had total assets of $77.8 billion and shareholders’ equity of $18.7 billion.
Our product and geographic diversification differentiates us from the vast majority of our competitors and has been a source of stability during periods of industry volatility. Our long-term business strategy focuses on sustained growth in book value achieved through a combination of underwriting and investment income. By doing so, we provide value to our clients and shareholders through the utilization of our substantial capital base in the insurance and reinsurance markets.
Redomestication to Zurich, Switzerland
In July 2008, our shareholders approved proposals submitted by our Board of Directors to transfer our domicile from the Cayman Islands to Zurich, Switzerland, our new jurisdiction of incorporation (the Continuation). As a result of the Continuation, we are deregistered in the Cayman Islands and are now subject to Swiss law. In connection with the Continuation, we changed the currency in which the par value of our Ordinary Shares was stated from U.S. dollars to Swiss francs. Upon the effectiveness of the Continuation, our Ordinary Shares became Common Shares. All Common Shares are registered shares with a current par value of CHF 32.20 each.
Notwithstanding the change of the currency in which the par value of Common Shares is stated, we continue to use U.S. dollars as our reporting currency for preparing our Consolidated Financial Statements. For the foreseeable future, we expect to pay dividends as a repayment of share capital in the form of a reduction in par value or qualified paid-in capital, which is not subject to Swiss withholding tax. Refer to “Liquidity” and “Capital Resources” below for more information, including changes to the process by which we make distributions in the form of par value reductions.
 
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The Combined Insurance Acquisition
On April 1, 2008, ACE acquired all of the outstanding shares of Combined Insurance Company of America (Combined Insurance) and certain of its subsidiaries from Aon Corporation for $2.56 billion. Combined Insurance is an underwriter and distributor of specialty individual accident and supplemental health insurance products targeted to middle-income consumers and small businesses in North America, Europe, Asia Pacific, and Latin America. ACE recorded the Combined Insurance acquisition using the purchase method of accounting. Our consolidated operating results include the results of Combined Insurance from April 1, 2008.
Investment in Assured Guaranty Ltd.
Assured Guaranty Ltd. (AGO), a Bermuda-based holding company, provides, through its operating subsidiaries, credit enhancement products to the public finance, structured finance, and mortgage markets. On July 1, 2009, AGO acquired Financial Security Assurance Holdings Ltd. from Dexia Holdings Inc., a subsidiary of Dexia S.A. The purchase price included approximately $546 million in cash and approximately 22.3 million AGO common shares, according to AGO’s public filings. AGO financed the cash portion of the purchase price partly through a June 2009 issuance of 38.5 million common shares before the exercise of any overallotment option (June 2009 issuance), according to AGO’s public filings. Prior to the June 2009 issuance, ACE included its investment in AGO in Investments in partially-owned insurance companies using the equity method of accounting. Effective with the June 2009 issuance, ACE was deemed to no longer exert significant influence over AGO for accounting purposes and accounts for the investment in AGO as an available-for-sale equity security. ACE accounted for AGO’s June 2009 issuance, and resulting dilutive effect, as if we had sold a proportionate share of the investment. ACE recorded two adjustments in the third quarter of 2009 related to its investment in AGO. The first adjustment was a $44 million loss recorded in Other (income) expense which reflects the true-up of ACE’s proportionate share of AGO’s second quarter 2009 net income accounted for using the equity method of accounting, principally due to higher than anticipated unrealized losses recorded by AGO. AGO’s unrealized losses resulted from an increase in the value of its fair value liabilities because of improvements in AGO’s credit spread. The second adjustment was a $10 million gain recorded in Net realized gains (losses) which reflects the true-up of a realized loss recognized in the second quarter of 2009 related to a dilutive common share issuance by AGO. In light of the $44 million decrease in carrying value of ACE’s investment in AGO as described above, ACE reduced its previously recognized realized loss related to AGO’s dilutive common share issuance from $67 million to $57 million. As of September 30, 2009, the fair value of ACE’s investment in AGO was $372 million and $37 million of unrealized gain on this investment is reflected in Accumulated other comprehensive income.
Market Conditions
With stabilization of the global economy and recovering financial markets and industry capital, more competitive market conditions are emerging. Although for the quarter ended September 30, 2009, we experienced a modest increase in rates globally, rates for business written in the early part of the third quarter were more favorable than for business written late in the quarter.
During the quarter ended September 30, 2009, we continued to focus our efforts on building ACE’s capabilities – expanding our product offerings, our underwriting and geographic presence, and special initiatives centered on certain customer segments and our distribution. Our revenues were adversely impacted by a strong U.S. dollar and the recession’s impact on pricing and demand for coverage. Nevertheless, we reported growth in lines where more than price matters – our relative financial strength compared to competitors continued to produce business gains, and we have also benefited from growth in those areas of the market that have experienced underwriting losses and prices have risen adequately thus creating opportunity for ACE. These include professional lines, political risk, offshore energy, property catastrophe, and aviation.
Consistent with the first half of 2009, in the third quarter we continued to experience more favorable pricing on reinsurance-related risks compared to insurance-related risks and also more favorable pricing on business sourced through the retail market compared with the wholesale market. Our reinsurance business grew in the
 
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third quarter of 2009, as we continued to attract business based on our financial strength and clients’ capital needs. With respect to our insurance business, the market continued to improve, although not in all classes. We have experienced modest growth in our global retail P&C business – ACE USA and ACE International – and declines in our London and U.S. wholesale business. In North America, U.S. retail rates increased and renewal retentions were stable as our investment of resources into lines such as directors and officers (D&O), errors and omissions (E&O), excess casualty, environmental and medical all reported growth. Our North American risk management business experienced a decline in business due to the recession’s impact on exposure and increased competition. Our U.S. wholesale business, excluding crop, reported higher rates but lower retention as competitive conditions continued in excess and surplus casualty and professional lines. Crop premiums declined primarily due to a decline in commodity prices. Our international P&C business reported growth in all regions as rates increased slightly and we benefitted from clients looking for financial strength as opposed to simply a price advantage. This was particularly evident in our financial lines offerings. Although our international wholesale business has experienced competitive conditions, rates in our portfolio increased modestly and we began to see a significant improvement in aviation pricing for the fourth quarter. Our A&H business continues to be impacted by the recession driven by a slow-down in growth and increased lapse rates as consumers adjust to less available credit, overall decreased travel, and employers reducing employee benefits including accident insurance.
Refer also to “Overview” in our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2008 Form 10-K.
Fair Value Measurements
We partially adopted the provisions (specific provisions described below) included in Accounting Standards Codification (ASC) Topic 820, Fair Value Measurements and Disclosures, on January 1, 2008. We fully adopted the provisions effective January 1, 2009. These provisions 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.
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 September 30, 2009, 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 14 percent of our liabilities that are measured at fair value and one percent of our total liabilities at September 30, 2009. During the quarter ended September 30, 2009, we transferred $32 million into our Level 3 assets. Refer to Note 9 to the Consolidated Financial Statements for a description of the valuation measurements used for our financial instruments carried or disclosed at fair value by valuation hierarchy (Levels 1, 2, and 3) as well as a roll-forward of Level 3 financial instruments for the three and nine months ended September 30, 2009 and 2008.
 
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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 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 2008 Form 10-K, for further description of this product and related accounting treatment.
The fair value of GMIB reinsurance is estimated using an internal valuation model which includes current market information and estimates of policyholder behavior from the perspective of a theoretical market participant. All of our treaties contain claim limits, which are factored into the valuation model. The fair value depends on a number of factors, including interest rates, current account value, market volatility, expected annuitization rates and other policyholder behavior, and changes in policyholder mortality. The model and related assumptions are continuously re-evaluated by management and enhanced, as appropriate, based upon additional experience obtained related to policyholder behavior and availability of more timely market information, such as market conditions and demographics of in-force annuities. Due to the inherent uncertainties of the assumptions used in the valuation models to determine the fair value of these derivative products, actual experience may differ from the estimates reflected in our Consolidated Financial Statements, and the differences may be material.
The most significant policyholder behavior assumptions include lapse rates and annuitization rates using the guaranteed benefit (GMIB annuitization rate). Assumptions regarding lapse rates and GMIB annuitization rates differ by treaty but the underlying methodology to determine rates applied to each treaty is comparable. The assumptions regarding lapse and GMIB annuitization rates determined for each treaty are based on a dynamic calculation that uses several underlying factors.
A lapse rate is the percentage of in-force policies surrendered in a given calendar year. All else equal, as lapse rates increase, ultimate claim payments will decrease. The GMIB annuitization rate is the percentage of policies for which the policyholder will elect to annuitize using the guaranteed benefit provided under the GMIB. All else equal, as GMIB annuitization rates increase, ultimate claim payments will increase, subject to treaty claim limits.
Key factors affecting the lapse rate assumption include investment performance and policy duration. We generally assume that lapse rates increase with policy duration with a significant increase in rates after the end of the surrender charge period. As investment performance of underlying fund investments declines, and guarantees become more valuable, lapse rates are anticipated to decrease thereby increasing the expected value of claims on minimum guarantees and thus, benefit reserves and the incremental fair value liability.
Key factors affecting the GMIB annuitization rate include investment performance and the level of interest rates after the GMIB waiting period. As investment performance of underlying fund investments declines, the monthly income available to a policyholder who annuitizes their account value falls; this makes the GMIB more valuable.
 
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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 September 30, 2009, we recorded $65 million of realized losses for GMIB reinsurance, primarily due to a significant narrowing of A-rated credit spreads (A-rated credit spreads are a proxy for ACE’s own credit spreads and a narrowing implies a reduction of the discount rate of future cash flows), partially offset by a rising equity market. During the nine months ended September 30, 2009, we recorded $218 million of realized gains for GMIB reinsurance, primarily due to a rising equity market and increased interest rate levels, partially offset by narrowing A-rated credit spreads and the receipt of premium (which increases the fair value). This excludes realized losses of $144 million during the quarter ended September 30, 2009, and $300 million during the nine months ended September 30, 2009, on derivative 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 September 30, 2009, and 2008.
ACE Tempest Life Re employs a strategy to manage the financial market and policyholder behavior risks embedded in the reinsurance of variable annuity guarantees. Risk management begins with underwriting a prospective client and guarantee design, with particular focus on protecting ACE’s position from policyholder options that, because of anti-selective behavior, could adversely impact our obligation.
A second layer of risk management is the structure of the reinsurance contracts. All variable annuity guarantee reinsurance contracts include some form of annual or aggregate claim limit(s). The exact limits vary by contract but some examples of typical contract provisions include:
 
 	•	 	Annual claim limits, as a percentage of reinsured account or guaranteed value, for GMDBs and GMIBs; and	
 
 	•	 	Annual annuitization rate limits, as a percentage of annuitization eligible account or guaranteed value, for GMIBs.	
A third layer of risk management is the hedging strategy which is focused on mitigating long-term economic losses at a portfolio level. ACE Tempest Life Re owned financial market instruments as part of the hedging strategy with a fair value of $49 million and $280 million at September 30, 2009, and December 31, 2008, respectively. The instruments are substantially collateralized by our counterparties, on a daily basis.
We also limit the aggregate amount of variable annuity reinsurance guarantee risk we are willing to assume. The last substantive U.S. transaction was quoted in mid-2007 and the last transaction in Japan was quoted in late 2007. ACE Tempest Life Re did not quote on new or renewal variable annuity transactions in 2008 or the first nine months of 2009, and the aggregate number of policyholders is currently decreasing through policyholder withdrawals and deaths at a rate of 5-10 percent annually.
 
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Note that GMIB claims cannot occur for any reinsured policy until it has reached the end of its “waiting period”. The vast majority of policies we reinsure reach the end of their “waiting periods” in 2013 or later, as shown in the table below.

Year of first annuitization eligibility	  	Percent of
living account
values	 	
2009 and prior	  	1	% 	
2010	  	<1	% 	
2011	  	<1	% 	
2012	  	7	% 	
2013	  	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
September 30	  	Nine Months Ended
September 30	
 	  	    2009    	 	 	    2008    	  	    2009    	 	 	    2008    	
 	  	(in millions of U.S. dollars)	
Death Benefits (GMDB)	  				 			  				 			
Premium	  	$	28	 	 	$	31	  	$	79	 	 	$	95	
Less paid claims	  	 	34	 	 	 	16	  	 	116	 	 	 	32	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	
Net	  	$	(6	) 	 	$	15	  	$	(37	) 	 	$	63	

Living Benefits (Includes GMIB and GMAB)	  				 			  				 			
Premium	  	$	40	 	 	$	39	  	$	121	 	 	$	109	
Less paid claims	  	 	—  	  	 	 	—  	  	 	1	 	 	 	—  	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	
Net	  	$	40	 	 	$	39	  	$	120	 	 	$	109	

Total VA Guaranteed Benefits	  				 			  				 			
Premium	  	$	68	 	 	$	70	  	$	200	 	 	$	204	
Less paid claims	  	 	34	 	 	 	16	  	 	117	 	 	 	32	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	
Net	  	$	34	 	 	$	54	  	$	83	 	 	$	172	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	
The amounts represent accrued past premium received and claims paid, split by benefit type.
Death Benefits (GMDB)
For premiums and claims from variable annuity contracts reinsuring GMDBs, at current market levels we expect approximately $135 million of claims and $103 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 $152 million of premium on living benefits over the next 12 months.
 
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Capital
As of September 30, 2009, the capital required to support the variable annuity guaranty business was approximately $460 million. All else equal, any additional capital required as a result of a falling equity market would be approximately offset by the increase in the fair value of currently held hedge assets.
Collateral
In order for its U.S.-domiciled clients to obtain statutory reserve credit, ACE Tempest Life Re holds collateral on behalf of its clients in the form of qualified assets in trust or letters of credit, equal to their ceded statutory reserves. At December 31, 2009, a new statutory reserve guideline adopted by the National Association of Insurance Commissioners is scheduled to take effect in the U.S. called Actuarial Guideline 43 that governs statutory reserve calculation for variable annuity guarantees. In many cases this will impact the 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 trustable 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 60 percent of the GMDB guaranteed value has an annual claim limit expressed as two percent of the total account value reinsured. The remainder of the GMDB guaranteed value is covered under treaties with limits calculated on other bases – either annual, aggregate, or at an individual policy level. The majority of this remainder has an annual limit calculated as a percentage of the total guaranteed value reinsured, with the percentage varying by contract from 0.22 percent to 1.8 percent.
Consolidated Operating Results – Three and Nine Months Ended September 30, 2009 and 2008
Our consolidated operating results include the results of Combined Insurance from April 1, 2008.

 	  	Three Months Ended
September 30	 	 	Nine Months Ended
September 30	 	 	% Change	 	
 	  	    2009    	 	 	    2008    	 	 	    2009    	 	 	    2008    	 	 	Q-09 vs.
Q-08	 	 	YTD-09 vs.
YTD-08	 	
 	  	(in millions of U.S. dollars)	 	 	 	 	 	 	 	
Net premiums written	  	$	3,155	 	 	$	3,276	 	 	$	9,994	 	 	$	10,028	 	 	(4	)% 	 	0	% 	
Net premiums earned	  	 	3,393	 	 	 	3,609	 	 	 	9,853	 	 	 	9,977	 	 	(6	)% 	 	(1	)% 	
Net investment income	  	 	511	 	 	 	520	 	 	 	1,519	 	 	 	1,541	 	 	(2	)% 	 	(1	)% 	
Net realized gains (losses)	  	 	(223	) 	 	 	(510	) 	 	 	(569	) 	 	 	(989	) 	 	56	% 	 	42	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total revenues	  	$	3,681	 	 	$	3,619	 	 	$	10,803	 	 	$	10,529	 	 	2	% 	 	3	% 	

Losses and loss expenses	  	 	1,885	 	 	 	2,369	 	 	 	5,522	 	 	 	5,843	 	 	(20	)% 	 	(5	)% 	
Policy benefits	  	 	79	 	 	 	91	 	 	 	256	 	 	 	243	 	 	(13	)% 	 	5	% 	
Policy acquisition costs	  	 	567	 	 	 	581	 	 	 	1,571	 	 	 	1,618	 	 	(2	)% 	 	(3	)% 	
Administrative expenses	  	 	451	 	 	 	457	 	 	 	1,325	 	 	 	1,293	 	 	(1	)% 	 	2	% 	
Interest expense	  	 	60	 	 	 	68	 	 	 	169	 	 	 	176	 	 	(12	)% 	 	(4	)% 	
Other (income) expense	  	 	51	 	 	 	6	 	 	 	44	 	 	 	(104	) 	 	750	% 	 	NM	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total expenses	  	$	3,093	 	 	$	3,572	 	 	$	8,887	 	 	$	9,069	 	 	(13	)% 	 	(2	)% 	

Income before income tax	  	 	588	 	 	 	47	 	 	 	1,916	 	 	 	1,460	 	 	1151	% 	 	31	% 	
Income tax expense (benefit)	  	 	94	 	 	 	(7	) 	 	 	320	 	 	 	283	 	 	NM	  	 	13	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	494	 	 	$	54	 	 	$	1,596	 	 	$	1,177	 	 	815	% 	 	36	% 	

NM – not meaningful
 
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Net premiums written, which reflect the premiums we retain after purchasing reinsurance protection, decreased in the quarter ended September 30, 2009, compared with the prior year quarter, primarily due to declines in crop and P&C business at our U.S.-based wholesale division and the impact of unfavorable foreign exchange in our international retail operations. Net premiums written in the nine months ended September 30, 2009, were stable as the unfavorable foreign exchange impact and lower production in wholesale P&C, the retail national account and property units, and personal lines was offset by increased retail specialty casualty production, the inclusion of Combined Insurance for the full period (the prior year period included the results of Combined Insurance from April 1, 2008) and the annual first quarter crop settlement. The inclusion of Combined Insurance for the full period added approximately three percentage points to our net premiums written for the nine months ended September 30, 2009. The crop settlement added two percentage points.
The following table provides a consolidated breakdown of net premiums earned by line of business for the periods indicated.

 	  	Three Months Ended
September 30	  	Nine Months Ended
September 30	  	% Change	 	
	  	    2009    	  	    2008    	  	    2009    	  	    2008    	  	Q-09 vs.
Q-08	 	 	YTD-09 vs.
YTD-08	 	
 	  	(in millions of U.S. dollars)	  	 	 	 	 	 	
Property and all other	  	$	1,081	  	$	1,190	  	$	3,062	  	$	3,030	  	(9	)% 	 	1	% 	
Casualty	  	 	1,383	  	 	1,463	  	 	4,122	  	 	4,435	  	(5	)% 	 	(7	)% 	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	
Subtotal	  	 	2,464	  	 	2,653	  	 	7,184	  	 	7,465	  	(7	)% 	 	(4	)% 	
Personal accident (A&H)	  	 	793	  	 	845	  	 	2,279	  	 	2,181	  	(6	)% 	 	4	% 	
Life	  	 	136	  	 	111	  	 	390	  	 	331	  	23	% 	 	18	% 	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	
Net premiums earned	  	$	3,393	  	$	3,609	  	$	9,853	  	$	9,977	  	(6	)% 	 	(1	)% 	

													
 	  	Three Months Ended
September 30	 	 	Nine Months Ended
September 30	 	
 	  	    2009    
% of total	 	 	    2008    
% of total	 	 	    2009    
% of total	 	 	    2008    
% of total	 	
 	  			 			 			 			
Property and all other	  	32	% 	 	33	% 	 	31	% 	 	30	% 	
Casualty	  	41	% 	 	41	% 	 	42	% 	 	45	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Subtotal	  	73	% 	 	74	% 	 	73	% 	 	75	% 	
Personal accident (A&H)	  	23	% 	 	23	% 	 	23	% 	 	22	% 	
Life	  	4	% 	 	3	% 	 	4	% 	 	3	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	  	100	% 	 	100	% 	 	100	% 	 	100	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Net premiums earned reflect the portion of net premiums written that were recorded as revenues for the period as the exposure period expires. The decrease in net premiums earned for the quarter ended September 30, 2009, compared with the prior year quarter, was primarily related to unfavorable foreign exchange impact in our international retail operations as well as the decrease in crop and P&C business at our U.S.-based wholesale division, partially offset by the growth of retail specialty casualty business. Net premiums earned for the nine months ended September 30, 2009, were stable as declines in wholesale P&C, were offset by growth in assumed loss portfolio business, crop business, and retail specialty casualty and included Combined Insurance’s results for the full period. Excluding Combined Insurance, net premiums earned decreased four percentage points in the nine months ended September 30, 2009.
Net investment income decreased in the three and nine months ended September 30, 2009, compared with the prior year periods, primarily due to lower yields on new investments, partially offset by an increase in average invested assets. Net investment income was also adversely impacted by unfavorable foreign exchange rate movements. Refer to “Net Investment Income” and “Investments”.
 
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In evaluating our segments excluding Life, we use the combined ratio, the loss and loss expense ratio, the policy acquisition cost ratio, and the administrative expense ratio. We calculate these ratios by dividing the respective expense amounts by net premiums earned. We do not calculate these ratios for the Life segment as we do not use these measures to monitor or manage that segment. The combined ratio is determined by adding the loss and loss expense ratio, the policy acquisition cost ratio, and the administrative expense ratio. A combined ratio under 100 percent indicates underwriting income and a combined ratio exceeding 100 percent indicates underwriting loss.
The following table shows our consolidated loss and loss expense ratio, policy acquisition ratio, administrative expense ratio, and combined ratio, excluding Life, for the periods indicated.

 	  	Three Months Ended
September 30	 	 	Nine Months Ended
September 30	 	
 	  	    2009    	 	 	    2008    	 	 	    2009    	 	 	    2008    	 	
Loss and loss expense ratio	  	58.2	% 	 	69.5	% 	 	58.7	% 	 	61.5	% 	
Policy acquisition cost ratio	  	16.7	% 	 	16.3	% 	 	16.0	% 	 	16.3	% 	
Administrative expense ratio	  	13.2	% 	 	12.1	% 	 	13.1	% 	 	12.6	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Combined ratio	  	88.1	% 	 	97.9	% 	 	87.8	% 	 	90.4	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
The following table shows the impact of catastrophe losses, prior period development, and other significant events on our consolidated loss and loss expense ratio for the periods indicated.

 	  	Three Months Ended
September 30	 	 	Nine Months Ended
September 30	 	
 	  	    2009    	 	 	    2008    	 	 	    2009    	 	 	    2008    	 	
Loss and loss expense ratio, as reported	  	58.2	% 	 	69.5	% 	 	58.7	% 	 	61.5	% 	
Catastrophe losses	  	(1.5	)% 	 	(12.7	)% 	 	(1.3	)% 	 	(5.5	)% 	
Prior period development excluding crop/hail results	  	6.5	% 	 	8.5	% 	 	4.8	% 	 	4.9	% 	
Prior period development crop/hail related	  	0.2	% 	 	0.0	% 	 	0.1	% 	 	1.2	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Loss and loss expense ratio, adjusted	  	63.4	% 	 	65.3	% 	 	62.3	% 	 	62.1	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
We recorded $45 million and $114 million in net catastrophe losses in the three and nine months ended September 30, 2009, respectively, compared with $411 million and $500 million in the prior year periods, respectively. The catastrophe losses for the quarter ended September 30, 2009, were primarily related to an earthquake in Asia and floods in Europe. Catastrophe losses for the nine months ended September 30, 2009, also included several weather-related events in the U.S. and a European windstorm. For the three and nine months ended September 30, 2008, our catastrophe losses were primarily related to Hurricanes Gustav and Ike and floods in the U.S. The decrease in the adjusted loss and loss expense ratio for the quarter ended September 30, 2009, was primarily related to more favorable current accident year experience in our international operations and changes in business mix in our reinsurance business.
We experienced $203 million and $429 million of net favorable prior period development in the three and nine months ended September 30, 2009, respectively. This compares with net favorable prior period development of $277 million and $562 million in the three and nine months ended September 30, 2008, respectively. The favorable prior period development was the net result of several underlying favorable and adverse movements. 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. With respect to our crop business, we regularly receive reports from our 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 with the quarter ended September 30, 2009, prior period development for our crop business includes adjustments to both crop losses and loss expenses, and the related crop profit share commission. Refer to “Prior Period Development” for more information.
 
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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 September 30, 2009, compared with the prior year quarter, primarily due to higher commission rates on Combined Insurance’s international A&H business and lower inward reinstatement premiums in our reinsurance business; reinstatement premiums generate minimal acquisition costs. Our administrative expenses declined in the quarter ended September 30, 2009, compared with the prior year quarter, primarily due to improvements in our international retail division. For the nine months ended September 30, 2009, our administrative expenses increased primarily due to the inclusion of administrative expenses related to Combined Insurance for the full period.
Our effective income tax rate, which we calculate as income tax expense divided by income before income tax, is dependent upon the mix of earnings from different jurisdictions with various tax rates. A change in the geographic mix of earnings would change the effective income tax rate. Our effective tax rate was 16 percent and 17 percent in the three and nine months ended September 30, 2009, respectively. This compares with an income tax benefit in the prior year quarter and an effective income tax rate of 19 percent in the prior year period. The income tax benefit in the prior year quarter was driven by catastrophe losses which were incurred primarily in higher tax paying jurisdictions, as well as, large realized losses on investment and derivatives.
Prior Period Development
The favorable prior period development of $203 million and $277 million during the quarters ended September 30, 2009 and 2008, respectively, was the net result of several underlying favorable and adverse movements. 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. With respect to our crop business, we regularly receive reports from our 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 with the quarter ended September 30, 2009, prior period development for our 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 by claim-tail attribute are discussed in more detail. Long-tail lines include lines such as workers’ compensation, general liability, and professional liability, while short-tail lines include lines such as most property lines, energy, personal accident, aviation, and marine. The following table summarizes prior period development, (favorable) and adverse, by segment and claim-tail attribute for the periods indicated.

Three Months Ended September 30	  	Long-tail	 	 	Short-tail	 	 	Total	 	 	% of net
unpaid
reserves*	
 	  	  (in millions of U.S. dollars, except for percentages)  	
2009	  			
Insurance – North American	  	$	(51	) 	 	$	6	 	 	$	(45	) 	 	0.3%	
Insurance – Overseas General	  	 	(107	) 	 	 	(12	) 	 	 	(119	) 	 	1.8%	
Global Reinsurance	  	 	(39	) 	 	 	—  	  	 	 	(39	) 	 	1.6%	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	(197	) 	 	$	(6	) 	 	$	(203	) 	 	0.8%	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	
2008	  				 				 				 		
Insurance – North American	  	$	(73	) 	 	$	(30	) 	 	$	(103	) 	 	0.7%	
Insurance – Overseas General	  	 	(69	) 	 	 	(52	) 	 	 	(121	) 	 	1.7%	
Global Reinsurance **	  	 	(11	) 	 	 	(42	) 	 	 	(53	) 	 	2.0%	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	(153	) 	 	$	(124	) 	 	$	(277	) 	 	1.1%	

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Nine Months Ended September 30	  	Long-tail	 	 	Short-tail	 	 	Total	 	 	% of net
unpaid
reserves*	
 	  	  (in millions of U.S. dollars, except for percentages)  	
2009	  			
Insurance – North American	  	$	(88	) 	 	$	(41	) 	 	$	(129	) 	 	0.8%	
Insurance – Overseas General	  	 	(110	) 	 	 	(59	) 	 	 	(169	) 	 	2.8%	
Global Reinsurance	  	 	(92	) 	 	 	(39	) 	 	 	(131	) 	 	5.2%	
Life	  	 	—  	  	 	 	1	 	 	 	1	 	 	0.3%	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	(290	) 	 	$	(138	) 	 	$	(428	) 	 	1.8%	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	
2008	  				 				 				 		
Insurance – North American	  	$	(60	) 	 	$	(189	) 	 	$	(249	) 	 	1.7%	
Insurance – Overseas General	  	 	(111	) 	 	 	(108	) 	 	 	(219	) 	 	3.4%	
Global Reinsurance **	  	 	(15	) 	 	 	(79	) 	 	 	(94	) 	 	3.5%	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	(186	) 	 	$	(376	) 	 	$	(562	) 	 	2.4%	

*	Calculated based on the segment beginning of period net unpaid loss and loss expenses reserves.	
**	Global Reinsurance: $3 million favorable prior period development on workers’ compensation catastrophe was reclassified from short-tail to long-tail.	
Insurance – North American
Insurance – North American experienced $45 million of net favorable prior period development in the quarter ended September 30, 2009, compared with net favorable prior period development of $103 million in the prior year quarter. The net prior period development for the quarter ended September 30, 2009, was the net result of underlying adverse and favorable movements, driven by the following principal changes:
 
 	•	 	Net favorable development of $51 million on long-tail business including:	
 
 	•	 	Favorable development of $16 million in our foreign casualty product line primarily impacting the 2006 accident year. Reported incurred loss activity was favorable relative to the expected activity implied in our prior review, particularly for workers’ compensation and general liability. This coverage typically includes high volume, low average premium business covering overseas exposures with shorter development patterns than typically found for larger commercial risks.	
 
 	•	 	Favorable development of $15 million in our medical risk business unit with the favorable activity concentrated in the 2004 and 2005 report years for hospital professional liability business. Our portfolio includes both primary and excess facilities business written primarily on a claims-made basis. Loss activity in the most recent calendar year for this business was lower than expected. In addition, all open claims for the 2005 and prior report years were reviewed in the quarter ended September 30, 2009, and updated using the most recent available information. This review led to a revision in our estimate of ultimate losses for the portfolio.	
 
 	•	 	Favorable development of $33 million in our ACE Financial Solutions business unit concentrated in policies issued in the 2004-2006 years. This favorable development was a function of a continuation of lower than expected loss development, first observed in 2008, on a small number of large risks with predominantly workers’ compensation exposure.	
 
 	•	 	Favorable development of $10 million for workers’ compensation captive business primarily for the 1999 and prior accident years. This correction resulted from a reserve reconciliation completed in the quarter ended September 30, 2009.	
 
 	•	 	Adverse development of $19 million on participations in run-off assumed reinsurance pools impacting accident years prior to 1999. A recent audit found that assumed losses payable had not been registered and this caused an understatement of the required reserves for this portfolio in prior quarters.	
 
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 	•	 	Adverse development of $8 million on run-off environmental losses for accident years prior to 1999 in the Brandywine business unit due to a single large claim where a recent court decision required the return of a contribution previously received from a third party.	
 
 	•	 	Net adverse development of $6 million on short-tail business including:	
 
 	•	 	Adverse development of $27 million in our energy and global property business lines primarily affecting the 2008 accident year. Higher than expected loss activity on a few large complex claims led to the increase in our estimate of ultimate losses in the quarter ended September 30, 2009.	
 
 	•	 	Adverse development of $10 million in our commercial marine lines affecting the 2008 accident year. A claims review of the 2008 hurricane losses performed in the quarter ended September 30, 2009 led to increases in loss estimates for several claims.	
 
 	•	 	Adverse development of $6 million in our farm line primarily associated with the 2008 accident year. Paid and reported loss activity for this product line was higher than anticipated in the current calendar year.	
 
 	•	 	Favorable development of $17 million in our Canadian accident and health business affecting the 2008 and prior accident years. This resulted from a reconciliation of statutory and GAAP ledger balances completed in the quarter ended September 30, 2009.	
 
 	•	 	Favorable development of $13 million in our inland marine product line primarily associated with the 2008 accident year. Paid and reported loss activity for this product line was lower than anticipated in the current calendar year.	
 
 	•	 	Favorable development of $7 million in our crop/hail business relating to the recording in the quarter ended September 30, 2009, of the most recent bordereau for the 2008 crop year.	
The net prior period development for the quarter ended September 30, 2008, was the net result of underlying adverse and favorable movements, driven by the following principal changes:
 
 	•	 	Net favorable development of $73 million on long-tail business including:	
 
 	•	 	Net adverse development totaling less than $1 million in our national accounts portfolio but comprised of several underlying parts, two of which are described here. First, $21 million of adverse development relating to 2004 and prior accident years as a result of a reconciliation review of deductible recoveries processed against workers’ compensation claims on high deductible contracts, primarily those with aggregate limits. The change was driven by identification of contracts where deductible recoveries continued to be processed despite the presence of an aggregate limit on the insured’s exposure. Second, favorable development of $13 million relating to the 1999-2002 accident years primarily on a block of run-off programs comprising general liability, auto liability, and workers’ compensation product coverages. The favorable development was a result of lower than expected paid and case incurred development observed in the most recent reserve review which resulted in lower selected ultimate loss projections.	
 
 	•	 	Adverse development of $29 million on our portfolio of Defense Base Acts workers’ compensation coverage (covers U.S. government employees overseas). We experienced higher than expected incurred loss development since the last reserve study completed in 2007, concentrated in the 2006 and 2007 accident years. The majority of the development was related to increases in case reserves on known claims for these accident years, and recorded in the quarter ended September 30, 2008. These increases were judged to be more than claim acceleration and resulted in significant increases in the 2006 and 2007 accident years ultimate loss projections given the immaturity of the impacted accident years and long-tail nature of the portfolio.	
 
 	•	 	Favorable development of $46 million on our medical risk business, primarily our hospital professional liability portfolio for the 2004 and 2005 accident years. Coverage is provided on a claims-made basis and both paid and case incurred loss activity since our last review completed in	
 
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 	2007, have been favorable relative to expected. As these accident periods matured, we gradually increased the weight applied to experience-based methods, including the Bornhuetter-Ferguson method, and placing less weight on our initial expected loss ratio method.	
 
 	•	 	Favorable development of $51 million on our long-tail exposures in our retail P&C operations, principally arising in the 2005 accident year on excess casualty, umbrella, and D&O product lines. Actual paid and case incurred loss activity has been lower than expected since our prior analysis, completed in 2007. In addition, we have increased the weighting given to experience-based methods from the initial expected loss ratio method as these accident years mature.	
 
 	•	 	Net favorable development of $30 million on short-tail business including:	
 
 	•	 	Favorable development of $29 million on property business in our retail division, primarily associated with the 2007 accident year and a portfolio of diverse global exposures written on an excess basis. Reported loss activity during the first half of 2008 was lower than anticipated in our prior review.	
 
 	•	 	Favorable development of $6 million in our retail P&C operations concentrated in the 2006 and 2007 accident years, covering multiple product lines including property and auto physical damage. Reported loss activity on these product lines was lower than expected.	
Insurance – Overseas General
Insurance – Overseas General experienced $119 million of net favorable prior period development in the quarter ended September 30, 2009, compared with net favorable prior period development of $121 million in the prior year quarter. The net prior period development for the quarter ended September 30, 2009, was the net result of several underlying favorable and adverse movements, driven by the following principal changes:
 
 	•	 	Net favorable development of $107 million on long-tail business including:	
 
 	•	 	Favorable development of $190 million on the 2005 and prior accident years in casualty (primary and excess) and financial lines. The detailed reviews completed in the quarter ended September 30, 2009, noted improvements in the experience relative to the expectations of the prior detailed analyses, including case-specific savings on several significant 2001-2003 bankers’ professional indemnity claims. Due to the greater level of maturity of these years, increasing weight has been given to the emerged loss experience.	
 
 	•	 	Adverse development of $60 million relating to the 2008 accident year for financial lines in connection with exposure to recent financial frauds. This amount was based on a claims review in the quarter ended September 30, 2009, of notifications and potential exposure. During this review, we obtained assessments from external legal counsel of the governing law on each potential claim and assessed all other claimant information, to arrive at the provision for each case.	
 
 	•	 	Adverse development of $10 million for subprime claims in the 2008 accident year for financial lines. This increase reflects an updated claims review in the quarter ended September 30, 2009, of all notified claims.	
 
 	•	 	Adverse development of $10 million driven predominantly by a recent court ruling in a major Continental European country on “quality of life” damages that is expected to increase casualty claim severities. The increases were focused in the 2006-2008 accident years.	
 
 	•	 	Net favorable development of $12 million on short-tail business including:	
 
 	•	 	Favorable development of $13 million on aviation. In combination with the detailed review in the quarter on all of aviation, case-specific reductions on products liability claims, primarily in the 2005 and prior accident years, led to a $19 million release, while adverse airline liability experience on the 2006-2008 accident years led to a $6 million strengthening.	
 
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 	•	 	Favorable development of $5 million on A&H lines. A review of development patterns conducted in the quarter ended September 30, 2009, coupled with the recent favorable loss activity led to reserve releases for the 2006 and 2007 accident years.	
 
 	•	 	Favorable development of $3 million on political risk. For the 2006 and prior accident years, there was favorable development of $11 million in connection with a potential settlement on South American exposure. On the other hand, there was adverse movement of $8 million on the 2007 and 2008 accident years in connection with a number of reported structured trade credit claims in excess of expectations, along with the review of all other activity.	
 
 	•	 	Adverse development of $6 million on property and energy lines in the 2007 and 2008 accident years. A review of the activity in the quarter ended September 30, 2009, and applicable reinsurance recoverables led to a strengthening of reserves related to these years.	
The net prior period development for the quarter ended September 30, 2008, was the net result of underlying adverse and favorable movements, driven by the following principal changes:
 
 	•	 	Net favorable development of $69 million on long-tail business including:	
 
 	•	 	Favorable development of $104 million from the 2004 and prior accident years in our international retail financial lines and casualty (primary and excess) portfolios. The financial lines and primary casualty releases were mainly in the 2004 and prior accident years. The excess casualty changes were primarily in the 2001 and prior accident years. Actual paid and case incurred loss activity was lower than expected since our prior analysis. In addition, we increased the weighting given to experience-based methods from the initial expected loss ratio method as these accident periods matured.	
 
 	•	 	Adverse development of $34 million primarily on the 2007 accident year in international retail financial lines and casualty portfolios following heavier than expected loss emergence. Actual major claim notices received in the quarter ended September 30, 2009, caused loss estimates on U.K. excess casualty and Continental Europe financial lines to be increased. Loss projections for certain primary casualty portfolios increased following adverse attritional claim activity (i.e., excluding catastrophes and large losses) and a large loss.	
 
 	•	 	Net favorable development of $52 million on short-tail business including:	
 
 	•	 	Favorable development in ACE Global Markets aviation of $18 million, including a release on accident years 2000-2002 of $26 million following claim reporting experience that was better than expected and a detailed claims review of actual reported claims. In contrast, reserves for more recent accident years were strengthened by $8 million, primarily from adverse claim activity in the airport liability book.	
 
 	•	 	Net favorable development of $15 million in property and A&H lines in our international retail operations. This was principally comprised of $10 million of favorable development on the 2003-2007 accident years, predominantly from a run-off block of excess property business. The block is reviewed annually and favorable emergence on individual case estimates since the last review (completed in 2007) led to the release. The remaining $5 million favorable development arose on A&H business following favorable loss emergence.	
 
 	•	 	Favorable development on specialty lines in our international retail operations of $5 million. This was mainly from the Continental Europe marine book primarily in the 2002-2007 accident years. This line indicated lower projections due to actual losses being less than expected losses in the quarter ended September 30, 2008. Since this short-tail line predominantly relies on experience-based methods, estimates were reduced for the quarter ended September 30, 2008.	
 
 	•	 	Favorable development of $20 million for the 2004 and 2005 hurricane losses in ACE Global Markets’ property portfolio following the completion in the quarter ended September 30, 2008, of a detailed review by the claims department of each reported case.	
 
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 	•	 	Adverse development of $12 million in the quarter ended September 30, 2008, due to several major ACE Global Markets energy losses primarily for the 2006 and 2007 accident years. We were notified of one of these losses in the quarter ended September 30, 2008. The remainder of the increase arose on previously notified claims that were subject to a detailed claims review during the quarter ended September 30, 2008, which considered individual event circumstances and their associated coverages.	
 
 	•	 	Favorable development in the ACE Global Markets marine book of $5 million primarily in the 2005 and 2006 accident years as a result of greater credibility to projections based on reported claims.	
Global Reinsurance
Global Reinsurance experienced $39 million of net favorable prior period development in the quarter ended September 30, 2009, compared with $53 million of net favorable prior period development in the prior year quarter. The net prior period development for the quarter ended September 30, 2009, was the net result of several underlying favorable and adverse movements, driven by the following principal changes:
 
 	•	 	Net favorable development of $39 million on long-tail business including:	
 
 	•	 	Favorable development of $24 million in the medical malpractice lines of business principally in treaty years 2004-2006 and favorable development of $15 million in the professional liability/D&O line of business primarily in treaty years 2004-2006. These developments were the result of reserve studies on these lines of business completed during the quarter ended September 30, 2009, which revealed that experience has been relatively favorable compared with assumptions.	
The net prior period development for the quarter ended September 30, 2008, was the net result of underlying adverse and favorable movements, driven by the following principal changes:
 
 	•	 	Net favorable development of $11 million on long-tail business across many lines and years including:	
 
 	•	 	Favorable development of $11 million principally from treaty years 2003 and 2004 across a number of portfolios (principally professional liability, D&O, casualty, and medical malpractice). The lower loss estimates arose from the combined impact of continued favorable paid and case incurred loss trends and increased weighting given to experience-based methods away from expectations as these treaty periods mature.	
 
 	•	 	Net favorable development of $42 million on short-tail business across a number of lines and years including:	
 
 	•	 	Favorable prior period development of $16 million on treaty years 2006 and prior across several portfolios. The development arose principally on property and the credit and surety line following completion of reserve reviews in the quarter ended September 30, 2008. The property portfolio benefited from better than expected claim emergence, while the release in the credit & surety line followed a detailed review of claims and associated recoveries, together with favorable loss emergence.	
 
 	•	 	Favorable prior period development of $14 million on treaty years 2006 and prior across several portfolios, principally property, marine, and energy. This included a $9 million property release on U.S. and international property exposures and reflected lower than anticipated loss emergence.	
 
 	•	 	Net favorable development of $12 million on the 2002-2006 accident years in our property catastrophe portfolio of claims from prior catastrophic events. The release followed a review of each cedant’s coverage terms and reflected lower reported claim development than previously anticipated.	
 
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Life
Life experienced no net prior period development in the quarter ended September 30, 2009, and in the prior year quarter.
Segment Operating Results – Three and Nine Months Ended September 30, 2009 and 2008
The discussions that follow include tables that show our segment operating results for the three and nine months ended September 30, 2009 and 2008.
We operate through the following business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life. As discussed previously, we completed the acquisition of all of the outstanding shares of Combined Insurance and certain of its subsidiaries on April 1, 2008. As such, our segment operating results include the results of the acquired Combined Insurance business from April 1, 2008. Results from Combined Insurance’s North American operations are included in ACE’s Life segment as the products are similar to those in our existing life operations. The results from Combined Insurance’s international operations are included in ACE’s Insurance – Overseas General segment as the products have similar economic characteristics to the existing products in this segment and are distributed outside of the North American insurance markets. For more information on each of our segments refer to “Segment Information” in our 2008 Form 10-K.
Insurance – North American
The Insurance – North American segment comprises our operations in the U.S., Canada, and Bermuda. This segment includes our retail division ACE USA (including ACE Canada), ACE Westchester which is our wholesale division in the U.S., ACE Bermuda, ACE Private Risk Services, and various run-off operations, including Brandywine Holdings Corporation (Brandywine Holdings).

 	  	Three Months Ended
September 30	 	 	Nine Months Ended
September 30	 	 	% Change	 	
 	  	    2009    	 	 	    2008    	 	 	    2009    	 	 	    2008    	 	 	Q-09 vs.
Q-08	 	 	YTD-09 vs.
YTD-08	 	
 	  	(in millions of U.S. dollars)	 	 	 	 	 	 	 	
							
Net premiums written	  	$	1,374	 	 	$	1,461	 	 	$	4,220	 	 	$	4,332	 	 	(6	)% 	 	(3	)% 	
Net premiums earned	  	 	1,467	 	 	 	1,583	 	 	 	4,319	 	 	 	4,302	 	 	(7	)% 	 	0	% 	
Losses and loss expenses	  	 	1,053	 	 	 	1,356	 	 	 	3,054	 	 	 	3,187	 	 	(22	)% 	 	(4	)% 	
Policy acquisition costs	  	 	142	 	 	 	160	 	 	 	394	 	 	 	450	 	 	(11	)% 	 	(12	)% 	
Administrative expenses	  	 	146	 	 	 	132	 	 	 	433	 	 	 	398	 	 	11	% 	 	9	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Underwriting income (loss)	  	$	126	 	 	$	(65	) 	 	$	438	 	 	$	267	 	 	NM	  	 	64	% 	

Net investment income	  	 	278	 	 	 	278	 	 	 	816	 	 	 	829	 	 	0	% 	 	(2	)% 	
Net realized gains (losses)	  	 	(25	) 	 	 	(284	) 	 	 	(242	) 	 	 	(450	) 	 	91	% 	 	46	% 	
Other (income) expense	  	 	4	 	 	 	3	 	 	 	9	 	 	 	6	 	 	33	% 	 	50	% 	
Income tax expense (benefit)	  	 	47	 	 	 	(7	) 	 	 	219	 	 	 	222	 	 	NM	  	 	(1	)% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	  	$	328	 	 	$	(67	) 	 	$	784	 	 	$	418	 	 	NM	  	 	88	% 	

Loss and loss expense ratio	  	 	71.7	% 	 	 	85.6	% 	 	 	70.7	% 	 	 	74.1	% 	 			 			
Policy acquisition cost ratio	  	 	9.7	% 	 	 	10.1	% 	 	 	9.1	% 	 	 	10.4	% 	 			 			
Administrative expense ratio	  	 	9.9	% 	 	 	8.4	% 	 	 	10.0	% 	 	 	9.3	% 	 			 			
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 			 			
Combined ratio	  	 	91.3	% 	 	 	104.1	% 	 	 	89.8	% 	 	 	93.8	% 	 			 			
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 			 			
Net premiums written for the Insurance – North American segment decreased in the quarter ended September 30, 2009, compared with the prior year quarter. This decrease was primarily related to declines in our crop business, which was impacted by lower commodity prices, as well as lower wholesale P&C production. Our U.S.-based
 
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retail business reported continued growth in specialty casualty and professional lines offset by declines in the national accounts and property divisions, as well as unfavorable foreign exchange impact from our Canadian operations. The retail business’ growth in specialty casualty and professional lines was driven by improved market conditions, several new product offerings, and successful initiatives in the small workers’ compensation and A&H units. Our high net worth business, ACE Private Risk Services, reported growth in net premiums written for the quarter ended September 30, 2009, on the strength of new business in homeowner’s, inland marine, and umbrella coverages. Insurance – North American reported a decrease in net premiums written for the nine months ended September 30, 2009, primarily as a result of declines in wholesale professional, casualty and property lines, as well as lower retail property and national accounts production, and unfavorable foreign exchange impact from our Canadian operations. Partially offsetting these declines was growth in our specialty casualty, assumed loss portfolio and crop businesses. In addition, the first quarter of 2008, included a one-time portfolio assumption of $76 million in net premiums written as part of the acquisition of our personal lines business.
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
September 30	  	Nine Months Ended
September 30	  	% Change	 	
 	  	    2009    	  	    2008    	  	    2009    	  	    2008    	  	Q-09 vs.
Q-08	 	 	YTD-09 vs.
YTD-08	 	
 	  	(in millions of U.S. dollars)	  	 	 	 	 	 	
							
Property and all other	  	$	496	  	$	551	  	$	1,361	  	$	1,214	  	(10	)% 	 	12	% 	
Casualty	  	 	904	  	 	969	  	 	2,766	  	 	2,903	  	(7	)% 	 	(5	)% 	
Personal accident (A&H)	  	 	67	  	 	63	  	 	192	  	 	185	  	6	% 	 	4	% 	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	
Net premiums earned	  	$	1,467	  	$	1,583	  	$	4,319	  	$	4,302	  	(7	)% 	 	0	% 	

													
 	  	Three Months Ended
September 30	 	 	Nine Months Ended
September 30	 	
 	  	    2009    
% of Total	 	 	    2008    
% of Total	 	 	    2009    
% of Total	 	 	    2008    
% of Total	 	
Property and all other	  	34	% 	 	35	% 	 	32	% 	 	28	% 	
Casualty	  	62	% 	 	61	% 	 	64	% 	 	68	% 	
Personal accident (A&H)	  	4	% 	 	4	% 	 	4	% 	 	4	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	  	100	% 	 	100	% 	 	100	% 	 	100	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Insurance – North American’s decrease in net premiums earned for the quarter ended September 30, 2009, compared with the prior year quarter, was primarily due to the decline in crop business and lower earnings on wholesale casualty and professional lines. Our retail business experienced lower earnings on national accounts and property business, as well as unfavorable foreign exchange impact from the Canadian operations, partially offset by increased earnings from specialty casualty products. The results for the nine months ended September 30, 2009, benefited from the annual first quarter crop settlement, growth in retail specialty casualty and professional lines, as well as higher assumed loss portfolio business, partially offset by declines in wholesale P&C and retail property, and the unfavorable foreign exchange impact in our Canadian operations.
 
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The following table shows the impact of catastrophe losses and prior period development on our loss and loss expense ratio for the periods indicated.

 	  	Three Months Ended
September 30	 	 	Nine Months Ended
September 30	 	
 	  	    2009    	 	 	    2008    	 	 	    2009    	 	 	    2008    	 	
Loss and loss expense ratio, as reported	  	71.7	% 	 	85.6	% 	 	70.7	% 	 	74.1	% 	
Catastrophe losses	  	(1.6	)% 	 	(17.0	)% 	 	(1.1	)% 	 	(7.1	)% 	
Prior period development excluding crop/hail results	  	2.5	% 	 	6.5	% 	 	2.7	% 	 	3.0	% 	
Prior period crop/hail related	  	0.5	% 	 	—	% 	 	0.3	% 	 	2.7	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Loss and loss expense ratio, adjusted	  	73.1	% 	 	75.1	% 	 	72.6	% 	 	72.7	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Insurance – North American’s net catastrophe losses were $24 million and $48 million in the three and nine months ended September 30, 2009, compared with $258 million and $295 million in the prior year periods. The catastrophe losses for the quarter ended September 30, 2009, were primarily related to an earthquake in Asia. Catastrophe losses for the nine months ended September 30, 2009, also included several weather-related events in the U.S. Catastrophe losses for the prior year periods were primarily related to Hurricanes Gustav and Ike. Insurance – North American experienced net favorable prior period development of $45 million and $129 million in the three and nine months ended September 30, 2009. This compares with net favorable prior period development of $103 million and $249 million in the prior year periods. Refer to “Prior Period Development” for more information. The decrease in our loss and loss expense ratio, adjusted, for the quarter ended September 30, 2009, relates primarily to favorable changes in business mix in our wholesale division, as well as improved current accident year experience in our property and high net worth businesses.
Insurance – North American’s policy acquisition cost ratio decreased in the three and nine months ended September 30, 2009, compared with the prior year periods, primarily due to higher ceding commissions in our retail division partially offset by higher commission on crop business in the current quarter. Additionally, for the nine months ended September 30, 2009, our policy acquisition cost ratio benefited from more favorable final crop year settlement of profit share commissions, compared with the prior year period. Insurance – North American’s administrative expense ratio increased in the three and nine months ended September 30, 2009, compared with the prior year periods, primarily due to higher administrative expenses in our retail division to support new business growth and new product expansion in certain businesses.
 
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Insurance – Overseas General
The Insurance – Overseas General segment consists of ACE International, which comprises our network of indigenous retail insurance operations; the wholesale insurance operations of ACE Global Markets, our London market underwriting unit including Lloyd’s Syndicate 2488; and the international A&H and life business of Combined Insurance. This segment has four regions of operations: ACE European Group, which is comprised of ACE Europe and ACE Global Markets branded business, ACE Asia Pacific, ACE Far East, and ACE Latin America. Combined Insurance distributes specialty individual accident and supplemental health insurance products targeted to middle income consumers in Europe, Asia Pacific, and Latin America. The following results include Combined Insurance from April 1, 2008.

 	  	Three Months Ended
September 30	 	 	Nine Months Ended
September 30	 	 	% Change	 	
 	  	    2009    	 	 	    2008    	 	 	    2009    	 	 	    2008    	 	 	Q-09 vs.
Q-08	 	 	YTD-09 vs.
YTD-08	 	
 	  	(in millions of U.S. dollars)	 	 	 	 	 	 	 	
							
Net premiums written	  	$	1,203	 	 	$	1,293	 	 	$	3,795	 	 	$	4,081	 	 	(7	)% 	 	(7	)% 	
Net premiums earned	  	 	1,317	 	 	 	1,425	 	 	 	3,747	 	 	 	4,087	 	 	(8	)% 	 	(8	)% 	
Losses and loss expenses	  	 	631	 	 	 	731	 	 	 	1,879	 	 	 	2,039	 	 	(14	)% 	 	(8	)% 	
Policy benefits	  	 	—  	  	 	 	5	 	 	 	3	 	 	 	10	 	 	NM	  	 	(70	)% 	
Policy acquisition costs	  	 	316	 	 	 	329	 	 	 	869	 	 	 	897	 	 	(4	)% 	 	(3	)% 	
Administrative expenses	  	 	204	 	 	 	217	 	 	 	569	 	 	 	598	 	 	(6	)% 	 	(5	)% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Underwriting income	  	$	166	 	 	$	143	 	 	$	427	 	 	$	543	 	 	16	% 	 	(21	)% 	

Net investment income	  	 	121	 	 	 	136	 	 	 	355	 	 	 	387	 	 	(11	)% 	 	(8	)% 	
Net realized gains (losses)	  	 	40	 	 	 	(58	) 	 	 	(40	) 	 	 	(199	) 	 	NM	  	 	80	% 	
Other (income) expense	  	 	3	 	 	 	6	 	 	 	12	 	 	 	(14	) 	 	(50	)% 	 	NM	  	
Income tax expense	  	 	56	 	 	 	10	 	 	 	131	 	 	 	95	 	 	460	% 	 	38	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	268	 	 	$	205	 	 	$	599	 	 	$	650	 	 	31	% 	 	(8	)% 	

Loss and loss expense ratio	  	 	48.0	% 	 	 	51.6	% 	 	 	50.2	% 	 	 	50.1	% 	 			 			
Policy acquisition cost ratio	  	 	24.0	% 	 	 	23.1	% 	 	 	23.2	% 	 	 	22.0	% 	 			 			
Administrative expense ratio	  	 	15.4	% 	 	 	15.2	% 	 	 	15.2	% 	 	 	14.6	% 	 			 			
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 			 			
Combined ratio	  	 	87.4	% 	 	 	89.9	% 	 	 	88.6	% 	 	 	86.7	% 	 			 			
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 			 			
Insurance – Overseas General’s net premiums written decreased in the three and nine months ended September 30, 2009, compared with the prior year periods, primarily due to a strengthening of the U.S. dollar relative to major currencies. Refer to the table below for the impact of foreign exchange on net premiums written and earned. On a constant dollar basis, our international retail operations experienced P&C growth in all regions and reported increased A&H business in Europe and Latin America. In addition to the unfavorable foreign exchange impact, our London market unit reported lower constant dollar production within most product lines, partially offset by current quarter growth in political risk, financial lines, and energy lines of business.
 
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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
September 30	  	Nine Months Ended
September 30	  	% Change	 	
 	  	    2009    	  	    2008    	  	    2009    	  	    2008    	  	Q-09 vs.
Q-08	 	 	YTD-09 vs.
YTD-08	 	
 	  	(in millions of U.S. dollars)	  	 	 	 	 	 	
							
Line of Business	  			  			  			  			  			 			
Property and all other	  	$	451	  	$	500	  	$	1,293	  	$	1,420	  	(10	)% 	 	(9	)% 	
Casualty	  	 	366	  	 	376	  	 	1,038	  	 	1,151	  	(3	)% 	 	(10	)% 	
Personal accident (A&H)	  	 	500	  	 	549	  	 	1,416	  	 	1,516	  	(9	)% 	 	(7	)% 	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	
Net premiums earned	  	$	1,317	  	$	1,425	  	$	3,747	  	$	4,087	  	(8	)% 	 	(8	)% 	

Region	  			  			  			  			  			 			
Europe	  	$	591	  	$	670	  	$	1,686	  	$	1,860	  	(12	)% 	 	(9	)% 	
Asia Pacific	  	 	199	  	 	213	  	 	562	  	 	607	  	(7	)% 	 	(7	)% 	
Far East	  	 	115	  	 	102	  	 	334	  	 	307	  	13	% 	 	9	% 	
Latin America	  	 	200	  	 	203	  	 	554	  	 	597	  	(1	)% 	 	(7	)% 	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	
	  	 	1,105	  	 	1,188	  	 	3,136	  	 	3,371	  	(7	)% 	 	(7	)% 	
ACE Global Markets	  	 	212	  	 	237	  	 	611	  	 	716	  	(11	)% 	 	(15	)% 	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	
Net premiums earned	  	$	1,317	  	$	1,425	  	$	3,747	  	$	4,087	  	(8	)% 	 	(8	)% 	

													
 	  	Three Months Ended
September 30	 	 	Nine Months Ended
September 30	 	
 	  	    2009    
% of Total	 	 	    2008    
% of Total	 	 	    2009    
% of Total	 	 	    2008    
% of Total	 	
					
Line of Business	  			 			 			 			
Property and all other	  	34	% 	 	35	% 	 	34	% 	 	35	% 	
Casualty	  	28	% 	 	26	% 	 	28	% 	 	28	% 	
Personal accident (A&H)	  	38	% 	 	39	% 	 	38	% 	 	37	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	  	100	% 	 	100	% 	 	100	% 	 	100	% 	

Region	  			 			 			 			
Europe	  	45	% 	 	47	% 	 	45	% 	 	45	% 	
Asia Pacific	  	15	% 	 	15	% 	 	15	% 	 	14	% 	
Far East	  	9	% 	 	7	% 	 	9	% 	 	8	% 	
Latin America	  	15	% 	 	14	% 	 	15	% 	 	15	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
	  	84	% 	 	83	% 	 	84	% 	 	82	% 	
ACE Global Markets	  	16	% 	 	17	% 	 	16	% 	 	18	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	  	100	% 	 	100	% 	 	100	% 	 	100	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Insurance – Overseas General’s net premiums earned decreased in the three and nine months ended September 30, 2009, compared with the prior year periods, primarily due to an unfavorable foreign exchange impact. On a constant dollar basis, net premiums earned increased due to growth in P&C production in our international retail operations. Our London market operations reported a decline in net premiums earned due to lower production in prior quarters.
 
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Insurance – Overseas General conducts business internationally and in most major foreign currencies. The following table summarizes the approximate effect of changes in foreign currency exchange rates on the growth of net premiums written and earned for the periods indicated.

 	  	Three Months Ended
September 30, 2009	 	 	Nine Months Ended
September 30, 2009	 	
Net premiums written:	  			 			
Growth in original currency	  	1.3	% 	 	3.8	% 	
Foreign exchange effect	  	(8.2	)% 	 	(10.8	)% 	
	  	 	 	 	 	 	
Growth as reported in U.S. dollars	  	(6.9	)% 	 	(7.0	)% 	
	  	 	 	 	 	 	
Net premiums earned:	  			 			
Growth in original currency	  	0.2	% 	 	3.1	% 	
Foreign exchange effect	  	(7.8	)% 	 	(11.4	)% 	
	  	 	 	 	 	 	
Growth as reported in U.S. dollars	  	(7.6	)% 	 	(8.3	)% 	
	  	 	 	 	 	 	
The following table shows the impact of catastrophe losses and prior period development on this segment’s loss and loss expense ratio for the periods indicated.

 	  	Three Months Ended
September 30	 	 	Nine Months Ended
September 30	 	
 	  	    2009    	 	 	    2008    	 	 	    2009    	 	 	    2008    	 	
Loss and loss expense ratio, as reported	  	48.0	% 	 	51.6	% 	 	50.2	% 	 	50.1	% 	
Catastrophe losses	  	(1.3	)% 	 	(3.5	)% 	 	(1.1	)% 	 	(2.2	)% 	
Prior period development	  	9.0	% 	 	8.6	% 	 	4.5	% 	 	5.4	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Loss and loss expense ratio, adjusted	  	55.7	% 	 	56.7	% 	 	53.6	% 	 	53.3	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Net catastrophe losses were $16 million and $41 million for the three and nine months ended September 30, 2009, respectively. This compares with net catastrophe losses of $49 million and $89 million in the prior year periods. The catastrophe losses for the quarter ended September 30, 2009, were primarily related to floods in Europe. Catastrophe losses for the nine months ended September 30, 2009, also included European windstorms. Insurance – Overseas General experienced net favorable prior period development of $119 million and $169 million in the three and nine months ended September 30, 2009, respectively, compared with favorable prior period development of $121 million and $219 million, respectively in the prior year periods. Refer to “Prior Period Development” for more information. The adjusted loss and loss expense ratio for the quarter ended September 30, 2009, decreased primarily due to more favorable current accident year experience, compared with the prior year quarter. After considering this impact, a slight deterioration in A&H loss experience had an increasing impact on our loss and loss expense ratio for the three and nine months ended September 30, 2009.
Insurance – Overseas General’s policy acquisition cost ratio increased in the three and nine months ended September 30, 2009, compared with the prior year periods, primarily due to higher amortization of value of business acquired due to increased lapse rates on Combined Insurance’s A&H business. Insurance – Overseas General’s administrative expense ratio increased in the three and nine months ended September 30, 2009, primarily due to the decrease in net premiums earned.
 
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Global Reinsurance
The Global Reinsurance segment represents ACE’s reinsurance operations, comprising ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re Europe, and ACE Tempest Re Canada. Global Reinsurance markets its reinsurance products worldwide under the ACE Tempest Re brand name and provides a broad range of coverages to a diverse array of primary P&C companies.

 	  	Three Months Ended
September 30	 	 	Nine Months Ended
September 30	 	 	% Change	 	
 	  	    2009    	 	 	    2008    	 	 	    2009    	 	 	    2008    	 	 	Q-09 vs.
Q-08	 	 	YTD-09 vs.
YTD-08	 	
 	  	(in millions of U.S. dollars)	 	 	 	 	 	 	 	
Net premiums written	  	$	206	 	 	$	174	 	 	$	894	 	 	$	788	 	 	18	% 	 	13	% 	
Net premiums earned	  	 	247	 	 	 	257	 	 	 	726	 	 	 	777	 	 	(4	)% 	 	(7	)% 	
Losses and loss expenses	  	 	80	 	 	 	178	 	 	 	223	 	 	 	403	 	 	(55	)% 	 	(45	)% 	
Policy acquisition costs	  	 	50	 	 	 	44	 	 	 	147	 	 	 	152	 	 	14	% 	 	(3	)% 	
Administrative expenses	  	 	15	 	 	 	14	 	 	 	41	 	 	 	43	 	 	7	% 	 	(5	)% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Underwriting income	  	$	102	 	 	$	21	 	 	$	315	 	 	$	179	 	 	386	% 	 	76	% 	

Net investment income	  	 	65	 	 	 	83	 	 	 	210	 	 	 	235	 	 	(22	)% 	 	(11	)% 	
Net realized gains (losses)	  	 	(11	) 	 	 	(2	) 	 	 	(47	) 	 	 	(67	) 	 	(450	)% 	 	30	% 	
Other (income) expense	  	 	(1	) 	 	 	1	 	 	 	—  	  	 	 	2	 	 	NM	  	 	NM	  	
Income tax expense	  	 	9	 	 	 	9	 	 	 	38	 	 	 	24	 	 	0	% 	 	58	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	148	 	 	$	92	 	 	$	440	 	 	$	321	 	 	61	% 	 	37	% 	

Loss and loss expense ratio	  	 	32.5	% 	 	 	69.2	% 	 	 	30.7	% 	 	 	51.9	% 	 			 			
Policy acquisition cost ratio	  	 	20.1	% 	 	 	16.9	% 	 	 	20.2	% 	 	 	19.5	% 	 			 			
Administrative expense ratio	  	 	5.9	% 	 	 	5.4	% 	 	 	5.6	% 	 	 	5.5	% 	 			 			
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 			 			
Combined ratio	  	 	58.5	% 	 	 	91.5	% 	 	 	56.5	% 	 	 	76.9	% 	 			 			
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 			 			
Global Reinsurance reported increased net premiums written in the three and nine months ended September 30, 2009, compared with the prior year periods, primarily due to production growth in U.S. property lines.
The following tables provide a line of business breakdown of Global Reinsurance’s net premiums earned for the periods indicated.

 	  	Three Months Ended
September 30	  	Nine Months Ended
September 30	  	% Change	 	
 	  	    2009    	  	    2008    	  	    2009    	  	    2008    	  	Q-09 vs.
Q-08	 	 	YTD-09 vs.
YTD-08	 	
 	  	(in millions of U.S. dollars)	  	 	 	 	 	 	
Property and all other	  	$	60	  	$	57	  	$	197	  	$	179	  	5	% 	 	10	% 	
Casualty	  	 	113	  	 	118	  	 	318	  	 	381	  	(4	)% 	 	(17	)% 	
Property catastrophe	  	 	74	  	 	82	  	 	211	  	 	217	  	(10	)% 	 	(3	)% 	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	 	 	 	
Net premiums earned	  	$	247	  	$	257	  	$	726	  	$	777	  	(4	)% 	 	(7	)% 	

													
 	  	Three Months Ended
September 30	 	 	Nine Months Ended
September 30	 	
 	  	    2009    
% of Total	 	 	    2008    
% of Total	 	 	    2009    
% of Total	 	 	    2008    
% of Total	 	
Property and all other	  	24	% 	 	22	% 	 	27	% 	 	23	% 	
Casualty	  	46	% 	 	46	% 	 	44	% 	 	49	% 	
Property catastrophe	  	30	% 	 	32	% 	 	29	% 	 	28	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	  	100	% 	 	100	% 	 	100	% 	 	100	% 	

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Global Reinsurance’s net premiums earned decreased in the three and nine months ended September 30, 2009, compared with the prior year periods, primarily because the prior year periods included inward reinstatement premiums related to Hurricanes Gustav and Ike.
The following table shows the impact of catastrophe losses and prior period development on this segment’s loss and loss expense ratio for the periods indicated.

 	  	Three Months Ended
September 30	 	 	Nine Months Ended
September 30	 	
 	  	    2009    	 	 	    2008    	 	 	    2009    	 	 	    2008    	 	
Loss and loss expense ratio, as reported	  	32.5	% 	 	69.2	% 	 	30.7	% 	 	51.9	% 	
Catastrophe losses	  	(2.0	)% 	 	(38.9	)% 	 	(3.4	)% 	 	(14.4	)% 	
Prior period development	  	15.9	% 	 	21.4	% 	 	18.1	% 	 	12.2	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Loss and loss expense ratio, adjusted	  	46.4	% 	 	51.7	% 	 	45.4	% 	 	49.7	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Global Reinsurance recorded net catastrophe losses of $5 million and $25 million in the three and nine months ended September 30, 2009, respectively. The catastrophe losses for the quarter ended September 30, 2009, were primarily related to various Canadian storms. Catastrophe losses for the nine months ended September 30, 2009, were primarily related to Hurricane Klaus. This compares with net catastrophe losses of $104 million and $116 million, respectively, in the prior year periods primarily related to Hurricanes Gustav and Ike.
Global Reinsurance experienced net favorable prior period development of $39 million and $131 million in the three and nine months ended September 30, 2009, respectively. This compares with net favorable prior period development of $53 million and $94 million, respectively, in the prior year periods. Refer to “Prior Period Development” for more information. The decrease in the adjusted loss and loss expense ratio was due to a change in business mix which resulted in a greater proportion of property and other business production, which typically generates lower loss ratios than casualty business.
Global Reinsurance’s policy acquisition costs ratio increased for the quarter ended September 30, 2009, compared with the prior year quarter, primarily due to unfavorable commission adjustments and the impact of the prior year reinstatement premiums, which generate minimal acquisition costs. Administrative expenses were stable for the three and nine months ended September 30, 2009, compared with prior year periods, as additional expense accruals were offset by lower staffing costs as a result of reduced headcount. The administrative expense ratio increased in the three and nine months ended September 30, 2009, primarily due to the decrease in net premiums earned.
Life
The Life segment includes the operations of ACE Tempest Life Re (ACE Life Re), ACE Life, and the North American A&H and life business of Combined Insurance. ACE Life Re comprises two operations. The first provides reinsurance to primary life insurers for variable annuity guarantees and the other is a traditional life reinsurance company. ACE Life Re is currently focused on expanding its traditional life reinsurance business and is not currently quoting on new opportunities in the variable annuity reinsurance marketplace. ACE Life develops direct insurance opportunities in emerging markets, including Egypt, Indonesia (commenced operations in April 2009), Taiwan, Thailand, Vietnam, and the United Arab Emirates, as well as in China. ACE has an interest of approximately 37 percent in Huatai Life Insurance Company of China, Limited that is not consolidated into the results below. Combined Insurance distributes specialty individual accident and supplemental health insurance products that are targeted to middle income consumers in the U.S. and Canada. The following results include Combined Insurance, which contributed 70 percent of the current quarter’s segment net premiums earned. Combined Insurance was acquired on April 1, 2008, and consequently, did not contribute to our operating results
 
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in the first quarter of 2008. We assess the performance of our life business based on life underwriting income which includes net investment income.

 	  	Three Months Ended
September 30	 	 	Nine Months Ended
September 30	 	 	% Change	 	
 	  	    2009    	 	 	    2008    	 	 	    2009    	 	 	    2008    	 	 	Q-09 vs.
Q-08	 	 	YTD-09 vs.
YTD-08	 	
 	  	(in millions of U.S. dollars)	 	 	 	 	 	 	 	
Net premiums written	  	$	372	 	 	$	348	 	 	$	1,085	 	 	$	827	 	 	7	% 	 	31	% 	
Net premiums earned	  	 	362	 	 	 	344	 	 	 	1,061	 	 	 	811	 	 	5	% 	 	31	% 	
Losses and loss expenses	  	 	121	 	 	 	104	 	 	 	366	 	 	 	214	 	 	16	% 	 	71	% 	
Policy benefits	  	 	79	 	 	 	86	 	 	 	253	 	 	 	233	 	 	(8	)% 	 	9	% 	
Policy acquisition costs	  	 	59	 	 	 	48	 	 	 	161	 	 	 	119	 	 	23	% 	 	35	% 	
Administrative expenses	  	 	51	 	 	 	61	 	 	 	173	 	 	 	143	 	 	(16	)% 	 	21	% 	
Net investment income	  	 	43	 	 	 	40	 	 	 	132	 	 	 	95	 	 	8	% 	 	39	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Life underwriting income	  	 	95	 	 	 	85	 	 	 	240	 	 	 	197	 	 	12	% 	 	22	% 	
Net realized gains (losses)	  	 	(212	) 	 	 	(180	) 	 	 	(95	) 	 	 	(302	) 	 	(18	)% 	 	69	% 	
Other (income) expense	  	 	—  	  	 	 	2	 	 	 	1	 	 	 	6	 	 	NM	  	 	(83	)% 	
Income tax expense	  	 	17	 	 	 	15	 	 	 	37	 	 	 	25	 	 	13	% 	 	48	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	  	$	(134	) 	 	$	(112	) 	 	$	107	 	 	$	(136	) 	 	(20	)% 	 	NM	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
The following table provides a line of business breakdown of life underwriting income for the periods indicated.

 	  	Three Months Ended
September 30	 	 	Nine Months Ended
September 30	 	 	% change	 	
 	  	    2009    	 	 	    2008    	 	 	    2009    	  	    2008    	 	 	Q-09 vs.
Q-08	 	 	YTD-09 vs.
YTD-08	 	
 	  	(in millions of U.S. dollars)	 	 	 	 	 	 	 	
Life reinsurance	  	$	41	 	 	$	38	 	 	$	109	  	$	123	 	 	8	% 	 	(11	)% 	
Life insurance	  	 	(1	) 	 	 	(3	) 	 	 	—  	  	 	(17	) 	 	67	% 	 	NM	  	
A&H	  	 	55	 	 	 	50	 	 	 	131	  	 	91	 	 	10	% 	 	44	% 	
	  	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	
Life underwriting income	  	$	95	 	 	$	85	 	 	$	240	  	$	197	 	 	12	% 	 	22	% 	
	  	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	
For the nine months ended September 30, 2009, the increase in life underwriting income for Life insurance and A&H was primarily due to the inclusion of Combined Insurance business in life insurance and A&H for the full period (the prior year period included Combined Insurance from April 1, 2008). With respect to life insurance, ACE Life continues to incur start-up costs in several countries, although its underwriting results improved in 2009 compared with 2008.
Life reinsurance underwriting income decreased in the nine months ended September 30, 2009, compared with the prior year period, primarily due to additional GMDB claims paid and payable and an increase in insurance liabilities for expected future claim payments as a result of lower equity market levels. Net realized gains (losses), which are excluded from life underwriting income, relate primarily to the change in the net fair value of reported GMIB reinsurance liabilities and changes in the fair value of derivatives used to partially offset the risk in the variable annuity guarantee portfolio. The net realized losses for the quarter ended September 30, 2009, were primarily due to a reduction in the value of hedge instruments and a significant narrowing of A-rated credit spreads (A-rated credit spreads are a proxy for ACE’s own credit spreads and a narrowing implies a reduction of the discount rate of future cash flows), partially offset by a rising equity market. Net realized losses for the nine months ended September 30, 2009, were primarily related to a reduction in the value of hedge instruments, the receipt of premium (which increases the fair value liability), and a narrowing of A-rated credit spreads; this was substantially offset by a rising equity market and a rising interest rate environment.
 
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Other Income and Expense Items

 	  	Three Months Ended
September 30	 	 	Nine Months Ended
September 30	 	
 	  	    2009    	  	    2008    	 	 	    2009    	  	    2008    	 	
 	  	(in millions of U.S. dollars)	 	
Equity in net loss (income) of partially-owned entities	  	$	42	  	$	10	 	 	$	11	  	$	(104	) 	
Noncontrolling interest expense	  	 	1	  	 	3	 	 	 	3	  	 	7	 	
Federal excise tax	  	 	3	  	 	3	 	 	 	9	  	 	10	 	
Other	  	 	5	  	 	(10	) 	 	 	21	  	 	(17	) 	
	  	 	 	  	 	 	 	 	 	 	  	 	 	 	
Other (income) expense	  	$	51	  	$	6	 	 	$	44	  	$	(104	) 	
	  	 	 	  	 	 	 	 	 	 	  	 	 	 	
Other (income) expense primarily comprises our equity in net income of AGO prior to the June 2009 issuance and Huatai Insurance Company of China, Limited, which is included in equity in net income of partially-owned entities. As discussed previously, prior to AGO’s June 2009 issuance, we included our investment in AGO in Investments in partially-owned insurance companies and reflected our portion of its net income (loss) under equity in net income of partially-owned entities. Effective with the June 2009 issuance, we now account for the investment as an available-for-sale equity security. Refer to “Overview – Investment in Assured Guaranty Ltd.”
Other (income) expense also includes certain federal excise taxes incurred as a result of capital management initiatives. These transactions are considered capital in nature and are excluded from underwriting results.
Net Investment Income

 	  	Three Months Ended
September 30	 	 	Nine Months Ended
September 30	 	
 	  	    2009    	 	 	    2008    	 	 	    2009    	 	 	    2008    	 	
 	  	(in millions of U.S. dollars)	 	
Fixed maturities	  	$	514	 	 	$	502	 	 	$	1,473	 	 	$	1,473	 	
Short-term investments	  	 	8	 	 	 	29	 	 	 	31	 	 	 	86	 	
Equity securities	  	 	9	 	 	 	23	 	 	 	38	 	 	 	72	 	
Other	  	 	15	 	 	 	(11	) 	 	 	44	 	 	 	(20	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross investment income	  	 	546	 	 	 	543	 	 	 	1,586	 	 	 	1,611	 	
Investment expenses	  	 	(35	) 	 	 	(23	) 	 	 	(67	) 	 	 	(70	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net investment income	  	$	511	 	 	$	520	 	 	$	1,519	 	 	$	1,541	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net investment income is influenced by a number of factors including the amounts and timing of inward and outward cash flows, the level of interest rates, changes in overall asset allocation, and the impact of foreign exchange. Net investment income decreased two percent and one percent in the three and nine months ended September 30, 2009, respectively, compared with the prior year periods. The average market yield on fixed maturities was 4.3 percent and 6.1 percent at September 30, 2009 and 2008, respectively. This yield is the weighted average yield to maturity of our fixed income portfolio based on the market prices of our holdings as of those dates. This effectively equates to the new money rate if we were to continue investing our portfolio in a similar distribution. Our average yield on invested assets was 4.7 percent for the quarters ended September 30, 2009 and 2008, which represents our net investment income divided by average cost of fixed maturities and other investments and average market value of equity securities. Net investment income decreased due to lower reinvestment yields and unfavorable foreign exchange impact during the three and nine months ended September 30, 2009, partially offset by higher average invested assets. For the nine months ended September 30, 2009, net investment income was also adversely impacted because we increased cash and short-term investments relative to debt and equity securities during the fourth quarter of 2008 and first quarter of 2009. During the second quarter of 2009, we deployed accumulated cash primarily into high-grade fixed-income securities and liquidated the majority of our publicly traded equity holdings and invested the proceeds in corporate bonds.
 
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Net Realized and Unrealized Gains (Losses)
We take a long-term view with our investment strategy and our investment managers manage our investment portfolio to maximize total return within certain specific guidelines designed to minimize risk. The majority of our investment portfolio is available for sale and reported at fair value. Our held to maturity investment portfolio is reported at amortized cost. Refer to “Investments”, below, for information on fixed maturities we transferred from available for sale to held to maturity during the quarter ended June 30, 2009.
The effect of market movements on our available for sale investment portfolio impacts net income (through net realized gains (losses)) when securities are sold or when we record an other-than-temporary impairment (OTTI) charge in net income (as discussed below). Additionally, net income is impacted through the reporting of changes in the fair value of derivatives, including financial futures, options, swaps, and GMIB reinsurance. Changes in unrealized appreciation and depreciation on available for sale securities, which result from the revaluation of securities held, are reported as a separate component of accumulated other comprehensive income in shareholders’ equity.
We adopted the provisions of ASC Topic 320, Investments-Debt and Equity Securities related to the recognition and presentation of OTTI as of April 1, 2009 (the adopted provisions). Under the adopted provisions, when an OTTI related to a fixed maturity security has occurred, we are required to record the OTTI in net income if we have the intent to sell the security or it is more likely than not that we will be required to sell the security. Further, in cases where we do not intend to sell the security and it is more likely than not that we will not be required to sell the security, we must evaluate the security to determine the portion of impairment, if any, related to credit losses. If a credit loss is indicated, an OTTI is considered to have occurred and any portion of the OTTI related to credit losses must be reflected in net income, while the portion of OTTI related to all other factors is included in other comprehensive income.
For fixed maturities, prior to the adopted provisions, ACE was required to record OTTI in net income unless we had the intent and ability to hold the impaired security to the expected recovery period. The adopted provisions do not have any impact on the accounting for OTTI for any other type of investment.
The cumulative effect of the adopted provisions resulted in a reduction to Accumulated other comprehensive income and an increase to Retained earnings of $242 million as of April 1, 2009. These adjustments reflect the net of tax amount ($305 million pre-tax) of OTTI recognized in net income prior to the adoption related to fixed maturities held at the adoption date that have not suffered a credit loss, we do not intend to sell, and it is more likely than not that we will not be required to sell before the recovery of their amortized cost. These amounts include a $25 million adjustment ($44 million pre-tax) recorded by ACE in the third quarter of 2009. The $44 million pre-tax adjustment reflects the true-up of ACE’s prior estimate of reversals of non-credit OTTI for securities impaired prior to 2006 (Pre-2006 OTTI) for which a detailed review of securities held at the adoption date of the new OTTI standards was not completed until the third quarter of 2009. Upon completion of the detailed review of securities held at the adoption date, ACE determined that fewer Pre-2006 OTTI securities were held than previously estimated, which resulted in an overstatement of the original reversal estimate of non-credit OTTI on Pre-2006 OTTI. The adjustment resulted in an increase to Accumulated other comprehensive income and an offsetting decrease in Retained earnings with no impact on net income or shareholders’ equity
Retained earnings and Deferred tax assets as of April 1, 2009, were also reduced by $47 million as a result of an increase in our valuation allowance against deferred tax assets, which is a direct effect of the adopted provisions. Specifically, as a result of the reassessment of credit losses required by the adopted provisions, we determined that certain previously impaired fixed maturity securities had suffered credit losses in excess of previously estimated amounts, which may give rise to additional future capital losses for tax purposes. Given the amount of available capital gains against which such additional capital losses could be offset, at the date of adoption, we expected that a portion of capital loss carry forwards would expire unused. Accordingly, we determined that an additional valuation allowance was necessary given that it is more likely than not that a portion of deferred tax assets related to previously impaired fixed income securities would not be realized.
 
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Each quarter, we review our securities in an unrealized loss position (impaired securities), including fixed maturity securities, securities lending collateral, equity securities, and other investments, to identify those impaired securities to be specifically evaluated for a potential OTTI.
For impaired fixed maturities, if we have the intent to sell the security or it is more likely than not that we will be required to sell the security, an OTTI is considered to have occurred. In cases where we do not intend to sell the security and it is more likely than not that we will not be required to sell the security, we evaluate the security to determine if a credit loss has occurred based on a combination of qualitative and quantitative factors including a discounted cash flow model, where necessary. If a credit loss is indicated, an OTTI is considered to have occurred. Prior to the adopted provisions when evaluating fixed maturities for OTTI, we principally considered our ability and intent to hold the impaired security to the expected recovery period, the issuer’s financial condition, and our assessment (using available market information such as credit ratings) of our ability to make future scheduled principal and interest payments on a timely basis. The factors that we now consider when determining if a credit loss exists related to a fixed maturity security are discussed in Note 3 b) to the Consolidated Financial Statements. All significant assumptions used in determining credit losses are subject to change as market conditions evolve.
We review all non-fixed maturity investments for OTTI based on the following:
 
 	•	 	the amount of time a security has been in a loss position and the magnitude of the loss position;	
 
 	•	 	the period in which cost is expected to be recovered, if at all, based on various criteria including economic conditions and other issuer-specific developments; and	
 
 	•	 	our ability and intent to hold the security to the expected recovery period.	
As a general rule, we also consider that equity securities in an unrealized loss position for twelve consecutive months are impaired.
The following tables present our pre-tax net realized and unrealized gains (losses) for the periods indicated.

 	  	Three Months Ended
September 30, 2009	 	 	Three Months Ended
September 30, 2008	 	
 	  	Net
Realized
Gains
(Losses)	 	 	Net
Unrealized
Gains
(Losses)	  	Net
Impact	 	 	Net
Realized
Gains
(Losses)	 	 	Net
Unrealized
Gains
(Losses)	 	 	Net
Impact	 	
 	  	(in millions of U.S. dollars)	 	
Fixed maturities 	  	$	(1	) 	 	$	1,602	  	$	1,601	  	 	$	(272	) 	 	$	(952	) 	 	$	(1,224	) 	
Equity securities	  	 	1	  	 	 	177	  	 	178	  	 	 	(126	) 	 	 	(95	) 	 	 	(221	) 	
Foreign exchange gains (losses)	  	 	(7	) 	 	 	—  	  	 	(7	) 	 	 	15	  	 	 	—  	  	 	 	15	  	
Other	  	 	(16	) 	 	 	198	  	 	182	  	 	 	4	  	 	 	(72	) 	 	 	(68	) 	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Subtotal	  	 	(23	) 	 	 	1,977	  	 	1,954	  	 	 	(379	) 	 	 	(1,119	) 	 	 	(1,498	) 	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivatives	  				 			  				 				 				 				
Equity and fixed income derivatives	  	 	28 	  	 	 	—  	  	 	28 	  	 	 	15 	  	 	 	—  	  	 	 	15	  	
Fair value adjustment on insurance derivatives	  	 	(65 	)  	 	 	—  	  	 	(65 	)  	 	 	(189	) 	 	 	—  	  	 	 	(189	) 	
S&P put option and futures	  	 	(144	) 	 	 	—  	  	 	(144 	)  	 	 	28 	  	 	 	—  	  	 	 	28	  	
Fair value adjustment on other derivatives	  	 	(19 	)  	 	 	—  	  	 	(19 	)  	 	 	15 	  	 	 	—  	  	 	 	15	  	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Subtotal derivatives	  	 	(200	) 	 	 	—  	  	 	(200	) 	 	 	(131	) 	 	 	—  	  	 	 	(131	) 	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total gains (losses)	  	$	(223	) 	 	$	1,977	  	$	1,754	  	 	$	(510	) 	 	$	(1,119	) 	 	$	(1,629	) 	

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 	  	Nine Months Ended
September 30, 2009	 	 	Nine Months Ended
September 30, 2008	 	
 	  	Net
Realized
Gains
(Losses)	 	 	Net
Unrealized
Gains
(Losses)	  	Net
Impact	 	 	Net
Realized
Gains
(Losses)	 	 	Net
Unrealized
Gains
(Losses)	 	 	Net
Impact	 	
 	  	(in millions of U.S. dollars)	 	
Fixed maturities 	  	$	(120	) 	 	$	2,736	  	$	2,616	  	 	$	(575	) 	 	$	(1,605	) 	 	$	(2,180	) 	
Equity securities	  	 	(180	) 	 	 	198	  	 	18	  	 	 	(167	) 	 	 	(326	) 	 	 	(493	) 	
Foreign exchange gains (losses)	  	 	(31	) 	 	 	—  	  	 	(31	) 	 	 	33	  	 	 	—  	  	 	 	33	  	
Other	  	 	(133	) 	 	 	260	  	 	127	  	 	 	(19	) 	 	 	(88	) 	 	 	(107	) 	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Subtotal	  	 	(464	) 	 	 	3,194	  	 	2,730	  	 	 	(728	) 	 	 	(2,019	) 	 	 	(2,747	) 	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivatives	  				 			  				 				 				 				
Equity and fixed income derivatives	  	 	62 	  	 	 	—  	  	 	62 	  	 	 	(10 	)  	 	 	—   	  	 	 	(10	) 	
Fair value adjustment on insurance derivatives	  	 	218 	  	 	 	—  	  	 	218 	  	 	 	(319	) 	 	 	—  	  	 	 	(319	) 	
S&P put option and futures	  	 	(300	) 	 	 	—  	  	 	(300	) 	 	 	40	  	 	 	—  	  	 	 	40	  	
Fair value adjustment on other derivatives	  	 	(85	) 	 	 	—  	  	 	(85	) 	 	 	28	  	 	 	—  	  	 	 	28	  	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Subtotal derivatives	  	 	(105	) 	 	 	—  	  	 	(105	) 	 	 	(261	) 	 	 	—  	  	 	 	(261	) 	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total gains (losses)	  	$	(569	) 	 	$	3,194	  	$	2,625	  	 	$	(989	) 	 	$	(2,019	) 	 	$	(3,008	) 	
	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Our net realized losses in the three and nine months ended September 30, 2009, included write-downs of $58 million and $364 million, respectively, as a result of conditions which caused us to conclude that the decline in fair value of certain securities was other-than-temporary. This compares with write-downs of $224 million and $623 million for the three and nine months ended September 30, 2008, respectively. Other-than-temporary impairments for the nine months ended September 30, 2009, included $217 million related to fixed maturities, $26 million related to equities, and $121 million related to other investments. The impairments recorded in net income related to fixed maturities for the nine months ended September 30, 2009, were primarily due to securities with below investment grade credit ratings and intent to sell securities in an unrealized loss position. Impairments related to all other investments were primarily due to duration and severity of decline below cost.
As of September 30, 2009, our investment portfolios held by U.S. legal entities included approximately $450 million of gross unrealized losses on fixed income investments. Our tax planning strategy related to these losses is based on our view that we will hold our fixed income investments until they recover their cost. As such, we have recognized a deferred tax asset of approximately $158 million related to these fixed income investments. This strategy allows us to recognize the associated deferred tax asset related to these fixed income investments as we do not believe these losses will ever be realized. In addition, management decreased the valuation allowance by $50 million during the quarter ended September 30, 2009, as a result of improvement in the unrealized gains and losses in the overall U.S. portfolio.
We engage in a securities lending program which involves lending investments to other institutions for short periods of time. ACE invests the collateral received in short-term funds of high credit quality with the objective of maintaining a stable principal balance. Certain investments in the money market mutual funds purchased with the securities lending collateral declined in value resulting in an unrealized loss of $52 million. The unrealized loss is attributable to fluctuations in market values of the underlying performing debt instruments held by the respective mutual funds, rather than default of a debt issuer. We concluded that the decline in value was temporary.
Investments
Our investment portfolio is invested primarily in publicly traded, investment grade fixed income securities with an average credit quality of AA (with over one half invested in AAA securities), as rated by the independent
 
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investment rating service S&P. The portfolio is externally managed by independent, professional investment managers. The average duration of our fixed income securities, including the effect of options and swaps, was 3.6 years at September 30, 2009, and December 31, 2008. We estimate that a 100 basis point (bps) increase in interest rates would reduce our book value by approximately $1.6 billion at September 30, 2009.
For the nine months ended September 30, 2009, we experienced net unrealized gains of $3.2 billion, primarily due to tightening of credit spreads in the six month period leading up to September 30, 2009, particularly during the quarter ended September 30, 2009. In addition, greater global demand-driven purchases of fixed income investments and a greater demand for risk-based assets contributed to the unrealized gains. The fixed maturities in an unrealized loss position at September 30, 2009, 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.
As part of our fixed income diversification strategy, we have decided to hold to maturity certain commercial mortgage-backed securities that have shorter term durations. Because we have the intent to hold such securities to maturity, a transfer of such securities with a fair value of $704 million was made during the quarter ended June 30, 2009, from Fixed maturities available for sale to Fixed maturities held to maturity. The $4 million unrealized depreciation at the date of the transfer continues to be reported as a component of Accumulated other comprehensive income and is being amortized over the remaining life of the securities as an adjustment of yield in a manner consistent with the amortization of any premium or discount.
Our Other investments principally comprise direct investments, investment funds, and limited partnerships. Our exposure to sub-prime asset backed securities was $55 million at September 30, 2009, which represented 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 September 30, 2009, and December 31, 2008.

 	  	September 30, 2009	  	December 31, 2008	
 	  	Fair Value	  	Cost/
Amortized Cost	  	Fair Value	  	Cost/
Amortized Cost	
 	  	(in millions of U.S. dollars)	
Fixed maturities available for sale 	  	$	38,559	  	$	38,004	  	$	31,155	  	$	33,109	
Fixed maturities held to maturity	  	 	3,532	  	 	3,439	  	 	2,865	  	 	2,860	
Short-term investments	  	 	1,853	  	 	1,852	  	 	3,350	  	 	3,350	
	  	 	 	  	 	 	  	 	 	  	 	 	
	  	 	43,944	  	 	43,295	  	 	37,370	  	 	39,319	
Equity securities	  	 	546	  	 	492	  	 	988	  	 	1,132	
Other investments	  	 	1,524	  	 	1,279	  	 	1,362	  	 	1,368	
	  	 	 	  	 	 	  	 	 	  	 	 	
Total investments	  	$	46,014	  	$	45,066	  	$	39,720	  	$	41,819	
	  	 	 	  	 	 	  	 	 	  	 	 	
The fair value of our total investments increased $6.3 billion during the nine months ended September 30, 2009. 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 September 30, 2009, and December 31, 2008. The first table lists investments according to type and the second according to S&P credit rating.

 	  	September 30, 2009	 	 	December 31, 2008	 	
 	  	Market
Value	  	Percentage
of Total	 	 	Market
Value	  	Percentage
of Total	 	
 	  	(in millions of
U.S. dollars)	  	 	 	 	(in millions of
U.S. dollars)	  	 	 	
Treasury	  	$	1,859	  	4	% 	 	$	1,018	  	3	% 	
Agency	  	 	2,557	  	6	% 	 	 	2,027	  	5	% 	
Corporate	  	 	12,875	  	29	% 	 	 	8,744	  	23	% 	
Mortgage-backed securities	  	 	11,207	  	26	% 	 	 	10,986	  	29	% 	
Asset-backed securities	  	 	436	  	1	% 	 	 	709	  	2	% 	
Municipal	  	 	2,427	  	6	% 	 	 	2,124	  	6	% 	
Non-U.S.	  	 	10,730	  	24	% 	 	 	8,412	  	23	% 	
Short-term investments	  	 	1,853	  	4	% 	 	 	3,350	  	9	% 	
	  	 	 	  	 	 	 	 	 	  	 	 	
Total	  	$	43,944	  	100	% 	 	$	37,370	  	100	% 	

AAA	  	$	22,707	  	52	% 	 	$	22,960	  	61	% 	
AA	  	 	3,851	  	9	% 	 	 	3,374	  	9	% 	
A	  	 	7,378	  	17	% 	 	 	5,497	  	15	% 	
BBB	  	 	4,779	  	11	% 	 	 	3,388	  	9	% 	
BB	  	 	2,677	  	6	% 	 	 	1,119	  	3	% 	
B	  	 	1,964	  	4	% 	 	 	934	  	3	% 	
Other	  	 	588	  	1	% 	 	 	98	  	0	% 	
	  	 	 	  	 	 	 	 	 	  	 	 	
Total	  	$	43,944	  	100	% 	 	$	37,370	  	100	% 	

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

 	  	September 30, 2009	
 	  	Market
Value	  	Rating	
 	  	(in millions of
U.S. dollars)	  	 	
General Electric Co 	  	$	451	  	AA+	
JP Morgan Chase & Co	  	 	434	  	A+	
Bank of America Corp	  	 	362	  	A	
Wells Fargo & Co	  	 	324	  	AA-	
Verizon Communications Inc	  	 	268	  	A	
Citigroup Inc	  	 	252	  	A	
AT&T INC	  	 	241	  	A	
Goldman Sachs Group Inc	  	 	227	  	A	
Morgan Stanley	  	 	197	  	A	
HSBC Holdings Plc	  	 	182	  	AA-	
Comcast Corp	  	 	173	  	BBB+	
Credit Suisse Group	  	 	136	  	A	
Lloyds TSB Group Plc	  	 	129	  	A	
Telecom Italia SpA	  	 	124	  	BBB	
ConocoPhillips	  	 	124	  	A	
Time Warner Cable Inc	  	 	116	  	BBB	
Barclays PLC	  	 	109	  	A+	
XTO Energy Inc	  	 	109	  	BBB	
American Express Co	  	 	95	  	BBB+	
Roche Holding AG	  	 	94	  	AA-	
Dominion Resources Inc/VA	  	 	91	  	A-	
News Corp Ltd	  	 	90	  	BBB+	
Banco Santander SA	  	 	89	  	AA	
Deutsche Telekom AG	  	 	87	  	BBB+	
Vodafone Grouping PLC	  	 	84	  	A-	
	  	 	 	  		
Total	  	$	4,588	  		

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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 September 30, 2009, are provided below:
Mortgage-backed and Asset-backed securities
Market Value at September 30, 2009
(in millions of U.S. dollars)

 	  	S&P Credit Rating	
 	  	AAA	  	AA	  	A	  	BBB	  	BB and
below	  	Total	
Mortgage-backed securities	  			  			  			  			  			  			
Residential mortgage-backed (RMBS)	  			  			  			  			  			  			
GNMA	  	$	512	  	$	—  	  	$	—  	  	$	—  	  	$	—  	  	$	512	
FNMA	  	 	5,069	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	5,069	
FHLMC	  	 	1,979	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	1,979	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total agency RMBS	  	 	7,560	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	7,560	
Non-agency RMBS	  	 	643	  	 	37	  	 	46	  	 	78	  	 	757	  	 	1,561	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total RMBS	  	 	8,203	  	 	37	  	 	46	  	 	78	  	 	757	  	 	9,121	
Commercial mortgage-backed	  	 	1,899	  	 	11	  	 	170	  	 	6	  	 	—  	  	 	2,086	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total mortgage-backed securities	  	$ 	10,102	  	$	48	  	$	216	  	$	84	  	$	757	  	$	11,207	

Asset-backed securities	  			  			  			  			  			  			
Sub-prime	  	$	22	  	$	4	  	$	3	  	$	1	  	$	25	  	$	55	
Credit cards	  	 	30	  	 	8	  	 	—  	  	 	6	  	 	—  	  	 	44	
Autos	  	 	167	  	 	19	  	 	18	  	 	2	  	 	2	  	 	208	
Other	  	 	125	  	 	1	  	 	—  	  	 	2	  	 	1	  	 	129	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total asset-backed securities	  	$ 	344	  	$	32	  	$	21	  	$	11	  	$	28	  	$	436	

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Mortgage-backed and Asset-backed securities
Amortized Cost at September 30, 2009
(in millions of U.S. dollars)

 	  	S&P Credit Rating	
 	  	AAA	  	AA	  	A	  	BBB	  	BB and
below	  	Total	
Mortgage-backed securities	  			  			  			  			  			  			
Residential mortgage-backed (RMBS)	  			  			  			  			  			  			
GNMA	  	$	496	  	$	—  	  	$	—  	  	$	—  	  	$	—  	  	$	496	
FNMA	  	 	4,898	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	4,898	
FHLMC	  	 	1,894	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	1,894	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total agency RMBS	  	 	7,288	  	 	—  	  	 	—  	  	 	—  	  	 	—  	  	 	7,288	
Non-agency RMBS	  	 	781	  	 	60	  	 	54	  	 	98	  	 	1,013	  	 	2,006	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total RMBS	  	 	8,069	  	 	60	  	 	54	  	 	98	  	 	1,013	  	 	9,294	
Commercial mortgage-backed	  	 	1,899	  	 	12	  	 	209	  	 	6	  	 	—  	  	 	2,126	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total mortgage-backed securities	  	$ 	9,968	  	$	72	  	$	263	  	$	104	  	$	1,013	  	$	11,420	

Asset-backed securities	  			  			  			  			  			  			
Sub-prime	  	$	29	  	$	6	  	$	6	  	$	1	  	$	49	  	$	91	
Credit cards	  	 	29	  	 	8	  	 	—  	  	 	6	  	 	—  	  	 	43	
Autos	  	 	164	  	 	19	  	 	18	  	 	2	  	 	2	  	 	205	
Other	  	 	123	  	 	—  	  	 	1	  	 	5	  	 	2	  	 	131	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total asset-backed securities	  	$ 	345	  	$	33	  	$	25	  	$	14	  	$	53	  	$	470	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Restricted assets
We are required to maintain assets on deposit with various regulatory authorities to support our insurance and reinsurance operations. These requirements are generally promulgated in the statutory regulations of the individual jurisdictions. The assets on deposit are available to settle insurance and reinsurance liabilities. We also utilize trust funds in certain large reinsurance transactions where the trust funds are set up for the benefit of the ceding companies and generally take the place of letter of credit (LOC) requirements. We also have investments in segregated portfolios primarily to provide collateral or guarantees for LOCs and derivative transactions. At September 30, 2009, restricted assets of $12.5 billion are included in fixed maturities and short-term investments, with the balance being included in equity securities and cash. The components of the fair value of the restricted assets at September 30, 2009, and December 31, 2008, are as follows:

 	  	September 30
2009	  	December 31
2008	
 	  	(in millions of U.S. dollars)	
Deposits with U.S. regulatory authorities 	  	$	1,201	  	$	1,165	
Deposits with non-U.S. regulatory authorities	  	 	2,524	  	 	1,863	
Other pledged assets	  	 	628	  	 	805	
Trust funds	  	 	8,376	  	 	7,712	
	  	 	 	  	 	 	
	  	$	12,729	  	$	11,545	

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Reinsurance Recoverable on Ceded Reinsurance
The composition of our reinsurance recoverable at September 30, 2009, and December 31, 2008, is as follows:

 	  	September 30
2009	 	 	December 31
2008	 	
 	  	(in millions of U.S. dollars)	 	
Reinsurance recoverable on unpaid losses and loss expenses 	  	$	13,252	  	 	$	13,386	  	
Provision for uncollectible reinsurance on unpaid losses and loss expenses	  	 	(452	) 	 	 	(451	) 	
	  	 	 	 	 	 	 	 	
Reinsurance recoverable on unpaid losses and loss expenses, net of a provision for uncollectible reinsurance	  	 	12,800	  	 	 	12,935	  	
Reinsurance recoverable on paid losses and loss expenses	  	 	1,022	  	 	 	1,122	  	
Provision for uncollectible reinsurance on paid losses and loss expenses	  	 	(133	) 	 	 	(140	) 	
	  	 	 	 	 	 	 	 	
Net reinsurance recoverable	  	$	13,689	  	 	$	13,917	  	
	  	 	 	 	 	 	 	 	
Reinsurance recoverable on policy benefits	  	$	345	  	 	$	259	  	
	  	 	 	 	 	 	 	 	
We evaluate the financial condition of our reinsurers and potential reinsurers on a regular basis and also monitor concentrations of credit risk with reinsurers. The provision for uncollectible reinsurance is required principally due to the failure of reinsurers to indemnify us, primarily because of disputes under reinsurance contracts and insolvencies. The decline in net reinsurance recoverable for the nine months ended September 30, 2009, was primarily related to payments on the 2008 crop-year and the quarterly National Indemnity Company (NICO) payment related to Brandywine. Reinsurance recoverable on policy benefits increased primarily due to a cession within Combined Insurance’s long-term care business.
Unpaid Losses and Loss Expenses
As an insurance and reinsurance company, we are required, by applicable laws and regulations and GAAP, to establish loss and loss expense reserves for the estimated unpaid portion of the ultimate liability for losses and loss expenses under the terms of our policies and agreements with our insured and reinsured customers. The estimate of the liabilities includes provisions for claims that have been reported but unpaid at the balance sheet date (case reserves) and for future obligations from claims that have been incurred but not reported (IBNR) at the balance sheet date (IBNR may also include a provision for additional development on reported claims in instances where the case reserve is viewed to be potentially insufficient). The reserves provide for liabilities that exist for the Company as of the balance sheet date. The loss reserve also includes an estimate of expenses associated with processing and settling these unpaid claims (loss expenses). At September 30, 2009, our gross unpaid loss and loss expense reserves were $38 billion and our net unpaid loss and loss expense reserves were $25.1 billion. With the exception of certain structured settlements, for which the timing and amount of future claim payments are reliably determinable, our loss reserves are not discounted for the time value of money.

 	  	Gross
Losses	 	 	Reinsurance
Recoverable	 	 	Net
Losses	 	
 	  	(in millions of U.S. dollars)	 	
Balance at December 31, 2008 	  	$	37,176	  	 	$	12,935	  	 	$	24,241	  	
Losses and loss expenses incurred	  	 	8,355	  	 	 	2,833	  	 	 	5,522	  	
Losses and loss expenses paid	  	 	(8,344	) 	 	 	(3,151	) 	 	 	(5,193	) 	
Other (including foreign exchange revaluation)	  	 	684	  	 	 	183	  	 	 	501	  	
	  	 	 	 	 	 	 	 	 	 	 	 	
Balance at September 30, 2009	  	$	37,871	  	 	$	12,800	  	 	$	25,071	  	

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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 September 30, 2009, and December 31, 2008.

 	  	September 30, 2009	  	December 31, 2008	
 	  	Gross	  	Ceded	  	Net	  	Gross	  	Ceded	  	Net	
 	  	(in millions of U.S. dollars)	
Case reserves 	  	$	17,454	  	$	6,878	  	$	10,576	  	$	16,583	  	$	6,539	  	$	10,044	
IBNR reserves	  	 	20,417	  	 	5,922	  	 	14,495	  	 	20,593	  	 	6,396	  	 	14,197	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Total	  	$	37,871	  	$	12,800	  	$	25,071	  	$	37,176	  	$	12,935	  	$	24,241	
	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
Asbestos and e nvironmental (A&E) and o ther r un-off l iabilities
Due to timing constraints this section is presented on a one quarter lag basis.
Included in our liabilities for losses and loss expenses are amounts for A&E (A&E liabilities). The A&E liabilities principally relate to claims arising from bodily-injury claims related to asbestos products and remediation costs associated with hazardous waste sites. The estimation of our A&E liabilities is particularly sensitive to future changes in the legal, social, and economic environment. We have not assumed any such future changes in setting the value of our A&E reserves, which include provisions for both reported and IBNR claims.
Our exposure to A&E claims principally arises out of liabilities acquired when we purchased Westchester Specialty in 1998 and the P&C business of CIGNA in 1999, with the larger exposure contained within the liabilities acquired in the CIGNA transaction. In 1996, prior to our acquisition of the P&C business of CIGNA, the Pennsylvania Insurance Commissioner approved a plan to restructure INA Financial Corporation and its subsidiaries (the Restructuring) which included the division of Insurance Company of North America (INA) into two separate corporations: (1) an active insurance company that retained the INA name and continued to write P&C business and (2) an inactive run-off company, now called Century Indemnity Company (Century). As a result of the division, predominantly all A&E and certain other liabilities of INA were allocated to Century and extinguished, as a matter of Pennsylvania law, as liabilities of INA. As part of the Restructuring, most A&E liabilities of various U.S. affiliates of INA were reinsured to Century. Century and certain other run-off companies having A&E and other liabilities were contributed to Brandywine Holdings. As part of the 1999 acquisition of the P&C business of CIGNA, we acquired Brandywine Holdings and its various subsidiaries. For more information refer to “Brandywine Run-Off Entities” below. Our A&E reserves are not discounted and do not reflect any anticipated future changes in the legal, social, or economic environment, or any benefit from future legislative reforms.
The table below presents a roll forward of our consolidated A&E loss reserves (excludes Other run-off liabilities), allocated and unallocated loss expense reserves for A&E exposures, and the provision for uncollectible paid and unpaid reinsurance recoverables for the period ended June 30, 2009.

 	  	Asbestos	 	 	Environmental	 	 	Total	 	
 	  	Gross	 	 	Net (1)	 	 	Gross	 	 	Net (1)	 	 	Gross	 	 	Net (1)	 	
 	  	(in millions of U.S. dollars)	 	
Balance at December 31, 2008 	  	$	2,629	  	 	$	1,365	  	 	$	310	  	 	$	297	  	 	$	2,939	  	 	$	1,662	  	
Incurred activity	  	 	2	  	 	 	2	  	 	 	1	  	 	 	1	  	 	 	3	  	 	 	3	  	
Payment activity	  	 	(220	) 	 	 	(162	) 	 	 	(49	) 	 	 	(48	) 	 	 	(269	) 	 	 	(210	) 	
Foreign currency revaluation	  	 	20	  	 	 	6	  	 	 	1	  	 	 	—  	  	 	 	21	  	 	 	6	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at June 30, 2009	  	$	2,431	  	 	$	1,211	  	 	$	263	  	 	$	250	  	 	$	2,694	  	 	$	1,461	  	

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(1)	The net balances at December 31, 2008, were reduced by $21 million ($4 million Asbestos, and $17 million Environmental) to reflect final bad debt reserve adjustments.	
The A&E net loss reserves including allocated and unallocated loss expense reserves and provision for uncollectible reinsurance at June 30, 2009, of $1.46 billion shown in the above table are comprised of $1.103 billion in reserves held by Brandywine run-off companies, $107 million of reserves held by Westchester Specialty, $131 million of reserves held by ACE Bermuda and $120 million of reserves held by Insurance – Overseas General.
The net figures in the above table reflect third-party reinsurance other than reinsurance provided by NICO under three aggregate excess of loss contracts described below (collectively, the NICO contracts). We exclude the NICO contracts as they cover non-A&E liabilities as well as A&E liabilities. The split of coverage provided under the NICO contracts for A&E liabilities as compared to non-A&E liabilities is entirely dependant on the timing of the payment of the related claims. Our ability to make an estimate of this split is not practicable. We believe, instead, that the A&E discussion is best provided excluding the NICO contracts, while separately discussing the NICO contracts in relation to the total subject business, both A&E and non-A&E, covered by those contracts. With certain exceptions, the NICO contracts provide coverage for the net A&E incurred losses and allocated loss expenses within the limits of coverage and above ACE’s retention levels. These exceptions include losses arising from certain operations of Insurance – Overseas General and participations by ACE Bermuda as a co-reinsurer or retrocessionaire in the NICO contracts.
Brandywine run-off - impact of NICO contracts on ACE’s run-off liabilities
As part of the acquisition of CIGNA’s P&C business, NICO provided $2.5 billion of reinsurance protection to Century on all Brandywine loss and allocated loss adjustment expense reserves and on the A&E reserves of various ACE INA insurance subsidiaries reinsured by Century (in each case, including uncollectible reinsurance). The benefits of this NICO contract (the Brandywine NICO Agreement) flow to the other Brandywine companies and to the ACE INA insurance subsidiaries through agreements between those companies and Century. The Brandywine NICO Agreement was exhausted on an incurred basis in the fourth quarter of 2002.
The following table presents a roll forward of net loss reserves, allocated and unallocated loss expense reserves, and provision for uncollectible paid and unpaid reinsurance recoverables in respect of Brandywine operations only, including the impact of the Brandywine NICO Agreement. The table presents Brandywine incurred activity for the period ended June 30, 2009.

 	  	Brandywine	 	 	NICO
Coverage (3)	 	 	Net of NICO
Coverage	 	
 	  	A&E (1)	 	 	Other (2)	 	 	Total	 	 			 			
 	  	(in millions of U.S. dollars)	 	
Balance at December 31, 2008 	  	$	1,269	  	 	$	1,016	  	 	$	2,285	  	 	$	1,430	  	 	$	855	  	
Incurred activity	  	 	3	  	 	 	10	  	 	 	13	  	 	 	—  	  	 	 	13	  	
Paid activity	  	 	(169	) 	 	 	(73	) 	 	 	(242	) 	 	 	(226	) 	 	 	(16	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at June 30, 2009	  	$	1,103	  	 	$	953	  	 	$	2,056	  	 	$	1,204	  	 	$	852	  	

(1)	The A&E balance was decreased by $21 million at December 31, 2008, to reflect final debt reserve adjustments.	
(2)	Other consists primarily of workers’ compensation, non-A&E general liability losses, and provision for uncollectible reinsurance on non-A&E business. The Other balance was increased by $4 million at December 31, 2008, to reflect final bad debt reserve adjustments.	
(3)	The balance at December 31, 2008, has been increased by $13 million to reflect final activity on the fourth quarter 2008 NICO bordereau.	
 
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The incurred activity during the six months ended June 30, 2009, consisted primarily of unallocated loss adjustment expenses. During the quarter ended September 30, 2009, incurred activity was approximately $30 million (not reflected in the table above) and was primarily related to adverse development in assumed reinsurance pools impacting accident years prior to 1999 and also due to an adverse court decision related to environmental losses.
Reserve reviews
During 2008, we conducted an internal, ground-up review of our consolidated A&E liabilities as of December 31, 2007. During the same period, a team of external actuaries performed an evaluation as to the adequacy of the reserves of Century. This external review was conducted in accordance with the Brandywine Restructuring Order, which requires that an independent actuarial review of Century’s reserves be completed every two years. Management takes full responsibility for the estimation of its A&E liabilities. As a result of our internal review, we increased our net loss reserves for the Brandywine operations, including A&E, by $65 million (net of reinsurance provided by NICO), while the gross loss reserves increased by $143 million. The conclusions of the external review provided estimates of ultimate net Brandywine liabilities that were little changed from a comparable study in 2006. We also decreased our net loss reserves for Westchester Specialty’s A&E and other liabilities by $13 million (net of NICO), while the gross loss reserves decreased by $10 million.
The internal actuarial review of our consolidated A&E liabilities at December 31, 2008, is currently being performed and any necessary reserve action will be recorded in the fourth quarter of 2009.
Westchester Specialty - impact of NICO contracts on ACE’s run-off liabilities
As part of the acquisition of Westchester Specialty in 1998, NICO provided a 75 percent pro-rata share of $1 billion of reinsurance protection on losses and loss adjustment expenses incurred on or before December 31, 1996, in excess of a retention of $721 million (the 1998 NICO Agreement). NICO has also provided an 85 percent pro-rata share of $150 million of reinsurance protection on losses and allocated loss adjustment expenses incurred on or before December 31, 1992, in excess of a retention of $755 million (the 1992 NICO Agreement). At December 31, 2008, the remaining unused incurred limit under the 1998 NICO Agreement was $530 million, which is only available for losses and loss adjustment expenses. The 1992 NICO Agreement is exhausted on an incurred basis.
The following table presents a roll forward of net loss reserves, allocated and unallocated loss expense reserves, and provision for uncollectible paid and unpaid reinsurance recoverables in respect of 1996 and prior Westchester Specialty operations that are the subject business of the NICO covers. The table presents incurred activity for the period ended June 30, 2009.

 	  	Westchester Specialty	 	 	NICO
Coverage	 	 	Net of NICO
Coverage	 	
 	  	A&E	 	 	Other	 	 	Total	 	 			 			
 	  	(in millions of U.S. dollars)	 	
Balance at December 31, 2008 	  	$	122	  	 	$	125	  	 	$	247	  	 	$	216	  	 	$	31	  	
Incurred activity	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	
Paid activity	  	 	(15	) 	 	 	(8	) 	 	 	(23	) 	 	 	(19	) 	 	 	(4	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance at June 30, 2009	  	$	107	  	 	$	117	  	 	$	224	  	 	$	197	  	 	$	27	  	

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Reserving considerations
For asbestos, we face claims relating to policies issued to manufacturers, distributors, installers, and other parties in the chain of commerce for asbestos and products containing asbestos. Claims can be filed by individual claimants or groups of claimants with the potential for hundreds of individual claimants at one time. Claimants will generally allege damages across an extended time period which may coincide with multiple policies for a single insured.
Environmental claims present exposure for remediation and defense costs associated with the contamination of property as a result of pollution. It is common, especially for larger defendants, to be named as a potentially responsible party at multiple sites.
Brandywine run-off entities
In addition to housing a significant portion of our A&E exposure, the Brandywine operations include run-off liabilities related to various insurance and reinsurance businesses. The following companies comprise ACE’s Brandywine operations: Century (a Pennsylvania insurer), Century Re (a Pennsylvania insurer), and Century International Reinsurance Company Ltd. (a Bermuda insurer (CIRC)). All of the Brandywine companies are direct or indirect subsidiaries of Brandywine Holdings.
The U.S.-based ACE INA companies assumed two contractual obligations in respect of the Brandywine operations in connection with the Restructuring: a dividend retention fund obligation and a surplus maintenance obligation in the form of an aggregate excess of loss reinsurance agreement. INA Financial Corporation established and funded a dividend retention fund (the Dividend Retention Fund) consisting of $50 million plus investment earnings. Pursuant to an interpretation of the Brandywine restructuring order, the full balance of the Dividend Retention Fund was contributed to Century as of December 31, 2002. Under the Restructuring Order, while any obligation to maintain the Dividend Retention Fund is in effect, to the extent dividends are paid by INA Holdings Corporation to its parent, INA Financial Corporation, and to the extent INA Financial Corporation then pays such dividends to INA Corporation, a portion of those dividends must be withheld to replenish the principal of the Dividend Retention Fund to $50 million within five years. In the six months ended June 30, 2009, and in the years ended December 31, 2008 and 2007, no such dividends were paid and, therefore, no replenishment of the Dividend Retention Fund occurred. The Dividend Retention Fund may not be terminated without prior written approval from the Pennsylvania Insurance Commissioner.
In addition, an ACE INA insurance subsidiary provided reinsurance coverage to Century in the amount of $800 million under an aggregate excess of loss reinsurance agreement (the Aggregate Excess of Loss Agreement), triggered if the statutory capital and surplus of Century falls below $25 million or if Century lacks liquid assets with which to pay claims as they become due, after giving effect to the contribution of the balance, if any, of the Dividend Retention Fund.
Effective December 31, 2004, ACE INA Holdings contributed $100 million to Century in exchange for a surplus note. After giving effect to the contribution and issuance of the surplus note, the statutory surplus of Century at June 30, 2009, was $25 million and approximately $139 million in statutory-basis losses have been ceded to the Aggregate Excess of Loss Agreement on an inception-to-date basis. Century reports the amount ceded under the Aggregate Excess of Loss Agreement in accordance with statutory accounting principles, which differ from GAAP by, among other things, allowing Century to discount its liabilities, including certain asbestos related and environmental pollution liabilities. For GAAP reporting purposes, intercompany reinsurance recoverables related to the Aggregate Excess of Loss Agreement are eliminated upon consolidation. To estimate ACE’s remaining claim exposure under the Aggregate Excess of Loss Agreement on a GAAP basis, we adjust the statutory cession to exclude the discount embedded in statutory loss reserves and adjust the statutory provision for uncollectible reinsurance to a GAAP basis amount. At June 30, 2009, approximately $398 million in GAAP basis losses were ceded under the Aggregate Excess of Loss Agreement, leaving a remaining limit of coverage under that
 
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agreement of approximately $402 million. At December 31, 2008, the remaining limit of coverage under the agreement was $393 million. While we believe ACE has no legal obligation to fund losses above the Aggregate Excess of Loss Agreement limit of coverage, ACE’s consolidated results would nevertheless continue to include any losses above the limit of coverage for so long as the Brandywine companies remain consolidated subsidiaries of ACE.
Uncertainties relating to ACE’s ultimate Brandywine exposure
In addition to the Dividend Retention Fund and Aggregate Excess of Loss Agreement commitments described above, certain ACE entities are primarily liable for asbestos, environmental, and other exposures that they have reinsured to Century. Accordingly, if Century were to become insolvent and ACE were to lose control of Century, some or all of the recoverables due to these ACE companies from Century could become uncollectible, yet those ACE entities would continue to be responsible to pay claims to their insureds or reinsureds. As of June 30, 2009, the aggregate reinsurance balances ceded by the active ACE companies to Century were approximately $1.3 billion. At June 30, 2009, Century’s carried gross reserves (including reserves ceded by the active ACE companies to Century) were $2.8 billion. We believe the intercompany reinsurance recoverables, which relate to liabilities payable over many years (i.e., 25 years or more), are not impaired at this time. A substantial portion of the liabilities ceded to Century by its affiliates have in turn been ceded by Century to NICO and, as of June 30, 2009, approximately $1.2 billion of cover remains on a paid basis. Should Century’s loss reserves experience adverse development in the future and should Century be placed into rehabilitation or liquidation, the reinsurance recoverables due from Century to its affiliates would be payable only after the payment in full of certain expenses and liabilities, including administrative expenses and direct policy liabilities. Thus, the intercompany reinsurance recoverables would be at risk to the extent of the shortage of assets remaining to pay these recoverables. As of June 30, 2009, losses ceded by Century to the active ACE companies and other amounts owed to Century by the active ACE companies were approximately $476 million in the aggregate.
Catastrophe Management
We continue to closely monitor our catastrophe accumulation around the world. Our modeled annual aggregate 1 in 100 year return period U.S. hurricane probable maximum loss, net of reinsurance is approximately $1.2 billion; i.e., according to the model there is a one percent chance that ACE’s losses incurred in any year from U.S. hurricanes could be in excess of $1.2 billion (or seven percent of our total shareholders’ equity at September 30, 2009). We estimate that at such hypothetical loss levels, aggregate industry losses would be approximately $142 billion. Our modeled single occurrence 1 in 100 return period California earthquake probable maximum loss, net of reinsurance is approximately $899 million; i.e., according to the model there is a one percent chance that ACE’s losses incurred in any single California earthquake event could be in excess of $899 million (or approximately five percent of our total shareholders’ equity at September 30, 2009). We estimate that at such hypothetical loss levels, the industry losses would be approximately $43 billion. ACE’s modeled losses reflect our in-force portfolio and reinsurance program as of July 1, 2009.
The modeling estimates of both ACE and industry loss levels are inherently uncertain owing to key assumptions. First, while the use of third-party catastrophe modeling packages to simulate potential hurricane and earthquake losses is prevalent within the insurance industry, the models are reliant upon significant meteorology, seismology, and engineering assumptions to estimate hurricane and earthquake losses. In particular, modeled hurricane and earthquake events are not always a representation of actual events and ensuing additional loss potential. Second, there is no universal standard in the preparation of insured data for use in the models and the running of the modeling software. Third, we are reliant upon third-party estimates of industry insured exposures and there is significant variation possible around the relationship between ACE’s loss and that of the industry following an event. Fourth, we assume that our reinsurance recoveries following an event are fully collectible. These loss estimates do not represent ACE’s potential maximum exposures and it is highly likely that ACE’s actual incurred losses would vary materially from the modeled estimates.
 
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Liquidity
Global market and economic conditions have been severely disrupted in recent quarters and these conditions may potentially affect (among other aspects of our business) the demand for and claims made under our products, the ability of customers, counterparties, and others to establish or maintain their relationships with us, our ability to access and efficiently use internal and external capital resources, the risks we assume under reinsurance programs covering variable annuity guarantees, and our investment performance. However, for the reasons discussed below, we believe that our present cash flows from operations, investing activities, and financing activities are sufficient to fund our current working capital and debt obligation needs. Refer to “Liquidity” in our 2008 Form 10-K.
We anticipate that positive cash flows from operations (underwriting activities and investment income) should be sufficient to cover cash outflows under most loss scenarios through 2009. Should the need arise, we generally have access to the capital markets and other available credit facilities. At September 30, 2009, our available credit lines totaled $2.5 billion and usage was $1.5 billion. This compares with total available credit lines at December 31, 2008 of $1.9 billion and usage of $1.2 billion. During the quarter ended June 30, 2009, we entered into a five-year, unsecured letter of credit facility, which permits the issuance of up to $500 million of letters of credit by ACE Limited. These letters of credit will be used for the general corporate purposes of ACE and our subsidiaries and may be issued to support the obligations of any wholly-owned subsidiary of ACE. This new credit facility supplements our existing letter of credit and revolving credit facilities. We believe that this increase to our total available credit capacity will facilitate collateral management through periods of financial market volatility and increased catastrophe severity that might occur in the near term. The covenants in the new credit facility are substantially similar to the covenants in other ACE group credit facilities. Refer to “Credit Facilities” below.
Our access to funds under existing credit facilities is dependent on the ability of the banks that are parties to the facilities to meet their funding commitments. Our existing credit facilities have remaining terms of three to five years. However, we may be required to replace credit sources in a difficult market should one of our existing credit providers experience financial difficulty. There has also been recent consolidation in the banking industry, which could lead to increased reliance on and exposure to particular institutions. If we cannot obtain adequate capital or sources of credit on favorable terms, or at all, our business, operating results, and financial condition could be adversely affected. To date, we have not experienced difficulty accessing any of our credit facilities .
The payments of dividends or other statutorily permissible distributions from our operating companies are subject to the laws and regulations applicable to each jurisdiction, as well as the need to maintain capital levels adequate to support the insurance and reinsurance operations, including financial strength ratings issued by independent rating agencies, which are discussed below. During the nine months ended September 30, 2009, we were able to meet all of our obligations, including the payments of dividends declared on our Common Shares, with our net cash flows and dividends received.
We assess which subsidiaries to draw dividends from based on a number of factors. Considerations such as regulatory and legal restrictions as well as the subsidiary’s financial condition are paramount to the dividend decision. The legal restrictions on the payment of dividends from retained earnings by our Bermuda subsidiaries are currently satisfied by the share capital and additional paid-in capital of each of the Bermuda subsidiaries. During the nine months ended September 30, 2009, ACE Tempest Life Re declared and paid dividends of $280 million ($915 million in the prior year period). ACE Bermuda declared and paid dividends of $280 million in the prior year period. A portion of the dividends received in the prior year period were used in connection with our April 1, 2008, acquisition of Combined Insurance. We expect that a majority of our cash inflows in 2009 will be from our Bermuda subsidiaries.
The payment of any dividends from ACE Global Markets or its subsidiaries is subject to applicable U.K. insurance laws and regulations. In addition, the release of funds by Syndicate 2488 to subsidiaries of ACE Global Markets is subject to regulations promulgated by the Society of Lloyd’s. The U.S. insurance subsidiaries of
 
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ACE INA (Cigna’s P&C business which we acquired in 1999) may pay dividends, without prior regulatory approval, subject to restrictions set out in state law of the subsidiary’s domicile (or, if applicable, “commercial domicile”). ACE INA’s international subsidiaries are also subject to insurance laws and regulations particular to the countries in which the subsidiaries operate. These laws and regulations sometimes include restrictions that limit the amount of dividends payable without prior approval of regulatory insurance authorities.
ACE Limited did not receive any dividends from ACE Global Markets or ACE INA during the nine months ended September 30, 2009 and 2008. The debt issued by ACE INA is serviced by statutorily permissible distributions by ACE INA’s insurance subsidiaries to ACE INA as well as other group resources.
Sources of liquidity include cash from operations, routine sales of investments, and financing arrangements. The following is a discussion of our cash flows for the nine months ended September 30, 2009 and 2008.
 
 	•	 	Our consolidated net cash flows from operating activities were $2.3 billion in the nine months ended September 30, 2009, compared with $3.1 billion for the prior year period. These amounts reflect net income for each period, adjusted for non-cash items and changes in working capital. Net income was $1.6 billion in the nine months ended September 30, 2009 compared with $1.2 billion in the prior year period. For the nine months ended September 30, 2009, significant adjustments included net realized gains (losses) of $569 million, increases of unearned premiums and insurance/reinsurance balances payable of $613 million, decrease in reinsurance recoverable of $453 million, and increase in unpaid losses of $289 million. These factors were partially offset by increases in deferred policy acquisition costs and prepaid reinsurance premiums of $431 million . Reinsurance recoverable on losses and loss expenses were significantly impacted by the 2008 annual crop settlement during the first quarter of 2009. The nine months ended September 30, 2009, included higher than typical net claim payments in connection with prior year catastrophes and other individual large losses, and an increase in tax payments. In addition, during the nine months ended September 30, 2009, operating cash flows were adversely impacted by the outflow of cash collateral in the amount of $397 million. This outflow consisted of both the return of collateral we had received from counterparties on hedging positions as the market has improved, and collateral requirements related to new hedge positions established to protect us from the market moving lower.	
 
 	•	 	Our consolidated net cash flows used for investing activities were $2.4 billion in the nine months ended September 30, 2009, compared with $3.5 billion in the prior year period. Net investing activities for the nine months ended September 30, 2009, were related primarily to net purchases of fixed maturities. For the nine months ended September 30, 2008, net investing activities were related primarily to net purchases and maturities on the fixed maturities portfolio and the acquisition of Combined Insurance of $2.56 billion.	
 
 	•	 	Our consolidated net cash flows used for financing activities were $30 million in the nine months ended September 30, 2009, compared with net cash flows from financing activities of $383 million in the prior year period. Net cash flows used for financing activities in the nine months ended September 30, 2009, included net proceeds from the issuance, in June 2009, of $500 million in long-term debt, net repayment of reverse repurchase agreements of $250 million, and dividends paid on our Common Shares of $283 million. Net cash flows from financing activities for the nine months ended September 30, 2008, included $1.2 billion net proceeds from the issuance of long-term debt. This was partially offset by $575 million of net cash flows used for financing activities relating to the redemption of our Preferred Shares, and dividends paid on our Common and Preferred Shares.	
Both internal and external forces influence our financial condition, results of operations, and cash flows. Claim settlements, premium levels, and investment returns may be impacted by changing rates of inflation and other economic conditions. In many cases, significant periods of time, ranging up to several years or more, may lapse between the occurrence of an insured loss, the reporting of the loss to us, and the settlement of the liability for that loss. We believe that our cash balances, cash flow from operations, routine sales of investments, and the liquidity provided by our credit facilities, are adequate to meet expected cash requirements.
 
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In addition to cash from operations, routine sales of investments, and financing arrangements, we have agreements with a bank provider which implemented two international multi-currency notional cash pooling programs to enhance cash management efficiency during periods of short-term timing mismatches between expected inflows and outflows of cash by currency. In each program, participating ACE entities establish deposit accounts in different currencies with the bank provider and each day the credit or debit balances in every account are notionally translated into a single currency (U.S. dollars) and then notionally pooled. The bank extends overdraft credit to any participating ACE entity as needed, provided that the overall notionally-pooled balance of all accounts in each pool at the end of each day is at least zero. Actual cash balances are not physically converted and are not co-mingled between legal entities. ACE entities may incur overdraft balances as a means to address short-term timing mismatches, and any overdraft balances incurred under this program by an ACE entity would be guaranteed by ACE Limited (up to $150 million in the aggregate). Our revolving credit facility allows for same day drawings to fund a net pool overdraft should participating ACE entities withdraw contributed funds from the pool.
We also, from time to time, utilize reverse repurchase agreements as a low-cost alternative for short-term funding needs. Refer to  “Capital Resources” below.
Capital Resources
Capital resources consist of funds deployed or available to be deployed to support our business operations. The following table summarizes the components of our capital resources at September 30, 2009, and December 31, 2008.

 	  	September 30
2009	 	 	December 31
2008	 	
 	  	(in millions of U.S. dollars,
except for percentages)	 	
Short-term debt	  	$	200	  	 	$	471	  	
Long-term debt	  	 	3,321	  	 	 	2,806	  	
	  	 	 	 	 	 	 	 	
Total debt	  	 	3,521	  	 	 	3,277	  	

Trust preferred securities	  	 	309	  	 	 	309	  	
	  	 	 	 	 	 	 	 	
Total shareholders’ equity	  	 	18,733	  	 	 	14,446	  	
	  	 	 	 	 	 	 	 	
Total capitalization	  	$	22,563	  	 	$	18,032	  	

Ratio of debt to total capitalization	  	 	15.6	% 	 	 	18.2	% 	
Ratio of debt plus trust preferred securities to total capitalization	  	 	17.0	% 	 	 	19.9	% 	
We have executed reverse repurchase agreements with certain counterparties whereby we agreed to sell securities and repurchase them at a date in the future for a predetermined price. At December 31, 2008, short-term debt included $250 million of amounts owed to brokers under reverse repurchase agreements. During the three months ended June 30, 2009, all reverse repurchase agreements had been settled. In September 2009, we repaid the $16 million nine-month term loan, the second tranche, of the ACE INA $66 million dual tranche floating interest rate term loan. The first tranche, a $50 million three-year term loan, is due December 2011 and is included in long-term debt.
In June 2009, our subsidiary ACE INA Holdings Inc., issued $500 million of 5.9 percent senior notes due June 2019. The notes are guaranteed by ACE Limited. The net proceeds from the issue of the senior notes were used to repay amounts owed to counterparties under reverse repurchase agreements as noted above, and will also be used to refinance upcoming debt maturities and for general corporate purposes.
 
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Total shareholders’ equity increased $4.3 billion in the nine months ended September 30, 2009. The following table reports the significant movements in our shareholders’ equity for the nine months ended September 30, 2009.

 	  	September 30
2009	 	
 	  	(in millions of U.S. dollars)	 	
Total shareholders’ equity, December 31, 2008 	  	$	14,446	  	
Net income	  	 	1,596	  	
Dividends declared on Common Shares	  	 	(297	) 	
Change in net unrealized appreciation (depreciation) on investments, net of tax	  	 	2,648	  	
Cumulative translation, net of tax	  	 	304	  	
Income tax valuation allowance on the adoption of new OTTI standard	  	 	(47	) 	
Other movements, net	  	 	83	  	
	  	 	 	 	
Total shareholders’ equity, September 30, 2009	  	$	18,733	  	
	  	 	 	 	
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 September 30, 2009, this authorization had not been utilized. We generally maintain shelf registration capacity at all times in order to allow capital market access for refinancing as well as for unforeseen or opportunistic capital needs. Our currently effective unlimited shelf registration statement expires in December 2011.
We have paid dividends each quarter since we became a public company in 1993. On January 12, 2009, and April 13, 2009, we paid dividends of $0.27 and $0.26 per Common Share (CHF 0.30 in each case) to shareholders of record on December 17, 2008, and March 31, 2009, respectively, through a distribution from the par value of Common Shares (refer to “Effects of the Continuation on Dividends”). On August 10, 2009, we paid a dividend of $0.31 per Common Share (CHF 0.33), to shareholders of record on July 28, 2009, and on October 13, 2009, we paid a dividend of $0.31 per Common Share (CHF 0.31), to shareholders of record on October 1, 2009, in each case also by way of a distribution from par value.
Effects of the Continuation on Dividends
For the foreseeable future, we expect to make distributions to shareholders as a repayment of share capital in the form of a reduction in par value or qualified paid-in capital rather than through dividends. At the 2008 Annual General Meeting, the Company’s shareholders approved a par value reduction of CHF 0.90, payable in three installments between that meeting and the 2009 Annual General Meeting. Under the resolutions so approved, the U.S. dollar amount of each installment depended upon the currency exchange rate in effect at the time of its payment, which caused the U.S. dollar value of each installment to vary from the date of approval. At the 2009 Annual General Meeting, the Board proposed and shareholders approved the payment of a dividend by the Company in the form of a distribution to shareholders (the Dividend Approval) through a Swiss franc par value reduction pursuant to a formula that has the effect of making the U.S. dollar value of distributions more consistent.
The Dividend Approval provides for an annual par value reduction of CHF 1.36 (the Base Annual Dividend), equal to $1.24 per share at the time of the Dividend Approval, payable in four installments; provided that each of the Swiss franc installments will be adjusted pursuant to the formula so that the actual Swiss franc par value reduction amount for each installment will equal $0.31, subject to an aggregate upward adjustment (the Dividend Cap) for the four installments of 50 percent of the Base Annual Dividend (i.e. CHF 0.68). Application of the formula will mean that the Swiss franc amount of each installment will be determined at the approximate time of distribution, while the U.S. dollar value of the installment will remain $0.31 unless and until the Dividend Cap is
 
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reached. A par value reduction that would otherwise exceed the Dividend Cap will be reduced to equal the Swiss franc amount remaining available under the Dividend Cap, and the U.S. dollar amount distributed will be the then-applicable U.S. dollar equivalent of that Swiss franc amount. We paid the second of the four installments of $0.31 per Common Share on October 13, 2009, and in connection with this dividend, the par value per share was reduced by CHF 0.31, based on the USD/CHF rate published on September 28, 2009.
Refer also to “AGENDA ITEM NO. 7: APPROVAL OF DISTRIBUTION TO SHAREHOLDERS IN THE FORM OF PAR VALUE REDUCTION” of the definitive proxy statement for our 2009 Annual General Meeting of Shareholders, which was filed on April 7, 2009.
Should we determine to pay dividends other than by a reduction in par value, under Swiss law, such dividends (other than by reductions in par value) may be paid out only if the corporation has sufficient distributable profits from previous business years, or if the reserves of the corporation are sufficient to allow distribution of a dividend. The board of directors of a Swiss corporation may propose that a dividend be paid, but cannot itself set the dividend. The Company auditors must confirm that the dividend proposal of the board of directors conforms with Swiss statutory law. Prior to the distribution of dividends, five percent of the annual profits must be allocated to the general reserve until the amount of general reserves has reached twenty percent of the paid-in nominal share capital. Our Swiss Articles of Association can provide for a higher general reserve or for the creation of further reserves setting forth their purpose and use. Once this level has been reached and maintained, the shareholders meeting may approve a distribution of each year’s profit within the framework of applicable legal requirements. Dividends paid from retained earnings are usually due and payable immediately after the shareholders’ resolution relating to the allocation of profits has been passed. Under Swiss law, the statute of limitations in respect of claims for dividend payments is five years. As noted above, for the foreseeable future, we expect to pay dividends as a repayment of share capital in the form of a reduction in par value or qualified paid-in capital, which would not be subject to Swiss withholding tax.
Credit Facilities
As our Bermuda subsidiaries are not admitted insurers and reinsurers in the U.S., the terms of certain U.S. insurance and reinsurance contracts require them to provide collateral, which can be in the form of LOCs. In addition, ACE Global Markets is required to satisfy certain U.S. regulatory trust fund requirements which can be met by the issuance of LOCs. LOCs may also be used for general corporate purposes and to provide underwriting capacity as funds at Lloyd’s.
The following table shows our main credit facilities by credit line, usage, expiry date, and purpose at September 30, 2009.

 	  	Credit
Line (1)	  	Usage	  	Expiry Date	
 	  	(in millions of U.S. dollars)	
Unsecured Liquidity Facility	  			  			  		
ACE Limited (2)	  	$	500	  	$	146	  	Nov. 2012	
Unsecured Operational LOC Facility	  			  			  		
ACE Limited	  	 	1,000	  	 	697	  	Nov. 2012	
Unsecured Capital Facility	  			  			  		
ACE Limited (3)	  	 	490	  	 	489	  	Dec. 2013	
Unsecured Operational LOC Facility	  			  			  		
ACE Limited	  	 	500	  	 	165	  	Sept. 2014	
	  	 	 	  	 	 	  		
Total	  	$	2,490	  	$	1,497	  		

(1)	Certain facilities are guaranteed by operating subsidiaries and/or ACE Limited.	
(2)	May also be used for LOCs.	
(3)	Supports ACE Global Markets underwriting capacity for Lloyd’s Syndicate 2488.	
 
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It is anticipated that the commercial facilities will be renewed on expiry but such renewals are subject to the availability of credit from banks utilized by ACE. In the event that such credit support is insufficient, we could be required to provide alternative security to clients. This could take the form of additional insurance trusts supported by our investment portfolio or funds withheld using our cash resources. The value of letters of credit required is driven by, among other things, loss development of existing reserves, the payment pattern of such reserves, the expansion of business, and loss experience of such business.
The facilities in the table above require that we maintain certain covenants, all of which have been met at September 30, 2009. These covenants include:
 
(i)	Maintenance of a minimum consolidated net worth in an amount not less than the “Minimum Amount”. For the purpose of this calculation, the Minimum Amount is an amount equal to the sum of the base amount (currently $12 billion) plus 25 percent of consolidated net income for each fiscal quarter, ending after the date on which the current base amount became effective, plus 50 percent of any increase in consolidated net worth during the same period, attributable to the issuance of Common and Preferred Shares. The Minimum Amount is subject to an annual reset provision.	
 
(ii)	Maintenance of a maximum debt to total capitalization ratio of not greater than 0.35 to 1. Under this covenant, debt does not include trust preferred securities or mezzanine equity, except where the ratio of the sum of trust preferred securities and mezzanine equity to total capitalization is greater than 15 percent. In this circumstance, the amount greater than 15 percent would be included in the debt to total capitalization ratio.	
At September 30, 2009, (a) the minimum consolidated net worth requirement under the covenant described in (i) above was $12.4 billion and our actual consolidated net worth as calculated under that covenant was $18 billion and (b) our ratio of debt to total capitalization was 0.156 to 1, which is below the maximum debt to total capitalization ratio of 0.35 to 1 as described in (ii) above.
Our failure to comply with the covenants under any credit facility would, subject to grace periods in the case of certain covenants, result in an event of default. This could require us to repay any outstanding borrowings or to cash collateralize LOCs under such facility. A failure by ACE Limited (or any of its subsidiaries) to pay an obligation due for an amount exceeding $50 million would result in an event of default under all of the facilities described above.
Recent Accounting Pronouncements
Refer to Note 2 to the Consolidated Financial  Statements, for a discussion of new accounting pronouncements.
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
Refer to Item 7A included in our 2008 Form 10-K, and Amendment No. 1 reflected in our 2008 Form 10-K/A.
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, related to accounting and reporting by insurance enterprises for certain non-traditional long-duration contracts and for separate accounts (ASC Topic 944). 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.
As of September 30, 2009, 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’s best estimate reflected a judgment that the equity markets will exhibit sub-par growth, if any, over the next several years. 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 regularly examines both quantitative and qualitative analysis and for the quarter ended September 30, 2009 determined that no change to the benefit ratio was warranted. The benefit ratio used to establish the benefit reserves at September 30, 2009, has averaged less than ½ 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 September 30, 2009.
ASC 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 ½ 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 700 for a prolonged period of time in order for management to give substantial weight to current market conditions.
 
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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, as of September 30, 2009, of the benefit reserves and FVL associated with the variable annuity guarantee reinsurance portfolio. In addition, the tables below show the sensitivity of the fair value of specific derivative instruments held (hedge value), 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 	  	54	  	 	13	  	 	(46	) 	 	(126	) 	 	(236	) 	 	(384	) 	
	  	(Increase)/decrease in FVL	  	232	  	 	126	  	 	13	  	 	(105	) 	 	(213	) 	 	(296	) 	
	  	Increase/(decrease) in hedge value	  	(107	) 	 	(8	) 	 	92	  	 	193	  	 	295	  	 	399	  	
	  	Increase/(decrease) in net income	  	179	  	 	131	  	 	59	  	 	(38	) 	 	(154	) 	 	(281	) 	
Flat	  	(Increase)/decrease in benefit reserves 	  	43	  	 	—  	  	 	(62	) 	 	(147	) 	 	(264	) 	 	(420	) 	
	  	(Increase)/decrease in FVL	  	131	  	 	—  	  	 	(135	) 	 	(264	) 	 	(387	) 	 	(484	) 	
	  	Increase/(decrease) in hedge value	  	(99	) 	 	—  	  	 	101	  	 	202	  	 	306	  	 	410	  	
	  	Increase/(decrease) in net income	  	75	  	 	—  	  	 	(96	) 	 	(209	) 	 	(345	) 	 	(494	) 	
-100 bps	  	(Increase)/decrease in benefit reserves 	  	25	  	 	(20	) 	 	(85	) 	 	(176	) 	 	(291	) 	 	(465	) 	
	  	(Increase)/decrease in FVL	  	(37	) 	 	(185	) 	 	(341	) 	 	(493	) 	 	(633	) 	 	(725	) 	
	  	Increase/(decrease) in hedge value	  	(91	) 	 	9	  	 	110	  	 	213	  	 	317	  	 	422	  	
	  	Increase/(decrease) in net income	  	(103	) 	 	(196	) 	 	(316	) 	 	(456	) 	 	(607	) 	 	(768	) 	

 	  	A-rated
Credit Spreads	 	 	Interest Rate
Volatility	  	Equity
Volatility	 	
Sensitivities to Other Economic Variables	  	+100	  	-100	 	 	+2%	 	 	-2%	  	+2%	 	 	-2%	 	
 	  	(in millions of U.S. dollars)	 	
(Increase)/decrease in benefit reserves	  	—  	  	—  	  	 	—  	  	 	—  	  	—  	  	 	—  	  	
(Increase)/decrease in FVL	  	66	  	(76	) 	 	(17	) 	 	23	  	(13	) 	 	12	  	
Increase/(decrease) in hedge value	  	—  	  	—  	  	 	—  	  	 	—  	  	4	  	 	(4	) 	
Increase/(decrease) in net income	  	66	  	(76	) 	 	(17	) 	 	23	  	(9	) 	 	8	  	

 	  	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	  	 	16	  	(20	) 	 	(7	) 	 	9	
(Increase)/decrease in FVL	  	11	  	 	(10	) 	 	121	  	(137	) 	 	(63	) 	 	66	
Increase/(decrease) in hedge value	  	—  	  	 	—  	  	 	—  	  	—  	  	 	—  	  	 	—  	
Increase/(decrease) in net income	  	(10	) 	 	12	  	 	137	  	(157	) 	 	(70	) 	 	75	
The above tables assume benefit reserves and FVL using the benefit ratio calculated as of September 30, 2009. Additionally, the above table assumes equity shocks impact all global equity markets equally and that the interest rate shock is a parallel shift in the U.S. yield curve. Although our liabilities have sensitivity to global equity markets, we would suggest using the S&P 500 as a proxy and although our liabilities have sensitivity to global interest rates at various points on the yield curve, we would suggest using the 10-year U.S. Treasury yield as a proxy. A change in A-rated credit spreads (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 September 30, 2009, 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
 
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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.
 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 September 30, 2009, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
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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 6 e) to our Consolidated Financial  Statements.
 Item 1A. Risk Factors
The following supplements the risk factors that could have a material impact on our results of operations or financial condition as described under “Risk Factors” in Item 1A. of Part I of our 2008 Annual Report on Form 10-K and under “Risk Factors” in Item 1A. of Part II of our quarterly report on Form 10-Q for the quarters ended March 31, 2009, and June 30, 2009, should be read in conjunction with those disclosures. The Risk Factor listed in our 2008 Annual Report on Form 10-K under the subheading, “We may be required to post additional collateral because of changes in our reinsurance liabilities to U.S.-regulated insurance companies.” is amended and restated to read in its entirety as set forth below.
We may be required to post additional collateral because of changes in our reinsurance liabilities to regulated insurance companies.
If our reinsurance liabilities increase, we may be required to post additional collateral for insurance company clients. In addition, regulatory changes sometimes affect our obligations to post collateral. Several such regulatory changes are currently under consideration, including changes related to variable annuity contracts. The need to post this additional collateral, if significant enough, may require us to sell investments at a loss in order to provide securities of suitable credit quality, or otherwise secure adequate capital at an unattractive cost. This could adversely impact our net income, and liquidity and capital resources.
 
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 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases by the Company of its Common Shares during the three months ended September  30, 2009.
Issuer’s Purchases of Equity Securities

Period	  	Total
Number of
Shares
Purchased*	  	Average Price
Paid per Share	  	Total Number of
Shares Purchased
as Part of Publicly
Announced Plan**	  	Approximate Dollar
Value of Shares that
May Yet be
Purchased
Under the Plan**	
July 1 through July 31	  	5,578	  	$	42.76	  	—  	  	$	250 million	
August 1 through August 31	  	821	  	$	49.06	  	—  	  	$	250 million	
September 1 through September 30	  	4,282	  	$	48.67	  	—  	  	$	250 million	
	  	 	  			  		  			
Total	  	10,681	  			  		  			

*	For the quarter ended September 30, 2009, this column represents the surrender to the Company of 10,681 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 September 30, 2009, 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	
			
November 6, 2009	 		 	/s/    E VAN G. G REENBERG        	
	 		 	Evan G. Greenberg	
	 		 	Chairman and
Chief Executive Officer	
			
November 6, 2009	 		 	/s/    P HILIP V. B ANCROFT        	
	 		 	Philip V. Bancroft	
	 		 	Chief Financial Officer	
 
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Exhibit
Number	  	Exhibit Description	 	Incorporated by Reference	 	Filed
Herewith	
	  		 	Form	 	Original
Number	 	Date Filed	 	SEC File
Reference
Number	 		
3.1	  	Articles of Association, as amended and restated	 	8-K	 	3	 	October 1, 2009	 	001-11778	 		
							
4.1	  	Articles of Association, as amended and restated	 	8-K	 	3	 	October 1, 2009	 	001-11778	 		
							
10.1	  	Director Restricted Stock Award Terms under the ACE Limited 2004 Long-Term Incentive Plan	 		 		 		 		 	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 September 30, 2009 formatted in XBRL: (i) Consolidated Balance Sheet at September 30, 2009 and December 31, 2008; (ii) Consolidated Statement of Operations and Comprehensive Income for the three months and nine months ended September 30, 2009 and 2008; (iii) Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2009 and 2008; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008; and (v) Notes to the Interim Consolidated Financial Statements, tagged as blocks of text.	 		 		 		 		 	X	
 
106

Exhibit 10.1
Director Restricted Stock Award Terms
under the
ACE Limited 2004 Long-Term Incentive Plan
The Participant has been granted a Restricted Stock Award by ACE Limited (the “Company”) under the ACE Limited 2004 Long-Term Incentive Plan (the “Plan”). The Restricted Stock Award shall be subject to the following Restricted Stock Award Terms:
1. Terms of Award . The following words and phrases used in these Restricted Stock Award Terms shall have the meanings set forth in this paragraph 1:
 
(a)	The “Participant” is [insert name of participant] .	
 
(b)	The “Grant Date” is [insert the date] .	
 
(c)	The number of “Covered Shares” is [insert number of shares granted] .	
Other words and phrases used in these Restricted Stock Award Terms are defined in paragraph 9 or elsewhere in these Restricted Stock Award Terms.
2. Restricted Period . Subject to the limitations of these Restricted Stock Award Terms, the “Restricted Period” for the Covered Shares shall begin on the day of the annual shareholders’ meeting held in [insert year] and end on the day before the annual shareholders’ meeting held in the immediately following year. Notwithstanding the foregoing, the Restricted Period shall end earlier to the extent set forth below:
 
(a)	The Restricted Period shall end upon the Date of Termination, if the Date of Termination occurs by reason of the Participant’s death.	
 
(b)	The Restricted Period shall end upon the Date of Termination, if the Date of Termination occurs by reason of the Participant’s Long-Term Disability.	
 
(c)	The Restricted Period shall end upon a Change in Control, provided that such Change in Control occurs on or before the Date of Termination.	
3. Transfer and Forfeiture of Shares . Except as otherwise determined by the Committee in its sole discretion, the Participant shall forfeit the Covered Shares as of the Participant’s Date of Termination, if such Date of Termination occurs prior to the end of the Restricted Period. If the Participant’s Date of Termination has not occurred prior to the last day of the Restricted Period, then, at the end of such Restricted Period, the Covered Shares shall be transferred to the Participant free of all restrictions. For the avoidance of doubt, if the Date of Termination is the last day of the Restricted Period, the Covered Shares shall be transferred free of restrictions in accordance with the immediately preceding sentence.
4. Withholding. All deliveries and distributions under these Restricted Stock Award Terms are subject to withholding of all applicable taxes to the extent, if any, that such withholding is required. At the election of the Participant, and subject to such rules and limitations as may be established by the Committee from time to time, such withholding

obligations may be satisfied through the surrender of shares of Stock which the Participant already owns, or to which the Participant is otherwise entitled under the Plan; provided, however, that such shares may be used to satisfy not more than the Company’s minimum statutory withholding obligation (based on minimum statutory withholding rates for Federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income).
5. Transferability . Except as otherwise provided by the Committee, the Covered Shares may not be sold, assigned, transferred, pledge or otherwise encumbered during the Restricted Period.
6. Dividends . The Participant shall be entitled to receive any dividends and distributions paid with respect to the Covered Shares that become payable or distributable during the Restricted Period (other than extraordinary dividends or distributions, as determined by the Committee); provided, however, that no dividends or distributions shall be payable or distributable to or for the benefit of the Participant for Covered Shares with respect to record dates occurring prior to the Grant Date, or with respect to record dates occurring on or after the date, if any, on which the Participant has forfeited those Covered Shares. Extraordinary dividends or distributions shall be vested in accordance with the same schedule as the shares to which such extraordinary dividends or distributions are attributable.
7. Voting . The Participant shall be entitled to vote the Covered Shares during the Restricted Period to the same extent as would have been applicable to the Participant if the Participant was then vested in the shares; provided, however, that the Participant shall not be entitled to vote the shares with respect to record dates for such voting rights arising prior to the Grant Date, or with respect to record dates occurring on or after the date, if any, on which the Participant has forfeited those Covered Shares.
8. Deposit of Covered Shares . Each certificate issued in respect of the Covered Shares granted under these Restricted Stock Award Terms shall be registered in the name of the Participant and, in the discretion of the Committee, may be held by the Company or a Related Company or deposited in a bank designated by the Committee. During the Restricted Period, certificates evidencing the Restricted Stock may be imprinted with the following legend: “The securities evidenced by this certificate are subject to the transfer restrictions, forfeiture restrictions and other provisions of the Restricted Stock Award Terms dated                      between the Company and the Participant.
9. Definitions . For purposes of these Restricted Stock Award Terms, words and phrases shall be defined as follows:
 
(a)	Change in Control . The term “Change in Control” shall be defined as set forth in the Plan.	
 
(b)	Date of Termination . The “Date of Termination” means the date the Director resigns or otherwise ceases to perform services as a Director for the Company or a Related Company for any reason.	
 
2

(c)	Director . The term “Director” means a member of the Board who is not an employee of the Company or a Related Company.	
 
(d)	Long-Term Disability . A Participant shall be considered to have a “Long-Term Disability” if the Committee determines, using standards comparable to those used in any long-term disability plan of the Company, that the Participant would be eligible for long-term disability benefits if he or she participated in such plan.	
 
(e)	Plan Definitions . Except where the context clearly implies or indicates the contrary, a word, term, or phrase used in the Plan is similarly used in these Restricted Stock Award Terms.	
10. Heirs and Successors . These Restricted Stock Award Terms shall be binding upon, and inure to the benefit of, the Company and its successors and assigns, and upon any person acquiring, whether by merger, consolidation, purchase of assets or otherwise, all or substantially all of the Company’s assets and business. If any benefits deliverable to the Participant under these Restricted Stock Award Terms have not been delivered at the time of the Participant’s death, such benefits shall be delivered to the Designated Beneficiary, in accordance with the provisions of these Restricted Stock Award Terms and the Plan. The “Designated Beneficiary” shall be the beneficiary or beneficiaries designated by the Participant in a writing filed with the Committee in such form and at such time as the Committee shall require. If a deceased Participant fails to designate a beneficiary, or if the Designated Beneficiary does not survive the Participant, any rights that would have been exercisable by the Participant and any benefits distributable to the Participant shall be distributed to the legal representative of the estate of the Participant. If a deceased Participant designates a beneficiary and the Designated Beneficiary survives the Participant but dies before the complete distribution of benefits to the Designated Beneficiary under these Restricted Stock Award Terms, then any benefits distributable to the Designated Beneficiary shall be distributed to the legal representative of the estate of the Designated Beneficiary.
11. Administration . The authority to manage and control the operation and administration of these Restricted Stock Award Terms shall be vested in the Committee, and the Committee shall have all powers with respect to these Restricted Stock Award Terms as it has with respect to the Plan. Any interpretation of these Restricted Stock Award Terms by the Committee and any decision made by it with respect to these Restricted Stock Award Terms are final and binding on all persons.
12. Plan Governs . Notwithstanding anything in these Restricted Stock Award Terms to the contrary, these Restricted Stock Award Terms shall be subject to the terms of the Plan, a copy of which may be obtained by the Participant from the office of the Secretary of the Company; and these Restricted Stock Award Terms are subject to all interpretations, amendments, rules and regulations promulgated by the Committee from time to time pursuant to the Plan.
13. Not An Employment Contract . The Restricted Stock Award will not confer on the Participant any right with respect to continuance of employment or other service with the Company or any Related Company, nor will it interfere in any way with any right the Company or any Related Company would otherwise have to terminate or modify the terms of such Participant’s employment or other service at any time.
 
3

14. Notices . Any written notices provided for in these Restricted Stock Award Terms or the Plan shall be in writing and shall be deemed sufficiently given if either hand delivered or if sent by fax or overnight courier, or by postage paid first class mail. Notices sent by mail shall be deemed received three business days after mailing but in no event later than the date of actual receipt. Notices shall be directed, if to the Participant, at the Participant’s address indicated by the Company’s records, or if to the Company, at the Company’s principal executive office.
15. Fractional Shares . In lieu of issuing a fraction of a share, resulting from an adjustment of the Restricted Stock Award pursuant to paragraph 5.2(f) of the Plan or otherwise, the Company will be entitled to pay to the Participant an amount equal to the fair market value of such fractional share.
16. Amendment . The Restricted Stock Award Terms may be amended in accordance with the provisions of the Plan, and may otherwise be amended by written agreement of the Participant and the Company without the consent of any other person.
IN WITNESS WHEREOF, the Company has caused these presents to be executed in its name and on its behalf, all as of the Grant Date.

ACE LIMITED	
		
By:	 	 	
Its:	 	 	
 
4

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 November 6, 2009

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

Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Philip V. Bancroft, certify that:
 
 	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 November 6, 2009

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

Exhibit 32.1
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned officer of ACE Limited (the “Corporation”) hereby certifies that the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, fully complies with the applicable reporting requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of ACE Limited.

Dated: November 6, 2009	 	/s/    E VAN G. G REENBERG        	
	 	Evan G. Greenberg	
	 	Chairman and Chief Executive Officer	

Exhibit 32.2
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned officer of ACE Limited (the “Corporation”) hereby certifies that the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, fully complies with the applicable reporting requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of ACE Limited.

Dated: November 6, 2009	 	/s/    P HILIP V. B ANCROFT        	
	 	Philip V. Bancroft	
	 	Chief Financial Officer