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 June 30, 2011
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
ACE LIMITED
(Exact name of registrant as specified in its charter)

Switzerland	 	98-0091805	
(State or other jurisdiction of
incorporation or organization)	 	(I.R.S. Employer
Identification No.)	
Baerengasse 32
Zurich, Switzerland CH-8001
(Address of principal executive offices) (Zip Code)
+41 (0)43 456 76 00
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
                                                         YES   x                                                  NO   ¨
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
                                                         YES   x                                                  NO   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer   x	 	Accelerated filer   ¨	 	Non-accelerated filer   ¨	 	Smaller reporting company   ¨	
                                                 (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
                                                         YES   ¨                                                  NO   x
The number of registrant’s Common Shares (CHF 30.27 par value) outstanding as of July 29, 2011 was 337,967,945.

Table of Contents
 ACE LIMITED
INDEX TO FORM 10-Q

   	 	 	  	 	  	Page No.	
Part I.	 	FINANCIAL INFORMATION	  		
			
Item 1.	 	Financial Statements:	  		
			
	 	Consolidated Balance Sheets (Unaudited)
June 30, 2011 and December 31, 2010	  	3	
			
	 	Consolidated Statements of Operations and Comprehensive Income (Unaudited)
Three and Six Months Ended June 30, 2011 and 2010	  	4	
			
	 	Consolidated Statements of Shareholders’ Equity (Unaudited)
Six Months Ended June 30, 2011 and 2010	  	5	
			
	 	Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 2011 and 2010	  	7	
			
	 	Notes to Consolidated Financial Statements (Unaudited)	  		
	 	Note 1.	  	General	  	8	
	 	Note 2.	  	Accounting guidance not yet adopted	  	8	
	 	Note 3.	  	Acquisitions	  	8	
	 	Note 4.	  	Investments	  	9	
	 	Note 5.	  	Fair value measurements	  	15	
	 	Note 6.	  	Assumed life reinsurance programs involving minimum benefit guarantees under annuity contracts	  	25	
	 	Note 7.	  	Commitments, contingencies, and guarantees	  	27	
	 	Note 8.	  	Shareholders’ equity	  	34	
	 	Note 9.	  	Share-based compensation	  	34	
	 	Note 10.	  	Segment information	  	35	
	 	Note 11.	  	Earnings per share	  	38	
	 	Note 12.	  	Information provided in connection with outstanding debt of subsidiaries	  	39	
			
Item 2.	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	45	
			
Item 3.	 	Quantitative and Qualitative Disclosures About Market Risk	  	84	
			
Item 4.	 	Controls and Procedures	  	87	
			
Part II.	 	OTHER INFORMATION	  		
			
Item 1.	 	Legal Proceedings	  	88	
			
Item 1A.	 	Risk Factors	  	88	
			
Item 2.	 	Unregistered Sales of Equity Securities and Use of Proceeds	  	88	
			
Item 6.	 	Exhibits	  	88	
 
2

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

 	  	June 30
2011	 	 	December 31
2010	 	
 	  	(in millions of U.S. dollars, except
share and per share data)	 	
Assets	  				 				
Investments	  				 				
			
Fixed maturities available for sale, at fair value (amortized cost – $39,862 and $36,542)
(includes hybrid financial instruments of $398 and $416)	  	$	41,038	 	 	$	37,539	 	
Fixed maturities held to maturity, at amortized cost (fair value – $9,078 and $9,461)	  	 	9,033	 	 	 	9,501	 	
Equity securities, at fair value (cost – $549 and $666)	  	 	582	 	 	 	692	 	
Short-term investments, at fair value and amortized cost	  	 	2,380	 	 	 	1,983	 	
Other investments (cost – $1,916 and $1,511)	  	 	2,156	 	 	 	1,692	 	
	  	 	 	 	 	 	 	 	
Total investments	  	 	55,189	 	 	 	51,407	 	
Cash	  	 	833	 	 	 	772	 	
Securities lending collateral	  	 	1,593	 	 	 	1,495	 	
Accrued investment income	  	 	538	 	 	 	521	 	
Insurance and reinsurance balances receivable	  	 	4,923	 	 	 	4,233	 	
Reinsurance recoverable on losses and loss expenses	  	 	13,375	 	 	 	12,871	 	
Reinsurance recoverable on policy benefits	  	 	250	 	 	 	281	 	
Deferred policy acquisition costs	  	 	1,821	 	 	 	1,641	 	
Value of business acquired	  	 	796	 	 	 	634	 	
Goodwill and other intangible assets	  	 	4,858	 	 	 	4,664	 	
Prepaid reinsurance premiums	  	 	1,711	 	 	 	1,511	 	
Deferred tax assets	  	 	586	 	 	 	769	 	
Investments in partially-owned insurance companies (cost – $349 and $357)	  	 	353	 	 	 	360	 	
Other assets	  	 	2,428	 	 	 	2,196	 	
	  	 	 	 	 	 	 	 	
Total assets	  	$	89,254	 	 	$	83,355	 	
	  	 	 	 	 	 	 	 	
Liabilities	  				 				
Unpaid losses and loss expenses	  	$	38,951	 	 	$	37,391	 	
Unearned premiums	  	 	6,913	 	 	 	6,330	 	
Future policy benefits	  	 	4,384	 	 	 	3,106	 	
Insurance and reinsurance balances payable	  	 	3,785	 	 	 	3,282	 	
Deposit liabilities	  	 	700	 	 	 	421	 	
Securities lending payable	  	 	1,610	 	 	 	1,518	 	
Payable for securities purchased	  	 	418	 	 	 	292	 	
Accounts payable, accrued expenses, and other liabilities	  	 	3,288	 	 	 	2,958	 	
Income taxes payable	  	 	23	 	 	 	116	 	
Short-term debt	  	 	1,400	 	 	 	1,300	 	
Long-term debt	  	 	3,360	 	 	 	3,358	 	
Trust preferred securities	  	 	309	 	 	 	309	 	
	  	 	 	 	 	 	 	 	
Total liabilities	  	 	65,141	 	 	 	60,381	 	
	  	 	 	 	 	 	 	 	
Commitments and contingencies	  				 				
Shareholders’ equity	  				 				
Common Shares (CHF 30.27 and CHF 30.57 par value, 342,775,070 and 341,094,559 shares issued, 337,912,324 and 334,942,852 shares outstanding)	  	 	10,098	 	 	 	10,161	 	
Common Shares in treasury (4,862,746 and 6,151,707 shares)	  	 	(250	) 	 	 	(330	) 	
Additional paid-in capital	  	 	5,484	 	 	 	5,623	 	
Retained earnings	  	 	6,792	 	 	 	5,926	 	
Deferred compensation obligation	  	 	2	 	 	 	2	 	
Accumulated other comprehensive income (AOCI)	  	 	1,989	 	 	 	1,594	 	
Common Shares issued to employee trust	  	 	(2	) 	 	 	(2	) 	
	  	 	 	 	 	 	 	 	
Total shareholders’ equity	  	 	24,113	 	 	 	22,974	 	
	  	 	 	 	 	 	 	 	
Total liabilities and shareholders’ equity	  	$	89,254	 	 	$	83,355	 	
	  	 	 	 	 	 	 	 	
See accompanying notes to consolidated financial statements
 
3

Table of Contents
 ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Unaudited)

 	  	Three Months Ended
June  30	 	 	Six Months Ended
June  30	 	
 	  	    2011    	 	 	2010	 	 	2011	 	 	2010	 	
 	  	(in millions of U.S. dollars, except per share data)	 	
Revenues	  				 				 				 				
Net premiums written	  	$	3,953	 	 	$	3,420	 	 	$	7,399	 	 	$	6,991	 	
Change in unearned premiums	  	 	(196	) 	 	 	(187	) 	 	 	(333	) 	 	 	(481	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	  	 	3,757	 	 	 	3,233	 	 	 	7,066	 	 	 	6,510	 	
Net investment income	  	 	569	 	 	 	518	 	 	 	1,113	 	 	 	1,022	 	
Net realized gains (losses):	  				 				 				 				
Other-than-temporary impairment (OTTI) losses gross	  	 	(9	) 	 	 	(31	) 	 	 	(14	) 	 	 	(81	) 	
Portion of OTTI losses recognized in other comprehensive income (OCI)	  	 	1	 	 	 	13	 	 	 	2	 	 	 	45	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net OTTI losses recognized in income	  	 	(8	) 	 	 	(18	) 	 	 	(12	) 	 	 	(36	) 	
Net realized gains (losses) excluding OTTI losses	  	 	(65	) 	 	 	27	 	 	 	(106	) 	 	 	213	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total net realized gains (losses)	  	 	(73	) 	 	 	9	 	 	 	(118	) 	 	 	177	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total revenues	  	 	4,253	 	 	 	3,760	 	 	 	8,061	 	 	 	7,709	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Expenses	  				 				 				 				
Losses and loss expenses	  	 	2,226	 	 	 	1,800	 	 	 	4,489	 	 	 	3,721	 	
Policy benefits	  	 	108	 	 	 	87	 	 	 	199	 	 	 	174	 	
Policy acquisition costs	  	 	604	 	 	 	536	 	 	 	1,159	 	 	 	1,090	 	
Administrative expenses	  	 	515	 	 	 	463	 	 	 	1,009	 	 	 	923	 	
Interest expense	  	 	62	 	 	 	52	 	 	 	125	 	 	 	104	 	
Other (income) expense	  	 	9	 	 	 	3	 	 	 	(5	) 	 	 	(1	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total expenses	  	 	3,524	 	 	 	2,941	 	 	 	6,976	 	 	 	6,011	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income tax	  	 	729	 	 	 	819	 	 	 	1,085	 	 	 	1,698	 	
Income tax expense	  	 	122	 	 	 	142	 	 	 	219	 	 	 	266	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	607	 	 	$	677	 	 	$	866	 	 	$	1,432	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive income	  				 				 				 				
Unrealized appreciation	  	$	303	 	 	$	487	 	 	$	369	 	 	$	1,070	 	
Reclassification adjustment for net realized gains included in net income	  	 	(78	) 	 	 	(97	) 	 	 	(134	) 	 	 	(226	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
	  	 	225	 	 	 	390	 	 	 	235	 	 	 	844	 	
Change in:	  				 				 				 				
Cumulative translation adjustment	  	 	69	 	 	 	(169	) 	 	 	301	 	 	 	(259	) 	
Pension liability	  	 	1	 	 	 	2	 	 	 	(5	) 	 	 	8	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive income, before income tax	  	 	295	 	 	 	223	 	 	 	531	 	 	 	593	 	
Income tax expense related to OCI items	  	 	(88	) 	 	 	(55	) 	 	 	(136	) 	 	 	(122	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other comprehensive income	  	 	207	 	 	 	168	 	 	 	395	 	 	 	471	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Comprehensive income	  	$	814	 	 	$	845	 	 	$	1,261	 	 	$	1,903	 	
					
Earnings per share	  				 				 				 				
Basic earnings per share	  	$	1.79	 	 	$	1.99	 	 	$	2.56	 	 	$	4.22	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Diluted earnings per share	  	$	1.77	 	 	$	1.98	 	 	$	2.54	 	 	$	4.21	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
See accompanying notes to consolidated financial statements
 
4

Table of Contents
 ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Unaudited)

 	  	Six Months Ended
June  30	 	
 	  	2011	 	 	2010	 	
 	  	(in millions of U.S.
dollars)	 	
Common Shares	  				 				
Balance – beginning of period	  	$	10,161	 	 	$	10,503	 	
Net shares issued under employee share-based compensation plans	  	 	—  	  	 	 	71	 	
Exercise of stock options	  	 	50	 	 	 	9	 	
Dividends declared on Common Shares-par value reduction	  	 	(113	) 	 	 	(218	) 	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	10,098	 	 	 	10,365	 	
	  	 	 	 	 	 	 	 	
Common Shares in treasury	  				 				
Balance – beginning of period	  	 	(330	) 	 	 	(3	) 	
Common Shares issued in treasury, net of net shares redeemed under employee share-based compensation plans	  	 	80	 	 	 	(26	) 	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	(250	) 	 	 	(29	) 	
	  	 	 	 	 	 	 	 	
Additional paid-in capital	  				 				
Balance – beginning of period	  	 	5,623	 	 	 	5,526	 	
Net shares redeemed under employee share-based compensation plans	  	 	(111	) 	 	 	(69	) 	
Exercise of stock options	  	 	20	 	 	 	5	 	
Share-based compensation expense and other	  	 	71	 	 	 	68	 	
Funding of dividends declared to Retained earnings	  	 	(119	) 	 	 	—  	  	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	5,484	 	 	 	5,530	 	
	  	 	 	 	 	 	 	 	
Retained earnings	  				 				
Balance – beginning of period	  	 	5,926	 	 	 	2,818	 	
Net income	  	 	866	 	 	 	1,432	 	
Funding of dividends declared from Additional paid-in capital	  	 	119	 	 	 	—  	  	
Dividends declared on Common Shares	  	 	(119	) 	 	 	—  	  	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	6,792	 	 	 	4,250	 	
	  	 	 	 	 	 	 	 	
Deferred compensation obligation	  				 				
Balance – beginning and end of period	  	$	2	 	 	$	2	 	
	  	 	 	 	 	 	 	 	
See accompanying notes to consolidated financial statements
 
5

Table of Contents
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (continued)
(Unaudited)

 	  	Six Months Ended
June 30	 	
 	  	2011	 	 	2010	 	
 	  	(in millions of U.S.
dollars)	 	
Accumulated other comprehensive income (loss)	  				 				
Net unrealized appreciation (depreciation) on investments	  				 				
Balance – beginning of period	  	$	1,399	 	 	$	657	 	
Change in period, net of income tax expense of $(60) and $(213)	  	 	175	 	 	 	631	 	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	1,574	 	 	 	1,288	 	
	  	 	 	 	 	 	 	 	
Cumulative translation adjustment	  				 				
Balance – beginning of period	  	 	262	 	 	 	240	 	
Change in period, net of income tax (expense) benefit of $(77) and $94	  	 	224	 	 	 	(165	) 	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	486	 	 	 	75	 	
	  	 	 	 	 	 	 	 	
Pension liability adjustment	  				 				
Balance – beginning of period	  	 	(67	) 	 	 	(74	) 	
Change in period, net of income tax benefit (expense) of $1 and $(3)	  	 	(4	) 	 	 	5	 	
	  	 	 	 	 	 	 	 	
Balance – end of period	  	 	(71	) 	 	 	(69	) 	
	  	 	 	 	 	 	 	 	
Accumulated other comprehensive income	  	 	1,989	 	 	 	1,294	 	
	  	 	 	 	 	 	 	 	
Common Shares issued to employee trust	  				 				
Balance – beginning and end of period	  	 	(2	) 	 	 	(2	) 	
	  	 	 	 	 	 	 	 	
Total shareholders’ equity	  	$	24,113	 	 	$	21,410	 	
	  	 	 	 	 	 	 	 	
See accompanying notes to consolidated financial statements
 
6

Table of Contents
 ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 	  	Six Months Ended
June 30	 	
 	  	2011	 	 	2010	 	
 	  	(in millions of U.S.
dollars)	 	
Cash flows from operating activities	  				 				
Net income	  	$	866	 	 	$	1,432	 	
Adjustments to reconcile net income to net cash flows from operating activities	  				 				
Net realized losses (gains)	  	 	118	 	 	 	(177	) 	
Amortization of premiums/discounts on fixed maturities	  	 	63	 	 	 	61	 	
Deferred income taxes	  	 	47	 	 	 	(48	) 	
Unpaid losses and loss expenses	  	 	1,001	 	 	 	(452	) 	
Unearned premiums	  	 	478	 	 	 	818	 	
Future policy benefits	  	 	37	 	 	 	40	 	
Insurance and reinsurance balances payable	  	 	449	 	 	 	(16	) 	
Accounts payable, accrued expenses, and other liabilities	  	 	3	 	 	 	33	 	
Income taxes payable	  	 	(91	) 	 	 	60	 	
Insurance and reinsurance balances receivable	  	 	(578	) 	 	 	(316	) 	
Reinsurance recoverable on losses and loss expenses	  	 	(296	) 	 	 	346	 	
Reinsurance recoverable on policy benefits	  	 	29	 	 	 	11	 	
Deferred policy acquisition costs	  	 	(149	) 	 	 	(167	) 	
Prepaid reinsurance premiums	  	 	(156	) 	 	 	(411	) 	
Other	  	 	242	 	 	 	477	 	
	  	 	 	 	 	 	 	 	
Net cash flows from operating activities	  	 	2,063	 	 	 	1,691	 	
	  	 	 	 	 	 	 	 	
Cash flows from investing activities	  				 				
Purchases of fixed maturities available for sale	  	 	(13,041	) 	 	 	(16,623	) 	
Purchases of to be announced mortgage-backed securities	  	 	(642	) 	 	 	(720	) 	
Purchases of fixed maturities held to maturity	  	 	(234	) 	 	 	(324	) 	
Purchases of equity securities	  	 	(170	) 	 	 	(38	) 	
Sales of fixed maturities available for sale	  	 	9,346	 	 	 	12,866	 	
Sales of to be announced mortgage-backed securities	  	 	639	 	 	 	684	 	
Sales of equity securities	  	 	347	 	 	 	311	 	
Maturities and redemptions of fixed maturities available for sale	  	 	1,758	 	 	 	1,776	 	
Maturities and redemptions of fixed maturities held to maturity	  	 	656	 	 	 	570	 	
Net derivative instruments settlements	  	 	(46	) 	 	 	131	 	
Acquisition of subsidiaries (net of cash acquired of $95 in 2011)	  	 	(380	) 	 	 	—  	  	
Other	  	 	(132	) 	 	 	(100	) 	
	  	 	 	 	 	 	 	 	
Net cash flows used for investing activities	  	 	(1,899	) 	 	 	(1,467	) 	
	  	 	 	 	 	 	 	 	
Cash flows from financing activities	  				 				
Dividends paid on Common Shares	  	 	(223	) 	 	 	(210	) 	
Common Shares repurchased	  	 	(68	) 	 	 	—  	  	
Proceeds from issuance of short-term debt	  	 	3,311	 	 	 	175	 	
Repayment of short-term debt	  	 	(3,211	) 	 	 	(175	) 	
Proceeds from share-based compensation plans	  	 	76	 	 	 	19	 	
	  	 	 	 	 	 	 	 	
Net cash flows used for financing activities	  	 	(115	) 	 	 	(191	) 	
	  	 	 	 	 	 	 	 	
Effect of foreign currency rate changes on cash and cash equivalents	  	 	12	 	 	 	(34	) 	
	  	 	 	 	 	 	 	 	
Net increase (decrease) in cash	  	 	61	 	 	 	(1	) 	
Cash – beginning of period	  	 	772	 	 	 	669	 	
	  	 	 	 	 	 	 	 	
Cash – end of period	  	$	833	 	 	$	668	 	
	  	 	 	 	 	 	 	 	
Supplemental cash flow information	  				 				
Taxes paid	  	$	265	 	 	$	256	 	
Interest paid	  	$	112	 	 	$	101	 	
See accompanying notes to consolidated financial statements
 
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 ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. General
ACE Limited is a holding company incorporated in Zurich, Switzerland. ACE Limited and its subsidiaries (collectively, ACE, we, us, or our) provide a broad range of insurance and reinsurance products to insureds worldwide. ACE operates through the following business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life.
The interim unaudited consolidated financial statements, which include the accounts of ACE and its subsidiaries, have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and, in the opinion of management, reflect all adjustments (consisting of normally recurring accruals) necessary for a fair statement of the results and financial position for such periods. All significant intercompany accounts and transactions have been eliminated. The results of operations and cash flows for any interim period are not necessarily indicative of the results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2010.
 2. Accounting guidance not yet adopted
Accounting for costs associated with acquiring or renewing insurance contracts
In October 2010, the Financial Accounting Standards Board (FASB) issued new guidance related to the accounting for costs associated with acquiring or renewing insurance contracts. The guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred. This guidance is effective for interim and annual reporting periods beginning on January 1, 2012, and may be applied prospectively or retrospectively. The amount of acquisition costs we will defer under the new guidance will be less than the amount deferred under our current accounting practice. We are in the process of assessing the impact that this guidance will have on our financial condition and results of operations.
Fair value measurements
In May 2011, the FASB issued new guidance on fair value measurements to revise the wording used to describe the requirements for measuring fair value and for disclosing information about fair value measurements. The guidance is not necessarily intended to result in a significant change in the application of the current requirements. Instead it is intended to clarify the intended application of existing fair value measurement requirements. It also changes certain principles or requirements for measuring fair value and disclosing information about fair value measurements. This guidance is effective for interim and annual reporting periods beginning on or after December 15, 2011. We are in the process of assessing the impact this amendment will have on our financial statements.
 3. Acquisitions
ACE acquired New York Life’s Korea operations on February 1, 2011 and New York Life’s Hong Kong operations on April 1, 2011 for approximately $425 million in cash. These acquired businesses, now operating under our Life segment, expand our presence in the North Asia market and complement our life insurance business established in that region. These acquisitions generated approximately $123 million of goodwill, none of which is expected to be deductible for income tax purposes, and approximately $207 million of intangible assets. The most significant intangible asset is the value of business acquired (VOBA). VOBA represents the fair value of the future profits of the in-force long duration contracts and is amortized in relation to the premium or profit emergence of the underlying contracts, depending on the nature of the product, in a manner similar to deferred acquisition costs.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
Prior year acquisitions
On December 28, 2010, ACE acquired all the outstanding common stock of Rain and Hail Insurance Service, Inc. (Rain and Hail) not previously owned by ACE for approximately $1.1 billion in cash. Rain and Hail has served America’s farmers since 1919, providing comprehensive multiple peril crop and crop/hail insurance protection to customers in the U.S. and Canada. This acquisition is consistent with ACE’s strategy to expand its specialty lines business and provides further diversification of ACE’s global product mix. The acquisition of Rain and Hail generated $129 million of goodwill, none of which is expected to be deductible for income tax purposes, and $523 million of other intangible assets. Goodwill and other intangible assets arising from this acquisition are included in the Insurance – North American segment.
On December 1, 2010, ACE acquired Jerneh Insurance Berhad (Jerneh), a general insurance company in Malaysia, for approximately $218 million in cash. The acquisitions of Rain and Hail and Jerneh were financed with cash on hand and the use of reverse repurchase agreements of $1 billion.
 4. Investments
a) Fixed maturities
The following tables present the fair value and amortized cost of and the gross unrealized appreciation (depreciation) related to fixed maturities as well as related OTTI recognized in AOCI:

 	  	June 30, 2011	 	
 	  	Amortized
Cost	 	  	Gross
Unrealized
Appreciation	 	  	Gross
Unrealized
Depreciation	 	 	Fair
Value	 	  	OTTI Recognized
in AOCI	 	
 	  	(in millions of U.S. dollars)	 	
Available for sale	  				  				  				 				  				
U.S. Treasury and agency	  	$	2,423	 	  	$	80	 	  	$	(8	) 	 	$	2,495	 	  	$	—  	  	
Foreign	  	 	12,341	 	  	 	389	 	  	 	(51	) 	 	 	12,679	 	  	 	(12	) 	
Corporate securities	  	 	13,853	 	  	 	723	 	  	 	(63	) 	 	 	14,513	 	  	 	(14	) 	
Mortgage-backed securities	  	 	9,932	 	  	 	259	 	  	 	(180	) 	 	 	10,011	 	  	 	(191	) 	
States, municipalities, and political subdivisions	  	 	1,313	 	  	 	36	 	  	 	(9	) 	 	 	1,340	 	  	 	—  	  	
	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
	  	$	39,862	 	  	$	1,487	 	  	$	(311	) 	 	$	41,038	 	  	$	(217	) 	
	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
Held to maturity	  				  				  				 				  				
U.S. Treasury and agency	  	$	1,067	 	  	$	30	 	  	$	(5	) 	 	$	1,092	 	  	$	—  	  	
Foreign	  	 	1,051	 	  	 	1	 	  	 	(24	) 	 	 	1,028	 	  	 	—  	  	
Corporate securities	  	 	2,311	 	  	 	15	 	  	 	(34	) 	 	 	2,292	 	  	 	—  	  	
Mortgage-backed securities	  	 	3,414	 	  	 	69	 	  	 	(11	) 	 	 	3,472	 	  	 	—  	  	
States, municipalities, and political subdivisions	  	 	1,190	 	  	 	10	 	  	 	(6	) 	 	 	1,194	 	  	 	—  	  	
	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
	  	$	9,033	 	  	$	125	 	  	$	(80	) 	 	$	9,078	 	  	$	—  	  	

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ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)

 	  	December 31, 2010	 	
 	  	Amortized
Cost	 	  	Gross
Unrealized
Appreciation	 	  	Gross
Unrealized
Depreciation	 	 	Fair
Value	 	  	OTTI Recognized
in AOCI	 	
 	  	(in millions of U.S. dollars)	 	
Available for sale	  				  				  				 				  				
U.S. Treasury and agency	  	$	2,904	 	  	$	74	 	  	$	(15	) 	 	$	2,963	 	  	$	—  	  	
Foreign	  	 	10,926	 	  	 	340	 	  	 	(80	) 	 	 	11,186	 	  	 	(28	) 	
Corporate securities	  	 	12,902	 	  	 	754	 	  	 	(69	) 	 	 	13,587	 	  	 	(29	) 	
Mortgage-backed securities	  	 	8,508	 	  	 	213	 	  	 	(205	) 	 	 	8,516	 	  	 	(228	) 	
States, municipalities, and political subdivisions	  	 	1,302	 	  	 	15	 	  	 	(30	) 	 	 	1,287	 	  	 	—  	  	
	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
	  	$	36,542	 	  	$	1,396	 	  	$	(399	) 	 	$	37,539	 	  	$	(285	) 	
	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
Held to maturity	  				  				  				 				  				
U.S. Treasury and agency	  	$	1,105	 	  	$	32	 	  	$	(10	) 	 	$	1,127	 	  	$	—  	  	
Foreign	  	 	1,049	 	  	 	1	 	  	 	(37	) 	 	 	1,013	 	  	 	—  	  	
Corporate securities	  	 	2,361	 	  	 	12	 	  	 	(60	) 	 	 	2,313	 	  	 	—  	  	
Mortgage-backed securities	  	 	3,811	 	  	 	62	 	  	 	(27	) 	 	 	3,846	 	  	 	—  	  	
States, municipalities, and political subdivisions	  	 	1,175	 	  	 	5	 	  	 	(18	) 	 	 	1,162	 	  	 	—  	  	
	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
	  	$	9,501	 	  	$	112	 	  	$	(152	) 	 	$	9,461	 	  	$	—  	  	
	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
As discussed in Note 4 c), if a credit loss is indicated on an impaired fixed maturity, an OTTI is considered to have occurred and the portion of the impairment not related to credit losses (non-credit OTTI) is recognized in OCI. Included in the “OTTI Recognized in AOCI” columns above is the cumulative amount of non-credit OTTI recognized in OCI adjusted for subsequent sales, maturities, and redemptions. OTTI Recognized in AOCI does not include the impact of subsequent changes in fair value of the related securities. In periods subsequent to a recognition of OTTI in OCI, changes in the fair value of the related fixed maturities are reflected in Unrealized appreciation (depreciation) in the consolidated statement of shareholders’ equity. For the three and six months ended June 30, 2011, $25 million and $8 million, respectively, of net unrealized depreciation related to such securities is included in OCI. For the three and six months ended June 30, 2010, $33 million and $96 million, respectively, of net unrealized appreciation related to such securities is included in OCI. At June 30, 2011 and December 31, 2010, AOCI includes net unrealized depreciation of $109 million and $99 million, respectively, related to securities remaining in the investment portfolio at those dates for which ACE has recognized a non-credit OTTI.
Mortgage-backed securities issued by U.S. government agencies are combined with all other to be announced mortgage derivatives held (refer to Note 7 a) (iv)) and are included in the category, “Mortgage-backed securities”. Approximately 81 percent and 79 percent of the total mortgage-backed securities at June 30, 2011 and December 31, 2010, respectively, are represented by investments in U.S. government agency bonds. The remainder of the mortgage exposure consists of collateralized mortgage obligations and nongovernment mortgage-backed securities, the majority of which provide a planned structure for principal and interest payments and carry a rating of AAA by the major credit rating agencies.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
The following table presents fixed maturities by contractual maturity. Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.

 	  	June 30
2011	 	  	December 31
2010	 	
 	  	Amortized
Cost	 	  	Fair
Value	 	  	Amortized
Cost	 	  	Fair
Value	 	
 	  	(in millions of U.S. dollars)	 	
Available for sale; maturity period	  				  				  				  				
Due in 1 year or less	  	$	2,046	 	  	$	2,074	 	  	$	1,846	 	  	$	1,985	 	
Due after 1 year through 5 years	  	 	12,962	 	  	 	13,446	 	  	 	13,094	 	  	 	13,444	 	
Due after 5 years through 10 years	  	 	11,468	 	  	 	11,972	 	  	 	10,276	 	  	 	10,782	 	
Due after 10 years	  	 	3,454	 	  	 	3,535	 	  	 	2,818	 	  	 	2,812	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
	  	 	29,930	 	  	 	31,027	 	  	 	28,034	 	  	 	29,023	 	
Mortgage-backed securities	  	 	9,932	 	  	 	10,011	 	  	 	8,508	 	  	 	8,516	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
	  	$	39,862	 	  	$	41,038	 	  	$	36,542	 	  	$	37,539	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Held to maturity; maturity period	  				  				  				  				
Due in 1 year or less	  	$	310	 	  	$	312	 	  	$	400	 	  	$	404	 	
Due after 1 year through 5 years	  	 	2,127	 	  	 	2,163	 	  	 	1,983	 	  	 	2,010	 	
Due after 5 years through 10 years	  	 	2,512	 	  	 	2,468	 	  	 	2,613	 	  	 	2,524	 	
Due after 10 years	  	 	670	 	  	 	663	 	  	 	694	 	  	 	677	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
	  	 	5,619	 	  	 	5,606	 	  	 	5,690	 	  	 	5,615	 	
Mortgage-backed securities	  	 	3,414	 	  	 	3,472	 	  	 	3,811	 	  	 	3,846	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
	  	$	9,033	 	  	$	9,078	 	  	$	9,501	 	  	$	9,461	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
b) Equity securities
The following table presents the fair value and cost of and gross unrealized appreciation (depreciation) related to equity securities:

 	  	June 30
2011	 	 	December 31
2010	 	
 	  	(in millions of U.S. dollars)	 	
Cost	  	$	549	 	 	$	666	 	
Gross unrealized appreciation	  	 	37	 	 	 	28	 	
Gross unrealized depreciation	  	 	(4	) 	 	 	(2	) 	
	  	 	 	 	 	 	 	 	
Fair value	  	$	582	 	 	$	692	 	
	  	 	 	 	 	 	 	 	
c) Net realized gains (losses)
In accordance with guidance related to the recognition and presentation of OTTI, when an OTTI related to a fixed maturity has occurred, OTTI is required to be recorded in net income if management has the intent to sell the security or it is more likely than not that we will be required to sell the security before the recovery of its amortized cost. Further, in cases where we do not intend to sell the security and it is more likely than not that we will not be required to sell the security, ACE must evaluate the security to determine the portion of the
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
impairment, if any, related to credit losses. If a credit loss is indicated, an OTTI is considered to have occurred and any portion of the OTTI related to credit losses must be reflected in net income while the portion of OTTI related to all other factors is recognized in OCI. For fixed maturities held to maturity, OTTI recognized in OCI is accreted from AOCI to the amortized cost of the fixed maturity prospectively over the remaining term of the securities.
Each quarter, securities in an unrealized loss position (impaired securities), including fixed maturities, securities lending collateral, equity securities, and other investments, are reviewed to identify impaired securities to be specifically evaluated for a potential OTTI.
For all non-fixed maturities, OTTI is evaluated based on the following:
 
 	•	 	the amount of time a security has been in a loss position and the magnitude of the loss position;	
 
 	•	 	the period in which cost is expected to be recovered, if at all, based on various criteria including economic conditions and other issuer-specific developments; and	
 
 	•	 	ACE’s ability and intent to hold the security to the expected recovery period.	
As a general rule, we also consider that equity securities in an unrealized loss position for twelve consecutive months are impaired.
We review each fixed maturity in an unrealized loss position to assess whether the security is a candidate for credit loss. Specifically, we consider credit rating, market price, and issuer-specific financial information, among other factors, to assess the likelihood of collection of all principal and interest as contractually due. Securities for which we determine that credit loss is likely are subjected to further analysis to estimate the credit loss recognized in net income, if any. In general, credit loss recognized in net income equals the difference between the security’s amortized cost and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security. All significant assumptions used in determining credit losses are subject to change as market conditions evolve.
Projected cash flows for corporate securities (principally senior unsecured bonds) are driven primarily by assumptions regarding probability of default and also the timing and amount of recoveries associated with defaults. We develop these estimates using information based on market observable data, issuer-specific information, and credit ratings. ACE developed its default assumption by using historical default data by Moody’s Investors Service (Moody’s) rating category to calculate a 1-in-100 year probability of default, which results in a default assumption in excess of the historical mean default rate.
There were no credit losses recognized in net income for corporate securities in 2011. For the three and six months ended June 30, 2010, credit losses recognized in net income for corporate securities were nil and $1 million, respectively.
For mortgage-backed securities, credit impairment is assessed using a cash flow model that estimates the cash flows on the underlying mortgages, using the security-specific collateral and transaction structure. The model estimates cash flows from the underlying mortgage loans and distributes those cash flows to various tranches of securities, considering the transaction structure and any subordination and credit enhancements that exist in that structure. The cash flow model incorporates actual cash flows on the mortgage-backed securities through the current period and then projects the remaining cash flows using a number of assumptions, including default rates, prepayment rates, and loss severity rates (the par value of a defaulted security that will not be recovered) on foreclosed properties.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
Credit losses recognized in net income for mortgage-backed securities for the three and six months ended June 30, 2011 were $2 million and $3 million, respectively. Credit losses recognized in net income for mortgage-backed securities for the three and six months ended June 30, 2010 were $5 million and $22 million, respectively.
The following table presents the Net realized gains (losses) and the losses included in Net realized gains (losses) and OCI as a result of conditions which caused management to conclude the decline in fair value of certain investments was “other-than-temporary”:

 	  	Three Months Ended
June 30	 	 	Six Months Ended
June 30	 	
 	  	2011	 	 	2010	 	 	2011	 	 	2010	 	
 	  	(in millions of U.S. dollars)	 	
Fixed maturities:	  				 				 				 				
OTTI on fixed maturities, gross	  	$	(6	) 	 	$	(18	) 	 	$	(11	) 	 	$	(68	) 	
OTTI on fixed maturities recognized in OCI (pre-tax)	  	 	1	 	 	 	13	 	 	 	2	 	 	 	45	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
OTTI on fixed maturities, net	  	 	(5	) 	 	 	(5	) 	 	 	(9	) 	 	 	(23	) 	
Gross realized gains excluding OTTI	  	 	108	 	 	 	128	 	 	 	217	 	 	 	296	 	
Gross realized losses excluding OTTI	  	 	(29	) 	 	 	(46	) 	 	 	(85	) 	 	 	(115	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total fixed maturities	  	 	74	 	 	 	77	 	 	 	123	 	 	 	158	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Equity securities:	  				 				 				 				
Gross realized gains excluding OTTI	  	 	4	 	 	 	32	 	 	 	12	 	 	 	77	 	
Gross realized losses excluding OTTI	  	 	—  	  	 	 	—  	  	 	 	(1	) 	 	 	—  	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total equity securities	  	 	4	 	 	 	32	 	 	 	11	 	 	 	77	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
OTTI on other investments	  	 	(3	) 	 	 	(13	) 	 	 	(3	) 	 	 	(13	) 	
Foreign exchange gains (losses)	  	 	(30	) 	 	 	61	 	 	 	(109	) 	 	 	52	 	
Investment and embedded derivative instruments	  	 	(48	) 	 	 	5	 	 	 	(68	) 	 	 	24	 	
Fair value adjustments on insurance derivative	  	 	(70	) 	 	 	(301	) 	 	 	1	 	 	 	(205	) 	
S&P put options and futures	  	 	3	 	 	 	143	 	 	 	(68	) 	 	 	84	 	
Other derivative instruments	  	 	(2	) 	 	 	4	 	 	 	(3	) 	 	 	(5	) 	
Other	  	 	(1	) 	 	 	1	 	 	 	(2	) 	 	 	5	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net realized gains (losses)	  	$	(73	) 	 	$	9	 	 	$	(118	) 	 	$	177	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
The following table presents a roll forward of pre-tax credit losses related to fixed maturities for which a portion of OTTI was recognized in OCI:

 	  	Three Months Ended
June 30	 	 	Six Months Ended
June 30	 	
 	  	2011	 	 	2010	 	 	2011	 	 	2010	 	
 	  	(in millions of U.S. dollars)	 	
Balance of credit losses related to securities still held- beginning of period	  	$	96	 	 	$	163	 	 	$	137	 	 	$	174	 	
Additions where no OTTI was previously recorded	  	 	2	 	 	 	5	 	 	 	2	 	 	 	22	 	
Additions where an OTTI was previously recorded	  	 	—  	  	 	 	—  	  	 	 	1	 	 	 	1	 	
Reductions for securities sold during the period	  	 	(4	) 	 	 	(31	) 	 	 	(46	) 	 	 	(60	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance of credit losses related to securities still held- end of period	  	$	94	 	 	$	137	 	 	$	94	 	 	$	137	 	

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ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
d) Gross unrealized loss
At June 30, 2011, there were 4,348 fixed maturities out of a total of 21,493 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $8 million. Fixed maturities in an unrealized loss position at June 30, 2011, comprised both investment grade and below investment grade securities for which fair value declined primarily due to widening credit spreads since the date of purchase.
The following tables present, for all securities in an unrealized loss position (including securities on loan), the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:

 	  	0 – 12 Months	 	 	Over 12 Months	 	 	Total	 	
 	  	Fair Value	 	  	Gross
Unrealized
Loss	 	 	Fair Value	 	  	Gross
Unrealized
Loss	 	 	Fair Value	 	  	Gross
Unrealized
Loss	 	
 	  	(in millions of U.S. dollars)	 	
June 30, 2011	  				  				 				  				 				  				
U.S. Treasury and agency	  	$	551	 	  	$	(13.3	) 	 	$	—  	  	  	$	—  	  	 	$	551	 	  	$	(13.3	) 	
Foreign	  	 	3,136	 	  	 	(60.7	) 	 	 	264	 	  	 	(14.1	) 	 	 	3,400	 	  	 	(74.8	) 	
Corporate securities	  	 	3,709	 	  	 	(73.2	) 	 	 	152	 	  	 	(23.9	) 	 	 	3,861	 	  	 	(97.1	) 	
Mortgage-backed securities	  	 	2,638	 	  	 	(35.1	) 	 	 	825	 	  	 	(155.4	) 	 	 	3,463	 	  	 	(190.5	) 	
States, municipalities, and political subdivisions	  	 	663	 	  	 	(10.8	) 	 	 	62	 	  	 	(4.6	) 	 	 	725	 	  	 	(15.4	) 	
	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
Total fixed maturities	  	 	10,697	 	  	 	(193.1	) 	 	 	1,303	 	  	 	(198.0	) 	 	 	12,000	 	  	 	(391.1	) 	
Equity securities	  	 	44	 	  	 	(3.3	) 	 	 	1	 	  	 	(0.4	) 	 	 	45	 	  	 	(3.7	) 	
Other investments	  	 	19	 	  	 	(1.0	) 	 	 	—  	  	  	 	—  	  	 	 	19	 	  	 	(1.0	) 	
	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
Total	  	$	10,760	 	  	$	(197.4	) 	 	$	1,304	 	  	$	(198.4	) 	 	$	12,064	 	  	$	(395.8	) 	

																									
 	  	0 – 12 Months	 	 	Over 12 Months	 	 	Total	 	
 	  	Fair Value	 	  	Gross
Unrealized
Loss	 	 	Fair Value	 	  	Gross
Unrealized
Loss	 	 	Fair Value	 	  	Gross
Unrealized
Loss	 	
 	  	(in millions of U.S. dollars)	 	
December 31, 2010	  				  				 				  				 				  				
U.S. Treasury and agency	  	$	864	 	  	$	(24.6	) 	 	$	—  	  	  	$	—  	  	 	$	864	 	  	$	(24.6	) 	
Foreign	  	 	4,409	 	  	 	(79.0	) 	 	 	312	 	  	 	(37.6	) 	 	 	4,721	 	  	 	(116.6	) 	
Corporate securities	  	 	3,553	 	  	 	(85.1	) 	 	 	273	 	  	 	(43.9	) 	 	 	3,826	 	  	 	(129.0	) 	
Mortgage-backed securities	  	 	3,904	 	  	 	(67.3	) 	 	 	1,031	 	  	 	(165.1	) 	 	 	4,935	 	  	 	(232.4	) 	
States, municipalities, and political subdivisions	  	 	1,115	 	  	 	(36.2	) 	 	 	79	 	  	 	(11.9	) 	 	 	1,194	 	  	 	(48.1	) 	
	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
Total fixed maturities	  	 	13,845	 	  	 	(292.2	) 	 	 	1,695	 	  	 	(258.5	) 	 	 	15,540	 	  	 	(550.7	) 	
Equity securities	  	 	45	 	  	 	(1.9	) 	 	 	1	 	  	 	(0.3	) 	 	 	46	 	  	 	(2.2	) 	
Other investments	  	 	66	 	  	 	(8.7	) 	 	 	—  	  	  	 	—  	  	 	 	66	 	  	 	(8.7	) 	
	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
Total	  	$	13,956	 	  	$	(302.8	) 	 	$	1,696	 	  	$	(258.8	) 	 	$	15,652	 	  	$	(561.6	) 	

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

 	  	June 30
2011	 	  	December 31
2010	 	
 	  	(in millions of U.S. dollars)	 	
Trust funds	  	$	9,143	 	  	$	8,200	 	
Deposits with U.S. regulatory authorities	  	 	1,254	 	  	 	1,384	 	
Deposits with non-U.S. regulatory authorities	  	 	2,264	 	  	 	2,289	 	
Other pledged assets	  	 	273	 	  	 	190	 	
	  	 	 	 	  	 	 	 	
	  	$	12,934	 	  	$	12,063	 	
	  	 	 	 	  	 	 	 	
 5. Fair value measurements
a) Fair value hierarchy
Fair value of financial assets and financial liabilities is estimated based on the framework established in the fair value accounting guidance. The guidance defines fair value as the price to sell an asset or transfer a liability in an orderly transaction between market participants and establishes a three-level valuation hierarchy in which inputs into valuation techniques used to measure fair value are classified. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The three levels of the hierarchy are as follows:
 
 	•	 	Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets;	
 
 	•	 	Level 2 – Includes, among other items, inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves, quoted prices for similar assets and liabilities in active markets, and quoted prices for identical or similar assets and liabilities in markets that are not active; and	
 
 	•	 	Level 3 – Inputs that are unobservable and reflect management’s judgments about assumptions that market participants would use in pricing an asset or liability.	
We categorize financial instruments within the valuation hierarchy at the balance sheet date based upon the lowest level of inputs that are significant to the fair value measurement. Accordingly, transfers between levels within the valuation hierarchy occur when there are significant changes to the inputs, such as increases or decreases in market activity, changes to the availability of current prices, changes to the transparency to underlying inputs, and whether there are significant variances in quoted prices. Transfers in and/or out of any level are assumed to occur at the end of the period.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
We use one or more pricing services to obtain fair value measurements for the majority of the investment securities we hold. Based on management’s understanding of the methodologies used by these pricing services, all applicable investments have been valued in accordance with GAAP. The following is a description of the valuation techniques and inputs used to determine fair value for financial instruments carried at fair value, as well as the general classification of such financial instruments pursuant to the valuation hierarchy.
Fixed maturities
We use pricing services to estimate fair value measurements for the majority of our fixed maturities. The pricing services use market quotations for fixed maturities that have quoted prices in active markets; such securities are classified within Level 1. For fixed maturities other than U.S. Treasury securities that generally do not trade on a daily basis, the pricing services prepare estimates of fair value measurements using their pricing applications, which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. Additional valuation factors that may be taken into account are nominal spreads, dollar basis, and liquidity adjustments. The pricing services evaluate each asset class based on relevant market and credit information, perceived market movements, and sector news. The market inputs used in the pricing evaluation, listed in the approximate order of priority include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. The extent of the use of each input is dependent on the asset class and the market conditions. Additionally, given the asset class, the priority of the use of inputs may change or some market inputs may not be relevant. The overwhelming majority of fixed maturities are classified within Level 2 because the most significant inputs used in the pricing techniques are observable. Fixed maturities for which pricing is unobservable are classified within Level 3.
Equity securities
Equity securities with active markets are classified within Level 1 as fair values are based on quoted market prices. For non-public equity securities, fair values are based on market valuations and are classified within Level 2. Equity securities for which pricing is unobservable are classified within Level 3.
Short-term investments
Short-term investments, which comprise securities due to mature within one year of the date of purchase that are traded in active markets, are classified within Level 1 as fair values are based on quoted market prices. Securities such as commercial paper and discount notes are classified within Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their cost approximates par value.
Other investments
Fair values for the majority of Other investments including investments in partially-owned investment companies, investment funds, and limited partnerships are based on their respective net asset values or equivalent (NAV). The majority of these investments, for which NAV was used as a practical expedient to measure fair value, are classified within Level 3 because either ACE will never have the contractual option to redeem the investment or will not have the contractual option to redeem the investments in the near term. The remainder of such investments are classified within Level 2. Equity securities and fixed maturities held in rabbi trusts maintained by ACE for deferred compensation plans as well as other portfolios, and included in Other investments, are classified within the valuation hierarchy on the same basis as other equity securities and fixed maturities.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
Securities lending collateral
The underlying assets included in Securities lending collateral are fixed maturities which are classified in the valuation hierarchy on the same basis as other fixed maturities. Excluded from the valuation hierarchy is the corresponding liability related to ACE’s obligation to return the collateral plus interest.
Investment derivative instruments
Actively traded investment derivative instruments, including futures, options, and exchange-traded forward contracts are classified within Level 1 as fair values are based on quoted market prices.
Guaranteed living benefits
The liability for Guaranteed Living Benefits (GLB) arises from life reinsurance programs covering living benefit guarantees whereby we assume the risk of Guaranteed Minimum Income Benefits (GMIB) and Guaranteed Minimum Accumulation Benefits (GMAB) associated with variable annuity contracts. For GLB reinsurance, ACE estimates fair value using an internal valuation model which includes current market information and estimates of policyholder behavior. All of the treaties contain claim limits, which are factored into the valuation model. The fair value depends on a number of inputs, including changes in interest rates, changes in equity markets, credit risk, current account value, changes in market volatility, expected annuitization rates, changes in policyholder behavior, and changes in policyholder mortality.
The most significant policyholder behavior assumptions include lapse rates and the GMIB annuitization rates. Assumptions regarding lapse rates and GMIB annuitization rates differ by treaty but the underlying methodologies to determine rates applied to each treaty are comparable. The assumptions regarding lapse and GMIB annuitization rates determined for each treaty are based on a dynamic calculation that uses several underlying factors.
A lapse rate is the percentage of in-force policies surrendered in a given calendar year. All else equal, as lapse rates increase, ultimate claim payments will decrease. In general, the base lapse function assumes low lapse rates (ranging from about 1 percent to 6 percent per annum) during the surrender charge period of the GMIB contract, followed by a “spike” lapse rate (ranging from about 10 percent to 30 percent per annum) in the year immediately following the surrender charge period, and then reverting to an ultimate lapse rate (generally around 10 percent per annum), typically over a 2-year period. This base rate is adjusted downward for policies with more valuable guarantees (policies with guaranteed values far in excess of their account values) by multiplying the base lapse rate by a factor ranging from 15 percent to 75 percent. Additional lapses due to partial withdrawals and older policyholders with tax-qualified contracts (due to required minimum distributions) are also included.
The GMIB annuitization rate is the percentage of policies for which the policyholder will elect to annuitize using the guaranteed benefit provided under the GMIB. All else equal, as GMIB annuitization rates increase, ultimate claim payments will increase, subject to treaty claim limits. In general ACE assumes that GMIB annuitization rates will be higher for policies with more valuable guarantees (policies with guaranteed values far in excess of their account values). In addition, we also assume that GMIB annuitization rates are higher in the first year immediately following the waiting period (the first year the policies are eligible to annuitize using the GMIB) in comparison to all subsequent years. We do not yet have a robust set of annuitization experience because most of our clients’ policyholders are not yet eligible to annuitize using the GMIB. However, for certain clients there are several years of annuitization experience. For these clients the annuitization function reflects the actual experience and has a maximum annuitization rate per annum of 8 percent (a higher maximum applies in the first year a policy is eligible to annuitize using the GMIB—it is over 13 percent). For most clients, there is no
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
currently observable relevant annuitization behavior data and so we use a weighted-average (with a heavier weighting on the observed experience noted previously) of three different annuitization functions with maximum annuitization rates per annum of 8 percent, 12 percent, and 30 percent, respectively (with significantly higher rates in the first year a policy is eligible to annuitize using the GMIB). The GMIB reinsurance treaties include claim limits to protect ACE in the event that actual annuitization behavior is significantly higher than expected.
The effect of changes in key market factors on assumed lapse and annuitization rates reflect emerging trends using data available from cedants. For treaties with limited experience, rates are established in line with data received from other ceding companies adjusted as appropriate with industry estimates. The model and related assumptions are continuously re-evaluated by management and enhanced, as appropriate, based upon additional experience obtained related to policyholder behavior and availability of more information, such as market conditions, market participant assumptions, and demographics of in-force annuities. Based on our first and second quarter 2011 review, no changes were made to actuarial or behavior assumptions. We made minor technical refinements to the model with a favorable net income impact of approximately $0.3 million and $6.3 million for the three and six months ended June 30, 2011, respectively.
We view the variable annuity reinsurance business as having a similar risk profile to that of catastrophe reinsurance, with the probability of a cumulative long-term economic net loss relatively small at the time of pricing. However, adverse changes in market factors and policyholder behavior will have an adverse impact on net income, which may be material. Because of the significant use of unobservable inputs including policyholder behavior, GLB reinsurance is classified within Level 3.
Other derivative instruments
We maintain positions in other derivative instruments including exchange-traded equity futures contracts and option contracts designed to limit exposure to a severe equity market decline, which would cause an increase in expected claims and, therefore, reserves for Guaranteed Minimum Death Benefits (GMDB) and GLB reinsurance business. Our position in exchange-traded equity futures contracts is classified within Level 1. The fair value of the majority of the remaining positions in other derivative instruments is based on significant observable inputs including equity security and interest rate indices. Accordingly, these are classified within Level 2. Our position in credit default swaps is typically included within Level 3.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
The following tables present, by valuation hierarchy, the financial instruments measured at fair value on a recurring basis:

   	  	Level 1	 	 	Level 2	 	  	Level 3	 	  	Total	 	
 	  	(in millions of U.S. dollars)	 	
June 30, 2011	  				 				  				  				
Assets:	  				 				  				  				
Fixed maturities available for sale	  				 				  				  				
U.S. Treasury and agency	  	$	1,245	 	 	$	1,250	 	  	$	—  	  	  	$	2,495	 	
Foreign	  	 	207	 	 	 	12,445	 	  	 	27	 	  	 	12,679	 	
Corporate securities	  	 	43	 	 	 	14,328	 	  	 	142	 	  	 	14,513	 	
Mortgage-backed securities	  	 	—  	  	 	 	9,977	 	  	 	34	 	  	 	10,011	 	
States, municipalities, and political subdivisions	  	 	—  	  	 	 	1,339	 	  	 	1	 	  	 	1,340	 	
	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
	  	 	1,495	 	 	 	39,339	 	  	 	204	 	  	 	41,038	 	
	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Equity securities	  	 	567	 	 	 	5	 	  	 	10	 	  	 	582	 	
Short-term investments	  	 	1,266	 	 	 	1,114	 	  	 	—  	  	  	 	2,380	 	
Other investments	  	 	239	 	 	 	237	 	  	 	1,680	 	  	 	2,156	 	
Securities lending collateral	  	 	—  	  	 	 	1,593	 	  	 	—  	  	  	 	1,593	 	
Investment derivative instruments	  	 	3	 	 	 	—  	  	  	 	—  	  	  	 	3	 	
Other derivative instruments	  	 	(37	) 	 	 	41	 	  	 	4	 	  	 	8	 	
	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Total assets measured at fair value	  	$	3,533	 	 	$	42,329	 	  	$	1,898	 	  	$	47,760	 	
	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Liabilities:	  				 				  				  				
GLB (1)	  	$	—  	  	 	$	—  	  	  	$	524	 	  	$	524	 	

(1)  	Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as future policy benefits in the consolidated balance sheets. Refer to Note 6 for additional information.	
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)

   	  	Level 1	 	 	Level 2	 	  	Level 3	 	  	Total	 	
 	  	(in millions of U.S. dollars)	 	
December 31, 2010	  				 				  				  				
Assets:	  				 				  				  				
Fixed maturities available for sale	  				 				  				  				
U.S. Treasury and agency	  	$	1,564	 	 	$	1,399	 	  	$	—  	  	  	$	2,963	 	
Foreign	  	 	187	 	 	 	10,973	 	  	 	26	 	  	 	11,186	 	
Corporate securities	  	 	31	 	 	 	13,441	 	  	 	115	 	  	 	13,587	 	
Mortgage-backed securities	  	 	—  	  	 	 	8,477	 	  	 	39	 	  	 	8,516	 	
States, municipalities, and political subdivisions	  	 	—  	  	 	 	1,285	 	  	 	2	 	  	 	1,287	 	
	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
	  	 	1,782	 	 	 	35,575	 	  	 	182	 	  	 	37,539	 	
	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Equity securities	  	 	676	 	 	 	3	 	  	 	13	 	  	 	692	 	
Short-term investments	  	 	903	 	 	 	1,080	 	  	 	—  	  	  	 	1,983	 	
Other investments	  	 	39	 	 	 	221	 	  	 	1,432	 	  	 	1,692	 	
Securities lending collateral	  	 	—  	  	 	 	1,495	 	  	 	—  	  	  	 	1,495	 	
Investment derivative instruments	  	 	11	 	 	 	—  	  	  	 	—  	  	  	 	11	 	
Other derivative instruments	  	 	(25	) 	 	 	46	 	  	 	4	 	  	 	25	 	
	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Total assets measured at fair value	  	$	3,386	 	 	$	38,420	 	  	$	1,631	 	  	$	43,437	 	
	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Liabilities:	  				 				  				  				
GLB (1)	  	$	—  	  	 	$	—  	  	  	$	507	 	  	$	507	 	

(1)  	Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as future policy benefits in the consolidated balance sheets. Refer to Note 6 for additional information.	
There were no significant gross transfers between Level 1 and Level 2 during the three and six months ended June 30, 2011 and 2010.
Fair value of alternative investments
Included in Other investments in the fair value hierarchy at June 30, 2011 and December 31, 2010 are investment funds, limited partnerships, and partially-owned investment companies measured at fair value using NAV as a practical expedient. At June 30, 2011 and December 31, 2010, there were no probable or pending sales related to any of the investments measured at fair value using NAV.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
The following table presents, by investment category, the fair value and maximum future funding commitments related to these investments. The table also shows the expected liquidation period from June 30, 2011.

 	  	Expected
Liquidation
Period	 	  	June 30, 2011	 	  	December 31, 2010	 	
	  			  	Fair
Value	 	  	Maximum
Future
Funding
Commitments	 	  	Fair
Value	 	  	Maximum
Future
Funding
Commitments	 	
 	  	 	 	  	(in millions of U.S. dollars)	 	
Financial	  	 	5 to 9 Years	  	  	$	207	 	  	$	163	 	  	$	192	 	  	$	151	 	
Real estate	  	 	3 to 9 Years	  	  	 	261	 	  	 	89	 	  	 	168	 	  	 	92	 	
Distressed	  	 	6 to 9 Years	  	  	 	221	 	  	 	219	 	  	 	243	 	  	 	43	 	
Mezzanine	  	 	6 to 9 Years	  	  	 	126	 	  	 	299	 	  	 	135	 	  	 	173	 	
Traditional	  	 	3 to 8 Years	  	  	 	457	 	  	 	410	 	  	 	376	 	  	 	291	 	
Vintage	  	 	1 to 3 Years	  	  	 	27	 	  	 	6	 	  	 	27	 	  	 	3	 	
Investment funds	  	 	Not Applicable	  	  	 	338	 	  	 	—  	  	  	 	329	 	  	 	—  	  	
	  				  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
	  				  	$	1,637	 	  	$	1,186	 	  	$	1,470	 	  	$	753	 	
	  				  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Included in all categories in the above table except for Investment funds are investments for which ACE will never have the contractual option to redeem but receives distributions based on the liquidation of the underlying assets. Included in the “Expected Liquidation Period” column above is the range in years over which ACE expects the majority of underlying assets in the respective categories to be liquidated. Further, for all categories except for Investment funds, ACE does not have the ability to sell or transfer the investments without the consent from the general partner of individual funds.
Financial
Financial consists of investments in private equity funds targeting financial services companies such as financial institutions and insurance services around the world.
Real estate
Real estate consists of investments in private equity funds targeting global distress opportunities, value added U.S. properties, and global mezzanine debt securities in the commercial real estate market.
Distressed
Distressed consists of investments in private equity funds targeting distressed debt/credit and equity opportunities in the U.S.
Mezzanine
Mezzanine consists of investments in private equity funds targeting private mezzanine debt of large-cap and mid-cap companies in the U.S. and worldwide.
Traditional
Traditional consists of investments in private equity funds employing traditional private equity investment strategies such as buyout and venture with different geographical focuses including Brazil, Asia, Europe, and the U.S.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
Vintage
Vintage consists of investments in private equity funds made before 2002 and where the funds’ commitment periods had already expired.
Investment funds
ACE’s investment funds employ various investment strategies such as long/short equity and arbitrage/distressed. Included in this category are investments for which ACE has the option to redeem at agreed upon value as described in each investment fund’s subscription agreement. Depending on the terms of the various subscription agreements, investment fund investments may be redeemed monthly, quarterly, semi-annually, or annually. If ACE wishes to redeem an investment fund investment, it must first determine if the investment fund is still in a lock-up period (a time when ACE cannot redeem its investment so that the investment fund manager has time to build the portfolio). If the investment fund is no longer in its lock-up period, ACE must then notify the investment fund manager of its intention to redeem by the notification date prescribed by the subscription agreement. Subsequent to notification, the investment fund can redeem ACE’s investment within several months of the notification. Notice periods for redemption of the investment funds range between 5 and 120 days. ACE can redeem its investment funds without consent from the investment fund managers.
Level 3 financial instruments
The following tables present a reconciliation of the beginning and ending balances of financial instruments measured at fair value using significant unobservable inputs (Level 3):

 	 	Three Months Ended June 30, 2011	 	
 	 	Assets	 	 	Liabilities	 	
 	 	Available-for-Sale Debt Securities	 	 	Equity
securities	 	 	Other
investments	 	 	Other
derivative
instruments	 	 	GLB (1)	 	
 	 	Foreign	 	 	Corporate
securities	 	 	Mortgage-
backed
securities	 	 	States,
municipalities,
and political
subdivisions	 	 			 			 			 			
 	 	(in millions of U.S. dollars)	 	
Balance-Beginning of Period	 	$	26	 	 	$	113	 	 	$	81	 	 	$	1	 	 	$	10	 	 	$	1,564	 	 	$	4	 	 	$	449	  	
Transfers into Level 3	 	 	5	 	 	 	29	 	 	 	3	 	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	
Transfers out of Level 3	 	 	(6	) 	 	 	—  	  	 	 	(35	) 	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	
Change in Net Unrealized Gains (Losses) included in OCI	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	9	 	 	 	—  	  	 	 	—  	  	
Net Realized Gains/Losses	 	 	1	 	 	 	(1	) 	 	 	—  	  	 	 	—  	  	 	 	2	 	 	 	(3	) 	 	 	—  	  	 	 	75 	  	
Purchases	 	 	5	 	 	 	3	 	 	 	—  	  	 	 	—  	  	 	 	2	 	 	 	243	 	 	 	—  	  	 	 	—  	  	
Issuances	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	
Sales	 	 	(2	) 	 	 	(1	) 	 	 	(12	) 	 	 	—  	  	 	 	(4	) 	 	 	(55	) 	 	 	—  	  	 	 	—  	  	
Settlements	 	 	(2	) 	 	 	(1	) 	 	 	(3	) 	 	 	—  	  	 	 	—  	  	 	 	(78	) 	 	 	—  	  	 	 	—  	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance-End of Period	 	$	27	 	 	$	142	 	 	$	34	 	 	$	1	 	 	$	10	 	 	$	1,680	 	 	$	4	 	 	$	524	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date	 	$	—  	  	 	$	—  	  	 	$	—  	  	 	$	—  	  	 	$	—  	  	 	$	(3	) 	 	$	—  	  	 	$	75	  	

(1)  	Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as future policy benefits in the consolidated balance sheets. Refer to Note 6 for additional information.	
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)

   	 	Three Months Ended June 30, 2010	 	
   	 	Assets	 	 	Liabilities	 	
 	 	Available-for-Sale Debt Securities	 	 	Equity
securities	 	 	Other
investments	 	 	Other
derivative
instruments	 	 	GLB (1)	 	
 	 	Foreign	 	 	Corporate
securities	 	 	Mortgage-
backed
securities	 	 	States,
municipalities,
and political
subdivisions	 	 			 			 			 			
 	 	(in millions of U.S. dollars)	 	
Balance-Beginning of Period	 	$	21	 	 	$	133	 	 	$	12	 	 	$	2	 	 	$	13	 	 	$	1,236	 	 	$	14	 	 	$	347	  	
Transfers into (Out of) Level 3	 	 	6	 	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	
Change in Net Unrealized Gains (Losses) included in OCI	 	 	1	 	 	 	3	 	 	 	—  	  	 	 	—  	  	 	 	(1	) 	 	 	14	 	 	 	—  	  	 	 	—  	  	
Net Realized Gains/Losses	 	 	—  	  	 	 	(1	) 	 	 	—  	  	 	 	—  	  	 	 	1	 	 	 	(14	) 	 	 	12	 	 	 	301	  	
Purchases, Sales, Issuances, and Settlements, Net	 	 	—  	  	 	 	(14	) 	 	 	—  	  	 	 	1	 	 	 	3	 	 	 	(9	) 	 	 	(12	) 	 				
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance-End of Period	 	$	28	 	 	$	121	 	 	$	12	 	 	$	3	 	 	$	16	 	 	$	1,227	 	 	$	14	 	 	$	648	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date	 	$	—  	  	 	$	—  	  	 	$	—  	  	 	$	—  	  	 	$	—  	  	 	$	(14	) 	 	$	12	 	 	$	301	  	

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

   	 	Six Months Ended June 30, 2011	 	
   	 	Assets	 	 	Liabilities	 	
 	 	Available-for-Sale Debt Securities	 	 	Equity
securities	 	 	Other
investments	 	 	Other
derivative
instruments	 	 	GLB (1)	 	
 	 	Foreign	 	 	Corporate
securities	 	 	Mortgage-
backed
securities	 	 	States,
municipalities,
and political
subdivisions	 	 			 			 			 			
 	 	(in millions of U.S. dollars)	 	
Balance-Beginning of Period	 	$	26	 	 	$	115	 	 	$	39	 	 	$	2	 	 	$	13	 	 	$	1,432	 	 	$	4	 	 	 	507	  	
Transfers into Level 3	 	 	9	 	 	 	34	 	 	 	4	 	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	
Transfers out of Level 3	 	 	(7	) 	 	 	(4	) 	 	 	(35	) 	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	
Change in Net Unrealized Gains (Losses) included in OCI	 	 	(1	) 	 	 	1	 	 	 	—  	  	 	 	—  	  	 	 	(1	) 	 	 	51	 	 	 	—  	  	 	 	—  	  	
Net Realized Gains/Losses	 	 	1	 	 	 	(2	) 	 	 	—  	  	 	 	—  	  	 	 	4	 	 	 	(3	) 	 	 	1	 	 	 	17 	  	
Purchases	 	 	5	 	 	 	22	 	 	 	46	 	 	 	—  	  	 	 	2	 	 	 	333	 	 	 	—  	  	 	 	—  	  	
Sales	 	 	(3	) 	 	 	(20	) 	 	 	(15	) 	 	 	—  	  	 	 	(8	) 	 	 	(55	) 	 	 	—  	  	 	 	—  	  	
Settlements	 	 	(3	) 	 	 	(4	) 	 	 	(5	) 	 	 	(1	) 	 	 	—  	  	 	 	(78	) 	 	 	(1	) 	 	 	—  	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance-End of Period	 	$	27	 	 	$	142	 	 	$	34	 	 	$	1	 	 	$	10	 	 	$	1,680	 	 	$	4	 	 	$	524	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date	 	$	—  	  	 	$	—  	  	 	$	—  	  	 	$	—  	  	 	$	—  	  	 	$	(3	) 	 	$	1	 	 	$	17	  	

(1)  	Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as future policy benefits in the consolidated balance sheets. Refer to Note 6 for additional information.	
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)

   	 	Six Months Ended June 30, 2010	 	
   	 	Assets	 	 	Liabilities	 	
 	 	Available-for-Sale Debt Securities	 	 	Equity
securities	 	 	Other
investments	 	 	Other
derivative
instruments	 	 	GLB (1)	 	
 	 	Foreign	 	 	Corporate
securities	 	 	Mortgage-
backed
securities	 	 	States,
municipalities,
and political
subdivisions	 	 			 			 			 			
 	 	(in millions of U.S. dollars)	 	
Balance-Beginning of Period	 	$	59	 	 	$	168	 	 	$	21	 	 	$	3	 	 	$	12	 	 	$	1,149	 	 	$	14	 	 	$	443	  	
Transfers into (Out of) Level 3	 	 	(31	) 	 	 	(35	) 	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	
Change in Net Unrealized Gains (Losses) included in OCI	 	 	1	 	 	 	6	 	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	33	 	 	 	—  	  	 	 	—  	  	
Net Realized Gains/Losses	 	 	(1	) 	 	 	(1	) 	 	 	—  	  	 	 	—  	  	 	 	1	 	 	 	(13	) 	 	 	12	 	 	 	205	  	
Purchases, Sales, Issuances, and Settlements, Net	 	 	—  	  	 	 	(17	) 	 	 	(9	) 	 	 	—  	  	 	 	3	 	 	 	58	 	 	 	(12	) 	 				
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance-End of Period	 	$	28	 	 	$	121	 	 	$	12	 	 	$	3	 	 	$	16	 	 	$	1,227	 	 	$	14	 	 	$	648	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date	 	$	—  	  	 	$	—  	  	 	$	—  	  	 	$	—  	  	 	$	—  	  	 	$	(13	) 	 	$	12	 	 	$	205	  	

(1)  	Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as future policy benefits. The liability for GLB reinsurance was $776 million at June 30, 2010, and $559 million at December 31, 2009, which includes a fair value derivative adjustment of $648 million and $443 million, respectively.	
b) Financial instruments disclosed, but not carried, at fair value
ACE uses various financial instruments in the normal course of its business. Our insurance contracts are excluded from fair value of financial instruments accounting guidance, and therefore excluded from the discussion below.
The carrying values of cash, other assets, other liabilities, and other financial instruments not included below approximated their fair values.
Investments in partially-owned insurance companies
Fair values for investments in partially-owned insurance companies are based on ACE’s share of the net assets based on the financial statements provided by those companies.
Short- and long-term debt and trust preferred securities
Where practical, fair values for short-term debt, long-term debt, and trust preferred securities are estimated using discounted cash flow calculations based principally on observable inputs including incremental borrowing rates, which reflect ACE’s credit rating, for similar types of borrowings with maturities consistent with those remaining for the debt being valued.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
The following table presents carrying values and fair values of financial instruments not measured at fair value:

 	  	June 30, 2011	 	  	December 31, 2010	 	
 	  	Carrying
Value	 	  	Fair
Value	 	  	Carrying
Value	 	  	Fair
Value	 	
 	  	(in millions of U.S. dollars)	 	
Assets:	  				  				  				  				
Fixed maturities held to maturity	  				  				  				  				
U.S. Treasury and agency	  	$	1,067	 	  	$	1,092	 	  	$	1,105	 	  	$	1,127	 	
Foreign	  	 	1,051	 	  	 	1,028	 	  	 	1,049	 	  	 	1,013	 	
Corporate securities	  	 	2,311	 	  	 	2,292	 	  	 	2,361	 	  	 	2,313	 	
Mortgage-backed securities	  	 	3,414	 	  	 	3,472	 	  	 	3,811	 	  	 	3,846	 	
States, municipalities, and political subdivisions	  	 	1,190	 	  	 	1,194	 	  	 	1,175	 	  	 	1,162	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total assets	  	 	9,033	 	  	 	9,078	 	  	 	9,501	 	  	 	9,461	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Liabilities:	  				  				  				  				
Short-term debt	  	 	1,400	 	  	 	1,400	 	  	 	1,300	 	  	 	1,300	 	
Long-term debt	  	 	3,360	 	  	 	3,719	 	  	 	3,358	 	  	 	3,846	 	
Trust preferred securities	  	 	309	 	  	 	385	 	  	 	309	 	  	 	376	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total liabilities	  	$	5,069	 	  	$	5,504	 	  	$	4,967	 	  	$	5,522	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
 6. Assumed life reinsurance programs involving minimum benefit guarantees under annuity contracts
The following table presents income and expenses relating to GMDB and GLB reinsurance. GLBs include GMIBs as well as some GMABs originating in Japan.

 	  	Three Months Ended
June 30	 	 	Six Months Ended
June 30	 	
 	  	    2011    	 	 	2010	 	 	2011	 	 	2010	 	
 	  	(in millions of U.S. dollars)	 	
GMDB	  				 				 				 				
Net premiums earned	  	$	25	 	 	$	27	 	 	$	51	 	 	$	56	 	
Policy benefits and other reserve adjustments	  	$	21	 	 	$	22	 	 	$	43	 	 	$	46	 	
GLB	  				 				 				 				
Net premiums earned	  	$	41	 	 	$	40	 	 	$	82	 	 	$	81	 	
Policy benefits and other reserve adjustments	  	 	6	 	 	 	6	 	 	 	12	 	 	 	13	 	
Net realized gains (losses)	  	 	(75	) 	 	 	(301	) 	 	 	(17	) 	 	 	(205	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gain (loss) recognized in income	  	$	(40	) 	 	$	(267	) 	 	$	53	 	 	$	(137	) 	
Net cash received	  	$	40	 	 	$	40	 	 	$	81	 	 	$	80	 	
Net increase in liability	  	$	(80	) 	 	$	(307	) 	 	$	(28	) 	 	$	(217	) 	
At June 30, 2011, reported liabilities for GMDB and GLB reinsurance were $181 million and $676 million, respectively, compared with $185 million and $648 million, respectively, at December 31, 2010. The reported liability for GLB reinsurance of $676 million at June 30, 2011, and $648 million at December 31, 2010, includes a fair value derivative adjustment of $524 million and $507 million, respectively. Included in Net realized gains (losses) in the table above are gains (losses) related to foreign exchange and other fair value derivative adjustments. Reported liabilities for both GMDB and GLB reinsurance are determined using internal valuation models. Such valuations require considerable judgment and are subject to significant uncertainty. The valuation of these products is subject to fluctuations arising from, among other factors, changes in interest rates, changes in
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
equity markets, changes in credit markets, changes in the allocation of the investments underlying annuitant’s account values, and assumptions regarding future policyholder behavior. These models and the related assumptions are continually reviewed by management and enhanced, as appropriate, based upon improvements in modeling assumptions and availability of more information, such as market conditions and demographics of in-force annuities.
a) GMDB reinsurance
At June 30, 2011 and December 31, 2010, the net amount at risk from GMDB reinsurance programs was $3.1 billion and $2.9 billion, respectively. For GMDB reinsurance programs, the net amount at risk is defined as the present value of future claim payments under the following assumptions:
 
 	•	 	policy account values and guaranteed values are fixed at the valuation date (June 30, 2011 and December 31, 2010, respectively);	
 
 	•	 	there are no lapses or withdrawals;	
 
 	•	 	mortality according to 100 percent of the Annuity 2000 mortality table; and	
 
 	•	 	future claims are discounted in line with the discounting assumption used in the calculation of the benefit reserve averaging between 1 and 2 percent.	
At June 30, 2011, if all of the cedants’ policyholders covered under GMDB reinsurance agreements were to die immediately, the total claim amount payable, taking into account all appropriate claims limits, would be approximately $1.5 billion. As a result of the annual claim limits on the GMDB reinsurance agreements, the claims payable are lower in this case than if all the policyholders were to die over time, all else equal.
b) GLB reinsurance
At June 30, 2011 and December 31, 2010, the net amount at risk from GLB reinsurance programs was $789 million and $719 million, respectively. For GLB reinsurance programs, the net amount at risk is defined as the present value of future claim payments under the following assumptions:
 
 	•	 	policy account values and guaranteed values are fixed at the valuation date (June 30, 2011 and December 31, 2010, respectively);	
 
 	•	 	there are no deaths, lapses, or withdrawals;	
 
 	•	 	policyholders annuitize at a frequency most disadvantageous to ACE (in other words, annuitization at a level that maximizes claims taking into account the treaty limits) under the terms of the reinsurance contracts;	
 
 	•	 	for annuitizing policyholders, the GMIB claim is calculated using interest rates in line with those used in calculating the reserve; and	
 
 	•	 	future claims are discounted in line with the discounting assumption used in the calculation of the benefit reserve averaging between 0 and 1 percent.	
The average attained age of all policyholders under all benefits reinsured, weighted by the guaranteed value of each reinsured policy, is approximately 67 years.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
 7. Commitments, contingencies, and guarantees
a) Derivative instruments
Derivative instruments employed
ACE maintains positions in derivative instruments such as futures, options, swaps, and foreign currency forward contracts for which the primary purposes are to manage duration and foreign currency exposure, yield enhancement, or to obtain an exposure to a particular financial market. Along with convertible bonds and to be announced mortgage-backed securities (TBA), discussed below, these are the most numerous and frequent derivative transactions.
ACE maintains positions in convertible bond investments that contain embedded derivatives. In addition, we purchase TBAs as part of our investing activities. These securities are included within the fixed maturities available for sale (FM AFS) portfolio.
Under reinsurance programs covering GLBs, ACE assumes the risk of GLBs, including GMIB and GMAB, associated with variable annuity contracts. The GMIB risk is triggered if, at the time the contract holder elects to convert the accumulated account value to a periodic payment stream (annuitize), the accumulated account value is not sufficient to provide a guaranteed minimum level of monthly income. The GMAB risk is triggered if, at contract maturity, the contract holder’s account value is less than a guaranteed minimum value. The GLB reinsurance product meets the definition of a derivative instrument. Benefit reserves in respect of GLBs are classified as Future policy benefits (FPB) while the fair value derivative adjustment is classified within Accounts payable, accrued expenses, and other liabilities (AP). ACE also maintains positions in exchange-traded equity futures contracts and options on equity market indices to limit equity exposure in the GMDB and GLB blocks of business.
In relation to certain debt issuances, ACE, from time to time, has entered into interest rate swap transactions for the purpose of either fixing or reducing borrowing costs. Although the use of these interest rate swaps has the economic effect of fixing or reducing borrowing costs on a net basis, gross interest expense on the related debt issuances is included in Interest expense while the settlements related to the interest rate swaps are reflected in Net realized gains (losses) in the consolidated statements of operations. At June 30, 2011 and December 31, 2010, ACE had no in force interest rate swaps, having exited such positions upon the repayment of related debt issuances during the fourth quarter of 2010.
ACE buys credit default swaps to mitigate global credit risk exposure, primarily related to reinsurance recoverables.
All derivative instruments are carried at fair value with changes in fair value recorded in Net realized gains (losses) in the consolidated statements of operations. None of the derivative instruments are designated as hedges for accounting purposes.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
The following table presents the balance sheet locations, fair values in an asset or (liability) position, and notional values/payment provisions of our derivative instruments:

   	  	Consolidated
Balance
Sheet
Location	 	  	June 30, 2011	 	  	December 31, 2010	 	
	  			  	Fair
Value	 	 	Notional
Value/
Payment
Provision	 	  	Fair
Value	 	 	Notional
Value/
Payment
Provision	 	
 	  	 	 	  	(in millions of U.S. dollars)	 	
Investment and embedded derivative instruments	  				  				 				  				 				
Foreign currency forward contracts	  	 	AP	  	  	$	1	 	 	$	753	 	  	$	3	 	 	$	729	 	
Futures contracts on money market instruments	  	 	AP	  	  	 	2	 	 	 	10,098	 	  	 	3	 	 	 	4,297	 	
Futures contracts on notes and bonds	  	 	AP	  	  	 	—  	  	 	 	1,158	 	  	 	5	 	 	 	676	 	
Options on money market instruments	  	 	AP	  	  	 	—  	  	 	 	528	 	  	 	—  	  	 	 	1	 	
Convertible bonds	  	 	FM AFS	  	  	 	398	 	 	 	367	 	  	 	416	 	 	 	382	 	
TBAs	  	 	FM AFS	  	  	 	123	 	 	 	117	 	  	 	101	 	 	 	98	 	
	  				  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
	  				  	$	524	 	 	$	13,021	 	  	$	528	 	 	$	6,183	 	
	  				  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
Other derivative instruments	  				  				 				  				 				
Futures contracts on equities	  	 	AP	  	  	$	(37	) 	 	$	1,110	 	  	$	(25	) 	 	$	1,069	 	
Options on equity market indices	  	 	AP	  	  	 	41	 	 	 	250	 	  	 	46	 	 	 	250	 	
Credit default swaps	  	 	AP	  	  	 	4	 	 	 	350	 	  	 	4	 	 	 	350	 	
Other	  	 	AP	  	  	 	—  	  	 	 	6	 	  	 	—  	  	 	 	17	 	
	  				  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
	  				  	$	8	 	 	$	1,716	 	  	$	25	 	 	$	1,686	 	
	  				  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	
GLB (1)	  	 	AP/FPB	  	  	$	(676	) 	 	$	789	 	  	$	(648	) 	 	$	719	 	

(1)  	Includes both future policy benefits reserves and fair value derivative adjustment. Refer to Note 6 for additional information. Note that the payment provision related to GLB is the net amount at risk. The concept of a notional value does not apply to the GLB reinsurance contracts.	
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
The following table presents net realized gains (losses) related to derivative instrument activity in the consolidated statement of operations:

 	  	Three Months Ended
June 30	 	 	Six Months Ended
June 30	 	
 	  	2011	 	 	2010	 	 	2011	 	 	2010	 	
 	  	(in millions of U.S. dollars)	 	
Investment and embedded derivative instruments	  				 				 				 				
Foreign currency forward contracts	  	$	(3	) 	 	$	23	 	 	$	(18	) 	 	$	36	 	
All other futures contracts and options	  	 	(24	) 	 	 	2	 	 	 	(27	) 	 	 	10	 	
Convertible bonds	  	 	(21	) 	 	 	(20	) 	 	 	(22	) 	 	 	(22	) 	
TBAs	  	 	—  	  	 	 	—  	  	 	 	(1	) 	 	 	—  	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
	  	$	(48	) 	 	$	5	 	 	$	(68	) 	 	$	24	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
GLB and other derivative instruments	  				 				 				 				
GLB	  	$	(75	) 	 	$	(301	) 	 	$	(17	) 	 	$	(205	) 	
Futures contracts on equities	  	 	—  	  	 	 	117	 	 	 	(63	) 	 	 	66	 	
Options on equity market indices	  	 	3	 	 	 	26	 	 	 	(5	) 	 	 	18	 	
Interest rate swaps	  	 	—  	  	 	 	(8	) 	 	 	—  	  	 	 	(17	) 	
Credit default swaps	  	 	(2	) 	 	 	11	 	 	 	(3	) 	 	 	11	 	
Other	  	 	—  	  	 	 	1	 	 	 	—  	  	 	 	1	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
	  	$	(74	) 	 	$	(154	) 	 	$	(88	) 	 	$	(126	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
	  	$	(122	) 	 	$	(149	) 	 	$	(156	) 	 	$	(102	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivative instrument objectives
(i) Foreign currency exposure management
A foreign currency forward contract (forward) is an agreement between participants to exchange specific foreign currencies at a future date. ACE uses forwards to minimize the effect of fluctuating foreign currencies.
(ii) Duration management and market exposure
Futures
Futures contracts give the holder the right and obligation to participate in market movements, determined by the index or underlying security on which the futures contract is based. Settlement is made daily in cash by an amount equal to the change in value of the futures contract times a multiplier that scales the size of the contract. Exchange-traded bond and note futures contracts are used in fixed maturity portfolios as substitutes for ownership of the bonds and notes without significantly increasing the risk in the portfolio. Investments in futures contracts may be made only to the extent that there are assets under management not otherwise committed. Exchange-traded equity futures contracts are used to limit exposure to a severe equity market decline, which would cause an increase in expected claims and therefore, reserves for GMDB and GLB reinsurance business.
Options
An option contract conveys to the holder the right, but not the obligation, to purchase or sell a specified amount or value of an underlying security at a fixed price. Option contracts are used in the investment portfolio as protection against unexpected shifts in interest rates, which would affect the duration of the fixed maturity
 
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(Unaudited)
 
portfolio. By using options in the portfolio, the overall interest rate sensitivity of the portfolio can be reduced. Option contracts may also be used as an alternative to futures contracts in the synthetic strategy as described above. Another use for option contracts is to limit exposure to a severe equity market decline, which would cause an increase in expected claims and therefore, reserves for GMDB and GLB reinsurance business. The price of an option is influenced by the underlying security, expected volatility, time to expiration, and supply and demand.
The credit risk associated with the above derivative financial instruments relates to the potential for non-performance by counterparties. Although non-performance is not anticipated, in order to minimize the risk of loss, management monitors the creditworthiness of its counterparties and obtains collateral. The performance of exchange-traded instruments is guaranteed by the exchange on which they trade. For non-exchange-traded instruments, the counterparties are principally banks which must meet certain criteria according to our investment guidelines.
Interest rate swaps
An interest rate swap is a contract between two counterparties in which interest payments are made based on a notional principal amount, which itself is never paid or received. Under the terms of an interest rate swap, one counterparty makes interest payments based on a fixed interest rate and the other counterparty’s payments are based on a floating rate. Interest rate swap contracts are used occasionally in the investment portfolio as protection against unexpected shifts in interest rates, which would affect the fair value of the fixed maturity portfolio. By using interest rate swaps in the portfolio, the overall duration or interest rate sensitivity of the portfolio can be reduced. Interest rate swaps are also employed related to certain debt issuances for the purpose of either fixing and/or reducing borrowing costs.
Credit default swaps
A credit default swap is a bilateral contract under which two counterparties agree to isolate and separately trade the credit risk of at least one third-party reference entity. Under a credit default swap agreement, a protection buyer pays a periodic fee to a protection seller in exchange for a contingent payment by the seller upon a credit event (such as a default or failure to pay) related to the reference entity. When a credit event is triggered, the protection seller pays the protection buyer the difference between the fair value of assets and the principal amount. We have purchased a credit default swap to mitigate our global credit risk exposure to one of our reinsurers.
(iii) Convertible security investments
A convertible bond is a debt instrument that can be converted into a predetermined amount of the issuer’s equity at certain times prior to the bond’s maturity. The convertible option is an embedded derivative within the fixed maturity host instruments which are classified in the investment portfolio as available for sale. ACE purchases convertible bonds for their total return and not specifically for the conversion feature.
(iv) TBA
By acquiring a TBA, a commitment is made to purchase a future issuance of mortgage-backed securities. For the period between purchase of the TBA and issuance of the underlying security, the position is accounted for as a derivative in the consolidated financial statements. ACE purchases TBAs both for their total return and for the flexibility they provide related to our mortgage-backed security strategy.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
(v) GLB
Under the GLB program, as the assuming entity, ACE is obligated to provide coverage until the expiration or maturity of the underlying annuities. Premiums received under the reinsurance treaties are classified as premium. Expected losses allocated to premiums received are classified as future policy benefits and valued similar to GMDB reinsurance. Other changes in fair value, principally arising from changes in expected losses allocated to expected future premiums, are classified as Net realized gains (losses). Fair value represents management’s estimate of exit price and thus, includes a risk margin. We may recognize a realized loss for other changes in fair value due to adverse changes in the capital markets (e.g., declining interest rates and/or declining equity markets) and changes in actual or estimated future policyholder behavior (e.g., increased annuitization or decreased lapse rates) although we expect the business to be profitable. We believe this presentation provides the most meaningful disclosure of changes in the underlying risk within the GLB reinsurance programs for a given reporting period.
b) Other investments
Included in Other investments are investments in limited partnerships and partially-owned investment companies with a carrying value of $1,299 million. In connection with these investments, we have commitments that may require funding of up to $1,186 million over the next several years.
c) Taxation
In 2010, ACE reached final settlement with the Internal Revenue Service (IRS) Appeals Division regarding its federal tax returns for 2002, 2003, and 2004. As a result of the settlement, the amount of unrecognized tax benefits was reduced by approximately $21 million. Additionally, in June 2010, the IRS completed its field examination of ACE’s federal tax returns for 2005, 2006, and 2007 and has proposed several adjustments principally involving transfer pricing and other insurance-related matters. In July 2010, we filed a written protest with the IRS, and the case is currently being reviewed by the IRS Appeals Division. The IRS commenced its field examination of ACE’s federal tax returns for 2008 and 2009 during January 2011. While it is reasonably possible that a significant change in the unrecognized tax benefits could occur in the next 12 months, we believe that the outcome of the appeal and the current examination will not have a material impact on our financial condition or results of operations. With few exceptions, our significant U.K. subsidiaries remain subject to examination for tax years 2007 and later.
d) Legal proceedings
(i) Claims and other litigation
ACE’s insurance subsidiaries are subject to claims litigation involving disputed interpretations of policy coverage and, in some jurisdictions, direct actions by allegedly-injured persons seeking damages from policyholders. These lawsuits, involving claims on policies issued by ACE’s subsidiaries, which are typical to the insurance industry in general and in the normal course of business, are considered in ACE’s loss and loss expense reserves. In addition to claims litigation, ACE and its subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from, or directly relate to, claims on insurance policies. This category of business litigation typically involves, amongst other things, allegations of underwriting errors or misconduct, employment claims, regulatory activity, or disputes arising from business ventures. In the opinion of ACE’s management, ACE’s ultimate liability for these matters is not likely to have a material adverse effect on ACE’s consolidated financial condition, although it is possible that the effect could be material to ACE’s consolidated results of operations for an individual reporting period.
 
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(Unaudited)
 
(ii) Business practices litigation
ACE, ACE INA Holdings Inc., and ACE USA, Inc., along with a number of other insurers and brokers, were named in a series of federal putative nationwide class actions brought by insurance policyholders. The Judicial Panel on Multidistrict Litigation (JPML) consolidated these cases in the District of New Jersey. On August 1, 2005, plaintiffs in the New Jersey consolidated proceedings filed two consolidated amended complaints – one concerning commercial insurance and the other concerning employee benefit plans. The employee benefit plans litigation against ACE has been dismissed.
In the commercial insurance complaint, the plaintiffs named ACE, ACE INA Holdings Inc., ACE USA, Inc., ACE American Insurance Co., Illinois Union Insurance Co., and Indemnity Insurance Co. of North America. They allege that certain brokers and insurers, including certain ACE entities, conspired to increase premiums and allocate customers through the use of “B” quotes and contingent commissions. In addition, they allege that the broker defendants received additional income by improperly placing their clients’ business with insurers through related wholesale entities that acted as intermediaries between brokers and insurers. Plaintiffs also allege that broker defendants tied the purchase of primary insurance to the placement of such coverage with reinsurance carriers through the broker defendants’ reinsurance broker subsidiaries. The complaint asserts the following causes of action against ACE: Federal Racketeer Influenced and Corrupt Organizations Act (RICO), federal antitrust law, state antitrust law, aiding and abetting breach of fiduciary duty, and unjust enrichment.
In 2006 and 2007, the Court dismissed plaintiffs’ first two attempts to properly plead a case without prejudice and permitted plaintiffs one final opportunity to re-plead. The amended complaint, filed on May 22, 2007, purported to add several new ACE defendants: ACE Group Holdings, Inc., ACE US Holdings, Inc., Westchester Fire Insurance Company, INA Corporation, INA Financial Corporation, INA Holdings Corporation, ACE Property and Casualty Insurance Company, and Pacific Employers Insurance Company. Plaintiffs also added a new antitrust claim against Marsh, ACE, and other insurers based on the same allegations as the other claims but limited to excess casualty insurance. In 2007, the Court granted defendants’ motions to dismiss plaintiffs’ antitrust and RICO claims with prejudice. The Court also declined to exercise supplemental jurisdiction over plaintiffs’ state law claims and dismissed those claims without prejudice. Plaintiffs appealed to the United States Court of Appeals for the Third Circuit. On August 16, 2010, the Third Circuit affirmed, in part, and vacated, in part, the District Court’s previous dismissals with instructions for further briefing at the District Court on remand. Defendants renewed their motions consistent with the Third Circuit’s instructions. On June 28, 2011, the District Court administratively terminated defendants’ motions without prejudice to re-file after adjudication of issues related to a proposed class settlement involving a number of other parties. The Court set September 14, 2011 for a fairness hearing on the proposed settlement, but did not indicate when it would finally resolve all issues such that ACE may re-file its motions to dismiss.
As of August 3, 2011, plaintiffs have not specified an amount of alleged damages and the Court has not decided defendants’ renewed motions to dismiss. The Court has also not determined if this case may proceed as a class action and has, therefore, not determined the size or scope of any class. As a result, ACE is unable to reasonably estimate the potential loss or range of losses, if any, arising from this litigation.
There are a number of federal actions brought by policyholders based on allegations similar to the allegations in the consolidated federal actions that were filed in, or transferred to, the United States District Court for the District of New Jersey for coordination (“tag-along cases”). All proceedings in these tag-along cases are currently stayed.
 
 	•	 	New Cingular Wireless Headquarters LLC et al. v. Marsh & McLennan Companies, Inc. et al. (Case No. 06-5120; D.N.J.), was originally filed in the Northern District of Georgia on April 4, 2006. ACE,	
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
 	ACE American Ins. Co., ACE USA, Inc., ACE Bermuda Ins. Co. Ltd., Illinois Union Ins. Co., Pacific Employers Ins. Co., and Lloyd’s of London Syndicate 2488 AGM, along with a number of other insurers and brokers, are named.	
 
 	•	 	Avery Dennison Corp. v. Marsh & McLennan Companies, Inc. et al. (Case No. 07-00757; D.N.J.) was filed on February 13, 2007. ACE, ACE INA Holdings Inc., ACE USA, Inc., and ACE American Insurance Co., along with a number of other insurers and brokers, are named.	
 
 	•	 	Henley Management Co., Inc. et al v. Marsh, Inc. et al. (Case No. 07-2389; D.N.J.) was filed on May 27, 2007. ACE USA, Inc., along with a number of other insurers and Marsh, are named.	
 
 	•	 	Lincoln Adventures LLC et al. v. Those Certain Underwriters at Lloyd’s, London Members of Syndicates 0033 et al. (Case No. 07-60991; D.N.J.) was originally filed in the Southern District of Florida on July 13, 2007. Supreme Auto Transport LLC et al. v. Certain Underwriters of Lloyd’s of London, et al. (Case No. 07-6703; D.N.J.) was originally filed in the Southern District of New York on July 25, 2007. Lloyd’s of London Syndicate 2488 AGM, along with a number of other Lloyd’s of London Syndicates and various brokers, are named in both actions. The allegations in these putative class-action lawsuits are similar to the allegations in the consolidated federal actions identified above, although these lawsuits focus on alleged conduct within the London insurance market.	
 
 	•	 	Sears, Roebuck & Co. et al. v. Marsh & McLennan Companies, Inc. et al. (Case No. 07-2535; D.N.J.) was originally filed in the Northern District of Georgia on October 12, 2007. ACE American Insurance Co., ACE Bermuda Insurance Ltd., and Westchester Surplus Lines Insurance Co., along with a number of other insurers and brokers, are named.	
As of August 3, 2011, plaintiffs have not specified an amount of alleged damages in any of the tag-along cases. The proceedings in the tag-along cases were stayed at a very early stage, before ACE could challenge the sufficiency of the claims with, for example, motions to dismiss. Also, the scope of the tag-along cases, in large part, will be affected by the outcome of the MDL Court’s decision on defendants’ renewed motions to dismiss. As a result, ACE is unable to reasonably estimate the potential loss or range of losses, if any, arising from these litigations.
In addition to the related federal cases, there are two pending state cases with allegations similar to those in the consolidated federal actions described above:
 
 	•	 	Van Emden Management Corporation v. Marsh & McLennan Companies, Inc., et al. (Case No. 05-0066A; Superior Court of Massachusetts), a class action in Massachusetts, was filed on January 13, 2005. Illinois Union Insurance Company is named. The Van Emden case has been stayed pending resolution of the consolidated proceedings in the District of New Jersey or until further order of the Court.	
As of August 3, 2011, plaintiffs have not specified an amount of alleged damages in this case. The proceedings were stayed at a very early stage, before ACE could challenge the sufficiency of the claims with, for example, a motion to dismiss. As a result, ACE is unable to reasonably estimate the potential loss or range of losses, if any, arising from this litigation.
 
 	•	 	State of Ohio, ex. rel. Marc E. Dann, Attorney General v. American Int’l Group, Inc. et al. (Case No. 07-633857; Court of Common Pleas in Cuyahoga County, Ohio) is an Ohio state action filed by the Ohio Attorney General on August 24, 2007. ACE INA Holdings Inc., ACE American Insurance Co., ACE Property & Casualty Insurance Co., Insurance Company of North America, and Westchester Fire Insurance Co., along with a number of other insurance companies and Marsh, are named. Defendants filed motions to dismiss in November 2007. On July 2, 2008, the court denied all of the defendants’ motions. Discovery is ongoing. Trial is set for September 12, 2011.	
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
In January 2011, plaintiff submitted an expert report in which it claims that ACE should be liable for $11.3 million in overcharges to Ohio public entities; plaintiffs may claim that this amount should be trebled pursuant to Ohio antitrust law. Plaintiff also seeks to impose a $10.3 million penalty on ACE related to ACE’s sales of private insurance in Ohio. ACE believes that these claims are without merit and continues to defend them vigorously.
In all of the lawsuits described above, except where specifically noted, plaintiffs seek compensatory and in some cases special damages without specifying an amount. As a result, ACE cannot at this time estimate its potential costs related to these legal matters and, accordingly, no liability for compensatory damages has been established in the consolidated financial statements.
ACE’s ultimate liability for these matters is not likely to have a material adverse effect on ACE’s consolidated financial condition, although it is possible that the effect could be material to ACE’s consolidated results of operations for an individual reporting period.
 8. Shareholders’ equity
All of ACE’s Common Shares are registered common shares under Swiss corporate law. Though the par value of Common Shares is stated in Swiss francs, ACE continues to use U.S. dollars as its reporting currency for preparing the consolidated financial statements. Under Swiss corporate law, dividends, including distributions through a reduction in par value (par value distributions) or from legal reserves, must be declared by ACE in Swiss francs though dividend payments are made by ACE in U.S. dollars. In light of a January 1, 2011 Swiss tax law change, at our May 2011 Annual General Meeting our shareholders approved a dividend for the coming year from our capital contributions reserves (additional paid in capital), a subaccount of legal reserves. Dividends declared in the first quarter of 2011 of CHF 0.30 ($0.33) per Common Share were paid in the form of a par value distribution (under the method approved by our shareholders at our May 2010 Annual General Meeting) and had the effect of reducing par value per Common Share to CHF 30.27. Dividends declared in the second quarter of 2011 of CHF 0.29 ($0.35) per Common Share were funded from capital contributions reserves (additional paid in capital) and paid from free reserves (retained earnings).
For the three and six months ended June 30, 2010, dividends declared per Common Share amounted to CHF 0.34 ($0.33), and CHF 0.67 ($0.64), respectively, and were paid by way of a par value distribution.
Common Shares in treasury are used principally for issuance upon the exercise of employee stock options. At June 30, 2011, 4,862,746 Common Shares remain in treasury after net shares redeemed under employee share-based compensation plans.
 9. Share-based compensation
The ACE Limited 2004 Long-Term Incentive Plan (the 2004 LTIP) provides for grants of both incentive and non-qualified stock options principally at an option price per share equal to the fair value of ACE’s Common Shares on the date of grant. Stock options are generally granted with a 3-year vesting period and a 10-year term. The stock options vest in equal annual installments over the respective vesting period, which is also the requisite service period. On February 24, 2011, ACE granted 1,620,954 stock options with a weighted-average grant date fair value of $14.63 each. The fair value of the options issued is estimated on the date of grant using the Black-Scholes option pricing model.
The 2004 LTIP also provides for grants of restricted stock and restricted stock units. ACE generally grants restricted stock and restricted stock units with a 4-year vesting period, based on a graded vesting schedule. The
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
restricted stock is granted at market close price on the day of grant. On February 24, 2011, ACE granted 1,667,653 restricted stock awards and 249,660 restricted stock units to employees and officers of ACE and its subsidiaries with a grant date fair value of $62.64 each. Each restricted stock unit represents our obligation to deliver to the holder one Common Share upon vesting. On May 18, 2011, the date of the Company’s annual general meeting, 32,660 restricted stock awards were granted to ACE’s outside directors with a grant date fair value of $69.35 each. Such awards will vest at the 2012 annual general meeting.
 10. Segment information
ACE operates through the following business segments, certain of which represent the aggregation of distinct operating segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life. These segments distribute their products through various forms of brokers, agencies, and direct marketing programs. All business segments have established relationships with reinsurance intermediaries.
For segment reporting purposes, certain items have been presented in a different manner than in the consolidated financial statements. Management uses underwriting income as the main measure of segment performance. ACE calculates underwriting income by subtracting losses and loss expenses, policy benefits, policy acquisition costs, and administrative expenses from net premiums earned. For the Life business, management also includes net investment income as a component of underwriting income. The following tables present the operations by segment:
Statement of Operations by Segment
For the Three Months Ended June 30, 2011
(in millions of U.S. dollars)

 	  	Insurance –
North
American	 	  	Insurance –
Overseas
General	 	 	Global
Reinsurance	 	 	Life	 	 	Corporate
and Other	 	 	ACE
Consolidated	 	
Net premiums written	  	$	1,735	 	  	$	1,477	 	 	$	282	 	 	$	459	 	 	$	—  	  	 	$	3,953	 	
Net premiums earned	  	 	1,604	 	  	 	1,447	 	 	 	254	 	 	 	452	 	 	 	—  	  	 	 	3,757	 	
Losses and loss expenses	  	 	1,233	 	  	 	733	 	 	 	112	 	 	 	147	 	 	 	1	 	 	 	2,226	 	
Policy benefits	  	 	—  	  	  	 	—  	  	 	 	—  	  	 	 	108	 	 	 	—  	  	 	 	108	 	
Policy acquisition costs	  	 	143	 	  	 	348	 	 	 	47	 	 	 	66	 	 	 	—  	  	 	 	604	 	
Administrative expenses	  	 	147	 	  	 	242	 	 	 	14	 	 	 	72	 	 	 	40	 	 	 	515	 	
	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Underwriting income (loss)	  	 	81	 	  	 	124	 	 	 	81	 	 	 	59	 	 	 	(41	) 	 	 	304	 	
	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net investment income	  	 	300	 	  	 	138	 	 	 	71	 	 	 	59	 	 	 	1	 	 	 	569	 	
Net realized gains (losses) including OTTI	  	 	21	 	  	 	(10	) 	 	 	(14	) 	 	 	(68	) 	 	 	(2	) 	 	 	(73	) 	
Interest expense	  	 	3	 	  	 	1	 	 	 	1	 	 	 	3	 	 	 	54	 	 	 	62	 	
Other (income) expense	  	 	3	 	  	 	(5	) 	 	 	1	 	 	 	8	 	 	 	2	 	 	 	9	 	
Income tax expense (benefit)	  	 	95	 	  	 	40	 	 	 	8	 	 	 	14	 	 	 	(35	) 	 	 	122	 	
	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	  	$	301	 	  	$	216	 	 	$	128	 	 	$	25	 	 	$	(63	) 	 	$	607	 	

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
Statement of Operations by Segment
For the Three Months Ended June 30, 2010
(in millions of U.S. dollars)

 	  	Insurance –
North
American	 	  	Insurance –
Overseas
General	 	 	Global
Reinsurance	 	 	Life	 	 	Corporate
and Other	 	 	ACE
Consolidated	 	
Net premiums written	  	$	1,438	 	  	$	1,302	 	 	$	289	 	 	$	391	 	 	$	—  	  	 	$	3,420	 	
Net premiums earned	  	 	1,326	 	  	 	1,263	 	 	 	256	 	 	 	388	 	 	 	—  	  	 	 	3,233	 	
Losses and loss expenses	  	 	924	 	  	 	644	 	 	 	103	 	 	 	129	 	 	 	—  	  	 	 	1,800	 	
Policy benefits	  	 	—  	  	  	 	1	 	 	 	—  	  	 	 	86	 	 	 	—  	  	 	 	87	 	
Policy acquisition costs	  	 	126	 	  	 	296	 	 	 	48	 	 	 	66	 	 	 	—  	  	 	 	536	 	
Administrative expenses	  	 	147	 	  	 	207	 	 	 	15	 	 	 	54	 	 	 	40	 	 	 	463	 	
	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Underwriting income (loss)	  	 	129	 	  	 	115	 	 	 	90	 	 	 	53	 	 	 	(40	) 	 	 	347	 	
	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net investment income	  	 	287	 	  	 	115	 	 	 	73	 	 	 	43	 	 	 	—  	  	 	 	518	 	
Net realized gains (losses) including OTTI	  	 	85	 	  	 	48	 	 	 	28	 	 	 	(155	) 	 	 	3	 	 	 	9	 	
Interest expense	  	 	—  	  	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	52	 	 	 	52	 	
Other (income) expense	  	 	4	 	  	 	(3	) 	 	 	(2	) 	 	 	3	 	 	 	1	 	 	 	3	 	
Income tax expense (benefit)	  	 	110	 	  	 	59	 	 	 	9	 	 	 	16	 	 	 	(52	) 	 	 	142	 	
	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	  	$	387	 	  	$	222	 	 	$	184	 	 	$	(78	) 	 	$	(38	) 	 	$	677	 	
	  	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Statement of Operations by Segment
For the Six Months Ended June 30, 2011
(in millions of U.S. dollars)

 	  	Insurance –
North
American	 	 	Insurance –
Overseas
General	 	 	Global
Reinsurance	 	 	Life	 	 	Corporate
and Other	 	 	ACE
Consolidated	 	
Net premiums written	  	$	3,020	 	 	$	2,914	 	 	$	597	 	 	$	868	 	 	$	—  	  	 	$	7,399	 	
Net premiums earned	  	 	2,950	 	 	 	2,751	 	 	 	514	 	 	 	851	 	 	 	—  	  	 	 	7,066	 	
Losses and loss expenses	  	 	2,227	 	 	 	1,595	 	 	 	391	 	 	 	275	 	 	 	1	 	 	 	4,489	 	
Policy benefits	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	199	 	 	 	—  	  	 	 	199	 	
Policy acquisition costs	  	 	279	 	 	 	660	 	 	 	93	 	 	 	127	 	 	 	—  	  	 	 	1,159	 	
Administrative expenses	  	 	295	 	 	 	466	 	 	 	26	 	 	 	140	 	 	 	82	 	 	 	1,009	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Underwriting income (loss)	  	 	149	 	 	 	30	 	 	 	4	 	 	 	110	 	 	 	(83	) 	 	 	210	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net investment income	  	 	595	 	 	 	269	 	 	 	143	 	 	 	105	 	 	 	1	 	 	 	1,113	 	
Net realized gains (losses) including OTTI	  	 	10	 	 	 	(19	) 	 	 	(27	) 	 	 	(81	) 	 	 	(1	) 	 	 	(118	) 	
Interest expense	  	 	7	 	 	 	2	 	 	 	1	 	 	 	6	 	 	 	109	 	 	 	125	 	
Other (income) expense	  	 	(13	) 	 	 	(7	) 	 	 	(5	) 	 	 	13	 	 	 	7	 	 	 	(5	) 	
Income tax expense (benefit)	  	 	184	 	 	 	59	 	 	 	18	 	 	 	27	 	 	 	(69	) 	 	 	219	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	  	$	576	 	 	$	226	 	 	$	106	 	 	$	88	 	 	$	(130	) 	 	$	866	 	

36

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
Statement of Operations by Segment
For the Six Months Ended June 30, 2010
(in millions of U.S. dollars)

 	  	Insurance –
North
American	 	 	Insurance –
Overseas
General	 	 	Global
Reinsurance	 	 	Life	 	 	Corporate
and Other	 	 	ACE
Consolidated	 	
Net premiums written	  	$	2,833	 	 	$	2,722	 	 	$	660	 	 	$	776	 	 	$	—  	  	 	$	6,991	 	
Net premiums earned	  	 	2,696	 	 	 	2,514	 	 	 	532	 	 	 	768	 	 	 	—  	  	 	 	6,510	 	
Losses and loss expenses	  	 	1,862	 	 	 	1,345	 	 	 	254	 	 	 	260	 	 	 	—  	  	 	 	3,721	 	
Policy benefits	  	 	—  	  	 	 	4	 	 	 	—  	  	 	 	170	 	 	 	—  	  	 	 	174	 	
Policy acquisition costs	  	 	282	 	 	 	579	 	 	 	102	 	 	 	127	 	 	 	—  	  	 	 	1,090	 	
Administrative expenses	  	 	295	 	 	 	409	 	 	 	27	 	 	 	112	 	 	 	80	 	 	 	923	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Underwriting income (loss)	  	 	257	 	 	 	177	 	 	 	149	 	 	 	99	 	 	 	(80	) 	 	 	602	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net investment income	  	 	565	 	 	 	229	 	 	 	142	 	 	 	86	 	 	 	—  	  	 	 	1,022	 	
Net realized gains (losses) including OTTI	  	 	165	 	 	 	70	 	 	 	59	 	 	 	(112	) 	 	 	(5	) 	 	 	177	 	
Interest expense	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	104	 	 	 	104	 	
Other (income) expense	  	 	(1	) 	 	 	(1	) 	 	 	(6	) 	 	 	6	 	 	 	1	 	 	 	(1	) 	
Income tax expense (benefit)	  	 	214	 	 	 	73	 	 	 	19	 	 	 	30	 	 	 	(70	) 	 	 	266	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	  	$	774	 	 	$	404	 	 	$	337	 	 	$	37	 	 	$	(120	) 	 	$	1,432	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Underwriting assets are reviewed in total by management for purpose of decision-making. Other than goodwill, ACE does not allocate assets to its segments.
The following table presents the net premiums earned for each segment by product:

 	  	Property &
All Other	 	  	Casualty	 	  	Life,
Accident &
Health	 	  	ACE
Consolidated	 	
 	  	(in millions of U.S. dollars)	 	
For the Three Months Ended June 30, 2011	  				  				  				  				
Insurance – North American	  	$	657	 	  	$	865	 	  	$	82	 	  	$	1,604	 	
Insurance – Overseas General	  	 	533	 	  	 	348	 	  	 	566	 	  	 	1,447	 	
Global Reinsurance	  	 	115	 	  	 	139	 	  	 	—  	  	  	 	254	 	
Life	  	 	—  	  	  	 	—  	  	  	 	452	 	  	 	452	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
	  	$	1,305	 	  	$	1,352	 	  	$	1,100	 	  	$	3,757	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
For the Three Months Ended June 30, 2010	  				  				  				  				
Insurance – North American	  	$	355	 	  	$	895	 	  	$	76	 	  	$	1,326	 	
Insurance – Overseas General	  	 	424	 	  	 	349	 	  	 	490	 	  	 	1,263	 	
Global Reinsurance	  	 	120	 	  	 	136	 	  	 	—  	  	  	 	256	 	
Life	  	 	—  	  	  	 	—  	  	  	 	388	 	  	 	388	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
	  	$	899	 	  	$	1,380	 	  	$	954	 	  	$	3,233	 	

37

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

 	  	Property &
All Other	 	  	Casualty	 	  	Life,
Accident &
Health	 	  	ACE
Consolidated	 	
 	  	(in millions of U.S. dollars)	 	
For the Six Months Ended June 30, 2011	  				  				  				  				
Insurance – North American	  	$	1,035	 	  	$	1,755	 	  	$	160	 	  	$	2,950	 	
Insurance – Overseas General	  	 	964	 	  	 	690	 	  	 	1,097	 	  	 	2,751	 	
Global Reinsurance	  	 	227	 	  	 	287	 	  	 	—  	  	  	 	514	 	
Life	  	 	—  	  	  	 	—  	  	  	 	851	 	  	 	851	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
	  	$	2,226	 	  	$	2,732	 	  	$	2,108	 	  	$	7,066	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
For the Six Months Ended June 30, 2010	  				  				  				  				
Insurance – North American	  	$	713	 	  	$	1,839	 	  	$	144	 	  	$	2,696	 	
Insurance – Overseas General	  	 	844	 	  	 	694	 	  	 	976	 	  	 	2,514	 	
Global Reinsurance	  	 	258	 	  	 	274	 	  	 	—  	  	  	 	532	 	
Life	  	 	—  	  	  	 	—  	  	  	 	768	 	  	 	768	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
	  	$	1,815	 	  	$	2,807	 	  	$	1,888	 	  	$	6,510	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
 11. Earnings per share
The following table presents the computation of basic and diluted earnings per share:

 	  	Three Months Ended June 30	 	  	Six Months Ended June 30	 	
 	  	2011	 	  	2010	 	  	2011	 	  	2010	 	
 	  	(in millions of U.S. dollars, except share and per share data)	 	
Numerator:	  				  				  				  				
Net Income	  	$	607	 	  	$	677	 	  	$	866	 	  	$	1,432	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Denominator:	  				  				  				  				
Denominator for basic earnings per share:	  				  				  				  				
Weighted-average shares outstanding	  	 	338,920,580	 	  	 	339,975,261	 	  	 	338,021,487	 	  	 	339,202,374	 	
Denominator for diluted earnings per share:	  				  				  				  				
Share-based compensation plans	  	 	2,768,388	 	  	 	1,268,395	 	  	 	2,596,909	 	  	 	1,185,944	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Adjusted weighted-average shares outstanding and assumed conversions	  	 	341,688,968	 	  	 	341,243,656	 	  	 	340,618,396	 	  	 	340,388,318	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Basic earnings per share	  	$	1.79	 	  	$	1.99	 	  	$	2.56	 	  	$	4.22	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Diluted earnings per share	  	$	1.77	 	  	$	1.98	 	  	$	2.54	 	  	$	4.21	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Excluded from adjusted weighted-average shares outstanding and assumed conversions is the impact of securities that would have been anti-dilutive during the respective periods. For the three months ended June 30, 2011 and 2010, the potential anti-dilutive share conversions were 1,212 shares and 426,167 shares, respectively. The potential anti-dilutive share conversions for the six months ended June 30, 2011 and 2010, were 81,718 shares and 429,990 shares, respectively.
 
38

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
 12. Information provided in connection with outstanding debt of subsidiaries
The following tables present condensed consolidating financial information at June 30, 2011 and December 31, 2010, and for the three and six months ended June 30, 2011 and 2010, for ACE Limited (the Parent Guarantor) and ACE INA Holdings Inc. (the Subsidiary Issuer). The Subsidiary Issuer is an indirect 100 percent-owned subsidiary of the Parent Guarantor. Investments in subsidiaries are accounted for by the Parent Guarantor under the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are reflected in the Parent Guarantor’s investment accounts and earnings. The Parent Guarantor fully and unconditionally guarantees certain of the debt of the Subsidiary Issuer. Condensed consolidating financial information of the Subsidiary Issuer is presented on a consolidated basis and consists principally of the net assets, results of operations, and cash flows of operating insurance company subsidiaries. 
Condensed Consolidating Balance Sheet at June 30, 2011
(in millions of U.S. dollars)

   	 	ACE
Limited
(Parent
Guarantor)	 	 	ACE INA
Holdings
Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	Consolidating
Adjustments (2)	 	 	ACE
Limited
Consolidated	 	
Assets	 				 				 				 				 				
Investments	 	$	40	 	 	$	29,095	 	 	$	26,054	  	 	$	—  	  	 	$	55,189	 	
Cash	 	 	(185	) 	 	 	664	 	 	 	354	  	 	 	—  	  	 	 	833	 	
Insurance and reinsurance balances receivable	 	 	—  	  	 	 	4,329	 	 	 	594	  	 	 	—  	  	 	 	4,923	 	
Reinsurance recoverable on losses and loss expenses	 	 	—  	  	 	 	17,722	 	 	 	(4,347	)  	 	 	—  	  	 	 	13,375	 	
Reinsurance recoverable on policy benefits	 	 	—  	  	 	 	941	 	 	 	(691	)  	 	 	—  	  	 	 	250	 	
Value of business acquired	 	 	—  	  	 	 	796	 	 	 	—  	  	 	 	—  	  	 	 	796	 	
Goodwill and other intangible assets	 	 	—  	  	 	 	4,301	 	 	 	557	  	 	 	—  	  	 	 	4,858	 	
Investments in subsidiaries	 	 	23,590	 	 	 	—  	  	 	 	—  	  	 	 	(23,590	) 	 	 	—  	  	
Due from (to) subsidiaries and affiliates, net	 	 	853	 	 	 	—  	  	 	 	—  	  	 	 	(853	)  	 	 	—  	  	
Other assets	 	 	6	 	 	 	7,471	 	 	 	1,553	  	 	 	—  	  	 	 	9,030	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets	 	$	24,304	 	 	$	65,319	 	 	$	24,074	  	 	$	(24,443	) 	 	$	89,254	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Liabilities	 				 				 				 				 				
Unpaid losses and loss expenses	 	$	—  	  	 	$	31,820	 	 	$	7,131	  	 	$	—  	  	 	$	38,951	 	
Unearned premiums	 	 	—  	  	 	 	5,820	 	 	 	1,093	  	 	 	—  	  	 	 	6,913	 	
Future policy benefits	 	 	—  	  	 	 	3,767	 	 	 	617	  	 	 	—  	  	 	 	4,384	 	
Due (from) to subsidiaries and affiliates, net	 	 	—  	  	 	 	907	 	 	 	(907	)  	 	 	—  	  	 	 	—  	  	
Short-term debt	 	 	—  	  	 	 	1,000	 	 	 	400	  	 	 	—  	  	 	 	1,400	 	
Long-term debt	 	 	—  	  	 	 	3,360	 	 	 	—  	  	 	 	—  	  	 	 	3,360	 	
Trust preferred securities	 	 	—  	  	 	 	309	 	 	 	—  	  	 	 	—  	  	 	 	309	 	
Other liabilities	 	 	191	 	 	 	8,060	 	 	 	1,573	  	 	 	—  	  	 	 	9,824	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total liabilities	 	 	191	 	 	 	55,043	 	 	 	9,907	  	 	 	—  	  	 	 	65,141	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total shareholders’ equity	 	 	24,113	 	 	 	10,276	 	 	 	14,167	  	 	 	(24,443	) 	 	 	24,113	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total liabilities and shareholders’ equity	 	$	24,304	 	 	$	65,319	 	 	$	24,074	  	 	$	(24,443	) 	 	$	89,254	 	

(1)  	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
(2)  	Includes ACE Limited parent company eliminations.	
 
39

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
Condensed Consolidating Balance Sheet at December 31, 2010
(in millions of U.S. dollars)

   	 	ACE
Limited
(Parent
Guarantor)	 	 	ACE INA
Holdings
Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	Consolidating
Adjustments (2)	 	 	ACE Limited
Consolidated	 	
Assets	 				 				 				 				 				
Investments	 	$	47	 	 	$	26,718	 	 	$	24,642	  	 	$	—  	  	 	$	51,407	 	
Cash	 	 	308	 	 	 	573	 	 	 	(109	)  	 	 	—  	  	 	 	772	 	
Insurance and reinsurance balances receivable	 	 	—  	  	 	 	3,710	 	 	 	523	  	 	 	—  	  	 	 	4,233	 	
Reinsurance recoverable on losses and loss expenses	 	 	—  	  	 	 	16,877	 	 	 	(4,006	)  	 	 	—  	  	 	 	12,871	 	
Reinsurance recoverable on policy benefits	 	 	—  	  	 	 	959	 	 	 	(678	)  	 	 	—  	  	 	 	281	 	
Value of business acquired	 	 	—  	  	 	 	634	 	 	 	—  	  	 	 	—  	  	 	 	634	 	
Goodwill and other intangible assets	 	 	—  	  	 	 	4,113	 	 	 	551	  	 	 	—  	  	 	 	4,664	 	
Investments in subsidiaries	 	 	22,529	 	 	 	—  	  	 	 	—  	  	 	 	(22,529	) 	 	 	—  	  	
Due from (to) subsidiaries and affiliates, net	 	 	564	 	 	 	(555	) 	 	 	555	  	 	 	(564	)  	 	 	—  	  	
Other assets	 	 	14	 	 	 	7,045	 	 	 	1,434	  	 	 	—  	  	 	 	8,493	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total assets	 	$	23,462	 	 	$	60,074	 	 	$	22,912	  	 	$	(23,093	) 	 	$	83,355	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Liabilities	 				 				 				 				 				
Unpaid losses and loss expenses	 	$	—  	  	 	$	30,430	 	 	$	6,961	  	 	$	—  	  	 	$	37,391	 	
Unearned premiums	 	 	—  	  	 	 	5,379	 	 	 	951	  	 	 	—  	  	 	 	6,330	 	
Future policy benefits	 	 	—  	  	 	 	2,495	 	 	 	611	  	 	 	—  	  	 	 	3,106	 	
Short-term debt	 	 	300	 	 	 	1,000	 	 	 	—  	  	 	 	—  	  	 	 	1,300	 	
Long-term debt	 	 	—  	  	 	 	3,358	 	 	 	—  	  	 	 	—  	  	 	 	3,358	 	
Trust preferred securities	 	 	—  	  	 	 	309	 	 	 	—  	  	 	 	—  	  	 	 	309	 	
Other liabilities	 	 	188	 	 	 	7,394	 	 	 	1,005	  	 	 	—  	  	 	 	8,587	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total liabilities	 	 	488	 	 	 	50,365	 	 	 	9,528	  	 	 	—  	  	 	 	60,381	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total shareholders’ equity	 	 	22,974	 	 	 	9,709	 	 	 	13,384	  	 	 	(23,093	) 	 	 	22,974	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total liabilities and shareholders’ equity	 	$	23,462	 	 	$	60,074	 	 	$	22,912	  	 	$	(23,093	) 	 	$	83,355	 	

(1)  	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
(2)  	Includes ACE Limited parent company eliminations.	
 
40

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ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2011
(in millions of U.S. dollars)

 	 	ACE
Limited
(Parent
Guarantor)	 	 	ACE INA
Holdings
Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	Consolidating
Adjustments (2)	 	 	ACE
Limited
Consolidated	 	
Net premiums written	 	$	—  	  	 	$	2,306	 	 	$	1,647	  	 	$	—  	  	 	$	3,953	 	
Net premiums earned	 	 	—  	  	 	 	2,225	 	 	 	1,532	  	 	 	—  	  	 	 	3,757	 	
Net investment income	 	 	—  	  	 	 	282	 	 	 	287	  	 	 	—  	  	 	 	569	 	
Equity in earnings of subsidiaries	 	 	579	 	 	 	—  	  	 	 	—  	  	 	 	(579	) 	 	 	—  	  	
Net realized gains (losses) including OTTI	 	 	(1	) 	 	 	17	 	 	 	(89	)  	 	 	—  	  	 	 	(73	) 	
Losses and loss expenses	 	 	—  	  	 	 	1,438	 	 	 	788	  	 	 	—  	  	 	 	2,226	 	
Policy benefits	 	 	—  	  	 	 	59	 	 	 	49	  	 	 	—  	  	 	 	108	 	
Policy acquisition costs and administrative expenses	 	 	18	 	 	 	609	 	 	 	504	  	 	 	(12	)  	 	 	1,119	 	
Interest expense	 	 	(10	) 	 	 	66	 	 	 	(3	)  	 	 	9 	  	 	 	62	 	
Other (income) expense	 	 	(40	) 	 	 	20	 	 	 	29	  	 	 	—  	  	 	 	9	 	
Income tax expense	 	 	3	 	 	 	110	 	 	 	9	  	 	 	—  	  	 	 	122	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	607	 	 	$	222	 	 	$	354	  	 	$	(576	) 	 	$	607	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2010
(in millions of U.S. dollars)

   	 	ACE
Limited
(Parent
Guarantor)	 	 	ACE INA
Holdings
Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	Consolidating
Adjustments (2)	 	 	ACE
Limited
Consolidated	 	
Net premiums written	 	$	—  	  	 	$	1,993	 	 	$	1,427	  	 	$	—  	  	 	$	3,420	 	
Net premiums earned	 	 	—  	  	 	 	1,894	 	 	 	1,339	  	 	 	—  	  	 	 	3,233	 	
Net investment income	 	 	—  	  	 	 	253	 	 	 	265	  	 	 	—  	  	 	 	518	 	
Equity in earnings of subsidiaries	 	 	648	 	 	 	—  	  	 	 	—  	  	 	 	(648	) 	 	 	—  	  	
Net realized gains (losses) including OTTI	 	 	12	 	 	 	63	 	 	 	(66	)  	 	 	—  	  	 	 	9	 	
Losses and loss expenses	 	 	—  	  	 	 	1,147	 	 	 	653	  	 	 	—  	  	 	 	1,800	 	
Policy benefits	 	 	—  	  	 	 	33	 	 	 	54	  	 	 	—  	  	 	 	87	 	
Policy acquisition costs and administrative expenses	 	 	16	 	 	 	583	 	 	 	410	  	 	 	(10	)  	 	 	999	 	
Interest expense	 	 	(10	) 	 	 	61	 	 	 	(9	)  	 	 	10	  	 	 	52	 	
Other (income) expense	 	 	(26	) 	 	 	19	 	 	 	10	  	 	 	—  	  	 	 	3	 	
Income tax expense	 	 	3	 	 	 	107	 	 	 	32	  	 	 	—  	  	 	 	142	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	677	 	 	$	260	 	 	$	388	  	 	$	(648	) 	 	$	677	 	

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

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ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2011
(in millions of U.S. dollars)

   	 	ACE
Limited
(Parent
Guarantor)	 	 	ACE INA
Holdings
Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	Consolidating
Adjustments (2)	 	 	ACE
Limited
Consolidated	 	
Net premiums written	 	$	—  	  	 	$	4,329	 	 	$	3,070	  	 	$	—  	  	 	$	7,399	 	
Net premiums earned	 	 	—  	  	 	 	4,163	 	 	 	2,903	  	 	 	—  	  	 	 	7,066	 	
Net investment income	 	 	1	 	 	 	544	 	 	 	568	  	 	 	—  	  	 	 	1,113	 	
Equity in earnings of subsidiaries	 	 	827	 	 	 	—  	  	 	 	—  	  	 	 	(827	) 	 	 	—  	  	
Net realized gains (losses) including OTTI	 	 	(2	) 	 	 	4	 	 	 	(120	)  	 	 	—  	  	 	 	(118	) 	
Losses and loss expenses	 	 	—  	  	 	 	2,739	 	 	 	1,750	  	 	 	—  	  	 	 	4,489	 	
Policy benefits	 	 	—  	  	 	 	99	 	 	 	100	  	 	 	—  	  	 	 	199	 	
Policy acquisition costs and administrative expenses	 	 	36	 	 	 	1,188	 	 	 	965	  	 	 	(21	)  	 	 	2,168	 	
Interest expense	 	 	(18	) 	 	 	133	 	 	 	(8	)  	 	 	18	  	 	 	125	 	
Other (income) expense	 	 	(62	) 	 	 	32	 	 	 	25	  	 	 	—  	  	 	 	(5	) 	
Income tax expense	 	 	4	 	 	 	179	 	 	 	36	  	 	 	—  	  	 	 	219	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	866	 	 	$	341	 	 	$	483	  	 	$	(824	) 	 	$	866	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2010
(in millions of U.S. dollars)

   	 	ACE
Limited
(Parent
Guarantor)	 	 	ACE INA
Holdings
Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	Consolidating
Adjustments (2)	 	 	ACE
Limited
Consolidated	 	
Net premiums written	 	$	—  	  	 	$	4,220	 	 	$	2,771	  	 	$	—  	  	 	$	6,991	 	
Net premiums earned	 	 	—  	  	 	 	3,850	 	 	 	2,660	  	 	 	—  	  	 	 	6,510	 	
Net investment income	 	 	—  	  	 	 	507	 	 	 	515	  	 	 	—  	  	 	 	1,022	 	
Equity in earnings of subsidiaries	 	 	1,383	 	 	 	—  	  	 	 	—  	  	 	 	(1,383	) 	 	 	—  	  	
Net realized gains (losses) including OTTI	 	 	11	 	 	 	73	 	 	 	93	  	 	 	—  	  	 	 	177	 	
Losses and loss expenses	 	 	—  	  	 	 	2,463	 	 	 	1,258	  	 	 	—  	  	 	 	3,721	 	
Policy benefits	 	 	—  	  	 	 	66	 	 	 	108	  	 	 	—  	  	 	 	174	 	
Policy acquisition costs and administrative expenses	 	 	32	 	 	 	1,144	 	 	 	854	  	 	 	(17	)  	 	 	2,013	 	
Interest expense	 	 	(19	) 	 	 	121	 	 	 	(17	)  	 	 	19	  	 	 	104	 	
Other (income) expense	 	 	(54	) 	 	 	38	 	 	 	15	  	 	 	—  	  	 	 	(1	) 	
Income tax expense (benefit)	 	 	3	 	 	 	203	 	 	 	60	  	 	 	—  	  	 	 	266	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	1,432	 	 	$	395	 	 	$	990	  	 	$	(1,385	) 	 	$	1,432	 	

(1)  	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
(2)  	Includes ACE Limited parent company eliminations.	
 
42

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2011
(in millions of U.S. dollars)

   	 	ACE
Limited
(Parent
Guarantor)	 	 	ACE INA
Holdings
Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	Consolidating
Adjustments (2)	 	 	ACE
Limited
Consolidated	 	
Net cash flows from operating activities	 	$	117	 	 	$	677	 	 	$	1,949	  	 	$	(680	) 	 	$	2,063	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash flows from (used for) investing activities	 				 				 				 				 				
Purchases of fixed maturities available for sale	 	 	—  	  	 	 	(6,330	) 	 	 	(7,353	) 	 	 	—  	  	 	 	(13,683	) 	
Purchases of fixed maturities held to maturity	 	 	—  	  	 	 	(233	) 	 	 	(1	)  	 	 	—  	  	 	 	(234	) 	
Purchases of equity securities	 	 	—  	  	 	 	(138	) 	 	 	(32	)  	 	 	—  	  	 	 	(170	) 	
Sales of fixed maturities available for sale	 	 	8	 	 	 	5,022	 	 	 	4,955	  	 	 	—  	  	 	 	9,985	 	
Sales of equity securities	 	 	—  	  	 	 	332	 	 	 	15	  	 	 	—  	  	 	 	347	 	
Maturities and redemptions of fixed maturities available for sale	 	 	—  	  	 	 	847	 	 	 	911	  	 	 	—  	  	 	 	1,758	 	
Maturities and redemptions of fixed maturities held to maturity	 	 	—  	  	 	 	475	 	 	 	181	  	 	 	—  	  	 	 	656	 	
Net derivative instruments settlements	 	 	(1	) 	 	 	(7	) 	 	 	(38	)  	 	 	—  	  	 	 	(46	) 	
Capital contribution to subsidiary	 	 	(385	) 	 	 	—  	  	 	 	—  	  	 	 	385	  	 	 	—  	  	
Advances (to) from affiliates	 	 	283	 	 	 	—  	  	 	 	(283	)  	 	 	—  	  	 	 	—  	  	
Acquisition of subsidiaries (net of cash acquired of $95)	 	 	—  	  	 	 	(343	) 	 	 	(37	)  	 	 	—  	  	 	 	(380	) 	
Other	 	 	—  	  	 	 	(449	) 	 	 	317	  	 	 	—  	  	 	 	(132	) 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash flows from (used for) investing activities	 	 	(95	) 	 	 	(824	) 	 	 	(1,365	) 	 	 	385	  	 	 	(1,899	) 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash flows from (used for) financing activities	 				 				 				 				 				
Dividends paid on Common Shares	 	 	(223	) 	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	(223	) 	
Common Shares repurchased	 	 	(68	) 	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	(68	) 	
Net proceeds from issuance (repayment) of short-term debt	 	 	(300	) 	 	 	—  	  	 	 	400	  	 	 	—  	  	 	 	100	 	
Proceeds from share based compensation plans	 	 	76	 	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	76	 	
Advances (to) from affiliates	 	 	—  	  	 	 	226	 	 	 	(226	)  	 	 	—  	  	 	 	—  	  	
Dividends to parent company	 	 	—  	  	 	 	—  	  	 	 	(680	)  	 	 	680	  	 	 	—  	  	
Capital contribution from parent	 	 	—  	  	 	 	—  	  	 	 	385	  	 	 	(385	) 	 	 	—  	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash flows from (used for) financing activities	 	 	(515	) 	 	 	226	 	 	 	(121	) 	 	 	295	  	 	 	(115	) 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Effect of foreign currency rate changes on cash and cash equivalents	 	 	—  	  	 	 	12	 	 	 	—  	  	 	 	—  	  	 	 	12	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net increase (decrease) in cash	 	 	(493	) 	 	 	91	 	 	 	463	  	 	 	—  	  	 	 	61	 	
Cash – beginning of period	 	 	308	 	 	 	573	 	 	 	(109	)  	 	 	—  	  	 	 	772	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash – end of period	 	$	(185	) 	 	$	664	 	 	$	354	  	 	$	—  	  	 	$	833	 	

(1)  	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
(2)  	Includes elimination of dividends paid from subsidiaries to ACE Limited and capital contribution to subsidiaries by ACE Limited.	
 
43

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(continued)
(Unaudited)
 
Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2010
(in millions of U.S. dollars)

   	 	ACE
Limited
(Parent
Guarantor)	 	 	ACE INA
Holdings
Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	Consolidating
Adjustments	 	 	ACE
Limited
Consolidated	 	
Net cash flows from operating activities	 	$	25	 	 	$	677	 	 	$	989	  	 	$	—  	  	 	$	1,691	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash flows from (used for) investing activities	 				 				 				 				 				
Purchases of fixed maturities available for sale	 	 	—  	  	 	 	(8,133	) 	 	 	(9,210	) 	 	 	—  	  	 	 	(17,343	) 	
Purchases of fixed maturities held to maturity	 	 	—  	  	 	 	(323	) 	 	 	(1	)  	 	 	—  	  	 	 	(324	) 	
Purchases of equity securities	 	 	—  	  	 	 	(28	) 	 	 	(10	)  	 	 	—  	  	 	 	(38	) 	
Sales of fixed maturities available for sale	 	 	2	 	 	 	6,491	 	 	 	7,057	  	 	 	—  	  	 	 	13,550	 	
Sales of equity securities	 	 	—  	  	 	 	2	 	 	 	309	  	 	 	—  	  	 	 	311	 	
Maturities and redemptions of fixed maturities available for sale	 	 	—  	  	 	 	926	 	 	 	850	  	 	 	—  	  	 	 	1,776	 	
Maturities and redemptions of fixed maturities held to maturity	 	 	—  	  	 	 	461	 	 	 	109	  	 	 	—  	  	 	 	570	 	
Net derivative instruments settlements	 	 	(1	) 	 	 	(3	) 	 	 	135	  	 	 	—  	  	 	 	131	 	
Advances (to) from affiliates	 	 	196	 	 	 	—  	  	 	 	(196	)  	 	 	—  	  	 	 	—  	  	
Other	 	 	—  	  	 	 	(80	) 	 	 	(20	)  	 	 	—  	  	 	 	(100	) 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash flows from (used for) investing activities	 	 	197	 	 	 	(687	) 	 	 	(977	)  	 	 	—  	  	 	 	(1,467	) 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash flows from (used for) financing activities	 				 				 				 				 				
Dividends paid on Common Shares	 	 	(210	) 	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	(210	) 	
Proceeds from share based compensation plans	 	 	19	 	 	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	19	 	
Advances (to) from affiliates	 	 	—  	  	 	 	3	 	 	 	(3	)  	 	 	—  	  	 	 	—  	  	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net cash flows from (used for) financing activities	 	 	(191	) 	 	 	3	 	 	 	(3	)  	 	 	—  	  	 	 	(191	) 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Effect of foreign currency rate changes on cash and cash equivalents	 	 	—  	  	 	 	(15	) 	 	 	(19	)  	 	 	—  	  	 	 	(34	) 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net increase (decrease) in cash	 	 	31	 	 	 	(22	) 	 	 	(10	)  	 	 	—  	  	 	 	(1	) 	
Cash – beginning of period	 	 	(1	) 	 	 	400	 	 	 	270	  	 	 	—  	  	 	 	669	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash – end of period	 	$	30	 	 	$	378	 	 	$	260	  	 	$	—  	  	 	$	668	 	

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

Table of Contents

Item 2.	 Management’s Discussion and Analysis of Financial Condition and Results of Operations	
The following is a discussion of our results of operations, financial condition, and liquidity and capital resources for the three and six months ended June 30, 2011. Our results of operations and cash flows for any interim period are not necessarily indicative of our results for the full year. This discussion should be read in conjunction with our Consolidated Financial Statements and related Notes and our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2010 (2010 Form 10-K).
Other Information
We routinely post important information for investors on our website (www.acegroup.com) under the Investor Information section. We use this website as a means of disclosing material, non-public information and for complying with our disclosure obligations under Securities and Exchange Commission (SEC) Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Investor Information portion of our website, in addition to following our press releases, SEC filings, and public conference calls and webcasts. The information contained on, or that may be accessed through, our website is not incorporated by reference into, and is not a part of, this report.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Any written or oral statements made by us or on our behalf may include forward-looking statements that reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks, uncertainties, and other factors that could, should potential events occur, cause actual results to differ materially from such statements. These risks, uncertainties, and other factors (which are described in more detail elsewhere herein and in other documents we file with the SEC) include but are not limited to:
 
 	•	 	developments in global financial markets, including changes in interest rates, stock markets, and other financial markets, increased government involvement or intervention in the financial services industry, the cost and availability of financing, and foreign currency exchange rate fluctuations (which we refer to in this report as foreign exchange and foreign currency exchange), which could affect our statement of operations, investment portfolio, financial position, and financing plans;	
 
 	•	 	general economic and business conditions resulting from volatility in the stock and credit markets and the depth and duration of recession;	
 
 	•	 	losses arising out of natural or man-made catastrophes such as hurricanes, typhoons, earthquakes, floods, climate change (including effects on weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain and snow), nuclear accidents or terrorism which could be affected by:	
 
 	•	 	the number of insureds and ceding companies affected;	
 
 	•	 	the amount and timing of losses actually incurred and reported by insureds;	
 
 	•	 	the impact of these losses on our reinsurers and the amount and timing of reinsurance recoverable actually received;	
 
 	•	 	the cost of building materials and labor to reconstruct properties or to perform environmental remediation following a catastrophic event; and	
 
 	•	 	complex coverage and regulatory issues such as whether losses occurred from storm surge or flooding and related lawsuits;	
 
 	•	 	actions that rating agencies may take from time to time, such as financial strength or credit ratings downgrades or placing these ratings on credit watch negative or the equivalent;	
 
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 	•	 	global political conditions, the occurrence of any terrorist attacks, including any nuclear, radiological, biological, or chemical events, or the outbreak and effects of war, and possible business disruption or economic contraction that may result from such events;	
 
 	•	 	the ability to collect reinsurance recoverable, credit developments of reinsurers, and any delays with respect thereto and changes in the cost, quality, or availability of reinsurance;	
 
 	•	 	actual loss experience from insured or reinsured events and the timing of claim payments;	
 
 	•	 	the uncertainties of the loss-reserving and claims-settlement processes, including the difficulties associated with assessing environmental damage and asbestos-related latent injuries, the impact of aggregate-policy-coverage limits, and the impact of bankruptcy protection sought by various asbestos producers and other related businesses and the timing of loss payments;	
 
 	•	 	infection rates and severity of pandemics and their effects on our business operations and claims activity;	
 
 	•	 	judicial decisions and rulings, new theories of liability, legal tactics, and settlement terms;	
 
 	•	 	the effects of public company bankruptcies and/or accounting restatements, as well as disclosures by and investigations of public companies relating to possible accounting irregularities, and other corporate governance issues, including the effects of such events on:	
 
 	•	 	the capital markets;	
 
 	•	 	the markets for directors and officers (D&O) and errors and omissions (E&O) insurance; and	
 
 	•	 	claims and litigation arising out of such disclosures or practices by other companies;	
 
 	•	 	uncertainties relating to governmental, legislative and regulatory policies, developments, actions, investigations and treaties, which, among other things, could subject us to insurance regulation or taxation in additional jurisdictions or affect our current operations;	
 
 	•	 	the actual amount of new and renewal business, market acceptance of our products, and risks associated with the introduction of new products and services and entering new markets, including regulatory constraints on exit strategies;	
 
 	•	 	the competitive environment in which we operate, including trends in pricing or in policy terms and conditions, which may differ from our projections and changes in market conditions that could render our business strategies ineffective or obsolete;	
 
 	•	 	acquisitions made by us performing differently than expected, our failure to realize anticipated expense-related efficiencies or growth from acquisitions, the impact of acquisitions on our pre-existing organization or announced acquisitions not closing;	
 
 	•	 	risks associated with being a Swiss corporation, including reduced flexibility with respect to certain aspects of capital management and the potential for additional regulatory burdens;	
 
 	•	 	the potential impact from government-mandated insurance coverage for acts of terrorism;	
 
 	•	 	the availability of borrowings and letters of credit under our credit facilities;	
 
 	•	 	the adequacy of collateral supporting funded high deductible programs;	
 
 	•	 	changes in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers;	
 
 	•	 	material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements;	
 
 	•	 	the effects of investigations into market practices in the property and casualty (P&C) industry;	
 
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 	•	 	changing rates of inflation and other economic conditions, for example, recession;	
 
 	•	 	the amount of dividends received from subsidiaries;	
 
 	•	 	loss of the services of any of our executive officers without suitable replacements being recruited in a reasonable time frame;	
 
 	•	 	the ability of our technology resources to perform as anticipated; and	
 
 	•	 	management’s response to these factors and actual events (including, but not limited to, those described above).	
The words “believe,” “anticipate,” “estimate,” “project,” “should,” “plan,” “expect,” “intend,” “hope,” “feel,” “foresee,” “will likely result,” or “will continue,” and variations thereof and similar expressions, identify forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future events or otherwise.
Overview
ACE Limited is the Swiss-incorporated holding company of the ACE Group of Companies. ACE opened its business office in Bermuda in 1985 and continues to maintain operations in Bermuda. ACE Limited, which is headquartered in Zurich, Switzerland, and its direct and indirect subsidiaries (collectively, the ACE Group of Companies, ACE, we, us, or our) are a global insurance and reinsurance organization, serving the needs of commercial and individual customers in more than 170 countries. We serve the P&C insurance needs of businesses of all sizes in a broad range of industries. We also provide specialized insurance products such as personal accident, supplemental health and life insurance to individuals in select countries. At June 30, 2011, ACE had total assets of $89 billion and shareholders’ equity of $24 billion.
Our product and geographic diversification differentiates us from the vast majority of our competitors and has been a source of stability during periods of industry volatility. Our long-term business strategy focuses on sustained growth in book value achieved through a combination of underwriting and investment income. By doing so, we provide value to our clients and shareholders through the utilization of our substantial capital base in the insurance and reinsurance markets.
We operate through the following business segments: Insurance—North American, Insurance—Overseas General, Global Reinsurance, and Life. The Insurance—North American segment includes our wholesale divisions ACE Westchester and ACE Bermuda; and our retail divisions ACE USA (including ACE Canada), Commercial Risk, Agriculture, ACE Private Risk Services, and various run-off operations, including Brandywine Holdings Corporation (Brandywine). The Insurance—Overseas General segment comprises ACE International, our retail business serving territories outside the U.S., Bermuda, and Canada; the international accident & health (A&H) and life business of Combined Insurance; and the wholesale insurance business of ACE Global Markets. The Global Reinsurance segment represents ACE’s reinsurance operations, comprising ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re International, ACE Tempest Re Canada, and the reinsurance operation of ACE Global Markets. The Life segment includes ACE’s international life operations (ACE Life), ACE Tempest Life Re (ACE Life Re), the acquired business of New York Life’s Korea operations and Hong Kong operations, and the North American supplemental A&H and life business of Combined Insurance. For more information on each of our segments refer to “Segment Information” in our 2010 Form 10-K.
Significant Events
The impact of natural catastrophes
We experienced a higher number of natural catastrophes in the first six months of 2011 compared to the first six months of 2010. Results for the three and six months ended June 30, 2011 were adversely impacted by net
 
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after-tax losses of $101 million and $544 million, respectively, including reinstatement premiums, related to several natural catastrophes including the Japan and New Zealand earthquakes, the Australian storms, and other severe weather related events in the U.S. For further details, see “Consolidated Operating Results”.
Acquisitions
ACE acquired New York Life’s Korea operations on February 1, 2011 and New York Life’s Hong Kong operations on April 1, 2011. The results for the three and six months ended June 30, 2011 include five months of results for the acquired New York Life Korea operations and a quarter of results for the acquired New York Life Hong Kong operations. See Note 3 to the Consolidated Financial Statements for more information.
Market Conditions
The industry experienced significant catastrophe losses in the second quarter resulting in above average industry catastrophe losses for the first half of 2011. As a result, pricing is increasing on certain classes of property business, such as single-peril catastrophe, large account property requiring significant capacity, and other classes such as international marine and energy. We believe that casualty pricing is firming although we have not seen meaningful rate increases. We continue efforts to maintain strict underwriting discipline and will continue to decline business when we deem pricing and exposure are inadequate to generate an underwriting profit.
Net premiums written increased in the North American wholesale business primarily due to growth in agriculture driven by our acquisition of Rain and Hail. As a result of adherence to our strict underwriting standards, new business writings for North American retail commercial P&C decreased significantly in the three months ended June 30, 2011, compared with the prior year period. We are writing less new business and maintaining our renewals.
Net premiums written were up in our retail International P&C business for the three months ended June 30, 2011. We saw double digit growth in Asia, Latin America, U.K. and continental Europe. With respect to our International wholesale business, we continue to reduce our exposure due to inadequate pricing. Both our retail and wholesale International P&C businesses benefited from favorable foreign exchange impact.
Our Global Reinsurance segment reported a decline in net written premium in the quarter ended June 30, 2011, as conditions remain competitive.
A&H premiums continue to experience good growth driven primarily by our international A&H business. Our Asian and Latin American A&H businesses contributed double digit growth even after adjusting for favorable foreign exchange impact. Our U.S. A&H business also demonstrated meaningful growth for the quarter. We believe our A&H business will continue to grow through 2011. In contrast, the ability to grow our Combined Insurance premiums continues to be hampered by the economic recession in its target markets. Additionally, Combined’s business in the U.K. and Ireland has been impacted by changes in the regulatory environment as regulators in these two countries have adopted a new stance regarding sales practices and customer service. This has resulted in a need for us to re-evaluate our sales model and to re-engineer our processes. We have put these two operations on a sales moratorium while we re-evaluate our business model. We have decided to cease sales in the small Spanish subsidiary of Combined-Ireland permanently. We intend to seek regulatory approval to integrate all European operations of Combined into our AEGL subsidiary, incorporated in the UK. We expect to seek regulatory approval to re-commence sales in the UK and Ireland once the integration is completed.
Life revenues were up primarily due to the acquisitions of New York Life’s Korea operations and Hong Kong operations and good growth in our International Life business.
 
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Consolidated Operating Results – Three and Six Months Ended June 30, 2011 and 2010

 	  	Three Months Ended
June 30	 	  	% Change	 	 	Six Months Ended
June 30	 	 	% Change	 	
 	  	2011	 	 	2010	 	  	Q-11 vs.
Q-10	 	 	2011	 	 	2010	 	 	YTD-11 vs.
YTD-10	 	
 	  	(in millions of U.S. dollars, except for percentages)	 	
Net premiums written	  	$	3,953	 	 	$	3,420	 	  	 	16	% 	 	$	7,399	 	 	$	6,991	 	 	 	6	% 	
Net premiums earned	  	 	3,757	 	 	 	3,233	 	  	 	16	% 	 	 	7,066	 	 	 	6,510	 	 	 	9	% 	
Net investment income	  	 	569	 	 	 	518	 	  	 	10	% 	 	 	1,113	 	 	 	1,022	 	 	 	9	% 	
Net realized gains (losses)	  	 	(73	) 	 	 	9	 	  	 	NM	  	 	 	(118	) 	 	 	177	 	 	 	NM	  	
	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total revenues	  	 	4,253	 	 	 	3,760	 	  	 	13	% 	 	 	8,061	 	 	 	7,709	 	 	 	5	% 	
	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Losses and loss expenses	  	 	2,226	 	 	 	1,800	 	  	 	24	% 	 	 	4,489	 	 	 	3,721	 	 	 	21	% 	
Policy benefits	  	 	108	 	 	 	87	 	  	 	24	% 	 	 	199	 	 	 	174	 	 	 	14	% 	
Policy acquisition costs	  	 	604	 	 	 	536	 	  	 	13	% 	 	 	1,159	 	 	 	1,090	 	 	 	6	% 	
Administrative expenses	  	 	515	 	 	 	463	 	  	 	11	% 	 	 	1,009	 	 	 	923	 	 	 	9	% 	
Interest expense	  	 	62	 	 	 	52	 	  	 	19	% 	 	 	125	 	 	 	104	 	 	 	20	% 	
Other (income) expense	  	 	9	 	 	 	3	 	  	 	NM	  	 	 	(5	) 	 	 	(1	) 	 	 	NM	  	
	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total expenses	  	 	3,524	 	 	 	2,941	 	  	 	20	% 	 	 	6,976	 	 	 	6,011	 	 	 	16	% 	
	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Income before income tax	  	 	729	 	 	 	819	 	  	 	(11	)% 	 	 	1,085	 	 	 	1,698	 	 	 	(36	)% 	
Income tax expense	  	 	122	 	 	 	142	 	  	 	(14	)% 	 	 	219	 	 	 	266	 	 	 	(18	)% 	
	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	607	 	 	$	677	 	  	 	(10	)% 	 	$	866	 	 	$	1,432	 	 	 	(40	)% 	
	  	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
NM—not meaningful	  				 				  				 				 				 				
The following table summarizes by major product line the approximate effect of changes in foreign currency exchange rates on the growth of net premiums written and earned:

 	  	Three Months Ended
June 30, 2011	 	
 	  	P&C	 	 	A&H	 	 	Total	 	
Net premiums written:	  				 				 				
Increase (decrease) net premiums written in original currency	  	 	14.7	% 	 	 	2.2	% 	 	 	11.6	% 	
Foreign exchange effect	  	 	3.0	% 	 	 	6.7	% 	 	 	4.0	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Increase (decrease) as reported in U.S. dollars	  	 	17.7	% 	 	 	8.9	% 	 	 	15.6	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Net premiums earned:	  				 				 				
Increase (decrease) net premiums earned in original currency	  	 	15.5	% 	 	 	2.4	% 	 	 	12.0	% 	
Foreign exchange effect	  	 	3.2	% 	 	 	6.6	% 	 	 	4.2	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Increase (decrease) as reported in U.S. dollars	  	 	18.7	% 	 	 	9.0	% 	 	 	16.2	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Net premiums written, which reflect the premiums we retain after purchasing reinsurance protection, increased in the three and six months ended June 30, 2011, compared with the prior year periods. The North American wholesale division benefited from the acquisition of Rain and Hail in December 2010, reporting premium growth in agricultural and personal lines. Our North American retail division reported less assumed loss portfolio business as well as lower new business and policy renewals across several lines of business. Our international retail business reported growth, partially offset by reinstatement premiums expensed in connection with first quarter catastrophe activity. The global reinsurance operations reported a decline in net premiums written compared with the prior year quarter, primarily due to competitive market conditions. The life segment reported an increase in net premiums written due primarily to the acquisition of New York Life’s Hong Kong operations.
 
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Net premiums earned reflect the portion of net premiums written that were recorded as revenues for the period as the exposure periods expire. Net premiums earned increased in the three and six months ended June 30, 2011, compared with the prior year periods, primarily due to the Rain & Hail acquisition and growth in the international retail business and favorable foreign exchange, partially offset by reinstatement premiums expensed and less assumed loss portfolio transfers.
The following table provides a consolidated breakdown of net premiums earned by line of business:

 	  	Three Months Ended
June 30	 	 	% Change	 	 	Six Months Ended
June 30	 	 	% Change	 	
 	  			 	Q-11 vs.
Q-10	 	 			 	YTD-11  vs.
YTD-10	 	
 	  	2011	 	 	2010	 	 			 	2011	 	 	2010	 	 			
 	  	(in millions of U.S. dollars, except for percentages)	 	
Property and all other	  	$	1,305	 	 	$	899	 	 	 	45	% 	 	$	2,226	 	 	$	1,815	 	 	 	23	% 	
Casualty	  	 	1,352	 	 	 	1,380	 	 	 	(2	)% 	 	 	2,732	 	 	 	2,807	 	 	 	(3	)% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Subtotal	  	 	2,657	 	 	 	2,279	 	 	 	17	% 	 	 	4,958	 	 	 	4,622	 	 	 	7	% 	
Personal accident (A&H)	  	 	901	 	 	 	827	 	 	 	9	% 	 	 	1,756	 	 	 	1,637	 	 	 	7	% 	
Life	  	 	199	 	 	 	127	 	 	 	57	% 	 	 	352	 	 	 	251	 	 	 	40	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	  	$	3,757	 	 	$	3,233	 	 	 	16	% 	 	$	7,066	 	 	$	6,510	 	 	 	9	% 	

 	  	2011
% of  total	 	 	2010
% of  total	 	 	 	 	 	2011
% of  total	 	 	2010
% of  total	 	 	 	 	
Property and all other	  	 	35	% 	 	 	28	% 	 				 	 	32	% 	 	 	28	% 	 				
Casualty	  	 	36	% 	 	 	43	% 	 				 	 	38	% 	 	 	43	% 	 				
	  	 	 	 	 	 	 	 	 				 	 	 	 	 	 	 	 	 				
Subtotal	  	 	71	% 	 	 	71	% 	 				 	 	70	% 	 	 	71	% 	 				
Personal accident (A&H)	  	 	24	% 	 	 	26	% 	 				 	 	25	% 	 	 	25	% 	 				
Life	  	 	5	% 	 	 	3	% 	 				 	 	5	% 	 	 	4	% 	 				
	  	 	 	 	 	 	 	 	 				 	 	 	 	 	 	 	 	 				
Net premiums earned	  	 	100	% 	 	 	100	% 	 				 	 	100	% 	 	 	100	% 	 				
	  	 	 	 	 	 	 	 	 				 	 	 	 	 	 	 	 	 				
Net investment income increased for the three and six months ended June 30, 2011, compared with the prior year periods, primarily due to positive operating cash flows, foreign exchange, and the impact of acquisitions which have resulted in a higher overall average invested asset base, partially offset by lower yields on new investments and short-term securities. Refer to “Net Investment Income” and “Investments”.
In evaluating our segments excluding Life, we use the combined ratio, the loss and loss expense ratio, the policy acquisition cost ratio, and the administrative expense ratio. We calculate these ratios by dividing the respective expense amounts by net premiums earned. We do not calculate these ratios for the Life segment as we do not use these measures to monitor or manage that segment. The combined ratio is determined by adding the loss and loss expense ratio, the policy acquisition cost ratio, and the administrative expense ratio. A combined ratio under 100 percent indicates underwriting income and a combined ratio exceeding 100 percent indicates underwriting loss.
The following table shows our consolidated loss and loss expense ratio, policy acquisition cost ratio, administrative expense ratio, and combined ratio:

 	  	Three Months Ended
June 30	 	 	Six Months Ended
June 30	 	
 	  	2011	 	 	2010	 	 	2011	 	 	2010	 	
Loss and loss expense ratio	  	 	62.9	% 	 	 	58.8	% 	 	 	67.8	% 	 	 	60.3	% 	
Policy acquisition cost ratio	  	 	16.3	% 	 	 	16.5	% 	 	 	16.6	% 	 	 	16.8	% 	
Administrative expense ratio	  	 	13.4	% 	 	 	14.4	% 	 	 	14.0	% 	 	 	14.1	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Combined ratio	  	 	92.6	% 	 	 	89.7	% 	 	 	98.4	% 	 	 	91.2	% 	

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

 	  	Three Months Ended
June  30	 	 	Six Months Ended
June  30	 	
 	  	2011	 	 	2010	 	 	2011	 	 	2010	 	
Loss and loss expense ratio, as reported	  	 	62.9	% 	 	 	58.8	% 	 	 	67.8	% 	 	 	60.3	% 	
Catastrophe losses and related reinstatement premiums	  	 	(4.1	)% 	 	 	(2.8	)% 	 	 	(9.6	)% 	 	 	(4.2	)% 	
Prior period development	  	 	4.4	% 	 	 	5.2	% 	 	 	3.8	% 	 	 	5.0	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss and loss expense ratio, adjusted	  	 	63.2	% 	 	 	61.2	% 	 	 	62.0	% 	 	 	61.1	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
The table below shows the impact of the catastrophe losses by segment:
Three Months Ended June 30, 2011

Catastrophe Loss Charges	  	Insurance -
North
American	 	 	Insurance -
Overseas
General	 	 	Global
Reinsurance	 	 	Reinstatement
Premiums Paid
(Collected)	 	 	Pre-tax
Total	 	 	After-tax
Total	 	
 	  	(in millions of U.S. dollars)	 	
Net loss:	  				 				 				 				 				 				
True-up of Q1 Events	  	$	(6	) 	 	$	(5	) 	 	$	(20	) 	 	$	(3	) 	 	$	(34	) 	 	$	(35	) 	
Q2 Events	  	 	116	 	 	 	15	 	 	 	42	 	 	 	(5	) 	 	 	168	 	 	 	136	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	110	 	 	$	10	 	 	$	22	 	 	$	(8	) 	 	$	134	 	 	$	101	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
We experienced total net pre-tax catastrophe losses of $142 million and $557 million (before reinstatement premiums) in the three and six months ended June 30, 2011, compared with $76 million and $224 million of net pre-tax catastrophe losses (before reinstatement premiums) in the prior year periods. The catastrophe losses incurred during the three and six months ended June 30, 2011, were primarily related to earthquakes in Japan and New Zealand, and storms in Australia, and severe weather related events in the U.S. Reinsurance recoverables are due from highly rated reinsurers.
On March 11, 2011, the Tohoku earthquake struck the northeastern coast of Japan. Due to the size and complexity of the earthquake, total covered losses for the insurance industry remain difficult to predict. However, industry sources have estimated that the losses arising out of the earthquake will be substantial.
Our Japan Tohoku earthquake estimates were based on ground-up reviews of a substantial majority of our in-force direct policies and internal modeling of our in-force reinsurance policies we believe to be affected, together with information from our insureds, adjusters, brokers and cedents. Actual losses may vary materially from these amounts as a result of, among other things, the receipt of additional information from insureds or brokers, the attribution of losses to coverages that, for the purpose of our calculations, we assumed would not be exposed and inflation in repair costs due to the limited availability of labor and materials. In addition, our Japan earthquake losses are subject to a high level of uncertainty due to extremely complex and unique causation and coverage issues associated with the events, including the attribution of losses to other perils and potential legal and regulatory developments related to potential losses. Further, products such as contingent business interruption may represent a significant source of uncertainty for our loss estimate, especially given the post-event impact on certain industries (for example, auto and consumer). Some issues may become the subject of litigation and may not be resolved for a considerable period of time. As a result, although we believe our reserves for these events are adequate, both industry-wide insured losses and our losses from the Japan earthquake may ultimately be materially greater or lower than our initial reported losses and any additional losses could have a further material adverse impact on our financial results.
 
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Prior period development arises from changes to loss estimates recognized in the current year that relate to loss reserves first reported in previous calendar years and excludes the effect of losses from the development of earned premium from previous accident years. We experienced $146 million and $239 million of net favorable prior period development in the three and six months ended June 30, 2011. This compares with net favorable prior period development of $149 million and $245 million in the prior year periods, respectively. Refer to “Prior Period Development” for more information.
Our policy acquisition costs include commissions, premium taxes, underwriting, and other costs that vary with, and are primarily related to, the production of premium. Administrative expenses include all other operating costs. Our policy acquisition cost ratio decreased in the three and six months ended June 30, 2011, compared with the prior year periods. Insurance – North American reported a decline in its policy acquisition cost ratio primarily due to a shift in the mix of business toward lower acquisition cost lines of business, primarily agriculture. This favorable impact on the policy acquisition cost ratio was offset by changes in business mix and the impact of reinstatement premiums expensed, mainly within the Insurance – Overseas General segment.
Our administrative expense ratio decreased in the three and six months ended June 30, 2011, compared with the prior year periods, primarily due to the growth of low expense ratio business including agriculture business in our Insurance—North American segment, partially offset by the impact of reinstatement premiums expensed mainly within the Insurance – Overseas General segment.
Our effective income tax rate, which we calculate as income tax expense divided by income before income tax, is dependent upon the mix of earnings from different jurisdictions with various tax rates. A change in the geographic mix of earnings would change the effective income tax rate. Our effective income tax rate was 17 and 20 percent in the three and six months ended June 30, 2011, compared with 17 and 16 percent in the prior year period, respectively. The increase in our effective income tax rate in the six months ended June 30, 2011, was primarily due to a higher percentage of losses being generated in lower tax-paying jurisdictions.
Prior Period Development
The favorable prior period development of $146 million and $239 million during the three and six months ended June 30, 2011, respectively, was the net result of several underlying favorable and adverse movements. With respect to our crop business, prior to the acquisition of Rain and Hail, we regularly received reports relating to the previous crop year(s), resulting in adjustments to previously reported premiums, losses and loss expenses, and profit share commissions. The adjustments were typically more significant in the first quarter of the year, compared with other periods. Following the Rain and Hail acquisition which closed on December 28, 2010, we now have access to such information sooner. As a result, the more significant changes in estimate that previously occurred in the first quarter now occur one quarter earlier. Accordingly, there was minimal prior period development related to the crop business in the six months ended June 30, 2011 as compared to approximately $41 million of favorable prior period development in the corresponding prior year period. In the sections following the tables below, significant prior period movements within each reporting segment are discussed in more detail. Long-tail lines include lines such as workers’ compensation, general liability, and professional liability; while short-tail lines include lines such as most property lines, energy, personal accident, aviation, and marine.
 
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The following table summarizes (favorable) and adverse prior period development by segment:

Three months ended June 30	  	Long-tail	 	 	Short-tail	 	 	Total	 	 	% of net
unpaid
reserves*	 	
   	  	(in millions of U.S. dollars, except for percentages)	 	
2011	  				 				 				 				
Insurance—North American	  	$	(46	) 	 	$	(25	) 	 	$	(71	) 	 	 	0.4	% 	
Insurance—Overseas General	  	 	—  	  	 	 	(40	) 	 	 	(40	) 	 	 	0.5	% 	
Global Reinsurance	  	 	(35	) 	 	 	—  	  	 	 	(35	) 	 	 	1.4	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	(81	) 	 	$	(65	) 	 	$	(146	) 	 	 	0.6	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2010	  				 				 				 				
Insurance—North American	  	$	(52	) 	 	$	(21	) 	 	$	(73	) 	 	 	0.5	% 	
Insurance—Overseas General	  	 	1	 	 	 	(46	) 	 	 	(45	) 	 	 	0.7	% 	
Global Reinsurance	  	 	(21	) 	 	 	(10	) 	 	 	(31	) 	 	 	1.4	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	(72	) 	 	$	(77	) 	 	$	(149	) 	 	 	0.6	% 	

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

Six months ended June 30	  	Long-tail	 	 	Short-tail	 	 	Total	 	 	% of net
unpaid
reserves*	 	
   	  	(in millions of U.S. dollars, except for percentages)	 	
2011	  				 				 				 				
Insurance—North American	  	$	(38	) 	 	$	(68	) 	 	$	(106	) 	 	 	0.7	% 	
Insurance—Overseas General	  	 	(1	) 	 	 	(83	) 	 	 	(84	) 	 	 	1.2	% 	
Global Reinsurance	  	 	(43	) 	 	 	(6	) 	 	 	(49	) 	 	 	2.2	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	(82	) 	 	$	(157	) 	 	$	(239	) 	 	 	0.9	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
2010	  				 				 				 				
Insurance—North American	  	$	(46	) 	 	$	(72	) 	 	$	(118	) 	 	 	0.7	% 	
Insurance—Overseas General	  	 	3	 	 	 	(85	) 	 	 	(82	) 	 	 	1.2	% 	
Global Reinsurance	  	 	(24	) 	 	 	(21	) 	 	 	(45	) 	 	 	2.0	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total	  	$	(67	) 	 	$	(178	) 	 	$	(245	) 	 	 	1.0	% 	

*	Calculated based on the segment/total beginning of period net unpaid loss and loss expenses reserves.	
Insurance – North American
Insurance – North American’s operations experienced net favorable prior period development of $71 million in the three months ended June 30, 2011 which was the net result of several underlying favorable and adverse movements driven by the following principal changes:
 
 	•	 	Net favorable development of $46 million on long-tail business, including:	
 
 	•	 	Favorable development of $56 million on our national accounts portfolios which consist of commercial auto liability, general liability, and workers’ compensation lines of business. The favorable development is the net impact of favorable and unfavorable movements, including:	
 
 	•	 	Favorable development of $40 million on the 2010 accident year relating to our annual assessment of multi-claimant events including industrial accidents. Consistent with prior years, we reviewed these potential exposures after the close of the accident year to allow for late reporting or identification of significant losses.	
 
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 	•	 	Favorable development of $41 million on the 2003 through 2006 accident years, primarily in workers’ compensation. Case activity in these portfolios, especially in our excess and high deductible products, has continued to be lower than expected. As these accident years matured, greater weight has been given to experience-based methods. The combination of this lower than expected activity and shift in weighting methodology have produced this favorable development.	
 
 	•	 	Adverse development of $25 million on the 2002 and prior accident years, primarily in workers’ compensation. This adverse activity is due in part to data refinements and analysis relating to these accident periods.	
 
 	•	 	The remaining adverse development of $10 million was on long-tail business across a number of lines and accident years, none of which was significant, related principally to updated studies that reflect the loss experience in the quarter ended June 30, 2011.	
 
 	•	 	Net favorable development of $25 million on short-tail business, including:	
 
 	•	 	Favorable development of $16 million in our general aviation product lines (both hull and liability) primarily for the 2008 accident year. Actual paid and incurred loss activity continues to be lower than expected based on long term historical averages leading to a reduction in our estimate of ultimate losses.	
 
 	•	 	The remaining favorable development of $9 million was on short-tail business across a number of lines and accident years, none of which was significant, related principally to updated studies that reflect the loss experience in the quarter ended June 30, 2011.	
Insurance – North American’s operations experienced net favorable prior period development of $73 million in the three months ended June 30, 2010, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:
 
 	•	 	Net favorable development of $52 million on long-tail business, including:	
 
 	•	 	Favorable development of $36 million on our national accounts workers’ compensation portfolios, which was the net of adverse development of $43 million on the 2004 and prior accident years offset by favorable development of $79 million on the 2005 and subsequent accident years.	
 
 	•	 	The favorable development was a function of two primary factors, $48 million of this development was related to the 2009 accident year and our annual assessment of multi-claimant events including industrial accidents. Consistent with prior years, we reviewed these potential exposures after the close of the accident year to allow for late reporting or identification of significant losses. The remaining $31 million was concentrated in the 2005 accident year within our excess and high deductible workers’ compensation portfolios, where actual reported activity to date was less than our expectations and more weight has been given to experience-based actuarial methods in the current review.	
 
 	•	 	The adverse development of $43 million was concentrated within two time periods. During the 2000 and prior accident years, we experienced higher than expected incurred loss activity, primarily on first dollar retrospectively rated business, leading to an increase in ultimate losses of $15 million. The remaining adverse development of $28 million primarily impacted the 2001-2004 accident years and was related to a combination of higher than expected incurred loss activity, particularly in connection to large claims movement, and our review of reinsurance cessions for these years.	
 
 	•	 	Favorable development of $17 million in two of our national accounts casualty lines – general liability and commercial auto liability. This favorable development was concentrated in the 2006 accident year for business written above a self insured retention or high deductible and was largely due to increased weighting on experience-based actuarial methods in the current review.	
 
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 	•	 	Favorable development of $11 million in our wholesale financial and professional liability lines of business. This favorable movement was the net result of two partially offsetting items. The first was favorable development of $23 million in the 2006 and prior accident years where claim development/emergence was lower than expected. The second was adverse movement of $12 million in the 2008 and 2009 accident years on large claims related to higher than expected claims activity on two separate programs, both of which are now in runoff.	
 
 	•	 	The remaining adverse development of $12 million was on long-tail business across a number of lines and accident years, none of which was significant, related principally to updated studies that reflect the loss experience in the quarter ended June 30, 2010.	
 
 	•	 	Net favorable development of $21 million on short-tail business, including:	
 
 	•	 	Favorable development of $13 million in our general aviation product lines (both hull and liability) primarily for the 2007 accident year. Reported incurred losses were lower than expected and resulted in loss development well below historical averages, which led to a reduction in our estimate of ultimate losses.	
 
 	•	 	Favorable development of $11 million in our wholesale property and inland marine portfolios, which was the net of adverse development of $17 million relating to higher than expected incurred loss activity on the 2009 accident year and favorable development of $28 million related to the 2009 and prior accident years. The favorable development included a reduction in our estimate for 2005 accident year catastrophe claims due to favorable settlements in the three months ended June 30, 2010, on a few large claims.	
 
 	•	 	The remaining adverse development of $3 million was on short-tail business across a number of lines and accident years, none of which was significant, related principally to updated studies that reflect the loss experience in the quarter ended June 30, 2010.	
Insurance – Overseas General
Insurance – Overseas General experienced net favorable prior period development of $40 million in the three months ended June 30, 2011, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:
 
 	•	 	There was no prior period development on long-tail business in the quarter ended June 30, 2011.	
 
 	•	 	Net favorable development of $40 million on short-tail business, including:	
 
 	•	 	Favorable development of $61 million in accident years 2009 and prior for property, technical, and marine lines. Given the short-tail nature of these lines and the additional credibility and maturity provided by the experience in the quarter ended June 30, 2011, the observed favorable development led to lower experience-based indications that were recognized in the quarter.	
 
 	•	 	Adverse development of $31 million in accident year 2010 for property and technical lines. This indication was driven predominantly by individual large case reserve increases and higher claim estimates for the December 2010 Australian floods.	
 
 	•	 	The remaining favorable development of $10 million was on short-tail business across a number of lines and accident years, none of which was significant, related principally to updated studies that reflect the loss experience in the quarter ended June 30, 2011.	
 
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Insurance – Overseas General experienced net favorable prior period development of $45 million in the three months ended June 30, 2010, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:
 
 	•	 	Net adverse development of $1 million on long-tail business based on reserve studies completed during the three months ended June 30, 2010, none of which was significant.	
 
 	•	 	Net favorable development of $46 million on short-tail business including:	
 
 	•	 	Favorable development of $39 million in property and energy lines across many geographical regions and within both the retail and wholesale operations. Specific case reserve reductions and lower than anticipated claims activity on other claims led to the reserve release, mainly in accident years 2008 and 2009, for retail business and accident years 2005-2009 for wholesale business.	
 
 	•	 	Favorable development of $11 million within the A&H direct marketing line, where we experienced lower than anticipated case development, primarily in accident years 2008 and 2009.	
 
 	•	 	The remaining adverse development of $4 million was on short-tail business across a number of lines and accident years, none of which was significant, related principally to updated studies that reflect the loss experience in the quarter ended June 30, 2010.	
Global Reinsurance
Global Reinsurance experienced net favorable prior period development of $35 million in the three months ended June 30, 2011, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:
 
 	•	 	Net favorable development of $35 million on long-tail business, including:	
 
 	•	 	Favorable development of $27 million in the casualty line of business principally in treaty years 2002 to 2007. Following the reserve studies recently completed in the quarter ended June 30, 2011, we reflected a greater weighting towards experience-based methods. Since experience has tended to be generally favorable compared with assumptions, the changes resulted in the favorable development referenced above.	
 
 	•	 	Favorable development of $13 million in the D&O line of business. $6 million relates to treaty years 2002 to 2004 where the loss experience has been generally more favorable than previously anticipated, while the remainder relates to treaty years 2006 to 2008, where the potential subprime exposure has not materialized into reported losses to the degree anticipated.	
 
 	•	 	The remaining adverse development of $5 million on long-tail business was across a number of lines and accident years, none of which was significant, and related principally to updated studies that reflect the loss experience in the quarter ended June 30, 2011.	
 
 	•	 	There was no prior period development on short-tail business in the quarter ended June 30, 2011.	
Global Reinsurance experienced net favorable prior period development of $31 million in the three months ended June 30, 2010, which was the net result of several underlying favorable movements across a number of lines and treaty years driven by the following principal changes:
 
 	•	 	Net favorable development of $21 million on long-tail business including:	
 
 	•	 	Favorable development of $14 million in the casualty and automobile lines of business principally in treaty years 2003-2005 and favorable development of $7 million in the D&O line of business primarily in treaty years 2002-2005. These developments were the result of reserve studies on these lines of business completed during the three months ended June 30, 2010. Following the studies, we reflected a greater weighting towards experience-based methods. Since experience has tended to be relatively favorable compared with assumptions, the changes resulted in the favorable development referenced above.	
 
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 	•	 	Net favorable development of $10 million on short-tail business was across a number of lines and accident years, none of which was significant, and related principally to updated studies that reflect the loss experience in the quarter ended June 30, 2010.	
Segment Operating Results – Three and Six Months Ended June 30, 2011 and 2010
The discussions that follow include tables that show our segment operating results.
We operate through the following business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life. For more information on each of our segments refer to  “Segment Information” in our 2010 Form 10-K.
Insurance – North American
The Insurance – North American segment comprises our operations in the U.S., Canada, and Bermuda. This segment includes the operations of ACE USA (including ACE Canada), Commercial Risk, Agriculture, ACE Westchester, ACE Bermuda, ACE Private Risk Services, and various run-off operations.

 	  	Three Months Ended
June 30	 	 	% Change	 	 	Six Months Ended
June 30	 	 	% Change	 	
	  			 	Q-11  vs.
Q-10	 	 			 	YTD-11  vs.
YTD-10	 	
 	  	2011	 	 	2010	 	 			 	2011	 	 	2010	 	 			
 	  	(in millions of U.S. dollars, except for percentages)	 	
Net premiums written	  	$	1,735	 	 	$	1,438	 	 	 	21	% 	 	$	3,020	 	 	$	2,833	 	 	 	7	% 	
Net premiums earned	  	 	1,604	 	 	 	1,326	 	 	 	21	% 	 	 	2,950	 	 	 	2,696	 	 	 	9	% 	
Losses and loss expenses	  	 	1,233	 	 	 	924	 	 	 	33	% 	 	 	2,227	 	 	 	1,862	 	 	 	20	% 	
Policy acquisition costs	  	 	143	 	 	 	126	 	 	 	13	% 	 	 	279	 	 	 	282	 	 	 	(1	)% 	
Administrative expenses	  	 	147	 	 	 	147	 	 	 	0	% 	 	 	295	 	 	 	295	 	 	 	0	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Underwriting income	  	 	81	 	 	 	129	 	 	 	(37	)% 	 	 	149	 	 	 	257	 	 	 	(42	)% 	
Net investment income	  	 	300	 	 	 	287	 	 	 	5	% 	 	 	595	 	 	 	565	 	 	 	5	% 	
Net realized gains	  	 	21	 	 	 	85	 	 	 	(75	)% 	 	 	10	 	 	 	165	 	 	 	(94	)% 	
Interest expense	  	 	3	 	 	 	—  	  	 	 	NM	  	 	 	7	 	 	 	—  	  	 	 	NM	  	
Other (income) expense	  	 	3	 	 	 	4	 	 	 	NM	  	 	 	(13	) 	 	 	(1	) 	 	 	NM	  	
Income tax expense	  	 	95	 	 	 	110	 	 	 	(14	)% 	 	 	184	 	 	 	214	 	 	 	(14	)% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	301	 	 	$	387	 	 	 	(22	)% 	 	$	576	 	 	$	774	 	 	 	(26	)% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss and loss expense ratio	  	 	76.9	% 	 	 	69.7	% 	 				 	 	75.5	% 	 	 	69.1	% 	 				
Policy acquisition cost ratio	  	 	8.9	% 	 	 	9.5	% 	 				 	 	9.5	% 	 	 	10.5	% 	 				
Administrative expense ratio	  	 	9.2	% 	 	 	11.1	% 	 				 	 	10.0	% 	 	 	10.9	% 	 				
	  	 	 	 	 	 	 	 	 				 	 	 	 	 	 	 	 	 				
Combined ratio	  	 	95.0	% 	 	 	90.3	% 	 				 	 	95.0	% 	 	 	90.5	% 	 				
	  	 	 	 	 	 	 	 	 				 	 	 	 	 	 	 	 	 				
Insurance – North American reported an increase in net premiums written for the three and six months ended June 30, 2011 and 2010, compared with the prior year periods. For the three and six months ended June 30, 2011 the wholesale division reported significantly higher premiums from the agriculture business due to the acquisition of Rain & Hail in December 2010. This increase was partially offset by lower wholesale casualty production in certain classes due to competitive market conditions and our adherence to underwriting standards. The retail division also reported less net written premiums for the three and six month periods ended June 30, 2011 primarily in the construction line of business due to a large contract written in the prior year. In addition, we experienced lower production in many of our retail property and casualty lines reflecting competitive market conditions and our adherence to underwriting discipline. The retail business also wrote less assumed loss portfolio transfer business for the six months ended June 30, 2011. These decreases were partially offset by
 
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growth in targeted classes, including A&H business and certain professional lines. Our personal lines business reported growth in homeowners and auto insurance, as well as specialty offerings for the three and six months ended June 30, 2011 and 2010.
The following two tables provide a line of business breakdown of Insurance – North American’s net premiums earned:

 	  	Three Months Ended
June 30	 	 	%Change	 	 	Six Months Ended
June 30	 	 	%Change	 	
 	  			 	Q-11  vs.
Q-10	 	 			 	YTD-11  vs.
YTD-10	 	
 	  	    2011    	 	 	2010	 	 			 	2011	 	 	2010	 	 			
 	  	(in millions of U.S. dollars, except for percentages)	 	
Property and all other	  	$	657	 	 	$	355	 	 	 	85	% 	 	$	1,035	 	 	$	713	 	 	 	45	% 	
Casualty	  	 	865	 	 	 	895	 	 	 	(3	)% 	 	 	1,755	 	 	 	1,839	 	 	 	(5	)% 	
Personal accident (A&H)	  	 	82	 	 	 	76	 	 	 	8	% 	 	 	160	 	 	 	144	 	 	 	11	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	  	$	1,604	 	 	$	1,326	 	 	 	21	% 	 	$	2,950	 	 	$	2,696	 	 	 	9	% 	

 	  	2011
% of  Total	 	 	2010
% of  Total	 	 	 	 	 	2011
% of  Total	 	 	2010
% of  Total	 	 	 	 	
Property and all other	  	 	41	% 	 	 	27	% 	 				 	 	36	% 	 	 	27	% 	 				
Casualty	  	 	54	% 	 	 	67	% 	 				 	 	59	% 	 	 	68	% 	 				
Personal accident (A&H)	  	 	5	% 	 	 	6	% 	 				 	 	5	% 	 	 	5	% 	 				
	  	 	 	 	 	 	 	 	 				 	 	 	 	 	 	 	 	 				
Net premiums earned	  	 	100	% 	 	 	100	% 	 				 	 	100	% 	 	 	100	% 	 				
	  	 	 	 	 	 	 	 	 				 	 	 	 	 	 	 	 	 				
Insurance – North American reported an increase in net premiums earned in the three and six months ended June 30, 2011, compared with the prior year periods. This increase was attributable to higher wholesale premiums primarily from agriculture business due to the acquisition of Rain & Hail in December 2010, and to a lesser extent growth in program business for the wholesale unit. The retail businesses generated lower net earned premiums mainly in the property and casualty risk lines of business reflecting lower writings in these lines due to adherence to underwriting standards. In addition, the retail unit experienced a decline in earned premiums from less assumed loss portfolio transfers for the six months ended June 30, 2011. These decreases were partially offset by growth in certain professional risk and A&H businesses. Net premiums earned for the personal lines business increased due to continued geographic expansion of the ACE Private Risk Service product offerings.
The following table shows the impact of catastrophe losses and related reinstatement premiums, and prior period development on our loss and loss expense ratio:

 	  	Three Months Ended	 	 	Six Months Ended	 	
 	  	June 30	 	 	June 30	 	
 	  	2011	 	 	2010	 	 	2011	 	 	2010	 	
Loss and loss expense ratio, as reported	  	 	76.9	% 	 	 	69.7	% 	 	 	75.5	% 	 	 	69.1	% 	
Catastrophe losses and related reinstatement premiums	  	 	(6.9	)% 	 	 	(4.2	)% 	 	 	(6.5	)% 	 	 	(4.1	)% 	
Prior period development	  	 	4.4	% 	 	 	5.5	% 	 	 	3.6	% 	 	 	6.1	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss and loss expense ratio, adjusted	  	 	74.4	% 	 	 	71.0	% 	 	 	72.6	% 	 	 	71.1	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Insurance – North American’s net catastrophe losses, excluding reinstatement premiums, in the three and six months ended June 30, 2011 were $110 million and $186 million, compared with $53 million and $105 million in the prior year periods. Catastrophe losses for the three months ended and six months ended June 30, 2011 were related to severe weather-related events in the U.S., including flooding in the Midwest. For the six months ended June 30, 2011, catastrophe losses also include exposures from the Japan earthquake. The catastrophe losses in the prior year periods were primarily related to severe weather-related events in the U.S. and, to a lesser extent, earthquakes in Haiti and Chile. Insurance – North American experienced net favorable prior period development
 
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of $71 million and $106 million in the three and six months ended June 30, 2011. This compares with net favorable prior period development of $73 million and $118 million in the prior year periods. Refer to “Prior Period Development” for more information. The adjusted loss and loss expense ratio increased in the three and six months ended June 30, 2011, compared with the prior year periods, primarily due to the increase in agriculture business, which is written at higher loss ratios than other types of business, partially offset by lower assumed loss portfolio business for the six months ended June 30, 2011.
Insurance – North American’s policy acquisition cost ratio decreased in the three and six months ended June 30, 2011, compared with the prior year periods primarily reflecting a shift in the mix of business toward lower acquisition cost lines of business, primarily agriculture. Partially offsetting the growth in the low expense ratio agriculture business was targeted growth in several higher acquisition ratio lines of business, including personal and professional business, as well as commercial risk program business and less premiums from lower expense ratio business, including national account business. Insurance – North American’s administrative expense ratio decreased in the three and six months ended June 30, 2011 primarily due to the growth of low expense ratio business including agriculture business. These decreases were partially offset by lower net revenues for ESIS ($6 million and $13 million for the three and six months ended June 30, 2011 compared with $18 million and $26 million for the prior year periods). ESIS is our third party claims administration business, which we include in administrative expenses. During the quarter ended June 30, 2010, at the request of BP p.l.c., ESIS assumed an oversight and administration role for claims generated by the Deepwater Horizon oil leak catastrophe.
Insurance – Overseas General
The Insurance – Overseas General segment comprises ACE International, our retail business serving territories outside the U.S., Bermuda, and Canada; the international A&H and life business of Combined Insurance; and the wholesale insurance business of ACE Global Markets, our London-based excess and surplus lines business that includes Lloyd’s Syndicate 2488. The reinsurance operation of ACE Global Markets is included in the Global Reinsurance segment.

 	  	Three Months Ended
June 30	 	 	% Change	 	 	Six Months Ended
June 30	 	 	% Change	 	
 	  			 	Q-11  vs.
Q-10	 	 			 	YTD-11  vs.
YTD-10	 	
 	  	    2011    	 	 	2010	 	 			 	2011	 	 	2010	 	 			
 	  	(in millions of U.S. dollars, except for percentages)	 	
Net premiums written	  	$	1,477	 	 	$	1,302	 	 	 	14	% 	 	$	2,914	 	 	$	2,722	 	 	 	7	% 	
Net premiums earned	  	 	1,447	 	 	 	1,263	 	 	 	15	% 	 	 	2,751	 	 	 	2,514	 	 	 	9	% 	
Losses and loss expenses	  	 	733	 	 	 	644	 	 	 	14	% 	 	 	1,595	 	 	 	1,345	 	 	 	19	% 	
Policy benefits	  	 	—  	  	 	 	1	 	 	 	NM	  	 	 	—  	  	 	 	4	 	 	 	NM	  	
Policy acquisition costs	  	 	348	 	 	 	296	 	 	 	18	% 	 	 	660	 	 	 	579	 	 	 	14	% 	
Administrative expenses	  	 	242	 	 	 	207	 	 	 	17	% 	 	 	466	 	 	 	409	 	 	 	14	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Underwriting income	  	 	124	 	 	 	115	 	 	 	8	% 	 	 	30	 	 	 	177	 	 	 	(83	)% 	
Net investment income	  	 	138	 	 	 	115	 	 	 	20	% 	 	 	269	 	 	 	229	 	 	 	17	% 	
Net realized gains (losses)	  	 	(10	) 	 	 	48	 	 	 	NM	  	 	 	(19	) 	 	 	70	 	 	 	NM	  	
Interest expense	  	 	1	 	 	 	—  	  	 	 	NM	  	 	 	2	 	 	 	—  	  	 	 	NM	  	
Other (income) expense	  	 	(5	) 	 	 	(3	) 	 	 	(67	)% 	 	 	(7	) 	 	 	(1	) 	 	 	NM	  	
Income tax expense	  	 	40	 	 	 	59	 	 	 	(32	)% 	 	 	59	 	 	 	73	 	 	 	(19	)% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	216	 	 	$	222	 	 	 	(3	)% 	 	$	226	 	 	$	404	 	 	 	(44	)% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss and loss expense ratio	  	 	50.7	% 	 	 	51.0	% 	 				 	 	58.0	% 	 	 	53.7	% 	 				
Policy acquisition cost ratio	  	 	24.0	% 	 	 	23.5	% 	 				 	 	24.0	% 	 	 	23.0	% 	 				
Administrative expense ratio	  	 	16.7	% 	 	 	16.4	% 	 				 	 	16.9	% 	 	 	16.3	% 	 				
	  	 	 	 	 	 	 	 	 				 	 	 	 	 	 	 	 	 				
Combined ratio	  	 	91.4	% 	 	 	90.9	% 	 				 	 	98.9	% 	 	 	93.0	% 	 				

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

 	  	Three Months Ended
June 30, 2011	 	
 	  	P&C	 	 	A&H	 	 	Total	 	
Net premiums written:	  				 				 				
Growth in original currency	  	 	5.3	% 	 	 	3.6	% 	 	 	5.0	% 	
Foreign exchange effect	  	 	7.4	% 	 	 	10.3	% 	 	 	8.5	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Growth as reported in U.S. dollars	  	 	12.7	% 	 	 	13.9	% 	 	 	13.5	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Net premiums earned:	  				 				 				
Growth in original currency	  	 	5.8	% 	 	 	5.0	% 	 	 	5.5	% 	
Foreign exchange effect	  	 	8.1	% 	 	 	10.5	% 	 	 	9.0	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Growth as reported in U.S. dollars	  	 	13.9	% 	 	 	15.5	% 	 	 	14.5	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Insurance – Overseas General’s net premiums written increased in the three and six months ended June 30, 2011, compared with prior year periods, primarily due to growth in our international retail operations and the acquisition of Jerneh Insurance Berhad in December 2010, partially offset by reinstatement premiums expensed in connection with the first quarter 2011 catastrophe activity. Refer to the table above for the impact of foreign exchange on net premiums written and earned. In the three and six months ended June 30, 2011, our international retail businesses reported growth of 9%. The growth was reported in all regions, primarily in Asia Pacific and Latin America. P&C, A&H and personal lines each reported double-digit growth. Our London wholesale business unit reported a decline in net premiums written of 4%, driven by lost business due to inadequate pricing in many of the lines underwritten in that market.
Insurance – Overseas General’s net premiums earned increased in the three and six months ended June 30, 2011, compared with the prior year periods, primarily due to the growth in the international retail operations and favorable foreign exchange impact, partially offset by lower wholesale writings and increased reinstatement premiums expensed in connection with first quarter catastrophe activity. On a constant dollar basis, net premiums earned increased due to growth in P&C and A&H production in our international retail operations. Our London wholesale operations reported a decline in net premiums earned due to lower production over the last year.
 
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The following two tables provide a line of business and regional breakdown of Insurance – Overseas General’s net premiums earned:

 	  	Three Months Ended
June 30	 	 	% Change	 	 	Six Months Ended
June 30	 	 	% Change	 	
 	  			 	Q-11 vs.
Q-10	 	 			 	YTD-11  vs.
YTD-10	 	
 	  	    2011    	 	 	    2010    	 	 			 	    2011    	 	 	    2010    	 	 			
 	  	(in millions of U.S. dollars, except for percentages)	 	
Line of Business	  				 				 				 				 				 				
Property and all other	  	$	533	 	 	$	424	 	 	 	26	% 	 	$	964	 	 	$	844	 	 	 	14	% 	
Casualty	  	 	348	 	 	 	349	 	 	 	0	% 	 	 	690	 	 	 	694	 	 	 	(1	)% 	
Personal accident (A&H)	  	 	566	 	 	 	490	 	 	 	16	% 	 	 	1,097	 	 	 	976	 	 	 	12	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	  	$	1,447	 	 	$	1,263	 	 	 	15	% 	 	$	2,751	 	 	$	2,514	 	 	 	9	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Region	  				 				 				 				 				 				
Europe	  	$	604	 	 	$	561	 	 	 	8	% 	 	$	1,109	 	 	$	1,098	 	 	 	1	% 	
Asia Pacific	  	 	275	 	 	 	192	 	 	 	43	% 	 	 	537	 	 	 	406	 	 	 	32	% 	
Far East	  	 	124	 	 	 	106	 	 	 	17	% 	 	 	249	 	 	 	218	 	 	 	14	% 	
Latin America	  	 	266	 	 	 	223	 	 	 	19	% 	 	 	515	 	 	 	434	 	 	 	19	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
	  	 	1,269	 	 	 	1,082	 	 	 	17	% 	 	 	2,410	 	 	 	2,156	 	 	 	12	% 	
ACE Global Markets	  	 	178	 	 	 	181	 	 	 	(2	)% 	 	 	341	 	 	 	358	 	 	 	(5	)% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	  	$	1,447	 	 	$	1,263	 	 	 	15	% 	 	$	2,751	 	 	$	2,514	 	 	 	9	% 	

 	  	    Three Months Ended    
June 30	 	 	 	 	 	    Six Months Ended
June 30	 	 	 	 	
 	  	2011	 	 	2010	 	 	 	 	 	2011	 	 	2010	 	 	 	 	
 	  	% of Total	 	 	% of Total	 	 	 	 	 	% of Total	 	 	% of Total	 	 	 	 	
Line of Business	  				 				 				 				 				 				
Property and all other	  	 	37	% 	 	 	33	% 	 				 	 	35	% 	 	 	33	% 	 				
Casualty	  	 	24	% 	 	 	28	% 	 				 	 	25	% 	 	 	28	% 	 				
Personal accident (A&H)	  	 	39	% 	 	 	39	% 	 				 	 	40	% 	 	 	39	% 	 				
	  	 	 	 	 	 	 	 	 				 	 	 	 	 	 	 	 	 				
Net premiums earned	  	 	100	% 	 	 	100	% 	 				 	 	100	% 	 	 	100	% 	 				
	  	 	 	 	 	 	 	 	 				 	 	 	 	 	 	 	 	 				
Region	  				 				 				 				 				 				
Europe	  	 	42	% 	 	 	45	% 	 				 	 	40	% 	 	 	44	% 	 				
Asia Pacific	  	 	19	% 	 	 	15	% 	 				 	 	20	% 	 	 	16	% 	 				
Far East	  	 	9	% 	 	 	8	% 	 				 	 	9	% 	 	 	9	% 	 				
Latin America	  	 	18	% 	 	 	18	% 	 				 	 	19	% 	 	 	17	% 	 				
	  	 	 	 	 	 	 	 	 				 	 	 	 	 	 	 	 	 				
	  	 	88	% 	 	 	86	% 	 				 	 	88	% 	 	 	86	% 	 				
ACE Global Markets	  	 	12	% 	 	 	14	% 	 				 	 	12	% 	 	 	14	% 	 				
	  	 	 	 	 	 	 	 	 				 	 	 	 	 	 	 	 	 				
Net premiums earned	  	 	100	% 	 	 	100	% 	 				 	 	100	% 	 	 	100	% 	 				

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

 	  	Three Months Ended
June 30	 	 	Six Months Ended
June 30	 	
 	  	2011	 	 	2010	 	 	2011	 	 	2010	 	
Loss and loss expense ratio, as reported	  	 	50.7	% 	 	 	51.0	% 	 	 	58.0	% 	 	 	53.7	% 	
Catastrophe losses and related reinstatement premiums	  	 	(0.6	)% 	 	 	(1.5	)% 	 	 	(8.3	)% 	 	 	(3.8	)% 	
Prior period development	  	 	2.8	% 	 	 	3.5	% 	 	 	3.0	% 	 	 	3.2	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss and loss expense ratio, adjusted	  	 	52.9	% 	 	 	53.0	% 	 	 	52.7	% 	 	 	53.1	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net catastrophe losses, excluding reinstatement premiums, in the three and six months ended June 30, 2011 were $10 million, and $197 million, compared with $18 million and $82 million in the prior year periods. The catastrophe losses in the three and six months ended June 30, 2011 included earthquakes in New Zealand and Japan and storms in Australia. The catastrophe losses for the three and six months ended June 30, 2010 were primarily related to earthquakes in Chile and Mexico, and storms in Australia and Europe. Insurance – Overseas General experienced net favorable prior period development of $40 million and $84 million in the three and six months ended June 30, 2011 compared with $45 million and $82 in the prior year periods, respectively. Refer to “Prior Period Development” for more information.
Insurance – Overseas General’s policy acquisition cost ratio increased in the three and six months ended June 30, 2011, compared with the prior year periods, primarily due to the impact of catastrophe-related reinstatement premiums expensed and changes in mix of business. Insurance – Overseas General’s administrative expense ratio increased in the three and six months ended June 30, 2011, primarily due to the impact of reinstatement premiums expensed, and reduced wholesale earned premiums.
Global Reinsurance
The Global Reinsurance segment represents our reinsurance operations comprising ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re International, and ACE Tempest Re Canada. Global Reinsurance markets its reinsurance products worldwide under the ACE Tempest Re brand name and provides a broad range of coverage to a diverse array of primary P&C companies.

 	  	Three Months Ended
June 30	 	 	% Change	 	 	Six Months Ended
June 30	 	 	% Change	 	
 	  			 	Q-11 vs.
Q-10	 	 			 	YTD-11  vs.
YTD-10	 	
 	  	    2011    	 	 	    2010    	 	 			 	2011	 	 	2010	 	 			
 	  	(in millions of U.S. dollars, except for percentages)	 	
Net premiums written	  	$	282	 	 	$	289	 	 	 	(2	)% 	 	$	597	 	 	$	660	 	 	 	(10	)% 	
Net premiums earned	  	 	254	 	 	 	256	 	 	 	(1	)% 	 	 	514	 	 	 	532	 	 	 	(3	)% 	
Losses and loss expenses	  	 	112	 	 	 	103	 	 	 	9	% 	 	 	391	 	 	 	254	 	 	 	54	% 	
Policy acquisition costs	  	 	47	 	 	 	48	 	 	 	(2	)% 	 	 	93	 	 	 	102	 	 	 	(9	)% 	
Administrative expenses	  	 	14	 	 	 	15	 	 	 	(7	)% 	 	 	26	 	 	 	27	 	 	 	(4	)% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Underwriting income	  	 	81	 	 	 	90	 	 	 	(10	)% 	 	 	4	 	 	 	149	 	 	 	(97	)% 	
Net investment income	  	 	71	 	 	 	73	 	 	 	(3	)% 	 	 	143	 	 	 	142	 	 	 	1	% 	
Net realized gains (losses)	  	 	(14	) 	 	 	28	 	 	 	NM	  	 	 	(27	) 	 	 	59	 	 	 	NM	  	
Interest expense	  	 	1	 	 	 	—  	  	 	 	NM	  	 	 	1	 	 	 	—  	  	 	 	NM	  	
Other (income) expense	  	 	1	 	 	 	(2	) 	 	 	NM	  	 	 	(5	) 	 	 	(6	) 	 	 	17	% 	
Income tax expense	  	 	8	 	 	 	9	 	 	 	(11	)% 	 	 	18	 	 	 	19	 	 	 	(5	)% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	128	 	 	$	184	 	 	 	(30	)% 	 	$	106	 	 	$	337	 	 	 	(69	)% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss and loss expense ratio	  	 	44.1	% 	 	 	40.4	% 	 				 	 	76.1	% 	 	 	47.8	% 	 				
Policy acquisition cost ratio	  	 	18.5	% 	 	 	18.5	% 	 				 	 	18.1	% 	 	 	19.1	% 	 				
Administrative expense ratio	  	 	5.3	% 	 	 	5.8	% 	 				 	 	4.9	% 	 	 	5.1	% 	 				
	  	 	 	 	 	 	 	 	 				 	 	 	 	 	 	 	 	 				
Combined ratio	  	 	67.9	% 	 	 	64.7	% 	 				 	 	99.1	% 	 	 	72.0	% 	 				

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Global Reinsurance reported a decrease in net premiums written in the three and six months ended June 30, 2011, compared with prior year periods, primarily due to competitive market conditions and lower exposures, partially offset by reductions in retrocessions.
The following tables provide a line of business breakdown of Global Reinsurance’s net premiums earned:

 	  	Three Months Ended
June 30	 	 	% Change	 	 	Six Months Ended
June 30	 	 	% Change	 	
 	  			 	Q-11 vs.
Q-10	 	 			 	YTD-11  vs.
YTD-10	 	
 	  	    2011    	 	 	    2010    	 	 			 	2011	 	 	2010	 	 			
 	  	(in millions of U.S. dollars, except for percentages)	 	
Property and all other	  	$	40	 	 	$	51	 	 	 	(22	)% 	 	$	85	 	 	$	117	 	 	 	(27	)% 	
Casualty	  	 	139	 	 	 	136	 	 	 	2	% 	 	 	287	 	 	 	274	 	 	 	5	% 	
Property catastrophe	  	 	75	 	 	 	69	 	 	 	9	% 	 	 	142	 	 	 	141	 	 	 	1	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	  	$	254	 	 	$	256	 	 	 	(1	)% 	 	$	514	 	 	$	532	 	 	 	(3	)% 	

 	  	2011
% of Total	 	 	2010
% of Total	 	 	 	 	 	2011
% of Total	 	 	2010
% of Total	 	 	 	 	
Property and all other	  	 	16	% 	 	 	20	% 	 				 	 	17	% 	 	 	22	% 	 				
Casualty	  	 	54	% 	 	 	53	% 	 				 	 	55	% 	 	 	51	% 	 				
Property catastrophe	  	 	30	% 	 	 	27	% 	 				 	 	28	% 	 	 	27	% 	 				
Net premiums earned	  	 	100	% 	 	 	100	% 	 				 	 	100	% 	 	 	100	% 	 				
Global Reinsurance’s net premiums earned decreased in the three and six months ended June 30, 2011, compared with the prior year periods, primarily due to 2011 decreases in production.
The following table shows the impact of catastrophe losses and related reinstatement premiums and prior period development on this segment’s loss and loss expense ratio:

 	  	Three Months Ended
June 30	 	 	Six Months Ended
June 30	 	
 	  	2011	 	 	2010	 	 	2011	 	 	2010	 	
Loss and loss expense ratio, as reported	  	 	44.1	% 	 	 	40.4	% 	 	 	76.1	% 	 	 	47.8	% 	
Catastrophe losses and related reinstatement premiums	  	 	(7.9	)% 	 	 	(2.0	)% 	 	 	(33.5	)% 	 	 	(6.8	)% 	
Prior period development	  	 	14.1	% 	 	 	12.5	% 	 	 	9.6	% 	 	 	8.6	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss and loss expense ratio, adjusted	  	 	50.3	% 	 	 	50.9	% 	 	 	52.2	% 	 	 	49.6	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Global Reinsurance recorded net catastrophe losses, excluding reinstatement premiums, of $22 million and $174 million in the three and six months ended June 30, 2011, respectively, compared with net catastrophe losses of $5 million and $37 million in the prior year periods, respectively. The catastrophe losses in the three and six months ended June 30, 2011, were primarily related to earthquakes in Japan and New Zealand, natural catastrophes in Australia and severe weather related events in the U.S. The catastrophe losses for the prior year periods were primarily related to storms in Australia and New Zealand. Global Reinsurance experienced net favorable prior period development of $35 million and $49 million in the three and six months ended June 30, 2011, respectively. This compares with net favorable prior period development of $31 million and $45 million in the three and six months ended June 30, 2010, respectively. Refer to “Prior Period Development” for more information. The decrease in the adjusted loss and loss expense ratio for the three months ended June 30, 2011 is due to the change in mix of business earned. The increase in the adjusted loss and loss expense ratio for the six months ended June 30, 2011 was due to a new workers’ compensation treaty and a medical malpractice LPT (“Loss Portfolio Transfer”), both with high loss ratios.
Global Reinsurance’s policy acquisition costs ratio was flat for the three months ended June 30, 2011, compared with the prior year period. The policy acquisition costs ratio decreased for the six months ended June 30, 2011, compared with the prior year period as a result of lower commission in our U.S. operations, primarily due to a
 
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new workers’ compensation treaty which did not generate acquisition costs as well as the medical malpractice LPT which had no ceding commission. The administrative expense ratio decreased for the three and six months ended June 30, 2011, compared with the prior year periods, primarily as a result of less headcount and compensation related costs.
Life
The Life segment includes our international life operations (ACE Life), ACE Tempest Life Re (ACE Life Re), the acquired business of New York Life’s Korea operations and Hong Kong operations, and the North American supplemental A&H and life business of Combined Insurance. We assess the performance of our life business based on life underwriting income which includes net investment income.

 	  	Three Months Ended
June 30	 	 	% Change	 	 	Six Months Ended
June 30	 	 	% Change	 	
 	  			 	Q-11 vs.
Q-10	 	 			 	YTD-11  vs.
YTD-10	 	
 	  	    2011    	 	 	    2010    	 	 			 	2011	 	 	2010	 	 			
 	  	(in millions of U.S. dollars, except for percentages)	 	
Net premiums written	  	$	459	 	 	$	391	 	 	 	17	% 	 	$	868	 	 	$	776	 	 	 	12	% 	
Net premiums earned	  	 	452	 	 	 	388	 	 	 	16	% 	 	 	851	 	 	 	768	 	 	 	11	% 	
Losses and loss expenses	  	 	147	 	 	 	129	 	 	 	14	% 	 	 	275	 	 	 	260	 	 	 	6	% 	
Policy benefits	  	 	108	 	 	 	86	 	 	 	26	% 	 	 	199	 	 	 	170	 	 	 	17	% 	
Policy acquisition costs	  	 	66	 	 	 	66	 	 	 	0	% 	 	 	127	 	 	 	127	 	 	 	0	% 	
Administrative expenses	  	 	72	 	 	 	54	 	 	 	33	% 	 	 	140	 	 	 	112	 	 	 	25	% 	
Net investment income	  	 	59	 	 	 	43	 	 	 	37	% 	 	 	105	 	 	 	86	 	 	 	22	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Life underwriting income	  	 	118	 	 	 	96	 	 	 	23	% 	 	 	215	 	 	 	185	 	 	 	16	% 	
Net realized gains (losses)	  	 	(68	) 	 	 	(155	) 	 	 	56	% 	 	 	(81	) 	 	 	(112	) 	 	 	28	% 	
Interest expense	  	 	3	 	 	 	—  	  	 	 	NM	  	 	 	6	 	 	 	—  	  	 	 	NM	  	
Other (income) expense	  	 	8	 	 	 	3	 	 	 	NM	  	 	 	13	 	 	 	6	 	 	 	NM	  	
Income tax expense	  	 	14	 	 	 	16	 	 	 	(13	)% 	 	 	27	 	 	 	30	 	 	 	(10	)% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	25	 	 	$	(78	) 	 	 	NM	  	 	$	88	 	 	$	37	 	 	 	138	% 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
The following table provides a line of business breakdown of life net premiums written:

 	  	Three Months Ended
June 30	 	  	% Change	 	 	Six Months Ended
June 30	 	  	% Change	 	
 	  			  	Q-11 vs.
Q-10	 	 			  	YTD-11  vs.
YTD-10	 	
 	  	    2011    	 	  	2010	 	  			 	2011	 	  	2010	 	  			
 	  	(in millions of U.S. dollars, except for percentages)	 	
Life reinsurance	  	$	85	 	  	$	91	 	  	 	(7	)% 	 	$	174	 	  	$	185	 	  	 	(6	)% 	
Life insurance	  	 	125	 	  	 	44	 	  	 	184	% 	 	 	197	 	  	 	78	 	  	 	153	% 	
A&H	  	 	249	 	  	 	256	 	  	 	(3	)% 	 	 	497	 	  	 	513	 	  	 	(3	)% 	
	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Life net premiums written	  	$	459	 	  	$	391	 	  	 	17	% 	 	$	868	 	  	$	776	 	  	 	12	% 	
	  	 	 	 	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	  	 	 	 	
Life insurance net premium increased for the three and six months ended June 30, 2011, compared with the prior year periods, primarily due to the acquisition of New York Life’s Korea operations and Hong Kong operations. Life reinsurance net premium decreased compared to prior year because there is no new life reinsurance business currently being written. A&H net premiums written declined slightly due to the effects of the economy resulting in lower new business.
Life underwriting income increased for the three and six months ended June 30, 2011, compared with the prior year periods, primarily due to the acquisition of New York Life’s Korea operations and Hong Kong operations. In addition, for the three and six months ended June 30, 2011, life reinsurance results improved modestly relative to prior year, primarily due to favorable mortality experience. A&H underwriting income increased modestly relative to prior year, primarily due to lower acquisition expenses.
 
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Net realized gains (losses), which are excluded from life underwriting income, relate primarily to the change in the net fair value of reported guaranteed living benefits (GLB) reinsurance liabilities and changes in the fair value of derivatives used to partially offset the risk in the variable annuity guarantee portfolio. During the three months ended June 30, 2011, realized losses were associated with an increased value of GLB liabilities due to falling interest rates and equity levels slightly offset by an increase in the value of the derivative instruments, which increase in value when the S&P 500 Index decreases. During the six months ended June 30, 2011, realized losses were associated with an increased value of GLB liabilities due to falling interest rates and a reduction in the value of the derivative  instruments, partially offset by rising equity levels.
Other Income and Expense Items

 	  	Three Months Ended
June  30	 	 	Six Months Ended
June 30	 	
 	  	     2011     	 	 	2010	 	 	2011	 	 	2010	 	
 	  	(in millions of U.S. dollars)	 	
Equity in net (income) loss of partially-owned entities	  	$	(8	) 	 	$	(5	) 	 	$	(40	) 	 	$	(23	) 	
Noncontrolling interest expense	  	 	1	 	 	 	2	 	 	 	2	 	 	 	9	 	
Federal excise and capital taxes	  	 	4	 	 	 	3	 	 	 	10	 	 	 	6	 	
Amortization of intangible assets	  	 	7	 	 	 	1	 	 	 	14	 	 	 	4	 	
Other	  	 	5	 	 	 	2	 	 	 	9	 	 	 	3	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other (income) expense	  	$	9	 	 	$	3	 	 	$	(5	) 	 	$	(1	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Other (income) expense primarily comprises our equity in net income of investment funds, limited partnerships, partially-owned investment companies, Huatai Insurance Company of China, Limited, and Huatai Life Insurance Company of China, Limited, which are included in equity in net income of partially-owned entities. Other (income) expense also includes certain federal excise and capital taxes incurred as a result of capital management initiatives. These transactions are considered capital in nature and are excluded from underwriting results.
Net Investment Income

 	  	Three Months Ended
June 30	 	 	Six Months Ended
June 30	 	
 	  	    2011    	 	 	2010	 	 	2011	 	 	2010	 	
 	  	(in millions of U.S. dollars)	 	
Fixed maturities	  	$	557	 	 	$	517	 	 	$	1,091	 	 	$	1,031	 	
Short-term investments	  	 	13	 	 	 	7	 	 	 	26	 	 	 	14	 	
Equity securities	  	 	10	 	 	 	5	 	 	 	18	 	 	 	11	 	
Other	  	 	13	 	 	 	12	 	 	 	29	 	 	 	16	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross investment income	  	 	593	 	 	 	541	 	 	 	1,164	 	 	 	1,072	 	
Investment expenses	  	 	(24	) 	 	 	(23	) 	 	 	(51	) 	 	 	(50	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net investment income	  	$	569	 	 	$	518	 	 	$	1,113	 	 	$	1,022	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net investment income is influenced by a number of factors including the amounts and timing of inward and outward cash flows, the level of interest rates, and changes in overall asset allocation. Net investment income increased ten percent and nine percent in the three and six months ended June 30, 2011, compared with the prior year periods, respectively. Net investment income resulted from positive operating cash flows, foreign exchange, private equity fund distributions, and a higher overall average invested asset base from acquisitions, partially offset by lower yields on new investments and short-term securities. The investment portfolio’s average market yield on fixed maturities was 3.4 percent and 3.7 percent at June 30, 2011 and 2010, respectively. Average market yield on fixed maturities represents the weighted average yield to maturity of our fixed income portfolio based on the market prices of the holdings at that date.
 
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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.
The effect of market movements on our available for sale investment portfolio impacts net income (through net realized gains (losses)) when securities are sold or when we record an Other-than-temporary impairment (OTTI) charge in net income. For a discussion related to how we assess OTTI for all of our investments, including credit-related OTTI, and the related impact on net income, refer to Note 4 c) to the Consolidated Financial Statements. Additionally, net income is impacted through the reporting of changes in the fair value of derivatives, including financial futures, options, swaps, and GLB reinsurance. Changes in unrealized appreciation and depreciation on available for sale securities, which result from the revaluation of securities held, are reported as a separate component of accumulated other comprehensive income in shareholders’ equity.
The following tables present our pre-tax net realized and unrealized gains (losses) for the periods indicated.

 	 	Three Months Ended
June 30, 2011	 	 	Three Months Ended
June 30, 2010	 	
 	 	Net
Realized
Gains
(Losses)	 	 	Net
Unrealized
Gains
(Losses)	 	 	Net
Impact	 	 	Net
Realized
Gains
(Losses)	 	 	Net
Unrealized
Gains
(Losses)	 	 	Net
Impact	 	
 	 	(in millions of U.S. dollars)	 	
Fixed maturities and short-term investments	 	$	74	 	 	$	202	 	 	$	276	 	 	$	77	 	 	$	408	 	 	$	485	 	
Equity securities	 	 	4	 	 	 	6	 	 	 	10	 	 	 	32	 	 	 	(31	) 	 	 	1	 	
Other	 	 	(4	) 	 	 	17	 	 	 	13	 	 	 	(12	) 	 	 	13	 	 	 	1	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Subtotal	 	 	74	 	 	 	225	 	 	 	299	 	 	 	97	 	 	 	390	 	 	 	487	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivatives	 				 				 				 				 				 				
Equity and fixed income derivatives	 	 	(48	) 	 	 	—  	  	 	 	(48	) 	 	 	5	 	 	 	—  	  	 	 	5	 	
Fair value adjustment on insurance derivatives	 	 	(70	) 	 	 	—  	  	 	 	(70	) 	 	 	(301	) 	 	 	—  	  	 	 	(301	) 	
S&P put option and futures	 	 	3	 	 	 	—  	  	 	 	3	 	 	 	143	 	 	 	—  	  	 	 	143	 	
Fair value adjustment on other derivatives	 	 	(2	) 	 	 	—  	  	 	 	(2	) 	 	 	4	 	 	 	—  	  	 	 	4	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Subtotal derivatives	 	 	(117	) 	 	 	—  	  	 	 	(117	) 	 	 	(149	) 	 	 	—  	  	 	 	(149	) 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Foreign exchange gains (losses)	 	 	(30	) 	 	 	—  	  	 	 	(30	) 	 	 	61	 	 	 	—  	  	 	 	61	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total gains (losses)	 	$	(73	) 	 	$	225	 	 	$	152	 	 	$	9	 	 	$	390	 	 	$	399	 	

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 	 	Six Months Ended
June 30, 2011	 	 	Six Months Ended
June 30, 2010	 	
 	 	Net
Realized
Gains
(Losses)	 	 	Net
Unrealized
Gains
(Losses)	 	 	Net
Impact	 	 	Net
Realized
Gains
(Losses)	 	 	Net
Unrealized
Gains
(Losses)	 	 	Net
Impact	 	
 	 	(in millions of U.S. dollars)	 	
Fixed maturities and short-term investments	 	$	123	 	 	$	163	 	 	$	286	 	 	$	158	 	 	$	831	 	 	$	989	 	
Equity securities	 	 	11	 	 	 	8	 	 	 	19	 	 	 	77	 	 	 	(55	) 	 	 	22	 	
Other	 	 	(5	) 	 	 	64	 	 	 	59	 	 	 	(8	) 	 	 	68	 	 	 	60	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Subtotal	 	 	129	 	 	 	235	 	 	 	364	 	 	 	227	 	 	 	844	 	 	 	1,071	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Derivatives	 				 				 				 				 				 				
Equity and fixed income derivatives	 	 	(68	) 	 	 	—  	  	 	 	(68	) 	 	 	24	 	 	 	—  	  	 	 	24	 	
Fair value adjustment on insurance derivatives	 	 	1	 	 	 	—  	  	 	 	1	 	 	 	(205	) 	 	 	—  	  	 	 	(205	) 	
S&P put option and futures	 	 	(68	) 	 	 	—  	  	 	 	(68	) 	 	 	84	 	 	 	—  	  	 	 	84	 	
Fair value adjustment on other derivatives	 	 	(3	) 	 	 	—  	  	 	 	(3	) 	 	 	(5	) 	 	 	—  	  	 	 	(5	) 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Subtotal derivatives	 	 	(138	) 	 	 	—  	  	 	 	(138	) 	 	 	(102	) 	 	 	—  	  	 	 	(102	) 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Foreign exchange gains (losses)	 	 	(109	) 	 	 	—  	  	 	 	(109	) 	 	 	52	 	 	 	—  	  	 	 	52	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total gains (losses)	 	$	(118	) 	 	$	235	 	 	$	117	 	 	$	177	 	 	$	844	 	 	$	1,021	 	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
The following tables present a breakdown of our OTTI and other net realized gains (losses) on investments for the periods indicated:

 	  	Three Months Ended
June 30, 2011	 	 	Three Months Ended
June 30, 2010	 	
 	  	OTTI	 	 	Other Net
Realized
Gains
(Losses)	 	 	Net
Realized
Gains
(Losses)	 	 	OTTI	 	 	Other Net
Realized
Gains
(Losses)	 	  	Net
Realized
Gains
(Losses)	 	
 	  	(in millions of U.S. dollars)	 	
Fixed maturities and short-term investments	  	$	(5	) 	 	$	79	 	 	$	74	 	 	$	(5	) 	 	$	82	 	  	$	77	 	
Equity securities	  	 	—  	  	 	 	4	 	 	 	4	 	 	 	—  	  	 	 	32	 	  	 	32	 	
Other	  	 	(3	) 	 	 	(1	) 	 	 	(4	) 	 	 	(13	) 	 	 	1	 	  	 	(12	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Total investment portfolio gains (losses)	  	$	(8	) 	 	$	82	 	 	$	74	 	 	$	(18	) 	 	$	115	 	  	$	97	 	

 	  	Six Months Ended
June 30, 2011	 	 	Six Months Ended
June 30, 2010	 	
 	  	OTTI	 	 	Other Net
Realized
Gains
(Losses)	 	 	Net
Realized
Gains
(Losses)	 	 	OTTI	 	 	Other Net
Realized
Gains
(Losses)	 	  	Net
Realized
Gains
(Losses)	 	
 	  	(in millions of U.S. dollars)	 	
Fixed maturities and short-term investments	  	$	(9	) 	 	$	132	 	 	$	123	 	 	$	(23	) 	 	$	181	 	  	$	158	 	
Equity securities	  	 	—  	  	 	 	11	 	 	 	11	 	 	 	—  	  	 	 	77	 	  	 	77	 	
Other	  	 	(3	) 	 	 	(2	) 	 	 	(5	) 	 	 	(13	) 	 	 	5	 	  	 	(8	) 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Total investment portfolio gains (losses)	  	$	(12	) 	 	$	141	 	 	$	129	 	 	$	(36	) 	 	$	263	 	  	$	227	 	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	  	 	 	 	
Our net realized gains (losses) for the three and six months ended June 30, 2011, included write-downs of $8 million and $12 million, respectively, as a result of an other-than-temporary decline in fair value of certain securities. This compares with write-downs of $18 million and $36 million for the three and six months ended June 30, 2010, respectively.
At June 30, 2011, our investment portfolios held by U.S. legal entities included approximately $115 million of gross unrealized losses on fixed income investments. Our tax planning strategy related to these losses is based on
 
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our view that we will hold these fixed income investments until they recover their cost. As such, we have recognized a deferred tax asset of approximately $40 million related to these fixed income investments. This strategy allows us to recognize the associated deferred tax asset related to these fixed income investments as we do not believe these losses will ever be realized.
We engage in a securities lending program which involves lending investments to other institutions for short periods of time. ACE invests the collateral received in securities of high credit quality and liquidity, with the objective of maintaining a stable principal balance. Certain investments purchased with the securities lending collateral declined in value resulting in an unrealized loss of $17 million at June 30, 2011. The unrealized loss is attributable to fluctuations in market values of the underlying performing debt instruments held by the respective mutual funds, rather than default of a debt issuer. It is our view that the decline in value is temporary.
Investments
Our investment portfolio is invested primarily in publicly traded, investment grade fixed income securities with an average credit quality of AA (with approximately one half invested in AAA securities), as rated by the independent investment rating service Standard and Poor’s (S&P). The portfolio is externally managed by independent, professional investment managers and is broadly diversified across geographies, sectors, and issuers. Our Other investments principally comprise direct investments, investment funds, and limited partnerships. We hold no collateralized debt obligations or collateralized loan obligations in our investment portfolio and we provide no credit default protection. We have long-standing global credit limits for our entire portfolio across the organization. Exposures are aggregated, monitored, and actively managed by our Global Credit Committee, comprised of senior executives, including our Chief Financial Officer, our Chief Risk Officer, our Chief Investment Officer, and our Treasurer. We also have well-established, strict contractual investment rules requiring managers to maintain highly diversified exposures to individual issuers and closely monitor investment manager compliance with portfolio guidelines.
The average duration of our fixed income securities, including the effect of options and swaps, was 3.8 years at June 30, 2011 and 3.7 years at December 31, 2010. We estimate that a 100 basis point (bps) increase in interest rates would reduce our book value by approximately $2.0 billion at June 30, 2011.
The following table shows the fair value and cost/amortized cost of our invested assets:

 	  	June 30, 2011	 	  	December 31, 2010	 	
 	  	Fair
Value	 	  	Cost/
Amortized
Cost	 	  	Fair
Value	 	  	Cost/
Amortized
Cost	 	
 	  	(in millions of U.S. dollars)	 	
Fixed maturities available for sale	  	$	41,038	 	  	$	39,862	 	  	$	37,539	 	  	$	36,542	 	
Fixed maturities held to maturity	  	 	9,078	 	  	 	9,033	 	  	 	9,461	 	  	 	9,501	 	
Short-term investments	  	 	2,380	 	  	 	2,380	 	  	 	1,983	 	  	 	1,983	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
	  	 	52,496	 	  	 	51,275	 	  	 	48,983	 	  	 	48,026	 	
Equity securities	  	 	582	 	  	 	549	 	  	 	692	 	  	 	666	 	
Other investments	  	 	2,156	 	  	 	1,916	 	  	 	1,692	 	  	 	1,511	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total investments	  	$	55,234	 	  	$	53,740	 	  	$	51,367	 	  	$	50,203	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
The fair value of our total investments increased $3.9 billion during the six months ended June 30, 2011, primarily due to the investing of operating cash flows and the acquisition of New York Life’s Korea operations and Hong Kong operations.
 
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The following tables show the market value of our fixed maturities and short-term investments at June 30, 2011 and December 31, 2010. The first table lists investments according to type and the second according to S&P credit rating.

 	  	June 30, 2011	 	 	December 31, 2010	 	
 	  	Market
Value	 	  	Percentage
of Total	 	 	Market
Value	 	  	Percentage
of Total	 	
 	  	(in millions of U.S. dollars, except for percentages)	 	
Treasury	  	$	1,832	 	  	 	3	% 	 	$	2,075	 	  	 	4	% 	
Agency	  	 	1,755	 	  	 	3	% 	 	 	2,015	 	  	 	4	% 	
Corporate and asset-backed securities	  	 	16,805	 	  	 	32	% 	 	 	15,900	 	  	 	33	% 	
Mortgage-backed securities	  	 	13,483	 	  	 	26	% 	 	 	12,362	 	  	 	25	% 	
Municipal	  	 	2,534	 	  	 	5	% 	 	 	2,449	 	  	 	5	% 	
Non-U.S.	  	 	13,707	 	  	 	26	% 	 	 	12,199	 	  	 	25	% 	
Short-term investments	  	 	2,380	 	  	 	5	% 	 	 	1,983	 	  	 	4	% 	
	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
Total	  	$	52,496	 	  	 	100	% 	 	$	48,983	 	  	 	100	% 	
	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
AAA	  	$	25,331	 	  	 	48	% 	 	$	23,718	 	  	 	48	% 	
AA	  	 	4,783	 	  	 	9	% 	 	 	4,714	 	  	 	10	% 	
A	  	 	9,944	 	  	 	19	% 	 	 	8,482	 	  	 	17	% 	
BBB	  	 	5,691	 	  	 	11	% 	 	 	5,487	 	  	 	11	% 	
BB	  	 	3,667	 	  	 	7	% 	 	 	3,357	 	  	 	7	% 	
B	  	 	2,389	 	  	 	5	% 	 	 	2,393	 	  	 	5	% 	
Other	  	 	691	 	  	 	1	% 	 	 	832	 	  	 	2	% 	
	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
Total	  	$	52,496	 	  	 	100	% 	 	$	48,983	 	  	 	100	% 	
	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
As part of our overall investment strategy, we may invest in states, municipalities, and other political subdivisions fixed maturity securities (Municipal). We apply the same investment selection process described previously to our Municipal investments. As of June 30, 2011, one state, including political subdivisions and other municipal issuers within the state, represented approximately 20 percent of our Municipal investments. A majority of the single state exposure represents special revenue bonds. Over 71 percent of our Municipal investments carry an S&P rating of AA- or better and none carry fair values that reflect a significantly different risk compared to those ratings. These Municipal investments are split 39 percent and 61 percent between general obligation and special revenue bonds, respectively.
 
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The table below summarizes the market value of our non-U.S. fixed income portfolio by country/sovereign for non-U.S. government securities at June 30, 2011:

 	  	Market Value	 	
 	  	(in millions of
U.S. dollars)	 	
United Kingdom	  	$	1,028	 	
Canada	  	 	893	 	
Republic of Korea	  	 	422	 	
Japan	  	 	390	 	
Germany	  	 	356	 	
Federative Republic of Brazil	  	 	220	 	
Province of Ontario	  	 	210	 	
France	  	 	175	 	
Swiss Confederation	  	 	162	 	
Province of Quebec	  	 	137	 	
State of Queensland	  	 	120	 	
Kingdom of Thailand	  	 	117	 	
People’s Republic of China	  	 	82	 	
Commonwealth of Australia	  	 	79	 	
United Mexican States	  	 	75	 	
State of New South Wales	  	 	69	 	
Federation of Malaysia	  	 	61	 	
Dominion of New Zealand	  	 	60	 	
Taiwan	  	 	59	 	
State of Victoria	  	 	55	 	
Republic of Austria	  	 	44	 	
Arab Republic of Egypt	  	 	41	 	
State of Qatar	  	 	37	 	
Province of Manitoba	  	 	34	 	
Province of Alberta	  	 	31	 	
Other Non-U.S. Government	  	 	444	 	
	  	 	 	 	
Non-U.S. Government Securities	  	 	5,401	 	
European Country Non-U.S. Corporate	  				
(excluding United Kingdom)	  	 	2,822	 	
Other Non-U.S. Corporate	  	 	5,484	 	
	  	 	 	 	
Total	  	$	13,707	 	
	  	 	 	 	
Our non-U.S. investment grade fixed income portfolios are currency-matched with the insurance liabilities of our non-U.S. operations. We have 81 percent of our non-U.S. fixed income portfolio denominated in G7 currencies. The average credit quality of our non-U.S. fixed income securities is AA and 53 percent of our holdings are rated AAA or guaranteed by governments or quasi-government agencies. Our corporate bond holdings are highly diversified across industries and geographies. Issuer limits are based on credit rating (AA—two percent, A—one percent, BBB—0.5 percent of the total portfolio) and are monitored on a daily basis by ACE via an internal compliance system.
 
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The table below summarizes the market value of our European Country fixed income portfolio (excluding United Kingdom) by industry at June 30, 2011:

 	  	Market Value	 	
 	  	(in millions of U.S. dollars)	 	
 	  	Bank	 	  	Financial	 	  	Industrial	 	  	Utility	 	  	Total	 	
Netherlands	  	$	204	  	  	$	171	  	  	$	233	  	  	$	135	  	  	$	743	  	
France	  	 	170	 	  	 	97	 	  	 	115	 	  	 	132	 	  	 	514	 	
Germany	  	 	270	 	  	 	37	 	  	 	73	 	  	 	5	 	  	 	385	 	
Luxembourg	  	 	41	 	  	 	3	 	  	 	216	 	  	 	98	 	  	 	358	 	
Switzerland	  	 	228	 	  	 	—  	  	  	 	—  	  	  	 	—  	  	  	 	228	 	
Euro Supranational	  	 	204	 	  	 	—  	  	  	 	—  	  	  	 	—  	  	  	 	204	 	
Ireland	  	 	—  	  	  	 	22	 	  	 	104	 	  	 	20	 	  	 	146	 	
Spain	  	 	63	 	  	 	4	 	  	 	61	 	  	 	6	 	  	 	134	 	
Italy	  	 	40	 	  	 	1	 	  	 	17	 	  	 	9	 	  	 	67	 	
Finland	  	 	11	 	  	 	—  	  	  	 	3	 	  	 	3	 	  	 	17	 	
Belgium	  	 	—  	  	  	 	1	 	  	 	11	 	  	 	2	 	  	 	14	 	
Austria	  	 	7	 	  	 	1	 	  	 	2	 	  	 	—  	  	  	 	10	 	
Portugal	  	 	—  	  	  	 	—  	  	  	 	2	 	  	 	—  	  	  	 	2	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	$	1,238	  	  	$	337	  	  	$	837	  	  	$	410	  	  	$	2,822	  	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Note: ACE has no investments in Greece
The table below summarizes the market value and credit rating of the top 10 European bank exposures within our European Country fixed income portfolio (excluding United Kingdom) at June 30, 2011:

 	  	Market Value	 	
 	  	(in millions of
U.S. dollars)	 	
European Investment Bank	  	$	193	  	
KFW	  	 	187	 	
UBS AG	  	 	117	 	
Credit Suisse Group AG	  	 	96	 	
Rabobank Nederland NV	  	 	95	 	
BNP Paribas SA	  	 	64	 	
Deutsche Bank AG	  	 	49	 	
Groupe BPCE	  	 	39	 	
Banco Santander SA	  	 	32	 	
Intesa Sanpaolo SpA	  	 	31	 	
The table below summarizes the market value and credit rating of the top 10 European corporate exposures within our European Country fixed income portfolio (excluding United Kingdom) at June 30, 2011:

 	  	Market Value	 	
	  	(in millions of
U.S. dollars)	 	
ING Groep NV	  	$	90	  	
Deutsche Telekom AG	  	 	81	 	
EDF SA	  	 	70	 	
Royal Dutch Shell PLC	  	 	67	 	
Telecom Italia SpA	  	 	59	 	
Telefonica SA	  	 	49	 	
Credit Agricole Groupe	  	 	47	 	
General Electric Co	  	 	40	 	
Gazprom OAO	  	 	39	 	
ArcelorMittal	  	 	39	 	
 
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The table below summarizes our largest exposures to corporate bonds by market value at June 30, 2011:

 	  	Market Value	 	
 	  	(in millions of
U.S. dollars)	 	
General Electric Co	  	$	523	 	
Bank of America Corp	  	 	436	 	
JP Morgan Chase & Co	  	 	429	 	
Citigroup Inc	  	 	372	 	
Morgan Stanley	  	 	356	 	
Goldman Sachs Group Inc/The	  	 	325	 	
Verizon Communications Inc	  	 	310	 	
Wells Fargo & Co	  	 	257	 	
AT&T INC	  	 	247	 	
HSBC Holdings Plc	  	 	239	 	
Lloyds Banking Group Plc	  	 	216	 	
Royal Bank of Scotland Group P	  	 	170	 	
Comcast Corp	  	 	168	 	
Kraft Foods Inc	  	 	165	 	
Barclays PLC	  	 	158	 	
Credit Suisse Group	  	 	156	 	
ConocoPhillips	  	 	128	 	
Time Warner Cable Inc	  	 	125	 	
American Express Co	  	 	121	 	
UBS AG	  	 	120	 	
BP PLC	  	 	115	 	
Pfizer Inc	  	 	114	 	
Dominion Resources Inc/VA	  	 	109	 	
Banco Santander SA	  	 	108	 	
Anheuser-Busch InBev NV	  	 	107	 	
 
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Mortgage-backed securities
Additional details on the mortgage-backed component of our investment portfolio at June 30, 2011, are provided below:
Mortgage-backed securities
Market Value
(in millions of U.S. dollars)

 	  	S&P Credit Rating	 	
 	  	AAA	 	  	AA	 	  	A	 	  	BBB	 	  	BB and
below	 	  	Total	 	
Mortgage-backed securities	  				  				  				  				  				  				
Residential mortgage-backed (RMBS)	  				  				  				  				  				  				
Agency RMBS	  	$	10,940	 	  	$	—  	  	  	$	—  	  	  	$	—  	  	  	$	—  	  	  	$	10,940	 	
Non-agency RMBS	  	 	346	 	  	 	15	 	  	 	19	 	  	 	35	 	  	 	650	 	  	 	1,065	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total RMBS	  	 	11,286	 	  	 	15	 	  	 	19	 	  	 	35	 	  	 	650	 	  	 	12,005	 	
Commercial mortgage-backed	  	 	1,437	 	  	 	24	 	  	 	14	 	  	 	3	 	  	 	—  	  	  	 	1,478	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total mortgage-backed securities	  	$	12,723	 	  	$	39	 	  	$	33	 	  	$	38	 	  	$	650	 	  	$	13,483	 	

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

		
 	  	S&P Credit Rating	 	
 	  	AAA	 	  	AA	 	  	A	 	  	BBB	 	  	BB and
below	 	  	Total	 	
Mortgage-backed securities	  				  				  				  				  				  				
Residential mortgage-backed (RMBS)	  				  				  				  				  				  				
Agency RMBS	  	$	10,713	 	  	$	—  	  	  	$	—  	  	  	$	—  	  	  	$	—  	  	  	$	10,713	 	
Non-agency RMBS	  	 	359	 	  	 	17	 	  	 	20	 	  	 	42	 	  	 	781	 	  	 	1,219	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total RMBS	  	 	11,072	 	  	 	17	 	  	 	20	 	  	 	42	 	  	 	781	 	  	 	11,932	 	
Commercial mortgage-backed	  	 	1,377	 	  	 	21	 	  	 	13	 	  	 	3	 	  	 	—  	  	  	 	1,414	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total mortgage-backed securities	  	$	12,449	 	  	$	38	 	  	$	33	 	  	$	45	 	  	$	781	 	  	$	13,346	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Our mortgage-backed securities are rated predominantly AAA and comprise approximately 26 percent of our fixed income portfolio. This compares with a 36 percent mortgage-backed weighting in representative indices of the U.S. fixed income market at the end of the second quarter of 2011. The minimum rating for our initial purchases of mortgage-backed securities is AAA.
Agency RMBS represent securities which have been issued by Federal agencies (Government National Mortgage Association, Federal National Mortgage Association, and Federal Home Loan Mortgage Corporation) with implied or explicit government guarantees. These represent 91 percent of our total RMBS portfolio. With respect to our non-agency RMBS, these are backed primarily by prime collateral and are broadly diversified in over 160,000 loans. This portfolio’s loan-to-value ratio is approximately 69 percent with an average Fair Isaac Corporation (FICO) score of 730. With this conservative loan-to-value ratio and subordinated collateral of nine percent, the cumulative 5-year foreclosure rate would have to rise to 14 percent and real estate values would have to fall 12 percent from their current levels, before principal is impaired. The current foreclosure rate of our non-agency RMBS portfolio is nine percent.
 
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Our commercial mortgage-backed securities (CMBS) are rated predominantly AAA, broadly diversified with over 16,000 loans, and 67 percent of the portfolio was issued before 2006 and 19 percent of the portfolio issued after 2009. The average loan-to-value ratio is approximately 67 percent with a debt service coverage ratio in excess of 1.7 and weighted-average subordinated collateral of 32 percent. The cumulative foreclosure rate would have to rise to 41 percent before principal is impaired. The foreclosure rate for our CMBS portfolio at the end of the second quarter of 2011 was approximately 2.7 percent.
Below-investment grade corporate fixed income portfolio
Below-investment grade securities have different characteristics than investment grade corporate debt securities. Risk of loss from default by the borrower is greater with below-investment grade securities. Below-investment grade securities are generally unsecured and are often subordinated to other creditors of the issuer. Also, issuers of below-investment grade securities usually have higher levels of debt and are more sensitive to adverse economic conditions, such as recession or increasing interest rates, than are investment grade issuers. At June 30, 2011, our fixed income investment portfolio included below-investment grade and non-rated securities which, in total, comprised approximately 10 percent of our fixed income portfolio. Our below-investment grade and non-rated portfolio includes over 700 issuers, with the greatest single exposure being $77 million.
We manage high yield bonds as a distinct and separate asset class from investment grade bonds. The allocation to high yield bonds is explicitly set by internal management and is targeted to securities in the upper tier of credit quality (BB/B). Our minimum rating for initial purchase is BB/B. Six external investment managers are responsible for high yield security selection and portfolio construction. Our high yield managers have a conservative approach to credit selection and very low historical default experience. Holdings are highly diversified across industries and subject to a 1.5 percent issuer limit as a percentage of high yield allocation. We monitor position limits daily through an internal compliance system. Derivative and structured securities (e.g. credit default swaps and collateralized mortgage obligations) are not permitted in the high-yield portfolio.
Reinsurance recoverable on ceded reinsurance
The composition of our reinsurance recoverable is as follows:

 	  	June 30
2011	 	  	December 31
2010	 	
 	  	(in millions of U.S. dollars)	 	
Reinsurance recoverable on unpaid losses and loss expenses, net of a provision for uncollectible reinsurance	  	$	12,667	 	  	$	12,149	 	
Reinsurance recoverable on paid losses and loss expenses, net of a provision for uncollectible reinsurance	  	 	708	 	  	 	722	 	
	  	 	 	 	  	 	 	 	
Net reinsurance recoverable on losses and loss expenses	  	$	13,375	 	  	$	12,871	 	
	  	 	 	 	  	 	 	 	
Reinsurance recoverable on policy benefits	  	$	250	 	  	$	281	 	
	  	 	 	 	  	 	 	 	
We evaluate the financial condition of our reinsurers and potential reinsurers on a regular basis and also monitor concentrations of credit risk with reinsurers. The provision for uncollectible reinsurance is required principally due to the failure of reinsurers to indemnify us, primarily because of disputes under reinsurance contracts and insolvencies. The increase in net reinsurance recoverable on losses and loss expenses was primarily due to the increase in natural catastrophe losses in 2011.
Unpaid losses and loss expenses
As an insurance and reinsurance company, we are required by applicable laws and regulations and GAAP to establish loss and loss expense reserves for the estimated unpaid portion of the ultimate liability for losses and loss expenses under the terms of our policies and agreements with our insured and reinsured customers. The
 
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estimate of the liabilities includes provisions for claims that have been reported but are unpaid at the balance sheet date (case reserves) and for obligations on claims that have been incurred but not reported (IBNR) at the balance sheet date (IBNR may also include a provision for additional development on reported claims in instances where the case reserve is viewed to be potentially insufficient). Loss reserves also include an estimate of expenses associated with processing and settling unpaid claims (loss expenses). At June 30, 2011, our gross unpaid loss and loss expense reserves were $39.0 billion and our net unpaid loss and loss expense reserves were $26.3 billion. With the exception of certain structured settlements, for which the timing and amount of future claim payments are reliably determinable, our loss reserves are not discounted for the time value of money. In connection with such structured settlements, we carry net discounted reserves of $67 million.
The table below presents a roll-forward of our unpaid losses and loss expenses for the six months ended June 30, 2011.

 	  	Gross
Losses	 	 	Reinsurance
Recoverable (1)	 	 	Net
Losses	 	
 	  	(in millions of U.S. dollars)	 	
Balance at December 31, 2010	  	$	37,391	 	 	$	12,149	  	 	$	25,242	 	
Losses and loss expenses incurred	  	 	6,572	 	 	 	2,083	  	 	 	4,489	 	
Losses and loss expenses paid	  	 	(5,577	) 	 	 	(1,756	)  	 	 	(3,821	) 	
Other (including foreign exchange translation)	  	 	565	 	 	 	191	  	 	 	374	 	
	  	 	 	 	 	 	 	 	 	 	 	 	
Balance at June 30, 2011	  	$	38,951	 	 	$	12,667	  	 	$	26,284	 	

(1)	Net of provision for uncollectible reinsurance	
The process of establishing loss reserves for property and casualty claims can be complex and is subject to considerable uncertainty as it requires the use of informed estimates and judgments based on circumstances known at the date of accrual.
The following table shows our total reserves (including loss expense reserves) segregated between case reserves and IBNR reserves:

 	  	June 30, 2011	 	  	December 31, 2010	 	
 	  	Gross	 	  	Ceded	 	  	Net	 	  	Gross	 	  	Ceded	 	  	Net	 	
 	  	(in millions of U.S. dollars)	 	
Case reserves	  	$	18,966	 	  	$	7,393	 	  	$	11,573	 	  	$	16,899	 	  	$	5,951	 	  	$	10,948	 	
IBNR reserves	  	 	19,985	 	  	 	5,274	 	  	 	14,711	 	  	 	20,492	 	  	 	6,198	 	  	 	14,294	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Total	  	$	38,951	 	  	$	12,667	 	  	$	26,284	 	  	$	37,391	 	  	$	12,149	 	  	$	25,242	 	
	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	  	 	 	 	
Asbestos and Environmental (A&E) and Other Run-off Liabilities
There was no unexpected A&E reserve activity during the six months ended June 30, 2011. For more information on our A&E exposure, refer to our 2010 Form 10-K.
Fair value measurements
The accounting guidance on fair value measurements defines fair value as the price to sell an asset or transfer a liability in an orderly transaction between market participants and establishes a three-level valuation hierarchy in which inputs into valuation techniques used to measure fair value are classified. Refer to Note 5 to the Consolidated Financial Statements for additional information.
We categorize financial instruments within the valuation hierarchy at the balance sheet date based upon the lowest level of inputs that are significant to the fair value measurement. Accordingly, transfers between levels
 
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within the valuation hierarchy occur when there are significant changes to the inputs, such as increases or decreases in market activity, changes to the availability of current prices, changes to the transparency to underlying inputs, and whether there are significant variances in quoted prices. Transfers in and/or out of any level are assumed to occur at the end of the period.
While we obtain values for the majority of the investment securities we hold from one or more pricing services, it is ultimately management’s responsibility to determine whether the values obtained and recorded in the financial statements are representative of fair value. We periodically update our understanding of the methodologies used by our pricing services in order to validate that the prices obtained from those services are consistent with the GAAP definition of fair value as an exit price. Based on our understanding of the methodologies used by our pricing services, all applicable investments have been valued in accordance with GAAP valuation principles. We do not typically adjust prices obtained from pricing services.
At June 30, 2011, our Level 3 assets represented four percent of our assets that are measured at fair value and two percent of our total assets. Our Level 3 liabilities represented 100 percent of our liabilities that are measured at fair value and one percent of our total liabilities at June 30, 2011. During the three and six months ended June 30, 2011, we transferred $41 million and $46 million, respectively, out of our Level 3 assets. Refer to Note 5 to the Consolidated Financial Statements for a description of the valuation techniques and inputs used to determine fair values for our financial instruments carried or disclosed at fair value by valuation hierarchy (Levels 1, 2, and 3) as well as a roll-forward of Level 3 financial instruments for the three and six months ended June 30, 2011 and 2010.
Guaranteed living benefits (GLB) derivatives
Under life reinsurance programs covering living benefit guarantees, we assumed the risk of GLBs associated with variable annuity (VA) contracts. We ceased writing this business in 2007. Our GLB reinsurance product meets the definition of a derivative for accounting purposes and is therefore carried at fair value. We believe that the most meaningful presentation of these derivatives is to reflect cash inflows or revenue as net premiums earned, and to record estimates of the average modeled value of future cash outflows as incurred losses. Accordingly, we recognize benefit reserves consistent with the accounting guidance related to accounting and reporting by insurance enterprises for certain non-traditional long-duration contracts and for separate accounts. Changes in the benefit reserves are reflected as policy benefits expense, which is included in life underwriting income. The incremental difference between fair value and benefit reserves is reflected in Accounts payable, accrued expenses, and other liabilities in the consolidated balance sheet and related changes in fair value are reflected in Net realized gains (losses) in the consolidated statement of operations. We intend to hold these derivative contracts to maturity (i.e., the expiration of the underlying liabilities through lapse, annuitization, death, or expiration of the reinsurance contract). At maturity, the cumulative gains and losses will net to zero (excluding cumulative hedge gains or losses) because, over time, the insurance liability will be increased or decreased to equal our obligation. For a sensitivity discussion of the effect of changes in interest rates, equity indices, and other assumptions on the fair value of GLBs, and the resulting impact on our net income, refer to Item 3. Refer to Note 2 j) to the Consolidated Financial Statements, under Item 8 of our 2010 Form 10-K, for further description of this product and related accounting treatment.
The fair value of GLB reinsurance is estimated using an internal valuation model, which includes current market information and estimates of policyholder behavior from the perspective of a theoretical market participant that would assume these liabilities. All of our treaties contain claim limits, which are factored into the valuation model. The fair value depends on a number of factors, including interest rates, current account value, market volatility, expected annuitization rates and other policyholder behavior, and changes in policyholder mortality. The model and related assumptions are continuously re-evaluated by management and enhanced, as appropriate, based upon additional experience obtained related to policyholder behavior and availability of more timely market information, such as market conditions and demographics of in-force annuities. Due to the inherent uncertainties of the assumptions used in the valuation models to determine the fair value of these derivative products, actual experience may differ from the estimates reflected in our Consolidated Financial Statements, and the differences may be material.
 
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The most significant policyholder behavior assumptions include lapse rates and the guaranteed minimum income benefit (GMIB) annuitization rates. Assumptions regarding lapse rates and GMIB annuitization rates differ by treaty but the underlying methodologies to determine rates applied to each treaty are comparable. The assumptions regarding lapse and GMIB annuitization rates determined for each treaty are based on a dynamic calculation that uses several underlying factors.
A lapse rate is the percentage of in-force policies surrendered in a given calendar year. All else equal, as lapse rates increase, ultimate claim payments will decrease. Key factors affecting the lapse rate assumption include investment performance and policy duration. In general, the base lapse function assumes low lapse rates (ranging from about 1 percent to 6 percent per annum) during the surrender charge period of the variable annuity contract, followed by a “spike” lapse rate (ranging from about 10 percent to 30 percent per annum) in the year immediately following the surrender charge period, and then reverting to an ultimate lapse rate (generally around 10 percent per annum), typically over a 2-year period. This base rate is adjusted downward for policies with more valuable (more “in the money”) guarantees by multiplying the base lapse rate by a factor ranging from 15 percent to 75 percent. Additional lapses due to partial withdrawals and older policyholders with tax-qualified contracts (due to required minimum distributions) are also included.
The GMIB annuitization rate is the percentage of policies for which the policyholder will elect to annuitize using the guaranteed benefit provided under the GMIB. All else equal, as GMIB annuitization rates increase, ultimate claim payments will increase, subject to treaty claim limits. Key factors affecting the GMIB annuitization rate include investment performance and the level of interest rates after the GMIB waiting period, since these factors determine the value of the guarantee to the policyholder. In general, we assume that GMIB annuitization rates will be higher for policies with more valuable (more “in the money”) guarantees. In addition, we also assume that GMIB annuitization rates are higher in the first year immediately following the waiting period (the first year the policies are eligible to annuitize utilizing the GMIB) in comparison to all subsequent years. We do not yet have a robust set of annuitization experience because most of our clients’ policyholders are not yet eligible to annuitize utilizing the GMIB. However, for certain clients there are several years of annuitization experience – for those clients the annuitization function reflects the actual experience and has a maximum annuitization rate per annum of 8 percent (a higher maximum applies in the first year a policy is eligible to annuitize utilizing the GMIB – it is over 13 percent). For most clients there is no currently observable relevant annuitization behavior data and so we use a weighted average (with a heavier weighting on the observed experience noted previously) of three different annuitization functions with maximum annuitization rates per annum of 8 percent, 12 percent, and 30 percent, respectively (with significantly higher rates in the first year a policy is eligible to annuitize utilizing the GMIB). As noted elsewhere, our GMIB reinsurance treaties include claim limits to protect ACE in the event that actual annuitization behavior is significantly higher than expected.
Based on our first or second quarter 2011 review, no changes were made to actuarial or behavior assumptions. We made minor technical refinements to the model with a favorable net income impact of approximately $6 million, in 2011. In 2010, changes were made to the VA valuation model that individually both increased and decreased our fair value liability. The aggregate result of these changes decreased our realized loss by $207 million, down to a loss of $158 million, inclusive of the benefits realized on derivative hedge instruments held.
During the three and six months ended June 30, 2011, we recorded realized losses of $75 million and $17 million, respectively, due to increasing net fair value of reported GLB reinsurance liabilities resulting substantially from falling interest rates. This excludes a realized gain of $3 million during the three months ended June 30, 2011 and a realized loss of $68 million during the six months ended June 30, 2011 on derivative hedge instruments held to partially offset the risk in the VA guarantee reinsurance portfolio. These derivatives do not receive hedge accounting treatment. Refer to “Net Realized Gains (Losses)” for a breakdown of the realized gains on GLB reinsurance and the realized losses on the derivatives for the three and six months ended June 30, 2011 and 2010.
ACE Tempest Life Re employs a strategy to manage the financial market and policyholder behavior risks embedded in the reinsurance of VA guarantees. Risk management begins with underwriting a prospective client
 
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and guarantee design, with particular focus on protecting our position from policyholder options that, because of anti-selective behavior, could adversely impact our obligation.
A second layer of risk management is the structure of the reinsurance contracts. All VA guarantee reinsurance contracts include some form of annual or aggregate claim limit(s). The exact limits vary by contract, but some examples of typical contract provisions include:
 
 	•	 	annual claim limits, as a percentage of reinsured account or guaranteed value, for GMDBs and GMIBs;	
 
 	•	 	annual annuitization rate limits, as a percentage of annuitization eligible account or guaranteed value, for GMIBs; and	
 
 	•	 	per policy claim limits, as a percentage of guaranteed value, for GMABs.	
A third layer of risk management is the hedging strategy which is focused on mitigating long-term economic losses at a portfolio level. ACE Tempest Life Re owned financial market instruments as part of the hedging strategy with a fair value of $4 million and $21 million at June 30, 2011, and December 31, 2010, respectively. The instruments are substantially collateralized by our counterparties, on a daily basis.
We also limit the aggregate amount of variable annuity reinsurance guarantee risk we are willing to assume. The last substantive U.S. transaction was quoted in mid-2007 and the last transaction in Japan was quoted in late 2007. The aggregate number of policyholders is currently decreasing through policyholder withdrawals and deaths at a rate of 5-10 percent annually.
Note that GLB claims cannot occur for any reinsured policy until it has reached the end of its “waiting period”. The vast majority of policies we reinsure reach the end of their “waiting periods” in 2013 or later, as shown in the table below.

Year of first payment eligibility	  	Percent
of living
benefit
account
values	 	
2011 and prior	  	 	1	% 	
2012	  	 	7	% 	
2013	  	 	24	% 	
2014	  	 	19	% 	
2015	  	 	5	% 	
2016	  	 	5	% 	
2017	  	 	18	% 	
2018 and after	  	 	21	% 	
	  	 	 	 	
Total	  	 	100	% 	

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

 	  	Three Months Ended
June 30	 	 	Six Months Ended
June 30	 	
 	  	2011	 	  	2010	 	 	2011	 	  	    2010    	 	
 	  	(in millions of U.S. dollars)	 	
Death Benefits (GMDB)	  				  				 				  				
Premium	  	$	25	 	  	$	27	 	 	$	51	 	  	$	55	 	
Less paid claims	  	 	23	 	  	 	28	 	 	 	49	 	  	 	61	 	
	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
Net	  	$	2	 	  	$	(1	) 	 	$	2	 	  	$	(6	) 	
	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
Living Benefits (Includes GMIB and GMAB)	  				  				 				  				
Premium	  	$	41	 	  	$	40	 	 	$	82	 	  	$	80	 	
Less paid claims	  	 	1	 	  	 	1	 	 	 	2	 	  	 	2	 	
	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
Net	  	$	40	 	  	$	39	 	 	$	80	 	  	$	78	 	
	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
Total VA Guaranteed Benefits	  				  				 				  				
Premium	  	$	66	 	  	$	67	 	 	$	133	 	  	$	135	 	
Less paid claims	  	 	24	 	  	 	29	 	 	 	51	 	  	 	63	 	
	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
Net	  	$	42	 	  	$	38	 	 	$	82	 	  	$	72	 	
	  	 	 	 	  	 	 	 	 	 	 	 	  	 	 	 	
Death Benefits (GMDB)
For premiums and claims from VA contracts reinsuring GMDBs, at current market levels, we expect approximately $108 million of claims and $93 million of premium on death benefits over the next 12 months.
GLB (includes GMIB and GMAB)
Our GLB’s predominantly include premiums and claims from VA contracts reinsuring GMIB and Guaranteed Minimum Accumulation Benefits (GMAB). Substantially all of our living benefit reinsurance clients’ policyholders are currently ineligible to trigger a claim payment. The vast majority of these policyholders become eligible in years 2013 and beyond. At current market levels, we expect approximately $1 million of claims and $154 million of premium on living benefits over the next 12 months.
Collateral
In order for its U.S.-domiciled clients to obtain statutory reserve credit, ACE Tempest Life Re holds collateral on behalf of its clients in the form of qualified assets in trust or letters of credit, in an amount sufficient for them to obtain statutory reserve credit. The timing of the calculation and amount of the collateral varies by client according to the particulars of the reinsurance treaty and the statutory reserve guidelines of the client’s state of domicile.
Catastrophe management
We continue to closely monitor our catastrophe risk accumulation around the world. The following modeled loss information reflects our in-force portfolio and reinsurance program at April 1, 2011.
The table below shows our modeled annual aggregate pre-tax probable maximum loss (PML), net of reinsurance, for 100-year and 250-year return periods for U.S. hurricanes and California earthquakes at June 30, 2011, and 2010. The table also shows corresponding pre-tax industry losses for each of the return periods for U.S. hurricanes and California earthquakes at June 30, 2011. For example, according to the model, for the 1-in-100
 
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return period scenario, there is a one percent chance that our losses incurred in any year from U.S. hurricanes could be in excess of $1.3 billion (or five percent of our total shareholders’ equity at June 30, 2011). We estimate that at such hypothetical loss levels, aggregate industry losses would be approximately $136.6 billion.

 	  	U.S. Hurricanes	 	  	California Earthquakes	 	
 	  	June 30,
2011	 	  	June 30,
2010	 	  	June 30,
2011	 	  	June 30,
2010	 	
Modeled Annual
Aggregate Net PML	  	 	 	  	% of Total
Shareholders’
Equity	 	 	Industry	 	  	ACE	 	  	 	 	  	% of Total
Shareholders’
Equity	 	 	Industry	 	  	ACE	 	
	  	ACE	 	 			  			  	ACE	 	 			  			
 	  	(in millions of U.S. dollars, except for percentages)	 	  	 	 	
1-in-100	  	$	1,254	  	  	 	5	% 	 	$	136,621	  	  	$	1,089	  	  	$	803	  	  	 	3	% 	 	$	36,665	  	  	$	771	  	
1-in-250	  	$	1,722	  	  	 	7	% 	 	$	198,607	  	  	$	1,398	  	  	$	948	  	  	 	4	% 	 	$	58,285	  	  	$	880	  	
The modeling estimates of both ACE and industry loss levels are inherently uncertain owing to key assumptions. First, while the use of third-party catastrophe modeling packages to simulate potential hurricane and earthquake losses is prevalent within the insurance industry, the models are reliant upon significant meteorology, seismology, and engineering assumptions to estimate hurricane and earthquake losses. In particular, modeled hurricane and earthquake events are not always a representation of actual events and ensuing additional loss potential. Second, there is no universal standard in the preparation of insured data for use in the models and the running of the modeling software. Third, we are reliant upon third-party estimates of industry insured exposures and there is significant variation possible around the relationship between our loss and that of the industry following an event. Fourth, we assume that our reinsurance recoveries following an event are fully collectible. These loss estimates do not represent our potential maximum exposures and it is highly likely that our actual incurred losses would vary materially from the modeled estimates.
Natural catastrophe property reinsurance program
ACE’s core property catastrophe reinsurance program provides protection against natural catastrophes impacting its primary property operations (i.e., excluding assumed reinsurance) and consists of two separate towers.
We regularly review our reinsurance protection and corresponding property catastrophe exposures. This may or may not lead to the purchase of additional reinsurance prior to a program’s renewal date. In addition, prior to each renewal date, we consider how much, if any, coverage we intend to buy and we may make material changes to the current structure in light of various factors, including modeled PML assessment at various return periods, reinsurance pricing, our risk tolerance and exposures, and various other structuring considerations.
There were no significant changes to ACE’s coverage under its Property Catastrophe Program for North America during the second quarter. With respect to our International Property Catastrophe Program, we renewed our core program for the period from July 1, 2011 through June 30, 2012 with limits similar to the expiring core program, except that we retained, in large part, the $75-$150 million loss layer.
Crop insurance
We are, and have been since the 1980s, one of the leading writers of crop insurance in the U.S. and have conducted that business through an MGA subsidiary of Rain and Hail. On December 28, 2010, we acquired all of the outstanding common stock of Rain and Hail not previously owned by us. Prior to this transaction, ACE owned approximately 20 percent of the outstanding common stock of Rain and Hail. Accordingly, the three and six months ended June 30, 2011 includes the results of Rain and Hail.
We provide protection throughout the U.S. and are therefore geographically diversified, which reduces the risk of exposure to a single event or a heavy accumulation of losses in any one region. Our crop insurance business comprises two components – multi-peril crop insurance (MPCI) and hail insurance.
 
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The MPCI program is a partnership with the U.S. Department of Agriculture (USDA). The policies cover revenue shortfalls or production losses due to natural causes such as drought, excessive moisture, hail, wind, frost, insects, and disease. Generally, policies have deductibles ranging from 10 percent to 50 percent of the insured’s risk. The USDA’s Risk Management Agency (RMA) sets the policy terms and conditions, rates and forms, and is also responsible for setting compliance standards. As a participating company, we report all details of policies underwritten to the RMA and are party to a Standard Reinsurance Agreement (SRA), which sets out the relationship between private insurance companies and the federal government concerning the terms and conditions regarding the risks each will bear. In addition to the pro-rata and excess of loss reinsurance protections inherent in the SRA, we cede business on a quota-share basis to third-party reinsurers and further protect our net retained position through the purchase of stop-loss reinsurance in the private market place. In July 2010, the RMA released a final version of a new SRA (the 2011 SRA), replacing the prior agreement which expired on June 30, 2010. The 2011 SRA applies to the 2011 Crop year. Similar to the recently expired SRA, the 2011 SRA contains the pro rata and state stop-loss provisions which continue to allow companies to limit the exposure of any one state or group of states on their underwriting results. Generally, it also continues to allow companies to selectively retain the more attractive risks while ceding the historically less profitable risks to the federal government. While the 2011 SRA does reduce the potential underwriting profit, it also decreases the maximum underwriting loss, compared with the prior version. Despite the potential underwriting profitability reduction, we believe the 2011 SRA allows for an acceptable rate of return in 2011.
Our hail program is a private offering. We use industry data to develop our own rates and forms for the coverage offered. The policy primarily protects farmers against yield reduction caused by hail and/or fire, and related costs such as transit to storage. We offer various deductibles to allow the grower to partially self-insure for a reduced premium cost. We limit our hail exposures through the use of township liability limits, quota-share reinsurance cessions, and stop-loss reinsurance on our net retained hail business.
On the MPCI business, we recognize net premiums written as we receive acreage reports from the policyholders on the various crops throughout the U.S. The program has specific timeframes as to when producers must report acreage to us. These reports allow us to determine the actual premium associated with the liability that is being planted. Once the net premium written has been booked, the premium is then earned over the growing season for the crops. Given the major crops that are covered in the program, we typically see a substantial written premium impact in the second and third quarters and the earned premium is also more concentrated in the second and third quarters. Premium is earned on the hail program over the coverage period of the policy. Given the very short nature of the growing season, most hail business is typically written in the second and third quarters with the earned premium also more heavily occurring during this time frame. Prior to the acquisition of Rain and Hail, we regularly received reports relating to the previous crop year(s), resulting in adjustments to previously reported premiums, losses and loss expenses, and profit share commissions. The adjustments were typically more significant in the first quarter of the year compared with other periods. Following the Rain and Hail acquisition on December 28, 2010, we have access to such information sooner. Accordingly, the more significant changes in estimate that previously occurred in the first quarter now occur one quarter earlier.
Liquidity
We anticipate that positive cash flows from operations (underwriting activities and investment income) should be sufficient to cover cash outflows under most loss scenarios through 2011. Should the need arise, we generally have access to the capital markets and available credit facilities. At June 30, 2011, our available credit lines totaled $2.4 billion and usage to support issued letters of credit was $1.5 billion. This compares with available credit lines of $2.4 billion and usage of $1.8 billion at December 31, 2010. Our access to funds under existing credit facilities is dependent on the ability of the banks that are parties to the facilities to meet their funding commitments. Our existing credit facilities have remaining terms expiring between 2012 and 2015 and require that we maintain certain financial covenants, all of which we met at June 30, 2011. Should any of our existing credit providers experience financial difficulty, we may be required to replace credit sources, possibly in a difficult market. There has also been recent consolidation in the banking industry which could lead to increased
 
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reliance on and exposure to particular institutions. If we cannot obtain adequate capital or sources of credit on favorable terms, on a timely basis or at all, our business, operating results, and financial condition could be adversely affected. To date, we have not experienced difficulty accessing any of our credit facilities . Refer to “Credit Facilities” in our 2010 Form 10-K.
The payments of dividends or other statutorily permissible distributions from our operating companies are subject to the laws and regulations applicable to each jurisdiction, as well as the need to maintain capital levels adequate to support the insurance and reinsurance operations, including financial strength ratings issued by independent rating agencies. During the first half of 2011, we were able to meet all of our obligations, including the payments of dividends declared on our Common Shares, with our net cash flows.
We assess which subsidiaries to draw dividends from based on a number of factors. Considerations such as regulatory and legal restrictions, as well as the subsidiary’s financial condition, are paramount to the dividend decision. The legal restrictions on the payment of dividends from retained earnings by our Bermuda subsidiaries are currently satisfied by the share capital and additional paid-in capital of each of the Bermuda subsidiaries. During the six months ended June 30, 2011, ACE Limited received dividends from its Bermuda subsidiaries of $500 million. ACE Limited did not receive any dividends from its Bermuda subsidiaries during the six months ended June 30, 2010.
The payment of any dividends from ACE Global Markets or its subsidiaries is subject to applicable U.K. insurance laws and regulations. In addition, the release of funds by Syndicate 2488 to subsidiaries of ACE Global Markets is subject to regulations promulgated by the Society of Lloyd’s. During the six months ended June 30, 2011, ACE Limited received dividends from ACE Global Markets of $180 million. ACE Limited did not receive any dividends from ACE Global Markets during the six months ended June 30, 2010.
The U.S. insurance subsidiaries of ACE INA may pay dividends, without prior regulatory approval, subject to restrictions set out in state law of the subsidiary’s domicile (or, if applicable, “commercial domicile”). ACE INA’s international subsidiaries are also subject to insurance laws and regulations particular to the countries in which the subsidiaries operate. These laws and regulations sometimes include restrictions that limit the amount of dividends payable without prior approval of regulatory insurance authorities.
ACE Limited did not receive any dividends from ACE INA during the six months ended June 30, 2011 and 2010. Debt issued by ACE INA is serviced by statutorily permissible distributions by ACE INA’s insurance subsidiaries to ACE INA as well as other group resources.
Cash Flows
Sources of liquidity include cash from operations, routine sales of investments, and financing arrangements. The following is a discussion of our cash flows for the six months ended June 30, 2011 and 2010.
Our consolidated net cash flows from operating activities were $2.1 billion in the six months ended June 30, 2011, compared with $1.7 billion in the prior year period. Net loss and loss expenses paid were $3.8 billion in the six months ended June 30, 2011, compared with $3.6 billion in the prior year period. Operating cash flow increased in the first half of 2011, in part due to net collections of insurance and reinsurance balances. In addition, cash flow from operations this quarter includes $312 million of cash collateral related to a large insurance transaction. Some or all of the cash collateral may change to non-cash collateral which would ultimately result in a reduction in future operating cash flows.
Multi-peril crop insurance products are seasonal and produce the strongest written premium volume during the second and third quarters. Premium monies are retained in a fund held by the Federal government as the policies are written and are reported as Insurance and Reinsurance Balances Receivable. This asset is reduced for claim
 
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payments, typically made during the third and fourth quarters, and the residual underwriting profit when collected by ACE ten months after the end of the fiscal year. This trend results in higher receivables from the Federal government until they are settled.
Our consolidated net cash flows used for investing activities were $1.9 billion in the six months ended June 30, 2011, compared with $1.5 billion in the prior year period. Net investing activities for the indicated periods were related primarily to net purchases of fixed maturities and for 2011, included the acquisition of New York Life’s Korea operations and Hong Kong operations.
Both internal and external forces influence our financial condition, results of operations, and cash flows. Claim settlements, premium levels, and investment returns may be impacted by changing rates of inflation and other economic conditions. In many cases, significant periods of time, ranging up to several years or more, may lapse between the occurrence of an insured loss, the reporting of the loss to us, and the settlement of the liability for that loss.
From time to time, we utilize reverse repurchase agreements as a low-cost alternative for short-term funding needs. We use these instruments to address short-term cash timing differences without disrupting our investment portfolio holdings, and we settle the transactions with future operating cash flows. At June 30, 2011, there were $1.4 billion in reverse repurchase agreements outstanding.
Capital Resources
Capital resources consist of funds deployed or available to be deployed to support our business operations. The following table summarizes the components of our capital resources:

 	  	June 30
2011	 	 	December 31
2010	 	
 	  	(in millions of U.S. dollars,
except for percentages)	 	
Short-term debt	  	$	1,400	 	 	$	1,300	 	
Long-term debt	  	 	3,360	 	 	 	3,358	 	
	  	 	 	 	 	 	 	 	
Total debt	  	 	4,760	 	 	 	4,658	 	
Trust preferred securities	  	 	309	 	 	 	309	 	
Total shareholders’ equity	  	 	24,113	 	 	 	22,974	 	
	  	 	 	 	 	 	 	 	
Total capitalization	  	$	29,182	 	 	$	27,941	 	
	  	 	 	 	 	 	 	 	
Ratio of debt to total capitalization	  	 	16.3	% 	 	 	16.7	% 	
Ratio of debt plus trust preferred securities to total capitalization	  	 	17.4	% 	 	 	17.8	% 	
The following table reports the significant movements in our shareholders’ equity for the six months ended June 30, 2011.

 	  	June 30, 2011	 	
 	  	(in millions of
U.S. dollars)	 	
Balance at December 31, 2010	  	$	22,974	 	
Net income	  	 	866	 	
Dividends declared on Common Shares	  	 	(232	) 	
Change in net unrealized appreciation on investments, net of tax	  	 	175	 	
Change in net cumulative translation, net of tax	  	 	224	 	
Other movements, net of tax	  	 	106	 	
	  	 	 	 	
Balance at June 30, 2011	  	$	24,113	 	

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As part of our capital management program, in November 2010, our Board of Directors authorized the repurchase of up to $600 million of ACE’s Common Shares through December 31, 2012. At June 30, 2011, $297 million of this authorization had not been used. There were no share repurchases during the six months ended June 30, 2011.
We generally maintain shelf registration capacity at all times in order to allow capital market access for refinancing as well as for unforeseen or opportunistic capital needs. Our currently effective unlimited shelf registration statement expires in December 2011. We expect to file a new unlimited shelf registration to replace the one that expires in December 2011.
Dividends
We have paid dividends each quarter since we became a public company in 1993. From the fourth quarter of 2008 through the second quarter of 2011, we paid dividends by way of a par value distribution. Beginning in the third quarter of 2011, dividends were paid out of capital contributions reserves (additional paid in capital) by the transfer of dividends from additional paid in capital to retained earnings. The following table represents dividends paid per Common Share to shareholders of record on each of the following dates:

Shareholders of record as of:	    	Dividends paid as of:	  	 	
December 16, 2010	    	January 11, 2011	  	$0.33 (CHF 0.32)	
April 1, 2011	    	April 22, 2011	  	$0.33 (CHF 0.30)	
June 30, 2011	    	July 21, 2011	  	$0.35 (CHF 0.29)	
At the Annual General Meeting held in May 2010, our shareholders approved a par value reduction in an aggregate Swiss franc amount, pursuant to a formula, equal to $1.32 per share, which we refer to as the Base Annual Dividend. The Base Annual Dividend was payable in four installments, provided that each of the Swiss franc installments would be adjusted pursuant to the formula so that the actual Swiss franc par value reduction amount for each installment equaled $0.33, subject to an aggregate upward adjustment, which we refer to as the Dividend Cap, for the four installments of 50 percent of the Base Annual Dividend.
Application of the formula meant that the Swiss franc amount of each installment was determined in connection with each distribution while the U.S. dollar value of the installment remained $0.33. Par value reduction that would otherwise exceed the Dividend Cap would be reduced to equal the Swiss franc amount remaining available under the Dividend Cap and the U.S. dollar amount distributed would be the then-applicable U.S. dollar equivalent of that Swiss franc amount.
Beginning January 1, 2011, Swiss tax law allows the payment of dividends out of capital contributions reserves, a subaccount of legal reserves, without such dividends being subject to Swiss withholding taxes. Thus, distributions to shareholders from capital contributions reserves have obtained the same tax-privileged status as distributions to shareholders by way of par value distribution on our common shares. At our May 2011 Annual General Meeting, the shareholders approved a dividend for the coming year from our capital contributions reserves. This dividend is of an aggregate CHF amount equal to $1.40 per share, payable in four installments, provided that each CHF installment will be adjusted pursuant to a dividend cap formula similar to the one previously used for par value distributions as described earlier in this section.
Recent accounting pronouncements
Refer to Note 2 to the Consolidated Financial Statements for a discussion of new accounting pronouncements.
Item   3. Quantitative and Qualitative Disclosures about Market Risk
Refer to Item 7A included in our 2010 Form 10-K.
 
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Reinsurance of GMDB and GLB guarantees
Our net income is directly impacted by changes in the benefit reserves calculated in connection with the reinsurance of variable annuity guarantees, primarily GMDB and GLB. The benefit reserves are calculated in accordance with the guidance related to accounting and reporting by insurance enterprises for certain non-traditional long-duration contracts and for separate accounts. Changes in the benefit reserves are reflected as policy benefits expense, which is included in life underwriting income. In addition, our net income is directly impacted by the change in the fair value of the GLB liability (FVL), which is classified as a derivative for accounting purposes. The FVL established for a GLB reinsurance contract represents the difference between the fair value of the contract and the benefit reserves. Changes in the FVL, net of associated changes in the calculated benefit reserves, are reflected as realized gains or losses.
ACE views its variable annuity reinsurance business as having a similar risk profile to that of catastrophe reinsurance with the probability of long-term economic loss relatively small, at the time of pricing. Adverse changes in market factors and policyholder behavior will have an impact on both life underwriting income and net income. When evaluating these risks, we expect to be compensated for taking both the risk of a cumulative long-term economic net loss, as well as the short-term accounting variations caused by these market movements. Therefore, we evaluate this business in terms of its long-term economic risk and reward.
At June 30, 2011, management established benefit reserves based on the benefit ratio calculated using assumptions reflecting management’s best estimate of the future performance of the variable annuity line of business. Management exercises judgment in determining the extent to which short-term market movements impact the benefit reserves. The benefit reserves are based on the calculation of a long-term benefit ratio (or loss ratio) for the variable annuity guarantee reinsurance. Despite the long-term nature of the risk, the benefit ratio calculation is impacted by short-term market movements that may be judged by management to be temporary or transient. Management’s best estimate reflected a judgment that the equity markets will exhibit sub-par growth over the next several years. Management regularly examines both quantitative and qualitative analysis and for the six months ended June 30, 2011, determined that no change to the benefit ratio was warranted. The benefit ratio used to establish the benefit reserves at June 30, 2011, has averaged less than 1/3 standard deviation from the calculated benefit ratios, averaging the periodic results from a 2-year rolling period ending June 30, 2011.
The guidance requires ACE to “regularly evaluate estimates used and adjust the liability balance… if actual experience or other evidence suggests that earlier assumptions should be revised.” ACE evaluates its estimates regularly and management uses judgment to determine the extent to which the assumptions underlying the benefit ratio calculation used to establish benefit reserves should be adjusted. The benefit ratio will be calculated based on management’s expectation for the short-term and long-term performance of the variable annuity guarantee liability. Management’s quantitative analysis includes a review of the differential between the benefit ratio used at the most recent valuation date and the benefit ratio calculated on subsequent dates. The differential is measured in terms of the standard deviation of the distribution of benefit ratios (reflecting 1,000 stochastic scenarios) calculated on subsequent dates.
The benefit reserves and FVL calculations are directly affected by market factors, including equity levels, interest rate levels, credit risk, and implied volatilities, as well as policyholder behaviors, such as annuitization and lapse rates. The tables below show the sensitivity, at June 30, 2011, of the benefit reserves and FVL associated with the variable annuity guarantee reinsurance portfolio. In addition, the tables below show the sensitivity of the fair value of specific derivative instruments held (hedge value) to partially offset the risk in the variable annuity guarantee reinsurance portfolio.
 
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 	  	 	  	Worldwide Equity Shock	 	
Interest
Rate Shock	  	 	  	+10%	 	 	Flat	 	 	-10%	 	 	-20%	 	 	-30%	 	 	-40%	 	
 	  	 	  	(in millions of U.S. dollars)	 	
+100 bps	  	(Increase)/decrease in benefit reserves	  	$	61	 	 	$	16	 	 	$	(53	) 	 	$	(166	) 	 	$	(325	) 	 	$	(541	) 	
	  	(Increase)/decrease in FVL	  	 	200	 	 	 	107	 	 	 	(13	) 	 	 	(174	) 	 	 	(388	) 	 	 	(613	) 	
	  	Increase/(decrease) in hedge value	  	 	(158	) 	 	 	(5	) 	 	 	149	 	 	 	306	 	 	 	465	 	 	 	626	 	
	  		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
	  	Increase/(decrease) in net income	  	$	103	 	 	$	118	 	 	$	83	 	 	$	(34	) 	 	$	(248	) 	 	$	(528	) 	
	  		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Flat	  	(Increase)/decrease in benefit reserves	  	$	46	 	 	$	—  	  	 	$	(73	) 	 	$	(190	) 	 	$	(357	) 	 	$	(585	) 	
	  	(Increase)/decrease in FVL	  	 	138	 	 	 	—  	  	 	 	(182	) 	 	 	(431	) 	 	 	(703	) 	 	 	(977	) 	
	  	Increase/(decrease) in hedge value	  	 	(153	) 	 	 	(5	) 	 	 	155	 	 	 	313	 	 	 	472	 	 	 	635	 	
	  		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
	  	Increase/(decrease) in net income	  	$	31	 	 	$	(5	) 	 	$	(100	) 	 	$	(308	) 	 	$	(588	) 	 	$	(927	) 	
	  		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
-100 bps	  	(Increase)/decrease in benefit reserves	  	$	30	 	 	$	(17	) 	 	$	(95	) 	 	$	(218	) 	 	$	(396	) 	 	$	(638	) 	
	  	(Increase)/decrease in FVL	  	 	(2	) 	 	 	(207	) 	 	 	(484	) 	 	 	(798	) 	 	 	(1,127	) 	 	 	(1,447	) 	
	  	Increase/(decrease) in hedge value	  	 	(148	) 	 	 	6	 	 	 	162	 	 	 	320	 	 	 	481	 	 	 	644	 	
	  		  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
	  	Increase/(decrease) in net income	  	$	(120	) 	 	$	(218	) 	 	$	(417	) 	 	$	(696	) 	 	$	(1,042	) 	 	$	(1,441	) 	

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

 	  	Mortality	 	
   	  	+20%	 	 	+10%	 	 	-10%	 	 	-20%	 	
 	  	(in millions of U.S. dollars)	 	
(Increase)/decrease in benefit reserves	  	$	(38	) 	 	$	(19	) 	 	$	20	 	 	$	42	 	
(Increase)/decrease in FVL	  	 	17	 	 	 	8	 	 	 	(9	) 	 	 	(17	) 	
Increase/(decrease) in hedge value	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Increase/(decrease) in net income	  	$	(21	) 	 	$	(11	) 	 	$	11	 	 	$	25	 	

 	  	Lapses	 	
 	  	+50%	 	 	+25%	 	 	-25%	 	 	-50%	 	
 	  	(in millions of U.S. dollars)	 	
(Increase)/decrease in benefit reserves	  	$	60	 	 	$	33	 	 	$	(41	) 	 	$	(92	) 	
(Increase)/decrease in FVL	  	 	130	 	 	 	75	 	 	 	(102	) 	 	 	(231	) 	
Increase/(decrease) in hedge value	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Increase/(decrease) in net income	  	$	190	 	 	$	108	 	 	$	(143	) 	 	$	(323	) 	

 	  	Annuitization	 	
 	  	+50%	 	 	+25%	 	 	-25%	 	 	-50%	 	
 	  	(in millions of U.S. dollars)	 	
(Increase)/decrease in benefit reserves	  	$	(29	) 	 	$	(16	) 	 	$	19	 	 	$	42	 	
(Increase)/decrease in FVL	  	 	(111	) 	 	 	(59	) 	 	 	49	 	 	 	95	 	
Increase/(decrease) in hedge value	  	 	—  	  	 	 	—  	  	 	 	—  	  	 	 	—  	  	
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Increase/(decrease) in net income	  	$	(140	) 	 	$	(75	) 	 	$	68	 	 	$	137	 	

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The above tables assume benefit reserves and FVL using the benefit ratio calculated at June 30, 2011. Additionally, the above table assumes equity shocks impact all global equity markets equally and that the interest rate shock is a parallel shift in the U.S. yield curve. Although our liabilities have sensitivity to global equity markets, we would suggest using the S&P 500 as a proxy and although our liabilities have sensitivity to global interest rates at various points on the yield curve, we would suggest using the 10-year U.S. Treasury yield as a proxy. A change in AA-rated credit spreads (AA-rated credit spreads are a proxy for both our own credit spreads and the credit spreads of the ceding insurers), impacts the rate used to discount cash flows in the fair value model. The hedge sensitivity is from June 30, 2011 market levels and includes the impact of an adjustment to the hedge portfolio made subsequent to that date.
The above sensitivities are not directly additive because changes in one factor will affect the sensitivity to changes in other factors. Also, the sensitivities do not scale linearly and may be proportionally greater for larger movements in the market factors. The calculation of the benefit reserves and FVL is based on internal models that include assumptions regarding future policyholder behavior, including lapse, annuitization, and asset allocation. These assumptions impact both the absolute level of the benefit reserves and the FVL as well as the sensitivities to changes in market factors shown above. Additionally, actual sensitivity of our benefit reserves, FVL, and net income may differ from those disclosed in the tables above due to differences between short-term market movements and management judgment regarding the long-term assumptions implicit in our benefit ratio. Furthermore, the sensitivities above could vary by multiples of the sensitivities in the tables above.
Item 4.  Controls and Procedures
As of the end of the period covered by this report, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in allowing information required to be disclosed in reports filed under the Securities and Exchange Act of 1934 to be recorded, processed, summarized, and reported within time periods specified in the rules and forms of the SEC and accumulated and communicated to our management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
During the six months ended June 30, 2011, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
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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 coverage and, in some jurisdictions, direct actions by allegedly-injured persons seeking damages from policyholders. These lawsuits, involving claims on policies issued by our subsidiaries, which are typical to the insurance industry in general and in the normal course of business, are considered in our loss and loss expense reserves. In addition to claims litigation, we and our subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from, or directly relate to, claims on insurance policies. This category of business litigation typically involves, amongst other things, allegations of underwriting errors or misconduct, employment claims, regulatory activity, or disputes arising from our business ventures.
While the outcomes of the business litigation involving us cannot be predicted with certainty at this point, we are disputing and will continue to dispute allegations against us that are without merit and believe that the ultimate outcomes of the matters in this category of business litigation will not have a material adverse effect on our financial condition, future operating results, or liquidity, although an adverse resolution of a number of these items could have a material adverse effect on our results of operations in a particular quarter or fiscal year.
Further information is set forth in Note 7 d) to our Consolidated Financial Statements.
Item 1  A. Risk Factors
Refer to “Risk Factors” under Item 1A. of Part I of our 2010 Form 10-K. There have been no material changes to the risk factors disclosed in Part I, Item 1A of our 2010 Form  10K.
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to purchases by ACE of its Common Shares during the three months ended June 30, 2011.
Issuer’s Purchases of Equity Securities

Period	  	Total
Number of
Shares
Purchased*	 	  	Average
Price
Paid
per
Share	 	  	Approximate
Dollar Value of
Shares that
May Yet be
Purchased
Under the
Plan**	 	
April 1 through April 30	  	 	7,195	 	  	$	66.00	 	  	$	 297 million	  	
May 1 through May 31	  	 	67,626	 	  	 	69.13	 	  	 	297 million	  	
June 1 through June 30	  	 	2,632	 	  	 	68.08	 	  	 	297 million	  	
	  	 	 	 	  				  				
Total	  	 	77,453	 	  				  				

*	This column represents activity related to the surrender to ACE of Common Shares to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees.	
**	In November 2010, the Company’s Board of Directors authorized the repurchase of up to $600 million of ACE’s Common Shares through 2012.	
Item 6.  Exhibits
Refer to the Exhibit Index.
 
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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	
			
August 4, 2011	 		 	/ S /    E VAN G. G REENBERG        	
	 		 	Evan G. Greenberg	
	 		 	Chairman and Chief
Executive Officer	
			
August 4, 2011	 		 	/ S /    P HILIP V. B ANCROFT        	
	 		 	Philip V. Bancroft	
	 		 	Chief Financial Officer	
 
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 	  	 	  	Incorporated by Reference	  	Filed
Herewith	
Exhibit
Number	  	Exhibit Description	  	Form	  	Original
Number	  	Date Filed	  	SEC File
Reference
Number	  		
    3.1	  	Articles of Association of the Company, as amended and restated	  	8-K	  	3	  	April 1, 2011	  	001-11778	  		
							
    4.1	  	Articles of Association of the Company, as amended and restated	  	8-K	  	4	  	April 1, 2011	  	001-11778	  		
							
  10.1*	  	Form of Incentive Stock Option Terms under the ACE Limited 2004 Long-Term Incentive Plan for Messrs. Greenberg and Cusumano.	  		  		  		  		  	X	
							
  10.2*	  	Form of Non-Qualified Stock Option Terms under the ACE Limited 2004 Long-Term Incentive Plan for Messrs. Greenberg and Cusumano.	  		  		  		  		  	X	
							
  10.3*	  	Form of Restricted Stock Award Terms under the ACE Limited 2004 Long-Term Incentive Plan for Messrs. Greenberg and Cusumano.	  		  		  		  		  	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 June 30, 2011 formatted in XBRL: (i) Consolidated Balance Sheets at June 30, 2011, and December 31, 2010; (ii) Consolidated Statements of Operations and Comprehensive Income for the three months and six months ended June 30, 2011 and 2010; (iii) Consolidated Statements of Shareholders’ Equity for the six months ended June 30, 2011 and 2010; (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010; and (v) Notes to Consolidated Financial Statements.	  		  		  		  		  		

*	Management Contract or Compensation Plan	
 
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Exhibit 10.1
For Awards for Messrs. Greenberg and Cusumano
Incentive Stock Option Terms
under the
ACE Limited 2004 Long-Term Incentive Plan
The Participant has been granted an Option by ACE Limited (the “Company”) under the ACE Limited 2004 Long-Term Incentive Plan (the “Plan”). The Option shall be subject to the following Incentive Stock Option Terms (sometimes referred to as the “Option Terms”):
1. Terms of Award . The following words and phrases used in these Option Terms shall have the meanings set forth in this paragraph 1:
 
(a)	The “Participant” is the individual recipient of the Incentive Stock Option Award on the specified Grant Date.	
 
(b)	The “Grant Date” is [Insert Date] .	
 
(c)	The number of “Covered Shares” shall be that number of shares of Stock awarded to the Participant on the Grant Date as reflected in the corporate records and shown in the Record-Keeping System in the Participant’s individual account records.	
 
(d)	The “Exercise Price” is $ [Insert Price] per share.	
Other words and phrases used in these Option Terms are defined pursuant to paragraph 8 or elsewhere in these Option Terms.
2. Incentive Stock Option . The Option is intended to constitute an “incentive stock option” as that term is used in Code section 422. To the extent that the aggregate fair market value (determined at the time of grant) of Shares with respect to which incentive stock options are exercisable for the first time by the Participant during any calendar year under all plans of the Company and its Subsidiaries exceeds $100,000, the options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as nonstatutory stock options. It should be understood that there is no assurance that the Option will, in fact, be treated as an incentive stock option.
3. Date of Exercise . Subject to the limitations of these Option Terms, each Installment of Covered Shares of the Option shall be exercisable on and after the Vesting Date for such Installment as described in the following schedule (but only if the Date of Termination has not occurred before the Vesting Date):

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

Notwithstanding the foregoing provisions of this paragraph 3, the Option shall become fully vested and exercisable as follows, with the exception of paragraph (c):
 
(a)	The Option shall become fully exercisable upon the Date of Termination, if the Date of Termination occurs by reason of the Participant’s death or Disability.	
 
(b)	If the Participant’s Date of Termination is a Change in Control Date of Termination (as defined below), then, for Installments, if any, as to which the Restricted Period has not ended prior to the Participant’s Date of Termination, the Restricted Period will end and such Installments will become exercisable on the Change in Control Date of Termination; provided that if the Participant’s Change in Control Date of Termination occurs within the 180-day period immediately preceding the date of a Change in Control, then all unvested Installments held by the Participant on the Date of Termination will become exercisable on the date of the Change in Control, subject to the following:	
(i) All Installments (including those that become exercisable under this paragraph (b)) shall remain exercisable until the earlier of (A) the three year anniversary of the Date of Termination or (B) the Option’s originally scheduled expiration date. If the originally scheduled expiration date for the Option occurs before the date of the Change in Control, then the Option will not become exercisable under this paragraph (b).
(ii) “Change in Control Date of Termination” means (A) the Participant’s Date of Termination that occurs for any reason (including, without limitation, voluntary resignation of the Participant with or without Good Reason) during the first calendar month that begins on or after the six-month anniversary of the date of a Change in Control or (B) the Participant’s Date of Termination occurs because the Company and/or any of the Related Companies terminates the Participant’s employment with the Company and/or the Related Companies without Cause (other than due to death, a Disability or a Retirement) or because the Participant terminates his or her employment for Good Reason, provided that such termination in accordance with this clause (B) occurs during the period commencing on the 180th day immediately preceding a Change in Control date and ending on the two year anniversary of such Change in Control date.
(iii) To the extent that the terms of the ACE Limited Executive Severance Plan would otherwise apply to this Stock Option Award, vesting shall be subject to Section 10.4(b) of that plan rather than Section 10.4(a) of that plan.
(iv) For purposes of this paragraph (b), the terms “Disability,” “Retirement,” “Cause” and “Good Reason” shall have the meanings ascribed to them in the Executive Severance Plan.
(v) To the extent that the Option or portion thereof is exercised more than three months after the Participant’s Date of Termination as an employee, the Option may, for U.S. tax purposes, be treated as a nonstatutory stock option.
 
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[The following paragraph (vi) should be included in the award terms for awards that are granted less than 181 days after the Severance Plan amendment is adopted. The paragraph should not be included in the award terms for awards that are granted more than 180 days after the Severance Plan amendment is adopted.]
(vi) Notwithstanding the foregoing provisions of this paragraph (b), if: (A) a Change in Control occurs before the Restricted Period has ended for all Installments, (B) the Change in Control occurs on or before the Date of Termination, and (C) the Change in Control occurs before [insert date that is 181 days after the date of the Board’s adoption of the Severance Plan amendment], then the Option shall become fully exercisable upon a Change in Control.
 
(c)	For Installments as to which the Restricted Period has not ended prior to the Date of Termination, if the Date of Termination occurs by reason of the Participant’s Retirement, vesting shall continue pursuant to the foregoing schedule following the Date of Termination. Following the Date of Termination the Restricted Period shall end in accordance with the above schedule.	
Except as specified in paragraphs (b) and (c), the Option may be exercised on or after the Date of Termination only as to that portion of the Covered Shares for which it was exercisable (or became exercisable) immediately prior to the Date of Termination.
4. Expiration . The Option shall not be exercisable after the Company’s close of business on the last business day that occurs prior to the Expiration Date. The “Expiration Date” shall be the earliest to occur of:
 
(a)	the ten-year anniversary of the Grant Date;	
 
(b)	if the Participant’s Date of Termination occurs by reason of death or Disability, the one-year anniversary of such Date of Termination;	
 
(c)	if the Participant’s Date of Termination occurs by reason of Retirement, the date on which the Expiration Date would occur if the Participant’s Date of Termination occurred on the ten-year anniversary of the Grant Date, or if earlier, the date of the Participant’s death; or	
 
(d)	if the Participant’s Date of Termination occurs for any reason other than those listed in subparagraph (b) or (c) of this paragraph 4, then subject to paragraph 3(b), the three-month anniversary of such Date of Termination.	
5. Method of Option Exercise . Subject to these Option Terms and the Plan, the Option may be exercised in whole or in part by filing a written notice (or by such other method as may be provided by the Committee, including but not limited to processes provided in electronic record-keeping systems utilized for management of the Plan) with the Secretary of the Company at its corporate headquarters prior to the Company’s close of business on the last business day that occurs prior to the Expiration Date. Such notice shall specify the number of shares of Stock which the Participant elects to purchase, and shall be accompanied by payment of the Exercise Price for such shares of Stock indicated by the Participant’s election. Payment
 
3

shall be by cash or by check payable to the Company. Except as otherwise provided by the Committee before the Option is exercised: (i) all or a portion of the Exercise Price may be paid by the Participant by delivery of shares of Stock owned by the Participant and acceptable to the Committee having an aggregate Fair Market Value (valued as of the date of exercise) that is equal to the amount of cash that would otherwise be required; and (ii) the Participant may pay the Exercise Price by authorizing a third party to sell shares of Stock (or a sufficient portion of the shares) acquired upon exercise of the Option and remit to the Company a sufficient portion of the sale proceeds to pay the entire Exercise Price and any tax withholding resulting from such exercise. The Option shall not be exercisable if and to the extent the Company determines that such exercise would violate applicable state or Federal securities laws or the rules and regulations of any securities exchange on which the Stock is traded. If the Company makes such a determination, it shall use all reasonable efforts to obtain compliance with such laws, rules and regulations. In making any determination hereunder, the Company may rely on the opinion of counsel for the Company.
6. Withholding . All deliveries and distributions under these Option Terms are subject to withholding of all applicable taxes. At the election of the Participant, and subject to such rules and limitations as may be established by the Committee from time to time, such withholding obligations may be satisfied through the surrender of shares of Stock which the Participant already owns, or to which the Participant is otherwise entitled under the Plan; provided, however, that such shares may be used to satisfy not more than the Company’s minimum statutory withholding obligation (based on minimum statutory withholding rates for Federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income).
7. Transferability . Except as otherwise provided by the Committee, the Option is not transferable other than as designated by the Participant by will or by the laws of descent and distribution, and during the Participant’s life, may be exercised only by the Participant.
8. Definitions . For purposes of these Option Terms, words and phrases shall be defined as follows:
 
(a)	Change in Control . The term “Change in Control” shall be defined as set forth in the Plan.	
 
(b)	Date of Termination . A Participant’s “Date of Termination” means, with respect to an employee, the date on which the Participant’s employment with the Company and Subsidiaries terminates for any reason, and with respect to a Director, the date immediately following the last day on which the Participant serves as a Director; provided that a Date of Termination shall not be deemed to occur by reason of a Participant’s transfer of employment between the Company and a Subsidiary or between two Subsidiaries; further provided that a Date of Termination shall not be deemed to occur by reason of a Participant’s cessation of service as a Director if immediately following such cessation of service the Participant becomes or continues to be employed by the Company or a Subsidiary, nor by reason of a Participant’s termination of employment with the Company or a Subsidiary if immediately following such termination of employment the Participant becomes or continues to be a Director; and	
 
4

 	further provided that a Participant’s employment shall not be considered terminated while the Participant is on a leave of absence from the Company or a Subsidiary approved by the Participant’s employer.	
 
(c)	Director . The term “Director” means a member of the Board, who may or may not be an employee of the Company or a Subsidiary.	
 
(d)	Disability . The Participant shall be considered to have a “Disability” during the period in which the Participant is unable, by reason of a medically determinable physical or mental impairment, to engage in any substantial gainful activity, which condition, in the opinion of a physician selected by the Committee, is expected to have a duration of not less than 120 days.	
 
(e)	Retirement . The term “Retirement” means an employee who’s Date of Termination occurs after satisfying all of the following: (i) the employee has provided at least ten years of service with the Company or a Related Company; (ii) the employee has attained at least age 62; and (iii) the employee terminates employment in good standing with the Company or a Related Company, and (iv) the employee executes an agreement and release as required by the Company which will include, without limitation, a general release, and non-competition and non-solicitation provisions. However, with respect to exercising vested options pursuant to 4(c), above, “Retirement” shall mean the occurrence of a Participant’s Date of Termination with the consent of the Participant’s employer after the Participant is eligible for early retirement or normal retirement under a retirement plan maintained by the Company or the Subsidiaries.	
 
(f)	Plan Definitions . Except where the context clearly implies or indicates the contrary, a word, term, or phrase used in the Plan is similarly used in these Option Terms.	
9. Heirs and Successors . The Option Terms shall be binding upon, and inure to the benefit of, the Company and its successors and assigns, and upon any person acquiring, whether by merger, consolidation, purchase of assets or otherwise, all or substantially all of the Company’s assets and business. If any rights exercisable by the Participant or benefits deliverable to the Participant under these Option Terms have not been exercised or delivered, respectively, at the time of the Participant’s death, such rights shall be exercisable by the Designated Beneficiary, and such benefits shall be delivered to the Designated Beneficiary, in accordance with the provisions of these Option Terms and the Plan. The “Designated Beneficiary” shall be the beneficiary or beneficiaries designated by the Participant in a writing filed with the Committee in such form and at such time as the Committee shall require. If a deceased Participant fails to designate a beneficiary, or if the Designated Beneficiary does not survive the Participant, any rights that would have been exercisable by the Participant and any benefits distributable to the Participant shall be exercised by or distributed to the legal representative of the estate of the Participant. If a deceased Participant designates a beneficiary and the Designated Beneficiary survives the Participant but dies before the Designated Beneficiary’s exercise of all rights under these Option Terms or before the complete distribution of benefits to the Designated Beneficiary under these Option Terms, then any rights that would have been exercisable by the Designated Beneficiary shall be exercised by the legal representative of the estate of the Designated Beneficiary, and any benefits distributable to the Designated Beneficiary shall be distributed to the legal representative of the estate of the Designated Beneficiary.
 
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10. Administration . The authority to manage and control the operation and administration of these Option Terms shall be vested in the Committee, and the Committee shall have all powers with respect to these Option Terms as it has with respect to the Plan. Any interpretation of the Agreement by the Committee and any decision made by it with respect to the Agreement is final and binding on all persons.
11. Plan and Corporate Records Govern . Notwithstanding anything in these Option Terms to the contrary, these Option Terms shall be subject to the terms of the Plan, a copy of which may be obtained by the Participant from the office of the Secretary of the Company; and these Option Terms are subject to all interpretations, amendments, rules and regulations promulgated by the Committee from time to time pursuant to the Plan. Notwithstanding anything in the Option Terms to the contrary, in the event of any discrepancies between the corporate records regarding this award and the Record-Keeping System, the corporate records shall control.
12. Not An Employment Contract . The Option will not confer on the Participant any right with respect to continuance of employment or other service with the Company or any Subsidiary, nor will it interfere in any way with any right the Company or any Subsidiary would otherwise have to terminate or modify the terms of such Participant’s employment or other service at any time.
13. Notices . Any written notices provided for in these Option Terms or the Plan shall be in writing and shall be deemed sufficiently given if either hand delivered or if sent by fax or overnight courier, or by postage paid first class mail. Notices sent by mail shall be deemed received three business days after mailing but in no event later than the date of actual receipt. Notices shall be directed, if to the Participant, at the Participant’s address indicated by the Company’s records, or if to the Company, at the Company’s principal executive office.
14. Fractional Shares . In lieu of issuing a fraction of a share upon any exercise of the Option, resulting from an adjustment of the Option pursuant to paragraph 5.2(f) of the Plan or otherwise, the Company will be entitled to pay to the Participant an amount equal to the fair market value of such fractional share.
15. No Rights As Shareholder . The Participant shall not have any rights of a shareholder with respect to the shares subject to the Option, until a stock certificate has been duly issued following exercise of the Option as provided herein.
16. Amendment . The Option Terms may be amended in accordance with the provisions of the Plan, and may otherwise be amended by written agreement of the Participant and the Company without the consent of any other person.
 
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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:	 	 	
 
7

Exhibit 10.2
For Awards for Messrs. Greenberg and Cusumano
Non-Qualified Stock Option Terms
under the
ACE Limited 2004 Long-Term Incentive Plan
The Participant has been granted an Option by ACE Limited (the “Company”) under the ACE Limited 2004 Long-Term Incentive Plan (the “Plan”). The Option shall be subject to the following Non-Qualified Stock Option Terms (sometimes referred to as the “Option Terms”):
1. Terms of Award . The following words and phrases used in these Option Terms shall have the meanings set forth in this paragraph 1:
 
(a)	The “Participant” is the individual recipient of the Non-Qualified Stock Option Award on the specified Grant Date.	
 
(b)	The “Grant Date” is [Insert Date] .	
 
(c)	The number of “Covered Shares” shall be that number of shares of Stock awarded to the Participant on the Grant Date as reflected in the corporate records and shown in the Record-Keeping System in the Participant’s individual account records.	
 
(d)	The “Exercise Price” is $ [Insert Price] per share.	
Other words and phrases used in these Option Terms are defined pursuant to paragraph 8 or elsewhere in these Option Terms.
2. Non-Qualified Stock Option . The Option is not intended to constitute an “incentive stock option” as that term is used in Code section 422.
3. Date of Exercise . Subject to the limitations of these Option Terms, each Installment of Covered Shares of the Option shall be exercisable on and after the Vesting Date for such Installment as described in the following schedule (but only if the Date of Termination has not occurred before the Vesting Date):

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

Notwithstanding the foregoing provisions of this paragraph 3, the Option shall become fully vested and exercisable as follows, with the exception of paragraph (c):
 
(a)	The Option shall become fully exercisable upon the Date of Termination, if the Date of Termination occurs by reason of the Participant’s death or Disability.	
 
(b)	If the Participant’s Date of Termination is a Change in Control Date of Termination (as defined below), then, for Installments, if any, as to which the Restricted Period has not ended prior to the Participant’s Date of Termination, the Restricted Period will end and such Installments will become exercisable on the Change in Control Date of Termination; provided that if the Participant’s Change in Control Date of Termination occurs within the 180-day period immediately preceding the date of a Change in Control, then all unvested Installments held by the Participant on the Date of Termination will become exercisable on the date of the Change in Control, subject to the following:	
(i) All Installments (including those that become exercisable under this paragraph (b)) shall remain exercisable until the earlier of (A) the three year anniversary of the Date of Termination or (B) the Option’s originally scheduled expiration date. If the originally scheduled expiration date for the Option occurs before the date of the Change in Control, then the Option will not become exercisable under this paragraph (b).
(ii) “Change in Control Date of Termination” means (A) the Participant’s Date of Termination that occurs for any reason (including, without limitation, voluntary resignation of the Participant with or without Good Reason) during the first calendar month that begins on or after the six-month anniversary of the date of a Change in Control or (B) the Participant’s Date of Termination occurs because the Company and/or any of the Related Companies terminates the Participant’s employment with the Company and/or the Related Companies without Cause (other than due to death, a Disability or a Retirement) or because the Participant terminates his or her employment for Good Reason, provided that such termination in accordance with this clause (B) occurs during the period commencing on the 180th day immediately preceding a Change in Control date and ending on the two year anniversary of such Change in Control date.
(iii) To the extent that the terms of the ACE Limited Executive Severance Plan would otherwise apply to this Stock Option Award, vesting shall be subject to Section 10.4(b) of that plan rather than Section 10.4(a) of that plan.
(iv) For purposes of this paragraph (b), the terms “Disability,” “Retirement,” “Cause” and “Good Reason” shall have the meanings ascribed to them in the Executive Severance Plan.
[The following paragraph (v) should be included in the award terms for awards that are granted less than 181 days after the Severance Plan amendment is adopted. The paragraph should not be included in the award terms for awards that are granted more than 180 days after the Severance Plan amendment is adopted.]
(v) Notwithstanding the foregoing provisions of this paragraph (b), if: (A) a Change in Control occurs before the Restricted Period has ended for all Installments, (B) the Change in Control occurs on or before the Date of Termination, and (C) the Change in Control occurs before [insert date that is 181 days after the date of the Board’s adoption of the Severance Plan amendment], then the Option shall become fully exercisable upon a Change in Control.
 
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(c)	For Installments as to which the Restricted Period has not ended prior to the Date of Termination, if the Date of Termination occurs by reason of the Participant’s Retirement, vesting shall continue pursuant to the foregoing schedule following the Date of Termination. Following the Date of Termination the Restricted Period shall end in accordance with the above schedule.	
Except as specified in paragraphs (b) and (c), the Option may be exercised on or after the Date of Termination only as to that portion of the Covered Shares for which it was exercisable (or became exercisable) immediately prior to the Date of Termination.
4. Expiration . The Option shall not be exercisable after the Company’s close of business on the last business day that occurs prior to the Expiration Date. The “Expiration Date” shall be the earliest to occur of:
 
(a)	the ten-year anniversary of the Grant Date;	
 
(b)	if the Participant’s Date of Termination occurs by reason of death or Disability, the one-year anniversary of such Date of Termination;	
 
(c)	if the Participant’s Date of Termination occurs by reason of Retirement, the date on which the Expiration Date would occur if the Participant’s Date of Termination occurred on the ten-year anniversary of the Grant Date, or if earlier, the date of the Participant’s death; or	
 
(d)	if the Participant’s Date of Termination occurs for any reason other than those listed in subparagraph (b) or (c) of this paragraph 4, then subject to paragraph 3(b), the three-month anniversary of such Date of Termination.	
5. Method of Option Exercise . Subject to these Option Terms and the Plan, the Option may be exercised in whole or in part by filing a written notice (or by such other method as may be provided by the Committee, including but not limited to processes provided in electronic record-keeping systems utilized for management of the Plan) with the Secretary of the Company at its corporate headquarters prior to the Company’s close of business on the last business day that occurs prior to the Expiration Date. Such notice shall specify the number of shares of Stock which the Participant elects to purchase, and shall be accompanied by payment of the Exercise Price for such shares of Stock indicated by the Participant’s election. Payment shall be by cash or by check payable to the Company. Except as otherwise provided by the Committee before the Option is exercised: (i) all or a portion of the Exercise Price may be paid by the Participant by delivery of shares of Stock owned by the Participant and acceptable to the Committee having an aggregate Fair Market Value (valued as of the date of exercise) that is equal to the amount of cash that would otherwise be required; and (ii) the Participant may pay the Exercise Price by authorizing a third party to sell shares of Stock (or a sufficient portion of the shares) acquired upon exercise of the Option and remit to the Company a sufficient portion of the sale proceeds to pay the entire Exercise Price and any tax withholding resulting from such exercise. The Option shall not be exercisable if and to the extent the Company determines that such exercise would
 
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violate applicable state or Federal securities laws or the rules and regulations of any securities exchange on which the Stock is traded. If the Company makes such a determination, it shall use all reasonable efforts to obtain compliance with such laws, rules and regulations. In making any determination hereunder, the Company may rely on the opinion of counsel for the Company.
6. Withholding . All deliveries and distributions under these Option Terms are subject to withholding of all applicable taxes. At the election of the Participant, and subject to such rules and limitations as may be established by the Committee from time to time, such withholding obligations may be satisfied through the surrender of shares of Stock which the Participant already owns, or to which the Participant is otherwise entitled under the Plan; provided, however, that such shares may be used to satisfy not more than the Company’s minimum statutory withholding obligation (based on minimum statutory withholding rates for Federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income).
7. Transferability . Except as otherwise provided by the Committee, the Option is not transferable other than as designated by the Participant by will or by the laws of descent and distribution, and during the Participant’s life, may be exercised only by the Participant.
8. Definitions . For purposes of these Option Terms, words and phrases shall be defined as follows:
 
(a)	Change in Control . The term “Change in Control” shall be defined as set forth in the Plan.	
 
(b)	Date of Termination . A Participant’s “Date of Termination” means, with respect to an employee, the date on which the Participant’s employment with the Company and Subsidiaries terminates for any reason, and with respect to a Director, the date immediately following the last day on which the Participant serves as a Director; provided that a Date of Termination shall not be deemed to occur by reason of a Participant’s transfer of employment between the Company and a Subsidiary or between two Subsidiaries; further provided that a Date of Termination shall not be deemed to occur by reason of a Participant’s cessation of service as a Director if immediately following such cessation of service the Participant becomes or continues to be employed by the Company or a Subsidiary, nor by reason of a Participant’s termination of employment with the Company or a Subsidiary if immediately following such termination of employment the Participant becomes or continues to be a Director; and further provided that a Participant’s employment shall not be considered terminated while the Participant is on a leave of absence from the Company or a Subsidiary approved by the Participant’s employer.	
 
(c)	Director . The term “Director” means a member of the Board, who may or may not be an employee of the Company or a Subsidiary.	
 
(d)	Disability . The Participant shall be considered to have a “Disability” during the period in which the Participant is unable, by reason of a medically determinable physical or mental impairment, to engage in any substantial gainful activity, which condition, in the opinion of a physician selected by the Committee, is expected to have a duration of not less than 120 days.	
 
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(e)	Retirement . The term “Retirement” means an employee who’s Date of Termination occurs after satisfying all of the following: (i) the employee has provided at least ten years of service with the Company or a Related Company; (ii) the employee has attained at least age 62; and (iii) the employee terminates employment in good standing with the Company or a Related Company, and (iv) the employee executes an agreement and release as required by the Company which will include, without limitation, a general release, and non-competition and non-solicitation provisions. However, with respect to exercising vested options pursuant to 4(c), above, “Retirement” shall mean the occurrence of a Participant’s Date of Termination with the consent of the Participant’s employer after the Participant is eligible for early retirement or normal retirement under a retirement plan maintained by the Company or the Subsidiaries.	
 
(f)	Plan Definitions . Except where the context clearly implies or indicates the contrary, a word, term, or phrase used in the Plan is similarly used in these Option Terms.	
9. Heirs and Successors . The Option Terms shall be binding upon, and inure to the benefit of, the Company and its successors and assigns, and upon any person acquiring, whether by merger, consolidation, purchase of assets or otherwise, all or substantially all of the Company’s assets and business. If any rights exercisable by the Participant or benefits deliverable to the Participant under these Option Terms have not been exercised or delivered, respectively, at the time of the Participant’s death, such rights shall be exercisable by the Designated Beneficiary, and such benefits shall be delivered to the Designated Beneficiary, in accordance with the provisions of these Option Terms and the Plan. The “Designated Beneficiary” shall be the beneficiary or beneficiaries designated by the Participant in a writing filed with the Committee in such form and at such time as the Committee shall require. If a deceased Participant fails to designate a beneficiary, or if the Designated Beneficiary does not survive the Participant, any rights that would have been exercisable by the Participant and any benefits distributable to the Participant shall be exercised by or distributed to the legal representative of the estate of the Participant. If a deceased Participant designates a beneficiary and the Designated Beneficiary survives the Participant but dies before the Designated Beneficiary’s exercise of all rights under these Option Terms or before the complete distribution of benefits to the Designated Beneficiary under these Option Terms, then any rights that would have been exercisable by the Designated Beneficiary shall be exercised by the legal representative of the estate of the Designated Beneficiary, and any benefits distributable to the Designated Beneficiary shall be distributed to the legal representative of the estate of the Designated Beneficiary.
10. Administration . The authority to manage and control the operation and administration of these Option Terms shall be vested in the Committee, and the Committee shall have all powers with respect to these Option Terms as it has with respect to the Plan. Any interpretation of the Agreement by the Committee and any decision made by it with respect to the Agreement is final and binding on all persons.
 
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11. Plan Governs . Notwithstanding anything in these Option Terms to the contrary, these Option Terms shall be subject to the terms of the Plan, a copy of which may be obtained by the Participant from the office of the Secretary of the Company; and these Option Terms are subject to all interpretations, amendments, rules and regulations promulgated by the Committee from time to time pursuant to the Plan. Notwithstanding anything in the Option Terms to the contrary, in the event of any discrepancies between the corporate records regarding this award and the Record-Keeping System, the corporate records shall control.
12. Not An Employment Contract . The Option will not confer on the Participant any right with respect to continuance of employment or other service with the Company or any Subsidiary, nor will it interfere in any way with any right the Company or any Subsidiary would otherwise have to terminate or modify the terms of such Participant’s employment or other service at any time.
13. Notices . Any written notices provided for in these Option Terms or the Plan shall be in writing and shall be deemed sufficiently given if either hand delivered or if sent by fax or overnight courier, or by postage paid first class mail. Notices sent by mail shall be deemed received three business days after mailing but in no event later than the date of actual receipt. Notices shall be directed, if to the Participant, at the Participant’s address indicated by the Company’s records, or if to the Company, at the Company’s principal executive office.
14. Fractional Shares . In lieu of issuing a fraction of a share upon any exercise of the Option, resulting from an adjustment of the Option pursuant to paragraph 5.2(f) of the Plan or otherwise, the Company will be entitled to pay to the Participant an amount equal to the fair market value of such fractional share.
15. No Rights As Shareholder . The Participant shall not have any rights of a shareholder with respect to the shares subject to the Option, until a stock certificate has been duly issued following exercise of the Option as provided herein.
16. Amendment . The Option Terms may be amended in accordance with the provisions of the Plan, and may otherwise be amended by written agreement of the Participant and the Company without the consent of any other person.
IN WITNESS WHEREOF, the Company has caused these presents to be executed in its name and on its behalf, all as of the Grant Date.

ACE LIMITED	
		
By:	 	 	
Its:	 	 	
 
6

Exhibit 10.3
For Awards for Messrs. Greenberg and Cusumano
Restricted Stock Award Terms
under the
ACE Limited 2004 Long-Term Incentive Plan
The Participant has been granted a Restricted Stock Award by ACE Limited (the “Company”) under the ACE Limited 2004 Long-Term Incentive Plan (the “Plan”). The Restricted Stock Award shall be subject to the following Restricted Stock Award Terms:
1. Terms of Award . The following words and phrases used in these Restricted Stock Award Terms shall have the meanings set forth in this paragraph 1:
 
(a)	The “Participant” is the individual recipient of the Restricted Stock Award on the specified Grant Date.	
 
(b)	The “Grant Date” is ( Insert Date )	
 
(c)	The number of “Covered Shares” shall be that number of shares of Stock awarded to the Participant on the Grant Date as reflected in the corporate records and shown in the Record-Keeping System in the Participant’s individual account records.	
Other words and phrases used in these Restricted Stock Award Terms are defined pursuant to paragraph 9 or elsewhere in these Restricted Stock Award Terms.
2. Restricted Period . Subject to the limitations of these Restricted Stock Award Terms, the “Restricted Period” for each Installment of Covered Shares of the Restricted Stock Award shall begin on the Grant Date and end as described in the following schedule (but only if the Date of Termination has not occurred before the end of the Restricted Period):

INSTALLMENT	  	RESTRICTED PERIOD
WILL END ON:	
1/4 of Covered Shares	  	One year anniversary of the Grant Date	
1/4 of Covered Shares	  	Two year anniversary of the Grant Date	
1/4 of Covered Shares	  	Three year anniversary of the Grant Date	
1/4 of Covered Shares	  	Four year anniversary of the Grant Date	
The Restricted Period shall end prior to the date specified in the foregoing schedule to the extent set forth below:
 
(a)	For Installments as to which the Restricted Period has not ended prior to the Date of Termination, the Restricted Period for such Installments shall end upon the Participant’s Date of Termination, if the Date of Termination occurs by reason of the Participant’s death.	

(b)	For Installments as to which the Restricted Period has not ended prior to the Date of Termination, the Restricted Period for such Installments shall end upon the Participant’s Date of Termination, if the Date of Termination occurs by reason of the Participant’s Long-Term Disability.	
 
(c)	If the Participant’s Date of Termination is a Change in Control Date of Termination (as defined below), then, for Installments, if any, as to which the Restricted Period has not ended prior to the Participant’s Date of Termination, the Restricted Period will end on the Change in Control Date of Termination; provided that if the Participant’s Change in Control Date of Termination occurs within the 180-day period immediately preceding the date of a Change in Control, then the Restricted Period for all unvested Installments held by the Participant on the Date of Termination will end, and those Installments will vest on the date of a Change in Control, subject to the following:	
(i) “Change in Control Date of Termination” means (A) the Participant’s Date of Termination that occurs for any reason (including, without limitation, voluntary resignation of the Participant with or without Good Reason) during the first calendar month that begins on or after the six month anniversary of the date of a Change in Control or (B) the Participant’s Date of Termination that occurs because the Company and/or any of the Related Companies terminates the Participant’s employment with the Company and/or the Related Companies without Cause (other than due to death, a Disability or a Retirement) or because the Participant terminates his or her employment for Good Reason, provided that such termination in accordance with this clause (B) occurs during the period commencing on the 180th day immediately preceding a Change in Control date and ending on the two year anniversary of such Change in Control date.
(ii) To the extent that the terms of the ACE Limited Executive Severance Plan would otherwise apply to this Restricted Stock Award, vesting shall be subject to Section 10.4(b) of that plan rather than Section 10.4(a) of that plan.
(iii) For purposes of this paragraph (c), the terms “Disability,” “Retirement,” “Cause” and “Good Reason” shall have the meanings ascribed to them in the Executive Severance Plan.
[The following paragraph (iv) should be included in the award terms for awards that are granted less than 181 days after the Severance Plan amendment is adopted. The paragraph should not be included in the award terms for awards that are granted more than 180 days after the Severance Plan amendment is adopted.]
(iv) Notwithstanding the foregoing provisions of this paragraph (c), if: (A) a Change in Control occurs before the Restricted Period has ended for all Installments, (B) the Change in Control occurs on or before the Date of Termination, and (C) the Change in Control occurs before [insert date that is 181 days after the date of the Board’s adoption of the Severance Plan amendment], then Restricted Period for such Installments shall end upon a Change in Control.
 
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3. Transfer and Forfeiture of Shares . Except as otherwise determined by the Committee in its sole discretion, the Participant shall forfeit the Installments of the Covered Shares as of the Participant’s Date of Termination, if such Date of Termination occurs prior to the end of the Restricted Period which applies to those Installments. If the Participant’s Date of Termination has not occurred prior to the last day of the Restricted Period with respect to any Installment of the Covered Shares, then, at the end of such Restricted Period, that Installment of Covered Shares shall be transferred to the Participant free of all restrictions.
4. Withholding . All deliveries and distributions under These Restricted Stock Award Terms are subject to withholding of all applicable taxes. At the election of the Participant, and subject to such rules and limitations as may be established by the Committee from time to time, such withholding obligations may be satisfied through the surrender of shares of Stock which the Participant already owns, or to which the Participant is otherwise entitled under the Plan; provided, however, that such shares may be used to satisfy not more than the Company’s minimum statutory withholding obligation (based on minimum statutory withholding rates for Federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income).
5. Transferability . Except as otherwise provided by the Committee, the Restricted Stock Award may not be sold, assigned, transferred, pledged or otherwise encumbered during the Restricted Period.
6. Dividends . The Participant shall not be prevented from receiving dividends and distributions paid on the Covered Shares of Restricted Stock merely because those shares are subject to the restrictions imposed by these Restricted Stock Award Terms and the Plan; provided, however that no dividends or distributions shall be payable to or for the benefit of the Participant with respect to record dates for such dividends or distributions for any Covered Shares occurring on or after the date, if any, on which the Participant has forfeited those shares.
7. Voting . The Participant shall not be prevented from voting the Restricted Stock Award merely because those shares are subject to the restrictions imposed by these Restricted Stock Award Terms and the Plan; provided, however, that the Participant shall not be entitled to vote Covered Shares with respect to record dates for any Covered Shares occurring on or after the date, if any, on which the Participant has forfeited those shares.
8. Deposit of Restricted Stock Award . Each certificate issued in respect of the Covered Shares awarded under these Restricted Stock Award Terms shall be registered in the name of the Participant and shall be deposited in a bank designated by the Committee.
9. Definitions . For purposes of these Restricted Stock Award Terms, words and phrases shall be defined as follows:
 
(a)	Change in Control . The term “Change in Control” shall be defined as set forth in the Plan.	
 
(b)	Date of Termination . A Participant’s “Date of Termination” means, with respect to an employee, the date on which the Participant’s employment with the Company and Related Companies terminates for any reason, and with respect to a Director, the date	
 
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 	immediately following the last day on which the Participant serves as a Director; provided that a Date of Termination shall not be deemed to occur by reason of a Participant’s transfer of employment between the Company and a Related Company or between two Related Companies; further provided that a Date of Termination shall not be deemed to occur by reason of a Participant’s cessation of service as a Director if immediately following such cessation of service the Participant becomes or continues to be employed by the Company or a Related Company, nor by reason of a Participant’s termination of employment with the Company or a Related Company if immediately following such termination of employment the Participant becomes or continues to be a Director; and further provided that a Participant’s employment shall not be considered terminated while the Participant is on a leave of absence from the Company or a Related Company approved by the Participant’s employer.	
 
(c)	Director . The term “Director” means a member of the Board, who may or may not be an employee of the Company or a Related Company.	
 
(d)	Long-Term Disability . A Participant shall be considered to have a “Long-Term Disability” if the Participant is determined to be eligible for long-term disability benefits under the long-term disability plan in which the Participant participates and which is sponsored by the Company or a Related Company; or if the Participant does not participate in a long-term disability plan sponsored by the Company or a Related Company, then the Participant shall be considered to have a “Long-Term Disability” if the Committee determines, under standards comparable to those of the Company’s long-term disability plan, that the Participant would be eligible for long-term disability benefits if he or she participated in such plan.	
 
(e)	Plan Definitions . Except where the context clearly implies or indicates the contrary, a word, term, or phrase used in the Plan is similarly used in these Restricted Stock Award Terms.	
10. Heirs and Successors . These Restricted Stock Award Terms shall be binding upon, and inure to the benefit of, the Company and its successors and assigns, and upon any person acquiring, whether by merger, consolidation, purchase of assets or otherwise, all or substantially all of the Company’s assets and business. If any benefits deliverable to the Participant under these Restricted Stock Award Terms have not been delivered at the time of the Participant’s death, such benefits shall be delivered to the Designated Beneficiary, in accordance with the provisions of these Restricted Stock Award Terms and the Plan. The “Designated Beneficiary” shall be the beneficiary or beneficiaries designated by the Participant in a writing filed with the Committee in such form and at such time as the Committee shall require. If a deceased Participant fails to designate a beneficiary, or if the Designated Beneficiary does not survive the Participant, any rights that would have been exercisable by the Participant and any benefits distributable to the Participant shall be distributed to the legal representative of the estate of the Participant. If a deceased Participant designates a beneficiary and the Designated Beneficiary survives the Participant but dies before the complete distribution of benefits to the Designated Beneficiary under these Restricted Stock Award Terms, then any benefits distributable to the Designated Beneficiary shall be distributed to the legal representative of the estate of the Designated Beneficiary.
 
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11. Administration . The authority to manage and control the operation and administration of these Restricted Stock Award Terms shall be vested in the Committee, and the Committee shall have all powers with respect to these Restricted Stock Award Terms as it has with respect to the Plan. Any interpretation of these Restricted Stock Award Terms by the Committee and any decision made by it with respect to these Restricted Stock Award Terms are final and binding on all persons.
12. Plan and Corporate Records Govern . Notwithstanding anything in these Restricted Stock Award Terms to the contrary, these Restricted Stock Award Terms shall be subject to the terms of the Plan, a copy of which may be obtained by the Participant from the office of the Secretary of the Company; and these Restricted Stock Award Terms are subject to all interpretations, amendments, rules and regulations promulgated by the Committee from time to time pursuant to the Plan. Notwithstanding anything in the Restricted Stock Award Terms to the contrary, in the event of any discrepancies between the corporate records regarding this award and the Record-Keeping System, the corporate records shall control.
13. Not An Employment Contract . The Restricted Stock Award will not confer on the Participant any right with respect to continuance of employment or other service with the Company or any Related Company, nor will it interfere in any way with any right the Company or any Related Company would otherwise have to terminate or modify the terms of such Participant’s employment or other service at any time.
14. Notices . Any written notices provided for in these Restricted Stock Award Terms or the Plan shall be in writing and shall be deemed sufficiently given if either hand delivered or if sent by fax or overnight courier, or by postage paid first class mail. Notices sent by mail shall be deemed received three business days after mailing but in no event later than the date of actual receipt. Notices shall be directed, if to the Participant, at the Participant’s address indicated by the Company’s records, or if to the Company, at the Company’s principal executive office.
15. Fractional Shares . In lieu of issuing a fraction of a share, resulting from an adjustment of the Restricted Stock Award pursuant to paragraph 5.2(f) of the Plan or otherwise, the Company will be entitled to pay to the Participant an amount equal to the fair market value of such fractional share.
16. Amendment . These Restricted Stock Award Terms may be amended in accordance with the provisions of the Plan, and may otherwise be amended by written agreement of the Participant and the Company without the consent of any other person.
IN WITNESS WHEREOF, the Company has caused these presents to be executed in its name and on its behalf, all as of the Grant Date.

ACE LIMITED	
		
By:	 	 	
Its	 	 	
 
5

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    August 4, 2011

/s/ Evan G. Greenberg	
Evan G. Greenberg	
Chairman and Chief
Executive Officer	

Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Philip V. Bancroft, certify that:
 
 	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    August 4, 2011

/s/ Philip V. Bancroft	
Philip V. Bancroft	
Chief Financial Officer	

Exhibit 32.1
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned officer of ACE Limited (the “Corporation”) hereby certifies that the Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, fully complies with the applicable reporting requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of ACE Limited.

Dated: August 4, 2011	  		 	/s/ Evan G. Greenberg
Evan G. Greenberg
Chairman and Chief
Executive Officer	

Exhibit 32.2
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned officer of ACE Limited (the “Corporation”) hereby certifies that the Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, fully complies with the applicable reporting requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of ACE Limited.

Dated: August 4, 2011	  		 	/s/ Philip V. Bancroft	
	  		 	Philip V. Bancroft	
	  		 	Chief Financial Officer