Table	of	Contents

# UNITED	STATES	SECURITIES	AND	EXCHANGE	COMMISSION

# Annual	Report	Pursuant	to	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934

For	the	fiscal	year	ended	December	31,	2008

Transition	Report	Pursuant	to	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934

# ACE	LIMITED

(Exact	name	of	registrant	as	specified	in	its	charter)

Switzerland

(State	or	other	jurisdiction	of	incorporation	or	organization)

(I.R.S.	Employer	Identification	No.)

# Bärengasse	32

Zurich,	Switzerland	CH-8001

(Address	of	principal	executive	offices,	Zip	Code)

(Registrant's	telephone	number,	including	area	code)

# Securities	registered	pursuant	to	Section	12(b)	of	the	Act:

# Securities	registered	pursuant	to	Section	12(g)	of	the	Act:	None

Indicate	by	check	mark	if	the	registrant	is	a	well-known	seasoned	issuer,	as	defined	in	Rule	405	of	the	Securities	Act.		YES þ		NO		¨ Indicate	by	check	mark	if	the	registrant	is	not	required	to	file	reports	pursuant	to	Section	13	or	Section	15(d)	of	the	Act.		YES ¨		NO		þ

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	periods	that	the	registrant	was	required	to	file	such	reports),	and	(2)	has	been	subject	to	such	filing requirements	for	the	past	90	days.		YES		þ		NO		¨

Indicate	by	check	mark	if	disclosure	of	delinquent	filers	pursuant	to	Item	405	of	Regulation	S-K	is	not	contained	herein,	and	will	not	be	contained,	to	the best	of	the	registrant's	knowledge,	in	definitive	proxy	or	information	statements	incorporated	by	reference	into	Part	III	of	this	Form	10-K	or	any amendment	to	this	Form	10-K.		¨

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	the	definitions	of	"large	accelerated	filer,"	"accelerated	filer"	and	"smaller	reporting	company"	in	Rule	12b-2	of	the	Exchange	Act.	(Check	one):

Non-accelerated	filer		¨												(Do	not	check	if	a	smaller	reporting	company)	Smaller	reporting	company		 ¨

Indicate	by	check	mark	whether	the	registrant	is	a	shell	company	(as	defined	in	Rule	12b-2	of	the	Exchange	Act)		YES ¨		NO		þ

The	aggregate	market	value	of	voting	stock	held	by	non-affiliates	as	of	June	30,	2008	(the	last	business	day	of	the	registrant's	most	recently	completed second	fiscal	quarter),	was	approximately	$18	billion.	For	the	purposes	of	this	computation,	shares	held	by	directors	and	officers	of	the	registrant	have been	excluded.	Such	exclusion	is	not	intended,	nor	shall	it	be	deemed,	to	be	an	admission	that	such	persons	are	affiliates	of	the	registrant.

# Documents	Incorporated	By	Reference

Certain	portions	of	the	registrant's	definitive	proxy	statement	relating	to	its	2009	Annual	General	Meeting	of	Shareholders	are	incorporated	by	reference in	Part	III	of	this	report.

# ACE	LIMITED	INDEX	TO	10-K

# PART	I

# CAUTIONARY	STATEMENT	REGARDING	FORWARD-LOOKING	INFORMATION

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	Securities	and	Exchange	Commission	(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 could	affect	our	statement	of	operations,	investment	portfolio,	financial	position	and	financing	plans;

•	general	economic	and	business	conditions	resulting	from	recent	declines	in	the	stock	markets	and	tightening	of	credit;

•	losses	arising	out	of	natural	or	man-made	catastrophes	such	as	hurricanes,	typhoons,	earthquakes,	floods,	or	terrorism	which	could	be	affected	by:

•	the	number	of	insureds	and	ceding	companies	affected,

•	the	amount	and	timing	of	losses	actually	incurred	and	reported	by	insureds,

•	the	impact	of	these	losses	on	our	reinsurers	and	the	amount	and	timing	of	reinsurance	recoverables	actually	received,

•	the	cost	of	building	materials	and	labor	to	reconstruct	properties	following	a	catastrophic	event,	and

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

•	actions	that	rating	agencies	may	take	from	time	to	time,	such	as	financial	strength	or	credit	ratings	downgrades	or	placing	these	ratings	on	credit	watch negative	or	the	equivalent;

•	global	political	conditions,	the	occurrence	of	any	terrorist	attacks,	including	any	nuclear,	radiological,	biological,	or	chemical	events,	or	the	outbreak	and effects	of	war,	and	possible	business	disruption	or	economic	contraction	that	may	result	from	such	events;

•	the	ability	to	collect	reinsurance	recoverables,	credit	developments	of	reinsurers,	and	any	delays	with	respect	thereto	and	changes	in	the	cost,	quality, or	availability	of	reinsurance;

•	actual	loss	experience	from	insured	or	reinsured	events	and	the	timing	of	claim	payments;

•	the	uncertainties	of	the	loss-reserving	and	claims-settlement	processes,	including	the	difficulties	associated	with	assessing	environmental	damage	and asbestos-related	latent	injuries,	the	impact	of	aggregate-policy-coverage	limits,	and	the	impact	of	bankruptcy	protection	sought	by	various	asbestos producers	and	other	related	businesses	and	the	timing	of	loss	payments;

•	judicial	decisions	and	rulings,	new	theories	of	liability,	legal	tactics,	and	settlement	terms;

•	the	effects	of	public	company	bankruptcies	and/or	accounting	restatements,	as	well	as	disclosures	by	and	investigations	of	public	companies	relating	to possible	accounting	irregularities,	and	other	corporate	governance	issues,	including	the	effects	of	such	events	on:

•	the	capital	markets,

•	the	markets	for	directors	and	officers	and	errors	and	omissions	insurance,	and

•	claims	and	litigation	arising	out	of	such	disclosures	or	practices	by	other	companies;

•	uncertainties	relating	to	governmental,	legislative	and	regulatory	policies,	developments,	actions,	investigations	and	treaties,	which,	among	other	things,

could	subject	us	to	insurance	regulation	or	taxation	in	additional	jurisdictions	or	affect	our	current	operations;

•	the	actual	amount	of	new	and	renewal	business,	market	acceptance	of	our	products,	and	risks	associated	with	the	introduction	of	new	products	and services	and	entering	new	markets,	including	regulatory	constraints	on	exit	strategies;

•	the	competitive	environment	in	which	we	operate,	including	trends	in	pricing	or	in	policy	terms	and	conditions,	which	may	differ	from	our	projections	and changes	in	market	conditions	that	could	render	our	business	strategies	ineffective	or	obsolete;

•	acquisitions	made	by	us,	performing	differently	than	expected,	our	failure	to	realize	anticipated	expense-related	efficiencies	or	growth	from	acquisitions,

or	the	impact	of	acquisitions	on	our	pre-existing	organization;

•	risks	associated	with	our	re-domestication	to	Switzerland,	including	possible	reduced	flexibility	with	respect	to	certain	aspects	of	capital	management and	the	potential	for	additional	regulatory	burdens;

•	the	potential	impact	from	government-mandated	insurance	coverage	for	acts	of	terrorism;

•	the	availability	of	borrowings	and	letters	of	credit	under	our	credit	facilities;

•	the	adequacy	of	collateral	supporting	funded	high	deductible	programs;

•	changes	in	the	distribution	or	placement	of	risks	due	to	increased	consolidation	of	insurance	and	reinsurance	brokers;

•	material	differences	between	actual	and	expected	assessments	for	guaranty	funds	and	mandatory	pooling	arrangements;

•	the	effects	of	investigations	into	market	practices	in	the	property	and	casualty	(P&C)	industry;

•	changing	rates	of	inflation	and	other	economic	conditions,	for	example,	recession;

•	the	amount	of	dividends	received	from	subsidiaries;

•	loss	of	the	services	of	any	of	our	executive	officers	without	suitable	replacements	being	recruited	in	a	reasonable	time	frame;

•	the	ability	of	our	technology	resources	to	perform	as	anticipated;	and

•	management's	response	to	these	factors	and	actual	events	(including,	but	not	limited	to,	those	described	above).

The	words	"believe,"	"anticipate,"	"estimate,"	"project,"	"should,"	"plan,"	"expect,"	"intend,"	"hope,"	"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.

ITEM	1. Business

# General	Development	of	Business

ACE	Limited	is	the	holding	company	of	the	ACE	Group	of	Companies.	ACE	opened	its	business	office	in	Bermuda	in	1985	and	continues	to	maintain significant	operations	in	Bermuda.	ACE	Limited,	which	is	now	headquartered	in	Zurich,	Switzerland,	and	its	direct	and	indirect	subsidiaries	(collectively, the	ACE	Group	of	Companies,	ACE,	the	Company,	we,	us,	or	our)	are	a	global	insurance	and	reinsurance	organization,	with	operating	subsidiaries	in more	than	50	countries	serving	the	needs	of	commercial	and	individual	customers	in	more	than	140	countries.	We	serve	the	property	and	casualty	(P&C) insurance	needs	of	businesses	of	all	sizes	in	a	broad	range	of	industries.	We	also	provide	specialized	insurance	products	–	such	as	personal	accident, supplemental	health	and	life	insurance	to	individuals	in	select	countries.	Our	reinsurance	operations	include	both	P&C	and	life	companies.	At December	31,	2008,	ACE	had	total	assets	of	approximately	$72	billion	and	shareholders'	equity	of	approximately	$14	billion.

In	July	2008,	our	shareholders	approved	proposals	submitted	by	our	Board	of	Directors	to	transfer	our	jurisdiction	of	incorporation	from	the Cayman	Islands	to	Zurich,	Switzerland,	our	new	jurisdiction	of	incorporation	(the	Continuation).	As	a	result	of	the	Continuation,	we	are	deregistered	in	the Cayman	Islands	and	are	now	subject	to	Swiss	law.	In	connection	with	the	Continuation,	we	changed	the	currency	in	which	the	par	value	of	our	Ordinary Shares	was	stated	from	U.S.	dollars	to	Swiss	francs.	Upon	the	effectiveness	of	the	Continuation,	our	Ordinary	Shares	became	Common	Shares. Notwithstanding	the	change	of	the	currency	in	which	the	par	value	of	Common	Shares	is	stated,	we	continue	to	use	U.S.	dollars	as	our	reporting	and functional	currency	for	preparing	our	Consolidated	Financial	Statements.	All	Common	Shares	are	registered	shares	with	a	current	par	value	of	CHF	33.14 each.

We	have	grown	our	business	through	increased	premium	volume,	expansion	of	product	offerings	and	geographic	reach,	and	acquisition	of	other companies.	On	April	1,	2008,	ACE	acquired	all	of	the	outstanding	shares	of	Combined	Insurance	Company	of	America	(Combined	Insurance)	and	certain of	its	subsidiaries	from	Aon	Corporation	for	$2.56	billion.	Our	2008	Consolidated	Financial	Statements	exclude	Combined	Insurance's	results	for	the	first quarter,	and	include	Combined	Insurance	from	April	1,	2008.	Combined	Insurance,	founded	in	1919	is	headquartered	in	Glenview,	Illinois,	and	is	a leading	underwriter	and	distributor	of	specialty	individual	accident	and	supplemental	health	insurance	products	targeted	to	middle	income	consumers	in the	U.S.,	Europe,	Canada,	and	Asia	Pacific.	Combined	Insurance	serves	close	to	four	million	policyholders	worldwide.	This	acquisition	has	diversified	our accident	and	health	(A&H)	distribution	capabilities	by	adding	a	significant	agent	base,	while	almost	doubling	our	A&H	franchise.	We	believe	this	will provide	significant	long-term	growth	opportunities.

# Employees

At	December	31,	2008,	there	were	approximately	15,000	employees	in	the	ACE	Group	of	Companies.	We	believe	that	employee	relations	are satisfactory.

# Customers

For	most	of	the	commercial	lines	of	business	that	we	offer,	insureds	typically	use	the	services	of	an	insurance	broker	or	agent.	An	insurance	broker	acts as	an	agent	for	the	insureds,	offering	advice	on	the	types	and	amount	of	insurance	to	purchase	and	also	assisting	in	the	negotiation	of	price	and	terms and	conditions.	We	obtain	business	from	the	local	and	major	international	insurance	brokers	and	typically	pay	a	commission	to	brokers	for	any	business accepted	and	bound.	Loss	of	all	or	a	substantial	portion	of	the	business	provided	by	one	or	more	of	these	brokers	could	have	a	material	adverse	effect	on our	business.	In	our	opinion,	no	material	part	of	our	business	is	dependent	upon	a	single	insured	or	group	of	insureds.	We	do	not	believe	that	the	loss	of any	one	insured	would	have	a	material	adverse	effect	on	our	financial	condition	or	results	of	operations	and	no	one	insured	or	group	of	affiliated	insureds account	for	as	much	as	10	percent	of	our	consolidated	revenues.

# Competition

Competition	in	the	insurance	and	reinsurance	marketplace	is	substantial,	although	a	number	of	competitors	were	weakened	during	the	year	as	a	result	of investment	and	underwriting	losses,	as	well	as	government	ownership.	Competition	varies	by	type	of	business	and	geographic	area.	Competitors	include other	stock	companies,	mutual	companies,	alternative	risk	sharing	groups	(such	as	group	captives	and	catastrophe	pools),	and	other	underwriting organizations.	These	companies	sell	through	various	distribution	channels	and	business	models,	across	a	broad	array	of	product	lines,	and	with	a	high level	of	variation	regarding	geographic,	marketing,	and	customer	segmentation.	We	compete	for	business	not	only	on	the	basis	of	price,	but	also

on	the	basis	of	availability	of	coverage	desired	by	customers	and	quality	of	service.	Our	ability	to	compete	is	dependent	on	a	number	of	factors, particularly	our	ability	to	maintain	the	appropriate	financial	strength	ratings	as	assigned	by	independent	rating	agencies.	Our	strong	capital	position	and global	platform	affords	us	opportunities	for	growth	not	available	to	smaller,	less	diversified	or	damaged	insurance	companies.	Refer	to	"Segment Information"	for	competitive	environment	by	segment.

# Trademarks	and	Trade	Names

We	use	various	trademarks	and	trade	names	in	our	business.	These	trademarks	and	trade	names	protect	names	of	certain	products	and	services	we offer	and	are	important	to	the	extent	they	provide	goodwill	and	name	recognition	in	the	insurance	industry.	We	use	commercially	reasonable	efforts	to protect	these	proprietary	rights,	including	various	trade	secret	and	trademark	laws.	One	or	more	of	the	trademarks	and	trade	names	could	be	material	to our	ability	to	sell	our	products	and	services.	We	have	taken	appropriate	steps	to	protect	our	ownership	of	key	names	and	we	believe	it	is	unlikely	that anyone	would	be	able	to	prevent	us	from	using	names	in	places	or	circumstances	material	to	our	operations.

# Available	Information

We	make	available	free	of	charge	through	our	Internet	site	(www.acelimited.com,	under	Investor	Information	/	Financial	Reports	or	Investor	Information	/ SEC	–	Section	16	Filings)	our	annual	report	on	Form	10-K,	quarterly	reports	on	Form	10-Q,	current	reports	on	Form	8-K,	and	amendments	to	those reports	filed	or	furnished	pursuant	to	Section	13	(a)	or	15	(d)	of	the	Exchange	Act	(15	U.S.C.	78m(a)	or	78o(d))	as	soon	as	reasonably	practicable	after we	electronically	file	such	material	with,	or	furnish	it	to,	the	SEC.

We	also	make	available	free	of	charge	through	our	Internet	site	(under	Investor	Information	/	Corporate	Governance)	our	Corporate	Governance Guidelines,	our	Code	of	Conduct,	and	Charters	for	our	Board	Committees.	These	documents	are	also	available	in	print	to	any	shareholder	who	requests them	from	our	Investor	Relations	Department	by:

E-mail:	investorrelations@acegroup.com

Nothing	on	our	Internet	site	should	be	considered	incorporated	by	reference	into	this	report.

# Segment	Information

We	operate	through	the	following	business	segments:	Insurance	–	North	American,	Insurance	–	Overseas	General,	Global	Reinsurance,	and	Life Insurance	and	Reinsurance.

The	following	table	sets	forth	an	analysis	of	net	premiums	earned	by	segment	for	the	years	ended	December	31,	2008,	2007,	and	2006.	The	year ended	December	31,	2008,	includes	Combined	Insurance's	results	of	operations	from	April	1,	2008.	Net	premiums	earned	from	Combined	Insurance's international	operations	are	included	in	our	Insurance	–	Overseas	General	segment	and	net	premiums	earned	from	Combined	Insurance's	North American	operations	are	included	in	our	Life	Insurance	and	Reinsurance	segment.

Additional	financial	information	about	our	segments,	including	net	premiums	earned	by	geographic	area,	is	included	in	Note	17	to	the	Consolidated Financial	Statements,	under	Item	8.

| (in	millions	of	U.S.	dollars) | 2008	Net<br>Premiums<br>Earned | Percentage<br>of	Total | 2007	Net<br>Premiums<br>Earned | Percentage<br>of	Total | 2006	Net<br>Premiums<br>Earned |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Insurance\t–\tNorth\tAmerican | $5,679 | 43% | $6,007 | 49% | $5,719 |
| Insurance\t–\tOverseas\tGeneral | 5,337 | 40% | 4,623 | 37% | 4,321 |
| Global\tReinsurance | 1,017 | 8% | 1,299 | 11% | 1,511 |
| Life\tInsurance\tand\tReinsurance | 1,170 | 9% | 368 | 3% | 274 |
|  | $13,203 | 100% | $12,297 | 100% | $11,825 |

# Insurance	–	North	American

# Overview

The	Insurance	–	North	American	segment	comprises	our	P&C	operation	in	the	U.S.,	Canada,	and	Bermuda.	This	segment,	which	accounted	for approximately	43	percent	of	our	2008	consolidated	net	premiums	earned,	includes	the	operations	of	ACE	USA	(including	ACE	Canada),	ACE Westchester,	ACE	Bermuda,	ACE	Private	Risk	Services,	and	various	run-off	operations:

•	ACE	USA	provides	a	broad	array	of	P&C,	A&H,	and	risk	management	products	and	services	to	a	diverse	group	of	commercial	and	non-commercial enterprises	and	consumers.	ACE	USA	is	this	segment's	largest	operation	and	represented	approximately	68	percent	of	Insurance	–	North	American's	net premiums	earned	in	2008.

•	ACE	Westchester	specializes	in	the	wholesale	distribution	of	excess,	surplus,	and	specialty	P&C	products.

•	ACE	Bermuda	provides	commercial	insurance	products	on	an	excess	basis	to	a	global	client	base,	covering	exposures	that	are	generally	low	in frequency	and	high	in	severity.

•	ACE	Private	Risk	Services	provides	personal	lines	coverages	(e.g.	homeowners	and	automobile)	for	high	net	worth	clients.

•	The	run-off	operations	include	Brandywine	Holdings	Corporation	(Brandywine),	Commercial	Insurance	Services,	residual	market	workers'	compensation business,	pools	and	syndicates	not	attributable	to	a	single	business	group,	and	other	exited	lines	of	business.	Run-off	operations	do	not	actively	sell insurance	products,	but	are	responsible	for	the	management	of	existing	policies	and	settlement	of	related	claims.

# Products	and	Distribution

ACE	USA	primarily	distributes	its	insurance	products	through	a	limited	number	of	brokers.	In	addition	to	using	brokers,	certain	products	are	also distributed	through	channels	such	as	general	agents,	independent	agents,	managing	general	agents	(MGA),	managing	general	underwriters,	alliances, affinity	groups,	and	direct	marketing	operations.	These	products	include	general	liability,	excess	liability,	property,	workers'	compensation,	commercial marine,	automobile	liability,	professional	lines	(D&O	and	E&O),	medical	liability,	aerospace,	and	A&H	coverages,	as	well	as	claims	and	risk	management products	and	services.	ACE	USA	has	also	established	Internet	distribution	channels	for	some	of	its	products.

ACE	USA's	on-going	operations	are	organized	into	distinct	business	units,	each	offering	specialized	products	and	services	targeted	at	specific niche	markets.

•	ACE	Risk	Management	offers	a	wide	range	of	customized	casualty	products	to	respond	to	the	needs	of	mid-	to	large-size	companies,	including	national accounts,	irrespective	of	industry.	These	programs	are	designed	to	help	insureds	address	the	significant	costs	of	financing	and	managing	risk	for workers'	compensation	and	general	and	auto	liability	coverages.	A	variety	of	program	structures	are	offered	to	support	each	client's	risk	financing	needs including:	large	deductible	captives,	third-party	rent-a-captives,	funded	deductibles,	and	net	present	value	and	other	risk	financing	structures,	including	a prospective	close-out	product.	ACE	Risk	Management	ceased	assuming	securitization	and	financial	guarantee	exposure	in	2004.

•	ACE	Global	Underwriting	Group,	specializing	in	global	programs	and	specialty	coverages,	provides	comprehensive	risk	management	programs	and services	to	mid-	to	large-size	U.S.-based	companies,	not-for-profit,	and	government	entities.	The	group's	key	products	include	global	property,	corporate risk	property,	inland	marine,	foreign	casualty,	commercial	marine,	energy,	and	aerospace.	In	addition,	this	group	provides	specialty	personal	lines coverage	for	recreational	marine	distributed	through	a	network	of	specialty	agents.

•	ACE	Casualty	Risk	offers	specialty	casualty	products	and	services	to	a	broad	range	of	customers,	ranging	from	middle	market	to	the	large	multinational clients.	Key	coverages	offered	by	ACE	Casualty	Risk	include	umbrella	and	excess	liability,	environmental	risk	for	commercial	and	industrial	risks,	and wrap-up	programs	written	on	a	loss-sensitive	basis,	protecting	contractors	and	project	sponsors	with	multi-risk	coverage	on	large	single-	and	multi-

location	construction	projects.	Small	to	mid-size	businesses	can	purchase	workers'	compensation	coverage	through	this	unit's	Internet-based	ACE Completesm	product.

•	ACE	Professional	Risk	(Professional	Risk)	provides	management	liability	and	professional	liability	(D&O	and	E&O),	as	well	as	surety	and	kidnap	& extortion	products	that	are	designed	to	meet	the	needs	of	our	insureds.

•	ACE	Canada	(ACE	USA's	Canadian	operations)	offers	a	broad	range	of	P&C	products	as	well	as	life	and	A&H	coverage.	ACE	Canada	specializes	in providing	customize	products	to	commercial	and	industrial	clients	as	well	as	to	groups	and	associations,	operating	nationally	or	internationally.

•	ACE	Accident	&	Health	works	with	employers,	travel	agencies,	and	affinity	groups	to	offer	a	variety	of	accident	and	other	supplemental	insurance programs.	Key	products	include	Employee	Benefit	Plans	(basic	and	voluntary	accidental	death	and	dismemberment,	limited	medical	insurance	for	vision, dental	and	prescription	drugs),	occupational	accident,	student	accident,	and	worldwide	travel	accident	and	global	medical	programs.	With	respect	to products	that	include	supplemental	medical	and	hospital	indemnity	coverages,	we	typically	pay	fixed	amounts	for	claims	and	are	therefore	insulated	from rising	health	care

costs.	ACE	Accident	&	Health	also	provides	specialty	personal	lines	products,	including	credit	card	enhancement	programs	(identity	theft,	rental	car collision	damage	waiver,	trip	travel,	and	purchase	protection	benefits),	and	disaster	recovery	programs	distributed	through	affinity	groups.

•	ACE	Medical	Risk	offers	a	wide	range	of	liability	products	for	the	healthcare	industry.	These	include	primary	coverages	for	professional	liability	and general	liability	for	selected	types	of	medical	facilities,	excess/umbrella	liability	for	medical	facilities,	primary	and	excess	coverages	for	products	liability for	biotechnology	and	specialty	pharmaceutical	companies,	and	liability	insurance	for	human	clinical	trials.

•	ESIS	Inc.	(ESIS),	ACE	USA's	in-house	third-party	claims	administrator,	performs	claims	management	and	risk	control	services	for	domestic	and international	organizations	that	self-insure	P&C	exposures.	These	services	include	comprehensive	medical	managed	care,	integrated	disability	services and	pre-loss	control	and	risk	management	services.	Additional	insurance-related	services	are	offered	by	ESIS's	Recovery	Services	International,	which provides	salvage	and	subrogation	and	health	care	recovery	services.	ESIS's	services	are	available	through	a	preferred	relationship	with	ACE	Risk Management	or	separately	for	those	clients	that	select	insurance	and	claims	management	services	independently.	The	operating	results	for	ESIS	are included	in	Insurance	–	North	American's	administrative	expenses.

ACE	Westchester	offers	wholesale	distribution	of	excess	and	surplus	property,	inland	marine,	casualty,	professional	lines,	and	environmental liability	products.	Through	its	Program	division,	ACE	Westchester	also	provides	coverage	for	agriculture	business	and	specialty	programs,	writing	a variety	of	commercial	coverages	through	program	agents,	including	sports/leisure	activities,	farm,	and	crop/hail	insurance.	We	are,	and	have	been	since the	1980s,	one	of	the	leading	writers	of	crop	insurance	in	the	U.S.	and	conduct	such	business	through	Rain	and	Hail	L.L.C.,	an	MGA.	We	provide protection	throughout	the	U.S.	and	are	therefore	geographically	diversified	which	reduces	the	risk	of	exposure	to	heavy	accumulation	of	losses	in	any	one region.	For	more	information,	refer	to	"Crop	Insurance",	under	Item	7.

ACE	Bermuda	targets	Fortune	1000	companies	and	underwrites	exposures	that	are	generally	low-frequency,	high-severity	on	an	excess	of	loss basis.	Its	principal	lines	of	business	are	excess	liability,	professional	lines,	excess	property,	and	political	risk,	the	latter	being	written	on	a	subscription basis	by	Sovereign	Risk	Insurance	Ltd.	(Sovereign),	a	wholly	owned	managing	agent.	ACE	Bermuda	accesses	its	clients	primarily	through	the	Bermuda offices	of	major,	internationally	recognized	insurance	brokers.

ACE	Private	Risk	Services	provides	specialty	coverages	including	homeowners,	automobile,	umbrella	liability,	fine	art	and	collections	insurance	for affluent	individuals	and	families	in	North	America.	ACE	Private	Risk	Services'	products	are	distributed	through	independent	regional	agents	and	brokers.

# Competitive	Environment

ACE	USA	and	ACE	Westchester	compete	against	a	number	of	large,	national	carriers	as	well	as	regional	competitors	in	certain	territories.	The	markets	in which	ACE	USA	and	ACE	Westchester	compete	are	subject	to	significant	cycles	of	fluctuating	capacity	and	wide	disparities	in	price	adequacy.	We	strive to	offer	superior	service,	which	we	believe	has	differentiated	us	from	our	competitors.	For	example,	ACE	USA's	ACE	Risk	Management	unit	has instituted	national	service	standards	on	service	deliverables	such	as	policy	issuance,	invoicing,	program	adjustments,	legal	agreements,	and	premium audit	activities.	The	ACE	USA	and	ACE	Westchester	operations	pursue	a	specialist	strategy	and	focus	on	market	opportunities	where	we	can	compete effectively	based	on	service	levels	and	product	design,	while	still	achieving	an	adequate	level	of	profitability.	A	competitive	advantage	is	also	achieved through	ACE	USA's	innovative	product	offerings	and	our	ability	to	provide	multiple	products	to	a	single	client	due	to	our	nationwide	local	presence.	An additional	competitive	strength	of	all	our	domestic	commercial	units	is	the	ability	to	deliver	global	products	and	coverage	to	customers	in	concert	with	our Insurance	–	Overseas	General	segment.	ACE	USA	has	grown,	in	part,	from	the	leveraging	of	cross-marketing	opportunities	with	our	other	operations	to take	advantage	of	our	organization's	global	presence.	ACE	Bermuda	competes	against	international	commercial	carriers	writing	business	on	an	excess	of loss	basis.	ACE	Private	Risk	Services	competes	against	insurance	companies	of	varying	sizes	that	sell	products	through	various	distribution	channels, including	through	the	Internet.

# Insurance	–	Overseas	General

The	Insurance	–	Overseas	General	segment,	which	accounted	for	40	percent	of	2008	consolidated	net	premiums	earned,	writes	a	variety	of	insurance coverage	including	P&C,	professional	lines,	marine,	energy,	aviation,	political	risk,	specialty	consumer-oriented	products,	and	A&H.

Insurance	–	Overseas	General	comprises	ACE	International,	our	network	of	indigenous	retail	insurance	operations	outside	North	America,	and	the wholesale	insurance	operations	of	ACE	Global	Markets,	our	London-based	excess	and	surplus	lines	business	that	includes	Lloyd's	Syndicate	2488 (Syndicate	2488).	The	reinsurance	operation	of	ACE	Global	Markets	is	included	in	the	Global	Reinsurance	segment.	From	April	1,	2008,	Insurance	– Overseas	General	also	includes	the	international	A&H	and	life	business	of	Combined	Insurance.	ACE	Global	Markets	offers	an	extensive	product	range through	its	unique	parallel	distribution	of	products	via	ACE	European	Group	Limited	(AEGL)	and	Syndicate	2488.	ACE	provides	funds	at	Lloyd's	to support	underwriting	by	Syndicate	2488,	which	is	managed	by	ACE	Underwriting	Agencies	Limited	and	has	an	underwriting	capacity	of	£285	million	in 2009,	compared	with	£330	million	in	2008.	ACE	Global	Markets	and	AEGL	are	London-based	and	regulated	by	the	Financial	Services	Authority,	the	U.K. insurance	regulator.	AEGL	underwrites	U.K.	and	Continental	Europe	insurance	and	reinsurance	business.

ACE	International	maintains	a	presence	in	every	major	insurance	market	in	the	world	and	with	operations	in	over	50	countries	is	organized geographically	along	product	lines	that	provide	dedicated	underwriting	focus	to	customers.	ACE	International's	P&C	business	is	generally	written,	on	both a	direct	and	assumed	basis,	through	major	international,	regional,	and	local	brokers	and	agents.	A&H	and	other	consumer	lines	products	are	distributed through	brokers,	agents,	direct	marketing	programs,	and	sponsor	relationships.	Property	insurance	products	include	traditional	commercial	fire	coverage as	well	as	energy	industry-related,	construction,	and	other	technical	coverages.	Principal	casualty	products	are	commercial	primary	and	excess	casualty, environmental,	and	general	liability.	ACE	International	provides	D&O,	and	professional	indemnity	coverages.	Marine	cargo	and	hull	coverages	are	written in	the	London	market	as	well	as	in	marine	markets	throughout	the	world.	The	A&H	insurance	operations	provide	products	that	are	designed	to	meet	the insurance	needs	of	individuals	and	groups	outside	of	U.S.	insurance	markets.	These	products	have	been	representing	an	increasing	portion	of	ACE International's	business	in	recent	years	and	include,	but	are	not	limited	to,	accidental	death,	medical	and	hospital	indemnity,	and	income	protection coverages.	We	are	not	in	the	primary	health	care	business.	With	respect	to	our	supplemental	medical	and	hospital	indemnity	products,	we	typically	pay fixed	amounts	for	claims	and	are	therefore	insulated	from	rising	health	care	costs.	ACE	International's	personal	lines	operations	provide	specialty products	and	services	designed	to	meet	the	needs	of	specific	target	markets	and	include,	but	are	not	limited	to,	property	damage,	auto,	homeowners,	and personal	liability.

Following	is	a	discussion	of	Insurance	–	Overseas	General's	four	regions	of	operations:	ACE	European	Group	(which	is	comprised	of	ACE	Europe and	ACE	Global	Markets	branded	business),	ACE	Asia	Pacific,	ACE	Far	East,	and	ACE	Latin	America.

•	ACE	European	Group	is	headquartered	in	London	and	offers	a	broad	range	of	P&C	and	specialty	coverages	principally	directed	at	large	and	mid-sized corporations,	as	well	as	individual	consumers.	ACE	European	Group	operates	in	every	major	market	in	the	European	Union.	Commercial	products	are principally	distributed	through	brokers	while	consumer	products	(mainly	A&H)	are	distributed	through	brokers	as	well	as	through	direct	marketing programs.	ACE	European	Group	also	has	operations	in	South	Africa,	Central	and	Eastern	Europe,	the	Commonwealth	of	Independent	States	(the	CIS), and	the	Middle	East	and	North	Africa.	Our	operations	in	these	regions	underwrite	P&C	and	A&H	business.	ACE	operations	within	Central	and	Eastern Europe	and	the	CIS	markets	include	insurance	subsidiaries	and	branches	in	Russia,	Poland,	Hungary,	Czech	Republic,	and	Turkey.	The	Middle	East and	North	Africa	region	includes	insurance	subsidiaries	and	joint	ventures	in	Bahrain,	Egypt,	Pakistan,	Saudi	Arabia,	and	the	United	Arab	Emirates.	ACE Global	Markets	primarily	underwrites	P&C	insurance	through	Syndicate	2488	and	AEGL.	ACE	Global	Markets	utilizes	Syndicate	2488	to	underwrite	P&C business	on	a	global	basis	through	Lloyd's	worldwide	licenses.	ACE	Global	Markets	utilizes	AEGL	to	underwrite	similar	classes	of	business	through	its network	of	U.K.	and	Continental	Europe	licenses,	and	in	the	U.S.	where	it	is	eligible	to	write	excess	&	surplus	business.	Factors	influencing	the	decision to	place	business	with	Syndicate	2488	or	AEGL	include	licensing	eligibilities,	capitalization	requirements,	and	client/broker	preference.	All	business underwritten	by	ACE	Global	Markets	is	accessed	through	registered	brokers.	The	main	lines	of	business	include	aviation,	property,	energy,	professional lines,	marine,	political	risk,	and	A&H.

•	ACE	Asia	Pacific	is	headquartered	in	Singapore	and	has	an	extensive	network	of	operations	serving	Australia,	Hong	Kong,	India,	Indonesia,	Korea, Macau,	Malaysia,	New	Zealand,	the	Philippines,	Singapore,	Taiwan,	Thailand,	and	Vietnam.	ACE	Asia	Pacific	offers	a	broad	range	of	P&C,	A&H,	and specialty	coverages	principally	directed	at	large	and	mid-sized	corporations	as	well	as	individual	consumers.	This	region	also	provides	management,

underwriting,	and	administrative	support	to	our	equity	investee,	Huatai	Insurance	Company	of	China,	Limited.

•	ACE	Far	East	is	based	in	Tokyo	and	offers	a	broad	range	of	P&C,	A&H,	and	personal	lines	insurance	products	and	services	to	businesses	and consumers	in	Japan,	principally	delivered	through	an	extensive	agency	network.

•	ACE	Latin	America	includes	business	operations	throughout	Latin	America	and	the	Caribbean,	including	offices	in	Argentina,	Brazil,	Chile,	Colombia, Ecuador,	Mexico,	Panama,	Peru,	and	Puerto	Rico.	ACE	Latin	America	focuses	on	providing	P&C,

A&H,	and	specialty	personal	lines	insurance	products	and	services	to	both	large	and	small	commercial	clients	as	well	as	individual	consumers.	ACE	Latin America	distributes	its	products	through	brokers	(for	its	commercial	business)	and	direct	marketing	and	sponsored	programs	(for	its	consumer	business). Combined	Insurance	uses	an	international	sales	force	of	approximately	3,300	independent	contractor	agents	to	distribute	a	wide	range	of	accident and	health	products,	including	short-term	disability,	critical	conditions	and	cancer	aid,	hospital	confinement/recovery,	and	long-term	coverage.	Most	of these	products	are	primarily	fixed-indemnity	obligations	and	are	not	subject	to	escalating	medical	cost	inflation.

ACE	International's	primary	competitors	include	U.S.-based	companies	with	global	operations,	as	well	as	non-U.S.	global	carriers	and	indigenous companies	in	regional	and	local	markets.	For	the	A&H	lines	of	business,	including	those	offered	by	Combined	Insurance,	locally-based	competitors include	financial	institutions	and	bank-owned	insurance	subsidiaries.	Our	international	operations	have	the	distinct	advantage	of	being	part	of	one	of	the few	international	insurance	groups	with	a	global	network	of	licensed	companies	able	to	write	policies	on	a	locally	admitted	basis.	The	principal	competitive factors	that	affect	the	international	operations	are	underwriting	expertise	and	pricing,	relative	operating	efficiency,	product	differentiation,	producer relations,	and	the	quality	of	policyholder	services.	A	competitive	strength	of	our	international	operations	is	our	global	network	and	breadth	of	insurance programs,	which	assist	individuals	and	business	organizations	to	meet	their	risk	management	objectives.	Insurance	operations	in	over	50	countries	also represent	a	competitive	advantage	in	terms	of	depth	of	local	technical	expertise,	accomplishing	a	spread	of	risk,	and	offering	a	global	network	to	service multi-national	accounts.

ACE	Global	Markets	is	one	of	the	preeminent	international	specialty	insurers	in	London	and	is	an	established	lead	underwriter	on	a	significant portion	of	the	risks	underwritten,	particularly	within	the	aviation	and	marine	lines	of	business.	This	leadership	position	allows	ACE	Global	Markets	to	set the	policy	terms	and	conditions	of	many	of	the	policies	written.	All	lines	of	business	face	competition,	depending	on	the	business	class,	from	Lloyd's syndicates,	the	London	market,	and	other	major	international	insurers	and	reinsurers.	Competition	for	international	risks	is	also	seen	from	domestic insurers	in	the	country	of	origin	of	the	insured.	ACE	Global	Markets	differentiates	itself	from	competitors	through	long	standing	experience	in	its	product lines,	its	multiple	insurance	entities	(Syndicate	2488	and	AEGL),	and	the	quality	of	its	underwriting	and	claims	service.

# Global	Reinsurance

The	Global	Reinsurance	segment,	which	accounted	for	eight	percent	of	2008	consolidated	net	premiums	earned,	represents	ACE's	reinsurance operations	comprising	ACE	Tempest	Re	Bermuda,	ACE	Tempest	Re	USA,	ACE	Tempest	Re	Europe,	and	ACE	Tempest	Re	Canada.	Global Reinsurance	includes	ACE	Global	Markets'	reinsurance	operations,	as	well	as	an	underwriting	presence	at	Lloyd's	Reinsurance	Company	(China) Limited,	Lloyd's	new	licensed	reinsurance	company	based	in	Shanghai.	Global	Reinsurance	markets	its	reinsurance	products	worldwide	under	the	ACE Tempest	Re	brand	name	and	provides	a	broad	range	of	coverages	to	a	diverse	array	of	primary	P&C	companies.	Over	the	last	five	years,	Global Reinsurance	has	expanded	beyond	catastrophe	lines	to	become	a	leading	global	multi-line	reinsurance	business	with	underwriting	offices	in	Bermuda, London,	Montreal,	Stamford,	and	Zurich.

Global	Reinsurance	services	clients	globally	through	its	major	units:	ACE	Tempest	Re	Bermuda,	ACE	Tempest	Re	USA,	ACE	Tempest	Re	Europe,	and ACE	Tempest	Re	Canada.	Through	these	operations,	we	are	able	to	provide	a	complete	portfolio	of	products	on	a	global	basis	to	clients.	Major international	brokers	submit	business	to	one	or	more	of	these	units'	underwriting	teams	who	have	built	strong	relationships	with	both	key	brokers	and clients	by	explaining	their	approach	and	demonstrating	consistently	open,	responsive,	and	dependable	service.

ACE	Tempest	Re	Bermuda	principally	provides	property	catastrophe	reinsurance,	on	an	excess	of	loss	per	occurrence	basis	globally	to	insurers	of commercial	and	personal	property.	Property	catastrophe	reinsurance	on	an	occurrence	basis	protects	a	ceding	company	against	an	accumulation	of losses	covered	by	its	issued	insurance	policies,	arising	from	a	common	event	or	occurrence.	ACE	Tempest	Re	Bermuda	underwrites	reinsurance principally	on	an	excess	of	loss	basis,	meaning	that	its	exposure	only	arises	after	the	ceding	company's	accumulated	losses	have	exceeded	the attachment	point	of	the	reinsurance	policy.	ACE	Tempest	Re	Bermuda	also	writes	other	types	of	reinsurance	on	a	limited	basis	for	selected	clients. Examples	include	proportional	property	(reinsurer	shares	a	proportional	part	of	the	premiums	and	losses	of	the	ceding	company)	and	per	risk	excess	of loss	treaty	reinsurance	(coverage	applies	on	a	per	risk	basis	rather	than	per	event	or	aggregate	basis),	together

with	specialty	lines	(catastrophe	workers'	compensation	and	terrorism).	ACE	Tempest	Re	Bermuda's	business	is	produced	through	reinsurance intermediaries.

ACE	Tempest	Re	USA	writes	all	lines	of	traditional	and	specialty	P&C	reinsurance	for	the	North	American	market,	with	a	focus	on	writing	property per	risk	and	casualty	reinsurance,	including	medical	malpractice	and	surety,	principally	on	a	treaty	basis,	with	a	weighting	towards	casualty.	This	unit's diversified	portfolio	is	produced	through	reinsurance	intermediaries.

ACE	Tempest	Re	Europe	provides	treaty	reinsurance	of	P&C	business	of	insurance	companies	worldwide,	with	emphasis	on	non-U.S.	and	London market	risks.	ACE	Tempest	Re	Europe	writes	all	lines	of	traditional	and	specialty	reinsurance	including	property,	casualty,	marine,	aviation,	and	medical malpractice	through	our	London-	and	Zurich-based	divisions.	The	London-based	divisions	of	ACE	Tempest	Re	Europe	focus	on	the	development	of business	sourced	through	London	market	brokers	and,	consequently,	write	a	diverse	book	of	international	business	utilizing	Lloyd's	Syndicate	2488	and AEGL.	The	Zurich-based	division	focuses	on	providing	reinsurance	to	continental	European	insurers	via	continental	European	brokers.

ACE	Tempest	Re	Canada	commenced	writing	business	in	2007,	offering	a	full	array	of	P&C	reinsurance	to	the	Canadian	market.	ACE	Tempest	Re Canada	provides	its	coverage	through	its	Canadian	company	platform	and	also	offers	its	clients	access	to	Lloyd's	Syndicate	2488.

The	Global	Reinsurance	segment	competes	worldwide	with	major	U.S.	and	non-U.S.	reinsurers	as	well	as	reinsurance	departments	of	numerous	multi- line	insurance	organizations.	Global	Reinsurance	is	considered	a	lead	reinsurer	and	is	typically	involved	in	the	negotiation	and	quotation	of	the	terms	and conditions	of	the	majority	of	the	contracts	in	which	it	participates.	Global	Reinsurance	competes	effectively	in	P&C	markets	worldwide	because	of	its strong	capital	position,	the	quality	of	service	provided	to	customers,	the	leading	role	it	plays	in	setting	the	terms,	pricing,	and	conditions	in	negotiating contracts,	and	its	customized	approach	to	risk	selection.	Over	the	last	two	years,	we	have	also	experienced	clients	who	are	increasing	their	risk	retention, which	resulted	in	increased	competition	in	the	reinsurance	marketplace.	The	key	competitors	in	our	markets	vary	by	geographic	region	and	product	line. Further,	over	the	last	several	years,	capital	markets	participants	have	developed	financial	products	intended	to	compete	with	traditional	reinsurance.	In addition,	government	sponsored	or	backed	catastrophe	funds	can	affect	demand	for	reinsurance.

# Life	Insurance	and	Reinsurance

Life	Insurance	and	Reinsurance,	which	accounted	for	nine	percent	of	2008	consolidated	net	premiums	earned,	includes	the	operations	of	ACE	Tempest Life	Re	(ACE	Life	Re),	ACE	International	Life,	and	from	April	1,	2008,	the	North	American	A&H	and	life	business	of	Combined	Insurance.	ACE	Life	Re helps	clients	(ceding	companies)	manage	mortality,	morbidity,	lapse,	and/or	capital	market	risks	embedded	in	their	books	of	business.	ACE	Life	Re comprises	two	companies.	The	first	is	a	Bermuda-based	niche	company	in	the	life	reinsurance	market	that	provides	reinsurance	coverage	to	other	life insurance	companies,	focusing	primarily	on	guarantees	included	in	certain	fixed	and	variable	annuity	products	and	also	on	more	traditional	mortality reinsurance	protection.	The	second	is	a	U.S.-based	traditional	life	reinsurance	company	licensed	in	49	states	and	the	District	of	Columbia,	offering reinsurance	capacity	for	the	individual	life	business	utilizing	yearly	renewable	term	and	coinsurance	structures.	ACE	International	Life	provides	traditional life	insurance	protection	and	investment	and	savings	products	to	individuals	in	several	countries	including	Egypt,	Taiwan,	Thailand,	Vietnam,	the	United Arab	Emirates,	and	in	China	through	a	partially-owned	company.	Combined	Insurance	distributes	specialty	individual	accident	and	supplemental	health and	life	insurance	products	targeted	to	middle	income	consumers	in	the	U.S.	and	Canada.

ACE	Life	Re	markets	its	products	directly	to	clients	as	well	as	through	reinsurance	intermediaries.	The	marketing	plan	seeks	to	capitalize	on	the relationships	developed	by	our	executive	officers	and	underwriters	with	members	of	the	actuarial	profession	and	executives	at	client	companies.	ACE	Life Re	targets	potential	ceding	insurers	that	it	believes	would	benefit	from	its	reinsurance	products	based	on	analysis	of	publicly	available	information	and other	industry	data.	In	addition,	reinsurance	transactions	are	often	placed	by	reinsurance	intermediaries	and	consultants.	ACE	Life	Re	works	with	such third	party	marketers	in	an	effort	to	maintain	a	high	degree	of	visibility	in	the	reinsurance	marketplace.	ACE	Life	Re's	strategy	and	business	does	not depend	on	a	single	client	or	a	few	clients.	A	significant	percentage	of	our	total	revenue	and	income/losses	in	Bermuda	derives	from	our	core	line	of business,	which	is	primarily	the	reinsurance	of	variable	annuity	guarantees,	including	guaranteed	minimum	death	benefits,	guaranteed	minimum	income benefits,	and	living	benefit	guarantees.	This	business	is	managed	with

a	long-term	perspective,	and	short-term	earnings	volatility	is	expected.	Our	primary	focus	in	the	Bermuda	operation	is	to	successfully	manage	the	current portfolio	of	risk	in	the	variable	annuity	line	of	business.	ACE	Life	Re	is	currently	not	quoting	on	new	opportunities	in	the	variable	annuity	reinsurance marketplace.	The	Bermuda	operation	also	participates	in	the	traditional	mortality	reinsurance	marketplace.	In	the	U.S.,	our	core	business	is	growing	and is	comprised	of	treaties	with	significant	players	in	the	U.S.	individual	life	insurance	market.	We	will	continue	to	grow	this	line	by	entering	into	reinsurance agreements	that	are	consistent	with	our	underwriting	and	profit	objectives.

ACE	International	Life	offers	a	broad	portfolio	of	products	including	whole	life,	endowment	plans,	individual	term	life,	group	term	life,	personal accident,	universal	life,	and	variable	annuity	contracts.	The	policies	written	by	ACE	International	Life	generally	provide	funds	for	dependents	of	insureds after	death	but	many	also	have	a	savings	component.	ACE	International	Life	sells	to	consumers	through	a	variety	of	distribution	channels	including agency,	bancassurance,	worksite	marketing,	brokers,	and	telemarketing	through	affinity	groups.	We	continue	to	expand	this	business	with	a	focus	on opportunities	in	emerging	markets	that	we	believe	will	ultimately	result	in	strong	and	sustainable	operating	profits	as	well	as	favorable	return	on	capital commitments	after	an	initial	growth	period.

Combined	Insurance	uses	a	North	American	sales	force	of	over	3,000	agents	to	distribute	a	wide	range	of	accident	and	sickness	insurance products,	including	short-term	disability,	critical	conditions	and	cancer	aid,	Medicare	products,	hospital	confinement/recovery,	and	long-term	coverage. Most	of	these	products	are	primarily	fixed-indemnity	obligations	and	are	not	subject	to	escalating	medical	cost	inflation.

While	ACE	Life	Re	is	not	currently	quoting	on	new	opportunities	in	the	variable	annuity	reinsurance	marketplace,	we	continue	to	monitor	developments	in this	market.	ACE	Life	Re	writes	traditional	mortality	reinsurance	from	both	its	Bermuda	and	U.S.	companies.	The	life	reinsurance	market	for	traditional mortality	risk	is	highly	competitive	as	most	of	the	reinsurance	companies	are	well	established,	have	significant	operating	histories,	strong	claims-paying ability	ratings,	and	long-standing	client	relationships	through	existing	treaties	with	ceding	companies.	ACE	Life	Re	competes	effectively	by	leveraging	the strength	of	its	client	relationships,	underwriting	expertise	and	capacity,	and	our	brand	name	and	capital	position.

ACE	International	Life's	competition	differs	by	location	but	generally	includes	multi-national	insurers,	and	in	some	locations,	local	insurers,	joint ventures,	or	state-owned	insurers.	ACE's	financial	strength	and	reputation	as	an	entrepreneurial	organization	with	a	global	presence	gives	ACE International	Life	a	strong	base	from	which	to	compete.

Combined	Insurance	competes	for	A&H	business	in	the	U.S.	against	numerous	A&H	and	life	insurance	companies	across	various	industry segments.

# Underwriting

ACE	is	an	underwriting	company	and	we	strive	to	emphasize	quality	of	underwriting	rather	than	volume	of	business	or	market	share.	Our	underwriting strategy	is	to	employ	consistent,	disciplined	pricing	and	risk	selection	in	order	to	maintain	a	profitable	book	of	business	throughout	market	cycles.	Clearly defined	underwriting	authorities,	standards,	and	guidelines	are	in	place	in	each	of	our	local	operations	and	global	profit	centers.	Global	product	boards ensure	consistency	of	approach	and	the	establishment	of	best	practices	throughout	the	world.	Our	priority	is	to	help	ensure	adherence	to	criteria	for	risk selection	by	maintaining	high	levels	of	experience	and	expertise	in	our	underwriting	staff.	In	addition,	we	employ	a	business	review	structure	that	helps ensure	control	of	risk	quality	and	conservative	use	of	policy	limits	and	terms	and	conditions.

Qualified	actuaries	in	each	region	work	closely	with	the	underwriting	teams	to	provide	additional	expertise	in	the	underwriting	process.	We	use sophisticated	catastrophe	loss	and	risk	modeling	techniques	designed	to	ensure	appropriate	spread	of	risk	and	to	analyze	correlation	of	risk	across different	product	lines	and	territories.	This	helps	to	ensure	that	losses	are	contained	within	our	risk	tolerances	and	appetite	for	individual	products	lines, businesses,	and	ACE	as	a	whole.	We	also	purchase	reinsurance	as	a	tool	to	diversify	risk	and	limit	the	net	loss	potential	of	catastrophes	and	large	or unusually	hazardous	risks,	refer	to	"Reinsurance	Protection".	For	more	information	refer	to	"Insurance	and	Reinsurance	Markets",	under	Item	1A, "Catastrophe	Exposure	Management"	and	"Natural	Catastrophe	Reinsurance	Program",	under	Item	7,	and	Note	5	to	the	Consolidated	Financial Statements,	under	Item	8.

# Reinsurance	Protection

As	part	of	our	risk	management	strategy,	we	purchase	reinsurance	protection	to	mitigate	our	exposure	to	losses,	including	catastrophes,	to	an	acceptable level.	Although	reinsurance	agreements	contractually	obligate	our	reinsurers	to	reimburse	us	for	an	agreed-upon	portion	of	our	gross	paid	losses,	this reinsurance	does	not	discharge	our	primary	liability	to	our	insureds	and,

thus,	we	ultimately	remain	liable	for	the	gross	direct	loss.	In	certain	countries,	reinsurer	selection	is	limited	by	local	laws	or	regulations.	In	those	areas where	there	is	more	freedom	of	choice,	the	counterparty	is	selected	based	upon	its	financial	strength,	management,	line	of	business	expertise,	and	its price	for	assuming	the	risk	transferred.	In	support	of	this	process,	we	maintain	an	ACE	authorized	reinsurer	list	that	stratifies	these	authorized	reinsurers by	classes	of	business	and	acceptable	limits.	This	list	is	maintained	by	our	Reinsurance	Security	Committee	(RSC),	a	committee	comprised	of	senior management	personnel,	and	a	dedicated	reinsurer	security	team.	Changes	to	the	list	are	authorized	by	the	RSC	and	recommended	to	the	Chair	of	the Enterprise	Risk	Management	Board.	The	reinsurers	on	the	authorized	list	and	potential	new	markets	are	regularly	reviewed,	and	the	list	may	be	modified following	these	reviews.	In	addition	to	the	authorized	list,	there	is	a	formal	exception	process	that	allows	authorized	reinsurance	buyers	to	use	reinsurers already	on	the	authorized	list	for	higher	limits	or	different	lines	of	business,	for	example,	or	other	reinsurers	not	on	the	authorized	list	if	their	use	is supported	by	compelling	business	reasons	for	a	particular	reinsurance	program.

A	separate	policy	and	process	exists	for	captive	reinsurance	companies.	Generally,	these	reinsurance	companies	are	established	by	our	clients	or our	clients	have	an	interest	in	them.	It	is	generally	our	policy	to	obtain	collateral	equal	to	the	expected	losses	that	may	be	ceded	to	the	captive.	Where appropriate,	exceptions	to	the	collateral	requirement	are	granted	but	only	after	senior	management	review.	Specific	collateral	guidelines	and	an exception	process	are	in	place	for	ACE	USA	and	Insurance	–	Overseas	General,	both	of	which	have	credit	management	units	evaluating	the	captive's credit	quality	and	that	of	their	parent	company.	The	credit	management	units,	working	with	actuarial,	determine	reasonable	exposure	estimates	(collateral calculations),	ensure	receipt	of	collateral	in	a	form	acceptable	to	the	Company,	and	coordinate	collateral	adjustments	as	and	when	needed.	Currently, financial	reviews	and	expected	loss	evaluations	are	performed	annually	for	active	captive	accounts	and	as	needed	for	run-off	exposures.	In	addition	to collateral,	parental	guarantees	are	often	used	to	enhance	the	credit	quality	of	the	captive.

In	general,	we	seek	to	place	our	reinsurance	with	highly	rated	companies	with	which	we	have	a	strong	trading	relationship.	For	more	information refer	to	"Catastrophe	Exposure	Management"	and	"Natural	Catastrophe	Reinsurance	Program",	under	Item	7,	and	Note	5	to	the	Consolidated	Financial Statements,	under	Item	8.

# Unpaid	Losses	and	Loss	Expenses

We	establish	reserves	for	unpaid	losses	and	loss	expenses,	which	are	estimates	of	future	payments	of	reported	and	unreported	claims	for	losses	and related	expenses,	with	respect	to	insured	events	that	have	occurred.	The	process	of	establishing	loss	reserves	for	P&C	claims	can	be	complex	and	is subject	to	considerable	variability	as	it	requires	the	use	of	informed	estimates	and	judgments	based	on	circumstances	known	at	the	date	of	accrual. These	estimates	and	judgments	are	based	on	numerous	factors,	and	may	be	revised	as	additional	experience	and	other	data	become	available	and	are reviewed,	as	new	or	improved	methodologies	are	developed,	or	as	current	laws	change.	We	have	actuarial	staff	in	each	of	our	operating	segments	who analyze	insurance	reserves	and	regularly	evaluate	the	levels	of	loss	reserves,	taking	into	consideration	factors	that	may	impact	the	ultimate	settlement value	of	the	unpaid	losses	and	loss	expenses.	Any	such	revisions	could	result	in	future	changes	in	estimates	of	losses	or	reinsurance	recoverable	and would	be	reflected	in	our	results	of	operations	in	the	period	in	which	the	estimates	are	changed.	Losses	and	loss	expenses	are	charged	to	income	as incurred.	The	reserve	for	unpaid	losses	and	loss	expenses	represents	the	estimated	ultimate	losses	and	loss	expenses	less	paid	losses	and	loss expenses,	and	comprises	case	reserves	and	incurred	but	not	reported	(IBNR)	loss	reserves.	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	time	value.	In	connection	with these	structured	settlements,	we	carry	reserves	of	$106	million,	net	of	discount,	at	December	31,	2008.

We	implicitly	consider	the	impact	of	various	forms	of	inflation,	for	example	medical	and	judicial,	in	estimating	the	reserve	for	unpaid	losses	and	loss expenses.	There	is	no	precise	method	for	subsequently	evaluating	the	adequacy	of	the	consideration	given	to	inflation,	since	claim	settlements	are affected	by	many	factors.

During	the	loss	settlement	period,	which	can	be	many	years	in	duration,	additional	facts	regarding	individual	claims	and	trends	often	will	become known.	As	these	become	apparent,	case	reserves	may	be	adjusted	by	allocation	from	IBNR	without	any	change	in	the	overall	reserve.	In	addition,	the circumstances	of	individual	claims	or	the	application	of	statistical	and	actuarial	methods	to	loss	experience	data	may	lead	to	the	adjustment	of	the	overall reserves	upward	or	downward	from	time	to	time.	Accordingly,	the	ultimate	settlement	of	losses	may	be	significantly	greater	than	or	less	than	reported loss	and	loss	expense	reserves.

We	have	considered	asbestos	and	environmental	(A&E)	claims	and	claims	expenses	in	establishing	the	liability	for	unpaid	losses	and	loss expenses	and	have	developed	reserving	methods	which	incorporate	new	sources	of	data	with	historical	experience	to	estimate	the	ultimate	losses arising	from	A&E	exposures.	The	reserves	for	A&E	claims	and	claims	expenses	represent

management's	best	estimate	of	future	loss	and	loss	expense	payments	and	recoveries	that	are	expected	to	develop	over	the	next	several	decades.	We continuously	monitor	evolving	case	law	and	its	effect	on	environmental	and	latent	injury	claims	and	we	monitor	A&E	claims	activity	quarterly	and	perform a	full	reserve	review	annually.

For	each	product	line,	management,	in	conjunction	with	internal	actuaries,	develops	a	"best	estimate"	of	the	ultimate	settlement	value	of	the	unpaid losses	and	loss	expenses	that	it	believes	provides	a	reasonable	estimate	of	the	required	reserve.	We	evaluate	our	estimates	of	reserves	quarterly	in	light of	developing	information	and	discussions	and	negotiations	with	our	insureds.	While	we	are	unable	at	this	time	to	determine	whether	additional	reserves, which	could	have	a	material	adverse	effect	upon	our	financial	condition,	results	of	operations,	and	cash	flows,	may	be	necessary	in	the	future,	we	believe that	our	reserves	for	unpaid	losses	and	loss	expenses	are	adequate	as	of	December	31,	2008.

For	more	information	refer	to	"Critical	Accounting	Estimates	–	Unpaid	losses	and	loss	expenses",	under	Item	7	and	Note	7	to	the	Consolidated Financial	Statements,	under	Item	8.

The	"Analysis	of	Losses	and	Loss	Expenses	Development"	table	shown	below	presents	for	each	balance	sheet	date	over	the	period	1998-2008, the	gross	and	net	loss	and	loss	expense	reserves	recorded	at	the	balance	sheet	date	and	subsequent	payments	from	the	net	reserves.	The	reserves represent	the	amount	required	for	the	estimated	future	settlement	value	of	liabilities	incurred	at	or	prior	to	the	balance	sheet	date	and	those	estimates may	change	subsequent	to	the	balance	sheet	date	as	new	information	emerges	regarding	the	ultimate	settlement	value	of	the	liability.	Accordingly,	the table	also	presents	through	December	31,	2008,	for	each	balance	sheet	date,	the	cumulative	impact	of	subsequent	valuations	of	the	liabilities	incurred	at the	original	balance	sheet	date.	The	data	in	the	table	is	presented	in	accordance	with	reporting	requirements	of	the	SEC.	This	table	should	be	interpreted with	care	by	those	not	familiar	with	its	format	or	those	who	are	familiar	with	other	triangulations	arranged	by	origin	year	of	loss	such	as	accident	or underwriting	year	rather	than	balance	sheet	date,	as	shown	below.	To	clarify	the	interpretation	of	the	table,	we	use	the	reserves	established	at December	31,	1999,	in	the	following	example.

The	top	two	lines	of	the	table	show	for	successive	balance	sheet	dates	the	gross	and	net	unpaid	losses	and	loss	expenses	recorded	as	provision for	liabilities	incurred	at	or	prior	to	each	balance	sheet	date.	It	can	be	seen	that	at	December	31,	1999,	a	reserve	of	$9.244	billion	net	of	reinsurance	had been	established.

The	upper	(paid)	triangulation	presents	the	net	amounts	paid	as	of	periods	subsequent	to	the	balance	sheet	date.	Hence	in	the	2000	financial	year, $2.717	billion	of	payments	were	made	from	the	December	31,	1999,	reserve	balance	established	for	liabilities	incurred	prior	to	the	2000	financial	year.	At the	end	of	the	2008	financial	year	this	block	of	liabilities	had	resulted	in	cumulative	net	payments	of	$7.495	billion.

The	lower	triangulation	within	the	table	shows	the	revised	estimate	of	the	net	liability	originally	recorded	at	each	balance	sheet	date	as	of	the	end	of subsequent	financial	years.	With	the	benefit	of	actual	loss	emergence	and	hindsight	over	the	intervening	period,	the	net	liabilities	incurred	as	of December	31,	1999,	are	now	estimated	to	be	$10.789	billion,	rather	than	the	original	estimate	of	$9.244	billion.	One	of	the	key	drivers	of	this	change	has been	adverse	development	on	latent	claims	that	we	categorize	as	asbestos	and	environmental	losses	and	other	run-off	liabilities	covered	under	the National	Indemnity	Company	(NICO)	reinsurance	treaties.	Of	the	cumulative	deficiency	of	$1.545	billion	recognized	in	the	nine	years	since	December	31, 1999,	$427	million	relates	to	non-latent	claims	and	$1.118	billion	relates	to	latent	claims.	The	deficiency	of	$1.545	billion	was	identified	and	recorded	as follows;	$16	million	redundant	in	2000,	$4	million	deficient	in	2001,	$526	million	deficient	in	2002,	$155	million	deficient	in	2003,	$875	million	deficient	in 2004,	$120	million	redundant	in	2005,	$41	million	deficient	in	2006,	$28	million	redundant	in	2007	and	$108	million	deficient	in	2008.

Importantly,	the	cumulative	deficiency	or	redundancy	for	different	balance	sheet	dates	are	not	independent	and	therefore,	should	not	be	added together.	In	the	last	year,	we	have	revised	our	estimate	of	the	December	31,	1999,	liabilities	from	$10.681	billion	to	$10.789	billion.	This	adverse development	of	$108	million	will	also	be	included	in	each	column	to	the	right	of	the	December	31,	1999,	column	to	recognize	that	this	additional	amount was	also	required	in	the	reserves	established	for	each	annual	balance	sheet	date	from	December	31,	2000,	to	December	31,	2008.

The	loss	development	table	shows	that	our	original	estimate	of	the	net	unpaid	loss	and	loss	expense	requirement	at	December	31,	2007,	of $23.592	billion	has,	with	the	benefit	of	actual	loss	emergence	and	hindsight,	been	revised	to	$22.778	billion	at	December	31,	2008.	This	favorable movement	of	$814	million	is	referred	to	as	prior	period	development	and	is	the	net	result	of	a	number	of	underlying	movements	both	favorable	and adverse.	The	key	underlying	movements	are	discussed	in	more	detail	within	the	"Prior	Period	Development"	section	of	Item	7.

The	bottom	lines	of	the	table	show	the	re-estimated	amount	of	previously	recorded	gross	liabilities	at	December	31,	2008,	together	with	the	change in	reinsurance	recoverable.	Similar	to	the	net	liabilities,	the	cumulative	redundancy	or	deficiency	on	the	gross	liability	is	the	difference	between	the	gross liability	originally	recorded	and	the	re-estimated	gross	liability	at	December	31,	2008.	For	example,	with	respect	to	the	gross	unpaid	loss	and	loss expenses	of	$16.713	billion	for	1999,	by

December	31,	2008,	this	gross	liability	was	re-estimated	to	be	$22.999	billion,	resulting	in	the	cumulative	deficiency	on	the	gross	liability	originally recorded	for	the	1999	balance	sheet	year	of	$6.286	billion.	This	deficiency	relates	primarily	to	U.S.	liabilities,	including	A&E	liabilities	for	1995	and	prior. The	gross	deficiency	results	in	a	net	deficiency	of	$1.545	billion	as	a	result	of	substantial	reinsurance	coverage	that	reduces	the	gross	loss;	approximately $2.2	billion	was	covered	by	reinsurance	placed	when	the	risks	were	originally	written	and	$1.25	billion	of	the	remaining	liability	has	been	ceded	to	NICO. We	do	not	consider	it	appropriate	to	extrapolate	future	deficiencies	or	redundancies	based	upon	the	table,	as	conditions	and	trends	that	have affected	development	of	the	liability	in	the	past	may	not	necessarily	recur	in	the	future.	We	believe	that	our	current	estimates	of	net	liabilities appropriately	reflect	our	current	knowledge	of	the	business	profile	and	the	prevailing	market,	social,	legal	and	economic	conditions	while	giving	due consideration	to	historical	trends	and	volatility	evidenced	in	our	markets	over	the	longer	term.	The	key	issues	and	considerations	involved	in	establishing our	estimate	of	the	net	liabilities	are	discussed	in	more	detail	within	the	"Critical	Accounting	Estimates	–	Unpaid	losses	and	loss	expenses"	section	of Item	7.

On	July	2,	1999,	we	changed	our	fiscal	year-end	from	September	30	to	December	31.	As	a	result,	the	information	provided	for	the	1999	year	is actually	for	the	15-month	period	from	October	1,	1998,	through	December	31,	1999.	For	1998,	the	net	unpaid	losses	and	loss	expenses	are	in	respect	of the	annual	period	ending	on	September	30.	We	acquired	Tarquin	(a	Lloyds	managing	agency)	on	July	9,	1998.	On	January	2,	1998,	we	acquired	ACE US	Holdings;	on	April	1,	1998,	we	acquired	CAT	Limited;	on	July	2,	1999,	we	acquired	ACE	INA	(CIGNA's	P&C	business)	and	on	April	1,	2008	we acquired	Combined	Insurance.	The	unpaid	loss	information	has	been	included	in	the	table	commencing	in	the	year	of	acquisition.	As	a	result,	1999 includes	net	reserves	of	$6.8	billion	related	to	ACE	INA	at	the	date	of	acquisition	and	subsequent	development	thereon.

# Analysis	of	Losses	and	Loss	Expenses	Development

| dollars) | 1998^(1) | 1999^(1) | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Gross\tunpaid\tloss | $3,738 | $16,713 | $17,603 | $20,941 | $24,597 | $27,083 | $31,483 | $35,055 | $35,517 | $37,112 | $37,176 |
| Net\tunpaid\tloss | 2,677 | 9,244 | 9,437 | \t 10,617 | \t 11,988 | \t 14,674 | \t 17,517 | \t 20,458 | \t 22,008 | \t 23,592 | \t 24,241 |
| Net\tpaid |  |  |  |  |  |  |  |  |  |  |  |
| (Cumulative) |  |  |  |  |  |  |  |  |  |  |  |
| As\tOf: |  |  |  |  |  |  |  |  |  |  |  |
| 1\tyear\tlater | 1,018 | 2,717 | 2,425 | 2,667 | 2,702 | 2,855 | 3,293 | 3,711 | 4,038(2) | 3,628 |  |
| 2\tyears\tlater | 1,480 | 4,119 | 3,850 | 4,640 | 4,379 | 4,878 | 5,483 | 6,487 | 6,356 |  |  |
| 3\tyears\tlater | 1,656 | 5,181 | 5,165 | 5,568 | 5,817 | 6,427 | 7,222 | 7,998 |  |  |  |
| 4\tyears\tlater | 1,813 | 6,217 | 5,515 | 6,688 | 7,009 | 7,819 | 8,066 |  |  |  |  |
| 5\tyears\tlater | 1,979 | 6,364 | 6,204 | 7,496 | 8,032 | 8,416 |  |  |  |  |  |
| 6\tyears\tlater | 2,041 | 6,880 | 6,638 | 8,014 | 8,390 |  |  |  |  |  |  |
| 7\tyears\tlater | 2,246 | 7,231 | 6,959 | 8,226 |  |  |  |  |  |  |  |
| 8\tyears\tlater | 2,300 | 7,448 | 7,036 |  |  |  |  |  |  |  |  |
| 9\tyears\tlater | 2,362 | 7,495 |  |  |  |  |  |  |  |  |  |
| 10\tyears\tlater | 2,398 |  |  |  |  |  |  |  |  |  |  |
| Net\tLiability |  |  |  |  |  |  |  |  |  |  |  |
| Re-estimated |  |  |  |  |  |  |  |  |  |  |  |
| As\tOf: |  |  |  |  |  |  |  |  |  |  |  |
| End\tof\tyear | $2,677 | $9,244 | $9,437 | $10,617 | $11,988 | $14,674 | $17,517 | $20,458 | $22,008 | $23,592 | $24,241 |
| 1\tyear\tlater | 2,752 | 9,228 | 9,596 | \t 11,344 | \t 12,170 | \t 15,221 | \t 17,624 | \t 20,446 | \t 21,791 | \t 22,778 |  |
| 2\tyears\tlater | 2,747 | 9,232 | \t 10,712 | \t 11,552 | \t 13,215 | \t 15,468 | \t 17,672 | \t 20,366 | \t 21,188 |  |  |
| 3\tyears\tlater | 2,722 | 9,758 | \t 10,417 | \t 12,541 | \t 13,477 | \t 15,732 | \t 17,649 | \t 19,926 |  |  |  |
| 4\tyears\tlater | 2,731 | 9,913 | \t 11,297 | \t 12,725 | \t 13,790 | \t 16,015 | \t 17,530 |  |  |  |  |
| 5\tyears\tlater | 2,715 | \t 10,788 | \t 11,231 | \t 12,880 | \t 14,152 | \t 16,086 |  |  |  |  |  |
| 6\tyears\tlater | 2,853 | \t 10,668 | \t 11,395 | \t 13,013 | \t 14,201 |  |  |  |  |  |  |
| 7\tyears\tlater | 2,723 | \t 10,709 | \t 11,419 | \t 13,099 |  |  |  |  |  |  |  |
| 8\tyears\tlater | 2,702 | \t 10,681 | \t 11,520 |  |  |  |  |  |  |  |  |
| 9\tyears\tlater | 2,679 | \t 10,789 |  |  |  |  |  |  |  |  |  |
| 10\tyears\tlater | 2,675 |  |  |  |  |  |  |  |  |  |  |
| Cumulative\tredundancy/\t(deficiency)\ton\tnet |  |  |  |  |  |  |  |  |  |  |  |
| unpaid | 2 | (1,545) | (2,083) | (2,482) | (2,213) | (1,412) | 8 | 532 | 820 | 814 |  |
| Cumulative\tdeficiency\trelated\tto\tA&amp;E | (19) | (1,118) | (1,118) | (1,113) | (597) | (597) | (132) | (132) | (80) | (51) |  |
| Cumulative\tredundancy/\t(deficiency)\ton\tnet |  |  |  |  |  |  |  |  |  |  |  |
| unpaid | 21 | (427) | (965) | (1,369) | (1,616) | (815) | 140 | 664 | 900 | 865 |  |
| Gross\tunpaid\tlosses\tand\tloss\texpenses\tend |  |  |  |  |  |  |  |  |  |  |  |
| of\tyear | $3,738 | $16,713 | $17,603 | $20,941 | $24,597 | $27,083 | $31,483 | $35,055 | $35,517 | $37,112 | $37,176 |
| Reinsurance\trecoverable\ton\tunpaid\tlosses | 1,061 | 7,469 | 8,166 | \t 10,324 | \t 12,609 | \t 12,409 | \t 13,966 | \t 14,597 | \t 13,509 | \t 13,520 | \t 12,935 |
| Net\tunpaid\tlosses\tand\tloss\texpenses | 2,677 | 9,244 | 9,437 | \t 10,617 | \t 11,988 | \t 14,674 | \t 17,517 | \t 20,458 | \t 22,008 | \t 23,592 | \t 24,241 |
| Gross\tliability\tre-estimated | 4,262 | \t 22,999 | \t 24,128 | \t 28,343 | \t 29,526 | \t 30,692 | \t 32,011 | \t 33,804 | \t 34,414 | \t 35,912 |  |
| Reinsurance\trecoverable\ton\tunpaid\tlosses | 1,587 | \t 12,210 | \t 12,608 | \t 15,244 | \t 15,325 | \t 14,606 | \t 14,481 | \t 13,878 | \t 13,226 | \t 13,134 |  |
| Net\tliability\tre-estimated | 2,675 | \t 10,789 | \t 11,520 | \t 13,099 | \t 14,201 | \t 16,086 | \t 17,530 | \t 19,926 | \t 21,188 | \t 22,778 |  |
| Cumulative\tredundancy/\t(deficiency)\ton\tgross\nunpaid\tlosses | (524) | (6,286) | (6,525) | (7,402) | (4,929) | (3,609) | (528) | 1,251 | 1,103 | 1,200 |  |

(2) 	This	amount	does	not	agree	to	the	reconciliation	of	unpaid	losses	and	loss	expenses	on	the	table	below	due	to	the	accounting	treatment	of	a	novation	of	a	retroactive	assumed	loss	portfolio	transfer from	2002	resulting	in	the	elimination	of	the	deferred	asset	of	$79	million	and	the	reduction	of	the	related	reserve.

# Reconciliation	of	Unpaid	Losses	and	Loss	Expenses

| (in	millions	of	U.S.	dollars) | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Gross\tunpaid\tlosses\tand\tloss\texpenses\tat\tbeginning\tof\tyear | $ 37,112 | $ 35,517 | $ 35,055 |
| Reinsurance\trecoverable\ton\tunpaid\tlosses | (13,520) | (13,509) | (14,597) |
| Net\tunpaid\tlosses\tand\tloss\texpenses\tat\tbeginning\tof\tyear | 23,592 | 22,008 | 20,458 |
| Acquisition\t(sale)\tof\tsubsidiaries | 353 | – | (472) |
| Total | 23,945 | 22,008 | 19,986 |
| Net\tlosses\tand\tloss\texpenses\tincurred\tin\trespect\tof\tlosses\toccurring\tin:\nCurrent\tyear | 8,417 | 7,568 | 7,082 |
| Prior\tyear | (814) | (217) | (12) |
| Total | 7,603 | 7,351 | 7,070 |
| Net\tlosses\tand\tloss\texpenses\tpaid\tin\trespect\tof\tlosses\toccurring\tin:\nCurrent\tyear | 2,699 | 1,975 | 1,748 |
| Prior\tyear | 3,628 | 3,959 | 3,711 |
| Total | 6,327 | 5,934 | 5,459 |
| Foreign\tcurrency\trevaluation\tand\tother | (980) | 167 | 411 |
| Net\tunpaid\tlosses\tand\tloss\texpenses\tat\tend\tof\tyear | 24,241 | 23,592 | 22,008 |
| Reinsurance\trecoverable\ton\tunpaid\tlosses | 12,935 | 13,520 | 13,509 |
| Gross\tunpaid\tlosses\tand\tloss\texpenses\tat\tend\tof\tyear | $ 37,176 | $ 37,112 | $ 35,517 |

Net	losses	and	loss	expenses	incurred	for	the	year	ended	December	31,	2008,	were	$7.6	billion,	compared	with	$7.4	billion	and	$7.1	billion	in	2007	and 2006,	respectively.	Net	losses	and	loss	expenses	incurred	for	2008,	2007,	and	2006	include	$814	million,	$217	million,	and	$12	million	of	net	favorable prior	period	development,	respectively.	For	more	information,	refer	to	the	"Prior	Period	Development"	section	of	Item	7.

# Investments

Our	principal	investment	objective	is	to	ensure	that	funds	will	be	available	to	meet	our	primary	insurance	and	reinsurance	obligations.	Within	this	broad liquidity	constraint,	the	investment	portfolio's	structure	seeks	to	maximize	return	subject	to	specifically-approved	guidelines	of	overall	asset	classes,	credit quality,	liquidity,	and	volatility	of	expected	returns.	As	such,	our	investment	portfolio	is	invested	primarily	in	investment-grade	fixed-income	securities	as measured	by	the	major	rating	agencies.

The	management	of	our	investment	portfolio	is	the	responsibility	of	ACE	Asset	Management.	ACE	Asset	Management,	an	indirect	wholly-owned subsidiary	of	ACE,	operates	principally	to	guide	and	direct	our	investment	process.	In	this	regard,	ACE	Asset	Management:

•	conducts	formal	asset	allocation	modeling	for	each	of	the	ACE	subsidiaries,	providing	formal	recommendations	for	the	portfolio's	structure;

•	establishes	recommended	investment	guidelines	that	are	appropriate	to	the	prescribed	asset	allocation	targets;

•	provides	the	analysis,	evaluation,	and	selection	of	our	external	investment	advisors;

•	establishes	and	develops	investment-related	analytics	to	enhance	portfolio	engineering	and	risk	control;

•	monitors	and	aggregates	the	correlated	risk	of	the	overall	investment	portfolio;	and

•	provides	governance	over	the	investment	process	for	each	of	our	operating	companies	to	ensure	consistency	of	approach	and	adherence	to	investment guidelines.

For	the	portfolio,	we	determine	allowable,	targeted	asset	allocation	and	ranges	for	each	of	the	operating	segments.	These	asset	allocation	targets are	derived	from	sophisticated	asset	and	liability	modeling	that	measures	correlated	histories	of	returns	and	volatility	of	returns.	Allowable	investment classes	are	further	refined	through	analysis	of	our	operating	environment,	including	expected	volatility	of	cash	flows,	overall	capital	position,	regulatory, and	rating	agency	considerations.

The	Finance	and	Investment	Committee	of	the	Board	of	Directors	approves	asset	allocation	targets	and	reviews	our	investment	policy	to	ensure that	it	is	consistent	with	our	overall	goals,	strategies,	and	objectives.	Overall	investment	guidelines	are

reviewed	and	approved	by	the	Finance	and	Investment	Committee	to	ensure	that	appropriate	levels	of	portfolio	liquidity,	credit	quality,	diversification,	and volatility	are	maintained.	In	addition,	the	Finance	and	Investment	Committee	systematically	reviews	the	portfolio's	exposures	to	capture	any	potential violations	of	investment	guidelines.

Within	the	guidelines	and	asset	allocation	parameters	established	by	the	Finance	and	Investment	Committee,	individual	investment	committees	of the	operating	segments	determine	tactical	asset	allocation.	Additionally,	these	committees	review	all	investment-related	activity	that	affects	their operating	company,	including	the	selection	of	outside	investment	advisors,	proposed	asset	allocations	changes,	and	the	systematic	review	of	investment guidelines.

For	additional	information	regarding	the	investment	portfolio,	including	breakdowns	of	the	sector	and	maturity	distributions,	refer	to	Note	4	to	the Consolidated	Financial	Statements,	under	Item	8.

# Regulation

Our	insurance	and	reinsurance	subsidiaries	conduct	business	globally,	including	in	all	50	states	of	the	United	States	and	the	District	of	Columbia.	Our businesses	in	each	of	these	jurisdictions	are	subject	to	varying	degrees	of	regulation	and	supervision.	The	laws	and	regulations	of	the	jurisdictions	in which	our	insurance	and	reinsurance	subsidiaries	are	domiciled	require,	among	other	things,	that	these	subsidiaries	maintain	minimum	levels	of	statutory capital,	surplus	and	liquidity,	meet	solvency	standards,	and	submit	to	periodic	examinations	of	their	financial	condition.	The	complex	regulatory environments	in	which	ACE	operates	are	subject	to	change	and	are	regularly	monitored.	The	following	is	an	overview	discussion	of	regulations	for	our operations	in	Switzerland,	the	U.S.,	Bermuda,	and	other	international	locations.

# Swiss	Operations

The	Swiss	Financial	Market	Supervisory	Authority,	which	we	refer	to	as	"FINMA,"	has	the	discretion	to	supervise	our	group	activities.	Under	so-called "group	supervision,"	FINMA	has	the	right	to	supervise	the	Company	on	a	group-wide	basis.	The	regulatory	power	of	FINMA	covers	in	particular	the following	areas:

•	reporting	on	organization;

•	reporting	on	structure;

•	reporting	on	internal	transactions;

•	solvency;

•	group/conglomerate	report;	and

•	corporate	governance/risk	management/internal	control	system

In	March	2008,	we	received	written	confirmation	from	the	Federal	Office	of	Private	Insurance	(FOPI),	a	FINMA	predecessor	insurance	supervising authority,	that	it	does	not	intend	to	subject	us	to	group	supervision	so	long	as	certain	business	parameters	within	Switzerland	are	not	exceeded.	While	we currently	intend	to	operate	within	these	parameters,	we	cannot	assure	you	that	our	future	business	needs	may	not	require	that	we	exceed	these parameters	or	that	FINMA	will	not	change	these	parameters	or	otherwise	determine	to	exercise	group	supervision	over	us.	The	costs	and	administrative burdens	of	group	supervision	could	be	substantial.	Late	in	2008,	we	formed	ACE	Insurance	(Switzerland)	Limited	which	offers	various	insurance	covers to	small	and	mid-sized	Swiss	companies,	as	well	as	A&H	solutions	to	individuals.	We	have	also	formed	a	reinsurance	subsidiary	named	ACE Reinsurance	(Switzerland)	Limited,	which	we	intend	to	operate	as	a	provider	of	reinsurance	to	other	ACE	entities.	Both	new	companies	are	licensed	and governed	by	FINMA.

# U.S.	Operations

Our	U.S.	insurance	subsidiaries	are	subject	to	extensive	regulation	and	supervision	by	the	states	in	which	they	do	business.	The	laws	of	the	various states	establish	departments	of	insurance	with	broad	authority	to	regulate,	among	other	things:	the	standards	of	solvency	that	must	be	met	and maintained,	the	licensing	of	insurers	and	their	producers,	approval	of	policy	forms	and	rates,	the	nature	of	and	limitations	on	investments,	restrictions	on the	size	of	the	risks	which	may	be	insured	under	a	single	policy,	deposits	of	securities	for	the	benefit	of	policyholders,	requirements	for	the	acceptability	of reinsurers,	periodic	examinations	of	the	affairs	of	insurance	companies,	the	form	and	content	of	reports	of	financial	condition	required	to	be	filed,	and	the adequacy	of	reserves	for	unearned	premiums,	losses,	and	other	purposes.

Our	U.S.	insurance	subsidiaries	are	required	to	file	detailed	annual	and	quarterly	reports	with	state	insurance	regulators	in	each	of	the	states	in which	they	do	business.	In	addition,	our	U.S.	insurance	subsidiaries'	operations	and	financial	records	are	subject	to	examination	at	regular	intervals	by state	regulators.

All	states	have	enacted	legislation	that	regulates	insurance	holding	companies.	This	legislation	provides	that	each	insurance	company	in	the system	is	required	to	register	with	the	insurance	department	of	its	state	of	domicile	and	furnish	information	concerning	the	operations	of	companies	within the	holding	company	system	that	may	materially	affect	the	oper-

ations,	management,	or	financial	condition	of	the	insurers	within	the	system.	All	transactions	within	a	holding	company	system	must	be	fair	and	equitable. Notice	to	the	insurance	departments	is	required	prior	to	the	consummation	of	transactions	affecting	the	ownership	or	control	of	an	insurer	and	of	certain material	transactions	between	an	insurer	and	an	entity	in	its	holding	company	system;	in	addition,	certain	transactions	may	not	be	consummated	without the	department's	prior	approval.

Statutory	surplus	is	an	important	measure	utilized	by	the	regulators	and	rating	agencies	to	assess	our	U.S.	insurance	subsidiaries'	ability	to	support business	operations	and	provide	dividend	capacity.	Our	U.S.	insurance	subsidiaries	are	subject	to	various	state	statutory	and	regulatory	restrictions	that limit	the	amount	of	dividends	that	may	be	paid	without	prior	approval	from	regulatory	authorities.	These	restrictions	differ	by	state,	but	are	generally	based on	calculations	incorporating	statutory	surplus,	statutory	net	income,	and/or	investment	income.

The	National	Association	of	Insurance	Commissioners	(NAIC)	has	a	risk-based	capital	requirement	for	P&C	insurance	companies.	This	risk-based capital	formula	is	used	by	many	state	regulatory	authorities	to	identify	insurance	companies	that	may	be	undercapitalized	and	which	merit	further regulatory	attention.	These	requirements	are	designed	to	monitor	capital	adequacy	using	a	formula	that	prescribes	a	series	of	risk	measurements	to determine	a	minimum	capital	amount	for	an	insurance	company,	based	on	the	profile	of	the	individual	company.	The	ratio	of	a	company's	actual policyholder	surplus	to	its	minimum	capital	requirement	will	determine	whether	any	state	regulatory	action	is	required.	There	are	progressive	risk-based capital	failure	levels	that	trigger	more	stringent	regulatory	action.	If	an	insurer's	policyholders'	surplus	falls	below	the	Mandatory	Control	Level	(70	percent of	the	Authorized	Control	Level,	as	defined	by	the	NAIC),	the	relevant	insurance	commissioner	is	required	to	place	the	insurer	under	regulatory	control. However,	an	insurance	commissioner	may	allow	a	P&C	company	operating	below	the	Mandatory	Control	Level	that	is	writing	no	business	and	is	running off	its	existing	business	to	continue	its	run-off.	Brandywine	is	running	off	its	liabilities	consistent	with	the	terms	of	an	order	issued	by	the	Insurance Commissioner	of	Pennsylvania.	This	includes	periodic	reporting	obligations	to	the	Pennsylvania	Insurance	Department.

In	November	2002,	the	U.S.	Congress	passed	the	Terrorism	Risk	Insurance	Act	(TRIA),	which	was	amended	and	restated	in	2005,	and	again	in 2007.	The	2007	TRIA	extension	renews	the	program	for	seven	years,	through	2014.	TRIA	was	enacted	to	ensure	the	availability	of	insurance	coverage for	certain	types	of	terrorist	acts	in	the	U.S.	and	requires	that	qualifying	insurers	offer	terrorism	insurance	coverage	in	all	P&C	insurance	policies	on	terms not	materially	different	than	terms	applicable	to	other	losses.	The	U.S.	federal	government	covers	85	percent	of	the	losses	from	covered	certified	acts	of terrorism,	in	excess	of	a	specified	deductible	amount	calculated	as	a	percentage	of	an	affiliated	insurance	group's	prior	year	premiums	on	commercial lines	policies	covering	risks	in	the	U.S.	This	specified	deductible	amount	is	20	percent	of	such	premiums	for	losses	occurring	in	the	prior	year.	Further,	to trigger	coverage	under	TRIA,	the	aggregate	industry	P&C	insurance	losses	resulting	from	an	act	of	terrorism	must	exceed	$100	million.	In	the	2007 extension,	TRIA	was	expanded	to	apply	to	losses	resulting	from	attacks	that	have	been	committed	by	individuals	on	behalf	of	a	foreign	person	or	foreign interest,	as	well	as	acts	of	domestic	terrorism.	Further,	any	such	attack	must	be	certified	as	an	"act	of	terrorism"	by	the	U.S.	federal	government,	and	such decision	is	not	subject	to	judicial	review.

Our	U.S.	subsidiaries	are	also	subject	to	the	general	laws	of	the	states	and	other	jurisdictions	in	which	they	do	business.	Beginning	in	2004,	ACE and	its	subsidiaries	and	affiliates	received	numerous	subpoenas,	interrogatories,	and	civil	investigative	demands	in	connection	with	certain	investigations of	insurance	industry	practices.	These	inquiries	have	been	issued	by	a	number	of	attorneys	general,	state	departments	of	insurance,	and	other authorities,	including	the	New	York	Attorney	General	(NYAG),	the	Pennsylvania	Insurance	Department,	and	the	SEC.	These	inquiries	seek	information concerning	underwriting	practices	and	non-traditional	or	loss	mitigation	insurance	products.	To	the	extent	they	are	ongoing,	ACE	is	cooperating	and	will continue	to	cooperate	with	such	inquiries.	Information	on	the	insurance	industry	investigations,	including	settlement	agreements	and	related	matters,	is set	forth	in	Note	10	to	the	Consolidated	Financial	Statements,	under	Item	8.

# Bermuda	Operations

In	Bermuda,	our	insurance	subsidiaries	are	principally	regulated	by	the	Insurance	Act	1978	(as	amended)	and	related	regulations	(the	Act).	The	Act imposes	solvency	and	liquidity	standards	as	well	as	auditing	and	reporting	requirements,	and	grants	the	Bermuda	Monetary	Authority	(the	Authority) powers	to	supervise,	investigate,	and	intervene	in	the	affairs	of	insurance	companies.	Significant	requirements	include	the	appointment	of	an	independent auditor,	the	appointment	of	a	loss	reserve	specialist,	and	the	filing	of	the	Annual	Statutory	Financial	Return	with	the	Executive	Member	responsible	for Insurance	(the	Executive).	The	Executive	is	the	chief	administrative	officer	under	the	Act.	We	must	comply	with	provisions	of	the	Companies	Act	1981 regulating	the	payment	of	dividends	and	distributions.	A	Bermuda	company	may	not	declare	or	pay	a	dividend	or	make	a	distribution	out	of	contributed surplus	if	there	are	reasonable	grounds	for	believing	that:	(a)	the	company	is,	or	would	after	the	payment	be,	unable	to	pay	its	liabilities	as	they	become due;	or	(b)	the	realizable	value	of	the	company's	assets	would	thereby	be	less	than	the	aggregate	of	its	liabilities	and	its	issued	share	capital	and	share premium	accounts.	Further,	an

insurer	may	not	declare	or	pay	any	dividends	during	any	financial	year	if	it	would	cause	the	insurer	to	fail	to	meet	its	relevant	margins,	and	an	insurer which	fails	to	meet	its	relevant	margins	on	the	last	day	of	any	financial	year	may	not,	without	the	approval	of	the	Minister	of	Finance,	declare	or	pay	any dividends	during	the	next	financial	year.	In	addition,	some	of	ACE's	Bermuda	subsidiaries	qualify	as	"Class	4"	insurers	and	may	not	in	any	financial	year pay	dividends	which	would	exceed	25	percent	of	their	total	statutory	capital	and	surplus,	as	shown	on	their	statutory	balance	sheet	in	relation	to	the previous	financial	year,	unless	they	file	a	solvency	affidavit	at	least	seven	days	in	advance.

The	Executive	may	appoint	an	inspector	with	extensive	powers	to	investigate	the	affairs	of	an	insurer	if	he	or	she	believes	that	an	investigation	is required	in	the	interest	of	the	insurer's	policyholders	or	persons	who	may	become	policyholders.	In	order	to	verify	or	supplement	information	otherwise provided	to	him,	the	Executive	may	direct	an	insurer	to	produce	documents	or	information	relating	to	matters	connected	with	the	insurer's	business.	If	it appears	to	the	Executive	that	there	is	a	risk	of	the	insurer	becoming	insolvent,	or	that	the	insurer	is	in	breach	of	the	Act	or	any	conditions	of	its	registration under	the	Act,	the	Executive	may	direct	the	insurer	not	to	take	on	any	new	insurance	business,	not	to	vary	any	insurance	contract	if	the	effect	would	be	to increase	the	insurer's	liabilities,	not	to	make	certain	investments,	to	realize	certain	investments,	to	maintain	in,	or	transfer	to	the	custody	of	a	specified bank	certain	assets,	not	to	declare	or	pay	any	dividends	or	other	distributions,	or	to	restrict	the	making	of	such	payments	and/or	to	limit	its	premium income.

The	Act	also	requires	the	Authority	to	supervise	persons	carrying	on	insurance	business,	insurance	managers,	and	intermediaries	with	the	aim	of protecting	the	interests	of	clients	and	potential	clients	of	such	persons.

The	Act	requires	every	insurer	to	appoint	a	principal	representative	resident	in	Bermuda	and	to	maintain	a	principal	office	in	Bermuda.	The	principal representative	must	be	knowledgeable	in	insurance	and	is	responsible	for	arranging	the	maintenance	and	custody	of	the	statutory	accounting	records and	for	filing	the	annual	Statutory	Financial	Return.

# Other	International	Operations

The	extent	of	insurance	regulation	varies	significantly	among	the	countries	in	which	the	non-U.S.	ACE	operations	conduct	business.	While	each	country imposes	licensing,	solvency,	auditing,	and	financial	reporting	requirements,	the	type	and	extent	of	the	requirements	differ	substantially.	For	example:

•	in	some	countries,	insurers	are	required	to	prepare	and	file	quarterly	financial	reports,	and	in	others,	only	annual	reports;

•	some	regulators	require	intermediaries	to	be	involved	in	the	sale	of	insurance	products,	whereas	other	regulators	permit	direct	sales	contact	between the	insurer	and	the	customer;

•	the	extent	of	restrictions	imposed	upon	an	insurer's	use	of	foreign	reinsurance	vary;

•	policy	form	filing	and	rate	regulation	vary	by	country;

•	the	frequency	of	contact	and	periodic	on-site	examinations	by	insurance	authorities	differ	by	country;	and

•	regulatory	requirements	relating	to	insurer	dividend	policies	vary	by	country.

Significant	variations	can	also	be	found	in	the	size,	structure,	and	resources	of	the	local	regulatory	departments	that	oversee	insurance	activities.

Certain	regulators	prefer	close	relationships	with	all	subject	insurers	and	others	operate	a	risk-based	approach.

ACE	operates	in	some	countries	through	subsidiaries	and	in	some	countries	through	branches	of	those	subsidiaries.	Local	capital	requirements applicable	to	a	subsidiary	generally	include	its	branches.	Certain	ACE	companies	are	jointly	owned	with	local	companies	to	comply	with	legal requirements	for	local	ownership.	Other	legal	requirements	include	discretionary	licensing	procedures,	compulsory	cessions	of	reinsurance,	local retention	of	funds	and	records,	data	privacy	and	protection	program	requirements,	and	foreign	exchange	controls.	ACE's	international	companies	are also	subject	to	multinational	application	of	certain	U.S.	laws.

# Tax	Matters

Refer	to	"Risk	Factors",	under	Item	1A	below,	and	Note	2	m)	to	the	Consolidated	Financial	Statements,	under	Item	8.

# ITEM	1A. Risk	Factors

Factors	that	could	have	a	material	impact	on	our	results	of	operations	or	financial	condition	are	outlined	below.	Additional	risks	not	presently	known	to	us or	that	we	currently	deem	insignificant	may	also	impair	our	business	or	results	of	operations	as	they	become	known	facts	or	as	facts	and	circumstances change.	Any	of	the	risks	described	below	could	result	in	a	significant	or	material	adverse	effect	on	our	results	of	operations	or	financial	condition.

# Business

# The	current	recession	and	other	adverse	consequences	of	the	recent	U.S.	and	global	economic	and	financial	industry	downturns	could	harm our	business,	our	liquidity	and	financial	condition,	and	our	stock	price.

Global	market	and	economic	conditions	have	been	severely	disrupted.	These	conditions	may	potentially	affect	(among	other	aspects	of	our	business)	the demand	for	and	claims	made	under	our	products,	the	ability	of	customers,	counterparties	and	others	to	establish	or	maintain	their	relationships	with	us, our	ability	to	access	and	efficiently	use	internal	and	external	capital	resources,	the	availability	of	reinsurance	protection,	the	risks	we	assume	under reinsurance	programs	covering	variable	annuity	guarantees,	and	our	investment	performance.	Continued	volatility	in	the	U.S.	and	other	securities markets	may	adversely	affect	our	stock	price.

# Our	financial	condition	could	be	adversely	affected	by	the	occurrence	of	natural	and	man-made	disasters.

We	have	substantial	exposure	to	losses	resulting	from	natural	disasters,	man-made	catastrophes,	and	other	catastrophic	events.	Catastrophes	can	be caused	by	various	events,	including	hurricanes,	typhoons,	earthquakes,	hailstorms,	explosions,	severe	winter	weather,	fires,	war,	acts	of	terrorism, political	instability,	and	other	natural	or	man-made	disasters.	The	incidence	and	severity	of	catastrophes	are	inherently	unpredictable	and	our	losses	from catastrophes	could	be	substantial.	In	addition,	climate	conditions,	may	be	worsening,	primarily	through	increases	in	global	temperatures,	which	may	in the	future	increase	the	frequency	and	severity	of	natural	catastrophes	and	the	losses	resulting	there	from.	The	occurrence	of	claims	from	catastrophic events	could	result	in	substantial	volatility	in	our	results	of	operations	or	financial	condition	for	any	fiscal	quarter	or	year.	Increases	in	the	values	and concentrations	of	insured	property	may	also	increase	the	severity	of	these	occurrences	in	the	future.	Although	we	attempt	to	manage	our	exposure	to such	events	through	the	use	of	underwriting	controls	and	the	purchase	of	third-party	reinsurance,	catastrophic	events	are	inherently	unpredictable	and the	actual	nature	of	such	events	when	they	occur	could	be	more	frequent	or	severe	than	contemplated	in	our	pricing	and	risk	management	expectations. As	a	result,	the	occurrence	of	one	or	more	catastrophic	events	could	have	a	material	adverse	effect	on	our	results	of	operations	or	financial	condition.

# If	actual	claims	exceed	our	loss	reserves,	our	financial	results	could	be	adversely	affected.

Our	results	of	operations	and	financial	condition	depend	upon	our	ability	to	assess	accurately	the	potential	losses	associated	with	the	risks	that	we	insure and	reinsure.	We	establish	reserves	for	unpaid	losses	and	loss	expenses,	which	are	estimates	of	future	payments	of	reported	and	unreported	claims	for losses	and	related	expenses,	with	respect	to	insured	events	that	have	occurred	at	or	prior	to	the	date	of	the	balance	sheet.	The	process	of	establishing reserves	can	be	highly	complex	and	is	subject	to	considerable	variability	as	it	requires	the	use	of	informed	estimates	and	judgments.	These	estimates and	judgments	are	based	on	numerous	factors,	and	may	be	revised	as	additional	experience	and	other	data	become	available	and	are	reviewed,	as	new or	improved	methodologies	are	developed,	as	loss	trends	and	claims	inflation	impact	future	payments,	or	as	current	laws	or	interpretations	thereof change.

We	have	actuarial	staff	in	each	of	our	operating	segments	who	analyze	insurance	reserves	and	regularly	evaluate	the	levels	of	loss	reserves.	Any such	evaluations	could	result	in	future	changes	in	estimates	of	losses	or	reinsurance	recoverable	and	would	be	reflected	in	our	results	of	operations	in	the period	in	which	the	estimates	are	changed.	Losses	and	loss	expenses	are	charged	to	income	as	incurred.	Reserves	for	unpaid	losses	and	loss	expenses represent	the	estimated	ultimate	losses	and	loss	expenses	less	paid	losses	and	loss	expenses,	and	is	comprised	of	case	reserves	and	IBNR.	During	the loss	settlement	period,	which	can	be	many	years	in	duration	for	some	of	our	lines	of	business,	additional	facts	regarding	individual	claims	and	trends	often will	become	known.	As	these	become	apparent,	case	reserves	may	be	adjusted	by	allocation	from	IBNR	without	any	change	in	overall	reserves.	In addition,	application	of	statistical	and	actuarial	methods	may	require	the	adjustment	of	overall	reserves	upward	or	downward	from	time	to	time.

Included	in	our	liabilities	for	losses	and	loss	expenses	are	liabilities	for	latent	claims	such	as	asbestos	and	environmental.	At	December	31,	2008, these	A&E	liabilities	represented	approximately	eight	percent	of	our	liabilities	for	losses	and	loss

expenses.	These	claims	are	principally	related	to	claims	arising	from	remediation	costs	associated	with	hazardous	waste	sites	and	bodily-injury	claims related	to	exposure	to	asbestos	products	and	environmental	hazards.	The	estimation	of	these	liabilities	is	subject	to	many	complex	variables	including: the	current	legal	environment;	specific	settlements	that	may	be	used	as	precedents	to	settle	future	claims;	assumptions	regarding	multiple	recoveries	by claimants	against	various	defendants;	the	ability	of	a	claimant	to	bring	a	claim	in	a	state	in	which	they	have	no	residency	or	exposure;	the	ability	of	a policyholder	to	claim	the	right	to	non-products	coverage;	whether	high-level	excess	policies	have	the	potential	to	be	accessed	given	the	policyholder's claim	trends	and	liability	situation;	payments	to	unimpaired	claimants;	and	the	potential	liability	of	peripheral	defendants.

Accordingly,	the	ultimate	settlement	of	losses,	arising	from	either	latent	or	non-latent	causes,	may	be	significantly	greater	or	less	than	the	loss	and loss	expense	reserves	held	at	the	date	of	the	balance	sheet.	If	our	loss	reserves	are	determined	to	be	inadequate,	we	will	be	required	to	increase	loss reserves	at	the	time	of	such	determination	and	our	net	income	will	be	reduced.	If	the	increase	in	loss	reserves	is	large	enough,	we	could	incur	a	net	loss and	a	reduction	of	our	capital.

# The	effects	of	emerging	claim	and	coverage	issues	on	our	business	are	uncertain.

As	industry	practices	and	legislative,	regulatory,	judicial,	social,	financial	and	other	environmental	conditions	change,	unexpected	and	unintended	issues related	to	claims	and	coverage	may	emerge.	These	issues	may	adversely	affect	our	business	by	either	extending	coverage	beyond	our	underwriting intent	or	by	increasing	the	frequency	and	severity	of	claims.	In	some	instances,	these	changes	may	not	become	apparent	until	some	time	after	we	have issued	insurance	or	reinsurance	contracts	that	are	affected	by	the	changes.	As	a	result,	the	full	extent	of	liability	under	our	insurance	or	reinsurance contracts	may	not	be	known	for	many	years	after	a	contract	is	issued.

# The	failure	of	any	of	the	loss	limitation	methods	we	employ	could	have	an	adverse	effect	on	our	results	of	operations	or	financial	condition.

We	seek	to	limit	our	loss	exposure	by	writing	a	number	of	our	insurance	and	reinsurance	contracts	on	an	excess	of	loss	basis.	Excess	of	loss	insurance and	reinsurance	indemnifies	the	insured	against	losses	in	excess	of	a	specified	amount.	In	addition,	we	limit	program	size	for	each	client	and	purchase third-party	reinsurance	for	our	own	account.	In	the	case	of	our	assumed	proportional	reinsurance	treaties,	we	seek	per	occurrence	limitations	or	loss	and loss	expense	ratio	caps	to	limit	the	impact	of	losses	ceded	by	the	client.	In	proportional	reinsurance,	the	reinsurer	shares	a	proportional	part	of	the premiums	and	losses	of	the	reinsured.	We	also	seek	to	limit	our	loss	exposure	by	geographic	diversification.	Geographic	zone	limitations	involve significant	underwriting	judgments,	including	the	determination	of	the	area	of	the	zones	and	the	inclusion	of	a	particular	policy	within	a	particular	zone's limits.	Various	provisions	of	our	policies,	such	as	limitations	or	exclusions	from	coverage	or	choice	of	forum	negotiated	to	limit	our	risks,	may	not	be enforceable	in	the	manner	we	intend.	As	a	result,	one	or	more	catastrophic	or	other	events	could	result	in	claims	that	substantially	exceed	our expectations,	which	could	have	an	adverse	effect	on	our	results	of	operations	or	financial	condition.

# We	may	be	unable	to	purchase	reinsurance,	and	if	we	successfully	purchase	reinsurance,	we	are	subject	to	the	possibility	of	non-payment.

We	purchase	reinsurance	to	protect	certain	ACE	companies	against	catastrophes,	to	increase	the	amount	of	protection	we	can	provide	our	clients,	and	as part	of	our	overall	risk	management	strategy.	Our	reinsurance	business	also	purchases	some	retrocessional	protection.	A	retrocessional	reinsurance agreement	allows	a	reinsurer	to	cede	to	another	company	all	or	part	of	the	reinsurance	that	was	originally	assumed	by	the	reinsurer.	A	reinsurer's	or retrocessionaire's	insolvency,	or	inability	or	unwillingness	to	make	timely	payments	under	the	terms	of	its	reinsurance	agreement	with	us,	could	have	an adverse	effect	on	us	because	we	remain	liable	to	the	insured.	From	time	to	time,	market	conditions	have	limited,	and	in	some	cases	have	prevented, insurers	and	reinsurers	from	obtaining	the	types	and	amounts	of	reinsurance	or	retrocessional	reinsurance	that	they	consider	adequate	for	their	business needs.

There	is	no	guarantee	our	desired	amounts	of	reinsurance	or	retrocessional	reinsurance	will	be	available	in	the	marketplace	in	the	future.	In addition	to	capacity	risk,	the	remaining	capacity	may	not	be	on	terms	we	deem	appropriate	or	acceptable	or	with	companies	with	whom	we	want	to	do business.	Finally,	we	face	some	degree	of	counterparty	risk	whenever	we	purchase	reinsurance	or	retrocessional	reinsurance.	Consequently,	the insolvency,	inability	or	unwillingness	of	any	of	our	present	or	future	reinsurers	to	make	timely	payments	to	us	under	the	terms	of	our	reinsurance	or retrocessional	agreements	could	have	an	adverse	effect	on	us.	At	December	31,	2008,	we	had	$13.9	billion	of	reinsurance	recoverables,	net	of	reserves for	uncollectible	recoverables.

As	part	of	the	restructuring	of	INA	Financial	Corporation	and	its	subsidiaries	that	occurred	in	1996,	Insurance	Company	of	North	America	(INA)	was divided	into	two	separate	corporations:	an	active	insurance	company	that	retained	the	INA	name	and	continued	to	write	P&C	business	and	an	inactive run-off	company,	now	called	Century	Indemnity	Company	(Century).	The

A&E	exposures	of	substantially	all	of	INA's	U.S.	P&C	companies,	now	our	subsidiaries,	were	either	allocated	to	Century	(as	a	result	of	the	restructuring) or	reinsured	to	subsidiaries	of	Brandywine,	primarily	Century.	Certain	of	our	subsidiaries	are	primarily	liable	for	A&E	and	other	exposures	they	have reinsured	to	Century.	As	of	December	31,	2008,	the	aggregate	reinsurance	balances	ceded	by	our	active	subsidiaries	to	Century	were	$1.3	billion. Should	Century	experience	adverse	loss	reserve	development	in	the	future	and	should	Century	be	placed	into	rehabilitation	or	liquidation,	the reinsurance	recoverables	due	to	Century's	affiliates	would	be	payable	only	after	the	payment	in	full	of	certain	expenses	and	liabilities,	including administrative	expenses	and	direct	policy	liabilities.	Thus,	the	intercompany	reinsurance	recoverables	would	be	at	risk	to	the	extent	of	the	shortage	of assets	remaining	to	pay	these	recoverables.	While	we	believe	the	intercompany	reinsurance	recoverables	from	Century	are	not	impaired	at	this	time,	we cannot	assure	you	that	adverse	development	with	respect	to	Century's	loss	reserves,	if	manifested,	will	not	result	in	Century's	insolvency,	which	could result	in	our	recognizing	a	loss	to	the	extent	of	any	uncollectible	reinsurance	from	Century.

# Our	net	income	may	be	volatile	because	certain	products	offered	by	our	Life	business	expose	us	to	reserve	and	fair	value	liability	changes that	are	directly	affected	by	market	and	other	factors	and	assumptions.

Our	pricing	and	valuation	of	life	insurance	and	annuity	products,	including	reinsurance	programs,	are	based	upon	various	assumptions,	including	but	not limited	to	market	changes,	mortality	rates,	morbidity	rates,	and	policyholder	behavior.	Significant	deviations	in	actual	experience	from	our	pricing assumptions	could	have	an	adverse	effect	on	the	profitability	of	our	products	and	our	business.

Under	reinsurance	programs	covering	variable	annuity	guarantees,	we	assume	the	risk	of	guaranteed	minimum	death	benefits	(GMDB)	and guaranteed	minimum	income	benefits	(GMIB)	associated	with	variable	annuity	contracts.	Our	net	income	is	directly	impacted	by	changes	in	the	reserves calculated	in	connection	with	the	reinsurance	of	GMDB	and	GMIB	liabilities.	In	addition,	our	net	income	is	directly	impacted	by	the	change	in	the	fair value	of	the	GMIB	liability.	The	reserve	and	fair	value	liability	calculations	are	directly	affected	by	market	factors,	including	equity	levels,	interest	rate levels,	credit	risk,	and	implied	volatilities.	The	reserve	and	fair	value	liability	calculations	are	also	affected	by	assumptions	about	policyholder	mortality and	changes	in	policyholder	behavior,	most	significantly	withdrawal	and	annuitization.	Significant	changes	in	behavior	as	a	result	of	policyholder reactions	to	market	or	economic	conditions	could	be	material.	ACE	views	our	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.	Refer	to	the	"Critical	Accounting	Estimates	–	Guaranteed minimum	income	benefits	derivatives",	under	Item	7	and	"Quantitative	and	Qualitative	Disclosures	about	Market	Risk	–	Reinsurance	of	GMIB	and	GMDB guarantees",	under	Item	7A	for	more	information.

# A	failure	in	our	operational	systems	or	infrastructure	or	those	of	third	parties	could	disrupt	business,	damage	our	reputation,	and	cause losses.

ACE's	operations	rely	on	the	secure	processing,	storage,	and	transmission	of	confidential	and	other	information	in	its	computer	systems	and	networks. ACE's	business	depends	on	effective	information	systems	and	the	integrity	and	timeliness	of	the	data	it	uses	to	run	its	business.	Our	ability	to	adequately price	products	and	services,	to	establish	reserves,	to	provide	effective	and	efficient	service	to	our	customers,	and	to	timely	and	accurately	report	our financial	results	also	depends	significantly	on	the	integrity	of	the	data	in	our	information	systems.	Although	we	take	protective	measures	and	endeavor	to modify	them	as	circumstances	warrant,	our	computer	systems,	software,	and	networks	may	be	vulnerable	to	unauthorized	access,	computer	viruses	or other	malicious	code,	and	other	events	that	could	have	security	consequences.	If	one	or	more	of	such	events	occur,	this	potentially	could	jeopardize ACE's	or	our	clients'	or	counterparties'	confidential	and	other	information	processed	and	stored	in,	and	transmitted	through,	our	computer	systems	and networks,	or	otherwise	cause	interruptions	or	malfunctions	in	ACE's,	its	clients',	its	counterparties',	or	third	parties'	operations,	which	could	result	in significant	losses	or	reputational	damage.	ACE	may	be	required	to	expend	significant	additional	resources	to	modify	our	protective	measures	or	to investigate	and	remediate	vulnerabilities	or	other	exposures,	and	we	may	be	subject	to	litigation	and	financial	losses	that	are	either	not	insured	against	or not	fully	covered	by	insurance	maintained.

Despite	the	contingency	plans	and	facilities	we	have	in	place,	our	ability	to	conduct	business	may	be	adversely	affected	by	a	disruption	of	the infrastructure	that	supports	our	business	in	the	communities	in	which	we	are	located.	This	may	include	a	disruption	involving	electrical,	communications, transportation,	or	other	services	used	by	ACE.	These	disruptions	may	occur,	for	example,	as	a	result	of	events	that	affect	only	the	buildings	occupied	by ACE	or	as	a	result	of	events	with	a	broader	effect

on	the	cities	where	those	buildings	are	located.	If	a	disruption	occurs	in	one	location	and	ACE	employees	in	that	location	are	unable	to	occupy	its	offices and	conduct	business	or	communicate	with	or	travel	to	other	locations,	our	ability	to	service	and	interact	with	clients	may	suffer	and	we	may	not	be	able	to successfully	implement	contingency	plans	that	depend	on	communication	or	travel.

# Employee	error	and	misconduct	may	be	difficult	to	detect	and	prevent	and	could	adversely	affect	our	business,	results	of	operations,	and financial	condition.

Losses	may	result	from,	among	other	things,	fraud,	errors,	failure	to	document	transactions	properly	or	to	obtain	proper	internal	authorization,	or	failure	to comply	with	regulatory	requirements.	It	is	not	always	possible	to	deter	or	prevent	employee	misconduct	and	the	precautions	ACE	takes	to	prevent	and detect	this	activity	may	not	be	effective	in	all	cases.	Resultant	losses	could	adversely	affect	our	business,	results	of	operations,	and	financial	condition.

# The	integration	of	acquired	companies	may	not	be	as	successful	as	we	anticipate.

Acquisitions	involve	numerous	risks,	including	operational,	strategic	and	financial	risks	such	as	potential	liabilities	associated	with	the	acquired	business. Difficulties	in	integrating	an	acquired	company	may	result	in	the	acquired	company	performing	differently	than	we	currently	expect	or	in	our	failure	to realize	anticipated	expense-related	efficiencies.	Our	existing	businesses	could	also	be	negatively	impacted	by	acquisitions.	For	example,	our	2008 acquisition	of	Combined	Insurance	resulted	in	our	obtaining	a	large	new	sales	force,	creating	new	distribution	channels	for	the	Company.	These	changes to	our	distribution	system	may	require	management	to	divert	its	attention	from	other	operational	matters	and	could	create	new	liabilities	for	us.

# Financial	Strength	Ratings

# A	decline	in	our	ratings	could	affect	our	standing	among	brokers	and	customers	and	cause	our	premiums	and	earnings	to	decrease.

Ratings	have	become	an	increasingly	important	factor	in	establishing	the	competitive	position	of	insurance	and	reinsurance	companies.	The	objective	of these	rating	systems	is	to	provide	an	opinion	of	an	insurer's	financial	strength	and	ability	to	meet	ongoing	obligations	to	its	policyholders.	Our	financial strength	ratings	reflect	the	rating	agencies'	opinions	of	our	claims	paying	ability,	are	not	evaluations	directed	to	investors	in	our	securities,	and	are	not recommendations	to	buy,	sell,	or	hold	our	securities.	If	our	financial	strength	ratings	are	reduced	from	their	current	levels	by	one	or	more	of	these	rating agencies,	our	competitive	position	in	the	insurance	industry	could	suffer	and	it	would	be	more	difficult	for	us	to	market	our	products.	A	downgrade, therefore,	could	result	in	a	substantial	loss	of	business	as	insureds,	ceding	companies,	and	brokers	move	to	other	insurers	and	reinsurers	with	higher ratings.	If	one	or	more	of	our	ratings	were	downgraded,	we	could	also	incur	higher	borrowing	costs,	and	our	ability	to	access	the	capital	markets	could	be impacted.	Additionally,	we	could	be	required	to	post	collateral	or	be	faced	with	the	cancellation	of	premium	in	certain	circumstances.	Refer	to	"Ratings", under	Item	7.

We	cannot	give	any	assurance	regarding	whether	or	to	what	extent	any	of	the	rating	agencies	may	downgrade	our	ratings	in	the	future.

# Loss	of	Key	Executives

# We	could	be	adversely	affected	by	the	loss	of	one	or	more	key	executives	or	by	an	inability	to	attract	and	retain	qualified	personnel.

Our	success	depends	on	our	ability	to	retain	the	services	of	our	existing	key	executives	and	to	attract	and	retain	additional	qualified	personnel	in	the future.	The	loss	of	the	services	of	any	of	our	key	executives	or	the	inability	to	hire	and	retain	other	highly	qualified	personnel	in	the	future	could	adversely affect	our	ability	to	conduct	our	business.	We	do	not	maintain	key	person	life	insurance	policies	with	respect	to	our	employees.

Many	of	our	senior	executives	working	in	Bermuda,	including	our	Chairman	and	Chief	Executive	Officer,	our	Chief	Financial	Officer,	our	Chief Accounting	Officer,	our	Chief	Actuary	&	Risk	Officer,	and	our	General	Counsel,	are	not	Bermudian.	Under	Bermuda	law,	non-Bermudians	(other	than spouses	of	Bermudians	and	holders	of	permanent	resident's	certificates)	may	not	engage	in	any	gainful	occupation	in	Bermuda	without	an	appropriate governmental	work	permit.	Our	success	may	depend	in	part	on	the	continued	services	of	key	employees	in	Bermuda.	A	work	permit	may	be	granted	or renewed	upon	showing	that,	after	proper	public	advertisement,	no	Bermudian	(or	spouse	of	a	Bermudian	or	holder	of	a	permanent	resident's	certificate) is	available	who	meets	the	minimum	standards	reasonably	required	by	the	employer.	The	Bermuda	government's	policy	places	a	six-year	term	limit	on individuals	with	work	permits,	subject	to	certain	exemptions	for	key	employees.	A	work	permit	may	be

issued	with	an	expiry	date	that	is	one	to	five	years	later,	and	no	assurances	can	be	given	that	any	work	permit	will	be	issued	or,	if	issued,	renewed	upon the	expiration	of	the	relevant	term.

# Brokers	and	Customers

# Since	we	depend	on	a	few	brokers	for	a	large	portion	of	our	revenues,	loss	of	business	provided	by	any	one	of	them	could	adversely	affect us.

We	market	our	insurance	and	reinsurance	worldwide	primarily	through	insurance	and	reinsurance	brokers.	Marsh,	Inc.	and	its	affiliates	and	Aon Corporation	and	its	affiliates	provided	approximately	13	percent	and	9	percent,	respectively,	of	our	gross	premiums	written	in	the	year	ended

December	31,	2008.	Loss	of	all	or	a	substantial	portion	of	the	business	provided	by	one	or	more	of	these	brokers	could	have	a	material	adverse	effect	on our	business.

# Our	reliance	on	brokers	subjects	us	to	credit	risk.

In	accordance	with	industry	practice,	we	generally	pay	amounts	owed	on	claims	under	our	insurance	and	reinsurance	contracts	to	brokers,	and	these brokers,	in	turn,	pay	these	amounts	over	to	the	clients	that	have	purchased	insurance	or	reinsurance	from	us.	Although	the	law	is	unsettled	and	depends upon	the	facts	and	circumstances	of	the	particular	case,	in	some	jurisdictions,	if	a	broker	fails	to	make	such	a	payment,	we	might	remain	liable	to	the insured	or	ceding	insurer	for	the	deficiency.	Conversely,	in	certain	jurisdictions,	when	the	insured	or	ceding	insurer	pays	premiums	for	these	policies	to brokers	for	payment	over	to	us,	these	premiums	might	be	considered	to	have	been	paid	and	the	insured	or	ceding	insurer	will	no	longer	be	liable	to	us	for those	amounts,	whether	or	not	we	have	actually	received	the	premiums	from	the	broker.	Consequently,	we	assume	a	degree	of	credit	risk	associated with	brokers	with	whom	we	transact	business.	However,	due	to	the	unsettled	and	fact-specific	nature	of	the	law,	we	are	unable	to	quantify	our	exposure	to this	risk.	To	date,	we	have	not	experienced	any	material	losses	related	to	these	credit	risks.

# Certain	of	our	policies	subject	us	to	credit	risk	from	customers.

We	offer	high-deductible	policies	which	are	primarily	provided	in	the	workers'	compensation	and	certain	general	liability	protection	lines	of	our	business. Under	the	terms	of	these	policies,	our	customers	are	responsible	for	a	set	dollar	amount	per	claim	and/or	an	aggregate	amount	for	all	covered	claims before	we	are	ultimately	liable.	However,	we	may	be	required	under	such	policies	to	pay	third	party	claimants	directly	and	then	seek	reimbursement	for losses	within	the	deductible	from	our	customers.	This	subjects	us	to	credit	risk	from	these	customers.	While	we	generally	seek	to	mitigate	this	risk through	collateral	agreements	and	maintain	a	provision	for	uncollectible	accounts	associated	with	this	credit	exposure,	an	increased	inability	of customers	to	reimburse	us	in	this	context	could	have	a	material	adverse	effect	on	our	financial	condition	and	results.	In	addition,	a	lack	of	credit	available to	our	customers	could	impact	our	ability	to	collateralize	this	risk	to	our	satisfaction,	which	in	turn,	could	reduce	the	amount	of	high-deductible	policies	we could	offer.

# Liquidity	and	Investments

# Our	investment	performance	may	affect	our	financial	results	and	ability	to	conduct	business.

Our	funds	are	invested	by	professional	investment	management	firms	under	the	direction	of	our	management	team	in	accordance	with	investment guidelines	approved	by	the	Finance	and	Investment	Committee	of	the	Board	of	Directors.	Although	our	investment	guidelines	stress	diversification	of	risks and	conservation	of	principal	and	liquidity,	our	investments	are	subject	to	market	risks,	as	well	as	risks	inherent	in	individual	securities.	The	volatility	of	our loss	claims	may	force	us	to	liquidate	securities,	which	may	cause	us	to	incur	capital	losses.	Realized	and	unrealized	losses	in	our	investment	portfolio could	significantly	decrease	our	book	value,	thereby	affecting	our	ability	to	conduct	business.	The	recent	investment	market	volatility,	stock	market decline	and	increased	credit	spreads	have	resulted	in	significant	realized	and	unrealized	losses	in	our	investment	portfolio.	For	the	year	ended December	31,	2008,	we	experienced	4.0	billion	of	pre-tax	realized	and	unrealized	losses	on	our	investment	portfolio.	Our	investment	portfolio	was	$39.7 at	December	31,	2008.

# Recent	financial	markets	events	create	greater	risks	relating	to	impairment	of	investments.

As	a	part	of	our	ongoing	analysis	of	our	investment	portfolio,	we	are	required	to	assess	whether	the	debt	and	equity	securities	we	hold	for	which	we	have recorded	an	unrealized	loss	have	been	"other	than	temporarily	impaired".	Refer	to	Note	4	under	Item	8	and	our	disclosure	for	details	and	results	of	our analysis.	This	analysis	requires	a	high	degree	of	judgment	and	requires	us	to	make	certain	assessments	about	the	potential	for	recovery	of	the	assets	we hold.	The	population	of	our	investments	in

unrealized	loss	positions	has	dramatically	increased	as	a	result	of	recent	disruption	in	the	financial	markets,	which	has	increased	the	significance	and potential	impact	of	the	judgments	we	have	to	make.	A	continued	decline	in	relevant	stock	and	other	financial	markets	could	adversely	affect	our	net income	and	other	financial	results,	and	may	result	in	additional	impairments.

# We	may	be	adversely	affected	by	interest	rate	changes.

Our	operating	results	are	affected	by	the	performance	of	our	investment	portfolio.	Our	investment	portfolio	contains	fixed	income	investments	and	may	be adversely	affected	by	changes	in	interest	rates.	Volatility	in	interest	rates	could	also	have	an	adverse	effect	on	our	investment	income	and	operating results.	For	example,	if	interest	rates	decline,	funds	reinvested	will	earn	less	than	the	maturing	investment.

Interest	rates	are	highly	sensitive	to	many	factors,	including	inflation,	monetary	and	fiscal	policies,	and	domestic	and	international	political conditions.	Although	we	take	measures	to	manage	the	risks	of	investing	in	a	changing	interest	rate	environment,	we	may	not	be	able	to	effectively mitigate	interest	rate	sensitivity.	Our	mitigation	efforts	include	maintaining	a	high	quality	portfolio	with	a	relatively	short	duration	to	reduce	the	effect	of interest	rate	changes	on	book	value.	A	significant	increase	in	interest	rates	could	have	an	adverse	effect	on	our	book	value.

# We	may	require	additional	capital	or	financing	sources	in	the	future,	which	may	not	be	available	or	may	be	available	only	on	unfavorable terms.

Our	future	capital	and	financing	requirements	depend	on	many	factors,	including	our	ability	to	write	new	business	successfully	and	to	establish	premium rates	and	reserves	at	levels	sufficient	to	cover	losses,	as	well	as	our	investment	performance.	We	may	need	to	raise	additional	funds	through	financings or	access	funds	through	existing	or	new	credit	facilities.	We	also	from	time	to	time	seek	to	refinance	debt	or	credit	as	amounts	become	due	or commitments	expire.	Any	equity	or	debt	financing	or	refinancing,	if	available	at	all,	may	be	on	terms	that	are	not	favorable	to	us.	In	the	case	of	equity financings,	dilution	to	our	shareholders	could	result,	and	in	any	case	such	securities	may	have	rights,	preferences,	and	privileges	that	are	senior	to	those of	our	Common	Shares.	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.	Those	banks	may	not	be	able	to	meet	their	funding	commitments	if	they	experience	shortages	of	capital	and	liquidity	or	if	they experience	excessive	volumes	of	borrowing	requests	within	a	short	period	of	time,	and	we	might	be	forced	to	replace	credit	sources	in	a	difficult market.	Also	recent	consolidation	in	the	banking	industry	could	lead	to	increased	reliance	on	and	exposure	to	particular	institutions.	If	we	cannot	obtain adequate	capital	or	sources	of	credit	on	favorable	terms,	or	at	all,	we	could	be	forced	to	utilize	assets	otherwise	available	for	our	business	operations,	and our	business,	operating	results,	and	financial	condition	could	be	adversely	affected.	It	is	possible	that,	in	the	future,	one	or	more	of	the	rating	agencies may	reduce	our	existing	ratings.	If	one	or	more	of	our	ratings	were	downgraded,	we	could	incur	higher	borrowing	costs	and	our	ability	to	access	the capital	markets	could	be	impacted.

# We	may	be	required	to	post	additional	collateral	because	of	changes	in	our	reinsurance	liabilities	to	U.S.-regulated	insurance	companies.

If	our	reinsurance	liabilities	increase,	we	may	be	required	to	post	additional	collateral	for	U.S.-based	insurance	company	clients,	if	the	ACE	company providing	the	reinsurance	is	an	unauthorized	reinsurer	for	U.S.	statutory	purposes.	The	need	to	post	this	additional	collateral,	if	significant	enough,	may require	us	to	sell	investments	at	a	loss	in	order	to	provide	securities	of	suitable	credit	quality,	or	otherwise	secure	adequate	capital	at	an	unattractive	cost. This	could	adversely	impact	our	net	income,	and	liquidity	and	capital	resources.

# Our	investment	portfolio	includes	below	investment-grade	securities	that	have	a	higher	degree	of	credit	or	default	risk	which	could	adversely affect	our	results	of	operations	and	financial	condition.

Our	fixed	income	portfolio	is	primarily	invested	in	high	quality,	investment-grade	securities.	However,	we	invest	a	smaller	portion	of	the	portfolio	in	below investment-grade	securities.	At	December	31,	2008,	below	investment-grade	securities	comprised	approximately	5	percent	of	our	fixed	income	portfolio. These	securities,	which	pay	a	higher	rate	of	interest,	also	have	a	higher	degree	of	credit	or	default	risk.	These	securities	may	also	be	less	liquid	in	times of	economic	weakness	or	market	disruptions.	While	we	have	put	in	place	procedures	to	monitor	the	credit	risk	and	liquidity	of	our	invested	assets,	it	is possible	that,	in	periods	of	economic	weakness	(such	as	the	current	recession),	we	may	experience	default	losses	in	our	portfolio.	This	may	result	in	a reduction	of	net	income	and	capital.

# We	could	be	adversely	affected	by	a	downgrade	of	the	financial	strength	or	financial	enhancement	ratings	of	Assured	Guaranty	Ltd.	(AGO)	or any	of	its	insurance	subsidiaries,	and	our	net	income	may	be	volatile	because	AGO	assumes	credit	derivatives	which	are	marked-to-market quarterly.

AGO	is	a	Bermuda-based	holding	company	that	provides,	through	its	operating	subsidiaries,	credit	enhancement	products	to	the	public	finance, structured	finance,	and	mortgage	markets.	Our	relationship	with	AGO	is	limited	to	our	equity	investment,	which	had	a	carrying	value	of	$397	million,	or $20.73	per	share,	compared	with	a	market	value	of	$218	million,	or	$11.40	per	share,	at	December	31,	2008.	We	conduct	no	financial	guaranty	business directly	or	with	AGO	and	we	retain	no	financial	guaranty	exposures	or	reinsurance	agreements	with	AGO.

The	ratings	assigned	by	the	major	rating	agencies	to	AGO	and	its	insurance	subsidiaries	are	subject	to	periodic	review	and	may	be	downgraded	by one	or	more	of	the	rating	agencies	at	any	time.	For	example,	in	November	2008,	Moody's	Investors	Service	downgraded	the	ratings	of	AGO	and	its insurance	subsidiaries.	Ratings	downgrades	have	an	adverse	effect	on	AGO's	competitive	position	and	its	prospects	for	future	business	opportunities.	A downgrade	may	also	reduce	the	value	of	the	reinsurance	offered	by	AGO,	which	may	no	longer	be	of	sufficient	economic	value	to	its	customers	to continue	to	cede	to	its	subsidiaries	at	economically	viable	rates.	In	certain	circumstances,	a	ratings	downgrade	may	also	entitle	a	ceding	company	to recapture	business	ceded	to	an	AGO	subsidiary	or,	alternatively,	to	retroactively	increase	cession	commissions	to	an	AGO	subsidiary,	either	of	which could	result	in	a	potentially	significant	negative	impact	to	AGO	earnings,	and,	therefore,	our	proportionate	share	thereof	(21	percent	at	December	31, 2008).

AGO's	net	income	and,	therefore,	our	proportionate	share	thereof,	may	be	volatile	because	a	portion	of	the	credit	risk	AGO	assumes	is	in	the	form of	credit	derivatives	that	are	marked-to-market	quarterly.	Any	event	causing	credit	spreads	on	an	underlying	security	referenced	in	a	credit	derivative	in AGO's	portfolio	either	to	widen	or	to	tighten	will	affect	the	fair	value	of	the	credit	derivative	and	may	increase	the	volatility	of	AGO's	earnings	and, therefore,	our	proportionate	share	thereof.

On	November	14,	2008,	Assured	Guaranty	Ltd.	(AGO)	announced	a	definitive	agreement	to	purchase	Financial	Security	Assurance,	Inc.	(FSA) from	Dexia	SA	(Dexia)	for	a	purchase	price	of	$722	million.	This	transaction	will	be	funded	by	$361	million	in	cash	and	44,657,000	common	shares	of AGO.	The	acquisition	is	expected	to	close	in	March	2009.	AGO	will	finance	the	cash	portion	of	the	acquisition	with	proceeds	from	a	public	equity	offering to	WL	Ross	&	Co	LLC	(WLR)	at	a	per	share	price	between	a	floor	of	$6.00	and	a	ceiling	of	$8.50.	EITF	08-6,	Equity	Method	Investment	Accounting Considerations,	requires	ACE	to	account	for	AGO's	issuance	of	shares,	and	resulting	dilutive	effect,	as	if	we	had	sold	a	proportionate	share	of	our investment.	Assuming	completion	of	the	planned	share	issuances,	ACE	will	no	longer	be	deemed	to	exert	significant	influence	over	AGO	and	must account	for	our	AGO	investment	as	an	available-for-sale	equity	security	in	accordance	with	FAS	115,	Accounting	for	Certain	Investments	in	Debt	and Equity	Securities	(FAS	115).	FAS	115	requires	that	we	then	carry	our	AGO	investment	at	fair	value	with	any	unrealized	gains	and	losses	reflected	in other	comprehensive	income.	Assuming	AGO	had	completed	its	share	issuances	associated	with	the	FSA	acquisition	on	December	31,	2008,	the application	of	FAS	115	would	have	reduced	our	book	value	by	approximately	$179	million.

# Exchange	Rates

# Our	operating	results	may	be	adversely	affected	by	currency	fluctuations.

Our	functional	currency	is	the	U.S.	dollar.	Many	of	our	non-U.S.	companies	maintain	both	assets	and	liabilities	in	local	currencies.	Therefore,	foreign exchange	risk	is	generally	limited	to	net	assets	denominated	in	those	foreign	currencies.	Foreign	exchange	risk	is	reviewed	as	part	of	our	risk management	process.	Locally	required	capital	levels	are	invested	in	home	currencies	in	order	to	satisfy	regulatory	requirements	and	to	support	local insurance	operations.	The	principal	currencies	creating	foreign	exchange	risk	are	the	British	pound	sterling,	the	euro,	and	the	Canadian	dollar.	For	the year	ended	December	31,	2008,	approximately	7.8	percent	of	our	net	assets	were	denominated	in	foreign	currencies.	We	may	experience	losses resulting	from	fluctuations	in	the	values	of	non-U.S.	currencies,	which	could	adversely	impact	our	results	of	operations	and	financial	condition.

# Regulatory	and	Other	Governmental	Developments

# The	regulatory	regimes	under	which	we	operate,	and	potential	changes	thereto,	could	have	an	adverse	effect	on	our	business.

Our	insurance	and	reinsurance	subsidiaries	conduct	business	globally.	Our	businesses	in	each	jurisdiction	are	subject	to	varying	degrees	of	regulation and	supervision.	The	laws	and	regulations	of	the	jurisdictions	in	which	our	insurance	and	reinsurance	subsidiaries	are	domiciled	require,	among	other things,	that	these	subsidiaries	maintain	minimum	levels	of	statutory	capital,	surplus,	and	liquidity,	meet	solvency	standards,	and	submit	to	periodic examinations	of	their	financial	condition.	In	some	jurisdictions,	laws	and	regulations	also	restrict	payments	of	dividends	and	reductions	of	capital. Applicable	statutes,	regu-

lations,	and	policies	may	also	restrict	the	ability	of	these	subsidiaries	to	write	insurance	and	reinsurance	policies,	to	make	certain	investments,	and	to distribute	funds.	The	purpose	of	insurance	laws	and	regulations	generally	is	to	protect	insureds	and	ceding	insurance	companies,	not	our	shareholders. We	may	not	be	able	to	comply	fully	with,	or	obtain	appropriate	exemptions	from,	applicable	statutes	and	regulations.	Failure	to	comply	with	or	to	obtain appropriate	authorizations	and/or	exemptions	under	any	applicable	laws	and	regulations	could	result	in	restrictions	on	our	ability	to	do	business	or undertake	activities	that	are	regulated	in	one	or	more	of	the	jurisdictions	in	which	we	conduct	business	and	could	subject	us	to	fines	and	other	sanctions. In	addition,	changes	in	the	laws	or	regulations	to	which	our	insurance	and	reinsurance	subsidiaries	are	subject	could	have	an	adverse	effect	on	our business.

# Current	legal	and	regulatory	activities	relating	to	insurance	brokers	and	agents,	contingent	commissions,	and	certain	finite-risk	insurance products	could	adversely	affect	our	business,	results	of	operations,	and	financial	condition.

Beginning	in	2004,	ACE	received	numerous	regulatory	inquiries,	subpoenas,	interrogatories,	and	civil	investigative	demands	from	regulatory	authorities in	connection	with	pending	investigations	of	insurance	industry	practices.	ACE	is	cooperating	and	will	continue	to	cooperate	with	such	inquiries.	We cannot	assure	you	that	we	will	not	receive	any	additional	requests	for	information	or	subpoenas	or	what	actions,	if	any,	any	of	these	governmental agencies	will	take	as	a	result	of	these	investigations.	Additionally,	at	this	time,	we	are	unable	to	predict	the	potential	effects,	if	any,	that	these	actions	may have	upon	the	insurance	and	reinsurance	markets	and	industry	business	practices	or	what,	if	any,	changes	may	be	made	to	laws	and	regulations regarding	the	industry	and	financial	reporting.	Any	of	the	foregoing	could	adversely	affect	our	business,	results	of	operations,	and	financial	condition.

# Current	legislative	activity	relating	to	New	York	workers'	compensation	surcharges	and	assessments	could	adversely	affect	our	results	of operations.

The	New	York	legislature,	as	part	of	the	2009-10	State	budget,	is	considering	language	that,	if	enacted,	would	require	an	insurer	which	(1)	paid	to	the Workers'	Compensation	Board	various	statutory	assessments	in	an	amount	less	than	that	insurer	"collected"	from	insured	employers	in	a	given	year	and (2)	"has	identified	any	funds	collected	but	not	paid	to	the	workers'	compensation	board,	as	measurable	and	available,	as	of	November	1,	2008"	to	pay retroactive	assessments	to	the	Board.	The	language,	and	impact,	of	the	proposed	legislation	is	uncertain	because	it	uses	terms	and	dates	that	are	not readily	identifiable	with	respect	to	insurers'	statutory	financial	statements.	Our	understanding	is	that	the	legislation	is	intended	to	address	certain inconsistencies	in	the	New	York	State	laws	regulating	the	calculation	of	Workers'	Compensation	assessments	by	insurance	carriers	and	the	remittance	of those	funds	to	the	State.	Although	it	is	impossible	to	predict	the	outcome	of	the	legislative	process,	we	are	confident	that	ACE	has	complied	with	the	law in	all	respects.	We	have	established	a	contingency	based	on	our	best	estimate	of	the	potential	liability	that	could	result	from	the	enactment	of	the legislation	or	other	events	surrounding	this	topic,	based	on	the	facts	and	circumstances	at	this	time.	Such	contingency	may	be	increased	or	decreased	as circumstances	develop.

# Events	may	result	in	political,	regulatory,	and	industry	initiatives	which	could	adversely	affect	our	business.

The	insurance	industry	is	affected	by	political,	judicial,	and	legal	developments	that	may	create	new	and	expanded	theories	of	liability.	Such	changes	may result	in	delays	or	cancellations	of	products	and	services	by	insurers	and	reinsurers,	which	could	adversely	affect	our	business.	In	addition,	the	current economic	climate	and,	in	the	U.S.,	the	change	in	presidential	administration	in	January	2009	present	additional	uncertainties	and	risks	relating	to increased	regulation	and	the	potential	for	increased	involvement	of	the	U.S.	and	other	governments	in	the	financial	services	industry.

Government	intervention	has	also	occurred	in	the	insurance	and	reinsurance	markets	in	relation	to	terrorism	coverage	both	in	the	U.S.	and	through industry	initiatives	in	other	countries.	The	Terrorism	Risk	Insurance	Act	(TRIA),	which	was	enacted	in	2002	to	ensure	the	availability	of	insurance coverage	for	certain	types	of	terrorist	acts	in	the	U.S.,	was	extended	in	2007	for	seven	years,	through	2014.

Government	intervention	and	the	possibility	of	future	interventions	has	created	uncertainty	in	the	insurance	and	reinsurance	markets	about	the definition	of	terrorist	acts	and	the	extent	to	which	future	coverages	will	extend	to	terrorist	acts.	Government	regulators	are	generally	concerned	with	the protection	of	policyholders	to	the	exclusion	of	other	constituencies,	including	shareholders	of	insurers	and	reinsurers.	While	we	cannot	predict	the	exact nature,	timing,	or	scope	of	possible	governmental	initiatives,	such	proposals	could	adversely	affect	our	business	by:

•	providing	insurance	and	reinsurance	capacity	in	markets	and	to	consumers	that	we	target;

•	requiring	our	participation	in	industry	pools	and	guaranty	associations;

•	expanding	the	scope	of	coverage	under	existing	policies;

•	regulating	the	terms	of	insurance	and	reinsurance	policies;	or

•	disproportionately	benefiting	the	companies	of	one	country	over	those	of	another.

# Our	operations	in	developing	nations	expose	us	to	political	developments	that	could	have	an	adverse	effect	on	our	business,	liquidity,	results of	operations,	and	financial	condition.

Our	international	operations	include	operations	in	various	developing	nations.	Both	current	and	future	foreign	operations	could	be	adversely	affected	by unfavorable	political	developments	including	law	changes,	tax	changes,	regulatory	restrictions,	and	nationalization	of	ACE	operations	without compensation.	Adverse	actions	from	any	one	country	could	have	an	adverse	effect	on	our	business,	liquidity,	results	of	operations,	and	financial	condition depending	on	the	magnitude	of	the	event	and	ACE's	net	financial	exposure	at	that	time	in	that	country.

# We	may	become	subject	to	additional	Swiss	regulation.

In	March	2008,	we	received	written	confirmation	from	the	Federal	Office	of	Private	Insurance	(FOPI),	a	FINMA	predecessor	insurance	supervising authority,	that	it	does	not	intend	to	subject	us	to	group	supervision	so	long	as	certain	business	parameters	within	Switzerland	are	not	exceeded.	While	we currently	intend	to	operate	within	these	parameters,	we	cannot	assure	you	that	our	future	business	needs	may	not	require	that	we	exceed	these parameters	or	that	FINMA	will	not	change	these	parameters	or	otherwise	determine	to	exercise	group	supervision	over	us.	The	costs	and	administrative burdens	of	such	group	supervision	could	be	substantial.

# Company	Structure

# Our	ability	to	pay	dividends	and	to	make	payments	on	indebtedness	may	be	constrained	by	our	holding	company	structure.

ACE	Limited	is	a	holding	company	and	does	not	have	any	significant	operations	or	assets	other	than	its	ownership	of	the	shares	of	its	operating insurance	and	reinsurance	subsidiaries.	Dividends	and	other	permitted	distributions	from	our	insurance	subsidiaries	are	our	primary	source	of	funds	to meet	ongoing	cash	requirements,	including	any	future	debt	service	payments	and	other	expenses,	and	to	pay	dividends	to	our	shareholders.	Some	of	our insurance	subsidiaries	are	subject	to	significant	regulatory	restrictions	limiting	their	ability	to	declare	and	pay	dividends.	The	inability	of	our	insurance subsidiaries	to	pay	dividends	in	an	amount	sufficient	to	enable	us	to	meet	our	cash	requirements	at	the	holding	company	level	could	have	an	adverse effect	on	our	operations	and	our	ability	to	pay	dividends	to	our	shareholders	and/or	meet	our	debt	service	obligations.

# ACE	Limited	is	a	Swiss	company;	it	may	be	difficult	for	you	to	enforce	judgments	against	it	or	its	directors	and	executive	officers.

ACE	Limited	is	incorporated	pursuant	to	the	laws	of	Switzerland.	In	addition,	certain	of	our	directors	and	officers	reside	outside	the	United	States	and	all or	a	substantial	portion	of	our	assets	and	the	assets	of	such	persons	are	located	in	jurisdictions	outside	the	United	States.	As	such,	it	may	be	difficult	or impossible	to	effect	service	of	process	within	the	United	States	upon	those	persons	or	to	recover	against	us	or	them	on	judgments	of	U.S.	courts, including	judgments	predicated	upon	civil	liability	provisions	of	the	U.S.	federal	securities	laws.

ACE	has	been	advised	by	Niederer	Kraft	&	Frey	AG,	its	Swiss	counsel,	that	there	is	doubt	as	to	whether	the	courts	in	Switzerland	would	enforce: •	judgments	of	U.S.	courts	based	upon	the	civil	liability	provisions	of	the	U.S.	Federal	securities	laws	obtained	in	actions	against	it	or	its	directors	and officers,	who	reside	outside	the	United	States;	or

•	original	actions	brought	in	Switzerland	against	these	persons	or	ACE	predicated	solely	upon	U.S.	Federal	securities	laws.

ACE	has	also	been	advised	by	Niederer	Kraft	&	Frey	AG	that	there	is	no	treaty	in	effect	between	the	United	States	and	Switzerland	providing	for this	enforcement,	and	there	are	grounds	upon	which	Swiss	courts	may	not	enforce	judgments	of	United	States	courts.	Some	remedies	available	under the	laws	of	United	States	jurisdictions,	including	some	remedies	available	under	the	U.S.	Federal	securities	laws,	would	not	be	allowed	in	Swiss	courts as	contrary	to	that	nation's	public	policy.

# As	a	result	of	the	increase	in	par	value	of	our	shares	that	occurred	in	connection	with	our	Continuation	to	Switzerland,	we	will	have	less flexibility	with	respect	to	certain	aspects	of	capital	management	than	previously.

In	connection	with	our	Continuation	to	Switzerland,	we	increased	the	par	value	of	our	shares;	as	of	December	31,	2008,	our	par	value	is	CHF	33.14	per share.	Under	Swiss	law,	we	generally	may	not	issue	registered	shares	below	their	par	value.	In	the	event	there	is	a	need	to	raise	common	equity	capital at	a	time	when	the	trading	price	of	our	registered	shares	is	below	our	par	value,	we	will	need	to	obtain	approval	of	our	shareholders	to	decrease	the	par value	of	our	registered	shares.	We	cannot	assure	you	that	we	would	be	able	to	obtain	such	shareholder	approval.	Furthermore,	obtaining	shareholder approval	would	require	filing	a	preliminary	proxy	statement	with	the	SEC	and	convening	a	meeting	of	shareholders	which	would	delay	any	capital	raising plans.	Furthermore,	any	reduction	in	par	value	would	decrease	our	ability	to	pay	dividends	as	a	repayment	of	share	capital,	which	is	not	subject	to	Swiss withholding	tax.	See	"Taxation	–	Shareholders	may	be	subject	to	Swiss	withholding	taxes	on	the	payment	of	dividends."

# Insurance	and	Reinsurance	Markets

# Competition	in	the	insurance	and	reinsurance	markets	could	reduce	our	margins.

Insurance	and	reinsurance	markets	are	highly	competitive.	We	compete	on	an	international	and	regional	basis	with	major	U.S.,	Bermuda,	European,	and other	international	insurers	and	reinsurers	and	with	underwriting	syndicates,	some	of	which	have	greater	financial,	marketing,	and	management resources	than	we	do.	We	also	compete	with	new	companies	that	continue	to	be	formed	to	enter	the	insurance	and	reinsurance	markets.	In	addition, capital	market	participants	have	created	alternative	products	that	are	intended	to	compete	with	reinsurance	products.	Increased	competition	could	result in	fewer	submissions,	lower	premium	rates,	and	less	favorable	policy	terms	and	conditions,	which	could	reduce	our	margins.

# Insurance	and	reinsurance	markets	are	historically	cyclical,	and	we	expect	to	experience	periods	with	excess	underwriting	capacity	and unfavorable	premium	rates.

The	insurance	and	reinsurance	markets	have	historically	been	cyclical,	characterized	by	periods	of	intense	price	competition	due	to	excessive underwriting	capacity	as	well	as	periods	when	shortages	of	capacity	permitted	favorable	premium	levels.	An	increase	in	premium	levels	is	often	offset	by an	increasing	supply	of	insurance	and	reinsurance	capacity,	either	by	capital	provided	by	new	entrants	or	by	the	commitment	of	additional	capital	by existing	insurers	or	reinsurers,	which	may	cause	prices	to	decrease.	Any	of	these	factors	could	lead	to	a	significant	reduction	in	premium	rates,	less favorable	policy	terms,	and	fewer	submissions	for	our	underwriting	services.	In	addition	to	these	considerations,	changes	in	the	frequency	and	severity	of losses	suffered	by	insureds	and	insurers	may	affect	the	cycles	of	the	insurance	and	reinsurance	markets	significantly,	as	could	periods	of	economic weakness	(such	as	recession).

# Charter	Documents	and	Applicable	Law

# There	are	provisions	in	our	charter	documents	that	may	reduce	the	voting	rights	of	our	Common	Shares.

Our	Articles	of	Association	generally	provide	that	shareholders	have	one	vote	for	each	Common	Share	held	by	them	and	are	entitled	to	vote	at	all meetings	of	shareholders.	However,	the	voting	rights	exercisable	by	a	shareholder	may	be	limited	so	that	certain	persons	or	groups	are	not	deemed	to hold	10	percent	or	more	of	the	voting	power	conferred	by	our	Common	Shares.	Under	these	provisions,	some	shareholders	may	have	the	ability	to exercise	their	voting	rights	limited	to	less	than	one	vote	per	share.	Moreover,	these	provisions	could	have	the	effect	of	reducing	the	voting	power	of	some shareholders	who	would	not	otherwise	be	subject	to	the	limitation	by	virtue	of	their	direct	share	ownership.	Our	Board	of	Directors	may	refuse	to	register holders	of	shares	as	shareholders	with	voting	rights	based	on	certain	grounds,	including	if	the	holder	would,	directly	or	indirectly,	formally,	constructively or	beneficially	own	(as	described	in	Articles	8	and	14	of	our	Articles	of	Association)	or	otherwise	control	voting	rights	with	respect	to	10	percent	or	more	of the	registered	share	capital	recorded	in	the	commercial	register.	In	addition,	the	Board	of	Directors	shall	reject	entry	of	holders	of	registered	shares	as shareholders	with	voting	rights	in	the	share	register	or	shall	decide	on	their	deregistration	when	the	acquirer	or	shareholder	upon	request	does	not expressly	state	that	she/he	has	acquired	or	holds	the	shares	in	her/his	own	name	and	for	her/his	account.

# Applicable	laws	may	make	it	difficult	to	effect	a	change	of	control	of	our	company.

Before	a	person	can	acquire	control	of	a	U.S.	insurance	company,	prior	written	approval	must	be	obtained	from	the	insurance	commissioner	of	the	state where	the	domestic	insurer	is	domiciled.	Prior	to	granting	approval	of	an	application	to	acquire	control	of	a	domestic	insurer,	the	state	insurance commissioner	will	consider	such	factors	as	the	financial	strength	of	the	applicant,	the	integrity	and	management	of	the	applicant's	Board	of	Directors	and executive	officers,	the	acquirer's	plans	for	the	future	operations	of	the	domestic	insurer,	and	any	anti-competitive	results	that	may	arise	from	the consummation	of	the

acquisition	of	control.	Generally,	state	statutes	provide	that	control	over	a	domestic	insurer	is	presumed	to	exist	if	any	person,	directly	or	indirectly,	owns, controls,	holds	with	the	power	to	vote,	or	holds	proxies	representing	10	percent	or	more	of	the	voting	securities	of	the	domestic	insurer.	Because	a person	acquiring	10	percent	or	more	of	our	Common	Shares	would	indirectly	control	the	same	percentage	of	the	stock	of	our	U.S.	insurance	subsidiaries, the	insurance	change	of	control	laws	of	various	U.S.	jurisdictions	would	likely	apply	to	such	a	transaction.	Laws	of	other	jurisdictions	in	which	one	or	more of	our	existing	subsidiaries	are,	or	a	future	subsidiary	may	be,	organized	or	domiciled	may	contain	similar	restrictions	on	the	acquisition	of	control	of	ACE.

While	our	Articles	of	Association	limit	the	voting	power	of	any	shareholder	to	less	than	10	percent,	there	can	be	no	assurance	that	the	applicable regulatory	body	would	agree	that	a	shareholder	who	owned	10	percent	or	more	of	our	Common	Shares	did	not,	because	of	the	limitation	on	the	voting power	of	such	shares,	control	the	applicable	insurance	subsidiary.

These	laws	may	discourage	potential	acquisition	proposals	and	may	delay,	deter,	or	prevent	a	change	of	control	of	the	Company,	including transactions	that	some	or	all	of	our	shareholders	might	consider	to	be	desirable.

# U.S.	persons	who	own	our	Common	Shares	may	have	more	difficulty	in	protecting	their	interests	than	U.S.	persons	who	are	shareholders	of	a U.S.	corporation.

Swiss	corporate	law,	which	applies	to	us,	differs	in	certain	material	respects	from	laws	generally	applicable	to	U.S.	corporations	and	their	shareholders.

These	differences	include	the	manner	in	which	directors	must	disclose	transactions	in	which	they	have	an	interest,	the	rights	of	shareholders	to	bring class	action	and	derivative	lawsuits,	and	the	scope	of	indemnification	available	to	directors	and	officers.

# Anti-takeover	provisions	in	our	charter	and	corporate	documents	could	impede	an	attempt	to	replace	our	directors	or	to	effect	a	change	of control,	which	could	diminish	the	value	of	our	Common	Shares.

Our	Articles	of	Association	contain	provisions	that	may	make	it	more	difficult	for	shareholders	to	replace	directors	and	could	delay	or	prevent	a	change	of control	that	a	shareholder	might	consider	favorable.	These	provisions	include	a	staggered	Board	of	Directors	and	voting	restrictions.	These	provisions may	prevent	a	shareholder	from	receiving	the	benefit	from	any	premium	over	the	market	price	of	our	Common	Shares	offered	by	a	bidder	in	a	potential takeover.	Even	in	the	absence	of	an	attempt	to	effect	a	change	in	management	or	a	takeover	attempt,	these	provisions	may	adversely	affect	the prevailing	market	price	of	our	Common	Shares	if	they	are	viewed	as	discouraging	takeover	attempts	in	the	future.

# Registered	holders	of	our	Common	Shares	must	apply	for	enrollment	in	our	share	register	as	shareholders	with	voting	rights	in	order	to	have voting	rights;	we	may	deny	such	registration	under	certain	circumstances.

To	be	able	to	exercise	voting	rights,	registered	holders	of	the	shares	must	apply	to	us	for	enrollment	in	our	share	register	(Aktienbuch)	as	shareholders with	voting	rights.	Our	Board	of	Directors	may	refuse	to	register	holders	of	shares	as	shareholder	with	voting	rights	based	on	certain	grounds,	including	if the	holder	would,	directly	or	indirectly,	formally,	constructively	or	beneficially	own	(as	described	in	Articles	8	and	14	of	our	Articles	of	Association)	or otherwise	control	voting	rights	with	respect	to	10	percent	or	more	of	the	registered	share	capital	recorded	in	the	commercial	register.

# We	are	required	to	declare	and	pay	dividends	in	Swiss	francs	and	any	currency	fluctuations	between	the	U.S.	dollar	and	Swiss	francs	will affect	the	dollar	value	of	the	dividends	we	pay.

Under	Swiss	corporate	law,	we	are	required	to	declare	and	pay	dividends,	including	distributions	through	a	reduction	in	par	value,	in	Swiss	francs. Dividend	payments	will	be	made	by	our	transfer	agent	in	U.S.	dollars	converted	at	the	U.S.	dollar/Swiss	franc	exchange	rate	shortly	before	the	payment date.	As	a	result,	under	our	current	procedure	shareholders	are	exposed	to	fluctuations	in	the	U.S.	dollar/Swiss	franc	exchange	rate	between	the	date used	for	purposes	of	calculating	the	Swiss	franc	amount	of	any	proposed	dividend	or	par	value	reduction	and	the	relevant	payment	date.

# Shareholder	voting	requirements	under	Swiss	law	may	limit	the	Company's	flexibility	with	respect	to	certain	aspects	of	capital	management compared	to	what	it	had	as	a	Cayman	Islands	company.

Swiss	law	allows	our	shareholders	to	authorize	share	capital	which	can	be	issued	by	our	Board	of	Directors	without	shareholder	approval	but	this authorization	must	be	renewed	by	the	shareholder	every	two	years.	Swiss	law	also	does	not	provide	as	much	flexibility	in	the	various	terms	that	can attach	to	different	classes	of	stock	as	permitted	in	other	jurisdictions.	Swiss	law	also	reserves	for	approval	by	shareholders	many	corporate	actions	over which	our	Board	of	Directors	previously	had	authority.	For	example,	dividends	must	be	approved	by	shareholders.	While	we	do	not	believe	that	Swiss	law requirements	relating	to	our	capital	management	will	have	an	adverse	effect	on	the	Company,	we	cannot	assure	you	that	situations	will	not	arise	where such	flexibility	would	have	provided	substantial	benefits	to	our	shareholders.

# Taxation

# Shareholders	may	be	subject	to	Swiss	withholding	taxes	on	the	payment	of	dividends.

Our	dividends	will	generally	be	subject	to	a	Swiss	federal	withholding	tax	at	a	rate	of	35	percent.	The	withholding	tax	must	be	withheld	from	the	gross distribution,	and	be	paid	to	the	Swiss	Federal	Tax	Administration.	A	U.S.	holder	that	qualifies	for	benefits	under	the	Convention	between	the	United States	of	America	and	the	Swiss	Confederation	for	the	Avoidance	of	Double	Taxation	with	Respect	to	Taxes	on	Income,	which	we	refer	to	as	the	"US- Swiss	Treaty,"	may	apply	for	a	refund	of	the	tax	withheld	in	excess	of	the	15	percent	treaty	rate	(or	for	a	full	refund	in	the	case	of	qualifying	retirement arrangements).	Payment	of	a	dividend	in	the	form	of	a	par	value	reduction	or	qualifying	paid-in	capital	reduction	is	not	subject	to	Swiss	withholding	tax.	In connection	with	and	prior	to	the	Company's	Continuation	to	Switzerland,	we	increased	the	par	value	of	each	share	to	CHF	33.74	(at	December	31,	2008, the	par	value	of	the	Common	Shares	was	CHF	33.14	following	two	quarterly	par	value	reductions	in	the	amount	of	CHF	0.30).	We	have	already	begun, and	currently	intend	to	continue,	subject	to	the	requirements	of	our	business	and	applicable	law,	to	recommend	to	shareholders	that	dividends	be	paid	in the	form	of	a	reduction	of	our	par	value	or	qualifying	paid-in	capital.	We	estimate	we	would	be	able	to	pay	dividends	in	the	form	of	a	reduction	of	par	value or	qualifying	paid-in	capital,	and	thus	exempt	from	Swiss	withholding	tax,	for	approximately	15-20	years	after	the	Continuation.	This	range	may	vary depending	upon	changes	in	annual	dividends,	special	dividends,	fluctuations	in	U.S.	dollar/Swiss	franc	exchange	rates,	increases/decreases	in	par	value or	qualifying	paid-in	capital,	or	changes	or	new	interpretations	to	Swiss	tax	law	or	regulations.	However,	there	can	be	no	assurance	that	our	shareholders will	approve	a	reduction	in	par	value	or	qualifying	paid-in	capital	each	year,	that	we	will	be	able	to	meet	the	other	legal	requirements	for	a	reduction	in	par value,	or	that	Swiss	withholding	rules	will	not	be	changed	in	the	future.

# We	may	become	subject	to	taxes	in	Bermuda	after	March	28,	2016,	which	may	have	an	adverse	effect	on	our	results	of	operations	and	your investment.

The	Bermuda	Minister	of	Finance,	under	the	Exempted	Undertakings	Tax	Protection	Act	1966	of	Bermuda,	as	amended,	has	given	each	of	ACE	Limited and	its	Bermuda	insurance	subsidiaries	a	written	assurance	that	if	any	legislation	is	enacted	in	Bermuda	that	would	impose	tax	computed	on	profits	or income,	or	computed	on	any	capital	asset,	gain,	or	appreciation,	or	any	tax	in	the	nature	of	estate	duty	or	inheritance	tax,	then	the	imposition	of	any	such tax	would	not	be	applicable	to	those	companies	or	any	of	their	respective	operations,	shares,	debentures,	or	other	obligations	until	March	28,	2016, except	insofar	as	such	tax	would	apply	to	persons	ordinarily	resident	in	Bermuda	or	is	payable	by	us	in	respect	of	real	property	owned	or	leased	by	us	in Bermuda.	Given	the	limited	duration	of	the	Minister	of	Finance's	assurance,	we	cannot	be	certain	that	we	will	not	be	subject	to	any	Bermuda	tax	after March	28,	2016.

# ACE	Limited,	our	Bermuda-based	management	and	holding	company	and	our	non-U.S.	subsidiaries	may	become	subject	to	U.S.	tax,	which may	have	an	adverse	effect	on	our	results	of	operations	and	your	investment.

ACE	Limited,	ACE	Group	Management	&	Holdings	Ltd.	and	our	non-U.S.	subsidiaries,	including	ACE	Bermuda	Insurance	Ltd.,	and	ACE	Tempest	Life Reinsurance	Ltd.,	operate	in	a	manner	so	that	none	of	these	companies	should	be	subject	to	U.S.	tax	(other	than	U.S.	excise	tax	on	insurance	and reinsurance	premium	income	attributable	to	insuring	or	reinsuring	U.S.	risks	and	U.S.	withholding	tax	on	some	types	of	U.S.	source	investment	income), because	none	of	these	companies	should	be	treated	as	engaged	in	a	trade	or	business	within	the	United	States.	However,	because	there	is	considerable uncertainty	as	to	the	activities	that	constitute	being	engaged	in	a	trade	or	business	within	the	United	States,	we	cannot	be	certain	that	the	Internal Revenue	Service	(IRS)	will	not	contend	successfully	that	any	of	ACE	Limited	or	its	non-U.S.	subsidiaries	is/are	engaged	in	a	trade	or	business	in	the United	States.	If	ACE	Limited	or	any	of	its	non-U.S.	subsidiaries	were	considered	to	be	engaged	in	a	trade	or	business	in	the	United	States,	such	entity could	be	subject	to	U.S.	corporate	income	and	additional	branch	profits	taxes	on	the	portion	of	its	earnings	effectively	connected	to	such	U.S.	business,	in which	case	our	results	of	operations	and	your	investment	could	be	adversely	affected.

# If	you	acquire	10	percent	or	more	of	ACE	Limited's	shares,	you	may	be	subject	to	taxation	under	the	"controlled	foreign	corporation"	(the CFC)	rules.

Under	certain	circumstances,	a	U.S.	person	who	owns	10	percent	or	more	of	the	voting	power	of	a	foreign	corporation	that	is	a	CFC	(a	foreign corporation	in	which	10	percent	U.S.	shareholders	own	more	than	50	percent	of	the	voting	power	or	value	of	the	stock	of	a	foreign	corporation	or	more than	25	percent	of	a	foreign	insurance	corporation)	for	an	uninterrupted	period	of	30	days	or	more	during	a	taxable	year	must	include	in	gross	income	for U.S.	federal	income	tax	purposes	such	"10	percent	U.S.	Shareholder's"	pro	rata	share	of	the	CFC's	"subpart	F	income",	even	if	the	subpart	F	income	is not	distributed	to	such	10	percent	U.S.	Shareholder	if	such	10	percent	U.S.	Shareholder	owns	(directly	or	indirectly	through	foreign	entities)	any	of	our

shares	on	the	last	day	of	our	fiscal	year.	Subpart	F	income	of	a	foreign	insurance	corporation	typically	includes	foreign	personal	holding	company	income (such	as	interest,	dividends,	and	other	types	of	passive	income),	as	well	as	insurance	and	reinsurance	income	(including	underwriting	and	investment income)	attributable	to	the	insurance	of	risks	situated	outside	the	CFC's	country	of	incorporation.

We	believe	that	because	of	the	dispersion	of	our	share	ownership,	provisions	in	our	organizational	documents	that	limit	voting	power,	and	other factors,	no	U.S.	person	or	U.S.	partnership	who	acquires	shares	of	ACE	Limited	directly	or	indirectly	through	one	or	more	foreign	entities	should	be required	to	include	our	subpart	F	income	in	income	under	the	CFC	rules	of	US	tax	law.	It	is	possible,	however,	that	the	IRS	could	challenge	the effectiveness	of	these	provisions	and	that	a	court	could	sustain	such	a	challenge,	in	which	case	your	investment	could	be	adversely	affected	if	you	own 10	percent	or	more	of	ACE	Limited's	stock.

# U.S.	persons	who	hold	shares	may	be	subject	to	U.S.	federal	income	taxation	at	ordinary	income	rates	on	their	proportionate	share	of	our Related	Person	Insurance	Income	(RPII).

If	the	RPII	of	any	of	our	non-U.S.	insurance	subsidiaries	(each	a	"Non-U.S.	Insurance	Subsidiary")	were	to	equal	or	exceed	20	percent	of	that	company's gross	insurance	income	in	any	taxable	year	and	direct	or	indirect	insureds	(and	persons	related	to	those	insureds)	own	directly	or	indirectly	through foreign	entities	20	percent	or	more	of	the	voting	power	or	value	of	ACE	Limited,	then	a	U.S.	person	who	owns	any	shares	of	ACE	Limited	(directly	or indirectly	through	foreign	entities)	on	the	last	day	of	the	taxable	year	would	be	required	to	include	in	its	income	for	U.S.	federal	income	tax	purposes	such person's	pro	rata	share	of	such	company's	RPII	for	the	entire	taxable	year,	determined	as	if	such	RPII	were	distributed	proportionately	only	to	U.S. persons	at	that	date	regardless	of	whether	such	income	is	distributed.	In	addition,	any	RPII	that	is	includible	in	the	income	of	a	U.S.	tax-exempt organization	may	be	treated	as	unrelated	business	taxable	income.	We	believe	that	the	gross	RPII	of	each	Non-U.S.	Insurance	Subsidiary	did	not	in	prior years	of	operation	and	is	not	expected	in	the	foreseeable	future	to	equal	or	exceed	20	percent	of	each	such	company's	gross	insurance	income,	and	we do	not	expect	the	direct	or	indirect	insureds	of	each	Non-U.S.	Insurance	Subsidiary	(and	persons	related	to	such	insureds)	to	directly	or	indirectly	own	20 percent	or	more	of	either	the	voting	power	or	value	of	our	shares,	but	we	cannot	be	certain	that	this	will	be	the	case	because	some	of	the	factors	which determine	the	extent	of	RPII	may	be	beyond	our	control.	If	these	thresholds	are	met	or	exceeded,	and	if	you	are	an	affected	U.S.	person,	your	investment could	be	adversely	affected.

# U.S.	persons	who	hold	shares	will	be	subject	to	adverse	tax	consequences	if	we	are	considered	to	be	a	Passive	Foreign	Investment	Company (PFIC)	for	U.S.	federal	income	tax	purposes.

If	ACE	Limited	is	considered	a	PFIC	for	U.S.	federal	income	tax	purposes,	a	U.S.	person	who	owns	any	shares	of	ACE	Limited	will	be	subject	to	adverse tax	consequences,	including	subjecting	the	investor	to	a	greater	tax	liability	than	might	otherwise	apply	and	subjecting	the	investor	to	tax	on	amounts	in advance	of	when	tax	would	otherwise	be	imposed,	in	which	case	your	investment	could	be	adversely	affected.	In	addition,	if	ACE	Limited	were considered	a	PFIC,	upon	the	death	of	any	U.S.	individual	owning	shares,	such	individual's	heirs	or	estate	would	not	be	entitled	to	a	"step-up"	in	the	basis of	the	shares	which	might	otherwise	be	available	under	U.S.	federal	income	tax	laws.	We	believe	that	we	are	not,	have	not	been,	and	currently	do	not expect	to	become,	a	PFIC	for	U.S.	federal	income	tax	purposes.	We	cannot	assure	you,	however,	that	we	will	not	be	deemed	a	PFIC	by	the	IRS.	If	we were	considered	a	PFIC,	it	could	have	adverse	tax	consequences	for	an	investor	that	is	subject	to	U.S.	federal	income	taxation.	There	are	currently	no regulations	regarding	the	application	of	the	PFIC	provisions	to	an	insurance	company.	New	regulations	or	pronouncements	interpreting	or	clarifying	these rules	may	be	forthcoming.	We	cannot	predict	what	impact,	if	any,	such	guidance	would	have	on	an	investor	that	is	subject	to	U.S.	federal	income taxation.

# U.S.	tax-exempt	organizations	who	own	our	shares	may	recognize	unrelated	business	taxable	income.

A	U.S.	tax-exempt	organization	may	recognize	unrelated	business	taxable	income	if	a	portion	of	our	insurance	income	is	allocated	to	the	organization, which	generally	would	be	the	case	if	either	we	are	a	CFC	and	the	tax-exempt	shareholder	is	a	10	percent	U.S.	shareholder	or	there	is	RPII,	certain exceptions	do	not	apply,	and	the	tax-exempt	organization,	directly	or	indirectly	through	foreign	entities,	owns	any	shares	of	ACE	Limited.	Although	we	do not	believe	that	any	U.S.	persons	or	U.S.	partnerships	should	be	allocated	such	insurance	income,	we	cannot	be	certain	that	this	will	be	the	case. Potential	U.S.	tax-exempt	investors	are	advised	to	consult	their	tax	advisors.

# The	Organization	for	Economic	Cooperation	and	Development	and	the	European	Union	are	considering	measures	that	might	encourage countries	to	increase	our	taxes.

A	number	of	multilateral	organizations,	including	the	European	Union,	the	Organization	for	Economic	Cooperation	and	Development	(OECD),	the Financial	Action	Task	Force,	and	the	Financial	Stability	Forum	(FSF)	have,	in	recent	years,	identified

some	countries	as	not	participating	in	adequate	information	exchange,	engaging	in	harmful	tax	practices,	or	not	maintaining	adequate	controls	to	prevent corruption,	such	as	money	laundering	activities.	Recommendations	to	limit	such	harmful	practices	are	under	consideration	by	these	organizations,	and	a report	published	on	November	27,	2001	by	the	OECD	at	the	behest	of	the	FSF	titled	"Behind	the	Corporate	Veil:	Using	Corporate	Entities	for	Illicit Purposes",	contains	an	extensive	discussion	of	specific	recommendations.	The	OECD	has	threatened	non-member	jurisdictions	that	do	not	agree	to cooperate	with	the	OECD	with	punitive	sanctions	by	OECD	member	countries,	though	specific	sanctions	have	yet	to	be	adopted	by	OECD	member countries.	It	is	as	yet	unclear	what	these	sanctions	will	be,	who	will	adopt	them,	and	when	or	if	they	will	be	imposed.	In	an	April	18,	2002	report,	updated as	of	June	2004,	Bermuda	was	not	listed	as	an	uncooperative	tax	haven	jurisdiction	by	the	OECD	because	it	previously	committed	to	eliminate	harmful tax	practices	and	to	embrace	international	tax	standards	for	transparency,	exchange	of	information,	and	the	elimination	of	regimes	for	financial	and	other services	that	attract	businesses	with	no	substantial	domestic	activity.	We	cannot	assure	you,	however,	that	the	action	taken	by	Bermuda	would	be sufficient	to	preclude	all	effects	of	the	measures	or	sanctions	described	above,	which,	if	ultimately	adopted,	could	adversely	affect	our	Bermuda subsidiaries.	However,	it	should	be	noted	that	in	respect	of	exchange	of	information,	Bermuda	has	entered	into	Tax	Information	Exchange	Agreements ("TIEAs")	with	Australia	and	the	United	Kingdom	and	that	other	TIEA	negotiations	are	currently	underway.

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

Legislation	is	periodically	introduced	in	the	U.S.	Congress	intended	to	eliminate	some	perceived	tax	advantages	of	companies	(including	insurance companies)	that	have	legal	domiciles	outside	the	United	States	but	have	certain	U.S.	connections.	For	example,	companion	bills	are	expected	to	be introduced	in	the	House	of	Representatives	and	the	Senate	during	the	111th	Congress	that	began	recently,	that	would	effectively	render	cross	border affiliate	reinsurance	by	foreign-owned	U.S.	insurance/reinsurance	companies	impossible	regardless	of	whether	or	not	it	is	properly	priced	under	the internationally	accepted	arms-length	standard.	If	enacted,	such	a	law	could	have	an	adverse	impact	on	us	or	our	shareholders.	It	is	possible	that	other legislative	proposals	could	emerge	in	the	future	that	could	have	an	adverse	impact	on	us	or	our	shareholders.

# ITEM	1B. Unresolved	Staff	Comments

There	are	currently	no	unresolved	SEC	staff	comments	regarding	our	periodic	or	current	reports.

# ITEM	2. Properties

We	maintain	office	facilities	around	the	world	including	in	North	America,	Europe	(including	our	principal	executive	offices	in	Switzerland),	Bermuda,	Latin America,	Asia,	and	the	Far	East.	Most	of	our	office	facilities	are	leased,	although	we	own	major	facilities	in	Hamilton,	Bermuda	and	Philadelphia,	U.S. Management	considers	its	office	facilities	suitable	and	adequate	for	the	current	level	of	operations.

# ITEM	3. Legal	Proceedings

Our	insurance	subsidiaries	are	subject	to	claims	litigation	involving	disputed	interpretations	of	policy	coverages	and,	in	some	jurisdictions,	direct	actions by	allegedly-injured	persons	seeking	damages	from	policyholders.	These	lawsuits,	involving	claims	on	policies	issued	by	our	subsidiaries	which	are typical	to	the	insurance	industry	in	general	and	in	the	normal	course	of	business,	are	considered	in	our	loss	and	loss	expense	reserves	which	are discussed	in	the	P&C	loss	reserves	discussion.	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,	among	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.

More	information	relating	to	legal	proceedings	is	set	forth	in	Note	10	f)	to	the	Consolidated	Financial	Statements,	under	Item	8.

# ITEM	4. Submission	of	Matters	to	a	Vote	of	Security	Holders

No	matters	were	submitted	to	a	vote	of	stockholders	during	the	fourth	quarter	of	the	fiscal	year	covered	by	this	report.

# EXECUTIVE	OFFICERS	OF	THE	COMPANY

The	table	below	sets	forth	the	names,	ages,	positions,	and	business	experience	of	the	executive	officers	of	ACE	Limited.

Philip	V.	Bancroft 49 Chief	Financial	Officer

Robert	F.	Cusumano 52 General	Counsel	and	Secretary

Paul	B.	Medini 51 Chief	Accounting	Officer

Evan	G.	Greenberg	has	been	a	director	of	ACE	since	August	2002.	Mr.	Greenberg	was	elected	Chairman	of	the	Board	of	Directors	in	May	2007.

Mr.	Greenberg	was	appointed	to	the	position	of	President	and	Chief	Executive	Officer	of	ACE	in	May	2004,	and	in	June	2003,	was	appointed	President and	Chief	Operating	Officer	of	ACE.	Mr.	Greenberg	was	appointed	to	the	position	of	Chief	Executive	Officer	of	ACE	Overseas	General	in	April	2002.	He joined	ACE	as	Vice	Chairman,	ACE	Limited,	and	Chief	Executive	Officer	of	ACE	Tempest	Re	in	November	2001.	Prior	to	joining	ACE,	Mr.	Greenberg was	most	recently	President	and	Chief	Operating	Officer	of	American	International	Group	(AIG),	a	position	he	held	from	1997	until	2000.

John	W.	Keogh	joined	ACE	as	Chief	Executive	Officer	of	ACE	Overseas	General	in	April	2006.	Prior	to	joining	ACE,	Mr.	Keogh	served	as	Senior Vice	President,	Domestic	General	Insurance	of	AIG,	and	President	and	Chief	Executive	Officer	of	National	Union	Fire	Insurance	Company,	AIG's member	company	that	specializes	in	D&O	and	fiduciary	liability	coverages.	Mr.	Keogh	joined	AIG	in	1986,	and	he	had	served	in	a	number	of	senior positions	there	including	as	Executive	Vice	President	of	AIG's	Domestic	Brokerage	Group,	and	as	President	and	Chief	Operating	Officer	of	AIG's Lexington	Insurance	Company	unit.

Brian	E.	Dowd	was	appointed	Chief	Executive	Officer	of	Insurance	–	North	America	in	May	2006.	In	January	2005,	Mr.	Dowd	was	named Chairman	and	Chief	Executive	Officer	of	ACE	USA,	Chairman	of	ACE	Westchester	and	President	of	ACE	INA	Holdings	Inc.	From	2002	until	2005, Mr.	Dowd	was	President	and	Chief	Executive	Officer	of	ACE	Westchester.	In	January	2004,	he	was	elected	to	the	position	of	Office	of	the	Chairman	of ACE	INA	Holdings	Inc.	–	a	position	which	Mr.	Dowd	currently	holds	along	with	that	of	President.	Mr.	Dowd	served	as	Executive	Vice	President,	ACE	USA Property	Division	from	1999	through	2001	when	he	was	appointed	President,	ACE	Specialty	P&C	Group.	Mr.	Dowd	joined	ACE	in	1995.

Philip	V.	Bancroft	was	appointed	Chief	Financial	Officer	of	ACE	in	January	2002.	For	nearly	twenty	years,	Mr.	Bancroft	worked	for PricewaterhouseCoopers	LLP.	Prior	to	joining	ACE,	he	served	as	partner-in-charge	of	the	New	York	Regional	Insurance	Practice.	Mr.	Bancroft	had	been a	partner	with	PricewaterhouseCoopers	LLP	for	10	years.

Robert	F.	Cusumano	was	appointed	General	Counsel	and	Secretary	of	ACE	in	March	2005.	Mr.	Cusumano	joined	ACE	from	the	international	law firm	of	Debevoise	&	Plimpton	LLP,	where	he	was	a	partner	and	a	member	of	the	firm's	Litigation	Department	from	2003	to	2005.	From	1990	to	2003, Mr.	Cusumano	was	a	partner	with	the	law	firm	of	Simpson	Thatcher	and	Bartlett.

Paul	B.	Medini	was	appointed	Chief	Accounting	Officer	of	ACE	in	October	2003.	For	twenty-two	years,	Mr.	Medini	worked	for PricewaterhouseCoopers	LLP.	Prior	to	joining	ACE,	he	served	as	a	partner	in	their	insurance	industry	practice.

# PART	II

ITEM	5. Market	for	Registrant's	Common	Equity,	Related	Stockholder	Matters	and	Issuer	Purchases	of	Equity	Securities

(a)	Our	Common	Shares	(previous	to	the	Continuation,	known	as	Ordinary	Shares),	with	a	current	par	value	of	CHF	33.14	per	share,	have	been	listed	on the	New	York	Stock	Exchange	since	March	25,	1993.

The	following	table	sets	forth	the	high	and	low	closing	sales	prices	of	our	Common	Shares	per	fiscal	quarter,	as	reported	on	the	New	York	Stock Exchange	Composite	Tape	for	the	periods	indicated:

| 2008 |  | 2007 |  |
| :--- | :--- | :--- | :--- |
| High | Low | High | Low |
| $61.65 | $53.66 | $60.35 | $53.22 |
| $62.67 | $55.06 | $62.54 | $57.21 |
| $66.00 | $45.30 | $63.97 | $54.23 |
| $57.36 | $37.97 | $63.33 | $56.83 |

The	last	reported	sale	price	of	the	Common	Shares	on	the	New	York	Stock	Exchange	Composite	Tape	on	February	24,	2009	was	$38.81.

(b)	The	approximate	number	of	record	holders	of	Common	Shares	as	of	February	24,	2009	was	3,524.

(c)	The	following	table	represents	(in	U.S.	dollars)	dividends	paid	per	Share	to	shareholders	of	record	on	each	of	the	following	dates:

*	The	payments	to	shareholders	of	record	on	September	30,	2008,	and	December	17,	2008,	are	the	U.S.	dollar	equivalent	of	CHF	0.30	converted	at	the	U.S.	dollar/Swiss	franc	exchange	rate	shortly before	the	payment	dates.

ACE	Limited	is	a	holding	company	whose	principal	source	of	income	is	investment	income	and	dividends	from	its	operating	subsidiaries.	The	ability	of	the operating	subsidiaries	to	pay	dividends	to	us	and	our	ability	to	pay	dividends	to	our	shareholders	are	each	subject	to	legal	and	regulatory	restrictions.	The declaration	and	payment	of	future	dividends	will	be	at	the	discretion	of	the	Board	of	Directors	and	will	be	dependent	upon	the	profits	and	financial requirements	of	ACE	and	other	factors,	including	legal	restrictions	on	the	payment	of	dividends	and	such	other	factors	as	the	Board	of	Directors	deems relevant.	Refer	to	Item	7.

(d)	The	following	table	provides	information	with	respect	to	purchases	by	the	Company	of	its	Common	Shares	during	the	three	months	ended December	31,	2008:

# Issuer's	Purchases	of	Equity	Securities

|  |  |  | Total	Number | Approximate	Dollar |
| :--- | :--- | :--- | :--- | :--- |
|  |  |  | of\tShares | Value\tof\tShares |
|  | Total\tNumber | Average\tPrice | Purchased\tas | that\tMay\tYet |
|  | of\tShares | Paid\tper | Part\tof\tPublicly | Be\tPurchased |
| Period | Purchased* | Share | Announced\tPlan** | Under\tthe\tPlan** |
| October\t1,\t2008\tthrough\tOctober\t31,\t2008 | 2,068 | $53.61 | – | $250\tmillion |
| November\t1,\t2008\tthrough\tNovember\t30,\t2008 | 1,098 | $57.36 | – | $250\tmillion |
| December\t1,\t2008\tthrough\tDecember\t31,\t2008 | 6,176 | $46.01 | – | $250\tmillion |
| Total | 9,342 |  |  | $250\tmillion |

*	For	the	three	months	ended	December	31,	2008,	this	column	represents	the	surrender	to	the	Company	of	9,342	Common	Shares	to	satisfy	tax	withholding	obligations	in	connection	with	the	vesting of	restricted	stock	issued	to	employees.

**	As	part	of	ACE's	capital	management	program,	in	November	2001,	the	Company's	Board	of	Directors	authorized	the	repurchase	of	any	ACE	issued	debt	or	capital	securities	including	Common Shares,	up	to	$250	million.	At	December	31,	2008,	this	authorization	had	not	been	utilized.

(e)	Set	forth	below	is	a	line	graph	comparing	the	dollar	change	in	the	cumulative	total	shareholder	return	on	the	Company's	Common	Shares	from December	31,	2003,	through	December	31,	2008,	as	compared	to	the	cumulative	total	return	of	the	Standard	&	Poor's	500	Stock	Index	and	the cumulative	total	return	of	the	Standard	&	Poor's	Property-Casualty	Insurance	Index.	The	chart	depicts	the	value	on	December	31,	2004,	2005,	2006, 2007,	and	2008,	of	a	$100	investment	made	on	December	31,	2003,	with	all	dividends	reinvested.

# ITEM	6. Selected	Financial	Data

The	following	table	sets	forth	selected	consolidated	financial	data	of	the	Company	as	of	and	for	the	years	ended	December	31,	2008,	2007,	2006,	2005, and	2004.	These	selected	financial	and	other	data	should	be	read	in	conjunction	with	the	Consolidated	Financial	Statements	and	related	notes,	under Item	8,	and	with	Item	7.	"Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations".

| and	selected	data) | 2008 | 2007 | 2006 | 2005 | 2004 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Operations\tdata: |  |  |  |  |  |
| Net\tpremiums\tearned | $13,203 | $12,297 | $11,825 | $11,748 | $11,110 |
| Net\tinvestment\tincome | 2,062 | 1,918 | 1,601 | 1,264 | 1,013 |
| Net\trealized\tgains\t(losses) | (1,633) | (61) | (98) | 76 | 197 |
| Losses\tand\tloss\texpenses | 7,603 | 7,351 | 7,070 | 8,571 | 7,690 |
| Life\tand\tannuity\tbenefits | 399 | 168 | 123 | 143 | 175 |
| Policy\tacquisition\tcosts\tand\tadministrative\texpenses | 3,872 | 3,226 | 3,171 | 2,924 | 2,824 |
| Interest\texpense | 230 | 175 | 176 | 174 | 183 |
| Other\t(income)\texpense | (39) | 81 | (35) | (25) | 9 |
| Income\ttax\texpense | 370 | 575 | 522 | 273 | 286 |
| Income\tbefore\tcumulative\teffect | 1,197 | 2,578 | 2,301 | 1,028 | 1,153 |
| Cumulative\teffect\tof\ta\tchange\tin\taccounting\tprinciple\t(net\tof\tincome |  |  |  |  |  |
| tax) | – | – | 4 | – | – |
| Net\tincome | 1,197 | 2,578 | 2,305 | 1,028 | 1,153 |
| Dividends\ton\tPreferred\tShares | (24) | (45) | (45) | (45) | (45) |
| Net\tincome\tavailable\tto\tholders\tof\tCommon\tShares | $1,173 | $2,533 | $2,260 | $983 | $1,108 |
| Diluted\tearnings\tper\tshare\tbefore\tcumulative\teffect\tof\ta\tchange\tin |  |  |  |  |  |
| accounting\tprinciple | $3.53 | $7.66 | $6.90 | $3.31 | $3.88 |
| Diluted\tearnings\tper\tshare(1) | $3.53 | $7.66 | $6.91 | $3.31 | $3.88 |
| Balance\tsheet\tdata\t(at\tend\tof\tperiod): |  |  |  |  |  |
| Total\tinvestments | $39,715 | $41,779 | $36,601 | $31,842 | $26,925 |
| Cash | 867 | 510 | 565 | 512 | 498 |
| Total\tassets | 72,057 | 72,090 | 67,135 | 62,440 | 56,183 |
| Net\tunpaid\tlosses\tand\tloss\texpenses | 24,241 | 23,592 | 22,008 | 20,458 | 17,517 |
| Net\tfuture\tpolicy\tbenefits\tfor\tlife\tand\tannuity\tcontracts | 2,645 | 537 | 508 | 510 | 494 |
| Long-term\tdebt | 2,806 | 1,811 | 1,560 | 1,811 | 1,849 |
| Trust\tpreferred\tsecurities | 309 | 309 | 309 | 309 | 412 |
| Total\tliabilities | 57,611 | 55,413 | 52,857 | 50,628 | 46,338 |
| Shareholders'\tequity | 14,446 | 16,677 | 14,278 | 11,812 | 9,845 |
| Book\tvalue\tper\tshare | $43.30 | $48.89 | $42.03 | $34.81 | $32.65 |
| Selected\tdata |  |  |  |  |  |
| Loss\tand\tloss\texpense\tratio(2) | 60.6% | 61.6% | 61.2% | 74.5% | 70.7% |
| Underwriting\tand\tadministrative\texpense\tratio (3) | 29.0% | 26.3% | 26.9% | 25.0% | 25.6% |
| Combined\tratio(4) | 89.6% | 87.9% | 88.1% | 99.5% | 96.3% |
| Net\tloss\treserves\tto\tcapital\tand\tsurplus\tratio (5) | 186.1% | 144.7% | 157.7% | 177.5% | 182.9% |
| Weighted\taverage\tshares\toutstanding\t–\tdiluted | \t 332,481,627 | \t 330,447,721 | \t 327,232,022 | \t 297,299,883 | \t 285,485,472 |
| Cash\tdividends\tper\tshare | $1.09 | $1.06 | $0.98 | $0.90 | $0.82 |

(1) 	Diluted	earnings	per	share	is	calculated	by	dividing	net	income	available	to	holders	of	Common	Shares	by	weighted	average	shares	outstanding	–	diluted.

(2) The	loss	and	loss	expense	ratio	is	calculated	by	dividing	the	losses	and	loss	expenses	by	net	premiums	earned	excluding	life	insurance	and	reinsurance	premiums.	Net	premiums	earned	for	life insurance	and	reinsurance	were	$1,170	million,	$368	million,	$274	million,	$248	million,	and	$226	million,	for	the	years	ended	December	31,	2008,	2007,	2006,	2005,	and	2004,	respectively.

(3) 	The	underwriting	and	administrative	expense	ratio	is	calculated	by	dividing	the	policy	acquisition	costs	and	administrative	expenses	by	net	premiums	earned	excluding	life	insurance	and reinsurance	premiums.

(4) The	combined	ratio	is	the	sum	of	the	loss	and	loss	expense	ratio	and	the	underwriting	and	administrative	expense	ratio.

(5) 	The	net	loss	reserves	to	capital	and	surplus	ratio	is	calculated	by	dividing	the	sum	of	the	net	unpaid	losses	and	loss	expenses	and	net	future	policy	benefits	for	life	and	annuity	contracts	by shareholders'	equity.

# ITEM	7. Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations

The	following	is	a	discussion	of	our	results	of	operations,	financial	condition,	and	liquidity	and	capital	resources	as	of	and	for	the	year	ended December	31,	2008.	This	discussion	should	be	read	in	conjunction	with	the	Consolidated	Financial	Statements	and	related	notes,	under	Item	8	of	this Form	10-K.

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	are	organized	along	a	profit	center	structure	by	line	of	business	and	territory	that	does	not	necessarily	correspond	to	corporate	legal	entities. Profit	centers	can	access	various	legal	entities,	subject	to	licensing	and	other	regulatory	rules.	Profit	centers	are	expected	to	generate	underwriting income	and	appropriate	risk-adjusted	returns.	This	corporate	structure	has	facilitated	the	development	of	management	talent	by	giving	each	profit	center's senior	management	team	the	necessary	autonomy	within	underwriting	authorities	to	make	operating	decisions	and	create	products	and	coverages needed	by	its	target	customer	base.	We	are	an	underwriting	organization	and	senior	management	is	focused	on	delivering	underwriting	profit.	We	strive to	achieve	underwriting	income	by	only	writing	policies	which	we	believe	adequately	compensate	us	for	the	risk	we	accept.

As	an	insurance	and	reinsurance	company,	we	generate	gross	revenues	from	two	principal	sources:	premiums	and	investment	income.	Cash	flow is	generated	from	premiums	collected	and	investment	income	received	less	paid	losses	and	loss	expenses,	policy	acquisition	costs,	and	administrative expenses.	Invested	assets	are	substantially	held	in	liquid,	investment	grade	fixed	income	securities	of	relatively	short	duration.	We	invest	in	equity securities	in	the	U.S.	and	international	markets.	A	small	portion	of	our	assets	are	held	in	less	liquid	or	higher	risk	assets	in	an	attempt	to	achieve	higher risk-adjusted	returns.	Claims	payments	in	any	short-term	period	are	highly	unpredictable	due	to	the	random	nature	of	loss	events	and	the	timing	of	claims awards	or	settlements.	The	value	of	investments	held	to	pay	future	claims	is	subject	to	market	forces	such	as	the	level	of	interest	rates,	stock	market volatility,	and	credit	events	such	as	corporate	defaults.	The	actual	cost	of	claims	is	also	volatile	based	on	loss	trends,	inflation	rates,	court	awards,	and catastrophes.	We	believe	that	our	cash	balance,	our	highly	liquid	investments,	credit	facilities,	and	reinsurance	protection	provide	sufficient	liquidity	to meet	unforeseen	claim	demands	that	might	occur	in	the	year	ahead.	Refer	to	"Liquidity	and	Capital	Resources".

# Redomestication	to	Zurich,	Switzerland

In	July	2008,	our	shareholders	approved	proposals	submitted	by	our	Board	of	Directors	to	transfer	our	domicile	from	the	Cayman	Islands	to	Zurich,	in Switzerland,	our	new	jurisdiction	of	incorporation	(the	Continuation).	As	a	result	of	the	Continuation,	we	are	deregistered	in	the	Cayman	Islands	and	are now	subject	to	Swiss	law.	In	connection	with	the	Continuation,	we	changed	the	currency	in	which	the	par	value	of	our	Ordinary	Shares	was	stated	from U.S.	dollars	to	Swiss	francs.	Upon	the	effectiveness	of	the	Continuation,	our	Ordinary	Shares	became	Common	Shares.	All	Common	Shares	are registered	shares	with	a	current	par	value	of	CHF	33.14	each.

Notwithstanding	the	change	of	the	currency	in	which	the	par	value	of	Common	Shares	is	stated,	we	continue	to	use	U.S.	dollars	as	our	reporting and	functional	currency	for	preparing	our	Consolidated	Financial	Statements.	For	the	foreseeable	future,	we	expect	to	pay	dividends	as	a	repayment	of share	capital	in	the	form	of	a	reduction	in	par	value	or	qualified	paid-in	capital,	which	would	not	be	subject	to	Swiss	withholding	tax.	Refer	to	"Liquidity and	Capital	Resources"	below	and	Note	12	to	our	Consolidated	Financial	Statements,	under	Item	8	for	more	information.

# The	Combined	Insurance	Acquisition

On	April	1,	2008,	ACE	acquired	all	of	the	outstanding	shares	of	Combined	Insurance	and	certain	of	its	subsidiaries	from	Aon	Corporation	for	$2.56	billion. Combined	Insurance,	founded	in	1919	is	headquartered	in	Glenview,	Illinois,	and	is	a	leading	underwriter	and	distributor	of	specialty	individual	accident and	supplemental	health	insurance	products	targeted	to	middle	income	consumers	in	the	U.S.,	Europe,	Canada,	and	Asia	Pacific.	Combined	Insurance serves	close	to	four	million	policyholders	worldwide.	This	acquisition	has	diversified	our	accident	and	health	(A&H)	distribution	capabilities	by	adding	a significant	agent	base,	while	almost	doubling	our	A&H	franchise.	We	believe	this	will	provide	significant	long-term	growth	opportunities.

Our	A&H	operations	have	represented	an	increasing	portion	of	our	business	in	recent	years.	Within	our	A&H	operations	(including	Combined Insurance),	our	primary	business	is	personal	accident.	We	are	not	in	the	primary	health	care	business.	Our	products	include,	but	are	not	limited	to, accidental	death,	accidental	disability,	supplemental	medical,	hospital	indemnity,	and	income	protection	coverages.	With	respect	to	our	supplemental medical	and	hospital	indemnity	products,	we	typically	pay	fixed	amounts	for	claims	and	are,	therefore,	insulated	from	rising	health	care	costs.	ACE recorded	the	Combined	Insurance	acquisition	using	the	purchase	method	of	accounting.	The	interim	Consolidated	Financial	Statements	include	the results	of	Combined	Insurance	beginning	April	1,	2008.	The	acquisition	generated	$928	million	of	goodwill	and	other	intangible	assets,	based	on	ACE's purchase	price	allocation.	Results	from	Combined	Insurance's	North	American	operations	are	included	in	ACE's	Life	Insurance	and	Reinsurance segment	as	the	products	are	similar	to	our	current	life	operations.	The	results	from	Combined	Insurance's	international	operations	are	included	in	ACE's Insurance	–	Overseas	General	segment	as	the	products	have	similar	economic	characteristics	and	are	distributed	outside	of	the	North	American insurance	markets.	Refer	to	Note	3	to	our	Consolidated	Financial	Statements,	under	Item	8	for	more	information.

# Market	Conditions

The	property	and	casualty	insurance	industry	began	2008	with	excess	underwriting	capacity,	as	defined	by	availability	of	capital.	Since	then,	natural catastrophes	and	financial	market	losses	have	destroyed	a	great	deal	of	this	excess	capital.	Additionally,	downgrades	and	government	ownership	have impaired	the	ability	of	a	number	of	companies	to	deploy	their	capital	and	operate	in	the	same	manner	as	they	have	in	the	past.

The	P&C	underwriting	environment,	particularly	rates,	improved	during	the	fourth	quarter	of	2008	and	into	the	first	quarter	of	2009.	This	trend	was more	obvious	in	certain	specialty	and	stressed	classes.	The	rate	of	change	varies	by	territory,	where	the	greatest	improvements	have	been	in	North America,	followed	by	the	London	company	market,	Australia,	and	Latin	America.	We	believe	that	due	to	our	strong	balance	sheet,	geographic	presence, and	product	breadth,	we	are	beginning	to	benefit	from	a	flight	to	quality	and	where	rate	is	adequate,	we	are	writing	more	business,	improving	our	position on	accounts,	and	gaining	market	share.	Where	rate	is	not	adequate,	we	are	walking	away	and	in	some	classes,	continuing	to	shed	business.	While	the relationship	between	rates	to	risk-exposure	is	improving,	exposure	is	declining	due	to	recession,	resulting	in	improved	underwriting	margins	but	not necessarily	more	premium.

In	North	America,	we	are	seeing	substantially	more	opportunity	to	quote	business	as	a	result	of	market	turmoil.	Submissions	are	up	significantly, though	our	quote-to-close	ratios	have	dropped	modestly	given	our	pricing	discipline.	In	those	lines	where	rate	is	adequate,	we	are	benefiting	from	the weakness	of	others	by	improving	our	position	on	accounts,	moving	into	primary	lead	or	first	excess	position	–	for	example,	in	excess	casualty,	directors and	officers'	liability	(D&O),	environmental	and	medical	liability.	We	are	also	gaining	new	business	in	certain	lines	where	we	already	enjoy	a	strong	lead position	such	as	our	E&O	business	and	risk	management	division.	There	are	also	classes	where	our	retention	rates	and	new	business	writings	are	being negatively	impacted	by	continued	inadequate	pricing	such	as	both	large	account	and	catastrophe-exposed	property,	E&S	casualty,	and	due	to	recession, construction-related	business.	Our	international	business	has	also	seen	improvement	–	in	the	fourth	quarter	of	2008,	our	P&C	business	in	original currency	experienced	its	best	quarter	of	the	year,	increasing	six	percent	over	the	third	quarter,	while	A&H	was	up	15	percent	over	the	same	period.	We deliberately	shrank	our	reinsurance	business	in	2008,	due	to	the	competitive	market	conditions.	However,	during	the	first	quarter	of	2009,	Global Reinsurance	experienced	improved	pricing	in	many	classes,	and	although	U.S.	casualty	remains	competitive,	we	gained	revenue	from	improved	signings due	to	competitor	weakness	and	more	clients	looking	for	a	reinsurance	solution	to	solve	a	capital	need.	In	reinsurance,	we	are	noticing	more	clients	willing to	pay	more	–	though	in	most	cases	not	dramatically	more	–	to	have	ACE	on	their	program.

Although,	the	relationship	between	rates	and	risk-exposure	is	improving	and	rates	are	improving,	we	cannot	predict	with	any	certainty	how	long these	conditions	will	continue.	We	believe	that	the	current	recession	is	impacting	exposures	and	client's	insurance	budgets	and	this	along	with	foreign exchange	weakness	relative	to	the	U.S.	dollar,	will	negatively	impact	growth	rates	in	2009.

We	are	continuing	to	invest	in	people	and	infrastructure	to	grow	our	presence	in	lines	of	businesses	globally	where	we	see	an	opportunity	for	ACE to	grow	market	share	at	reasonable	terms.	We	are	also	continuing	to	invest	in	our	enterprise	risk	management	capability,	our	systems	and	data environment,	and	our	research	and	development	capabilities.

# Critical	Accounting	Estimates

Our	Consolidated	Financial	Statements	include	amounts	that,	either	by	their	nature	or	due	to	requirements	of	accounting	principles	generally	accepted	in the	U.S.	(GAAP),	are	determined	using	best	estimates	and	assumptions.	While	we	believe	that	the	amounts	included	in	our	Consolidated	Financial Statements	reflect	our	best	judgment,	actual	amounts	could	ultimately	materially	differ	from	those	currently	presented.	We	believe	the	items	that	require the	most	subjective	and	complex	estimates	are:

•	unpaid	loss	and	loss	expense	reserves,	including	long-tail	asbestos	and	environmental	(A&E)	reserves;

•	future	policy	benefits	reserves;

•	valuation	of	value	of	business	acquired	(VOBA)	and	amortization	of	deferred	policy	acquisition	costs	and	VOBA;

•	the	assessment	of	risk	transfer	for	certain	structured	insurance	and	reinsurance	contracts;

•	reinsurance	recoverable,	including	a	provision	for	uncollectible	reinsurance;

•	impairments	to	the	carrying	value	of	our	investment	portfolio;

•	the	valuation	of	deferred	tax	assets;

•	the	valuation	of	derivative	instruments	related	to	guaranteed	minimum	income	benefits	(GMIB);	and

•	the	valuation	of	goodwill.

We	believe	our	accounting	policies	for	these	items	are	of	critical	importance	to	our	Consolidated	Financial	Statements.	The	following	discussion provides	more	information	regarding	the	estimates	and	assumptions	required	to	arrive	at	these	amounts	and	should	be	read	in	conjunction	with	the sections	entitled:	Prior	Period	Development,	Asbestos	and	Environmental	and	Other	Run-off	Liabilities,	Reinsurance	Recoverable	on	Ceded Reinsurance,	Investments,	Net	Realized	Gains	(Losses),	and	Other	Income	and	Expense	Items.

As	an	insurance	and	reinsurance	company,	we	are	required,	by	applicable	laws	and	regulations	and	GAAP,	to	establish	loss	and	loss	expense	reserves for	the	estimated	unpaid	portion	of	the	ultimate	liability	for	losses	and	loss	expenses	under	the	terms	of	our	policies	and	agreements	with	our	insured	and reinsured	customers.	The	estimate	of	the	liabilities	includes	provisions	for	claims	that	have	been	reported	but	unpaid	at	the	balance	sheet	date	(case reserves)	and	for	future	obligations	from	claims	that	have	been	incurred	but	not	reported	(IBNR)	at	the	balance	sheet	date	(IBNR	may	also	include	a provision	for	additional	development	on	reported	claims	in	instances	where	the	case	reserve	is	viewed	to	be	potentially	insufficient).	The	reserves	provide for	liabilities	that	exist	for	the	Company	as	of	the	balance	sheet	date.	The	loss	reserve	also	includes	an	estimate	of	expenses	associated	with	processing and	settling	these	unpaid	claims	(loss	expenses).	At	December	31,	2008,	our	gross	unpaid	loss	and	loss	expense	reserves	were	$37.2	billion	and	our	net unpaid	loss	and	loss	expense	reserves	were	$24.2	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	reserves	of	$106	million	(net	of	discount).

The	table	below	presents	a	roll-forward	of	our	unpaid	losses	and	loss	expenses	for	the	indicated	periods.

|  | Gross | Reinsurance |  |
| :--- | :--- | :--- | :--- |
| (in\tmillions\tof\tU.S.\tdollars) | Losses | Recoverable | Net\tLosses |
| Balance\tat\tDecember\t31,\t2006 | $35,517 | $13,509 | $22,008 |
| Losses\tand\tloss\texpenses\tincurred | \t 10,831 | 3,480 | 7,351 |
| Losses\tand\tloss\texpenses\tpaid | (9,516) | (3,582) | (5,934) |
| Other\t(including\tforeign\texchange\trevaluation) | 280 | 113 | 167 |
| Balance\tat\tDecember\t31,\t2007 | \t 37,112 | 13,520 | 23,592 |
| Losses\tand\tloss\texpenses\tincurred | \t 10,944 | 3,341 | 7,603 |
| Losses\tand\tloss\texpenses\tpaid | (9,899) | (3,572) | (6,327) |
| Other\t(including\tforeign\texchange\trevaluation) | (1,367) | (387) | (980) |
| Losses\tand\tloss\texpenses\tacquired | 386 | 33 | 353 |
| Balance\tat\tDecember\t31,\t2008 | $37,176 | $12,935 | $24,241 |

The	process	of	establishing	loss	reserves	for	property	and	casualty	claims	can	be	complex	and	is	subject	to	considerable	uncertainty	as	it	requires	the use	of	informed	estimates	and	judgments	based	on	circumstances	known	at	the	date	of	accrual.	The	following	table	shows	our	total	reserves	segregated between	case	reserves	(including	loss	expense	reserves)	and	IBNR	reserves	at	December	31,	2008	and	2007.

|  |  | 2008 |  |  | 2007 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Gross | Ceded | Net | Gross | Ceded | Net |
| $16,583 | $6,539 | $ 10,044 | $ 15,625 | $6,077 | $9,548 |
| 20,593 | 6,396 | 14,197 | 21,487 | 7,443 | 14,044 |
| $37,176 | $ 12,935 | $ 24,241 | $ 37,112 | $ 13,520 | $23,592 |

The	following	table	segregates	the	loss	reserves	by	line	of	business	including	property	and	all	other,	casualty,	and	personal	accident	(A&H)	at December	31,	2008	and	2007.	In	the	table,	loss	expenses	are	defined	to	include	unallocated	and	allocated	loss	adjustment	expenses.	For	certain	lines, in	particular	ACE	International	and	ACE	Bermuda	products,	loss	adjustment	expenses	are	partially	included	in	IBNR	and	partially	included	in	loss expenses.

|  |  |  | 2008 |  |  | 2007 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| (in\tmillions\tof\tU.S.\tdollars) | Gross | Ceded | Net | Gross | Ceded | Net |
| Property\tand\tall\tother |  |  |  |  |  |  |
| Case\treserves | $3,180 | $1,367 | $1,813 | $2,901 | $1,256 | $1,645 |
| Loss\texpenses | 264 | 92 | 172 | 230 | 55 | 175 |
| IBNR | 2,456 | 1,084 | 1,372 | 2,824 | 1,095 | 1,729 |
| Subtotal | 5,900 | 2,543 | 3,357 | 5,955 | 2,406 | 3,549 |
| Casualty |  |  |  |  |  |  |
| Case\treserves | 8,700 | 3,178 | 5,522 | 8,747 | 3,150 | 5,597 |
| Loss\texpenses | 3,871 | 1,779 | 2,092 | 3,348 | 1,544 | 1,804 |
| IBNR | 17,455 | 5,144 | 12,311 | 18,070 | 6,193 | 11,877 |
| Subtotal | 30,026 | 10,101 | 19,925 | 30,165 | 10,887 | 19,278 |
| A&amp;H |  |  |  |  |  |  |
| Case\treserves | 536 | 121 | 415 | 370 | 68 | 302 |
| Loss\texpenses | 32 | 2 | 30 | 29 | 4 | 25 |
| IBNR | 682 | 168 | 514 | 593 | 155 | 438 |
| Subtotal | 1,250 | 291 | 959 | 992 | 227 | 765 |
| Total |  |  |  |  |  |  |
| Case\treserves | 12,416 | 4,666 | 7,750 | 12,018 | 4,474 | 7,544 |
| Loss\texpenses | 4,167 | 1,873 | 2,294 | 3,607 | 1,603 | 2,004 |
| IBNR | 20,593 | 6,396 | 14,197 | 21,487 | 7,443 | 14,044 |
| Total | $37,176 | $ 12,935 | $ 24,241 | $ 37,112 | $ 13,520 | $23,592 |

The	judgments	used	to	estimate	unpaid	loss	and	loss	expense	reserves	require	different	considerations	depending	upon	the	individual circumstances	underlying	the	insured	loss.	For	example,	the	reserves	established	for	high	excess	casualty	claims,	A&E	claims,	claims	from	major catastrophic	events,	or	the	IBNR	for	our	various	product	lines	each	require	different	assumptions	and	judgments	to	be	made.	Necessary	judgments	are based	on	numerous	factors	and	may	be	revised	as	additional	experience	and	other	data	become	available	and	are	reviewed,	as	new	or	improved methods	are	developed,	or	as	laws	change.	Hence,	ultimate	loss	payments	may	differ	from	the	estimate	of	the	ultimate	liabilities	made	at	the	balance sheet	date.	Changes	to	our	previous	estimates	of	prior	period	loss	reserves	impact	the	reported	calendar	year	underwriting	results	by	worsening	our reported	results	if	the	prior	year	reserves	prove	to	be	deficient	or	improving	our	reported	results	if	the	prior	year	reserves	prove	to	be	redundant.	The potential	for	variation	in	loss	reserves	is	impacted	by	numerous	factors,	which	we	discuss	below.

We	establish	loss	and	loss	expense	reserves	for	our	liabilities	from	claims	for	all	of	the	insurance	and	reinsurance	business	that	we	write.	For	those claims	reported	by	insureds	or	ceding	companies	to	us	prior	to	the	balance	sheet	date,	and	where	we	have	sufficient	information,	our	claims	personnel establish	case	reserves	as	appropriate	based	on	the	circumstances	of	the	claim(s),	standard	claim	handling	practices,	and	professional	judgment.	In respect	of	those	claims	that	have	been	incurred	but	not	reported	prior	to	the	balance	sheet	date,	there	is	by	definition	limited	actual	information	to	form the	case	reserve	estimate	and	reliance	is	placed	upon	historical	loss	experience	and	actuarial	methods	to	project	the	ultimate	loss	obligations	and	the corresponding	amount	of	IBNR.	Furthermore,	for	our	assumed	reinsurance	operation,	Global	Reinsurance,	an	additional	case	reserve	may	be	established above	the	amount	notified	by	the	ceding	company	if	the	notified	case	reserve	is	judged	to	be	insufficient	by	Global	Reinsurance's	claims	department (refer	to	"Assumed	reinsurance"	below).

We	have	actuarial	staff	within	each	of	our	operating	segments	who	analyze	loss	reserves	and	regularly	project	estimates	of	ultimate	losses	and	the required	IBNR	reserve.	IBNR	reserve	estimates	are	generally	calculated	by	first	projecting	the	ultimate	amount	of	expected	claims	for	a	product	line	and subtracting	paid	losses	and	case	reserves	for	reported	claims.	The	judgments	involved	in	projecting	the	ultimate	losses	may	involve	the	use	and interpretation	of	various	actuarial	projection	methods	that	place	reliance	on	the	extrapolation	of	actual	historical	data,	loss	development	patterns	and industry	data	as	needed.	The	estimate	of	the	IBNR	reserve	also	requires	judgment	by	actuaries	and	management	to	reflect	the	impact	of	more contemporary,	qualitative,	and	subjective	factors.	Among	some	of	the	factors	that	might	be	considered	are	changes	in	business	mix	or	volume,	changes in	ceded	reinsurance	structures,	reported	and	projected	loss	trends,	inflation,	legal	environment,	and	the	terms	and	conditions	of	the	contracts	sold	to	our insured	parties.

Typically,	for	each	product	line,	one	or	more	standard	actuarial	reserving	methods	may	be	used	to	estimate	ultimate	losses	and	loss	expenses,	and from	these	estimates	a	single	actuarial	central	estimate	is	selected.	Exceptions	to	the	use	of	standard	actuarial	projection	methods	occur	for	individual claims	of	significance	that	require	complex	legal,	claims,	and	actuarial	analysis	and	judgment	(for	example,	A&E	account	projections	or	high	excess casualty	accounts	in	litigation)	or	product	lines	where	the	nature	of	the	claims	experience	and	/	or	availability	of	the	data	prevent	application	of	such methods.	In	addition,	claims	arising	from	catastrophic	events	require	evaluation	based	upon	our	exposure	at	the	time	of	the	event	and	the	circumstances of	the	catastrophe	and	its	post-event	impact	that	do	not	utilize	standard	actuarial	loss	projection	methods.

The	standard	actuarial	reserving	methods	may	include,	but	are	not	necessarily	limited	to,	paid	and	reported	loss	development,	expected	loss	ratio, and	Bornhuetter-Ferguson	methods.	A	general	description	of	these	methods	is	provided	below.	In	the	subsequent	discussion	on	short	and	long-tail business,	reference	is	also	made	where	appropriate	to	how	consideration	in	method	selection	impacted	2008	results.	In	addition	to	these	standard methods,	we	may	use	other	recognized	actuarial	methods	and	approaches	depending	upon	the	product	line	characteristics	and	available	data.	To	ensure that	the	projections	of	future	loss	emergence	based	on	historical	loss	development	patterns	are	representative	of	the	underlying	business,	the	historical loss	and	premium	data	is	required	to	be	of	sufficient	homogeneity	and	credibility.	For	example,	to	improve	data	homogeneity,	we	may	group	product	line data	further	by	similar	risk	attribute	(e.g.,	geography,	coverage	such	as	property	versus	liability	exposure,	or	origin	year),	project	losses	for	these homogenous	groups	and	then	combine	these	results	to	provide	the	overall	product	line	estimate.	The	premium	and	loss	data	is	aggregated	by	origin	year (e.g.,	the	year	in	which	the	losses	were	incurred	or	"accident	year")	and	annual	or	quarterly	development	periods	subsequent	to	the	origin	year.	Implicit	in the	standard	actuarial	methods	that	we	generally	utilize	is	the	need	for	two	fundamental	assumptions:	first,	the	expected	loss	ratio	for	each	origin	year (i.e.,	accident,	report,	or	underwriting)	and	second,	the	pattern	by	which	losses	are	expected	to	emerge	over	time	for	each	origin	year.

The	expected	loss	ratio	for	any	particular	origin	year	is	selected	after	consideration	of	a	number	of	factors,	including	historical	loss	ratios	adjusted for	intervening	premium	and	loss	trends,	industry	benchmarks,	the	results	of	policy	level	loss	modeling	at	the	time	of	underwriting,	and	other	more subjective	considerations	for	the	product	line	and	external	environment	as	noted	above.	For	the	more	recent	origin	years,	the	expected	loss	ratio	for	a given	origin	year	is	established	at	the	start	of	the	origin	year	as	part	of	the	planning	process.	This	analysis	is	performed	in	conjunction	with	underwriters and	management.	The	expected	loss	ratio	method	arrives	at	an	ultimate	loss	estimate	by	multiplying	the	expected	ultimate	loss	ratio	by	the corresponding	premium	base.	This	method	is	most	commonly	used	for	immature	origin	periods	on	product	lines	where	the	actual	paid	or	reported	loss experience	is	not	yet	deemed	sufficiently	credible	to	warrant	consideration	in	the	selection	of	ultimate	losses.	The	expected	loss	ratio	for	a	given	origin year	may	be	modified	over	time	if	the	underlying	assumptions	such	as	loss	trend	or	premium	rate	changes	differ	from	the	original	assumptions.

Our	assumed	paid	and	reported	development	patterns	provide	a	benchmark	against	which	the	actual	emerging	loss	experience	can	be	monitored. Where	possible,	development	patterns	are	selected	based	on	historical	loss	emergence	by	origin	year	with	appropriate	allowance	for	changes	in business	mix,	claims	handling	process,	or	ceded	reinsurance	that	are	likely	to	lead	to	a	discernible	difference	between	the	rate	of	historical	and	future loss	emergence.	For	product	lines	where	the	historical	data

is	viewed	to	have	low	statistical	credibility,	the	selected	development	patterns	also	reflect	relevant	industry	benchmarks	and/or	experience	from	similar product	lines	written	elsewhere	within	ACE.	This	typically	arises	for	product	lines	that	are	relatively	immature	or	for	high	severity/low	frequency	portfolios where	our	historical	experience	exhibits	considerable	volatility	and/or	lacks	credibility.	The	paid	and	reported	loss	development	methods	convert	the assumed	loss	emergence	pattern	to	a	set	of	multiplicative	factors	which	are	then	applied	to	actual	paid	or	reported	losses	to	arrive	at	an	estimate	of ultimate	losses	for	each	period.	Due	to	their	multiplicative	nature,	the	paid	and	reported	loss	development	methods	magnify	differences	between	actual and	expected	loss	emergence.	These	methods	tend	to	be	utilized	for	more	mature	origin	periods	and	for	those	portfolios	where	the	loss	emergence	has been	relatively	consistent	over	time.

The	Bornhuetter-Ferguson	method	is	essentially	a	combination	of	the	expected	loss	ratio	method	and	the	loss	development	method,	under	which the	loss	development	method	is	given	more	weight	as	the	origin	year	matures.	This	approach	allows	a	logical	transition	between	the	expected	loss	ratio method	which	is	generally	utilized	at	earlier	maturities	and	the	loss	development	methods	which	are	typically	utilized	at	latter	maturities.	We	usually	apply this	method	using	reported	loss	data	although	paid	data	may	be	used.

The	applicability	of	actuarial	methods	will	also	be	impacted	by	the	attachment	point	of	the	policy	or	contract	with	the	insured	or	ceding	company.	In the	case	of	low	attachment	points	typical	of	primary	or	working	layer	reinsurance,	the	experience	tends	to	be	more	frequency	driven.	These	product	types allow	for	the	standard	actuarial	methods	to	be	used	in	determining	loss	reserve	levels,	as	they	often	have	a	sufficient	history	and	volume	of	claims experience	to	be	credible.	In	the	case	of	high	attachment	points	typical	of	excess	insurance	or	excess	of	loss	reinsurance,	the	experience	tends	to	be severity	driven,	as	only	a	loss	of	significant	size	will	enter	the	layer.	For	structured	or	unique	contracts,	most	common	to	the	financial	solutions	business (which	we	have	considerably	curtailed)	and,	to	a	lesser	extent,	our	reinsurance	business,	we	typically	supplement	the	standard	actuarial	methods	with	an analysis	of	each	contract's	terms,	original	pricing	information,	subsequent	internal	and	external	analyses	of	the	ongoing	contracts,	market	exposures	and history,	and	qualitative	input	from	claims	managers.

Our	recorded	reserves	represent	management's	best	estimate	of	the	provision	for	unpaid	claims	as	of	the	balance	sheet	date.	We	perform	an actuarial	reserve	review	for	each	product	line	and	establish	an	actuarial	central	estimate	at	the	review's	conclusion.	The	process	to	select	the	actuarial central	estimate,	when	more	than	one	estimate	is	available,	may	differ	across	product	lines.	For	example,	an	actuary	may	base	the	central	estimate	on loss	projections	developed	using	an	incurred	loss	development	approach	instead	of	a	paid	loss	development	approach	when	reported	losses	are	viewed to	be	a	more	credible	indication	of	the	ultimate	loss	compared	with	paid	losses.	The	availability	of	estimates	by	different	projection	techniques	will	depend upon	the	product	line,	the	underwriting	circumstances,	and	the	maturity	of	the	loss	emergence.	For	a	well-established	product	line	with	sufficient	volume and	history,	the	actuarial	central	estimate	may	be	drawn	from	a	weighting	of	paid	and	reported	loss	development	and/or	Bornhuetter-Ferguson	methods. However,	for	a	new	long-tail	product	line	for	which	we	have	limited	data	and	experience	or	a	rapidly	growing	line,	the	emerging	loss	experience	may	not have	sufficient	credibility	to	allow	selection	of	loss	development	or	Bornhuetter-Ferguson	methods	and	reliance	may	be	placed	upon	the	expected	loss ratio	method	until	the	experience	matures.

Management's	best	estimate	is	developed	from	the	actuarial	central	estimate	after	collaboration	with	actuaries,	underwriting,	claims,	legal,	and finance	departments	and	culminates	with	the	input	of	reserve	committees.	Each	business	unit	reserve	committee	includes	the	participation	of	the relevant	parties	from	actuarial,	finance,	claims,	and	senior	management	and	has	the	responsibility	for	finalizing	and	approving	the	estimate	to	be	used	as management's	best	estimate.	Reserves	are	further	reviewed	by	ACE	Limited's	Chief	Actuary	and	senior	management.	The	objective	of	such	a	process	is to	determine	a	single	estimate	that	we	believe	represents	a	better	estimate	than	any	other.	Such	an	estimate	is	viewed	by	management	to	be	the	best estimate	of	ultimate	loss	settlements	and	is	determined	based	on	several	factors	including,	but	not	limited	to:

•	Segmentation	of	data	to	provide	sufficient	homogeneity	and	credibility	for	loss	projection	methods;

•	Extent	of	internal	historical	loss	data,	and	industry	information	where	required;

•	Historical	variability	of	loss	estimates	compared	with	actual	loss	experience;

•	Perceived	credibility	of	emerged	loss	experience;	and

•	Nature	and	extent	of	underlying	assumptions.

Management	does	not	build	in	any	specific	provision	for	uncertainty.

We	do	not	calculate	a	range	of	loss	reserve	estimates	for	our	individual	loss	reserve	studies.	Ranges	are	not	necessarily	a	true	reflection	of	the potential	difference	between	loss	reserves	estimated	at	the	balance	sheet	date	and	the	ultimate	settlement	value	of	losses.	This	is	due	to	the	fact	that	an actuarial	range	is	developed	based	on	known	events	as	of	the	valuation	date	whereas	actual	prior	period	development	reported	in	subsequent Consolidated	Financial	Statements	relates	in	part	to	events	and	circumstances	that	were	unknown	as	of	the	original	valuation	date.	While	we	believe	that our	recorded	reserves	are

reasonable	and	represent	management's	best	estimate	for	each	product	line	as	of	the	current	valuation	date,	future	changes	to	our	view	of	the	ultimate liabilities	are	possible.	A	five	percent	change	in	our	net	loss	reserves	equates	to	$1.2	billion	and	represents	eight	percent	of	shareholders'	equity	at December	31,	2008.	Historically,	including	A&E	reserve	charges,	our	reserves,	at	times,	have	developed	in	excess	of	10	percent	of	recorded	amounts. Refer	to	"Analysis	of	Losses	and	Loss	Expense	Development"	under	Item	1	for	a	summary	of	historical	volatility	between	estimated	loss	reserves	and ultimate	loss	settlements.

We	perform	internal	loss	reserve	studies	for	all	product	lines	at	least	once	a	year;	the	timing	of	such	studies	varies	throughout	the	year.

Additionally,	each	quarter	for	most	product	lines,	we	review	the	emergence	of	actual	losses	relative	to	expectations.	If	warranted	from	findings	in	loss emergence	tests,	we	will	accelerate	the	timing	of	our	product	line	reserve	studies.	Finally,	loss	reserve	studies	are	performed	annually	by	external	third- parties	and	the	findings	are	used	to	test	the	reasonability	of	our	internal	findings.

The	time	period	between	the	date	of	loss	occurrence	and	the	final	payment	date	of	the	ensuing	claim(s)	is	referred	to	as	the	"claim-tail".	The following	is	a	discussion	of	specific	reserving	considerations	for	both	short-tail	and	long-tail	product	lines.	In	this	section,	we	reference	the	nature	of	recent prior	period	development	to	give	a	high-level	understanding	of	how	these	considerations	translate	through	the	reserving	process	into	financial	decisions. Refer	to	"Segment	Operating	Results"	for	more	information	on	prior	period	development.

# Short-tail	business

Short-tail	business	generally	describes	product	lines	for	which	losses	are	usually	known	and	paid	shortly	after	the	loss	actually	occurs.	This	would include,	for	example,	most	property,	personal	accident,	aviation	hull,	and	automobile	physical	damage	policies	that	are	written	by	ACE.	There	are	some exceptions	on	certain	product	lines	or	events	(e.g.,	major	hurricanes)	where	the	event	has	occurred,	but	the	final	settlement	amount	is	highly	variable and	not	known	with	certainty	for	a	potentially	lengthy	period.	Due	to	the	short	reporting	development	pattern	for	these	product	lines,	our	estimate	of ultimate	losses	from	any	particular	accident	period	responds	quickly	to	the	latest	loss	data.	We	typically	assign	credibility	to	methods	that	incorporate actual	loss	emergence,	such	as	the	paid	and	reported	loss	development	and	Bornhuetter-Ferguson	methods,	sooner	than	would	be	the	case	for	long-tail lines	at	a	similar	stage	of	development	for	a	given	origin	year.	The	reserving	process	for	short-tail	losses	arising	from	catastrophic	events	typically involves	the	determination	by	the	claims	department,	in	conjunction	with	underwriters	and	actuaries,	of	our	exposure	and	estimated	losses	immediately following	an	event	and	then	subsequent	revisions	of	the	estimated	losses	as	our	insureds	provide	updated	actual	loss	information.

For	the	2008	origin	year,	the	short-tail	line	loss	reserves	were	typically	established	using	the	expected	loss	ratio	method	for	the	non-catastrophe exposures.	Reserves	were	also	established	for	losses	arising	on	catastrophe	activity	during	2008.	The	underlying	calculation	for	the	non-catastrophe losses	requires	initial	expected	loss	ratios	by	product	line	adjusted	for	actual	experience	during	the	2008	calendar	year.	As	previously	noted,	the derivation	of	initial	loss	ratios	incorporates	actuarial	projections	of	prior	years'	losses,	past	and	future	loss	and	exposure	trends,	rate	adequacy	for	new and	renewal	business,	and	ceded	reinsurance	coverage	and	costs.	We	also	considered	our	view	of	the	impact	of	terms	and	conditions	and	the	market environment,	which	by	their	nature	tend	to	be	more	judgmental	relative	to	other	factors.	For	our	short-tail	businesses	taken	as	a	whole,	overall	loss	trend assumptions	did	not	differ	significantly	relative	to	prior	years.	Because	there	is	some	degree	of	random	volatility	of	non-catastrophe	loss	experience	from year	to	year,	we	considered	average	loss	experience	over	several	years	when	developing	loss	estimates	for	the	current	accident	year.	Therefore,	while there	has	been	favorable	loss	development	in	recent	years	on	non-catastrophe	exposures,	the	effect	of	this	favorable	development	on	expected	loss ratios	for	the	current	accident	year	is	relatively	small.	Further,	other	considerations,	such	as	rate	reductions	and	broadening	of	terms	and	conditions	in	a competitive	market	somewhat	offset	the	impact	of	recent	favorable	loss	development.

In	terms	of	prior	accident	years,	the	bulk	of	the	changes	made	in	the	2008	calendar	year	arose	from	the	2006	and	2007	accident	years.

Specifically,	the	Insurance	–	North	American,	Insurance	–	Overseas	General,	and	Global	Reinsurance	segments	experienced	$220	million,	$173	million, and	$142	million	of	favorable	development,	respectively,	primarily	due	to	lower	than	anticipated	loss	emergence	on	the	2006	and	2007	accident	years.	In the	Insurance	–	North	American	and	Insurance	–	Overseas	General	segments,	these	prior	period	movements	were	primarily	the	result	of	changes	to	the ultimate	loss	estimates	for	the	2006	and	2007	accident	years	in	response	to	the	latest	reported	loss	data	rather	than	any	significant	changes	to underlying	actuarial	assumptions	such	as	loss	development	patterns.	In	the	Global	Reinsurance	segment,	the	prior	period	movements	were	primarily	the result	of	changes	to	the	ultimate	loss	estimates	for	the	2003-2005	accident	years	that	resulted	from	a	detailed	review.	The	changes	to	the	ultimate	losses were	principally	related	to	recognition	of	the	latest	reported	loss	data	rather	than	any	significant	changes	to	underlying	actuarial	assumptions	such	as loss	development	patterns.

For	a	detailed	analysis	of	changes	in	assumptions	related	to	prior	accident	year	reserves	during	calendar	year	2008,	refer	to	"Prior	Period Development".

# Long-tail	business

Long-tail	business	describes	lines	of	business	for	which	specific	losses	may	not	be	known	for	some	period	and	claims	can	take	significant	time	to emerge.	This	includes	most	casualty	lines	such	as	general	liability,	D&O,	and	workers'	compensation.	There	are	many	factors	contributing	to	the uncertainty	and	volatility	of	long-tail	business.	Among	these	are:

•	Our	historical	loss	data	and	experience	is	often	too	immature	and	lacking	in	credibility	to	rely	upon	for	reserving	purposes.	Where	this	is	the	case,	in	our reserve	analysis	we	rely	on	industry	loss	ratios	or	industry	benchmark	development	patterns	that	we	believe	reflect	the	nature	and	coverage	of	the underwritten	business	and	its	future	development,	where	available.	For	such	product	lines,	actual	loss	experience	may	differ	from	industry	loss	statistics as	well	as	loss	experience	for	previous	underwriting	years;

•	The	inherent	uncertainty	around	loss	trends,	claims	inflation	(e.g.,	medical	and	judicial)	and	underlying	economic	conditions;

•	The	inherent	uncertainty	of	the	estimated	duration	of	the	paid	and	reporting	loss	development	patterns	beyond	the	historical	record	requires	that professional	judgment	be	used	in	the	determination	of	the	length	of	the	patterns	based	on	the	historical	data	and	other	information;

•	The	inherent	uncertainty	of	assuming	that	historical	paid	and	reported	loss	development	patterns	for	older	origin	years	will	be	representative	of subsequent	loss	emergence	on	recent	origin	years.	For	example,	changes	over	time	in	the	processes	and	procedures	for	establishing	case	reserves	can distort	reported	loss	development	patterns	or	changes	in	ceded	reinsurance	structures	by	origin	year	can	distort	the	development	of	paid	and	reported losses;

•	Loss	reserve	analyses	typically	require	loss	or	other	data	be	grouped	by	common	characteristics	in	some	manner.	If	data	from	two	combined	lines	of business	exhibit	different	characteristics,	such	as	loss	payment	patterns,	the	credibility	of	the	reserve	estimate	could	be	affected.	Additionally,	since casualty	lines	of	business	can	have	significant	intricacies	in	the	terms	and	conditions	afforded	to	the	insured,	there	is	an	inherent	risk	as	to	the homogeneity	of	the	underlying	data	used	in	performing	reserve	analyses;	and

•	The	applicability	of	the	price	change	data	used	to	estimate	ultimate	loss	ratios	for	most	recent	origin	years.

As	can	be	seen	from	the	above,	various	factors	are	considered	when	determining	appropriate	data,	assumptions,	and	methods	used	to	establish the	loss	reserve	for	the	long-tail	product	lines.	These	factors	will	also	vary	by	origin	year	for	given	product	lines.	The	derivation	of	loss	development patterns	from	data	and	the	selection	of	a	tail	factor	to	project	ultimate	losses	from	actual	loss	emergence	require	considerable	judgment,	particularly	with respect	to	the	extent	to	which	historical	loss	experience	is	relied	upon	to	support	changes	in	key	reserving	assumptions.	Examples	of	the	relationship between	changes	in	historical	loss	experience	and	key	reserving	assumptions	are	provided	below.

For	those	long-tail	product	lines	that	are	less	claim	frequency	and	more	claim	severity	oriented,	such	as	professional	lines	and	high	excess casualty,	we	placed	more	reliance	upon	expert	legal	and	claims	review	of	the	specific	circumstance	underlying	reported	cases	rather	than	loss development	patterns.	The	assumptions	used	for	these	lines	of	business	are	updated	over	time	to	reflect	new	claim	and	legal	advice	judged	to	be	of significance.

For	the	2008	origin	year,	loss	reserves	were	typically	established	through	the	application	of	individual	product	line	expected	loss	ratios	that contemplated	assumptions	similar	in	nature	to	those	noted	in	the	short-tail	line	discussion.	Our	assumptions	on	loss	trend	and	development	patterns reflect	reliance	on	our	historical	loss	data	provided	the	length	of	history	and	homogeneity	afford	credibility.	Given	the	recent	growth	on	a	number	of product	lines,	such	as	general	casualty	and	financial	lines,	our	historical	loss	data	is	less	extensive	and	our	assumptions	require	judgmental	use	of industry	loss	trends	and	development	patterns.	We	note	that	industry	patterns	are	not	always	available	to	match	the	nature	of	the	business	being	written; this	issue	is	particularly	problematic	for	non-U.S.	exposed	lines.	Given	the	underlying	volatility	of	the	long-tail	product	lines	and	the	lengthy	period required	for	full	paid	and	reported	loss	emergence,	we	typically	assign	little	to	no	credibility	to	actual	loss	emergence	in	the	early	development	periods. Accordingly,	we	generally	used	the	expected	loss	ratio	method	for	the	2008	and	immediately	preceding	origin	years	to	establish	reserves	by	product	line. We	monitor	actual	paid	and	reported	loss	emergence	relative	to	expected	loss	emergence	for	most	individual	product	lines.	While	recent	experience	has generally	been	favorable	relative	to	our	expectations,	we	do	not	yet	believe	that	this	favorable	experience	is	sufficiently	credible	for	us	to	consider	moving to	loss-based	projection	methods	in	setting	reserves	for	the	more	recent	years.

Given	the	nature	of	long-tail	casualty	business	and	related	reserving	considerations,	for	the	major	long-tail	lines	in	Insurance	–	North	American, Insurance	–	Overseas	General,	and	Global	Reinsurance,	no	changes	of	significance	were	made	to

the	key	actuarial	assumptions	for	the	loss	trend	(aside	from	changes	to	inflation	assumptions),	exposure	trend,	and	loss	development	patterns	used	to establish	the	2008	accident	year	reserves	relative	to	prior	accident	years.

To	the	extent	that	actual	loss	emergence	in	calendar	year	2008	differed	from	our	expectation	for	the	more	recent	origin	years,	the	deviation	was not	typically	seen	as	sufficiently	credible,	particularly	given	the	volatility	and	lengthy	period	for	full	loss	emergence,	to	alter	either	our	booked	ultimate	loss selections	or	the	actuarial	assumptions	underlying	the	reserve	reviews.	Such	judgments	were	made	with	due	consideration	to	the	factors	impacting reserve	uncertainty	as	discussed	above.	However,	for	some	product	lines,	credibility	was	assigned	to	emerging	loss	experience	and	this	is	discussed further	below	and	in	the	section	entitled	"Prior	Period	Development".	For	the	2007	and	2008	origin	years,	our	best	estimate	reflects	what	we	believe	to	be our	exposure	to	credit-crunch	related	claims	(primarily	E&O	and	D&O)	based	on	information	received	to	date.

For	more	mature	accident	years,	typically	2004	and	prior,	we	relied	upon	paid	and	reported	loss	development	patterns	for	older	origin	years	where sufficient	credibility	existed.	For	those	lines	where	the	historical	experience	lacked	credibility,	we	placed	reliance	upon	the	latest	benchmark	patterns (where	available)	from	external	industry	bodies	such	as	Insurance	Services	Office	(ISO)	or	the	National	Council	on	Compensation	Insurance,	Inc. (NCCI).	Accordingly,	the	assumptions	used	to	project	loss	estimates	will	not	fully	reflect	our	own	actual	loss	experience	until	our	data	is	deemed sufficiently	credible.

In	contrast	to	short-tail	lines,	the	prior	period	development	in	2008	for	long-tail	lines	of	business	arose	across	a	number	of	accident	years	in	the Insurance	–	North	American	and	Insurance	–	Overseas	General	segments,	typically	in	more	mature	origin	years.	The	movements	were	generally	the result	of	actual	loss	emergence	in	calendar	year	2008	that	differed	notably	from	the	expected	loss	emergence	and	where	such	deviations	were	deemed significant	enough	to	warrant	revising	the	projections	for	certain	product	lines.	The	nature	of	the	changes	to	the	assumptions	in	2008,	and	the	associated impact	on	the	prior	accident	years,	varies	by	product	line.	For	example,	in	Insurance	–	North	American	the	changes	to	recorded	estimates	for	national account	casualty	lines,	medical	risk	lines,	and	Canada	P&C	operations	involved	assigning	greater	credibility	to	actual	loss	experience;	i.e.	more	weight was	given	to	paid	and	reported	loss	development	and	Bornhuetter-Ferguson	methods	rather	than	the	expected	loss	ratio	methods	mainly	on	accident years	2005	and	prior.	This	resulted	in	$32	million,	$46	million,	and	$51	million	of	favorable	development,	respectively.	Similarly,	for	the	ACE	International division	within	Insurance	–	Overseas	General,	there	was	$159	million	of	favorable	development	mainly	on	accident	years	2005	and	prior	as	more	weight was	given	to	paid	and	reported	loss	development	and	Bornhuetter-Ferguson	methods	rather	than	the	expected	loss	ratio	methods.

While	we	believe	that	our	reserve	for	unpaid	losses	and	loss	expenses	at	December	31,	2008,	is	adequate,	new	information	or	emerging	trends that	differ	from	our	assumptions	may	lead	to	future	development	of	losses	and	loss	expenses	significantly	greater	or	less	than	the	reserve	provided, which	could	have	a	material	effect	on	future	operating	results.	As	noted	previously,	our	best	estimate	of	required	loss	reserves	for	most	portfolios	is judgmentally	selected	for	each	origin	year	after	considering	the	results	from	any	number	of	reserving	methods	and	is	not	a	purely	mechanical	process. Therefore,	it	is	difficult	to	convey,	in	a	simple	and	quantitative	manner,	the	impact	that	a	change	to	a	single	assumption	will	have	on	our	best	estimate.	In the	examples	shown	below,	we	attempt	to	give	an	indication	of	the	potential	impact	by	isolating	a	single	change	for	a	specific	reserving	method	that would	be	pertinent	in	establishing	the	best	estimate	for	the	product	line	described.	We	consider	each	of	the	following	sensitivity	analyses	to	represent	a reasonably	likely	deviation	in	the	underlying	assumption.

Given	the	long	reporting	and	paid	development	patterns,	the	tail	factors	used	to	project	actual	current	losses	to	ultimate	losses	for	claims	covered	by	our inactive	middle	market	workers'	compensation	business	requires	considerable	judgment	that	could	be	material	to	consolidated	loss	and	loss	expense reserves.	Specifically,	when	applying	the	paid	loss	development	method,	a	one	percent	change	in	the	tail	factor	(i.e.,	1.04	changed	to	either	1.05	or	1.03) would	cause	a	change	of	approximately	$45	million,	either	positively	or	negatively,	for	the	projected	net	loss	and	loss	expense	reserves.	This	is	relative	to recorded	net	loss	and	loss	expense	reserves	of	approximately	$270	million.

Our	ACE	Bermuda	operations	write	predominantly	high	excess	liability	coverage	on	an	occurrence-first-reported	basis	(typically	with	attachment points	in	excess	of	$300	million	and	gross	limits	of	$150	million	or	less)	and	D&O	and	other	professional	liability	coverage	on	a	claims-made	basis (typically	with	attachment	points	in	excess	of	$100	million	and	gross	limits	of	$50	million	or	less).	Claims	development	for	this	business	can	vary significantly	for	individual	claims	and	historically	could	vary	by	as	much	as	$50	million	per	claim	for	professional	liability	and	$150	million	per	claim	for excess	liability	depending	on	the	nature	of	the	loss.

Certain	long-tail	lines,	such	as	casualty	and	professional	lines,	are	particularly	susceptible	to	changes	in	loss	trend	and	claim	inflation.	Heightened perceptions	of	tort	and	settlement	awards	around	the	world	are	increasing	the	demand	for	these	products	as	well	as	contributing	to	the	uncertainty	in	the reserving	estimates.	Our	reserving	methods	rely	on	loss	development	patterns	estimated	from	historical	data	and	while	we	attempt	to	adjust	such	factors for	known	changes	in	the	current	tort	environment,	it	is	possible	that	such	factors	may	not	entirely	reflect	all	recent	trends	in	tort	environments.	For example,	when	applying	the	reported	loss	development	method,	the	lengthening	by	six	months	of	our	selected	loss	development	patterns	would	increase reserve	estimates	on	long-tail	casualty	and	professional	lines	for	accident	years	2000-2006	by	approximately	$254	million.	This	movement	is	relative	to recorded	net	loss	and	loss	expense	reserves	of	approximately	$1.7	billion	for	these	years.

Typically,	there	is	inherent	uncertainty	around	the	length	of	paid	and	reported	development	patterns,	especially	for	certain	casualty	lines	such	as	excess workers'	compensation	or	general	liability,	which	may	take	up	to	30	years	to	fully	develop.	This	uncertainty	is	accentuated	by	the	need	to	supplement client	development	patterns	with	industry	development	patterns	due	to	the	sometimes	low	credibility	of	the	data.	The	underlying	source	and	selection	of the	final	development	patterns	can	thus	have	a	significant	impact	on	the	selected	net	losses	and	loss	expenses	ultimate.	For	example,	a	twenty	percent shortening	or	lengthening	of	the	development	patterns	used	for	U.S.	long-tail	lines	would	cause	the	loss	reserve	estimate	derived	by	the	reported Bornhuetter-Ferguson	method	for	these	lines	to	change	by	approximately	$217	million.	This	movement	is	relative	to	recorded	net	loss	and	loss	expense reserves	of	approximately	$1.5	billion.

# Assumed	reinsurance

At	December	31,	2008,	net	unpaid	losses	and	loss	expenses	for	the	Global	Reinsurance	segment	aggregated	to	$2.5	billion,	consisting	of	$836	million	of case	reserves	and	$1.7	billion	of	IBNR.	In	comparison,	at	December	31,	2007,	net	unpaid	losses	and	loss	expenses	for	the	Global	Reinsurance	segment aggregated	to	$2.6	billion,	consisting	of	$740	million	of	case	reserves	and	$1.9	billion	of	IBNR.

For	catastrophe	business,	we	principally	estimate	unpaid	losses	and	loss	expenses	on	an	event	basis	by	considering	various	sources	of information,	including	specific	loss	estimates	reported	by	our	cedants,	ceding	company	and	overall	industry	loss	estimates	reported	by	our	brokers,	and our	internal	data	regarding	reinsured	exposures	related	to	the	geographical	location	of	the	event.	Our	internal	data	analysis	enables	us	to	establish catastrophe	reserves	for	known	events	with	more	certainty	at	an	earlier	date	than	would	be	the	case	if	we	solely	relied	on	reports	from	third	parties	to determine	carried	reserves.

For	our	casualty	reinsurance	business,	we	generally	rely	on	ceding	companies	to	report	claims	and	then	use	that	data	as	a	key	input	to	estimate unpaid	losses	and	loss	expenses.	Due	to	the	reliance	on	claims	information	reported	by	ceding	companies,	as	well	as	other	factors,	the	estimation	of unpaid	losses	and	loss	expenses	for	assumed	reinsurance	includes	certain	risks	and	uncertainties	that	are	unique	relative	to	our	direct	insurance business.	These	include,	but	are	not	necessarily	limited	to,	the	following:

•	The	reported	claims	information	could	be	inaccurate;

•	Typically,	a	lag	exists	between	the	reporting	of	a	loss	event	to	a	ceding	company	and	its	reporting	to	us	as	a	reinsurance	claim.	The	use	of	a	broker	to transmit	financial	information	from	a	ceding	company	to	us	increases	the	reporting	lag.	Because	most	of	our	reinsurance	business	is	produced	by brokers,	ceding	companies	generally	first	submit	claim	and	other	financial	information	to	brokers,	who	then	report	the	proportionate	share	of	such information	to	each	reinsurer	of	a	particular	treaty.	The	reporting	lag	generally	results	in	a	longer	period	of	time	between	the	date	a	claim	is	incurred	and the	date	a	claim	is	reported	compared	with	direct	insurance	operations.	Therefore,	the	risk	of	delayed	recognition	of	loss	reserve	development	is	higher for	assumed	reinsurance	than	for	direct	insurance	lines;	and

•	The	historical	claims	data	for	a	particular	reinsurance	contract	can	be	limited	relative	to	our	insurance	business	in	that	there	may	be	less	historical information	available.	Further,	for	certain	coverages	or	products,	such	as	excess	of	loss	contracts,	there	may	be	relatively	few	expected	claims	in	a particular	year	so	the	actual	number	of	claims	may	be	susceptible	to	significant	variability.	In	such	cases,	the	actuary	often	relies	on	industry	data	from several	recognized	sources.

We	mitigate	the	above	risks	in	several	ways.	In	addition	to	routine	analytical	reviews	of	ceding	company	reports	to	ensure	reported	claims information	appears	reasonable,	we	perform	regular	underwriting	and	claims	audits	of	certain	ceding	companies	to	ensure	reported	claims	information	is accurate,	complete,	and	timely.	As	appropriate,	audit	findings	are	used	to	adjust	claims	in	the	reserving	process.	We	also	use	our	knowledge	of	the historical	development	of	losses	from	individual	ceding	companies	to	adjust	the	level	of	adequacy	we	believe	exists	in	the	reported	ceded	losses.

On	occasion,	there	will	be	differences	between	our	carried	loss	reserves	and	unearned	premium	reserves	and	the	amount	of	loss	reserves	and unearned	premium	reserves	reported	by	the	ceding	companies.	This	is	due	to	the	fact	that	we	receive	consistent	and	timely	information	from	ceding companies	only	with	respect	to	case	reserves.	For	IBNR,	we	use	historical	experience	and	other	statistical	information,	depending	on	the	type	of business,	to	estimate	the	ultimate	loss.	We	estimate	our	unearned	premium	reserve	by	applying	estimated	earning	patterns	to	net	premiums	written	for each	treaty	based	upon	that	treaty's	coverage	basis	(i.e.,	risks	attaching	or	losses	occurring).	At	December	31,	2008,	the	case	reserves	reported	to	us	by our	ceding	companies	were	$811	million,	compared	with	the	$836	million	we	recorded.	Our	policy	is	to	post	additional	case	reserves	in	addition	to	the amounts	reported	by	our	cedants	when	our	evaluation	of	the	ultimate	value	of	a	reported	claim	is	different	than	the	evaluation	of	that	claim	by	our	cedant.

Within	the	Insurance	–	North	American	segment,	we	also	have	exposure	to	certain	liability	reinsurance	lines	that	have	been	in	run-off	since	1994. Unpaid	losses	and	loss	expenses	relating	to	this	run-off	reinsurance	business	resides	within	the	Brandywine	Division	of	our	Insurance	–	North	American segment.	Most	of	the	remaining	unpaid	losses	and	loss	expense	reserves	for	the	run-off	reinsurance	business	relate	to	A&E	claims.	(Refer	to	"Asbestos and	Environmental	and	Other	Run-off	Liabilities"	for	more	information.)

# Asbestos	and	environmental	reserves

Included	in	our	liabilities	for	losses	and	loss	expenses	are	liabilities	for	asbestos	and	environmental	claims	and	expenses.	These	claims	are	principally related	to	claims	arising	from	remediation	costs	associated	with	hazardous	waste	sites	and	bodily-injury	claims	related	to	exposure	to	asbestos	products and	environmental	hazards.	The	estimation	of	these	liabilities	is	particularly	sensitive	to	the	recent	legal	environment,	including	specific	settlements	that may	be	used	as	precedents	to	settle	future	claims.

During	2008,	we	conducted	an	internal,	ground-up	review	of	our	consolidated	A&E	liabilities	as	of	December	31,	2007.	During	the	same	period,	a team	of	external	actuaries	performed	an	evaluation	as	to	the	adequacy	of	the	reserves	of	Century.	This	external	review	was	conducted	in	accordance with	the	Brandywine	Restructuring	Order,	which	requires	that	an	independent	actuarial	review	of	Century's	reserves	be	completed	every	two	years. Management	takes	full	responsibility	for	the	estimation	of	its	A&E	liabilities.	As	a	result	of	our	internal	review,	we	increased	our	net	loss	reserves	for	the Brandywine	operations,	including	A&E,	by	$65	million,	while	the	gross	loss	reserves	increased	by	$143	million.	The	conclusions	of	the	external	review provided	estimates	of	ultimate	net	Brandywine	liabilities	that	are	little	changed	from	a	comparable	study	in	2006.	We	also	decreased	our	net	loss	reserves for	Westchester	Specialty's	A&E	and	other	liabilities	by	$13	million,	while	the	gross	loss	reserves	decreased	by	$10	million.	Our	A&E	reserves	are	not discounted	and	do	not	reflect	any	anticipated	future	changes	in	the	legal,	social	or	economic	environment,	or	any	benefit	from	future	legislative	reforms. There	are	many	complex	variables	that	we	consider	when	estimating	the	reserves	for	our	inventory	of	asbestos	accounts	and	these	variables	may directly	impact	the	predicted	outcome.	We	believe	the	most	significant	variables	relating	to	our	A&E	reserves	include	assumptions	regarding	trends	with respect	to	claim	severity	and	the	frequency	of	higher	severity	claims,	the	ability	of	a	claimant	to	bring	a	claim	in	a	state	in	which	they	have	no	residency	or exposure,	the	ability	of	a	policyholder	to	claim	the	right	to	non-products	coverage,	whether	high-level	excess	policies	have	the	potential	to	be	accessed given	the	policyholders	claim	trends	and	liability	situation,	and	payments	to	unimpaired	claimants	and	the	potential	liability	of	peripheral defendants.	Based	on	the	policies,	the	facts,	the	law,	and	a	careful	analysis	of	the	impact	that	these	factors	will	likely	have	on	any	given	account,	we estimate	the	potential	liability	for	indemnity,	policyholder	defense	costs,	and	coverage	litigation	expense.

The	results	in	asbestos	cases	announced	by	other	carriers	may	well	have	little	or	no	relevance	to	us	because	coverage	exposures	are	highly dependent	upon	the	specific	facts	of	individual	coverage	and	resolution	status	of	disputes	among	carriers,	policyholders,	and	claimants.

Refer	to	"Asbestos	and	Environmental	and	Other	Run-off	Liabilities"	for	more	information.

We	issue	contracts	in	our	Insurance	–	Overseas	General	and	Life	Insurance	and	Reinsurance	segments	that	are	classified	as	long-duration.	These contracts	generally	include	accident	and	supplemental	health	products,	term	and	whole	life	products,	and	endowment	products.	We	establish	reserves for	contracts	determined	to	be	long-duration	based	on	approved	actuarial	methods	that	include	assumptions	related	to	expenses,	mortality,	morbidity, persistency,	and	investment	yields	with	a	factor	for	adverse	deviation.	These	assumptions	are	"locked	in"	at	the	inception	of	the	contract.	The	future policy	benefit	reserve	balance	is	regularly	evaluated	for	a	premium	deficiency.

As	part	of	purchase	accounting	related	to	the	Combined	Insurance	acquisition,	we	applied	fair	value	accounting	to	the	future	policy	benefit	reserves acquired.	An	additional	liability	resulted	primarily	as	a	result	of	using	current	interest	rates	and	an	adjusted	risk	margin.	We	applied	this	fair	value adjustment	by	essentially	"unlocking"	the	future	policy	benefit	reserves	and	then	"locking	in"	the	new	assumptions	which	will	be	subject	to	the	same premium	deficiency	analysis	as	the	original	reserves.

As	part	of	the	Combined	Insurance	acquisition,	we	established	an	intangible	asset	related	to	VOBA.	The	valuation	of	VOBA	is	derived	from	similar assumptions	to	those	used	to	establish	the	associated	future	policy	benefit	reserve.	The	most	significant	input	in	this	calculation	is	the	discount	rate	used to	present	value	the	net	cash	flows.	We	amortize	deferred	policy	acquisition	costs	associated	with	long-duration	contracts	and	VOBA	(collectively	DAC) over	the	estimated	life	of	the	contracts	in	proportion	to	premium	revenue	recognized.	The	estimated	life	is	established	at	the	inception	of	the	contracts	or upon	acquisition	and	is	based	on	current	persistency	assumptions.	DAC	is	tested	along	with	the	future	policy	benefit	reserves	regularly	for	premium deficiencies	of	which	we	have	not	identified	any	significant	deficiencies.

# Risk	transfer

In	the	ordinary	course	of	business,	we	both	purchase	(or	cede)	and	sell	(or	assume)	reinsurance	protection.	In	2002,	as	a	matter	of	policy,	we discontinued	the	purchase	of	all	finite	reinsurance	contracts.	For	both	ceded	and	assumed	reinsurance,	risk	transfer	requirements	must	be	met	in	order	to use	reinsurance	accounting,	principally	resulting	in	the	recognition	of	cash	flows	under	the	contract	as	premiums	and	losses.	If	risk	transfer	requirements are	not	met,	a	contract	is	to	be	accounted	for	as	a	deposit,	typically	resulting	in	the	recognition	of	cash	flows	under	the	contract	through	a	deposit	asset or	liability	and	not	as	revenue	or	expense.	To	meet	risk	transfer	requirements,	a	reinsurance	contract	must	include	both	insurance	risk,	consisting	of underwriting	and	timing	risk,	and	a	reasonable	possibility	of	a	significant	loss	for	the	assuming	entity.	We	also	apply	similar	risk	transfer	requirements	to determine	whether	certain	commercial	insurance	contracts	should	be	accounted	for	as	insurance	or	a	deposit.	Contracts	that	include	fixed	premium	(i.e., premium	not	subject	to	adjustment	based	on	loss	experience	under	the	contract)	for	fixed	coverage	generally	transfer	risk	and	do	not	require	judgment.

Reinsurance	and	insurance	contracts	that	include	both	significant	risk	sharing	provisions,	such	as	adjustments	to	premiums	or	loss	coverage	based on	loss	experience,	and	relatively	low	policy	limits	as	evidenced	by	a	high	proportion	of	maximum	premium	assessments	to	loss	limits,	can	require considerable	judgment	to	determine	whether	or	not	risk	transfer	requirements	are	met.	For	such	contracts,	often	referred	to	as	finite	or	structured products,	we	require	that	risk	transfer	be	specifically	assessed	for	each	contract	by	developing	expected	cash	flow	analyses	at	contract	inception.	To support	risk	transfer,	the	cash	flow	analyses	must	demonstrate	that	a	significant	loss	is	reasonably	possible,	such	as	a	scenario	in	which	the	ratio	of	the net	present	value	of	losses	divided	by	the	net	present	value	of	premiums	equals	or	exceeds	110	percent.	For	purposes	of	cash	flow	analyses,	we generally	use	a	risk-free	rate	of	return	consistent	with	the	expected	average	duration	of	loss	payments.	In	addition,	to	support	insurance	risk,	we	must prove	the	reinsurer's	risk	of	loss	varies	with	that	of	the	reinsured	and/or	support	various	scenarios	under	which	the	assuming	entity	can	recognize	a significant	loss.

To	ensure	risk	transfer	requirements	are	routinely	assessed,	qualitative	and	quantitative	risk	transfer	analyses	and	memoranda	supporting	risk transfer	are	developed	by	underwriters	for	all	structured	products.	We	have	established	protocols	for	structured	products	that	include	criteria	triggering	an accounting	review	of	the	contract	prior	to	quoting.	If	any	criterion	is	triggered,	a	contract	must	be	reviewed	by	a	committee	established	by	each	of	our operating	segments	with	reporting	oversight,	including	peer	review,	from	our	global	Structured	Transaction	Review	Committee.

With	respect	to	ceded	reinsurance,	we	entered	into	a	few	multi-year	excess	of	loss	retrospectively-rated	contracts,	principally	in	2002,	some	of which	remain	in-force.	These	contracts	principally	provide	severity	protection	for	specific	product	divisions.	Because	traditional	one-year	reinsurance coverage	had	become	relatively	costly,	these	contracts	were	generally	entered	into	to	secure	a	more	cost-effective	reinsurance	program.	All	of	these contracts	transferred	risk	and	have	been	accounted	for	as	reinsurance.	In	addition,	we	maintain	a	few	aggregate	excess	of	loss	reinsurance	contracts that	were	principally	entered	into	prior	to	2003,	such	as	the	National	Indemnity	Company	(NICO)	contracts	referred	to	in	the	section	entitled,	"Asbestos and	Environmental	and	Other	Run-off	Liabilities".	Subsequent	to	the	ACE	INA	acquisition,	we	have	not	purchased	any	retroactive	ceded	reinsurance contracts.

With	respect	to	assumed	reinsurance	and	insurance	contracts,	products	giving	rise	to	judgments	regarding	risk	transfer	were	primarily	sold	by	our financial	solutions	business.	Although	we	have	significantly	curtailed	writing	financial	solutions	business,	several	contracts	remain	in-force	and	principally include	multi-year	retrospectively-rated	contracts	and	loss	portfolio	transfers.	Because	transfer	of	insurance	risk	is	generally	a	primary	client	motivation for	purchasing	these	products,	relatively	few	insurance	and	reinsurance	contracts	have	historically	been	written	for	which	we	concluded	that	risk	transfer criteria	had

not	been	met.	For	certain	insurance	contracts	that	have	been	reported	as	deposits,	the	insured	desired	to	self-insure	a	risk	but	was	required,	legally	or otherwise,	to	purchase	insurance	so	that	claimants	would	be	protected	by	a	licensed	insurance	company	in	the	event	of	non-payment	from	the	insured. A	significant	portion	of	ACE	Tempest	Re	USA's	business	is	written	through	quota	share	treaties	(approximately	$363	million	of	net	premiums earned	in	2008,	comprised	of	$250	million	of	first	dollar	quota	share	treaties	and	$113	million	of	excess	quota	share	treaties),	a	small	portion	of	which	are categorized	as	structured	products.	Structured	quota	share	treaties	typically	contain	relatively	low	aggregate	policy	limits,	a	feature	that	reduces	loss coverage	in	some	manner	and	a	profit	sharing	provision.

# Reinsurance	recoverable	on	losses	and	loss	expenses

Reinsurance	recoverable	includes	the	balances	due	to	us	from	reinsurance	companies	for	paid	and	unpaid	losses	and	loss	expenses	and	is	presented net	of	a	provision	for	uncollectible	reinsurance.	The	provision	for	uncollectible	reinsurance	is	determined	based	upon	a	review	of	the	financial	condition	of the	reinsurers	and	other	factors.	Ceded	reinsurance	contracts	do	not	relieve	our	primary	obligation	to	our	policyholders.	Consequently,	an	exposure	exists with	respect	to	reinsurance	recoverable	to	the	extent	that	any	reinsurer	is	unable	or	unwilling	to	meet	its	obligations	or	disputes	the	liabilities	assumed under	the	reinsurance	contracts.	We	determine	the	reinsurance	recoverable	on	unpaid	losses	and	loss	expenses	using	actuarial	estimates	as	well	as	a determination	of	our	ability	to	cede	unpaid	losses	and	loss	expenses	under	existing	reinsurance	contracts	subject	to	the	terms	of	the	reinsurance contracts.

The	recognition	of	reinsurance	recoverable	requires	two	key	judgments.	The	first	judgment	involves	our	estimation	based	on	the	amount	of	gross reserves	and	the	percentage	of	that	amount	which	may	be	ceded	to	reinsurers.	Ceded	IBNR,	which	is	a	major	component	of	the	reinsurance	recoverable on	unpaid	losses	and	loss	expenses,	is	generally	developed	as	part	of	our	loss	reserving	process	and,	consequently,	this	estimation	is	subject	to	similar risks	and	uncertainties	as	the	estimation	of	gross	reserves.	Refer	to	"Critical	Accounting	Estimates	–	Unpaid	losses	and	loss	expenses".	The	second judgment	involves	our	estimate	of	the	amount	of	the	reinsurance	recoverable	balance	that	we	may	ultimately	be	unable	to	recover	from	reinsurers	due	to insolvency,	contractual	dispute,	or	for	other	reasons.	Amounts	estimated	to	be	uncollectible	are	reflected	in	a	provision	that	reduces	the	reinsurance recoverable	asset	and,	in	turn,	shareholders'	equity.	Changes	in	the	provision	for	uncollectible	reinsurance	are	reflected	in	net	income.

Although	the	contractual	obligation	of	individual	reinsurers	to	pay	their	reinsurance	obligations	is	based	on	specific	contract	provisions,	the collectability	of	such	amounts	requires	estimation	by	management.	The	majority	of	the	balance	we	have	accrued	as	recoverable	will	not	be	due	for collection	until	sometime	in	the	future,	and	the	duration	of	our	recoverables	may	be	longer	than	the	duration	of	our	direct	exposures.	Over	this	period	of time,	economic	conditions	and	operational	performance	of	a	particular	reinsurer	may	impact	their	ability	to	meet	these	obligations	and	while	they	may continue	to	acknowledge	their	contractual	obligation	to	do	so,	they	may	not	have	the	financial	resources	or	willingness	to	fully	meet	their	obligation	to	us. To	estimate	the	provision	for	uncollectible	reinsurance,	the	reinsurance	recoverable	must	first	be	determined	for	each	reinsurer.	This	determination is	based	on	a	process	rather	than	an	estimate,	although	an	element	of	judgment	must	be	applied.	As	part	of	the	process,	ceded	reserves	are	allocated	to reinsurance	contracts	because	ceded	reserves	are	not	generally	calculated	on	a	contract	by	contract	basis.	The	allocations	are	generally	based	on premiums	ceded	under	reinsurance	contracts,	adjusted	for	actual	loss	experience	and	historical	relationships	between	gross	and	ceded	losses.	If	actual experience	varies	materially	from	historical	experience,	including	that	used	to	determine	ceded	premium,	the	allocation	of	reinsurance	recoverable	by reinsurer	will	change.	While	such	change	is	unlikely	to	result	in	a	large	percentage	change	in	the	provision	for	uncollectible	reinsurance,	it	could, nevertheless,	have	a	material	effect	on	our	net	income	in	the	period	recorded.

Generally,	we	use	a	default	analysis	to	estimate	uncollectible	reinsurance.	The	primary	components	of	the	default	analysis	are	reinsurance recoverable	balances	by	reinsurer,	net	of	collateral,	and	default	factors	used	to	estimate	the	probability	that	the	reinsurer	may	be	unable	to	meet	its	future obligations	in	full.	The	definition	of	collateral	for	this	purpose	requires	some	judgment	and	is	generally	limited	to	assets	held	in	an	ACE-only	beneficiary trust,	letters	of	credit,	and	liabilities	held	by	us	with	the	same	legal	entity	for	which	we	believe	there	is	a	right	of	offset.	We	do	not	currently	include	multi- beneficiary	trusts.	However,	we	have	several	reinsurers	that	have	established	multi-beneficiary	trusts	for	which	certain	of	our	companies	are	beneficiaries. The	determination	of	the	default	factor	is	principally	based	on	the	financial	strength	rating	of	the	reinsurer	and	a	corresponding	default	factor	applicable	to the	financial	strength	rating.	Default	factors	require	considerable	judgment	and	are	determined	using	the	current	financial	strength	rating,	or	rating equivalent,	of	each	reinsurer	as	well	as	other	key	considerations	and	assumptions.	Significant	considerations	and	assumptions	include,	but	are	not necessarily	limited	to,	the	following:

•	For	reinsurers	that	maintain	a	financial	strength	rating	from	a	major	rating	agency,	and	for	which	recoverable	balances	are	considered	representative	of the	larger	population	(i.e.,	default	probabilities	are	consistent	with	similarly	rated	reinsurers	and

payment	durations	conform	to	averages),	the	judgment	exercised	by	management	to	determine	the	provision	for	uncollectible	reinsurance	of	each reinsurer	is	typically	limited	because	the	financial	rating	is	based	on	a	published	source	and	the	default	factor	we	apply	is	based	on	a	default	factor	of	a major	rating	agency	applicable	to	the	particular	rating	class.	Default	factors	applied	for	financial	ratings	of	AAA,	AA,	A,	BBB,	BB,	B,	and	CCC,	are	0.5 percent,	1.2	percent,	1.9	percent,	4.7	percent,	9.6	percent,	23.8	percent,	and	49.7	percent,	respectively.	Because	the	model	we	use	is	predicated	on capital	charges	previously	applied	by	a	major	rating	agency,	we	do	not	generally	consider	alternative	factors.	However,	when	a	recoverable	is	expected to	be	paid	in	a	brief	period	of	time	by	a	highly-rated	reinsurer,	such	as	certain	property	catastrophe	claims,	a	default	factor	may	not	be	applied; •	For	balances	recoverable	from	reinsurers	that	are	both	unrated	by	a	major	rating	agency	and	for	which	management	is	unable	to	determine	a	credible rating	equivalent	based	on	a	parent,	affiliate,	or	peer	company,	we	determine	a	rating	equivalent	based	on	an	analysis	of	the	reinsurer	that	considers	an assessment	of	the	creditworthiness	of	the	particular	entity,	industry	benchmarks,	or	other	factors	as	considered	appropriate.	We	then	apply	the	applicable default	factor	for	that	rating	class.	For	balances	recoverable	from	unrated	reinsurers	for	which	we	have	not	adopted	a	rating	equivalent,	we	generally apply	a	default	factor	of	25	percent;

•	For	balances	recoverable	from	reinsurers	that	are	either	insolvent	or	under	regulatory	supervision,	we	establish	a	default	factor	and	resulting	provision for	uncollectible	reinsurance	based	on	specific	facts	and	circumstances	surrounding	each	company.	Upon	initial	notification	of	an	insolvency,	we generally	recognize	expense	for	a	substantial	portion	of	all	balances	outstanding,	net	of	collateral,	through	a	combination	of	write-offs	of	recoverable balances	and	increases	to	the	provision	for	uncollectible	reinsurance.	When	regulatory	action	is	taken	on	a	reinsurer,	we	generally	recognize	a	default factor	by	estimating	an	expected	recovery	on	all	balances	outstanding,	net	of	collateral.	When	sufficient	credible	information	becomes	available,	we adjust	the	provision	for	uncollectible	reinsurance	by	establishing	a	default	factor	pursuant	to	information	received;	and

•	For	captives	and	other	recoverables,	management	determines	the	provision	for	uncollectible	reinsurance	based	on	the	specific	facts	and circumstances.

The	following	table	summarizes	reinsurance	recoverables	on	paid	and	unpaid	losses	and	loss	expenses	as	well	as	the	provision	for	uncollectible reinsurance	for	each	type	of	reinsurance	recoverable	balance	at	December	31,	2008.

| (in	millions	of	U.S.	dollars) | and<br>Loss<br>Expenses | Recoverables<br>(Net	of	Usable<br>Collateral) | Provision	for<br>Uncollectible<br>Reinsurance |
| :--- | :--- | :--- | :--- |
| Type |  |  |  |
| Reinsurers\twith\tcredit\tratings | $11,108 | $10,143 | $253 |
| Reinsurers\tnot\trated | 493 | 408 | 136 |
| Reinsurers\tunder\tsupervision\tand\tinsolvent\treinsurers | 196 | 180 | 125 |
| Captives | 1,650 | 385 | 28 |
| Other\t–\tstructured\tsettlements\tand\tpools | 1,061 | 1,061 | 49 |
| Total | $14,508 | $12,177 | $591 |

At	December	31,	2008,	the	use	of	different	assumptions	within	our	approach	could	have	a	material	effect	on	the	provision	for	uncollectible reinsurance	reflected	in	our	Consolidated	Financial	Statements.	To	the	extent	the	creditworthiness	of	our	reinsurers	were	to	deteriorate	due	to	an	adverse event	affecting	the	reinsurance	industry,	such	as	a	large	number	of	major	catastrophes,	actual	uncollectible	amounts	could	be	significantly	greater	than our	provision	for	uncollectible	reinsurance.	Such	an	event	could	have	a	material	adverse	effect	on	our	financial	condition,	results	of	operations,	and	our liquidity.	Given	the	various	considerations	used	to	estimate	our	uncollectible	provision,	we	cannot	precisely	quantify	the	effect	a	specific	industry	event may	have	on	the	provision	for	uncollectible	reinsurance.	However,	based	on	the	composition	(particularly	the	average	credit	quality)	of	the	reinsurance recoverables	on	paid	and	unpaid	losses	and	loss	expenses	at	December	31,	2008,	we	estimate	that	a	ratings	downgrade	of	one	notch	for	all	rated reinsurers	(i.e,	from	A	to	A-	or	A-	to	BBB+)	could	increase	our	provision	for	uncollectible	reinsurance	by	approximately	$171	million	or	approximately	one percent	of	the	reinsurance	recoverable	balance,	assuming	no	other	changes	relevant	to	the	calculation.	While	a	ratings	downgrade	would	result	in	an increase	in	our	provision	for	uncollectible	reinsurance	and	a	charge	to	earnings	in	that	period,	a	downgrade	in	and	of	itself	does	not	imply	that	we	will	be unable	to	collect	all	of	the	ceded	reinsurance	recoverable	from	the	reinsurers	in	question.	Refer	to	Note	5	to	the	Consolidated	Financial	Statements, under	Item	8,	for	more	information.

Our	fixed	maturity	investments	are	classified	as	either	available	for	sale	or	held	to	maturity.	Our	available	for	sale	portfolio	is	reported	at	fair	value	with changes	in	fair	value	reflected	in	shareholders'	equity	as	a	separate	component	of	accumulated	other	comprehensive	income.	Fair	value	is	determined using	observable	inputs	where	available	such	as	the	quoted	market	price	of	these	securities	provided	by	either	independent	pricing	services;	or	when such	prices	are	not	available,	by	reference	to	broker	or	underwriter	bid	indications.	If	significant	observable	inputs	are	unavailable,	we	rely	on unobservable	inputs	to	determine	fair	value.	Refer	to	Note	15	to	the	Consolidated	Financial	Statements,	under	Item	8,	for	more	information.	We	regularly review	our	impaired	investments	(i.e.,	those	debt	securities	for	which	fair	value	is	below	amortized	cost	or	those	equity	securities	for	which	fair	value	is below	cost)	for	other-than-temporary	impairment.	If	we	believe	a	decline	in	the	value	of	a	particular	investment	is	temporary,	we	record	the	decline	as	an unrealized	loss	in	shareholders'	equity.	If	we	believe	the	decline	is	other-than-temporary,	we	write	down	the	book	value	of	the	investment	and	record	a realized	loss	in	the	consolidated	statement	of	operations.	An	impairment	is	considered	other-than-temporary	unless	we	have	the	ability	and	intent	to	hold the	investment	to	recovery	of	the	cost	of	the	investment,	and	evidence	indicating	the	cost	of	the	investment	is	recoverable	within	a	reasonable	period outweighs	evidence	to	the	contrary.	The	determination	as	to	whether	or	not	the	decline	is	other-than-temporary	principally	requires	the	following	critical judgments:	i)	the	circumstances	that	require	management	to	make	a	specific	assessment	as	to	whether	or	not	the	decline	is	other-than-temporary,	such as	the	time	period	an	investment	has	been	in	a	loss	position	and	the	significance	of	the	decline;	and	ii)	for	those	securities	to	be	assessed,	whether	we have	the	ability	and	intent	to	hold	the	security	through	an	expected	recovery	period,	absent	a	significant	change	in	facts	that	would	be	expected	to	have	a material	adverse	effect	on	either	the	financial	markets	or	the	financial	position	of	the	issuer.

Given	current	market	conditions,	and	in	light	of	recent	general	guidance	from	the	SEC	and	the	FASB	regarding	the	application	of	existing	guidance during	stressed	market	conditions,	beginning	in	the	third	quarter	of	2008	we	have	qualitatively	evaluated	our	application	of	the	parameters	under	which we	consider	a	decline	in	value	to	be	other-than-temporary.	Similar	to	prior	quarters,	we	evaluated	investments	in	our	portfolio	where	cost	exceeded	fair value	and	made	certain	judgments	as	to	our	ability	to	recover	our	cost.	Our	analysis	in	the	third	and	fourth	quarters	of	2008	required	we	consider	carefully the	duration	and	severity	of	decline	and	the	root	causes	thereof.	Specifically,	we	further	evaluated	whether	declines	were	related	to	temporary	liquidity concerns	and	current	market	conditions,	and	therefore	more	likely	to	be	temporary,	or	were	instead	related	to	specific	credit	events	or	issuer performance,	and	therefore	more	likely	to	be	other-than-temporarily	impaired.	Using	this	refined	evaluation	process	resulted	in	a	lower	dollar	value	of investments	in	an	unrealized	loss	position	being	deemed	other-than-temporarily	impaired	in	comparison	to	our	previous	evaluation	process.	We	believe the	underlying	credit	quality	of	the	portfolio	supports	the	use	of	our	modified	approach.	Refer	to	Note	4	e)	to	the	Consolidated	Financial	Statements, under	Item	8,	which	includes	a	table	that	summarizes	all	of	our	securities	in	an	unrealized	loss	position	at	December	31,	2008.

With	respect	to	securities	where	the	decline	in	value	is	determined	to	be	temporary	and	the	security's	value	is	not	written	down,	a	subsequent decision	may	be	made	to	sell	that	security	and	realize	a	loss.	Subsequent	decisions	on	security	sales	are	the	result	of	changing	or	unforeseen	facts	and circumstances	(e.g.,	arising	from	a	large	insured	loss	such	as	a	catastrophe),	deterioration	of	the	credit-worthiness	of	the	issuer	or	its	industry,	or changes	in	regulatory	requirements.	We	believe	that	subsequent	decisions	to	sell	such	securities	are	consistent	with	the	classification	of	the	majority	of the	portfolio	as	available	for	sale.	The	gross	unrealized	loss	at	December	31,	2008,	for	all	securities	in	a	loss	position	was	$3.2	billion	with	$684	million	in an	unrealized	loss	position	for	over	12	months	($20	million	was	related	to	fixed	maturities	held	to	maturity).	Our	net	realized	losses	in	2008	included	write- downs	of	$1.1	billion	of	which	$760	million	was	related	to	fixed	maturities.	This	compares	with	write-downs	of	$141	million	and	$214	million	in	2007	and 2006,	respectively.	The	other-than-temporary	impairments	recorded	in	2008	were	primarily	due	to	an	increase	in	market	interest	rates	resulting	from volatility	and	widening	credit	spreads;	issuer	defaults,	of	which	Lehman	Brothers	was	the	most	significant	to	us;	and	significant	declines	in	global	equity markets.	The	other-than-temporary	impairments	recorded	in	2007	and	2006	were	primarily	due	to	an	increase	in	market	interest	rates	from	the	date	of security	purchase	and	as	such,	were	not	credit-related.

Because	our	investment	portfolio	is	the	largest	component	of	consolidated	assets	and	a	multiple	of	shareholders'	equity,	adverse	changes	in economic	conditions	subsequent	to	the	balance	sheet	date	could	result	in	other-than-temporary	impairments	that	are	material	to	our	financial	condition and	operating	results.	Such	economic	changes	could	arise	from	overall	changes	in	the	financial	markets	and	specific	changes	to	industries,	companies, or	foreign	governments	in	which	we	maintain	relatively	large	investment	holdings.	Further,	an	increase	in	interest	rates	could	result	in	an	increased number	of	fixed	maturities	for	which	we	cannot	support	the	intent	to	hold	to	recovery.	More	information	regarding	our	process	for	reviewing	our	portfolio for	possible	impairments	can	be	found	in	the	section	entitled	"Net	Realized	Gains	(Losses)".

# Deferred	tax	assets

Many	of	our	insurance	businesses	operate	in	income	tax-paying	jurisdictions.	Our	deferred	tax	assets	and	liabilities	primarily	result	from	temporary differences	between	the	amounts	recorded	in	our	Consolidated	Financial	Statements	and	the	tax	basis	of	our	assets	and	liabilities.	We	determine deferred	tax	assets	and	liabilities	separately	for	each	tax-paying	component	(an	individual	entity	or	group	of	entities	that	is	consolidated	for	tax	purposes) in	each	tax	jurisdiction.

At	December	31,	2008,	our	net	deferred	tax	asset	was	$1.8	billion.	(Refer	to	Note	8	to	the	Consolidated	Financial	Statements,	under	Item	8,	for more	information).	At	each	balance	sheet	date,	management	assesses	the	need	to	establish	a	valuation	allowance	that	reduces	deferred	tax	assets when	it	is	more	likely	than	not	that	all,	or	some	portion,	of	the	deferred	tax	assets	will	not	be	realized.	The	valuation	allowance	is	based	on	all	available information	including	projections	of	future	taxable	income	from	each	tax-paying	component	in	each	tax	jurisdiction,	principally	derived	from	business plans	and	available	tax	planning	strategies.	Projections	of	future	taxable	income	incorporate	several	assumptions	of	future	business	and	operations	that are	apt	to	differ	from	actual	experience.	The	valuation	allowance	is	also	based	on	maintaining	our	ability	and	intent	to	hold	our	U.S.	fixed	maturities	to recovery.	If,	in	the	future,	our	assumptions	and	estimates	that	resulted	in	our	forecast	of	future	taxable	income	for	each	tax-paying	component	prove	to	be incorrect,	or	future	market	events	occur	that	prevent	our	ability	to	hold	our	U.S.	fixed	maturities	to	recovery,	an	additional	valuation	allowance	could become	necessary.	This	could	have	a	material	adverse	effect	on	our	financial	condition,	results	of	operations,	and	liquidity.	At	December	31,	2008,	the valuation	allowance	of	$35	million	(including	$24	million	with	respect	to	foreign	tax	credits)	reflects	management's	assessment	that	it	is	more	likely	than not	that	a	portion	of	the	deferred	tax	asset	will	not	be	realized	due	to	the	inability	of	certain	foreign	subsidiaries	to	generate	sufficient	taxable	income	and the	inability	of	ACE	Group	Holdings	and	its	subsidiaries	to	utilize	foreign	tax	credits.

# Guaranteed	minimum	income	benefits	derivatives

Under	reinsurance	programs	covering	living	benefit	guarantees,	we	assume	the	risk	of	guaranteed	minimum	income	benefits	associated	with	variable annuity	contracts.	Our	GMIB	reinsurance	product	meets	the	definition	of	a	derivative	for	accounting	purposes	and	is	therefore	carried	at	fair	value	with changes	in	fair	value	recognized	in	net	realized	gains	(losses)	in	the	period	of	the	change	pursuant	to	Statement	of	Financial	Accounting	Standard No.	133,	Accounting	for	Derivative	Instruments	and	Hedging	Activities	(FAS	133).	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	AICPA	Statement	of	Position	03-1,	Accounting	and	Reporting	by	Insurance Enterprises	for	Certain	Non-traditional	Long-duration	Contracts	and	for	Separate	Accounts	(SOP	03-1).	Changes	in	this	reserve	are	included	in	life underwriting	income.	The	incremental	difference	between	fair	value	and	SOP	03-1	benefit	reserves	is	reflected	in	other	assets	or	other	liabilities	in	the balance	sheet	and	related	changes	in	fair	value	are	reflected	in	net	realized	gains	(losses)	in	the	consolidated	statement	of	operations.	We	intend	to	hold these	derivative	contracts	to	maturity	(i.e.,	the	expiration	of	the	underlying	annuities	through	lapses,	annuitization	or	death.	At	maturity,	the	cumulative gains	and	losses	will	net	to	zero	because,	over	time,	the	insurance	liability	will	be	increased	or	decreased	to	equal	our	obligation.	Refer	to	Note	2j)	to	the Consolidated	Financial	Statements,	under	Item	8,	for	further	description	of	this	product	and	related	accounting	treatment.	For	a	sensitivity	discussion	of the	effect	of	changes	in	interest	rates,	equity	indices	and	other	assumptions	on	the	fair	value	of	GMIBs,	and	the	resulting	impact	on	our	net	income,	refer to	Item	7A.

The	fair	value	of	GMIB	reinsurance	is	estimated	using	an	internal	valuation	model	which	includes	current	market	information	and	estimates	of policyholder	behavior	from	the	perspective	of	a	theoretical	market	participant.	All	of	our	treaties	contain	claim	limits,	which	are	factored	into	the	valuation model.	The	fair	value	depends	on	a	number	of	factors,	including	interest	rates,	current	account	value,	market	volatility,	expected	annuitization	rates	and other	policyholder	behavior,	and	changes	in	policyholder	mortality.	The	model	and	related	assumptions	are	continuously	re-evaluated	by	management and	enhanced,	as	appropriate,	based	upon	additional	experience	obtained	related	to	policyholder	behavior	and	availability	of	more	timely	market information,	such	as	market	conditions	and	demographics	of	in-force	annuities.	Due	to	the	inherent	uncertainties	of	the	assumptions	used	in	the	valuation models	to	determine	the	fair	value	of	these	derivative	products,	actual	experience	may	differ	from	the	estimates	reflected	in	our	Consolidated	Financial Statements,	and	the	differences	may	be	material.

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

A	lapse	rate	is	the	percentage	of	in-force	policies	surrendered	in	a	given	calendar	year.	All	else	equal,	as	lapse	rates	increase,	ultimate	claim payments	will	decrease.	The	GMIB	annuitization	rate	is	the	percentage	of	policies	for	which	the	customer	will	elect	to	annuitize	using	the	guaranteed benefit	provided	under	the	GMIB.	All	else	equal,	as	GMIB	annuitization	rates	increase,	ultimate	claim	payments	will	increase,	subject	to	treaty	claim	limits. Key	factors	affecting	the	lapse	rate	assumption	include	investment	performance	and	policy	duration.	We	generally	assume	that	lapse	rates increase	with	policy	duration	with	a	significant	increase	in	rates	after	the	end	of	the	surrender	charge	period.	As	investment	performance	of	underlying fund	investments	declines,	and	guarantees	become	more	valuable,	lapse	rates	are	anticipated	to	decrease	thereby	increasing	the	expected	value	of claims	on	minimum	guarantees	and	thus	benefit	reserves	and	the	incremental	fair	value	liability.

Key	factors	affecting	the	GMIB	annuitization	rate	include	investment	performance	and	interest	rates	after	the	GMIB	waiting	period.	As	investment performance	of	underlying	fund	investments	declines,	the	monthly	income	available	to	a	policyholder	who	annuitizes	their	account	value	falls;	this	makes the	GMIB	more	valuable.	As	the	GMIB	becomes	more	valuable,	our	modeling	assumes	that	annuitization	rates	will	increase,	resulting	in	higher	benefit reserves	and	fair	value	liability.	The	same	is	true	in	an	environment	where	long-term	interest	rates	are	decreasing.	Prior	to	2008,	we	had	very	limited actual	reported	experience	related	to	annuitization	rates	and	relied	primarily	on	judgment	to	determine	this	assumption.	During	2008,	actual	annuitization experience,	as	well	as	available	industry	experience,	has	developed	to	allow	us	to	refine	this	assumption.

As	a	result	of	our	normal	quarterly	reserve	review	we	made	several	assumption	changes	in	our	variable	annuity	valuation	models	in	the	fourth quarter	of	2008,	the	most	meaningful	of	which	were	related	to	mortality	and	annuitization	behavior.	These	changes,	which	had	both	a	positive	and negative	impact,	were	made	in	response	to	a	combination	of	emerging	new	and	validated	experience	on	the	ACE	business	and	industry	data	we	obtained in	the	fourth	quarter	of	2008	and	in	aggregate	benefited	net	income	by	approximately	$470	million.	The	vast	majority	of	which	is	related	to	the	impact	of assumption	changes	on	the	fair	value	liability	affecting	all	future	cash	flows	on	a	present	value	basis	in	income	in	the	current	period.

Net	realized	losses	for	2008	included	$650	million	for	GMIB	reinsurance	excluding	realized	gains	of	$164	million	on	derivative	instruments	held	to partially	offset	the	risk	in	the	variable	annuity	guarantee	reinsurance	portfolio.	These	losses	were	principally	driven	by	decreasing	interest	rates	and	equity markets.	These	derivatives	do	not	receive	hedge	accounting	treatment.	Refer	to	"Net	Realized	Gains	(Losses)"	for	more	information.	Net	realized	losses for	GMIB	reinsurance	included	$185	million	and	$NIL	for	2007	and	2006,	respectively.

As	of	December	31,	2008,	the	capital	required	to	support	the	variable	annuity	guaranty	business	is	approximately	$400	million.	If	the	Standard	& Poor's	(S&P)	500	Index	were	to	drop	from	its	level	of	903	at	December	31,	2008	to	a	level	of	700,	all	else	being	equal,	any	additional	capital	required would	be	approximately	offset	by	the	increase	in	value	of	currently	held	hedge	assets.	However,	we	would	be	required	to	post	additional	collateral.

ACE	Tempest	Life	Re	employs	a	strategy	to	manage	the	financial	market	and	policyholder	behavior	risks	embedded	in	the	reinsurance	of	variable annuity	guarantees.	Risk	management	begins	with	underwriting	a	prospective	client	and	guarantee	design,	with	particular	focus	on	protecting	ACE's position	from	policyholder	options	that,	because	of	anti-selective	behavior,	could	adversely	impact	our	obligation.

A	second	layer	of	risk	management	is	the	structure	of	the	reinsurance	contracts.	All	variable	annuity	guarantee	reinsurance	contracts	include	some form	of	annual	or	aggregate	claim	limit(s).	The	exact	limits	vary	by	contract	but	some	examples	of	typical	contract	provisions	include:

•	Annual	claim	limits,	as	a	percentage	of	reinsured	Account	or	Guaranteed	Value,	for	Guaranteed	Minimum	Death	Benefits	(GMDB)	and	GMIBs •	Annual	Annuitization	Rate	Limits,	as	a	percentage	of	annuitization	eligible	Account	or	Guaranteed	Value,	for	GMIBs

A	third	layer	of	risk	management	is	the	hedging	strategy	which	is	focused	on	mitigating	long-term	economic	losses	at	a	portfolio	level.	As	of December	31,	2008	and	2007,	ACE	Tempest	Life	Re	owned	financial	market	instruments	as	part	of	the	hedging	strategy	with	a	fair	value	of	$280	million, and	$70	million,	respectively.	The	instruments	are	substantially	collateralized	by	our	counterparty,	on	a	daily	basis.

We	also	limit	the	aggregate	amount	of	variable	annuity	reinsurance	guarantee	risk	we	are	willing	to	assume.	The	last	substantive	U.S.	transaction was	quoted	in	mid-2007	and	the	last	transaction	in	Japan	was	quoted	in	late	2007.	ACE	Tempest	Life	Re	did	not	quote	on	new	or	renewal	variable annuity	transactions	in	2008	and	the	aggregate	number	of	policyholders	is	currently	decreasing	through	policyholder	withdrawals	and	deaths	at	a	rate	of 5%-10%	annually.

Note	that	GMIB	claims	cannot	occur	for	any	reinsured	policy	until	it	has	reached	the	end	of	its	"waiting	period".	The	vast	majority	of	policies	we reinsure	reach	the	end	of	their	"waiting	periods"	in	2013	or	later,	as	shown	in	the	table	below.

The	following	table	provides	the	historic	cash	flows	under	these	policies	for	the	years	ended	December	31,	2008	and	2007.

| (in	millions	of	U.S.	dollars) | 2008 | 2007 |
| :--- | :--- | :--- |
| Death\tBenefits\t(GMDB) |  |  |
| Premium | $123 | $125 |
| less\tPaid\tClaims | 67 | 9 |
|  | $56 | $116 |
| Living\tBenefits |  |  |
| Premium | $145 | $107 |
| less\tPaid\tClaims | – | – |
|  | $145 | $107 |
| Total\tVA\tGuaranteed\tBenefits |  |  |
| Premium | $268 | $232 |
| less\tPaid\tClaims | 67 | 9 |
|  | $201 | $223 |

Amounts	represent	past	premium	received	and	claims	paid,	split	by	benefit	type.

# Death	Benefits	(GMDB)

Premiums	and	claims	from	variable	annuity	contracts	reinsuring	GMDBs.	Approximately	65	percent	of	our	GMDB	guaranteed	value	has	an	annual	claim limit	expressed	as	two	percent	of	the	total	account	value	reinsured.	This	limit	falls	as	account	values	fall	in	a	declining	market.	Using	our	current	mortality assumptions	we	expect	approximately	$164	million	of	claims	and	$108	million	of	premium	on	death	benefits	during	2009.

# Living	Benefits	(Includes	GMIB	and	GMAB)

Premiums	and	claims	from	variable	annuity	contracts	reinsuring	predominantly	GMIBs	and	Guaranteed	Minimum	Accumulation	Benefits	(GMAB), collectively	known	as	Living	Benefits.	Substantially	all	of	our	living	benefit	reinsurance	clients'	policyholders	are	currently	ineligible	to	trigger	a	claim payment.	These	policyholders	begin	to	become	eligible	in	2013.	Using	our	current	mortality	assumptions	we	expect	approximately	$2	million	of	claims and	$129	million	of	premium	on	living	benefits	during	2009.

In	order	for	its	U.S.-domiciled	clients	to	obtain	statutory	reserve	credit	ACE	Tempest	Life	Re	holds	collateral	on	behalf	of	its	clients	in	the	form	of qualified	assets	in	trust	or	letters	of	credit,	equal	to	their	statutory	ceded	reserves.	ACE	Tempest	Life	Re	maintains	sufficient	qualified	assets	to	meet	its funding	requirements.

# Goodwill

Goodwill,	which	represents	the	excess	of	acquisition	cost	over	the	fair	value	of	net	assets	acquired,	was	$3.6	billion	at	December	31,	2008.	The	ACE	INA and	Combined	Insurance	acquisitions	represent	approximately	87	percent	of	this	balance.	Goodwill	is	not	amortized	but	is	subject	to	a	periodic evaluation	for	impairment	at	least	annually,	or	earlier	if	there	are	any	indications	of	possible	impairment.	The	impairment	tests	in	2008,	in	the	aggregate, show	a	fair	value	in	excess	of	the	carrying	value.	Goodwill	is	assigned	to	applicable	reporting	units	of	acquired	entities	at	acquisition.	The	most	significant reporting	units	are	the	North	American	and	international	divisions	of	Combined	Insurance	acquired	in	2008;	domestic	and	international	divisions	of	ACE INA	acquired	in	1999;	ACE	Tempest	Re's	catastrophe	businesses	acquired	in	1996	and	1998;	and	Tarquin	Limited	acquired	in	1998.	There	are	other reporting	units	that	resulted	from	smaller	acquisitions	that	are	also	assessed	annually.	In	our	impairment	tests,	to	estimate	the	fair	value	of	a	reporting unit,	we	consistently	applied	a	combination	of	the	following	models:	an	earnings	multiple,	a	book	value	multiple,	a	discounted	cash	flow	or	an	allocated market	capitalization.	The	earnings	and	book	value	models	apply	multiples	of	comparable	publicly	traded	companies	to	forecasted	earnings	or	book	value of	each	reporting	unit	and	consider	current	market	transactions.	The	discounted	cash	flow	model	applies	a	discount	to	estimated	cash	flows	including	a terminal	value	calculation.	The	market	capitalization	model	allocates	our	market	capitalization	to	each	reporting	unit.	We	must	assess	whether	the	current fair	value	of	our	operating	units	is	at	least	equal	to	the	fair	value	used	in	the	determination	of	goodwill.	In	doing	this,	we	make	assumptions	and	estimates about	the	profitability	attributable	to	our	operating	segments,	as	this	is	important	in	assessing	whether	impairment	has	occurred.	If,	in	the	future,	our assumptions	and	estimates	made	in	assessing	the	fair	value	of	acquired	entities	change,	goodwill	could	be	materially	adjusted.	This	would	cause	us	to write-down	the	carrying	value	of	goodwill	and	could	have	a	material	adverse	effect	on	our	results	of	operations	in	the	period	the	charge	is	taken.

# Fair	Value	Measurements

We	partially	adopted	the	provisions	of	Financial	Accounting	Standard	No.	157,	 Fair	Value	Measurements	(FAS	157)	on	January	1,	2008.	FAS	157 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.	Inputs	in	Level	1	are	unadjusted	quoted	prices	for	identical	assets	or liabilities	in	active	markets.	Level	2	includes	inputs	other	than	quoted	prices	included	within	Level	1	that	are	observable	for	assets	or	liabilities	either directly	or	indirectly.	Level	2	inputs	include,	among	other	items,	quoted	prices	for	similar	assets	and	liabilities	in	active	markets,	quoted	prices	for	identical or	similar	assets	and	liabilities	in	markets	that	are	not	active,	and	inputs	other	than	quoted	prices	that	are	observable	for	the	asset	or	liability	such	as interest	rates	and	yield	curves.	Level	3	inputs	are	unobservable	and	reflect	our	judgments	about	assumptions	that	market	participants	would	use	in pricing	an	asset	or	liability.	A	financial	instrument's	categorization	within	the	valuation	hierarchy	is	based	upon	the	lowest	level	of	input	that	is	significant	to the	fair	value	measurement.

While	the	Company	obtains	values	for	the	majority	of	the	investment	securities	it	holds	from	one	or	more	pricing	services,	it	is	ultimately management's	responsibility	to	determine	whether	the	values	obtained	and	recorded	in	the	financial	statements	are	representative	of	fair	value.	We periodically	update	our	understanding	of	the	methodologies	used	by	our	pricing	services	in	order	to	validate	that	the	prices	obtained	from	those	services are	consistent	with	FAS	157	valuation	principles.	Based	on	our	understanding	of	the	methodologies	used	by	our	pricing	services,	all	investments	have been	valued	in	accordance	with	FAS	157.	We	do	not	typically	adjust	prices	obtained	from	pricing	services.

Volatility	and	widening	credit	spreads	during	the	second	half	of	2008	adversely	affected	the	values	of	certain	of	our	securities.	However,	we	believe there	was	sufficient	market	activity	to	price	securities	under	FAS	157	in	a	manner	consistent	with	prior	periods.

At	December	31,	2008,	our	Level	3	assets	represented	approximately	five	percent	of	our	assets	that	are	measured	at	fair	value	and	three	percent	of our	total	assets.	At	December	31,	2008,	our	Level	3	liabilities	represented	approximately	21	percent	of	our	liabilities	that	are	measured	at	fair	value	and less	than	two	percent	of	our	total	liabilities.	During	2008,	we	transferred	$176	million	out	of	Level	3.	The	following	is	a	description	of	the	valuation measurements	used	for	our	financial	instruments	(Levels	1,	2,	and	3)	carried	or	disclosed	at	fair	value,	as	well	as	the	general	classification	of	such financial	instruments	pursuant	to	the	valuation	hierarchy.

•	Fixed	maturities	with	active	markets	such	as	U.S.	Treasury	and	agency	securities	are	classified	within	Level	1	as	fair	values	are	based	on	quoted market	prices.	For	fixed	maturities	that	trade	in	less	active	markets,	including	corporate	and	municipal	securities,	fair	values	are	based	on	the	output	of "pricing	matrix	models",	the	significant	inputs	into	which	include,	but	are	not	limited	to,	yield	curves,	credit	risks	and	spreads,	measures	of	volatility,	and prepayment	speeds.	These	fixed	maturities	are	classified	within	Level	2.	Our	pricing	methodologies	incorporate	back-testing	of	valuation	techniques	as	a standard	part	of	our	process.	Fixed	maturities	for	which	pricing	is	unobservable	are	classified	within	Level	3.

•	Equity	securities	with	active	markets	are	classified	within	Level	1	as	fair	values	are	based	on	quoted	market	prices.	For	non-public	equity	securities,	fair values	are	based	on	market	valuations	and	are	classified	within	Level	2.

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

•	Fair	values	for	other	investments,	principally	other	direct	equity	investments,	investment	funds,	and	limited	partnerships,	are	based	on	the	net	asset value	or	financial	statements	and	are	included	within	Level	3.	Equity	securities	and	fixed	maturities	held	in	rabbi	trusts	maintained	by	ACE	for	deferred compensation	plans,	and	included	in	Other	investments,	are	classified	within	the	valuation	hierarchy	on	the	same	basis	as	our	other	equity	securities	and fixed	maturities.

•	The	fair	value	of	our	investment	in	Assured	Guaranty	Ltd.	included	in	Investments	in	partially-owned	insurance	companies	is	based	on	a	quoted	market price	and	is	classified	within	Level	1.	Fair	values	for	investments	in	partially-owned	insurance	companies	based	on	the	financial	statements	provided	by those	companies	used	for	equity	accounting	are	classified	within	Level	3.

•	For	actively	traded	investment	derivative	instruments,	including	futures,	options,	and	exchange-traded	forward	contracts,	we	obtain	quoted	market prices	to	determine	fair	value.	As	such,	these	instruments	are	included	within	Level	1.	Forward	contracts	that	are	not	exchange-traded	are	priced	using	a pricing	matrix	model	principally	employing	observable	inputs	and,	as	such,	are	classified	within	Level	2.	Our	position	in	interest	rate	and	credit	default swaps	is	typically	classified	within	Level	3.

•	For	GMIB	reinsurance,	we	estimate	fair	value	using	an	internal	valuation	model	which	includes	current	market	information	and	estimates	of	policyholder behavior.	All	of	our	treaties	contain	claim	limits,	which	are	factored	into	the	valuation	model.	The	cumulative	effect	of	partially	adopting	FAS	157	resulted in	a	reduction	to	retained	earnings	of	$4	million	related	to	an	increase	in	risk	margins	included	in	the	valuation	of	certain	GMIB	contracts.	The	fair	value depends	on	a	number	of	inputs,	including	changes	in	interest	rates,	changes	in	equity	markets,	credit	risk,	current	account	value,	changes	in	market volatility,	expected	annuitization	rates,	changes	in	policyholder	behavior,	and	changes	in	policyholder	mortality.	The	model	and	related	assumptions	are continuously	re-evaluated	by	management	and	enhanced,	as	appropriate,	based	upon	additional	experience	obtained	related	to	policyholder	behavior	and availability	of	more	timely	information,	such	as	market	conditions	and	demographics	of	in-force	annuities.	The	most	significant	policyholder	behavior assumptions	include	lapse	rates	and	annuitization	rates	using	the	guaranteed	benefit	(GMIB	annuitization	rate).	Assumptions	regarding	lapse	rates	and GMIB	annuitization	rates	differ	by	treaty	but	the	underlying	methodology	to	determine	rates	applied	to	each	treaty	is	comparable.	The	assumptions regarding	lapse	and	GMIB	annuitization	rates	determined	for	each	treaty	are	based	on	a	dynamic	calculation	that	uses	several	underlying	factors.	A lapse	rate	is	the	percentage	of	in-force	policies	surrendered	in	a	given	calendar	year.	All	else	equal,	as	lapse	rates	increase,	ultimate	claim	payments	will decrease.	The	GMIB	annuitization	rate	is	the	percentage	of	policies	for	which	the	customer	will	elect	to	annuitize	using	the	guaranteed	benefit	provided under	the	GMIB.	All	else	equal,	as	GMIB	annuitization	rates	increase,	ultimate	claim	payments	will	increase,	subject	to	treaty	claim	limits.	The	effect	of changes	in	key	market	factors	on	assumed	lapse	and	annuitization	rates	reflect	emerging	trends	using	actual	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.	We view	our	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.	However,	adverse	changes	in	market	factors	and	policyholder	behavior	will	have	an	adverse	impact	on	both	our life	underwriting	income	and	our	net	income,	which	may	be	material.	Because	of	the	significant	use	of	unobservable	inputs	including	policyholder behavior,	GMIB	reinsurance	is	classified	within	Level	3.	Refer	to	"Critical	Accounting	Estimates	–	Guaranteed	minimum	income	benefits	derivatives"	and "Quantitative	and	Qualitative	Disclosures	about	Market	Risk	–	Reinsurance	of	GMIB	and	GMDB	guarantees".

•	We	maintain	positions	in	other	derivative	instruments	including	option	contracts	designed	to	limit	long-term	exposure	to	a	severe	equity	market	decline or	decrease	in	interest	rates,	which	would	cause	an	increase	in	expected	claims	and,	therefore,	reserves	for	GMDB	and	GMIB	reinsurance	business.	The fair	value	of	the	majority	of	our	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.

•	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	our	incremental	borrowing	rates	for	similar	types	of	borrowings	with	maturities	consistent	with	those remaining	for	the	debt	being	valued.	As	such,	these	instruments	are	classified	within	Level	2.

Note	15	to	our	Consolidated	Financial	Statements,	under	Item	8,	presents	a	break-down	of	our	financial	instruments	carried	or	disclosed	at	fair value	by	valuation	hierarchy	as	well	as	a	roll-forward	of	Level	3	financial	instruments	for	the	year	ended	December	31,	2008.

As	discussed	previously,	on	April	1,	2008,	we	acquired	all	outstanding	shares	of	Combined	Insurance	and	certain	of	its	subsidiaries.	As	such, consolidated	operating	results	for	the	year	ended	December	31,	2008,	include	the	results	of	the	acquired	Combined	Insurance	business	from	April	1, 2008.

|  | 2008 | 2007 | 2006 | 2008	vs.<br>2007 | 2007	vs.<br>2006 |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | (in\tmillions\tof\tU.S.\tdollars) | (in\tmillions\tof\tU.S.\tdollars) |  |  |
| Net\tpremiums\twritten | $13,080 | $11,979 | $12,030 | 9\t% | – |
| Net\tpremiums\tearned | \t 13,203 | \t 12,297 | \t 11,825 | 7\t% | 4\t% |
| Net\tinvestment\tincome | 2,062 | 1,918 | 1,601 | 7\t% | 20\t% |
| Net\trealized\tgains\t(losses) | (1,633) | (61) | (98) | NM | (38)% |
| Total\trevenues | \t 13,632 | \t 14,154 | \t 13,328 | (4)% | 6\t% |
| Losses\tand\tloss\texpenses | 7,603 | 7,351 | 7,070 | 3\t% | 4\t% |
| Future\tpolicy\tbenefits | 399 | 168 | 123 | 138\t% | 37\t% |
| Policy\tacquisition\tcosts | 2,135 | 1,771 | 1,715 | 21\t% | 3\t% |
| Administrative\texpenses | 1,737 | 1,455 | 1,456 | 19\t% | – |
| Interest\texpense | 230 | 175 | 176 | 31\t% | (1)% |
| Other\t(income)\texpense | (39) | 81 | (35) | NM | NM |
| Total\texpenses | \t 12,065 | \t 11,001 | \t 10,505 | 10\t% | 5\t% |
| Income\tbefore\tincome\ttax | 1,567 | 3,153 | 2,823 | (50)% | 12\t% |
| Income\ttax\texpense | 370 | 575 | 522 | (36)% | 10\t% |
| Cumulative\teffect\tof\ta\tchange\tin\taccounting\tprinciple | – | – | 4 | – | NM |
| Net\tincome | $1,197 | $2,578 | $2,305 | (54)% | 12\t% |

# NM–denotes	not	meaningful

Our	net	income	was	significantly	impacted	by	net	realized	losses	in	2008.	These	losses	were	primarily	related	to	our	fixed	income	and	equity	portfolios and	are	largely	due	to	the	widening	credit	spreads	in	our	high	quality	corporate	bond	portfolio.	Net	realized	losses	were	also	related	to	changes	in reported	liabilities	on	GMIB	reinsurance	reported	at	fair	value.	Refer	to	"Net	Realized	and	Unrealized	Gains	(Losses)"	and	"Investments".	In	addition,	we recorded	$567	million	in	pre-tax	net	catastrophe-related	charges	in	2008,	compared	with	$159	million	and	$17	million	in	2007	and	2006,	respectively.	For 2008,	our	catastrophe	losses	were	primarily	related	to	Hurricanes	Gustav	and	Ike	and	floods	in	the	U.S.

Net	premiums	written,	which	reflect	the	premiums	we	retain	after	purchasing	reinsurance	protection,	increased	in	2008,	compared	with	2007, having	been	increased	by	the	inclusion	of	Combined	Insurance	which	added	$1.1	billion	to	our	total	net	premiums	written	in	2008.	In	2008,	our international	operations	benefited	from	growth	in	A&H	business	and	favorable	foreign	exchange	impact	due	to	the	strengthening	of	several	major currencies,	particularly	the	euro,	relative	to	the	U.S.	dollar.	The	favorable	foreign	exchange	impact	began	to	reverse	during	the	fourth	quarter	of	2008.	In addition,	ACE	Private	Risk	Services,	which	we	acquired	in	2008,	added	$207	million	to	our	2008	net	premiums	written.	Excluding	the	impact	of	the businesses	we	acquired	in	2008,	net	premiums	written	declined	two	percent,	reflecting	the	competitive	conditions	we	have	experienced	across	most	lines of	business	and	regions	of	operation	over	the	past	two	years.

The	following	table	provides	a	consolidated	breakdown	of	net	premiums	earned	by	line	of	business	for	the	years	ended	December	31,	2008,	2007, and	2006.

|  |  |  |  | 2008	vs. | 2007	vs. |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2008 | 2007 | 2006 | 2007 | 2006 |
|  |  | (in\tmillions\tof\tU.S.\tdollars) | (in\tmillions\tof\tU.S.\tdollars) |  |  |
| Property\tand\tall\tother | $3,954 | $3,811 | $3,625 | 4\t% | 5\t% |
| Casualty | 5,838 | 6,464 | 6,506 | (10)% | (1)% |
| Subtotal | 9,792 | 10,275 | 10,131 | (5)% | 1\t% |
| Personal\taccident\t(A&amp;H) | 2,949 | 1,654 | 1,420 | 78\t% | 16\t% |
| Life | 462 | 368 | 274 | 26\t% | 34\t% |
| Net\tpremiums\tearned | $13,203 | $12,297 | $11,825 | 7\t% | 4\t% |

|  | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
|  | %\tof\ttotal | %\tof\ttotal | %\tof\ttotal |
| Property\tand\tall\tother | 30% | 31% | 31% |
| Casualty | 44% | 53% | 55% |
| Subtotal | 74% | 84% | 86% |
| Personal\taccident\t(A&amp;H) | 22% | 13% | 12% |
| Life | 4% | 3% | 2% |
| Net\tpremiums\tearned | 100% | 100% | 100% |

Net	premiums	earned	reflect	the	portion	of	net	premiums	written	that	were	recorded	as	revenues	for	the	period	as	the	exposure	period	expires.	The increase	in	2008	net	premiums	earned,	compared	with	2007,	was	primarily	related	to	the	inclusion	of	Combined	Insurance	which	added	$1.1	billion.	ACE Private	Risk	Services	added	$137	million	to	our	2008	net	premiums	earned.	During	2008,	our	A&H	business	continued	to	report	growth	while	our	casualty lines,	particularly	in	North	America,	declined.	The	increase	in	net	premiums	earned	in	2007,	compared	with	2006,	was	primarily	related	to	increased production	at	ACE	USA	and	ACE	International	as	well	as	our	life	operations,	partially	offset	by	decreased	production	at	our	Global	Reinsurance	segment. Net	investment	income	increased	over	the	last	three	years,	primarily	due	to	investment	of	positive	operating	cash	flows	which	have	resulted	in	a higher	overall	average	invested	asset	base.	Refer	to	"Net	Investment	Income"	and	"Investments".

In	evaluating	our	segments	excluding	Life	Insurance	and	Reinsurance,	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	Insurance	and	Reinsurance	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	losses.

The	following	table	shows	our	consolidated	loss	and	loss	expense	ratio,	policy	acquisition	ratio,	administrative	expense	ratio,	and	combined	ratio for	the	years	ended	December	31,	2008,	2007,	and	2006.

|  | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Loss\tand\tloss\texpense\tratio | 60.6% | 61.6% | 61.2% |
| Policy\tacquisition\tcost\tratio | 16.2% | 14.5% | 14.6% |
| Administrative\texpense\tratio | 12.8% | 11.8% | 12.3% |
| Combined\tratio | 89.6% | 87.9% | 88.1% |

The	following	table	shows	the	impact	of	catastrophe	losses	and	prior	period	development	on	our	loss	and	loss	expense	ratio	for	the	years	ended December	31,	2008,	2007,	and	2006.

The	following	table	shows	the	impact	of	catastrophe	charges	on	each	of	our	operating	segments	attributable	to	2008	catastrophe	losses.	This	information is	based	on	currently	available	information	derived	from	industry	assessments	of	exposure	and	claims	information	obtained	from	our	clients	and	brokers. Actual	losses	from	these	events	may	vary	materially	from	our	estimates	due	to	the	inherent	uncertainties	in	making	such	determinations	resulting	from several	factors,	including	the	potential	inaccuracies	and	inadequacies	in	the	data	provided	by	clients	and	brokers,	as	well	as	the	potential	impact	from post-event	circumstances,	for	example	factors	such	as	demand	surge	or	judicial	rulings.

| (in	millions	of	U.S.	dollars,	except	for	percentages) | Insurance-<br>North<br>American | Insurance-<br>Overseas<br>General | Global<br>Reinsurance | Consolidated |
| :--- | :--- | :--- | :--- | :--- |
| Net\tloss |  |  |  |  |
| Hurricane\t–\tGustav | $50 | $11 | $6 | $67 |
| Hurricane\t–\tIke | 206 | 48 | 174 | 428 |
| Other | 42 | 24 | 6 | 72 |
| Total | $298 | $83 | $186 | $567 |
| Reinstatement\tpremiums\t(earned)\texpensed | 16 | 8 | (21) | 3 |
| Total\tbefore\tincome\ttax | 314 | 91 | 165 | 570 |
| Income\ttax\tbenefit | (99) | (20) | (1) | (120) |
| Total\tafter\tincome\ttax | $215 | $71 | $164 | $450 |
| Effective\ttax\trate | 32% | 22% | 1% | 21% |

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	$814	million	of net	favorable	prior	period	development	in	2008.	This	compares	with	$217	million	of	net	favorable	prior	period	development	in	2007,	and	$12	million	of	net favorable	prior	period	development	in	2006.	The	favorable	prior	period	development	in	2008	was	the	net	result	of	several	underlying	favorable	and adverse	movements;	refer	to	"Prior	Period	Development".

Overall,	the	loss	and	loss	expense	ratio,	adjusted,	has	increased	over	the	prior	year,	due	to	competitive	market	conditions,	partially	offset	by	the favorable	impact	of	the	increasing	mix	of	A&H	business,	which	experiences	lower	loss	ratios	relative	to	P&C	business.

Our	policy	acquisition	costs	include	commissions,	premium	taxes,	underwriting,	and	other	costs	that	vary	with,	and	are	primarily	related	to,	the production	of	premium.	Administrative	expenses	include	all	other	operating	costs.

Our	policy	acquisition	cost	ratio	increased	significantly	in	2008,	compared	with	2007,	primarily	due	to	the	growth	in	A&H	business,	including	the Combined	Insurance	business,	which	is	predominantly	A&H.	A&H	business	typically	requires	higher	commission	rates	than	traditional	P&C	business.	For 2008,	the	increase	in	policy	acquisition	costs	also	included	the	impact	of	higher	acquisition	costs	on	ACE	Westchester's	crop/hail	business,	reflecting more	profitable	crop/hail	results	on	final	settlement	of	2007	written	policies.	This	generated	a	higher	profit	share	commission	which	added	approximately 0.4	percentage	points	to	our	2008	policy	acquisition	cost	ratio.	Additionally,	for	2008,	we	experienced	higher	costs	due	to	the	inclusion	of	ACE	Private Risk	Services	unit	which	typically	generates	a	higher	policy	acquisition	cost	ratio	than	our	commercial	P&C	business.	Our	administrative	expenses increased	in	2008,	primarily	due	to	the	inclusion	of	administrative	expenses	related	to	Combined	Insurance	and	ACE	Private	Risk	Services.	For	2007,	our policy	acquisition	cost	ratio	was	stable,	compared	with	2006,	as	the	increasing	trend	experienced	due	to	the	growth	of	A&H	was	offset	by	reduced	ceding commission	at	ACE	Tempest	Re	USA.	Our	administrative	expense	ratio	decreased	in	2007,	compared	with	2006,	due	to	the	increase	in	net	premiums

earned.	Administrative	expenses	in	2006	include	$80	million	related	to	the	settlement	with	certain	governmental	agencies	from	their	investigations	of various	insurance	industry	practices.

Our	effective	income	tax	rate,	which	we	calculate	as	income	tax	expense	divided	by	income	before	income	tax,	is	dependent	upon	the	mix	of earnings	from	different	jurisdictions	with	various	tax	rates.	A	change	in	the	geographic	mix	of	earnings	would	change	the	effective	income	tax	rate.	Our effective	tax	rate	on	net	income	was	24	percent	in	2008,	compared	with	18	percent	in	2007	and	2006.	For	2008,	our	effective	tax	rate	was	adversely impacted	by	large	realized	losses	on	investments	and	derivatives	and	also	due	to	a	higher	proportion	of	our	net	income	being	generated	in	higher	tax- paying	jurisdictions.	We	decreased	our	liability	for	unrecognized	tax	benefits	in	the	amount	of	$39	million	in	2007	due	primarily	to	a	change	in	tax regulation.

# Prior	Period	Development

The	favorable	prior	period	development	of	$814	million	on	net	unpaid	losses	and	loss	expenses	during	the	year	ended	December	31,	2008,	was	the	net result	of	several	underlying	favorable	and	adverse	movements.	In	the	sections	following	the	table	below,	significant	prior	period	movements	within	each reporting	segment	by	claim-tail	attribute	are	discussed	in	more	detail.	Long-tail	lines	include	lines	such	as	workers'	compensation,	general	liability,	and professional	liability.	Short-tail	lines	include	lines	such	as	most	property	lines,	energy,	personal	accident,	aviation,	and	marine.	The	following	table summarizes	prior	period	development,	(favorable)	and	adverse,	by	segment	and	claim-tail	attribute	for	the	years	ended	December	31,	2008	and	2007.

| (in	millions	of	U.S.	dollars,	except	for	percentages) | Long-tail | Short-tail | Total | reserves* |
| :--- | :--- | :--- | :--- | :--- |
| 2008 |  |  |  |  |
| Insurance\t–\tNorth\tAmerican | $(131) | $(220) | $(351) | 2.4% |
| Insurance\t–\tOverseas\tGeneral | (131) | (173) | (304) | 4.7% |
| Global\tReinsurance | (17) | (142) | (159) | 5.9% |
| Total | $(279) | $(535) | $(814) | 3.5% |
| 2007\nInsurance\t–\tNorth\tAmerican** | $(13) | $22 | $9 | 0.1% |
| Insurance\t–\tOverseas\tGeneral | (53) | (139) | (192) | 3.2% |
| Global\tReinsurance*** | 8 | (42) | (34) | 1.3% |
| Total | $(58) | $(159) | $(217) | 1.0% |

*	Calculated	based	on	the	segment	beginning	of	period	net	unpaid	losses	and	loss	expense	reserves.

**	Insurance	–	North	American:	$52	million	favorable	development	on	workers'	compensation	was	reclassified	from	short-tail	to	long-tail.

***	Global	Reinsurance:	$5	million	favorable	development	on	workers'	compensation	was	reclassified	from	short-tail	to	long-tail.

Insurance	–	North	American	incurred	net	favorable	prior	period	development	of	$351	million	in	2008,	representing	2.4	percent	of	the	segment's	net unpaid	loss	and	loss	expense	reserves	at	December	31,	2007.	The	net	prior	period	development	in	2008	was	the	net	result	of	several	underlying favorable	and	adverse	movements,	driven	by	the	following	principal	changes:

•	Net	favorable	development	of	$131	million	on	long-tail	business,	including:

•	Adverse	development	of	$15	million	in	our	national	accounts	workers'	compensation	portfolios	comprised	two	items	of	significance.	First,

favorable	development	of	$47	million	arising	on	accident	year	2007,	due	to	the	absence	of	multi-claimant	events	such	as	industrial	accidents.	The majority	of	our	exposure	for	these	perils	falls	under	our	national	accounts	high	deductible	and	excess	product	lines.	We	evaluate	this	exposure	on an	annual	basis,	after	the	accident	year	has	closed,	allowing	for	the	late	reporting	or	identification	of	significant	losses	and	for	an	initial	assessment of	the	accident	year.	Our	review	in	2008	of	potential	2007	events,	coupled	with	our	initial	assessment	of	the	accident	year	has	led	to	a	decrease	in our	estimate	of	the	required	provision	for	these	claims.	Second,	adverse	development	of	$62	million	relating	to	2003	and	prior	accident	years.	This development	was	the	direct	result	of	reported	loss	activity	greater	than	expected	in	our	prior	review.	During	the	past	year,	a	targeted	open	case reserve	review	was	conducted	by	our	claims	staff	which	resulted	in	a	number	of	material	case	reserve	increases	that	were	not	anticipated	in	our prior	estimates	of	ultimate	loss;

•	Favorable	development	of	$32	million	in	our	national	accounts	commercial	auto	and	general	liability	product	lines	comprised	two	items	of significance.	First,	favorable	development	of	$19	million	was	mainly	from	accident	years	2003

and	prior	for	exposures	written	on	an	excess	basis.	The	combination	of	continued	lower	than	expected	reported	incurred	loss	activity	for	the	2001- 2003	accident	years	as	well	as	increased	weighting	on	loss	development	reserving	methods,	as	these	years	mature,	has	driven	the	majority	of	the improvement	in	projected	ultimate	losses.	Second,	favorable	development	of	$13	million	relating	to	the	1999-2002	accident	years	primarily	on	a block	of	runoff	programs	comprising	general	liability,	auto	liability,	and	workers'	compensation	product	coverages.	This	favorable	development	was a	result	of	lower	than	expected	paid	and	case	incurred	development	observed	in	the	most	recent	reserve	review	which	resulted	in	lower	selected ultimate	loss	projections;

•	Adverse	development	of	$10	million	related	to	higher	than	expected	loss	and	allocated	loss	adjustment	expense	activity	on	reported	claims	in	our small	and	middle	market	guaranteed	cost	workers'	compensation	portfolios,	primarily	affecting	the	2005	and	2006	accident	years.	Recent	case activity	on	these	portfolios	through	calendar	year	2007	and	into	2008	was	higher	than	expectations	and	we	adjusted	our	estimates	of	ultimate	loss accordingly.	Prior	estimates	relied	heavily	on	industry	benchmarks	including	average	severity	trends;

•	Adverse	development	of	$29	million	on	a	portfolio	of	primary	casualty	business	written	by	ACE	Westchester	impacting	the	2002-2004	accident years.	This	adverse	activity	was	a	function	of	higher	than	expected	loss	and	allocated	expenses	on	business	that	has	a	heavy	concentration	of exposure	to	commercial	contractors.	In	the	past	few	quarters,	both	paid	and	incurred	development	patterns	for	the	tail	period	beyond	60	months have	developed	worse	than	industry	benchmark	factors	which	formed	the	basis	for	our	projections	in	prior	analyses;

•	Favorable	development	of	$19	million	on	excess	casualty	and	umbrella	business	in	our	ACE	Westchester	unit	primarily	impacting	accident	years 2002-2004.	This	favorable	activity	was	a	function	of	a	shift	in	weighting	from	expected	loss	based	reserving	methods	to	direct	projections	of	ultimate losses	as	this	long	tailed	exposure	begins	to	mature	for	these	accident	periods;

•	Adverse	development	of	$10	million	on	an	ACE	Bermuda	professional	lines	claim	in	accident	year	2001	as	a	result	of	a	review	in	2008,	that identified	significant	erosion	below	our	attachment;

•	Adverse	development	of	$29	million	on	our	portfolio	of	Defense	Base	Acts	workers'	compensation	coverage	(covers	employees	of	U.S.

government	contractors	overseas).	We	experienced	higher	than	expected	incurred	loss	development	since	the	last	reserve	study	concentrated	in the	2006	and	2007	accident	years.	The	majority	of	the	development	was	related	to	increases	in	case	reserves	on	known	claims	for	these	accident years,	and	recorded	in	2008.	These	increases	were	judged	to	be	more	than	claim	acceleration	and	resulted	in	significant	increases	in	the	2006	and 2007	accident	year	ultimate	loss	projections	given	the	immaturity	of	the	impacted	accident	years	and	long-tail	nature	of	the	portfolio; •	Favorable	development	of	$46	million	on	our	medical	risk	business,	primarily	our	hospital	professional	liability	portfolio	for	the	2004	and	2005 accident	years.	Coverage	is	provided	on	a	claims-made	basis	and	both	paid	and	case	incurred	loss	activity	since	our	last	review	have	been favorable	relative	to	expected.	As	these	accident	periods	have	matured,	we	have	gradually	increased	the	weight	applied	to	experience-based methods,	including	the	Bornhuetter-Ferguson	method,	and	placing	less	weight	on	our	initial	expected	loss	ratio	method;

•	Favorable	development	of	$34	million	in	our	management	and	professional	liability	product	lines.	This	development	was	the	net	result	of	favorable development	totaling	$117	million	associated	with	the	2005	and	prior	accident	years	and	adverse	development	of	$81	million	with	respect	to	the 2007	accident	year.	The	favorable	prior	period	development	was	a	function	of	a	review	of	all	open	claims	in	our	retail	management	liability operation	and	a	reassessment	of	the	potential	ultimate	exposure	on	these	claims.	This	reassessment	of	exposure	and	the	maturation	of	these accident	periods	supported	increasing	the	weight	given	to	experience	based	loss	projections.	The	adverse	development	relating	to	the	2007 accident	year	is	due	solely	to	a	claim-by-claim	review	of	exposures	impacted	by	the	ongoing	credit	crisis	including	but	not	limited	to	sub-prime mortgages.	These	claim	file	reviews	occurred	during	the	2008	calendar	year	as	facts	and	circumstances	surrounding	these	exposures	continued	to emerge	and	develop;

•	Favorable	development	of	$51	million	on	our	long-tail	exposures	in	our	Canadian	P&C	operations,	principally	arising	in	the	2005	accident	year	on excess	casualty,	umbrella,	and	D&O	product	lines.	Actual	paid	and	case	incurred	loss	activity	has	been	lower	than	expected	since	our	prior analysis.	In	addition,	we	have	increased	the	weighting	given	to	experience-based	methods	from	the	initial	expected	loss	ratio	method	as	these accident	years	mature;

•	Favorable	development	of	$68	million	for	accident	years	2003-2006	due	to	the	expiration	of	a	large,	multi-year	insurance	contract	written	in	our ACE	Financial	Solutions	business	unit.	This	contract	included	a	significant	per	occurrence	limit	excess	of	a	high	attachment	point.	Coverage	was provided	on	an	integrated	occurrence	basis	requiring	notice	of	an	event	during	the	policy	period.	We	completed	a	detailed	claims	audit	in	the	fourth quarter	of	2008	which	led	to	an	adjustment	to	the	booked	loss	and	loss	expense	reserves;

•	Adverse	development	of	$51	million	on	runoff	casualty	reserves,	including	asbestos	and	environmental,	in	the	Brandywine	and	ACE	Westchester business	units	following	completion	of	our	internal	ground-up	review	of	asbestos	and	environmental	liabilities	for	the	most	significant	policyholders identified	to	date.	This	adverse	development	arose	from	several	sources,	the	principal	one	of	which	was	as	a	result	of	increased	defense	costs	in litigating	traditional	tort	defenses	on	asbestos	cases;	and

•	Favorable	development	of	$16	million	relating	to	the	completion	of	account	reconciliations	that	identified	duplicate	loss	processing,	over processed	coinsurance,	and	unregistered	reinsurance	recoveries.

•	Net	favorable	development	of	$220	million	on	short-tail	business,	including:

•	Favorable	development	of	$116	million	on	ACE	Westchester	crop/hail	business	relating	to	the	recording	of	the	2007	crop	year	bordereau	received in	2008;

•	Adverse	development	totaling	$33	million	relating	to	increases	in	our	estimates	of	losses	for	the	2005	hurricanes	primarily	in	ACE	Westchester property	($23	million)	and	ACE	Financial	Services	International	(ACE	FSI)	($10	million).	The	ACE	Westchester	development	was	due	primarily	to settlement	on	several	excess	policies	above	our	prior	case	reserves,	resulting	in	higher	estimates	of	ultimate	loss.	The	claims	handling	associated with	the	2005	hurricanes	involved	complex	and	unique	causation	and	coverage	issues.	These	issues	continue	to	be	present	and	may	have	a further	adverse	impact	on	our	financial	results,	which	may	be	material.	The	ACE	FSI	development	was	due	to	adverse	development	on	a retrocessional	program	following	a	review	of	the	program's	claim	circumstances;

•	Favorable	development	of	$13	million	relating	to	lower	than	expected	paid	claims	for	the	2007	accident	year	on	a	run-off	portfolio	of	warranty business,	mostly	automobile	extended	warranty	contracts.	The	change	was	driven	primarily	by	recognition	of	recent	paid	claim	experience,	as	a percentage	of	earned	premiums,	which	has	been	lower	than	the	historical	averages	used	in	our	prior	analyses;

•	Favorable	development	of	$27	million	on	ACE	Westchester	property	and	inland	marine	businesses.	This	change	was	due	primarily	to	the	fact	that the	reported	incurred	and	paid	loss	activity	for	the	2007	accident	year	non-catastrophe	losses	proved	lower	than	anticipated	based	on	historical loss	development	patterns;

•	Favorable	settlements	of	$15	million	on	ACE	Bermuda	property	claims	mainly	in	accident	years	2005-2007	as	a	result	of	favorable	claims experience.	A	review	of	all	open	claims	was	performed	in	the	fourth	quarter	of	2008,	which	concluded	that	actual	experience	to	date	had	been	more favorable	than	the	assumptions	used	to	establish	the	reserves	for	the	open	claims;

•	Favorable	development	of	$9	million	mainly	in	accident	years	2006	and	2007	for	ACE	Bermuda	political	risk.	This	line	is	subject	to	review	twice	a year;	during	the	fourth	quarter	2008	review,	we	reflected	the	limited	paid	and	case	incurred	loss	activity	relative	to	our	assumptions	and	known events	by	releasing	$9	million	of	IBNR;

•	Favorable	development	of	$29	million	on	ACE	USA's	property	business,	primarily	associated	with	the	2007	accident	year	and	a	portfolio	of diverse	global	exposures	written	on	an	excess	basis.	Reported	loss	activity	during	the	2008	year,	has	been	lower	than	anticipated	in	our	prior review;

•	Favorable	development	of	$6	million	in	our	Canadian	P&C	operations	short-tail	lines	concentrated	in	the	2006	and	2007	accident	years,	covering multiple	product	lines	including	property	and	auto	physical	damage.	Reported	loss	activity	on	these	product	lines	was	lower	than	expected;

•	Favorable	development	of	$6	million	on	the	ACE	USA	commercial	marine	product	lines	primarily	with	respect	to	the	2002-2005	accident	years. The	favorable	development	was	concentrated	in	the	marine	hull	product	line	where	loss	development	and/or	emergence	during	the	2008	calendar year	were	lower	than	expected;	and

•	Favorable	development	of	$14	million	on	the	ACE	USA	recreational	marine	business	primarily	associated	with	the	2007	accident	year.	Loss emergence	and/or	development	during	the	2008	calendar	year	were	lower	than	historical	averages	used	in	our	prior	projections.

Insurance	–	North	American	incurred	net	adverse	prior	period	development	of	$9	million	in	2007,	representing	0.1	percent	of	the	segment's	net	unpaid loss	and	loss	expense	reserves	at	December	31,	2006.	The	net	prior	period	development	in	2007	was	the	net	result	of	several	underlying	favorable	and adverse	movements,	driven	by	the	following	principal	changes:

•	Adverse	development	of	$21	million	due	to	an	adjustment	made	in	2006	relating	to	IBNR	reserves	on	commuted	ceded	reinsurance	contracts, identified	and	resolved	during	2007;

•	Adverse	development	of	$33	million	on	two	related	specialty	claims	from	a	runoff	financial	guaranty	program	affecting	accident	year	2000	due	to adverse	judicial	rulings	rendered	during	the	2007	calendar	year;

•	Adverse	development	on	our	estimates	of	future	allocated	claims	expense	on	two	separate	portfolios	of	workers'	compensation	insurance	totaling $28	million.	This	change	in	estimate	affected	our	national	accounts	workers'	compensation

business	(principally	accident	years	2002-2004)	and	a	runoff	portfolio	of	workers'	compensation	servicing	carrier	business	(covering	accident	years 1996	and	prior).	For	the	national	accounts	business,	the	change	was	principally	in	our	high	deductible	portfolio.	Based	on	analyses	completed during	2007,	we	have	increased	our	tail	factor	for	allocated	loss	adjustment	expenses	(ALAE)	as	well	as	our	ratios	of	ALAE	to	loss	used	in	our projection	methodologies.	Small	movements	in	these	assumptions	produce	a	leveraged	increase	in	the	loss	estimates	across	a	number	of accident	years;

•	Adverse	development	on	our	estimates	of	ultimate	loss	on	a	collection	of	runoff	professional	liability	and	medical	programs	totaling	$20	million. This	adverse	development	was	the	direct	result	of	a	review	of	all	open	claims	that	was	completed	during	2007.	This	claims	review	identified	a number	of	cases	where	adverse	change	in	facts	and	circumstances	led	to	a	significant	deviation	from	our	estimates	of	ultimate	claim	value; •	Favorable	development	of	$52	million	in	our	workers'	compensation	business	due	to	the	absence	of	multi-claimant	events	such	as	industrial accidents	for	the	2006	accident	year.	The	majority	of	our	exposure	for	these	perils	falls	under	our	national	accounts	high	deductible	line	of business.	We	evaluate	this	exposure	annually	after	the	accident	year	has	closed	allowing	for	the	late	identification	of	significant	losses.	Our	review in	2007	of	potential	2006	accident	year	losses	has	led	to	a	decrease	in	our	estimate	of	the	required	provision	for	these	claims; •	Favorable	development	in	our	estimate	of	ultimate	loss	and	ALAE	of	$18	million	in	our	surety	business.	This	improvement	was	heavily concentrated	in	the	2005	and	2006	accident	years.	In	the	2007	calendar	year,	the	level	of	late	reported	claims	and	development	on	known	claims for	this	portfolio	was	significantly	below	historical	levels	for	this	line	of	business	resulting	in	a	reduction	in	all	loss	projection	methods;

•	Favorable	development	on	our	national	accounts	casualty	business,	primarily	general	liability,	of	$21	million	for	the	2002-2004	accident	years. Development	on	these	portfolios	had	been	favorable	relative	to	the	original	assumptions	used	to	price	the	products.	Actual	paid	and	incurred	loss activity	in	2007	was	lower	than	assumed	in	our	prior	projections	and	we	have	modified	our	estimates	accordingly;	and •	Favorable	development	of	$25	million	on	our	foreign	casualty	portfolio	for	the	2004	and	prior	accident	years.	This	was	partly	due	to	an	adjustment for	a	reserve	established	in	2006	for	a	single	large	claim,	but	also	due	to	low	levels	of	reported	and	paid	loss	activity	on	our	foreign	captive business.	This	particular	line	has	net	exposure	on	a	per	occurrence	basis	excess	of	high	deductibles/self-insured	retentions	and	an	aggregate basis	excess	of	an	aggregate	attachment	point.	Expected	loss	emergence	patterns	used	in	our	2006	review	projected	higher	loss	development	for the	2004	and	prior	accident	years	than	emerged	during	2007	prompting	a	reduction	in	our	projection	of	ultimate	losses.

•	Net	adverse	development	of	$22	million	on	short-tail	business	including:

•	Adverse	development	totaling	$115	million	relating	to	increases	in	our	estimates	of	loss	for	the	2005	storms	primarily	in	our	ACE	Westchester operation	but	also	some	modest	development	in	our	offshore	energy	business.	This	development	was	due	primarily	to	a	relatively	small	number	of losses	on	excess	policies	with	large	exposed	limits.	These	losses	reached	settlement	during	2007	for	amounts	in	excess	of	our	case	reserves prompting	adjustments	to	our	projections	of	ultimate	losses.	The	claims	handling	associated	with	the	2005	hurricanes	had	involved	complex	and unique	causation	and	coverage	issues.	These	issues	were	present	in	2007;

•	Favorable	development	of	$33	million	on	ACE	Westchester	crop/hail	business.	This	was	the	direct	effect	of	recording	the	final	settlement	of	the 2006	pool	year	from	the	bordereau	received	during	the	2007	calendar	year;

•	Favorable	development	in	our	estimates	of	ultimate	losses	for	first	party	lines	including	property	and	auto	physical	damage	in	our	ACE	Canada operations	totaling	$18	million,	affecting	primarily	the	2006	accident	year.	Incurred	loss	development	during	calendar	year	2007	on	the	2006 accident	year	was	lower	than	historical	averages	which	formed	the	basis	for	our	prior	projections.	Given	the	relatively	short	reporting	pattern	for this	business,	the	actual	loss	emergence	was	assigned	greater	credibility	and	the	ultimate	loss	estimates	revised	accordingly;

•	Favorable	development	in	our	estimates	of	ultimate	loss	of	$19	million	on	our	Canadian	A&H	portfolio.	We	have	limited	historical	experience	for this	product	line.	Losses	were	originally	recorded	using	an	expected	loss	ratio	method.	Actual	loss	emergence	in	calendar	year	2007	has	proven	to be	more	favorable	than	our	prior	projections.	Given	the	relatively	short	reporting	pattern	for	this	business,	the	actual	loss	emergence	was	assigned credibility	and	the	ultimate	loss	estimates	revised	accordingly;	and

•	Favorable	development	in	our	estimates	of	ultimate	loss	of	$28	million	on	short	tail,	non-catastrophe	losses	in	our	ACE	Westchester	property	and inland	marine	product	lines.	Attritional	incurred	loss	activity	on	the	2005	and	2006	accident	years	in	the	2007	calendar	year	was	lower	than historical	averages	which	formed	the	basis	for	our	prior	projections.

Insurance	–	North	American	experienced	adverse	prior	period	development	of	$65	million	in	2006,	representing	0.5	percent	of	the	segment's	net	unpaid loss	and	loss	expense	reserves	at	December	31,	2005.

Insurance	–	Overseas	General	experienced	net	favorable	prior	period	development	of	$304	million	in	2008,	representing	4.7	percent	of	the	segment's	net unpaid	loss	and	loss	expense	reserves	at	December	31,	2007.	The	net	prior	period	development	for	2008	was	the	net	result	of	several	underlying favorable	and	adverse	movements,	driven	by	the	following	principal	changes:

•	Favorable	development	of	$159	million	from	accident	years	2005	and	prior	in	ACE	International's	financial	lines	and	casualty	(primary	and	excess) portfolios.	Most	of	the	reduction	was	in	accident	years	2002-2005	on	financial	lines,	primary	casualty,	and	supported	casualty	excess.	Additional excess	releases	were	made	in	accident	years	2001	and	prior.	Actual	paid	and	case	incurred	loss	activity	has	been	lower	than	expected	since	the prior	year's	analysis.	In	addition,	we	have	increased	the	weighting	given	to	experience-based	methods	from	the	initial	expected	loss	ratio	method as	these	accident	periods	mature;

•	Favorable	development	of	$11	million	in	ACE	Global	Market	financial	lines.	This	was	across	a	number	of	accident	years.	The	decrease	was driven	by	a	reliance	on	experience	based	methods	which	reflected	favorable	development	in	2008	in	the	quicker	developing	financial	lines	of	crime and	professional	indemnity;	and

•	Adverse	development	of	$39	million	on	accident	years	2006-2007,	mainly	in	ACE	International	casualty	portfolios	following	heavier	than	expected loss	emergence.	Actual	major	claim	notices	received	in	2008	caused	loss	estimates	on	U.K.	excess	casualty	and	Continental	Europe	financial	lines to	be	increased.	Loss	projections	for	the	Continental	Europe	casualty	portfolios	also	increased	following	adverse	attritional	claim	activity	(i.e.

excluding	catastrophes	and	large	losses)	in	one	country	and	a	large	loss	in	another	country.

•	Net	favorable	development	of	$173	million	on	short-tail	business	including:

•	Net	favorable	development	of	$113	million	in	ACE	International	property	lines.	This	activity	was	focused	mainly	in	accident	years	2003-2007	and the	U.K.	and	Continental	Europe	regions.	The	releases	in	accident	years	2003-2005	were	partially	due	to	case	specific	reserve	reductions	driven by	new	information	obtained	in	2008.	Accident	years	2006-2007	were	driven	by	favorable	emergence	relative	to	the	expected	development	pattern as	of	the	prior	year	end	and	reliance	on	experience	based	methods	for	this	short-tailed	line;

•	Favorable	development	on	ACE	International	accident	and	health	of	$44	million.	This	was	mainly	from	the	U.K.,	Continental	Europe,	and	Latin America	regions	in	accident	years	2003-2007.	The	decrease	was	driven	by	a	combination	of	favorable	development	in	2008	across	all	segments	of this	book	and	greater	reliance	on	experience-based	methods	as	the	accident	years	mature;

•	Favorable	development	of	$30	million	for	the	ACE	International	marine	book.	This	was	mainly	in	accident	years	2005-2007	and	in	the	Continental Europe	and	Latin	America	regions.	Given	the	short-tailed	nature	of	this	line,	experience-based	methods	are	the	primary	basis	of	carried	reserves. Given	the	favorable	loss	emergence	in	2008,	reserves	were	reduced	to	reflect	this	experience;	and

•	Adverse	development	of	$14	million	due	to	several	major	ACE	Global	Markets	energy	losses	primarily	for	accident	years	2006	and	2007.	First notice	for	one	of	these	losses	was	received	in	2008,	while	the	remainder	of	the	increase	arose	on	previously	notified	claims	that	were	subject	in 2008	to	a	detailed	claims	review	of	individual	event	circumstances	and	their	associated	coverages.

Insurance	–	Overseas	General	experienced	net	favorable	prior	period	development	of	$192	million	in	2007,	representing	3.2	percent	of	the segment's	net	unpaid	loss	and	loss	expense	reserves	at	December	31,	2006.	The	net	prior	period	development	for	2007	was	the	net	result	of	several underlying	favorable	and	adverse	movements,	driven	by	the	following	principal	changes:

•	Net	favorable	development	of	$53	million	on	long-tail	lines	of	business,	including:

•	Net	favorable	development	of	$33	million	in	the	2006	and	prior	accident	years	for	Insurance	–	Overseas	General	long-tail	lines,	primarily	casualty and	financial	lines.	This	favorable	prior	period	development	was	in	response	to	our	annual	review	of	long-tail	lines	completed	during	2007.	There was	$23	million	of	net	favorable	development	for	Insurance	–	Overseas	General	on	the	2003-2005	accident	years	driven	by	reductions	in	loss development	method	indications	and	greater	credibility	being	assigned	to	Bornhuetter-Ferguson	projections	versus	expected	loss	ratio	methods. This	shift	in	credibility	weighting	between	reserving	methods	is	common	practice	and	allows	for	greater	recognition	of	actual	loss	emergence	as accident	years	mature;

•	Net	favorable	development	of	$20	million	as	a	result	of	an	update	of	the	detailed	annual	evaluation	of	the	excess	exposures	in	Insurance	– Overseas	General	which	comprised	strengthening	of	$89	million	in	accident	years	2003	and	prior	and	$45	million	in	accident	year	2006,	and	a release	of	$154	million	in	accident	years	2004	and	2005	;	and

•	Adverse	development	of	$11	million	in	ACE	Global	Markets'	long-tail	professional	lines,	primarily	in	accident	years	1999-2003.	This	adverse	prior period	development	was	largely	in	response	to	claims	department	recommendations	on	three	accounts	based	on	updated	information	received during	the	course	of	claim	settlement	in	2007.

•	Net	favorable	development	of	$139	million	on	short-tail	lines	of	business	including:

•	Favorable	development	of	$84	million	on	short-tail	property	and	fire	lines	primarily	in	the	2006	accident	year	in	ACE	International.	The	favorable development	during	the	past	year	was	due	in	large	part	to	shifting	credibility	away	from	Bornhuetter-Ferguson	methods	and	relying	more	heavily	on loss	development	patterns	as	case	incurred	loss	became	a	more	accurate	predictor	of	ultimate	loss.	This	shift	in	credibility	tended	to	reduce indicated	ultimate	losses	since,	with	hindsight,	our	initial	expected	loss	ratios	have	proven	to	be	conservative;

•	Favorable	development	of	$13	million	on	2005	hurricane	losses	in	ACE	Global	Markets.	This	adjustment	was	due	to	the	fact	that	after	24	months of	development,	it	was	concluded	that	there	would	be	no	new	reported	claims;

•	Favorable	development	of	$30	million	on	specialty	A&H	primarily	in	the	2005	and	2006	accident	years	in	ACE	Europe.	This	favorable	prior	period development	followed	the	completion	of	the	regular	reserve	review	and	was	driven	by	better	than	expected	loss	experience	relative	to	prior reserving	assumptions.	The	favorable	experience	arose	across	several	countries	with	no	particular	underlying	claim	or	loss	emergence	trend identifiable;

•	Favorable	development	of	$28	million	on	specialty	marine,	primarily	in	the	2005	and	2006	accident	years	in	both	ACE	International	and	ACE Global	Markets.	This	favorable	prior	period	development	was	largely	in	response	to	claims	department	recommendations	on	several	large	claims based	on	updated	information	received	during	claim	settlement	in	2007;	and

•	Adverse	development	of	$9	million	on	specialty	consumer	lines,	primarily	in	accident	year	2006.	This	adverse	development	was	primarily	driven by	further	deterioration	of	ACE	International's	homeowner's	warranty	business	in	Norway.	The	indicated	ultimate	loss	was	revised	upwards	in	2007 in	response	to	several	key	claim	metrics	underlying	the	reserve	estimate:	number	of	reopened	claims,	loss	adjustment	expenses,	and	frequency and	severity	of	late	reported	claims.

Insurance	–	Overseas	General	experienced	net	favorable	prior	period	development	of	$72	million	in	2006,	representing	1.3	percent	of	the	segment's	net unpaid	loss	and	loss	expense	reserves	at	December	31,	2005.

Global	Reinsurance	experienced	net	favorable	prior	period	development	of	$159	million	in	2008,	representing	5.9	percent	of	the	segment's	net	unpaid loss	and	loss	expense	reserves	at	December	31,	2007.	The	net	prior	period	development	recorded	in	2008	was	the	net	result	of	several	underlying favorable	and	adverse	movements.

•	Net	favorable	development	of	$17	million	on	long-tail	business	across	a	number	of	lines	and	years	including:

•	Net	favorable	prior	period	development	of	$30	million	principally	in	treaty	years	2003	and	2004	in	ACE	Tempest	Re	USA	and	ACE	Tempest	Re Europe	across	a	number	of	portfolios	(professional	liability,	D&O,	casualty,	workers'	compensation	catastrophe,	and	medical	malpractice),	offset	by $16	million	adverse	development	in	treaty	year	2007.	The	lower	loss	estimates	arose	from	the	combined	impact	of	continued	favorable	paid	and case	incurred	loss	trends	and	increased	weighting	given	to	experience-based	methods	away	from	expectations	as	these	treaty	periods	mature, while	the	2007	treaty	year	development	resulted	from	adverse	incurred	losses	due	to	large	loss	development	in	casualty	lines	of	business.

•	Net	favorable	development	of	$142	million	on	short-tail	business	across	a	number	of	lines	and	years	including:

•	Favorable	prior	period	development	of	$43	million	primarily	on	treaty	years	2006	and	prior	in	ACE	Tempest	Re	USA	across	several	portfolios.	The development	arose	principally	on	property	and	the	credit	&	surety	line	following	completion	of	reserve	reviews	in	2008.	The	property	portfolio benefited	from	better	than	expected	claim	emergence,	while	the	release	in	the	credit	&	surety	line	followed	a	detailed	review	of	claims	and associated	recoveries,	together	with	favorable	loss	emergence;

•	Favorable	prior	period	development	of	$28	million	primarily	on	treaty	years	2006	and	prior	in	ACE	Tempest	Re	Europe	across	several	portfolios, principally	property,	marine	and	energy.	This	included	$16	million	property	release	on	U.S.	and	international	property	exposures	and	reflected	lower than	anticipated	loss	emergence;	and

•	Net	favorable	development	of	$71	million	primarily	on	accident	years	2002-2006	in	ACE	Tempest	Re	Bermuda's	property	catastrophe	portfolio	for claims	from	prior	catastrophe	events.	The	release	followed	a	detailed	review	during	the	2008	year	of	each	event	and	each	cedant's	coverage	terms and	reflected	lower	reported	claim	development	than	previously	anticipated.

Global	Reinsurance	experienced	net	favorable	prior	period	development	of	$34	million	in	2007,	representing	1.3	percent	of	the	segment's	net	unpaid loss	and	loss	expense	reserves	at	December	31,	2006.	The	net	prior	period	development	recorded	in	2007	was	the	net	result	of	several	underlying favorable	and	adverse	movements.	The	largest	adverse	movement	was	related	to

long-tail	lines	of	business	for	ACE	Tempest	Re	USA	of	$8	million	mainly	as	a	result	of	higher	than	expected	claims	reported	in	2007	primarily	for	treaty years	2000-2005	for	casualty	and	workers'	compensation	business	on	several	accounts.	Favorable	movements	of	$42	million	largely	related	to	claim closings	on	short-tail	property	and	other	short-tail	lines	of	business	primarily	from	treaty	years	2005	and	prior	were	recorded	in	2007.

Global	Reinsurance	experienced	net	favorable	prior	period	development	of	$5	million	in	2006,	representing	0.2	percent	of	the	segment's	net unpaid	loss	and	loss	expense	reserves	at	December	31,	2005.

The	discussions	that	follow	include	tables,	which	show	our	segment	operating	results	for	the	three	years	ended	December	31,	2008,	2007,	and	2006.

We	operate	through	the	following	business	segments:	Insurance	–	North	American,	Insurance	–	Overseas	General,	Global	Reinsurance,	and	Life Insurance	and	Reinsurance.	As	discussed	previously,	we	completed	the	acquisition	of	all	of	the	outstanding	shares	of	Combined	Insurance	and	certain	of its	subsidiaries	on	April	1,	2008.	As	such,	segment	operating	results	for	the	year	ended	December	31,	2008,	include	the	results	of	the	acquired Combined	Insurance	business.	The	Combined	Insurance	results	are	included	in	our	Insurance	–	Overseas	General	segment	or	Life	Insurance	and Reinsurance	segment	according	to	the	nature	of	the	business	written.	Results	from	Combined	Insurance's	North	American	operations	are	included	in ACE's	Life	Insurance	and	Reinsurance	segment	and	the	results	from	Combined	Insurance's	international	operations	are	included	in	ACE's	Insurance	– Overseas	General	segment.	For	more	information	on	each	of	our	segments	refer	to	"Segment	Information",	under	Item	1.

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),	ACE	Westchester,	ACE	Bermuda,	and	various	run-off	operations,	including	Brandywine	Holdings	Corporation	(Brandywine Holdings).	In	addition,	beginning	in	the	quarter	ended	March	31,	2008,	Insurance	–	North	American	includes	ACE	Private	Risk	Services,	an	underwriting unit	we	acquired	in	2008	that	provides	personal	lines	coverages	(such	as	homeowners	and	automobile)	for	high	net	worth	clients.

|  | 2008 | 2007 | 2006 | 2008<br>vs.<br>2007 | 2007<br>vs.<br>2006 |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | (in\tmillions\tof\tU.S.\tdollars) | (in\tmillions\tof\tU.S.\tdollars) |  |  |
| Net\tpremiums\twritten | $ 5,636 | $5,833 | $5,940 | (3)% | (2)% |
| Net\tpremiums\tearned | 5,679 | 6,007 | 5,719 | (5)% | 5\t% |
| Losses\tand\tloss\texpenses | 4,080 | 4,269 | 4,026 | (4)% | 6\t% |
| Policy\tacquisition\tcosts | 562 | 515 | 530 | 9\t% | (3)% |
| Administrative\texpenses | 536 | 530 | 502 | 1\t% | 6\t% |
| Underwriting\tincome | 501 | 693 | 661 | (28)% | 5% |
| Net\tinvestment\tincome | 1,095 | 1,034 | 876 | 6\t% | 18\t% |
| Net\trealized\tgains\t(losses) | (709) | 125 | (83) | NM | NM |
| Interest\texpense | 1 | – | – | NM | – |
| Other\t(income)\texpense | 7 | 11 | (2) | (36)% | NM |
| Income\ttax\texpense | 315 | 468 | 352 | (33)% | 33\t% |
| Net\tincome | $564 | $1,373 | $1,104 | (59)% | 24% |
| Loss\tand\tloss\texpense\tratio | \t 71.8% | \t 71.1% | \t 70.4% |  |  |
| Policy\tacquisition\tcost\tratio | 9.9% | 8.6% | 9.2% |  |  |
| Administrative\texpense\tratio | 9.4% | 8.8% | 8.8% |  |  |
| Combined\tratio | \t 91.1% | \t 88.5% | \t 88.4% |  |  |

Net	premiums	written	for	the	Insurance	–	North	American	segment	decreased	in	2008,	primarily	due	to	lower	new	and	renewal	business	for	ACE	USA, this	segment's	U.S.	–	based	retail	division.	Net	premiums	written	in	2008	include	ACE	Private	Risk	Services	which	added	$207	million	to	this	segment's net	premiums	written.	ACE	Private	Risk	Services	was	acquired	in	December	2007.	Excluding	ACE	Private	Risk	Services,	Insurance	–	North	American's net	premiums	written	decreased	seven	percent	in	2008,	compared	with	2007.	ACE	USA	experienced	competitive	conditions	across	many	of	its	units	in 2008	which	resulted	in	reductions	in	net	premiums	written	in	its	middle-market	and	large	risk	workers'	compensation	businesses,	its	property	business, and	its	specialty	businesses	including	aerospace,	marine,	medical	facilities,	and	surety.	In	addition	to	these	reductions	for	ACE	USA,	the	year	ended December	31,	2007,	included	a	one-time	assumed	loss	portfolio	transfer	program	which	produced	approximately	$170	million	of	net	premiums	written and	earned.	These	ACE	USA	decreases	were	partially	offset	by	increased	writings	in	professional	liability,	foreign	casualty,	and	A&H	lines	of	business. For	ACE	Westchester,	net	premiums	written	decreased	in	2008	due	to	competitive	conditions	throughout	2008	that	resulted	in	lower	premium	volume	in our	casualty,	inland	marine,	and	property	units.	For	2008,	higher	crop	premium	partially	offset	these	reductions	as	there	were	generally	higher	commodity prices	during	2008	compared	with	2007.	ACE	Bermuda	experienced	decreases	in	its	excess	liability	business	primarily	due	to	lower	production	and retention	as	we	declined	or	ceded	business	submitted	to	us	with	unfavorable	rates	relative	to	risk	exposure.	This	trend	was	partially	offset	by	growth	in ACE	Bermuda's	political	risk	business.	The	decrease	in	Insurance	–	North	American's	net	premiums	written	in	2007,	compared	with	2006,	was	primarily due	to	a	decrease	in	new	and	renewal	business	at	ACE	Westchester,	which	experienced	very	competitive	conditions	on	P&C	lines.	ACE	Westchester also	reported	a	decrease	in	retention	of	gross	premiums	written,	primarily	due	to	changes	in	business	mix.	ACE	USA	reported	modest	growth	in	2007, driven	primarily	by	specialty	casualty	and	energy	lines	as	well	as	professional	risk	and	the	large	assumed	portfolio	transfer.

The	following	two	tables	provide	a	line	of	business	and	entity/divisional	breakdown	of	Insurance	–	North	American's	net	premiums	earned	for	the years	ended	December	31,	2008,	2007,	and	2006.

ACE	USA's	reduction	in	net	premiums	earned	in	2008	was	primarily	driven	by	the	decrease	in	financial	solutions	business,	as	the	prior	year	included approximately	$170	million	related	to	a	one-time	assumed	loss	portfolio	transfer	program.	In	addition,	net	premiums	earned	were	lower	in	2008	due	to decreases	in	middle-market	workers'	compensation	business,	large	risk	accounts	and	property,	reflecting	competitive	market	conditions	and	declining business	that	did	not	meet	our	selective	underwriting	standards.	These	reductions	were	partially	offset	by	growth	in	ACE	USA's	professional	liability, specialty	casualty,	A&H,	inland	marine	and	foreign	casualty	units.	ACE	USA's	increase	in	net	premiums	earned	in	2007,	compared	with	2006,	was primarily	driven	by	assumed	loss	portfolio	business,	as	well	as	new	business	in	the	energy	unit	and	growth	in	specialty	casualty	lines.	ACE	USA's curtailment	of	middle	market	worker's	compensation	business	partially	offset	these	increases.	ACE	Westchester's	reduction	in	net	premiums	earned	over the	last	two	years	was	primarily	due	to	declines	in	casualty	and	inland	marine	business,	which	resulted	from	competitive	market	conditions.	This	trend was	partially	offset	by	crop	business	growth,	which	benefited	from	generally	higher	commodity	prices	for	most	of	2008	and	in	2007.	ACE	Bermuda's reduction	in	net	premiums	earned	in	2008,	compared	with	2007,	was	a	result	of	lower	production,	and	the	decrease	in	2007,	compared	with	2006,	was primarily	due	to	the	curtailment	of	financial	solutions	business.

Insurance	–	North	American's	loss	and	loss	expense	ratio	increased	in	2008	and	2007.	The	following	table	shows	the	impact	of	catastrophe	losses and	prior	period	development	on	our	loss	and	loss	expense	ratio	for	the	years	ended	December	31,	2008,	2007,	and	2006.

Insurance	–	North	American's	catastrophe	losses	were	$298	million	in	2008,	compared	with	$16	million	in	2007,	and	$nil	in	2006.	Catastrophe	losses	in 2008	were	primarily	related	to	Hurricanes	Gustav	and	Ike.	Insurance	–	North	American	incurred	net	favorable	prior	period	development	of	$351	million	in 2008.	This	compares	with	net	adverse	prior	period	development	of	$9	million	and	$65	million	in	2007	and	2006,	respectively.	Refer	to	"Prior	Period Development"	for	more	information.

The	increase	in	the	loss	and	loss	expense	ratio	as	adjusted	in	2008,	compared	with	2007,	was	primarily	due	to	changes	in	business	mix, specifically	higher	premiums	from	the	crop	business,	which	carries	a	relatively	high	current	accident	year	loss	ratio.	In	addition,	the	2008	loss	and	loss expense	ratio	reflects	increased	loss	costs,	including	higher	incurred	losses	for	non-catastrophe	events	that	affected	the	property,	marine	and	energy business	units.

Insurance	–	North	American's	policy	acquisition	cost	ratio	increased	in	2008,	compared	with	2007,	due	in	part	to	the	inclusion	of	ACE	Private	Risk Services	in	2008,	which	generates	a	higher	acquisition	cost	ratio	than	our	commercial	P&C	business.	The	increase	also	reflects	higher	acquisition	costs on	ACE	Westchester's	crop/hail	business,	as	2008	included	more	profitable	results	on	the	first	quarter	final	settlement	than	in	2007,	as	well	as	increased crop/hail	production	for	2008.	The	first	quarter	settlement	in	2008	generated	a	higher	profit	share	commission,	which	added	approximately	0.8 percentage	points	to	Insurance	–	North	American's	2008	policy	acquisition	cost	ratio.	In	addition,	higher	assumed	loss	portfolio	transfer	business	in	2007, which	incurred	low	acquisition	costs	as	is	typical	for	these	types	of	transactions,	reduced	the	2007	policy	acquisition	ratio	by	0.2	percentage	points. These	increases	in	the	2008	policy	acquisition	cost	ratio	were	partially	offset	by	improvements	at	ACE	Bermuda,	primarily	due	to	increased	ceding commissions.	The	decrease	in	Insurance	–	North	American's	2007	policy	acquisition	cost	ratio,	compared	with	2006,	was	primarily	related	to	reductions in	the	policy	acquisition	cost	ratio	at	ACE	USA	and	ACE	Westchester.	For	ACE	USA,	the	reduction	reflected	higher	ceding	commissions	as	well	as	lower premium	taxes	due	to	reassessment	of	obligations	for	premium-based	assessments	and	guaranty	funds.	For	ACE	Westchester,	the	reduction	in	the policy	acquisition	cost	ratio	was	primarily	due	to	lower	profit	share	commissions	on	crop	business	in	2007,	compared	with	2006.

Insurance	–	North	American's	administrative	expense	ratio	increased	in	2008,	compared	with	2007,	reflecting	the	inclusion	of	ACE	Private	Risk Services	unit,	which	generates	higher	administrative	expense	ratios	than	our	commercial	P&C	business,	and	the	reduction	in	net	premiums	earned.	The administrative	expense	ratio	was	stable	in	2007,	compared	with	2006.

The	Insurance	–	Overseas	General	segment	consists	of	ACE	International,	which	comprises	our	network	of	indigenous	insurance	operations;	the wholesale	insurance	operations	of	ACE	Global	Markets,	our	London	market	underwriting	unit	including	Lloyd's	Syndicate	2488	and	the	international	A&H and	life	business	of	Combined	Insurance.	This	segment	has	four	regions	of	operations;	ACE	European	Group,	which	is	comprised	of	ACE	Europe	and ACE	Global	Markets	branded	business,	ACE	Asia	Pacific,	ACE	Far	East,	and	ACE	Latin	America.	Combined	Insurance	distributes	specialty	individual accident	and	supplemental	health	insurance	products	targeted	to	middle	income	consumers	in	Europe	and	Asia	Pacific.

|  | 2008 | 2007 | 2006 | 2008<br>vs.<br>2007 | 2007<br>vs.<br>2006 |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | (in\tmillions\tof\tU.S.\tdollars) | (in\tmillions\tof\tU.S.\tdollars) |  |  |
| Net\tpremiums\twritten | $ 5,332 | $4,568 | $4,266 | 17\t% | 7\t% |
| Net\tpremiums\tearned | 5,337 | 4,623 | 4,321 | 15\t% | 7\t% |
| Losses\tand\tloss\texpenses | 2,679 | 2,420 | 2,259 | 11\t% | 7\t% |
| Future\tpolicy\tbenefits | 12 | – | – | NM | – |
| Policy\tacquisition\tcosts | 1,193 | 963 | 856 | 24\t% | 13\t% |
| Administrative\texpenses | 793 | 669 | 609 | 19\t% | 10\t% |
| Underwriting\tincome | 660 | 571 | 597 | 16\t% | (4)% |
| Net\tinvestment\tincome | 521 | 450 | 370 | 16\t% | 22\t% |
| Net\trealized\tgains\t(losses) | (316) | (69) | (16) | NM | NM |
| Other\t(income)\texpense | (11) | (20) | 10 | (45)% | NM |
| Income\ttax\texpense | 100 | 183 | 206 | (45)% | (11)% |
| Net\tincome | $776 | $789 | $735 | (2)% | 7\t% |
| Loss\tand\tloss\texpense\tratio | \t 50.4% | \t 52.4% | \t 52.3% |  |  |
| Policy\tacquisition\tcost\tratio | \t 22.4% | \t 20.8% | \t 19.8% |  |  |
| Administrative\texpense\tratio | \t 14.8% | \t 14.5% | \t 14.1% |  |  |
| Combined\tratio | \t 87.6% | \t 87.7% | \t 86.2% |  |  |

Insurance	–	Overseas	General's	net	premiums	written	increased	in	2008,	compared	with	2007,	primarily	due	to	the	inclusion	of	Combined	Insurance, which	added	$370	million	of	net	premiums	written,	favorable	foreign	exchange	impact,	and	growth	in	A&H	business.	During	2008,	ACE	International benefited	from	the	strengthening	of	the	euro,	relative	to	the	U.S.	dollar	(refer	to	the	table	below	for	the	impact	of	foreign	exchange	on	net	premiums written	and	earned).	The	favorable	foreign	exchange	impact	began	to	reverse	during	the	fourth	quarter	of	2008.	ACE	International	continues	to	report growth	in	its	A&H	business,	particularly	in	Latin	America	and	Asia	Pacific.	On	the	P&C	side,	ACE	International	reported	growth	in	emerging	markets	in Europe	and	the	Middle	East,	Asia	Pacific,	and	Latin	America,	offset	by	declines	in	the	U.K.	ACE	Global	Markets	reported	lower	production	in	most product	lines,	particularly	property,	aviation,	marine,	and	energy,	primarily	due	to	competitive	conditions.	Insurance	–	Overseas	General's	net	premiums written	increased	in	2007,	compared	with	2006,	primarily	due	to	favorable	foreign	exchange	impact	on	ACE	International's	results	as	both	the	euro	and the	pound	sterling	strengthened	significantly	relative	to	the	U.S.	dollar	during	2007.

The	following	two	tables	provide	a	line	of	business	and	entity/divisional	breakdown	of	Insurance	–	Overseas	General's	net	premiums	earned	for	the years	ended	December	31,	2008,	2007,	and	2006.

Insurance	–	Overseas	General's	net	premiums	earned	increased	in	2008,	compared	with	2007,	primarily	due	to	the	added	premiums	from	Combined Insurance,	growth	in	A&H	production,	and	favorable	foreign	exchange	impact.	Combined	Insurance	added	$371	million	to	this	segment's	2008	net premiums	earned.	ACE	International	continues	to	benefit	from	growth	in	A&H	business,	particularly	in	ACE	Asia	Pacific	and	ACE	Latin	America.	For several	years,	these	regions	have	been	successfully	utilizing	unique	and	innovative	distribution	channels	to	grow	their	A&H	customer	base.	Our	A&H business	is	mainly	personal	accident	with	some	supplemental	medical	cover,	typically	paying	fixed	amounts	for	claims,	and	is	therefore,	insulated	from rising	health	care	costs.	Following	decreased	production	over	the	last	several	quarters,	ACE	Global	Markets	reported	decreases	in	net	premiums	earned. Insurance	–	Overseas	General	reported	an	increase	in	net	premiums	earned	in	2007,	compared	with	2006,	primarily	driven	by	favorable	foreign exchange	impact	on	ACE	International	business.

Insurance	–	Overseas	General	conducts	business	internationally	and	in	most	major	foreign	currencies.	The	following	table	summarizes	the approximate	effect	of	changes	in	foreign	currency	exchange	rates	on	the	growth	of	net	premiums	written	and	earned,	excluding	Combined	Insurance,	for the	periods	indicated.

|  | 2008 | 2007 |
| :--- | :--- | :--- |
| Net\tpremiums\twritten: |  |  |
| Growth\tin\toriginal\tcurrency | 6.2% | 0.6% |
| Foreign\texchange\teffect | 2.4% | 6.5% |
| Growth\tas\treported\tin\tU.S.\tdollars | 8.6% | 7.1% |
| Net\tpremiums\tearned: |  |  |
| Growth\tin\toriginal\tcurrency | 5.1% | 0.7% |
| Foreign\texchange\teffect | 2.3% | 6.3% |
| Growth\tas\treported\tin\tU.S.\tdollars | 7.4% | 7.0% |

|  | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Loss\tand\tloss\texpense\tratio,\tas\treported | 50.4\t% | 52.4\t% | 52.3\t% |
| Catastrophe\tlosses | (1.6)% | (2.1)% | (0.1)% |
| Prior\tperiod\tdevelopment | 5.7\t% | 4.1\t% | 1.7\t% |
| Loss\tand\tloss\texpense\tratio,\tadjusted | 54.5\t% | 54.4\t% | 53.9\t% |

Net	catastrophe	losses	for	2008	were	$83	million,	compared	with	$94	million	and	$3	million	in	2007	and	2006,	respectively.	Catastrophe	losses	in	2008, were	primarily	related	to	Hurricanes	Gustav	and	Ike,	tornadoes	in	the	U.S.,	and	an	earthquake	in	China.	Insurance	–	Overseas	General	incurred	net favorable	prior	period	development	of	$304	million,	$192	million,	and	$72	million	in	2008,	2007	and	2006,	respectively.	Refer	to	"Prior	Period Development"	for	more	information.	Our	loss	and	loss	expense	ratio	will	tend	to	decrease	on	a	comparative	basis	as	the	proportion	of	A&H	business	to P&C	business	grows.	A&H	business	typically	generates	a	much	lower	loss	and	loss	expense	ratio	(and	a	higher	policy	acquisition	cost	ratio)	than traditional	P&C	business.	The	impact	of	both	the	growth	in	A&H	business	relative	to	P&C	and	the	addition	of	Combined	Insurance	resulted	in	a	1.0 percentage	point	decrease	in	the	adjusted	loss	ratios	for	2008.	After	considering	this	impact,	the	adjusted	loss	ratio	for	2008,	increased	due	to deteriorating	market	conditions.

Insurance	–	Overseas	General's	policy	acquisition	cost	ratio	increased	in	2008	compared	with	2007,	primarily	due	to	the	growth	in	A&H	business and	the	impact	of	the	recently	acquired	Combined	Insurance	business,	which	is	predominantly	A&H	business.	A&H	business	typically	attracts	higher commission	rates	than	traditional	P&C	business.	In	addition,	for	2008,	reduced	ceding	commissions	had	the	effect	of	increasing	policy	acquisition	costs. In	2007,	the	increasing	impact	on	policy	acquisition	costs	from	A&H	growth	was	partially	offset	by	increased	ceding	commissions	at	ACE	Global	Markets. Insurance	–	Overseas	General's	administrative	expense	ratio	has	been	relatively	stable	over	the	last	three	years	primarily	due	to	expense management	as	it	grows	its	businesses.	For	2008,	administrative	expenses	increased	primarily	due	to	unfavorable	foreign	exchange	impact	and	the inclusion	of	administrative	expenses	related	to	Combined	Insurance.	Insurance	–	Overseas	General's	administrative	expense	ratio	increased	in	2007, compared	with	2006,	primarily	due	to	the	impact	of	foreign	exchange.	Additionally,	ACE	International	reported	increased	costs	for	2007,	associated	with its	entrance	into	emerging	markets,	specifically	Eastern	Europe	and	the	Middle	East,	and	in	support	of	A&H	growth	at	Asia	Pacific.

The	Global	Reinsurance	segment	represents	ACE's	reinsurance	operations,	comprising	ACE	Tempest	Re	Bermuda,	ACE	Tempest	Re	USA,	ACE Tempest	Re	Europe,	and	ACE	Tempest	Re	Canada.	Global	Reinsurance	markets	its	reinsurance	products	worldwide	under	the	ACE	Tempest	Re	brand name	and	provides	a	broad	range	of	coverages	to	a	diverse	array	of	primary	P&C	companies.

|  |  |  |  | 2008 | 2007 |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  |  | vs. | vs. |
|  | 2008 | 2007 | 2006 | 2007 | 2006 |
|  |  | (in\tmillions\tof\tU.S.\tdollars) | (in\tmillions\tof\tU.S.\tdollars) |  |  |
| Net\tpremiums\twritten | $914 | $1,197 | $1,550 | (24)% | (23)% |
| Net\tpremiums\tearned | \t 1,017 | 1,299 | 1,511 | (22)% | (14)% |
| Losses\tand\tloss\texpenses | 524 | 664 | 784 | (21)% | (15)% |
| Policy\tacquisition\tcosts | 192 | 248 | 303 | (23)% | (18)% |
| Administrative\texpenses | 56 | 64 | 62 | (13)% | 3\t% |
| Underwriting\tincome | 245 | 323 | 362 | (24)% | (11)% |
| Net\tinvestment\tincome | 309 | 274 | 221 | 13\t% | 24% |
| Net\trealized\tgains\t(losses) | (163) | 21 | 10 | NM | 110% |
| Other\t(income)\texpense | 2 | 4 | 8 | (50)% | (50)% |
| Income\ttax\texpense | 30 | 32 | 38 | (6)\t% | (16)% |
| Net\tincome | $359 | $582 | $547 | (38)% | 6\t% |
| Loss\tand\tloss\texpense\tratio | \t 51.5% | \t 51.1% | \t 51.8% |  |  |
| Policy\tacquisition\tcost\tratio | \t 18.8% | \t 19.1% | \t 20.1% |  |  |
| Administrative\texpense\tratio | 5.5% | 4.9% | 4.1% |  |  |
| Combined\tratio | \t 75.8% | \t 75.1% | \t 76.0% |  |  |

Global	Reinsurance	reported	intense	competition	across	the	majority	of	its	regions	of	operations	over	the	last	two	years.	This	has	resulted	in	significant declines	in	production,	as	clients	increased	their	own	risk	retention	and	we	adhered	to	our	strict	underwriting	standards	which	meant	not	renewing	several large	policies.	The	following	tables	provide	a	line	of	business	and	entity/divisional	breakdown	of	Global	Reinsurance's	net	premiums	earned	for	the	years ended	December	31,	2008,	2007,	and	2006.

|  |  |  |  | 2008 | 2007 |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  |  | vs. | vs. |
|  | 2008 | 2007 | 2006 | 2007 | 2006 |
|  |  | (in\tmillions\tof\tU.S.\tdollars) | (in\tmillions\tof\tU.S.\tdollars) |  |  |
| Line\tof\tBusiness |  |  |  |  |  |
| Property\tand\tall\tother | $229 | $285 | $354 | (20)% | (19)% |
| Casualty | 494 | 671 | 799 | (26)% | (16)% |
| Property\tcatastrophe | 294 | 343 | 358 | (14)% | (4)% |
| Net\tpremiums\tearned | $1,017 | $1,299 | $1,511 | (22)% | (14)% |
| Entity/Division |  |  |  |  |  |
| ACE\tTempest\tRe\tBermuda | $299 | $356 | $367 | (16)% | (3)% |
| ACE\tTempest\tRe\tUSA | 490 | 693 | 872 | (29)% | (21)% |
| ACE\tTempest\tRe\tEurope | 212 | 241 | 272 | (12)% | (11)% |
| ACE\tTempest\tRe\tCanada | 16 | 9 | – | 78\t% | NM |
| Net\tpremiums\tearned | $1,017 | $1,299 | $1,511 | (22)% | (14)% |

Global	Reinsurance's	net	premiums	earned	decreased	in	2008,	compared	with	2007,	primarily	due	to	lower	production.	ACE	Tempest	Re	Bermuda reported	a	decline	in	net	premiums	earned	due	to	non-renewed	business,	offset	by	$21	million	of	inward	reinstatement	premiums	in	connection	with Hurricanes	Ike	and	Gustav.	ACE	Tempest	Re	USA	and	ACE	Tempest	Re	Europe	reported	declines	in	net	premiums	earned,	primarily	due	to	competitive conditions	over	the	last	two	years,	which	reduced	production.	The	decrease	in	net	premiums	earned	in	2007,	compared	to	2006,	was	primarily	due	to lower	production	at	ACE	Tempest	Re	Bermuda,	ACE	Tempest	Re	USA,	and	ACE	Tempest	Re	Europe.

|  | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Loss\tand\tloss\texpense\tratio,\tas\treported | 51.5\t% | 51.1\t% | 51.8\t% |
| Catastrophe\tlosses | (17.6)% | (3.7)% | (0.9)% |
| Prior\tperiod\tdevelopment | 16.0\t% | 2.6\t% | 0.4\t% |
| Loss\tand\tloss\texpense\tratio,\tadjusted | 49.9% | 50.0% | 51.3% |

Global	Reinsurance	recorded	net	catastrophe	losses	of	$186	million	in	2008,	mainly	due	to	Hurricanes	Ike	and	Gustav.	This	compares	with	net catastrophe	losses	of	$49	million	and	$14	million	in	2007	and	2006,	respectively.	Global	Reinsurance	incurred	net	favorable	prior	period	development	of $159	million	in	2008.	This	compares	with	net	favorable	prior	period	development	of	$34	million	and	$5	million	in	2007	and	2006,	respectively.	Refer	to "Prior	Period	Development"	for	more	information.

Global	Reinsurance's	policy	acquisition	cost	ratio	decreased	during	2008,	compared	with	2007,	primarily	due	to	the	increase	in	inward	catastrophe- related	reinstatement	premiums	at	ACE	Tempest	Re	Bermuda.	We	pay	little	or	no	commission	on	reinstatement	premiums	written	and	earned.	The decrease	in	the	policy	acquisition	cost	ratio	in	2007,	compared	with	2006,	was	primarily	due	to	changes	in	business	mix	and	lower	ceding	commissions at	ACE	Tempest	Re	USA.	Administrative	expenses	decreased	in	2008,	compared	with	2007,	primarily	due	to	lower	staffing	costs.	The	administrative expense	ratio	increased	over	the	last	three	years	primarily	due	to	the	decrease	in	net	premiums	earned,	partially	offset	by	reduced	staffing	costs.

The	Life	Insurance	and	Reinsurance	segment	includes	the	operations	of	ACE	Tempest	Life	Re	(ACE	Life	Re),	ACE	International	Life,	and	the	North American	A&H	and	life	business	of	Combined	Insurance.	ACE	Life	Re	comprises	two	operations.	The	first	provides	reinsurance	to	primary	life	insurers for	variable	annuity	guarantees	and	the	other	is	a	traditional	life	reinsurance	company.	ACE	Life	Re	is	currently	not	quoting	on	new	opportunities	in	the variable	annuity	reinsurance	marketplace.	ACE	International	Life	develops	direct	insurance	opportunities	in	emerging	markets,	including	Egypt,	Taiwan, Thailand,	Vietnam,	the	United	Arab	Emirates,	and	in	China	through	a	partially	owned	company.	Combined	Insurance	distributes	specialty	individual accident	and	supplemental	health	insurance	products	that	are	targeted	to	middle	income	consumers	in	the	U.S.	and	Canada.	Results	for	2008	include Combined	Insurance	from	April	1,	2008,	the	date	of	acquisition.	We	assess	the	performance	of	our	life	insurance	and	reinsurance	business	based	on	life underwriting	income	which	includes	net	investment	income.

| (in	millions	of	U.S.	dollars) | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Net\tpremiums\twritten | $1,198 | $ 381 | $274 |
| Net\tpremiums\tearned | \t 1,170 | 368 | \t 274 |
| Losses\tand\tloss\texpenses | 320 | – | – |
| Future\tpolicy\tbenefits | 387 | 168 | \t 123 |
| Policy\tacquisition\tcosts | 188 | 45 | 26 |
| Administrative\texpenses | 199 | 50 | 35 |
| Net\tinvestment\tincome | 142 | 55 | 42 |
| Life\tunderwriting\tincome | 218 | 160 | \t 132 |
| Net\trealized\tgains\t(losses) | (532) | (164) | (36) |
| Other\t(income)\texpense | 12 | 1 | – |
| Income\ttax\texpense\t(benefit) | 30 | (8) | (6) |
| Net\tincome\t(loss) | $(356) | $3 | $102 |

The	following	table	provides	a	line	of	business	breakdown	of	Life	Insurance	and	Reinsurance's	underwriting	income	for	the	periods	indicated.

|  |  |  |  | 2008 | 2007 |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2008 | 2007 | 2006 | vs.\t2007 | vs.\t2006 |
|  |  | (in\tmillions\tU.S.\tdollars) | (in\tmillions\tU.S.\tdollars) |  |  |
| Life\tunderwriting\tincome |  |  |  |  |  |
| ACE\tLife\tRe | $105 | $181 | $153 | (42)% | 18% |
| ACE\tInternational\tLife | (28) | (21) | (21) | 33% | – |
| Combined\tInsurance | \t 141 | – | – | NM | – |
| Life\tunderwriting\tincome | $218 | $160 | $132 | 36% | 21% |

Life	underwriting	income	increased	in	2008,	compared	with	2007,	primarily	due	to	the	inclusion	of	the	operating	results	of	the	acquired	Combined Insurance	business.

•	ACE	Life	Re's	(Life	reinsurance)	underwriting	income	decreased	in	2008	due	to	increased	benefit	reserves	primarily	due	to	poor	worldwide	equity market	performance.	Benefit	reserves	reflect	the	expected	value	of	future	claims	on	earned	premium	exposures	and	fluctuate	with	movements	in	equity indices,	interest	rates	and	policyholder	behavior.	Net	realized	gains	(losses),	which	we	exclude	from	life	underwriting	income,	relate	primarily	to	changes in	reported	liabilities	on	GMIB	reinsurance	reported	at	fair	value.	We	experienced	significant	net	realized	losses	in	2008	which	were	caused	by	adverse financial	market	conditions,	primarily	poor	equity	market	performance.	Refer	to	"Critical	Accounting	Estimates"	and	"Fair	Value	Measurements"	for	more information.

•	ACE	International	Life	generated	an	underwriting	loss	in	2008	as	we	continue	to	incur	start-up	costs	in	several	countries	as	we	develop	the	business. •	The	above	table	reflects	Combined	Insurance	business	beginning	April	1,	2008,	the	date	of	acquisition.	From	April	1,	2008,	through	December	31, 2008,	net	premiums	earned	from	Combined	Insurance	were	$763	million.

# Net	Investment	Income

| (in	millions	of	U.S.	dollars) | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Fixed\tmaturities | $1,972 | $1,773 | $1,463 |
| Short-term\tinvestments | 109 | 130 | 119 |
| Equity\tsecurities | 93 | 68 | 57 |
| Other | (20) | 25 | 26 |
| Gross\tinvestment\tincome | \t 2,154 | \t 1,996 | \t 1,665 |
| Investment\texpenses | (92) | (78) | (64) |
| Net\tinvestment\tincome | $2,062 | $1,918 | $1,601 |

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	includes	accretion	from	the	new	cost	basis	of	securities	for	which	other- than-temporary	impairments	have	been	recorded	due	to	interest	rate	spreads.	Accretion	does	not	occur	for	securities	where	an	other	than	temporary impairment	was	attributable	to	issuer	specific	credit	events.	Net	investment	income	increased	eight	percent	in	2008,	compared	with	2007,	and	20	percent in	2007,	compared	with	2006.	The	increase	in	net	investment	income	is	primarily	due	to	several	years	of	positive	operating	cash	flows	which	have resulted	in	a	higher	overall	average	invested	asset	base.	The	investment	portfolio's	average	market	yield	on	fixed	maturities	was	6.4	percent	at December	31,	2008,	compared	with	5.3	percent	and	5.4	percent	at	December	31,	2007	and	2006,	respectively.	Included	in	Other	investment	income	are changes	in	fair	value	of	trading	securities	included	within	rabbi	trusts	maintained	for	compensation	plans.

The	following	table	shows	the	return	on	average	invested	assets	for	the	years	ended	December	31,	2008,	2007,	and	2006.

| (in	millions	of	U.S.	dollars) | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Average\tinvested\tassets | \t\t $41,502 | \t\t $38,798 | \t\t $34,007 |
| Net\tinvestment\tincome | \t\t $2,062 | \t\t $1,918 | \t\t $1,601 |
| Return\ton\taverage\tinvested\tassets | 5.0% | 4.9% | 4.7% |

# 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	other-than-temporary	impairments	are	recorded.	Additionally,	net	income	is	impacted	through	the	reporting	of	changes	in	the fair	value	of	derivatives,	including	financial	futures,	options,	swaps,	and	GMIB	reinsurance.	Changes	in	unrealized	appreciation	and	depreciation	on available	for	sale	securities,	which	result	from	the	revaluation	of	securities	held,	are	reported	as	a	separate	component	of	accumulated	other comprehensive	income	in	shareholders'	equity.

Subject	to	investment	guidelines	approved	by	our	Finance	and	Investment	Committee	of	the	Board	of	Directors	(relating	to	asset	classes,	credit quality,	and	liquidity),	our	investment	managers	generally	have	the	ability	to	sell	securities	from	our	available	for	sale	investment	portfolio	with	the concurrence	of	ACE	management	when	they	determine	that	an	alternative	security	with	comparable	risks	is	likely	to	provide	a	higher	investment	return, considering	the	realized	gain	or	loss	on	sale	of	the	held	security	and	differential	in	future	investment	income.	Often,	sales	of	individual	securities	occur when	investment	managers	conclude	there	are	changes	in	the	credit	quality	of	a	particular	security	or,	for	other	reasons,	market	value	is	apt	to deteriorate.	Further,	we	may	sell	securities	when	we	conclude	it	is	prudent	to	reduce	a	concentration	in	a	particular	issuer	or	industry.	Therefore, securities	sales	volume	may	increase	in	a	volatile	credit	market	in	which	credit	spreads	and,	thus,	the	market	value	of	fixed	maturity	investments	are subject	to	significant	changes	in	a	short	period	of	time.	The	interest	rate	environment	will	tend	to	have	a	limited	effect	on	securities	sales	volume	but extreme	conditions	could	have	an	effect	on	the	magnitude	of	realized	gains	or	losses.	For	example,	in	a	declining	interest	rate	environment,	the	market value	of	securities	increases,	resulting	in	a	greater	likelihood	of	net	realized	gains	and	we	would,	therefore,	tend	to	reduce	the	average	duration	of	our fixed	maturity	investment	portfolio.	An	environment	where	interest	rates	are	increasing	would	tend	to	have	the	opposite	effect.	The	effect	of	a	high	level	of realized	losses	or	gains	for	a	particular	period	will	tend	to	be	offset	by	increases	or	decreases	in	investment	income,	respectively,	in	subsequent	periods. From	a	liquidity	perspective,	there	is	a	risk	is	that	we	could	be	forced	to	sell	a	large	volume	of	securities	at	a	loss	(i.e.,	in	a	high	interest	rate	environment) to	meet	operating	needs	and	are,	thus,	unable	to	reinvest	proceeds	to	recoup	such	losses	with	future	investment	income	(Refer	to	"Liquidity	and	Capital Resources"	for	more	information).

We	review	our	investments	for	other-than-temporary	impairment	based	on	the	following:

•	the	amount	of	time	a	security	has	been	in	a	loss	position,	the	magnitude	of	the	loss	position,	and	whether	the	security	is	rated	below	an	investment grade	level;

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

•	our	ability	and	intent	to	hold	the	security	to	the	expected	recovery	period;	and

•	equity	securities	in	an	unrealized	loss	position	for	twelve	consecutive	months	were	generally	impaired.

Given	current	market	conditions,	and	in	light	of	recent	general	guidance	from	the	SEC	and	the	FASB	regarding	the	application	of	existing	guidance during	stressed	market	conditions,	beginning	in	the	third	quarter	of	2008	we	have	qualitatively	evaluated	our	application	of	the	parameters	under	which we	consider	a	decline	in	value	to	be	other-than-temporary.	Similar	to	prior	quarters,	we	evaluated	investments	in	our	portfolio	where	cost	exceeded	fair value	and	made	certain	judgments	as	to	our	ability	to	recover	our	cost.	Our	analysis,	beginning	with	the	third	quarter	of	2008,	required	us	to	consider carefully	the	duration	and	severity	of	decline	and	the	root	causes	thereof.	Specifically,	we	further	evaluated	during	the	quarter	whether	declines	were related	to	temporary	liquidity	concerns	and	current	market	conditions,	and	therefore	more	likely	to	be	temporary,	or	were	instead	related	to	specific	credit events	or	issuer	performance,	and	therefore	more	likely	to	be	other-than-temporarily	impaired.	Using	this	refined	evaluation	process	resulted	in	a	lower dollar	value	of	investments	in	an	unrealized	loss	position	being	deemed	other-than-temporarily	impaired	in	comparison	to	our	previous	evaluation process.	We	believe	the	underlying	credit	quality	of	the	portfolio	supports	the	use	of	our	modified	approach.	Refer	to	Note	4	e)	to	the	Consolidated Financial	Statements,	under	Item	8,	which	includes	a	table	that	summarizes	all	of	our	securities	in	an	unrealized	loss	position	at	December	31,	2008. When	we	determine	that	there	is	an	other-than-temporary	impairment,	we	record	a	write-down	to	estimated	fair	value,	which	reduces	the	cost basis.	The	new	cost	basis	of	an	impaired	security	is	not	adjusted	for	subsequent	increases	in	estimated	fair	value.	For	fixed	maturity	investments,	the discount	(or	reduced	premium)	based	on	the	new	cost	basis	is	accreted	into	net	investment	income,	and	included	in	income	in	future	periods	based	upon the	amount	and	timing	of	expected	future	cash	flows	of	the	security.

The	following	tables	present	our	pre-tax	net	realized	and	unrealized	gains	(losses)	for	the	years	ended	December	31,	2008	and	2007.

|  | 2008 | 2008 | 2008 | 2007 | 2007 | 2007 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Net | Net |  | Net | Net |  |
|  | Realized | Unrealized |  | Realized | Unrealized |  |
|  | Gains | Gains | Net | Gains | Gains | Net |
| (in\tmillions\tof\tU.S.\tdollars) | (Losses) | (Losses) | Impact | (Losses) | (Losses) | Impact |
| Fixed\tmaturities\tand\tshort-term\tinvestments | $(846) | $(2,091) | $(2,937) | $(98) | $48 | $(50) |
| Equity\tsecurities | (349) | (363) | (712) | 162 | (122) | 40 |
| Other | (55) | (313) | (368) | 37 | 73 | 110 |
| Subtotal\tinvestments | (1,250) | (2,767) | (4,017) | 101 | 1 | 100 |
| Derivatives: |  |  |  |  |  |  |
| Equity\tand\tfixed\tincome\tderivatives | (3) | – | (3) | (19) | – | (19) |
| Fair\tvalue\tadjustment\ton\tinsurance\tderivatives | (650) | – | (650) | (185) | – | (185) |
| S&amp;P\tput\toption | 164 | – | 164 | 22 | – | 22 |
| Fair\tvalue\tadjustment\ton\tother\tderivatives | 83 | – | 83 | 16 | – | 16 |
| Subtotal\tderivatives | (406) | – | (406) | (166) | – | (166) |
| Foreign\texchange\tgains | 23 | – | 23 | 4 | – | 4 |
| Total\tgains\t(losses) | $(1,633) | $(2,767) | $(4,400) | $(61) | $(1) | $(62) |

In	2008,	we	recorded	net	realized	losses	on	derivative	transactions.	For	a	sensitivity	discussion	of	the	effect	of	changes	in	interest	rates	and	equity indices	on	the	fair	value	of	derivatives	and	the	resulting	impact	on	our	net	income,	refer	to	Item	7A.

Our	net	realized	losses	in	2008	included	write-downs	of	$1.1	billion	as	a	result	of	conditions	which	caused	us	to	conclude	that	the	decline	in	fair value	of	certain	securities	was	other-than-temporary.	This	compares	with	write-downs	of	$141	million	and	$214	million	in	2007	and	2006,	respectively. The	following	table	provides	a	breakdown	of	our	other-than-temporary	impairments	and	other	net	realized	gains	(losses)	on	investments	for	the	year ended	December	31,	2008.

|  | Price<br>Impairment | Credit<br>Impairment | Other	Net<br>Realized<br>Gains<br>(Losses) | Net<br>Realized<br>Gains<br>(Losses) |
| :--- | :--- | :--- | :--- | :--- |
| Investment\tgrade\tcorporate | $(245) | $(169) | $(36) | $(450) |
| High\tyield\tcorporate | (233) | (13) | (56) | (302) |
| Mortgage-backed\tsecurities/Asset-backed\tsecurities | (100) | – | 80 | (20) |
| Convertible\tbonds | – | – | (74) | (74) |
| Fixed\tmaturities\tand\tshort-\tterm\tinvestments | (578) | (182) | (86) | (846) |
| Equity\tsecurities | (248) | – | (101) | (349) |
| Other | (56) | – | 1 | (55) |
| Total | $(882) | $(182) | $(186) | $(1,250) |

The	allocation	of	other-than-temporary	impairments	between	those	primarily	triggered	by	severity	of	price	decline	versus	credit	loss	is	judgmental	given that	it	is	difficult	to	discern,	on	a	security	by	security	basis,	the	portion,	if	any,	of	price	decline	attributable	to	credit	loss.	The	Credit	Impairment	column includes	securities	where	credit	losses	represent	all,	or	substantially	all,	of	the	price	decline	reflected	as	other-than-temporary	impairments.	The	Price Impairment	column	includes	the	remaining	other-than-temporary	impairments.	In	light	of	the	magnitude	of	our	other-than-temporary	impairments	in	2008 relative	to	prior	periods,	comparative	information	for	2007	and	2006	is	not	meaningful.	Other	Net	Realized	Gains	(Losses)	principally	includes	gains	and losses	from	security	sales.

Other-than-temporary	impairments	of	fixed	maturities	in	2008	were	concentrated	in	the	financial	services	sector	of	our	corporate	securities	and were	primarily	driven	by	downgrades	in	credit,	bankruptcy	or	other	adverse	financial	conditions	of	the	respective	issuers.	Other-than-temporary impairments	of	fixed	maturities	in	2008	included	approximately	$150	million	related	to	the	filing	of	a	Chapter	11	bankruptcy	petition	by	Lehman	Brothers. Other-than-temporary	impairments	of	equity	securities	in	2008	of	$248	million	were	driven	by	overall	declines	in	the	equity	markets.	Other-than-temporary impairments	in	2007	and	2006	were	$123	million	and	$198	million	for	fixed	maturities,	$16	million	and	$10	million	for	equities	and	$2	million	and	$6	million for	other	investments	and	were	primarily	due	to	an	increase	in	market	interest	rates	from	the	date	of	security	purchase.

Our	net	realized	and	unrealized	loss	in	2008	included	approximately	$2.1	billion	of	decline	in	our	investment	grade	fixed	income	portfolio	and approximately	$873	million	on	our	high	yield	bond	portfolio.

As	of	December	31,	2008,	our	U.S.	investment	portfolios	held	by	U.S.	legal	entities	included	approximately	$1.1	billion	of	gross	unrealized	losses on	fixed	income	investments	and	$392	million	of	realized	losses	for	impairments	of	fixed	income	investments	related	to	temporary	liquidity	concerns	and current	market	conditions.	Our	tax	planning	strategy	related	to	these	losses	is	based	on	our	view	that	we	will	hold	our	fixed	income	investments	until	they recover	their	cost.	As	such,	we	have	recognized	a	deferred	tax	asset	of	approximately	$525	million	related	to	these	fixed	income	investments.	This strategy	allows	us	to	fully	recognize	the	associated	deferred	tax	asset	as	we	do	not	believe	these	losses	will	ever	be	realized,	and	accordingly,	we	did	not record	a	valuation	allowance	against	this	deferred	tax	asset.

We	engage	in	a	securities	lending	program,	which	involves	lending	investments	to	other	institutions	for	short	periods	of	time.	ACE	invests	the collateral	received	in	short-term	funds	of	high	credit	quality	with	the	objective	of	maintaining	a	stable	principal	balance.	During	2008,	certain	investments in	the	money	market	mutual	funds	purchased	with	the	securities	lending	collateral	declined	in	value	resulting	in	a	$66	million	unrealized	loss.	The unrealized	loss	is	attributable	to	fluctuations	in	market	values	of	the	underlying	performing	debt	instruments	held	by	the	respective	mutual	funds,	rather than	default	of	a	debt	issuer.	We	concluded	that	the	decline	in	value	was	temporary.

# Other	Income	and	Expense	Items

| (in	millions	of	U.S.	dollars) | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Equity\tin\tnet\tincome\t(loss)\tof\tpartially-owned\tcompanies | $ (52) | $39 | $(60) |
| Minority\tinterest\texpense | 11 | 7 | 8 |
| Federal\texcise\tand\tcapital\ttaxes | 16 | \t 18 | 10 |
| Other | (14) | \t 17 | 7 |
| Other\t(income)\texpense | $ (39) | $81 | $(35) |

Other	(income)	expense	primarily	comprises	our	equity	in	net	income	of	Huatai	Insurance	Company	of	China,	Limited	and	Assured	Guaranty	Ltd. (AGO),	which	is	included	in	equity	in	net	income	of	partially-owned	companies.	Our	relationship	with	AGO	is	limited	to	our	equity	investment,	which	had	a carrying	value	of	$397	million,	or	$20.73	per	share,	compared	with	a	market	value	of	$218	million,	or	$11.40	per	share,	at	December	31,	2008.	We conduct	no	financial	guaranty	business	directly	or	with	AGO	and	we	retain	no	financial	guaranty	exposures	with	AGO.	Our	investment	is	not	other-than- temporarily	impaired	as	of	December	31,	2008.

On	November	14,	2008,	Assured	Guaranty	Ltd.	(AGO)	announced	a	definitive	agreement	to	purchase	Financial	Security	Assurance,	Inc.	(FSA) from	Dexia	SA	(Dexia)	for	a	purchase	price	of	$722	million.	This	transaction	will	be	funded	by	$361	million	in	cash	and	44,657,000	common	shares	of AGO.	The	acquisition	is	expected	to	close	in	March	2009.	AGO	will	finance	the	cash	portion	of	the	acquisition	with	proceeds	from	a	public	equity	offering to	WL	Ross	&	Co	LLC	(WLR)	at	a	per	share	price	between	a	floor	of	$6.00	and	a	ceiling	of	$8.50.	EITF	08-6,	Equity	Method	Investment	Accounting Considerations,	requires	ACE	account	for	AGO's	issuance	of	shares,	and	resulting	dilutive	effect,	as	if	we	had	sold	a	proportionate	share	of	our investment.	Assuming	completion	of	the	planned	share	issuances,	ACE	will	no	longer	be	deemed	to	exert	significant	influence	over	AGO	and	must account	for	our	AGO	investment	as	an	available-for-sale	equity	security	in	accordance	with	FAS	115,	Accounting	for	Certain	Investments	in	Debt	and Equity	Securities	(FAS	115).	FAS	115	requires	that	we	then	carry	our	AGO	investment	at	fair	value	with	any	unrealized	gains	and	losses	reflected	in other	comprehensive	income.	Assuming	AGO	had	completed	its	share	issuances	associated	with	the	FSA	acquisition	on	December	31,	2008,	the application	of	FAS	115	would	have	reduced	our	book	value	by	approximately	$179	million.

Other	income	and	expense	also	includes	certain	federal	excise	taxes	incurred	as	a	result	of	capital	management	initiatives.	These	transactions	are considered	capital	in	nature	and	are	excluded	from	underwriting	results.

Our	investment	portfolio	is	invested	primarily	in	fixed	income	securities	with	an	average	credit	quality	of	AA,	as	rated	by	the	independent	investment rating	service	Standard	and	Poor's	(S&P).	The	portfolio	is	externally	managed	by	independent,	professional	investment	managers.	The	average	duration of	our	fixed	income	securities,	including	the	effect	of	options	and	swaps,	was	3.6	years	at	December	31,	2008,	compared	with	3.5	years	at	December	31, 2007.	We	estimate	that	a	100	basis	point	(bps)	increase	in	interest	rates	would	reduce	our	book	value	by	approximately	$1.3	billion	at	December	31, 2008.	For	the	year	ended	December	31,	2008,	we	experienced	net	unrealized	losses	of	approximately	$2.8	billion,	primarily	due	to	widening	of	credit spreads.	We	have	the	ability	and	intent	to	hold	these	securities	until	they	recover	their	cost.	"Other	investments"	principally	comprises	direct	investments, investment	funds,	and	limited	partnerships.	Our	exposure	to	sub-prime	asset	backed	securities	was	$76	million	at	December	31,	2008,	which	represented less	than	one	percent	of	our	investment	portfolio.	We	do	not	expect	any	material	investment	loss	from	our	exposure	to	sub-prime	mortgages.	Our investment	portfolio	continues	to	be	predominantly	invested	in	investment	grade	fixed	income	securities	and	is	broadly	diversified	across	geographies, sectors	and	issuers.	Our	aggregate	investment	exposure	to	Lehman	Brothers	and	American	International	Group	has	been	and	is	a	small	percentage	of our	investment	portfolio.	We	hold	no	collateralized	debt	obligations	or	collateralized	loan	obligations	in	our	investment	portfolio.	We	provide	no	credit default	protection.	We	have	long-standing	global	credit	limits	for	our	entire	portfolio	across	the	organization.	Exposures	are	aggregated,	monitored,	and actively	managed	by	our	Global	Credit	Committee,	comprised	of	senior	executives,	including	our	Chief	Financial	Officer,	our	Chief	Risk	Officer,	our	Chief Investment	Officer	and	our	Treasurer.	We	also	have	well	established	strict	contractual	investment	rules	requiring	managers	to	maintain	highly	diversified exposures	to	individual	issuers	and	closely	monitor	investment	manager	compliance	with	portfolio	guidelines.

The	following	table	shows	the	fair	value	and	cost/amortized	cost	of	our	invested	assets	at	December	31,	2008	and	2007.

|  |  | 2008 |  | 2007 |
| :--- | :--- | :--- | :--- | :--- |
|  |  | Cost/ |  | Cost/ |
|  |  | Amortized |  | Amortized |
| (in\tmillions\tof\tU.S.\tdollars) | Fair\tValue | Cost | Fair\tValue | Cost |
| Fixed\tmaturities\tavailable\tfor\tsale | $31,155 | $33,109 | $33,184 | $32,994 |
| Fixed\tmaturities\theld\tto\tmaturity | 2,865 | 2,860 | 3,015 | 2,987 |
| Short-term\tinvestments | 3,350 | 3,350 | 2,631 | 2,631 |
|  | \t 37,370 | \t 39,319 | \t 38,830 | \t 38,612 |
| Equity\tsecurities | 988 | 1,132 | 1,837 | 1,618 |
| Other\tinvestments | 1,362 | 1,368 | 1,140 | 880 |
| Total\tinvestments | $39,720 | $41,819 | $41,807 | $41,110 |

The	fair	value	of	our	total	investments	decreased	$2.1	billion	in	2008.	The	decrease	was	primarily	due	to	unrealized	depreciation	on	investments, settlement	of	reverse	repurchase	agreements,	redemption	of	our	Preferred	Shares,	unfavorable	foreign	exchange	impact,	offset	by	the	investing	of operating	cash	flows	and	the	net	addition	of	Combined	Insurance's	investment	portfolio.	Other	investments	increased	primarily	due	to	additional	funding of	limited	partnerships	and	investment	funds.

The	following	tables	show	the	market	value	of	our	fixed	maturities	and	short-term	investments	at	December	31,	2008	and	2007.	The	first	table	lists investments	according	to	type	and	the	second	according	to	S&P	credit	rating.

| (in	millions	of	U.S.	dollars) | Market<br>Value | 2008<br>Percentage<br>of	Total | Market<br>Value | 2007<br>Percentage<br>of	Total |
| :--- | :--- | :--- | :--- | :--- |
| Treasury | $1,018 | 3% | $1,145 | 3% |
| Agency | 2,027 | 5% | 1,820 | 5% |
| Corporate | 8,744 | 23% | 9,015 | 23% |
| Mortgage-backed\tsecurities | \t 10,986 | 29% | \t 13,733 | 35% |
| Asset-backed\tsecurities | 709 | 2% | 1,150 | 3% |
| Municipal | 2,124 | 6% | 1,844 | 5% |
| Non-U.S. | 8,412 | 23% | 7,492 | 19% |
| Short-term\tinvestments | 3,350 | 9% | 2,631 | 7% |
| Total | $37,370 | 100% | $38,830 | 100% |
| AAA | $22,960 | 61% | $24,553 | 63% |
| AA | 3,374 | 9% | 3,747 | 10% |
| A | 5,497 | 15% | 4,590 | 12% |
| BBB | 3,388 | 9% | 3,297 | 8% |
| BB | 1,119 | 3% | 1,073 | 3% |
| B | 934 | 3% | 1,481 | 4% |
| Other | 98 | – | 89 | – |
| Total | $37,370 | 100% | $38,830 | 100% |

# Below-investment	grade	corporate	fixed	income	portfolio

In	accordance	with	our	investment	process,	we	invest	in	below-investment	grade	securities	through	investment	portfolios	managed	by	external investment	managers	that	have	investment	professionals	specifically	dedicated	to	this	asset	class.	At	December	31,	2008,	our	fixed	income	investment portfolio	included	below-investment	grade	and	non-rated	securities	which,	in	total,	comprised	approximately	five	percent	of	our	fixed	income	portfolio.	We define	a	security	as	being	below-investment	grade	if	it	has	an	S&P	credit	rating	of	BB	or	less.	Our	below-investment	grade	and	non-rated	portfolio includes	approximately	500	issuers,	with	the	greatest	single	exposure	being	$31	million.	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.

ACE	manages	high	yield	bonds	as	a	distinct	and	separate	asset	class	from	investment	grade	bonds.	ACE's	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. Four	external	investment	managers	are	responsible	for	high	yield	security	selection	and	portfolio	construction.	ACE's	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	(approximately	0.1	percent	of	investment	portfolio).

The	table	below	summarizes	our	significant	exposures	to	corporate	bonds	by	market	value	and	S&P	credit	rating	as	of	December	31,	2008:

| General	Electric	Co. | $459 | AAA |
| :--- | :--- | :--- |
| JP\tMorgan\tChase\t&amp;\tCo. | 365 | A+ |
| Bank\tof\tAmerica\tCorp. | 322 | A+ |
| Citigroup\tInc. | 293 | A |
| AT&amp;T\tInc. | 189 | A |
| Wells\tFargo\t&amp;\tCo. | 187 | AA |
| Goldman\tSachs\tGroup\tInc. | 179 | A |
| HSBC\tHoldings\tPlc | 178 | AA- |
| Wachovia\tCorp. | 166 | A+ |
| Comcast\tCorp. | 158 | BBB+ |
| Morgan\tStanley | 155 | A |
| Time\tWarner\tInc. | 155 | BBB+ |
| Merrill\tLynch\t&amp;\tCo.\tInc. | 148 | A+ |
| Royal\tBank\tof\tScotland\tGroup\tPlc | 139 | A |
| Verizon\tCommunication\tInc. | 138 | A |
| ConocoPhillips | 115 | A |
| Credit\tSuisse\tGroup | 106 | A |
| XTO\tEnergy\tInc. | 96 | BBB |
| Banco\tSantander\tSA | 95 | AA |
| HBOS\tPlc | 87 | A+ |
| Deutsche\tTelekom\tAG | 87 | BBB+ |
| Telecom\tItalia\tSpA | 86 | BBB |
| American\tInternational\tGroup | 83 | A- |
| Dominion\tResources\tInc./VA | 76 | A- |
| American\tExpress | 74 | A |
| Total | $4,136 |  |

# Municipal	bond	portfolio

Financial	guarantee	companies	insure	approximately	$1.0	billion	of	our	$2.1	billion	municipal	bond	portfolio.	These	investments	are	made	based	on	the underlying	credit	of	the	issuer	and,	as	such,	any	decline	in	value	because	of	a	downgrade	of	bond	insurers	would	be	minimal.	For	example,	without	the AAA	insurance	guarantees,	the	average	rating	of	this	portfolio	would	fall	to	AA	from	AA+,	which	would	result	in	a	nominal	decline	in	value.	We	would expect	a	similar	market	impact	from	the	loss	of	AAA	insurance	guarantees	on	our	$118	million	in	other	investments	wrapped	by	financial	guarantors.

# Mortgage-backed	and	asset-backed	securities

Additional	details	on	the	mortgage-backed	and	asset-backed	components	of	our	investment	portfolio	at	December	31,	2008,	are	provided	below:

# Fair	Value

# (in	millions	of	U.S.	dollars)

|  | AAA | AA | A | BBB | BB<br>and<br>below | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Mortgage-backed\tsecurities |  |  |  |  |  |  |
| Residential\tmortgage-backed\t(RMBS) |  |  |  |  |  |  |
| GNMA | $406 | $– | $– | $– | $– | $406 |
| FNMA | 4,483 | – | – | – | – | 4,483 |
| Freddie\tMac | 2,071 | – | – | – | – | 2,071 |
| Total\tagency\tRMBS | 6,960 | – | – | – | – | 6,960 |
| Non-agency\tRMBS | 1,764 | \t 56 | \t 34 | \t 24 | 7 | 1,885 |
| Total\tRMBS | 8,724 | \t 56 | \t 34 | \t 24 | 7 | 8,845 |
| Commercial\tmortgage-backed | 2,126 | 4 | 9 | 2 | – | 2,141 |
| Total\tmortgage-backed\tsecurities | $10,850 | $60 | $43 | $26 | $7 | $10,986 |
| Asset-backed\tsecurities |  |  |  |  |  |  |
| Sub-prime | $60 | $5 | $6 | $1 | $4 | $76 |
| Credit\tCards | 53 | – | \t 15 | 6 | – | 74 |
| Autos | 312 | \t 44 | 5 | 8 | – | 369 |
| Other | 183 | 3 | 3 | 1 | – | 190 |
| Total\tasset-backed\tsecurities | $608 | $52 | $29 | $16 | $4 | $709 |

# Amortized	Cost

|  | AAA | AA | A | BBB | BB	and<br>below | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Mortgage-backed\tsecurities |  |  |  |  |  |  |
| Residential\tmortgage-backed |  |  |  |  |  |  |
| GNMA | $395 | $– | $– | $– | $– | $395 |
| FNMA | 4,340 | – | – | – | – | 4,340 |
| Freddie\tMac | 1,999 | – | – | – | – | 1,999 |
| Total\tagency\tRMBS | 6,734 | – | – | – | – | 6,734 |
| Non-agency\tRMBS | 2,454 | \t 84 | 63 | 43 | 7 | 2,651 |
| Total\tRMBS | 9,188 | \t 84 | 63 | 43 | 7 | 9,385 |
| Commercial\tmortgage-backed | 2,434 | 4 | 9 | 3 | – | 2,450 |
| Total\tmortgage-backed\tsecurities | $ 11,622 | $88 | $72 | $ 46 | $7 | $11,835 |
| Asset-backed\tsecurities |  |  |  |  |  |  |
| Sub-prime | $77 | $6 | $8 | $1 | $4 | $96 |
| Credit\tCards | 55 | – | 16 | 8 | – | 79 |
| Autos | 324 | \t 49 | 5 | 9 | – | 387 |
| Other | 187 | 5 | 3 | – | – | 195 |
| Total\tasset-backed\tsecurities | $643 | $60 | $32 | $ 18 | $4 | $757 |

# Restricted	Assets

We	are	required	to	maintain	assets	on	deposit	with	various	regulatory	authorities	to	support	our	insurance	and	reinsurance	operations.	These requirements	are	generally	promulgated	in	the	statutory	regulations	of	the	individual	jurisdictions.	The	assets	on	deposit	are	available	to	settle	insurance and	reinsurance	liabilities.	We	also	utilize	trust	funds	in	certain	large	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	debt	instruments.	Refer	to	Notes	9	and	10	to	the	Consolidated	Financial	Statements,	under	Item	8,	for	more	information. The	following	table	identifies	the	value	of	restricted	assets	at	December	31,	2008	and	2007.

| (in	millions	of	U.S.	dollars) | 2008 | 2007 |
| :--- | :--- | :--- |
| Deposits\twith\tU.S.\tregulatory\tauthorities | $1,165 | $1,069 |
| Deposits\twith\tnon-U.S.\tregulatory\tauthorities | 1,863 | \t 2,101 |
| Other\tpledged\tassets | 805 | 510 |
| Trust\tfunds | 7,712 | \t 5,775 |
|  | $11,545 | $9,455 |

The	value	of	restricted	assets	increased	22	percent	in	2008	compared	with	2007,	primarily	due	to	the	increased	use	of	trust	funds	in	support	of	inter- company	reinsurance	and	third	party	variable	annuity	business.

# Reinsurance	Recoverable	on	Ceded	Reinsurance

The	composition	of	our	reinsurance	recoverable	at	December	31,	2008	and	2007,	is	as	follows:

| (in	millions	of	U.S.	dollars) | 2008 | 2007 |
| :--- | :--- | :--- |
| Reinsurance\trecoverable\ton\tunpaid\tlosses\tand\tloss\texpenses | $13,386 | $13,990 |
| Provision\tfor\tuncollectible\treinsurance\ton\tunpaid\tlosses\tand\tloss\texpenses | (451) | (470) |
| Reinsurance\trecoverable\ton\tunpaid\tlosses\tand\tloss\texpenses,\tnet\tof\ta\tprovision\tfor\tuncollectible\treinsurance | \t 12,935 | \t 13,520 |
| Reinsurance\trecoverable\ton\tpaid\tlosses\tand\tloss\texpenses | 1,122 | 1,050 |
| Provision\tfor\tuncollectible\treinsurance\ton\tpaid\tlosses\tand\tloss\texpenses | (140) | (216) |
| Net\treinsurance\trecoverable | $13,917 | $14,354 |
| Reinsurance\trecoverable\ton\tfuture\tpolicy\tbenefits | $259 | $8 |

We	evaluate	the	financial	condition	of	our	reinsurers	and	potential	reinsurers	on	a	regular	basis	and	also	monitor	concentrations	of	credit	risk	with reinsurers.	The	provision	for	uncollectible	reinsurance	is	required	principally	due	to	the	failure	of	reinsurers	to	indemnify	us,	primarily	because	of	disputes under	reinsurance	contracts	and	insolvencies.	The	decrease	in	reinsurance	recoverable	was	due	to	a	number	of	factors,	the	largest	contributors	are	the decline	due	to	foreign	exchange	revaluation	of	$387	million,	collections	on	run-off	business	of	approximately	$774	million,	a	decrease	in	gross	and	ceded IBNR	on	run-off	business	as	a	result	of	a	reserve	review	of	$180	million	offset	by	an	increase	of	approximately	$450	million	of	catastrophe	losses	ceded, primarily	related	to	Hurricanes	Gustav	and	Ike.	The	acquisition	of	Combined	Insurance	added	$33	million	to	our	reinsurance	recoverable	on	unpaid	losses and	loss	expenses	and	$261	million	to	our	reinsurance	recoverable	on	future	policy	benefits	at	the	date	of	acquisition.

# Asbestos	and	Environmental	and	Other	Run-off	Liabilities

Included	in	our	liabilities	for	losses	and	loss	expenses	are	amounts	for	A&E.	These	A&E	liabilities	principally	relate	to	claims	arising	from	bodily-injury claims	related	to	asbestos	products	and	remediation	costs	associated	with	hazardous	waste	sites.	The	estimation	of	these	liabilities	is	particularly sensitive	to	future	changes	in	the	legal,	social,	and	economic	environment.	We	have	not	assumed	any	such	future	changes	in	setting	the	value	of	our A&E	reserves,	which	include	provisions	for	both	reported	and	IBNR	claims.

Our	exposure	to	A&E	claims	principally	arises	out	of	liabilities	acquired	when	we	purchased	Westchester	Specialty	in	1998	and	the	P&C	business of	CIGNA	in	1999,	with	the	larger	exposure	contained	within	the	liabilities	acquired	in	the	CIGNA	transaction.	In	1996,	prior	to	our	acquisition	of	the	P&C business	of	CIGNA,	the	Pennsylvania	Insurance	Commissioner	approved	a	plan	to	restructure	INA	Financial	Corporation	and	its	subsidiaries	(the Restructuring)	which	included	the	division	of	Insurance	Company	of	North	America	(INA)	into	two	separate	corporations:	(1)	an	active	insurance company	that	retained	the	INA	name	and	continued	to	write	P&C	business	and	(2)	an	inactive	run-off	company,	now	called	Century	Indemnity	Company (Century).	As	a	result	of	the	division,	predominantly	all	A&E	and	certain	other	liabilities	of	INA	were	allocated	to	Century	and	extinguished,	as	a	matter	of Pennsylvania	law,	as	liabilities	of	INA.	As	part	of	the	Restructuring,	most	A&E	liabilities	of	various	U.S.	affiliates	of	INA	were	reinsured	to	Century,	and Century	and	certain	other	run-off	companies	having	A&E	and	other	liabilities	were	contributed	to	Brandywine	Holdings.	As	part	of	the	1999	acquisition	of the	P&C	business	of	CIGNA,	we	acquired	Brandywine	Holdings	and	its	various	subsidiaries.	For	more	information	refer	to	"Brandywine	Run-Off	Entities" below.

During	2008,	we	conducted	an	internal,	ground-up	review	of	our	consolidated	A&E	liabilities	as	of	December	31,	2007.	During	the	same	period,	a team	of	external	actuaries	performed	an	evaluation	as	to	the	adequacy	of	the	reserves	of	Century.	This	external	review	was	conducted	in	accordance with	the	Brandywine	Restructuring	Order,	which	requires	that	an	independent	actuarial	review	of	Century's	reserves	be	completed	every	two	years. Management	takes	full	responsibility	for	the	estimation	of	its	A&E	liabilities.	As	a	result	of	our	internal	review,	we	increased	our	net	loss	reserves	for	the Brandywine	operations,	including	A&E,	by	$65	million	(net	of	reinsurance	provided	by	NICO),	while	the	gross	loss	reserves	increased	by	$143	million.	The conclusions	of	the	external	review	provided	estimates	of	ultimate	net	Brandywine	liabilities	that	are	little	changed	from	a	comparable	study	in	2006.	We also	decreased	our	net	loss	reserves	for	Westchester	Specialty's	A&E	and	other	liabilities	by	$13	million	(net	of	NICO),	while	the	gross	loss	reserves decreased	by	$10	million.	Our	A&E	reserves	are	not	discounted	and	do	not	reflect	any	anticipated	future	changes	in	the	legal,	social	or	economic environment,	or	any	benefit	from	future	legislative	reforms.

The	table	below	presents	a	roll	forward	of	our	consolidated	A&E	loss	reserves	(excludes	Other	run-off	liabilities),	allocated	and	unallocated	loss expense	reserves	for	A&E	exposures,	and	the	provision	for	uncollectible	paid	and	unpaid	reinsurance	recoverables	for	the	year	ended	December	31, 2008.

|  | Asbestos | Asbestos | Environmental^(2) | Environmental^(2) | Total | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| (in\tmillions\tof\tU.S.\tdollars) | Gross | Net^(1) | Gross | Net | Gross | Net |
| Balance\tat\tDecember\t31,\t2007 | $2,942 | $1,482 | $418 | $393 | $3,360 | $1,875 |
| Incurred\tactivity | 97 | 2 | 19 | (2) | 116 | – |
| Payment\tactivity | (347) | (99) | (123) | (75) | (470) | (174) |
| Foreign\tcurrency\trevaluation | (63) | (16) | (4) | (2) | (67) | (18) |
| Balance\tat\tDecember\t31,\t2008 | $2,629 | $1,369 | $310 | $314 | $2,939 | $1,683 |

(1)	The	balance	at	December	31,	2007,	was	reduced	by	$10	million	to	reflect	reserve	reclassification	between	Asbestos	and	Other,	refer	to	"Westchester	Specialty	–	impact	of	NICO	contracts	on ACE's	run-off	liabilities".

(2)	At	December	31,	2008,	net	environmental	reserves	are	higher	than	gross	environmental	reserves	because	they	include	the	provision	for	uncollectible	paid	reinsurance	recoverables.

The	A&E	net	loss	reserves	including	allocated	and	unallocated	loss	expense	reserves	and	provision	for	uncollectible	reinsurance	at	December	31,	2008, of	$1.683	billion	shown	in	the	above	table	are	comprised	of	$1.29	billion	in	reserves	held	by	Brandywine	run-off	companies,	$122	million	of	reserves	held by	Westchester	Specialty,	$154	million	of	reserves	held	by	ACE	Bermuda	and	$117	million	of	reserves	held	by	Insurance	–	Overseas	General.

The	net	figures	in	the	above	table	reflect	third-party	reinsurance	other	than	reinsurance	provided	by	NICO	under	three	aggregate	excess	of	loss contracts	described	below	(collectively,	the	NICO	contracts).	We	exclude	the	NICO	contracts	as	they	cover	non-A&E	liabilities	as	well	as	A&E liabilities.	The	split	of	coverage	provided	under	the	NICO	contracts	for	A&E	liabilities	as	compared	to	non-A&E	liabilities	is	entirely	dependant	on	the timing	of	the	payment	of	the	related	claims.	Our	ability	to	make	an	estimate	of	this	split	is	not	practicable.	We	believe,	instead,	that	the	A&E	discussion	is best	provided	excluding	the	NICO	contracts,	while	separately	discussing	the	NICO	contracts	in	relation	to	the	total	subject	business,	both	A&E	and	non- A&E,	covered	by	those	contracts.	With	certain	exceptions,	the	NICO	contracts	provide	coverage	for	our	net	A&E	incurred	losses	and	allocated	loss expenses	within	the	limits	of	coverage	and	above	ACE's	retention	levels.	These	exceptions	include	losses	arising	from	certain	operations	of	Insurance	– Overseas	General	and	participations	by	ACE	Bermuda	as	a	co-reinsurer	or	retrocessionaire	in	the	NICO	contracts.

# Brandywine	run-off	–	impact	of	NICO	contracts	on	ACE's	run-off	liabilities

As	part	of	the	acquisition	of	CIGNA's	P&C	business,	NICO	provided	$2.5	billion	of	reinsurance	protection	to	Century	on	all	Brandywine	loss	and	allocated loss	adjustment	expense	reserves	and	on	the	A&E	reserves	of	various	ACE	INA	insurance	subsidiaries	reinsured	by	Century	(in	each	case,	including uncollectible	reinsurance).	The	benefits	of	this	NICO	contract	(the	"Brandywine	NICO	Agreement")	flow	to	the	other	Brandywine	companies	and	to	the ACE	INA	insurance	subsidiaries	through	agreements	between	those	companies	and	Century.	The	Brandywine	NICO	Agreement	was	exhausted	on	an incurred	basis	in	the	fourth	quarter	of	2002.

The	following	table	presents	a	roll	forward	of	net	loss	reserves,	allocated	and	unallocated	loss	expense	reserves,	and	provision	for	uncollectible paid	and	unpaid	reinsurance	recoverables	in	respect	of	Brandywine	operations	only,	including	the	impact	of	the	Brandywine	NICO	Agreement.	The	table presents	Brandywine	incurred	activity	for	the	year	ended	December	31,	2008.

|  |  | Brandywine |  | NICO | Net	of	NICO |
| :--- | :--- | :--- | :--- | :--- | :--- |
| (in\tmillions\tof\tU.S.\tdollars) | A&amp;E^(1) | Other^(1) | Total | Coverage^(2) | Coverage |
| Balance\tat\tDecember\t31,\t2007 | $1,344 | $1,089 | $2,433 | $1,630 | $803 |
| Incurred\tactivity | 61 | 6 | 67 | – | 67 |
| Payment\tactivity | (115) | (83) | (198) | (213) | 15 |
| Balance\tat\tDecember\t31,\t2008 | $1,290 | $1,012 | $2,302 | $1,417 | $885 |

(1)	Other	consists	primarily	of	workers'	compensation,	non-A&E	general	liability	losses,	and	provision	for	uncollectible	reinsurance	on	non-A&E	business.	The	A&E	and	Other	balances	were	increased by	$21	million	and	$25	million,	respectively,	at	December	31,	2007,	to	more	properly	reflect	unallocated	loss	adjustment	expense	reserves	as	part	of	Brandywine.	The	Other	reserve	balance	at December	31,	2007,	was	further	increased	by	$24	million	to	reflect	final	activity	on	the	fourth	quarter	2007	NICO	bordereau.	As	a	result	of	these	adjustments,	the	total	A&E	and	Other	balances	at December	31,	2007,	have	been	increased	by	$70	million.

(2)	The	balance	at	December	31,	2007,	has	been	increased	by	$33	million	to	reflect	final	activity	on	the	fourth	quarter	2007	NICO	bordereau.

The	incurred	activity	was	primarily	related	to	our	internal	review	of	our	consolidated	A&E	liabilities	resulting	in	an	increase	to	our	net	loss	reserves	for	the Brandywine	operations,	including	A&E,	by	$65	million,	while	the	gross	loss	reserves	increased	by	$143	million.

# Westchester	Specialty—impact	of	NICO	contracts	on	ACE's	run-off	liabilities

As	part	of	the	acquisition	of	Westchester	Specialty	in	1998,	NICO	provided	a	75	percent	pro-rata	share	of	$1	billion	of	reinsurance	protection	on	losses and	loss	adjustment	expenses	incurred	on	or	before	December	31,	1996,	in	excess	of	a	retention	of	$721	million	(the	1998	NICO	Agreement).	NICO	has also	provided	an	85	percent	pro-rata	share	of	$150	million	of	reinsurance	protection	on	losses	and	allocated	loss	adjustment	expenses	incurred	on	or before	December	31,	1992,	in	excess	of	a	retention	of	$755	million	(the	1992	NICO	Agreement).	At	December	31,	2008,	the	remaining	unused	incurred limit	under	the	1998	NICO	Agreement	was	$530	million,	which	is	only	available	for	losses	and	loss	adjustment	expenses.	The	increase	in	the	remaining unused	limit	was	primarily	in	connection	with	recording	the	results	of	our	internal	reserve	review.	The	1992	NICO	Agreement	is	exhausted	on	an	incurred basis.

The	following	table	presents	a	roll	forward	of	net	loss	reserves,	allocated	and	unallocated	loss	expense	reserves,	and	provision	for	uncollectible paid	and	unpaid	reinsurance	recoverables	in	respect	of	1996	and	prior	Westchester	Specialty	operations	that	are	the	subject	business	of	the	NICO covers.	The	table	presents	incurred	activity	for	the	year	ended	December	31,	2008.

|  |  | Westchester	Specialty |  | NICO | Net	of	NICO |
| :--- | :--- | :--- | :--- | :--- | :--- |
| (in\tmillions\tof\tU.S.\tdollars) | A&amp;E^(1) | Other^(1) | Total | Coverage | Coverage |
| Balance\tat\tDecember\t31,\t2007 | $214 | $130 | $344 | $298 | $46 |
| Incurred\tactivity | (51) | (3) | (54) | (41) | (13) |
| Payment\tactivity | (41) | (2) | (43) | (41) | (2) |
| Balance\tat\tDecember\t31,\t2008 | $122 | $125 | $247 | $216 | $31 |

(1)	The	A&E	balance	at	December	31,	2007,	has	been	reduced	by	$10	million	to	reflect	reserve	classification	between	Asbestos	and	Other.	Other	reserves,	which	consist	primarily	of	non-A&E	general liability	and	products	liability	losses,	were	increased	by	$10	million	at	December	31,	2007.

The	incurred	activity	was	primarily	related	to	our	internal	review	of	our	consolidated	A&E	liabilities	resulting	in	a	decrease	to	our	net	loss	reserves	for Westchester	Specialty's	A&E	and	other	liabilities	by	$13	million	(net	of	NICO),	while	the	gross	loss	reserves	decreased	by	$10	million.

# Reserving	considerations

For	asbestos,	we	face	claims	relating	to	policies	issued	to	manufacturers,	distributors,	installers,	and	other	parties	in	the	chain	of	commerce	for	asbestos and	products	containing	asbestos.	Claims	can	be	filed	by	individual	claimants	or	groups	of	claimants	with	the	potential	for	hundreds	of	individual claimants	at	one	time.	Claimants	will	generally	allege	damages	across	an	extended	time	period	which	may	coincide	with	multiple	policies	for	a	single insured.

Environmental	claims	present	exposure	for	remediation	and	defense	costs	associated	with	the	contamination	of	property	as	a	result	of	pollution.	It is	common,	especially	for	larger	defendants,	to	be	named	as	a	potentially	responsible	party	(PRP)	at	multiple	sites.	Our	environmental	claim	count definition	is	based	on	policyholder	by	site	numbers.	For	example,	if	a	policyholder	were	named	as	a	PRP	at	ten	pollution	sites,	we	would	track	this	as	ten claim	counts.	In	addition,	should	we	have	multiple	policyholders	identified	as	PRP's	at	the	same	waste	site,	each	would	constitute	a	separate	claim	count.

The	table	below	summarizes	count	information	for	asbestos	and	environmental	claims	for	the	years	ended	December	31,	2008	and	2007,	for	direct policies	only,	and	excludes	claims	from	assumed	reinsurance.

|  | 2008 | 2007 |
| :--- | :--- | :--- |
| Asbestos\t(by\tcausative\tagent) |  |  |
| Open\tat\tthe\tbeginning\tof\tyear | 1,169 | 1,391 |
| Newly\treported | 75 | 87 |
| Closed\tor\totherwise\tdisposed | 46 | 309 |
| Open\tat\tend\tof\tyear | 1,198 | 1,169 |
| Environmental\t(by\tsite) |  |  |
| Open\tat\tthe\tbeginning\tof\tyear | 5,132 | 6,424 |
| Newly\treported | 250 | 206 |
| Closed\tor\totherwise\tdisposed | 678 | 1,498 |
| Open\tat\tend\tof\tyear | 4,704 | 5,132 |

Closed	or	otherwise	disposed	claims	were	significantly	higher	in	2007,	compared	with	2008,	following	a	review	in	2007	of	inactive	files	that	revealed	that payment	was	no	longer	sought	on	the	files,	therefore,	the	files	were	closed.

The	following	table	shows	our	gross	and	net	survival	ratios	for	our	A&E	loss	reserves	and	ALAE	reserves	at	December	31,	2008	and	2007.

|  | 3	Year | 2008	Survival	Ratios | 1	Year |  | 3	Year | 2007	Survival	Ratios | 1	Year |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Gross | Net | Gross | Net | Gross | Net | Gross | Net |
| 8.3 | 9.6 | 8.3 | 18.2 | 10.2 | 10.7 | 10.6 | 10.6 |
| 3.5 | 5.3 | 2.7 | 4.5 | 4.5 | 6.6 | 5.7 | 9.8 |
| 7.2 | 8.2 | 6.8 | 11.2 | 8.9 | 9.3 | 9.6 | 10.4 |

The	net	ratios	reflect	third	party	reinsurance	other	than	the	aggregate	excess	reinsurance	provided	under	the	NICO	contracts.	These	survival	ratios	are calculated	by	dividing	the	asbestos	or	environmental	loss	and	ALAE	reserves	by	the	average	asbestos	or	environmental	loss	and	ALAE	payments	for	the three	most	recent	calendar	years	(3	year	survival	ratio),	and	by	asbestos	or	environmental	loss	and	ALAE	payments	in	2008	(1	year	survival	ratio).	The survival	ratios	provide	only	a	very	rough	depiction	of	reserves,	and	are	significantly	impacted	by	a	number	of	factors	such	as	aggressive	settlement practices,	variations	in	gross	to	ceded	relationships	within	the	asbestos	or	environmental	claims	and	levels	of	coverage	provided.	We,	therefore,	urge caution	in	using	these	very	simplistic	ratios	to	gauge	reserve	adequacy	and	note	that	the	1	year	survival	ratios,	particularly,	are	likely	to	move considerably	from	year	to	year	for	the	reasons	just	described.

The	1	year	gross	survival	ratios	for	both	asbestos	and	environmental	decreased	markedly	from	2007	due	to	a	number	of	large	settlements	in	2008. This	has	resulted	in	a	decline	in	the	three	year	gross	ratios	as	well,	though	to	a	lesser	degree	than	seen	in	the	1	year	ratios.	The	1	year	net	asbestos ratio	of	18.2	was	abnormally	high	because	of	the	relatively	large	ceded	reinsurance	associated	with	asbestos	payments	in	2008.

# Brandywine	run-off	entities

In	addition	to	housing	a	significant	portion	of	our	A&E	exposure,	the	Brandywine	operations	include	run-off	liabilities	related	to	various	insurance	and reinsurance	businesses.	The	following	companies	comprise	ACE's	Brandywine	operations:	Century	(a	Pennsylvania	insurer),	Century	Re	(a Pennsylvania	insurer),	and	Century	International	Reinsurance	Company	Ltd.	(a	Bermuda	insurer	(CIRC)).	All	of	the	Brandywine	companies	are	direct	or indirect	subsidiaries	of	Brandywine	Holdings.

The	U.S.-based	ACE	INA	companies	assumed	two	contractual	obligations	in	respect	of	the	Brandywine	operations	in	connection	with	the Restructuring:	a	dividend	retention	fund	obligation	and	a	surplus	maintenance	obligation	in	the	form	of	an	aggregate	excess	of	loss	reinsurance agreement.	INA	Financial	Corporation	established	and	funded	a	dividend	retention	fund	(the	Dividend	Retention	Fund)	consisting	of	$50	million	plus investment	earnings.	Pursuant	to	an	interpretation	of	the	Brandywine	restructuring	order,	the	full	balance	of	the	Dividend	Retention	Fund	was	contributed to	Century	as	of	December	31,	2002.	Under	the	Restructuring	Order,	while	any	obligation	to	maintain	the	Dividend	Retention	Fund	is	in	effect,	to	the extent	dividends	are	paid	by	INA	Holdings	Corporation	to	its	parent,	INA	Financial	Corporation,	and	to	the	extent	INA	Financial	Corporation	then	pays such	dividends	to	INA	Corporation,	a	portion	of	those	dividends	must	be	withheld	to	replenish	the	principal	of	the	Dividend	Retention	Fund	to	$50	million within	five	years.	In	2008,	2007	and	2006,	no	such	dividends	were	paid	and,	therefore,	no	replenishment	of	the	Dividend	Retention	Fund	occurred.	The Dividend	Retention	Fund	may	not	be	terminated	without	prior	written	approval	from	the	Pennsylvania	Insurance	Commissioner.

In	addition,	an	ACE	INA	insurance	subsidiary	provided	reinsurance	coverage	to	Century	in	the	amount	of	$800	million	under	an	aggregate	excess of	loss	reinsurance	agreement	(the	Aggregate	Excess	of	Loss	Agreement)	if	the	statutory	capital	and	surplus	of	Century	falls	below	$25	million	or	if Century	lacks	liquid	assets	with	which	to	pay	claims	as	they	become	due,	after	giving	effect	to	the	contribution	of	the	balance,	if	any,	of	the	Dividend Retention	Fund.

Effective	December	31,	2004,	ACE	INA	Holdings	contributed	$100	million	to	Century	in	exchange	for	a	surplus	note.	After	giving	effect	to	the contribution	and	issuance	of	the	surplus	note,	the	statutory	surplus	of	Century	at	December	31,	2008,	was	$25	million	and	approximately	$112	million	in statutory-basis	losses	have	been	ceded	to	the	Aggregate	Excess	of	Loss	Agreement	on	an	inception-to-date	basis.	Century	reports	the	amount	ceded under	the	Aggregate	Excess	of	Loss	Agreement	in	accordance	with	statutory	accounting	principles,	which	differ	from	GAAP	by,	among	other	things, allowing	Century	to	discount	its	liabilities,	including	certain	asbestos	related	and	environmental	pollution	liabilities.	The	reduction	in	2008	in	statutory- basis	losses	ceded	to	the	Aggregate	Excess	of	Loss	Agreement	resulted	principally	from	the	cession	of	certain	reinsurance	amounts	associated	with estimates	of	reinsurer	bad	debt,	to	affiliated	ACE	companies,	and	from	an	increase	in	discount	benefit.	For

GAAP	reporting	purposes,	intercompany	reinsurance	recoverables	related	to	the	Aggregate	Excess	of	Loss	Agreement	are	eliminated	upon consolidation.	To	estimate	ACE's	remaining	claim	exposure	under	the	Aggregate	Excess	of	Loss	Agreement	on	a	GAAP	basis,	we	adjust	the	statutory cession	to	exclude	the	discount	embedded	in	statutory	loss	reserves	and	we	adjust	the	statutory	provision	for	uncollectible	reinsurance	to	a	GAAP	basis amount.	At	December	31,	2008,	approximately	$407	million	in	GAAP	basis	losses	were	ceded	under	the	Aggregate	Excess	of	Loss	Agreement,	leaving	a remaining	limit	of	coverage	under	that	agreement	of	approximately	$393	million.	At	December	31,	2007,	the	remaining	limit	of	coverage	under	the agreement	was	$228	million.	The	reduction	in	GAAP-basis	losses	ceded	to	the	Aggregate	Excess	of	Loss	Agreement	resulted	principally	from	the previously	mentioned	cession	of	certain	reinsurance	bad	debts	to	affiliated	ACE	companies.	While	we	believe	ACE	has	no	legal	obligation	to	fund	losses above	the	Aggregate	Excess	of	Loss	Agreement	limit	of	coverage,	ACE's	consolidated	results	would	nevertheless	continue	to	include	any	losses	above the	limit	of	coverage	for	so	long	as	the	Brandywine	companies	remain	consolidated	subsidiaries	of	ACE.

# Uncertainties	relating	to	ACE's	ultimate	Brandywine	exposure

In	addition	to	the	Dividend	Retention	Fund	and	Aggregate	Excess	of	Loss	Agreement	commitments	described	above,	certain	ACE	entities	are	primarily liable	for	asbestos,	environmental,	and	other	exposures	that	they	have	reinsured	to	Century.	Accordingly,	if	Century	were	to	become	insolvent	and	ACE were	to	lose	control	of	Century,	some	or	all	of	the	recoverables	due	to	these	ACE	companies	from	Century	could	become	uncollectible,	yet	those	ACE entities	would	continue	to	be	responsible	to	pay	claims	to	their	insureds	or	reinsureds.	As	of	December	31,	2008,	the	aggregate	reinsurance	balances ceded	by	the	active	ACE	companies	to	Century	were	approximately	$1.3	billion.	At	December	31,	2008,	Century's	carried	gross	reserves	(including reserves	ceded	by	the	active	ACE	companies	to	Century)	were	$3.1	billion.	We	believe	the	intercompany	reinsurance	recoverables,	which	relate	to liabilities	payable	over	many	years	(i.e.,	25	years	or	more),	are	not	impaired	at	this	time.	A	substantial	portion	of	the	liabilities	ceded	to	Century	by	its affiliates	have	in	turn	been	ceded	by	Century	to	NICO	and,	as	of	December	31,	2008,	approximately	$1.4	billion	of	cover	remains	on	a	paid	basis.	Should Century's	loss	reserves	experience	adverse	development	in	the	future	and	should	Century	be	placed	into	rehabilitation	or	liquidation,	the	reinsurance recoverables	due	from	Century	to	its	affiliates	would	be	payable	only	after	the	payment	in	full	of	certain	expenses	and	liabilities,	including	administrative expenses	and	direct	policy	liabilities.	Thus,	the	intercompany	reinsurance	recoverables	would	be	at	risk	to	the	extent	of	the	shortage	of	assets	remaining to	pay	these	recoverables.	As	of	December	31,	2008,	losses	ceded	by	Century	to	the	active	ACE	companies	and	other	amounts	owed	to	Century	by	the active	ACE	companies	were	approximately	$465	million	in	the	aggregate.

# Catastrophe	Management

We	continue	to	closely	monitor	our	catastrophe	accumulation	around	the	world.	Our	modeled	annual	aggregate	1	in	100	year	return	period	U.S. hurricane	probable	maximum	loss,	net	of	reinsurance	is	approximately	$1.2	billion;	i.e.,	according	to	the	model	there	is	a	one	percent	chance	that	ACE's losses	incurred	in	any	year	from	U.S.	hurricanes	could	be	in	excess	of	$1.2	billion	(or	nine	percent	of	our	total	shareholders'	equity	at	December	31, 2008).	We	estimate	that	at	such	hypothetical	loss	levels,	aggregate	industry	losses	would	be	approximately	$141	billion.	Our	modeled	single	occurrence 1	in	100	return	period	California	earthquake	probable	maximum	loss,	net	of	reinsurance	is	approximately	$887	million;	i.e.,	according	to	the	model	there is	a	one	percent	chance	that	ACE's	losses	incurred	in	any	single	California	earthquake	event	could	be	in	excess	of	$887	million	(or	approximately	six percent	our	total	shareholders'	equity	at	December	31,	2008).	We	estimate	that	at	such	hypothetical	loss	levels,	the	industry	losses	would	be approximately	$39	billion.	ACE's	modeled	losses	reflect	our	in-force	portfolio	as	of	October	1,	2008	and	reinsurance	program	as	of	January	1,	2009.

The	modeling	estimates	of	both	ACE	and	industry	loss	levels	are	inherently	uncertain	owing	to	key	assumptions.	First,	while	the	use	of	third-party catastrophe	modeling	packages	to	simulate	potential	hurricane	and	earthquake	losses	is	prevalent	within	the	insurance	industry,	the	models	are	reliant upon	significant	meteorology,	seismology,	and	engineering	assumptions	to	estimate	hurricane	and	earthquake	losses.	In	particular,	modeled	hurricane and	earthquake	events	are	not	always	a	representation	of	actual	events	and	ensuing	additional	loss	potential.	Second,	there	is	no	universal	standard	in the	preparation	of	insured	data	for	use	in	the	models	and	the	running	of	the	modeling	software.	Third,	we	are	reliant	upon	third-party	estimates	of	industry insured	exposures	and	there	is	significant	variation	possible	around	the	relationship	between	ACE's	loss	and	that	of	the	industry	following	an	event. Fourth,	we	assume	that	our	reinsurance	recoveries	following	an	event	are	fully	collectible.	These	loss	estimates	do	not	represent	ACE's	potential maximum	exposures	and	it	is	highly	likely	that	ACE's	actual	incurred	losses	would	vary	materially	from	the	modeled	estimates.

# Natural	Catastrophe	Reinsurance	Program

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

First,	for	losses	arising	out	of	North	America,	our	core	traditional	program	renewed	on	January	1,	2009,	and	we	have	purchased	reinsurance coverage	with	the	first	layer	being	$200	million	in	excess	of	$500	million	in	all-risk	coverage.	We	also	purchased	a	reinsurance	treaty	that	provides	$95 million	part	of	$150	million	in	coverage	for	U.S.	property	perils	other	than	U.S.	wind	in	excess	of	$700	million.	In	addition,	to	complement	our	core program,	we	purchased	$50	million	part	of	$150	million	in	excess	of	$960	million	and	approximately	50	percent	of	$49	million	in	excess	of	$911	million. Each	program	noted	above	has	a	single	reinstatement	available.	In	addition	to	the	foregoing,	we	have	in	place	a	multi-year,	peril-specific	program	from	a major	reinsurer	that	is	backed	by	their	credit	worthiness	and	the	issuance	of	fully	collateralized	catastrophe	bonds.	Under	this	coverage,	we	have	$200 million	of	U.S.	hurricane	coverage	in	excess	of	an	attachment	point	of	approximately	$712	million.	In	addition,	we	have	purchased	U.S.	earthquake coverage	with	a	territorial	scope	of	California,	the	Pacific	Northwest,	and	the	central	U.S.	This	cover	is	$50	million	part	of	$200	million	of	loss	incurred	in excess	of	an	attachment	point	of	$690	million.	Finally,	we	also	purchased	a	combined	U.S.	earthquake	(covering	the	three	territories	noted	above)	and U.S.	hurricane	top	layer	cover	of	$100	million	part	of	$150	million	of	loss	incurred	in	excess	of	an	attachment	point	of	$960	million.	These	multi-year programs	do	not	have	a	reinstatement	feature.	To	keep	the	expected	loss	the	same	each	year	of	these	multi-year	covers,	the	attachment	point	is adjusted	annually,	either	up	or	down,	based	upon	an	independent	modeling	firm's	review	of	the	exposure	data	underlying	each	program.	Fifty	percent	of the	$200	million	in	excess	of	the	$712	million	attachment	point	in	wind	coverage,	noted	above,	will	expire	in	June	2009.	We	expect	to	replace	this	layer with	a	like	amount	of	coverage	but	the	final	placement	will	be	dependent	upon	price	and	terms	available	at	that	time.	By	way	of	comparison,	the	2009 program	has	potentially	approximately	$20	million	more	in	coverage	for	U.S.	hurricane	and	California	earthquake	than	the	expiring	program	but	our retention	has	increased.	We	consider	our	effective	retention	to	be	approximately	$500	million	but	this	will	depend	upon	the	nature	of	the	loss	and	the interplay	between	the	underlying	per	risk	programs	and	certain	other	coverages	purchased	by	individual	business	units.

Second,	for	losses	arising	outside	of	the	U.S.	and	effective	July	1,	2008,	our	core	program	is	made	up	of	two	layers.	We	have	protection	of	$50 million	from	a	single	catastrophic	event	in	excess	of	the	retention	of	$50	million	with	two	reinstatements.	In	addition,	we	have	another	layer	that	provides $150	million	in	protection	in	excess	of	$100	million	with	one	reinstatement.	There	is	further	protection	above	this	core	program	for	specific	geographic regions,	being	$100	million	in	excess	of	$250	million	for	Asia	Pacific	and	$150	million	in	excess	of	$250	million	for	Europe.	Each	of	these	top	layers	has	a single	reinstatement.	In	addition,	there	are	various	underlying	per	risk	and	catastrophe	treaties	underlying	the	core	program's	retention	of	$50	million.	In comparison	to	the	prior	year,	the	core	program	and	the	specific	layers	for	Asia	Pacific	and	Europe	provide	the	same	amount	of	coverage.

# Crop	Insurance

We	are,	and	have	been	since	the	1980s,	one	of	the	leading	writers	of	crop	insurance	in	the	U.S.	and	conduct	that	business	through	Rain	and	Hail	L.L.C., a	managing	general	agency	(MGA).	We	provide	protection	throughout	the	U.S.	and	are	therefore	geographically	diversified,	which	reduces	the	risk	of exposure	to	a	single	event	or	a	heavy	accumulation	of	losses	in	any	one	region.

Our	crop	insurance	book	comprises	two	components	–	multi-peril	crop	insurance	(MPCI)	and	hail	insurance.

The	MPCI	program	is	a	partnership	with	the	U.S.	Department	of	Agriculture	(USDA).	The	policies	cover	crop	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.

Our	hail	program	is	a	private	offering.	We	use	industry	data	to	develop	our	own	rates	and	forms	for	the	coverage	offered.	The	policy	primarily protects	farmers	against	yield	reduction	caused	by	hail	and/or	fire,	and	related	costs	such	as	transit	to	storage.	We	offer	various	deductibles	to	allow	the grower	to	partially	self-insure	for	a	reduced	premium	cost.	We	limit	our	hail

exposures	through	the	use	of	township	liability	limits,	quota-share	reinsurance	cessions,	and	stop-loss	reinsurance	on	our	net	retained	hail	business. On	the	MPCI	business,	we	recognize	net	premiums	written	as	we	receive	acreage	reports	from	the	policyholders	on	the	various	crops	throughout the	U.S.	The	program	has	specific	timeframes	as	to	when	producers	must	report	acreage	to	us.	These	reports	allow	us	to	determine	the	actual	premium associated	with	the	liability	that	is	being	planted.	Once	the	net	premium	written	has	been	booked,	the	premium	is	then	earned	over	the	growing	season for	the	crops.	Given	the	major	crops	that	are	covered	in	the	program,	we	typically	see	a	substantial	written	premium	impact	in	the	second	and	third quarter	and	the	earned	premium	is	also	more	concentrated	in	the	second	and	third	quarters.

The	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.	During	the	first quarter	of	each	calendar	year	our	MGA	reports	to	us	the	results	from	the	previous	crop	year.	Typically,	this	results	in	an	adjustment	to	the	previously estimated	losses	and	loss	expenses	and	profit	share	commission	which	impacts	our	policy	acquisition	costs.	For	example,	for	the	quarter	ended March	31,	2008,	the	2007	crop-year	settlement	reduced	our	losses	and	loss	expenses	by	approximately	$105	million	and	gave	rise	to	$44	million	in	profit share	commission	resulting	in	a	net	pre-tax	benefit	to	income	of	approximately	$61	million.

# Liquidity	and	Capital	Resources

# Liquidity

Liquidity	is	a	measure	of	a	company's	ability	to	generate	cash	flows	sufficient	to	meet	the	short-term	and	long-term	cash	requirements	of	its	business operations.	As	a	holding	company,	ACE	Limited	possesses	assets	that	consist	primarily	of	the	stock	of	its	subsidiaries	and	other	investments.	In	addition to	net	investment	income,	our	cash	flows	currently	depend	primarily	on	dividends	or	other	statutorily	permissible	payments.	Historically,	these	dividends and	other	payments	have	come	from	ACE's	Bermuda-based	operating	subsidiaries,	which	we	refer	to	as	our	Bermuda	subsidiaries.	Our	consolidated sources	of	funds	consist	primarily	of	net	premiums	written,	fees,	net	investment	income,	and	proceeds	from	sales	and	maturities	of	investments.	Funds are	used	at	our	various	companies	primarily	to	pay	claims,	operating	expenses,	and	dividends	and	to	service	debt	and	purchase	investments.	After satisfying	our	cash	requirements,	excess	cash	flows	from	these	underwriting	and	investing	activities	are	invested.

Global	market	and	economic	conditions	have	been	severely	disrupted	over	the	past	year.	These	conditions	may	potentially	affect	(among	other aspects	of	our	business)	the	demand	for	and	claims	made	under	our	products,	the	ability	of	customers,	counterparties	and	others	to	establish	or	maintain their	relationships	with	us,	our	ability	to	access	and	efficiently	use	internal	and	external	capital	resources,	the	risks	we	assume	under	reinsurance programs	covering	variable	annuity	guarantees,	and	our	investment	performance.	However,	we	believe	that	our	present	cash	flows	from	operations, investing	activities	and	financing	activities	are	sufficient	to	fund	our	working	capital	and	debt	obligation	needs.	We	do	not	expect	this	to	change	in	the	near term	due	in	part	to	factors	such	as	the	following:

•	ACE's	balance	sheet	continues	to	reflect	significant	liquidity	and	a	strong	capital	base.	Our	shareholders'	equity	was	$14	billion	at	December	31,	2008. Cash	and	AAA	rated	invested	assets	were	$24	billion	at	December	31,	2008.	Our	sub-prime	portfolio	represented	less	than	one	percent	of	our	investment portfolio	at	December	31,	2008,	and	we	hold	no	collateralized	debt	obligations	or	collateralized	loan	obligations.	We	provide	no	credit	default	protection.

•	We	do	not	anticipate	changes	in	our	core	insurance	and	reinsurance	operations	which	would	significantly	impact	liquidity,	and	we	continue	to	maintain reinsurance	contracts	which	limit	the	impact	of	potential	catastrophic	events.

•	Our	cash	flows	from	operations	have	been	relatively	consistent,	averaging	over	a	$1	billion	per	quarter	for	the	last	five	years.	We	expect	our	core insurance	and	reinsurance	operations	to	continue	to	provide	us	with	consistent	cash	flows	going	forward.	Refer	to	"Cash	Flows",	below.

•	Financial	flexibility	at	the	holding	company	level	remains	strong	given	our	operating	companies'	dividend	capacity.

•	We	anticipate	minimal	refinancing	needs	of	existing	debt	over	the	next	five	years.	Beyond	five	years,	our	current	strategy	is	to	schedule	no	more	than $600	million	maturing	in	any	one	year.	Refer	to	the	"Contractual	Obligations	and	Commitments"	table	below.

•	We	have	no	main	credit	facility	expiring	within	the	next	three	years,	and	unused	available	credit	of	$729	million	at	December	31,	2008.	We	are	not reliant	on	a	single	bank	or	group	of	banks	and	have	not	experienced	unwillingness	by	our	lenders	to	permit	access	to	our	existing	credit	facilities.	At December	31,	2008,	the	minimum	consolidated	net	worth	require-

ment	under	covenants	related	to	our	main	credit	facilities	was	$11.97	billion	and	our	actual	consolidated	net	worth	as	calculated	under	applicable covenants	was	$16.2	billion.	Refer	to	"Credit	Facilities",	below.

•	On	December	19,	2008,	Standard	&	Poor's	announced	that	it	was	revising	its	outlook	on	ACE	Limited	and	ACE's	core	operating	insurance	companies to	positive	from	stable.	S&P	also	reaffirmed	all	of	ACE's	counterparty	credit	and	financial	strength	ratings,	including	its	A+	Financial	Strength	rating	for the	core	operating	companies.	This	is	important	since	our	customers	look	to	our	financial	strength	ratings	when	assessing	our	claims-paying	ability,	and certain	of	our	credit	facilities	include	financial	strength	covenants.	Refer	to	"Ratings",	below.

•	Throughout	2008,	we	were	successful	in	executing	securities	repurchase	agreements	as	a	low-cost	financing	alternative	to	short-term	debt,	which allowed	us	to	avoid	liquidating	higher-yielding	or	temporarily	distressed	assets	in	our	investment	portfolio.

•	We	have	not	recently	relied	on	the	securitization	markets	for	liquidity	and	therefore	are	not	impacted	by	its	current	state.

•	Minimum	funding	requirements	for	our	pension	obligations	are	immaterial	over	the	next	year.

•	We	have	filed	a	shelf	registration	statement,	expiring	in	December	2011,	under	which	we	may	issue	debt	or	equity	securities.

As	an	insurance	company,	one	of	our	principal	responsibilities	to	our	clients	is	to	ensure	that	we	have	ready	access	to	funds	to	settle	large unforeseen	claims.	We	expect	that	positive	cash	flows	from	operations	(underwriting	activities	and	investment	income)	will	be	sufficient	to	cover	cash outflows	under	most	loss	scenarios	through	2009.	To	further	ensure	the	sufficiency	of	funds	to	settle	unforeseen	claims,	we	hold	a	certain	amount	of invested	assets	in	cash	and	short-term	investments	and	maintain	available	credit	facilities	(refer	to	"Credit	Facilities"	below).	In	addition,	for	certain insurance,	reinsurance,	or	deposit	contracts	that	tend	to	have	relatively	large	and	reasonably	predictable	cash	outflows,	we	attempt	to	establish	dedicated portfolios	of	assets	that	are	duration-matched	with	the	related	liabilities.	With	respect	to	the	duration	of	our	overall	investment	portfolio,	we	manage	asset durations	to	both	maximize	return	given	current	market	conditions	and	provide	sufficient	liquidity	to	cover	future	loss	payments.	In	a	low	interest	rate environment,	the	overall	duration	of	our	fixed	maturity	investments	tends	to	be	shorter	and	in	a	high	interest	rate	environment,	such	durations	tend	to	be longer.	Given	the	current	low-rate	environment,	at	December	31,	2008,	the	average	duration	of	our	fixed	maturity	investments	(3.6	years)	is	less	than	the average	expected	duration	of	our	insurance	liabilities	(3.9	years).

Despite	our	safeguards,	if	paid	losses	accelerated	beyond	our	ability	to	fund	such	paid	losses	from	current	operating	cash	flows,	we	might	need	to either	liquidate	a	portion	of	our	investment	portfolio	or	arrange	for	financing.	Potential	events	causing	such	a	liquidity	strain	could	include	several significant	catastrophes	occurring	in	a	relatively	short	period	of	time	or	large	scale	uncollectible	reinsurance	recoverables	on	paid	losses	(as	a	result	of coverage	disputes,	reinsurers'	credit	problems,	decreases	in	the	value	of	collateral	supporting	reinsurance	recoverables	or	increases	in	collateral postings	under	our	variable	annuity	reinsurance	business).	Because	each	subsidiary	focuses	on	a	more	limited	number	of	specific	product	lines	than	is collectively	available	from	the	ACE	Group	of	Companies,	the	mix	of	business	tends	to	be	less	diverse	at	the	subsidiary	level.	As	a	result,	the	probability of	a	liquidity	strain,	as	described	above,	may	be	greater	for	individual	subsidiaries	than	when	liquidity	is	assessed	on	a	consolidated	basis.	If	such	a liquidity	strain	were	to	occur	in	a	subsidiary,	we	could	be	required	to	liquidate	a	portion	of	our	investment,	potentially	at	distressed	prices,	as	well	as	be required	to	contribute	capital	to	the	particular	subsidiary	and/or	curtail	dividends	from	the	subsidiary	to	support	holding	company	operations.

The	payments	of	dividends	or	other	statutorily	permissible	distributions	from	our	operating	companies	are	subject	to	the	laws	and	regulations applicable	to	each	jurisdiction,	as	well	as	the	need	to	maintain	capital	levels	adequate	to	support	the	insurance	and	reinsurance	operations,	including financial	strength	ratings	issued	by	independent	rating	agencies,	which	are	discussed	below.	During	2008,	we	were	able	to	meet	all	of	our	obligations, including	the	payment	of	dividends	declared	on	our	Ordinary	Shares,	Common	Shares	and	Preferred	Shares,	with	our	net	cash	flows	and	dividends received.	Should	the	need	arise,	we	would	expect	to	have	access	to	the	capital	markets	and	other	available	credit	facilities.

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.	In 2008,	ACE	Bermuda	declared	and	paid	dividends	of	$502	million	($168	million	in	the	prior	year	period),	and	ACE	Tempest	Life	Re	declared	and	paid dividends	of	$1.2	billion	($nil	in	the	prior	year	period).	A	portion	of	the	dividends	received	were	used	in	connection	with	the	acquisition	of	Combined Insurance.	We	expect	that	a	majority	of	our	cash	inflows	in	2009	will	be	from	our	Bermuda	subsidiaries.

The	payment	of	any	dividends	from	ACE	Global	Markets	or	its	subsidiaries	is	subject	to	applicable	U.K.	insurance	laws	and	regulations.	In	addition, the	release	of	funds	by	Syndicate	2488	to	subsidiaries	of	ACE	Global	Markets	is	subject	to	regulations	promulgated	by	the	Society	of	Lloyd's.	ACE	INA's U.S.	insurance	subsidiaries	may	pay	dividends,	without	prior

regulatory	approval,	subject	to	restrictions	set	out	in	state	law	of	the	subsidiary's	domicile	(or,	if	applicable,	"commercial	domicile").	ACE	INA's international	subsidiaries	are	also	subject	to	insurance	laws	and	regulations	particular	to	the	countries	in	which	the	subsidiaries	operate.	These	laws	and regulations	sometimes	include	restrictions	that	limit	the	amount	of	dividends	payable	without	prior	approval	of	regulatory	insurance	authorities.

ACE	Limited	did	not	receive	any	dividends	from	ACE	Global	Markets	or	ACE	INA	in	2008	and	2007.	The	debt	issued	by	ACE	INA	to	provide	partial financing	for	the	ACE	INA	acquisition	and	for	other	operating	needs	is	serviced	by	statutorily	permissible	distributions	by	ACE	INA's	insurance subsidiaries	to	ACE	INA	as	well	as	other	group	resources.

# Cash	Flows

Our	insurance	and	reinsurance	operations	provide	liquidity	in	that	premiums	are	received	in	advance,	sometimes	substantially	in	advance,	of	the	time claims	are	paid.	Generally,	cash	flows	are	affected	by	claim	payments	that,	due	to	the	nature	of	our	operations,	may	be	comprised	of	large	loss	payments on	a	limited	number	of	claims	and	which	can	fluctuate	significantly	from	period	to	period.	The	irregular	timing	of	these	loss	payments	can	create significant	variations	in	cash	flows	from	operations	between	periods.	Refer	to	"Contractual	Obligations	and	Commitments"	for	our	estimate	for	future claim	payments	by	period.

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	years	ended	December	31,	2008	and	2007.

•	Our	consolidated	net	cash	flows	from	operating	activities	were	$4.1	billion	in	2008,	compared	with	$4.7	billion	in	2007.	These	amounts	reflect	net income	for	each	period,	adjusted	for	non-cash	items	and	changes	in	working	capital.	Net	income	in	2008	was	$1.2	billion	compared	with	$2.6	billion	in 2007.	For	2008,	significant	adjustments	included	net	realized	gains	(losses)	of	$1.6	billion,	unpaid	losses	and	loss	expenses	of	$1.3	billion	and	accounts payable/accrued	expenses	of	$638	million.	The	unpaid	losses	and	loss	expenses	were	significantly	impacted	by	third	quarter	catastrophes	and	the	first quarter	settlement	of	the	crop/hail	business.

•	Our	consolidated	net	cash	flows	used	for	investing	activities	were	$4.1	billion	in	2008,	compared	with	$4.5	billion	in	2007.	For	the	indicated	periods,	net investing	activities	were	related	primarily	to	net	purchases	and	maturities	on	the	fixed	maturities	portfolio	and	for	2008	included	the	acquisition	of Combined	Insurance	of	$2.56	billion.

•	Our	consolidated	net	cash	flows	from	financing	activities	were	$314	million	in	2008,	compared	with	net	cash	flows	used	for	financing	activities	of	$253 million	in	2007.	Net	cash	flows	from	financing	activities	in	2008,	include	$1.2	billion	net	proceeds	from	the	issuance	of	long-term	debt,	partially	offset	by $575	million	of	net	cash	flows	used	for	financing	activities	relating	to	the	redemption	of	our	Preferred	Shares	and	dividends	on	our	Common	and Preferred	Shares	of	$386	million.

Both	internal	and	external	forces	influence	our	financial	condition,	results	of	operations,	and	cash	flows.	Claim	settlements,	premium	levels,	and investment	returns	may	be	impacted	by	changing	rates	of	inflation	and	other	economic	conditions.	In	many	cases,	significant	periods	of	time,	ranging	up to	several	years	or	more,	may	lapse	between	the	occurrence	of	an	insured	loss,	the	reporting	of	the	loss	to	us,	and	the	settlement	of	the	liability	for	that loss.	We	believe	that	our	cash	balances,	cash	flow	from	operations,	routine	sales	of	investments,	and	the	liquidity	provided	by	our	credit	facilities,	as discussed	below,	are	adequate	to	meet	expected	cash	requirements.

In	addition	to	cash	from	operations,	routine	sales	of	investments,	and	financing	arrangements,	we	have	entered	into	agreements	with	a	bank provider	to	implement	two	international	multi-currency	notional	cash	pooling	programs	in	order	to	enhance	cash	management	efficiency	during	periods	of short-term	timing	mismatches	between	expected	inflows	and	outflows	of	cash	by	currency.	In	each	program,	participating	ACE	entities	establish	deposit accounts	in	different	currencies	with	the	bank	provider	and	each	day	the	credit	or	debit	balances	in	every	account	are	notionally	translated	into	a	single currency	(U.S.	dollars)	and	then	notionally	pooled.	The	bank	extends	overdraft	credit	to	any	participating	ACE	entity	as	needed,	provided	that	the	overall notionally-pooled	balance	of	all	accounts	in	each	pool	at	the	end	of	each	day	is	at	least	zero.	Actual	cash	balances	are	not	physically	converted	and	are not	co-mingled	between	legal	entities.	ACE	entities	may	incur	overdraft	balances	as	a	means	to	address	short-term	timing	mismatches,	and	any overdraft	balances	incurred	under	this	program	by	an	ACE	entity	would	be	guaranteed	by	ACE	Limited	(up	to	$150	million	in	the	aggregate).	Our revolving	credit	facility	allows	for	same	day	drawings	to	fund	a	net	pool	overdraft	should	participating	ACE	entities	withdraw	contributed	funds	from	the pool.

We	also	utilize	reverse	securities	repurchase	agreements	as	a	low-cost	alternative	for	short-term	funding	needs.	We	utilized	this	funding	source	to fund	part	of	the	purchase	of	Combined	Insurance.	Refer	to	"Short-term	Debt".

# Capital	Resources

Capital	resources	consist	of	funds	deployed,	or	available	to	be	deployed,	to	support	our	business	operations.	The	following	table	summarizes	the components	of	our	capital	resources	at	December	31,	2008	and	2007.

| (in	millions	of	U.S.	dollars) | 2008 | 2007 |
| :--- | :--- | :--- |
| Short-term\tdebt | $471 | $372 |
| Long-term\tdebt | 2,806 | 1,811 |
| Total\tdebt | 3,277 | 2,183 |
| Trust\tpreferred\tsecurities | 309 | 309 |
| Preferred\tShares | – | 557 |
| Common\tshareholders'\tequity | \t 14,446 | \t 16,120 |
| Total\tshareholders'\tequity | \t 14,446 | \t 16,677 |
| Total\tcapitalization | $18,032 | $19,169 |
| Ratio\tof\tdebt\tto\ttotal\tcapitalization | 18.2% | 11.4% |
| Ratio\tof\tdebt\tplus\ttrust\tpreferred\tsecurities\tto\ttotal\tcapitalization | 19.9% | 13.0% |

We	believe	our	financial	strength	provides	us	with	the	flexibility	and	capacity	to	obtain	available	funds	externally	through	debt	or	equity	financing	on	both a	short-term	and	long-term	basis.	Our	ability	to	access	the	capital	markets	is	dependent	on,	among	other	things,	market	conditions	and	our	perceived financial	strength.	We	have	accessed	both	the	debt	and	equity	markets	from	time	to	time.	As	part	of	our	capital	management	program,	in	November 2001,	our	Board	of	Directors	authorized	the	repurchase	of	any	ACE	issued	debt	or	capital	securities,	which	includes	Common	Shares,	up	to	$250	million. At	December	31,	2008,	this	authorization	had	not	been	utilized.	We	generally	maintain	shelf	registration	capacity	at	all	times	in	order	to	allow	capital market	access	for	refinancing	as	well	as	for	unforeseen	or	opportunistic	capital	needs.	Our	currently	effective	unlimited	shelf	registration	statement expires	in	December	2011.

Our	ratios	of	debt	to	total	capitalization	and	debt	plus	trust	preferred	securities	to	total	capitalization	have	increased	due	to	the	decrease	in shareholders'	equity	and	increase	in	debt.

The	following	table	reports	the	significant	movements	in	our	shareholders'	equity	for	the	year	ended	December	31,	2008.

| (in	millions	of	U.S.	dollars) |  |
| :--- | :--- |
| Total\tshareholders'\tequity,\tbeginning\tof\tyear | $16,677 |
| Net\tincome | 1,197 |
| Dividends\tdeclared\ton\tCommon\tShares | (364) |
| Dividends\tdeclared\ton\tPreferred\tShares | (24) |
| Redemption\tof\tPreferred\tShares | (575) |
| Proceeds\tfrom\texercise\tof\tstock\toptions | 97 |
| Change\t(depreciation)\ton\tinvestments,\tnet\tof\tincome\ttax | (2,302) |
| Cumulative\ttranslation\tadjustment,\tnet\tof\tincome\ttax | (392) |
| Other\tmovements,\tnet | 132 |
| Total\tshareholders'\tequity,\tend\tof\tyear | $14,446 |

Total	shareholders'	equity	decreased	$2.2	billion	in	2008	due	to	several	factors.	Net	income	of	$1.2	billion	included	realized	losses	after-tax	of	$1	billion on	our	investment	portfolio	and	net	fair	value	losses	of	$486	million	on	GMIBs.	The	change	in	net	unrealized	deprecation	on	investments	of	$2.3	billion was	primarily	due	to	the	widening	of	credit	spreads	and	the	decline	of	the	global	equity	markets.	The	cumulative	translation	declined	as	major	currencies declined	against	the	U.S.	dollar.

# Short-term	Debt

At	December	31,	2008,	short-term	debt	included	$205	million	of	11.2	percent	unsecured	subordinated	notes	maturing	in	December	2009,	and	a	$16 million	term	loan	maturing	in	September	2009	(refer	to	Long-Term	debt).	In	December	1999,	ACE	INA	issued	$300	million	of	11.2	percent	unsecured subordinated	notes	that	mature	December	2009;	we	repaid	$100	million	of	this	outstanding	amount	during	2002.	We	have	a	$200	million	credit	default swap	in	place	that	has	the	economic	effect	of	reducing	our	cost	of	borrowing	associated	with	this	issuance.	The	minimum	collateral	in	connection	with	the credit	default	swap	is	$70	million.	In	the	event	that	we	terminate	the	swap	prematurely,	we	would	be	liable	for	certain	transaction	costs.	The	swap counterparty	is	a	highly-rated	financial	institution	and	we	do	not	anticipate	non-performance.	Prior	to	the	maturity	of	the	11.2	percent	unsecured subordinated	notes,	we	will	evaluate	the	public	and	private	debt	markets,	and	if	terms	at	the	desired	tenor	are	inconsistent	with	our	capital	objectives,	we may	choose	to	retire	the	notes	with	available	cash.

We	have	executed	reverse	repurchase	agreements	with	certain	counterparties	whereby	we	agreed	to	sell	securities	and	repurchase	them	at	a	date in	the	future	for	a	predetermined	price.	During	2008,	these	included	reverse	repurchase	agreements	totaling	$1	billion	as	part	of	the	financing	of	the Combined	Insurance	acquisition	and	the	October	2008	repayment	of	$250	million	of	ACE	US	Holdings	senior	notes.	At	December	31,	2008,	short-term debt	included	$250	million	of	amounts	owed	to	brokers	under	reverse	repurchase	agreements.	These	agreements	expired	on	February	4,	2009,	at	which time	we	entered	into	another	$250	million	reverse	repurchase	agreement	with	a	90	day	term.

In	December	2008,	we	repaid	the	Australia	Holdings	PTY	Ltd.	AUD	$100	million	($87	million	at	December	31,	2007)	syndicated	unsecured	term loan.

# Long-term	Debt

Our	total	long-term	debt	of	$2.8	billion	is	described	in	detail	in	Note	9	to	the	Consolidated	Financial	Statements,	under	Item	8.

In	February	2008,	ACE	INA	issued	$300	million	of	5.8	percent	senior	notes	due	March	2018	and,	in	April	2008,	we	entered	into	a	$450	million unsecured	term	loan	repayable	in	April	2013.	The	proceeds	of	the	above-referenced	reverse	repurchase	agreements,	the	notes,	and	the	term	loan	were applied	to	pay	a	portion	of	the	purchase	price	of	the	acquisition	of	Combined	Insurance.	In	connection	with	the	term	loan,	we	simultaneously	entered	into a	$450	million	swap	transaction	that	has	the	economic	effect	of	fixing	the	interest	rate	at	4.15	percent	for	the	term	of	the	loan.	The	swap	counterparty	is	a highly-rated	financial	institution	and	we	do	not	anticipate	non-performance.

In	May	2008,	ACE	INA	issued	$450	million	of	5.6	percent	senior	notes,	due	May	2015.	The	net	proceeds	plus	available	cash	were	used	to	redeem all	$575	million	of	the	7.8	percent	Preferred	Shares	and	related	depository	shares	in	June	2008.	Refer	to	Note	10	to	the	Consolidated	Financial Statements,	under	Item	8.

In	December	2008,	ACE	INA	Holdings	entered	into	a	$66	million	dual	tranche	floating	interest	rate	term	loan	agreement.	The	first	tranche,	a	$50 million	three-year	term	loan	due	December	2011,	has	a	floating	interest	rate	based	on	LIBOR.	Simultaneously,	we	entered	into	a	swap	transaction	that has	the	economic	effect	of	fixing	the	interest	rate,	excluding	fees	and	expenses,	at	5.61	percent	for	the	full	term	of	the	loan.	The	second	tranche,	a	$16 million	nine-month	term	loan,	due	September	2009,	has	a	floating	interest	rate	based	on	LIBOR.	Simultaneously,	we	entered	into	a	swap	transaction	that has	the	economic	effect	of	fixing	the	interest	rate,	excluding	fees	and	expenses,	at	3.02	percent	for	the	full	term	of	the	loan.	The	swap	counterparty	is	a highly-rated	financial	institution	and	we	do	not	anticipate	non-performance.	The	loan	is	unsecured	and	repayable	on	maturity	and	contains	customary limitations	on	lien	provisions	as	well	as	customary	events	of	default	provisions	which,	if	breached,	could	result	in	the	accelerated	maturity	of	such	debt. The	obligation	of	the	borrower	under	the	loan	agreement	is	guaranteed	by	ACE	Limited.

# Trust	Preferred	Securities

The	securities	outstanding	consist	of	$300	million	of	trust	preferred	securities	due	2030,	issued	by	a	special	purpose	entity	(a	trust)	that	is	wholly	owned by	us.	The	sole	assets	of	the	special	purpose	entity	are	debt	instruments	issued	by	one	or	more	of	our	subsidiaries.	The	special	purpose	entity	looks	to payments	on	the	debt	instruments	to	make	payments	on	the	preferred	securities.	We	have	guaranteed	the	payments	on	these	debt	instruments.	The trustees	of	the	trust	include	one	or	more	of	our	officers	and	at	least	one	independent	trustee,	such	as	a	trust	company.	Our	officers	serving	as	trustees	of the	trust	do	not	receive	any	compensation	or	other	remuneration	for	their	services	in	such	capacity.	The	full	$309	million	of	outstanding	trust	preferred securities	(calculated	as	$300	million	as	discussed	above	plus	our	equity	share	of	the	trust)	is	shown	on	our	consolidated	balance	sheet	as	a	liability. Additional	information	with	respect	to	the	trust	preferred	securities	is	contained	in	Note	9	f)	to	the	Consolidated	Financial	Statements,	under	Item	8.

# Common	Shares

In	connection	with	the	Continuation,	we	changed	the	currency	in	which	the	par	value	of	our	Ordinary	Shares	was	stated	from	U.S.	dollars	to	Swiss	francs and	increased	the	par	value	of	Ordinary	Shares	from	$0.041666667	to	CHF	33.74.	Upon	the	effectiveness	of	the	Continuation,	our	Ordinary	Shares became	Common	Shares.	At	December	31,	2008,	the	par	value	of	the	Common	Shares	was	CHF	33.14	following	two	quarterly	par	value	reductions	in the	amount	of	CHF	0.30.	Refer	to	"Effects	of	the	Continuation	on	Dividends",	below.

# Effects	of	the	Continuation	on	Dividends

We	have	paid	dividends	each	quarter	since	we	became	a	public	company	in	1993.	For	information	on	dividend	payment	and	timing,	refer	to	Item	5	of	this Form	10-K.

Under	Swiss	law	all	dividends	and	distributions	through	a	reduction	in	par	value	must	be	approved	in	advance	by	our	shareholders,	though	the determination	of	the	record	and	payment	dates	may	be	delegated	to	our	Board	of	Directors.	Swiss	law	permits	distributions	to	shareholders	by	way	of	par value	reductions	if	(a)	after	the	implementation	of	the	par	value	reduction	the	reduced	aggregate	nominal	value	of	the	share	capital	and	the	statutory reserves	is	covered	by	net	assets,	(b)	they	are	approved	by	shareholders	at	a	general	meeting,	(c)	our	Swiss	statutory	auditor	confirms	to	the	general meeting	in	a	written	report	that	the	claims	of	the	creditors	are	fully	covered	despite	the	par	value	reduction,	(d)	creditors	are	informed	by	way	of	public notification	in	the	Swiss	Commercial	Gazette	that	they	can	within	two	months	ask	for	discharge	of	or	the	posting	of	security	for	their	claims	and (e)	the	par	value	reduction	is	registered	in	the	Swiss	commercial	register.

We	currently	intend,	subject	to	the	discretion	of	our	Board	of	Directors	and	the	needs	of	our	business,	to	propose	at	each	annual	general	meeting, beginning	with	our	annual	general	meeting	in	2009,	a	reduction	in	par	value	that	will	be	effected	in	four	quarterly	installments.	The	amount	of	a	proposed par	value	reduction	will	be	based	on	the	Board	of	Directors'	determination	of	an	appropriate	U.S.	dollar	dividend	for	the	succeeding	year	and	will	be converted	into	Swiss	francs	for	purposes	of	obtaining	shareholder	approval	based	on	the	U.S.	dollar/Swiss	franc	exchange	rate	shortly	before	the	annual general	meeting.	At	our	2008	annual	general	meeting,	our	shareholders	approved	payments	of	a	dividend	in	the	form	of	a	par	value	reduction	equal	to CHF	0.90	per	Common	Share	in	the	aggregate	(equivalent	at	the	time	to	U.S.	$0.87	per	Common	Share),	to	be	paid	in	three	equal	quarterly	installments of	CHF	0.30	(each	equivalent	at	the	time	to	U.S.	$0.29	per	Common	Share).

Dividends,	including	distributions	through	a	reduction	in	par	value,	must	be	declared	by	ACE	in	Swiss	francs.	However,	we	have	arranged	it	such that	these	distributions	are	paid	to	our	shareholders	in	U.S.	dollars	at	the	U.S.	dollar/Swiss	franc	exchange	rate	shortly	before	the	payment	date.	As	a result,	under	the	current	process,	shareholders	will	be	exposed	to	fluctuations	in	the	U.S.	dollar/Swiss	franc	exchange	rate	between	the	date	a	dividend amount	is	determined	and	the	relevant	dividend	payment	date.	For	example,	on	January	12,	2009,	we	paid	a	quarterly	dividend	(through	a	reduction	in par	value)	of	U.S.	$0.27	per	Common	Share	to	shareholders	of	record	as	of	December	17,	2008.	The	payment	amount	was	based	on	the	January	5, 2009,	U.S.	dollar/Swiss	Franc	exchange	rate	of	1.083	applied	to	the	quarterly	par	value	reduction	installment	amount	of	CHF	0.30	referenced	above. Should	we	determine	to	pay	dividends	other	than	by	a	reduction	in	par	value,	under	Swiss	law,	such	dividends	may	be	paid	out	only	if	the corporation	has	sufficient	distributable	profits	from	previous	business	years,	or	if	the	reserves	of	the	corporation	are	sufficient	to	allow	distribution	of	a dividend.	The	board	of	directors	of	a	Swiss	corporation	may	propose	that	a	dividend	be	paid,	but	cannot	itself	set	the	dividend.	The	Company	auditors must	confirm	that	the	dividend	proposal	of	the	board	of	directors	conforms	with	statutory	law.	Prior	to	the	distribution	of	dividends,	five	percent	of	the annual	profits	must	be	allocated	to	the	general	reserve	until	the	amount	of	general	reserves	has	reached	twenty	percent	of	the	paid-in	nominal	share capital.	Our	Articles	of	Association	can	provide	for	a	higher	general	reserve	or	for	the	creation	of	further	reserves	setting	forth	their	purpose	and	use. Once	this	level	has	been	reached	and	maintained,	the	shareholders	meeting	may	approve	a	distribution	of	each	year's	profit	within	the	framework	of applicable	legal	requirements.	Dividends	paid	from	retained	earnings	are	usually	due	and	payable	immediately	after	the	shareholders'	resolution	relating to	the	allocation	of	profits	has	been	passed.	Under	Swiss	law,	the	statute	of	limitations	in	respect	of	claims	for	dividend	payments	is	five	years.	As	noted above,	for	the	foreseeable	future,	we	expect	to	pay	dividends	as	a	repayment	of	share	capital	in	the	form	of	a	reduction	in	par	value	or	qualified	paid-in capital,	which	would	not	be	subject	to	Swiss	withholding	tax.

# Contractual	Obligations	and	Commitments

The	table	below	shows	our	contractual	obligations	and	commitments	including	our	payments	due	by	period	at	December	31,	2008.

|  |  | Less	than |  | 4-5 | After |
| :--- | :--- | :--- | :--- | :--- | :--- |
| (in\tmillions\tof\tU.S.\tdollars) | Total | 1\tYear | 1-3\tYears | Years | 5\tYears |
| Payment\tamounts\tdeterminable\tfrom\tthe\trespective\tcontracts |  |  |  |  |  |
| Deposit\tliabilities | $345 | $44 | $112 | $30 | $159 |
| Purchase\tobligations | 595 | 108 | 322 | 165 | – |
| Limited\tpartnerships\t–\tfunding\tcommitments | 863 | 334 | 408 | 58 | 63 |
| Operating\tleases | 351 | 68 | 108 | 75 | 100 |
| Short-term\tdebt | 471 | 471 | – | – | – |
| Long-term\tdebt | 2,806 | – | 199 | 450 | 2,157 |
| Trust\tpreferred\tsecurities | 309 | – | – | – | 309 |
| Interest\ton\tdebt\tobligations | 2,196 | 210 | 369 | 342 | 1,275 |
| Total\tobligations\tin\twhich\tpayment\tamounts\tare\tdeterminable\tfrom\tthe\trespective\tcontracts | 7,936 | 1,235 | 1,518 | \t 1,120 | 4,063 |
| Payment\tamounts\tnot\tdeterminable\tfrom\tthe\trespective\tcontracts |  |  |  |  |  |
| Estimated\tgross\tloss\tpayments\tunder\tinsurance\tand\treinsurance\tcontracts | \t 37,176 | 9,445 | \t 10,371 | \t 5,493 | \t 11,867 |
| Estimated\tpayments\tfor\tfuture\tlife\tand\tannuity\tpolicy\tbenefits | 4,280 | 284 | 461 | 366 | 3,169 |
| Total\tcontractual\tobligations\tand\tcommitments | $49,392 | $10,964 | $12,350 | $6,979 | $19,099 |

The	above	table	excludes	the	following	items:

Pension	Obligations:	Minimum	funding	requirements	for	our	pension	obligations	are	immaterial.	Subsequent	funding	commitments	are	apt	to	vary due	to	many	factors	and	are	difficult	to	estimate	at	this	time.	Refer	to	Note	14	to	the	Consolidated	Financial	Statements,	under	Item	8,	for	more information.

Liabilities	for	unrecognized	tax	benefits	are	recorded	in	accordance	with	issued	FASB	Interpretation	No.	48,	 Accounting	for	Uncertainty	in	Income Taxes	–	an	interpretation	of	FASB	Statement	No.	109	(FIN	48).	The	FIN	48	liability	for	unrecognized	tax	benefits,	including	interest,	was	$150	million	at December	31,	2008.	We	recognize	accruals	for	interest	and	penalties,	if	any,	related	to	unrecognized	tax	benefits	in	income	tax	expense.	As	of December	31,	2008,	we	had	$14	million	in	liabilities	for	income	tax-related	interest	in	our	consolidated	balance	sheet.	We	are	unable	to	make	a reasonably	reliable	estimate	for	the	timing	of	cash	settlement	with	respect	to	these	liabilities.	Refer	to	Note	8	to	the	Consolidated	Financial	Statements, under	Item	8,	for	more	information.

We	have	no	other	significant	contractual	obligations	or	commitments	not	reflected	in	the	table	above.

# Deposit	liabilities

Deposit	liabilities	include	reinsurance	deposit	liabilities	of	$310	million	and	contract	holder	deposit	funds	of	$35	million	at	December	31,	2008.	The reinsurance	deposit	liabilities	arise	from	contracts	we	sold	for	which	there	is	not	a	significant	transfer	of	risk.	At	contract	inception,	the	deposit	liability	is equal	to	net	cash	we	received.	An	accretion	rate	is	established	based	on	actuarial	estimates	whereby	the	deposit	liability	is	increased	to	the	estimated amount	payable	over	the	term	of	the	contract.	The	deposit	accretion	rate	is	the	rate	of	return	required	to	fund	expected	future	payment	obligations.	We periodically	reassess	the	estimated	ultimate	liability	and	related	expected	rate	of	return.	Any	resulting	changes	to	the	amount	of	the	deposit	liability	are reflected	as	an	adjustment	to	earnings	to	reflect	the	cumulative	effect	of	the	period	the	contract	has	been	in	force,	and	by	an	adjustment	to	the	future accretion	rate	of	the	liability	over	the	remaining	estimated	contract	term.

Additional	information	with	respect	to	deposit	liabilities	is	contained	in	Note	2	k)	to	the	Consolidated	Financial	Statements,	under	Item	8.

# Purchase	obligations

We	are	party	to	enforceable	and	legally	binding	agreements	to	purchase	certain	services.	Purchase	obligations	in	the	table	primarily	comprise	audit	fees and	agreements	with	vendors	to	purchase	system	software	administration	and	maintenance	services.

# Limited	partnerships	–	funding	commitments

In	connection	with	our	investments	in	limited	partnerships,	we	have	commitments	that	may	require	funding	of	up	to	$863	million	over	the	next	several years.	The	timing	of	the	payment	of	these	commitments	is	uncertain	and	will	differ	from	our	estimated	timing	in	the	table.

# Operating	lease	commitments

We	lease	office	space	in	most	countries	in	which	we	operate	under	operating	leases	that	expire	at	various	dates	through	December	2033.	We	renew	and enter	into	new	leases	in	the	ordinary	course	of	business	as	required.

# Estimated	gross	loss	payments	under	insurance	and	reinsurance	contracts

We	are	obligated	to	pay	claims	under	insurance	and	reinsurance	contracts	for	specified	loss	events	covered	under	those	contracts.	Such	loss	payments represent	our	most	significant	future	payment	obligation	as	a	P&C	insurance	and	reinsurance	company.	In	contrast	to	other	contractual	obligations,	cash payments	are	not	determinable	from	the	terms	specified	within	the	contract.	For	example,	we	do	not	ultimately	make	a	payment	to	our	counterparty	for many	insurance	and	reinsurance	contracts	(i.e.,	when	a	loss	event	has	not	occurred)	and	if	a	payment	is	to	be	made,	the	amount	and	timing	cannot	be determined	from	the	contract.	In	the	table	above,	we	estimate	payments	by	period	relating	to	our	gross	liability	for	unpaid	losses	and	loss	expenses included	in	the	consolidated	balance	sheet	at	December	31,	2008,	and	do	not	take	into	account	reinsurance	recoverable.	These	estimated	loss	payments are	inherently	uncertain	and	the	amount	and	timing	of	actual	loss	payments	are	likely	to	differ	from	these	estimates	and	the	differences	could	be	material. Given	the	numerous	factors	and	assumptions	involved	in	both	estimates	of	loss	and	loss	expense	reserves	and	related	estimates	as	to	the	timing	of future	loss	and	loss	expense	payments	in	the	table	above,	differences	between	actual	and	estimated	loss	payments	will	not	necessarily	indicate	a commensurate	change	in	ultimate	loss	estimates.

# Estimated	payments	for	future	life	and	annuity	policy	benefits

We	establish	reserves	for	future	policy	benefits	for	life	and	annuity	contracts	including,	but	not	limited	to,	GMDBs	and	GMIBs.	The	amounts	in	the	table are	gross	of	fees	or	premiums	due	from	the	underlying	contracts.	The	liability	for	future	policy	benefits	for	life	and	annuity	contracts	presented	in	our balance	sheet	is	discounted	and,	with	respect	to	GMIB	reinsurance,	reflected	net	of	fees	or	premiums	due	from	the	underlying	contracts,	and	with	respect to	GMDB	reinsurance,	does	not	consider	benefit	payments	related	to	future	fees	or	premiums	not	recognized	through	the	balance	sheet	date.

Accordingly,	the	estimated	amounts	in	the	table	exceed	the	liability	for	future	policy	benefits	for	life	and	annuity	contracts	presented	in	our	balance	sheet. Payment	amounts	related	to	these	reserves	must	be	estimated	and	are	not	determinable	from	the	contract.	Due	to	the	uncertainty	with	respect	to	the timing	and	amount	of	these	payments,	actual	results	could	materially	differ	from	the	estimates	in	the	table.

# Credit	Facilities

As	our	Bermuda	subsidiaries	are	not	admitted	insurers	and	reinsurers	in	the	U.S.,	the	terms	of	certain	U.S.	insurance	and	reinsurance	contracts	require them	to	provide	LOCs	to	clients.	In	addition,	ACE	Global	Markets	is	required	to	satisfy	certain	U.S.	regulatory	trust	fund	requirements	which	can	be	met by	the	issuance	of	LOCs.	LOCs	may	also	be	used	for	general	corporate	purposes	and	for	funds	at	Lloyd's.

The	following	table	shows	our	main	credit	facilities	by	credit	line,	usage,	expiry	date,	and	purpose	at	December	31,	2008.

| (in	millions	of	U.S.	dollars) | Line^1 | Usage | Expiry	Date |
| :--- | :--- | :--- | :--- |
| Unsecured\tLiquidity\tFacilities |  |  |  |
| ACE\tLimited2 | $500 | $142 | \t Nov.\t2012 |
| Unsecured\tOperational\tLOC\tFacilities |  |  |  |
| ACE\tLimited | \t 1,000 | 811 | \t Nov.\t2012 |
| Unsecured\tCapital\tFacilities |  |  |  |
| ACE\tLimited3 | 438 | 256 | \t Dec.\t2013 |
| Total | $1,938 | $1,209 |  |

(1) 	Certain	facilities	are	guaranteed	by	operating	subsidiaries	and/or	ACE	Limited.

(3) 	Supports	ACE	Global	Markets	underwriting	capacity	for	Lloyd's	Syndicate	2488.

It	is	anticipated	that	the	commercial	facilities	will	be	renewed	on	expiry	but	such	renewals	are	subject	to	the	availability	of	credit	from	banks	utilized by	ACE.	In	the	event	that	such	credit	support	is	insufficient,	we	could	be	required	to	provide	alternative	security	to	clients.	This	could	take	the	form	of additional	insurance	trusts	supported	by	our	investment	portfolio	or	funds	withheld	using	our	cash	resources.	The	value	of	letters	of	credit	required	is driven	by,	among	other	things,	loss	development	of	existing	reserves,	the	payment	pattern	of	such	reserves,	the	expansion	of	business	and	loss experience	of	such	business.

The	facilities	in	the	table	above	require	that	we	maintain	certain	covenants,	all	of	which	have	been	met	at	December	31,	2008.	These	covenants include	(but	are	not	limited	to):

(i) Maintenance	of	a	minimum	consolidated	net	worth	in	an	amount	not	less	than	the	"Minimum	Amount".	For	the	purpose	of	this	calculation,	the Minimum	Amount	is	an	amount	equal	to	the	sum	of	the	base	amount	(currently	$11.7	billion)	plus	25	percent	of	consolidated	net	income	for	each	fiscal quarter,	ending	after	the	date	on	which	the	current	base	amount	became	effective,	plus	50	percent	of	any	increase	in	consolidated	net	worth	during the	same	period,	attributable	to	the	issuance	of	Common	and	Preferred	Shares.	The	Minimum	Amount	is	subject	to	an	annual	reset	provision. (ii) Maintenance	of	a	maximum	debt	to	total	capitalization	ratio	of	not	greater	than	0.35	to	1.	Under	this	covenant,	debt	does	not	include	trust	preferred securities	or	mezzanine	equity,	except	where	the	ratio	of	the	sum	of	trust	preferred	securities	and	mezzanine	equity	to	total	capitalization	is	greater than	15	percent.	In	this	circumstance,	the	amount	greater	than	15	percent	would	be	included	in	the	debt	to	total	capitalization	ratio.

At	December	31,	2008,	(a)	the	minimum	consolidated	net	worth	requirement	under	the	covenant	described	in	(i)	above	was	$11.97	billion	and	our actual	consolidated	net	worth	as	calculated	under	that	covenant	was	$16.2	billion	and	b)	our	ratio	of	debt	to	total	capitalization	was	0.182	to	1.

Our	failure	to	comply	with	the	covenants	under	any	credit	facility	would,	subject	to	grace	periods	in	the	case	of	certain	covenants,	result	in	an	event of	default.	This	could	require	us	to	repay	any	outstanding	borrowings	or	to	cash	collateralize	LOCs	under	such	facility.	A	failure	by	ACE	Limited	(or	any	of its	subsidiaries)	to	pay	an	obligation	due	for	an	amount	exceeding	$50	million	would	result	in	an	event	of	default	under	all	of	the	facilities	described above.

# Ratings

ACE	Limited	and	its	subsidiaries	are	assigned	debt	and	financial	strength	(insurance)	ratings	from	internationally	recognized	rating	agencies,	including S&P,	A.M.	Best,	Moody's	Investors	Service,	and	Fitch.	The	ratings	issued	on	our	companies	by	these	agencies	are	announced	publicly	and	are	available directly	from	the	agencies.	Our	Internet	site,	www.acelimited.com,	also	contains	some	information	about	our	ratings,	which	can	be	found	under	the Investor	Information	tab.

Financial	strength	ratings	reflect	the	rating	agencies'	opinions	of	a	company's	claims	paying	ability.	Independent	ratings	are	one	of	the	important factors	that	establish	our	competitive	position	in	the	insurance	markets.	The	rating	agencies	consider	many	factors	in	determining	the	financial	strength rating	of	an	insurance	company,	including	the	relative	level	of	statutory	surplus	necessary	to	support	the	business	operations	of	the	company.	These ratings	are	based	upon	factors	relevant	to	policyholders,	agents,	and	intermediaries	and	are	not	directed	toward	the	protection	of	investors.	Such	ratings are	not	recommendations	to	buy,	sell,	or	hold	securities.

Debt	ratings	apply	to	short-term	and	long-term	debt.	These	ratings	are	assessments	of	the	likelihood	that	we	will	make	timely	payments	of	principal, interest,	and	preferred	stock	dividends.

It	is	possible	that,	in	the	future,	one	or	more	of	the	rating	agencies	may	reduce	our	existing	ratings.	If	one	or	more	of	our	ratings	were	downgraded, we	could	incur	higher	borrowing	costs	and	our	ability	to	access	the	capital	markets	could	be	impacted.	In	addition,	our	insurance	and	reinsurance operations	could	be	adversely	impacted	by	a	downgrade	in	our	financial	strength	ratings,	including	a	possible	reduction	in	demand	for	our	products	in certain	markets.	For	example,	the	ACE	Global	Markets	capital	facility	requires	that	collateral	be	posted	if	the	S&P	financial	strength	rating	of	ACE	falls	to BBB+	or	lower.	Similarly,	we	have	private	debt	that	would	require	us	to	post	additional	collateral	if	the	S&P	financial	strength	rating	of	ACE	falls	to	BBB+ or	lower.	Also,	we	have	insurance	and	reinsurance	contracts	which	contain	rating	triggers.	In	the	event	the	S&P	financial	strength	rating	of	ACE	falls	to BBB+	or	lower,	we	may	be	faced	with	the	cancellation	of	premium	or	be	required	to	post	collateral	on	our	underlying	obligation	associated	with	this premium.	We	estimate	that	at	December	31,	2008,	a	one-notch	downgrade	of	our	S&P	financial	strength	rating	would	result	in	an	immaterial	loss	of premium	or	requirement	for	collateral	to	be	posted	(less	than	$25	million).

# Recent	Accounting	Pronouncements

Refer	to	Note	2	r)	to	the	Consolidated	Financial	Statements,	under	Item	8,	for	a	discussion	of	recent	accounting	pronouncements.

# Item	7A. Quantitative	and	Qualitative	Disclosures	about	Market	Risk

# Market	Sensitive	Instruments	and	Risk	Management

Market	risk	represents	the	potential	for	loss	due	to	adverse	changes	in	the	fair	value	of	financial	instruments.	We	are	exposed	to	potential	losses	from various	market	risks	including	changes	in	interest	rates,	equity	prices	and	foreign	currency	exchange	rates.	Further,	through	the	writings	of	certain products	such	as	credit	derivatives	(through	our	approximately	21	percent	ownership	of	Assured	Guaranty	Ltd.)	and	GMIB	and	GMDB	products,	we	are exposed	to	deterioration	in	the	credit	markets,	decreases	in	interest	rates,	and	declines	in	the	equity	markets.	Our	investment	portfolio	consists	of	both fixed	income	and	equity	securities,	denominated	in	both	U.S.	dollars	and	foreign	currencies,	which	are	sensitive	to	changes	in	interest	rates,	equity prices,	and	foreign	currency	exchange	rates.

The	majority	of	our	fixed	income	and	all	of	our	equity	securities	are	classified	as	available	for	sale	and,	as	such,	changes	in	interest	rates,	equity prices,	or	foreign	currency	exchange	rates	will	have	an	immediate	effect	on	comprehensive	income	and	shareholders'	equity	but	will	not	ordinarily	have an	immediate	effect	on	net	income.	Nevertheless,	changes	in	interest	rates	and	equity	prices	affect	consolidated	net	income	when,	and	if,	a	security	is sold	or	a	determination	is	made	to	incur	a	charge	for	impairment.	From	time	to	time,	we	also	use	investment	derivative	instruments	such	as	futures, options,	swaps,	and	foreign	currency	forward	contracts	to	manage	the	duration	of	our	investment	portfolio	and	foreign	currency	exposures	and	also	to obtain	exposure	to	a	particular	financial	market.	At	December	31,	2008	and	2007,	our	notional	exposure	to	investment	derivative	instruments	was	$10.3 billion	and	$15.8	billion,	respectively.	In	addition,	as	part	of	our	investing	activity,	we	purchase	to	be	announced	mortgage	backed	securities	(TBAs). These	instruments	are	recognized	as	assets	or	liabilities	in	our	Consolidated	Financial	Statements	and	are	sensitive	to	changes	in	interest	rates,	foreign currency	exchange	rates,	and	equity	security	prices.	Changes	in	the	fair	value	of	TBAs	are	included	in	net	realized	gains	(losses)	and	therefore	have	an immediate	effect	on	both	our	net	income	and	shareholders'	equity.

We	seek	to	mitigate	market	risk	using	a	number	of	techniques,	including	maintaining	and	managing	the	assets	and	liabilities	of	our	international operations	consistent	with	the	foreign	currencies	of	the	underlying	insurance	and	reinsurance	businesses,	thereby	limiting	exchange	rate	risk	to	net assets	denominated	in	foreign	currencies.

The	following	is	a	discussion	of	our	primary	market	risk	exposures	at	December	31,	2008.	Our	policies	to	address	these	risks	in	2008	were	not materially	different	from	2007.	We	do	not	currently	anticipate	significant	changes	in	our	primary	market	risk	exposures	or	in	how	those	exposures	are managed	in	future	reporting	periods	based	upon	what	is	known	or	expected	to	be	in	effect	in	future	reporting	periods.

# Interest	rate	risk	–	fixed	income	portfolio	and	debt	obligations

Our	fixed	income	portfolio	and	debt	obligations	have	exposure	to	interest	rate	risk.	Changes	in	investment	values	attributable	to	interest	rate	changes	are mitigated	by	corresponding	and	partially	offsetting	changes	in	the	economic	value	of	our	insurance	reserves	and	debt	obligations.	We	monitor	this exposure	through	periodic	reviews	of	our	asset	and	liability	positions.

The	following	table	shows	the	impact	on	the	market	value	of	our	fixed	income	portfolio	of	a	hypothetical	increase	in	interest	rates	of	100	bps	applied instantly	across	the	U.S.	yield	curve	(an	immediate	time	horizon	was	used	as	this	presents	the	worst	case	scenario)	at	December	31,	2008	and	2007.

| (in	millions	of	U.S.	dollars) | 2008 | 2007 |
| :--- | :--- | :--- |
| Fair\tvalue\tof\tfixed\tincome\tportfolio | $37,370 | $38,830 |
| Pre-tax\timpact\tof\t100\tbps\tincrease\tin\tinterest\trates | $1,329 | $1,281 |
| Percentage\tof\ttotal\tfixed\tincome\tportfolio\tat\tfair\tvalue | 3.6% | 3.3% |

Changes	in	interest	rates	will	have	an	immediate	effect	on	comprehensive	income	and	shareholders'	equity	but	will	not	ordinarily	have	an	immediate effect	on	net	income.

Although	our	debt,	Preferred	Shares	(redeemed	in	2008),	and	trust	preferred	securities	(collectively	referred	to	as	debt	obligations)	are	reported	at amortized	value	and	not	adjusted	for	fair	value	changes,	changes	in	interest	rates	could	have	a	material	impact	on	their	fair	value,	albeit	there	is	no immediate	impact	on	our	Consolidated	Financial	Statements.	The	following	table	shows	the	impact	on	the	market	value	of	our	debt	obligations	of	a hypothetical	decrease	in	interest	rates	of	100	bps	applied	instantly	across	the	U.S.	yield	curve	(an	immediate	time	horizon	was	used	as	this	presents	the worst	case	scenario)	at	December	31,	2008	and	2007.

Variations	in	market	interest	rates	could	produce	significant	changes	in	the	timing	of	prepayments	due	to	prepayment	options	available.	For	these reasons,	actual	results	could	differ	from	those	reflected	in	the	tables.

# Equity	price	risk	–	equity	portfolio

Our	portfolio	of	equity	securities,	which	we	carry	on	our	balance	sheet	at	fair	value,	has	exposure	to	price	risk.	This	risk	is	defined	as	the	potential	loss	in fair	value	resulting	from	adverse	changes	in	stock	prices.	In	addition,	we	attain	exposure	to	the	equity	markets	through	the	use	of	derivative	instruments, which	also	have	exposure	to	price	risk.	Our	U.S.	equity	portfolio	is	correlated	with	the	S&P	500	index	and	changes	in	that	index	would	approximate	the impact	on	our	portfolio.	Our	international	equity	portfolio	has	exposure	to	a	broad	range	of	non-U.S.	equity	markets.	The	following	table	provides	more information	on	our	exposure	to	equity	price	risk	at	December	31,	2008	and	2007.

Changes	in	the	fair	value	of	our	equity	portfolio	are	recorded	as	unrealized	appreciation	(depreciation)	and	are	included	as	a	separate	component	of accumulated	other	comprehensive	income	in	shareholders'	equity.

# Foreign	currency	exchange	rate	risk

Many	of	our	non-U.S.	companies	maintain	both	assets	and	liabilities	in	local	currencies.	Therefore,	foreign	exchange	rate	risk	is	generally	limited	to	net assets	denominated	in	those	foreign	currencies.	Foreign	exchange	rate	risk	is	reviewed	as	part	of	our	risk	management	process.	Locally	required	capital levels	are	invested	in	home	currencies	in	order	to	satisfy	regulatory	requirements	and	to	support	local	insurance	operations	regardless	of	currency fluctuations.	The	principal	currencies	creating	foreign	exchange	risk	for	us	are	the	British	pound	sterling,	the	euro,	and	the	Canadian	dollar.	The	following table	provides	more	information	on	our	exposure	to	foreign	exchange	rate	risk	at	December	31,	2008	and	2007.

# Reinsurance	of	GMDB	and	GMIB	guarantees

Our	net	income	is	directly	impacted	by	changes	in	the	reserves	calculated	in	connection	with	the	reinsurance	of	variable	annuity	guarantees,	primarily GMDB	and	GMIB.	These	reserves	are	calculated	in	accordance	with	SOP	03-1	(SOP	reserves)	and	changes	in	these	reserves	are	reflected	as	life	and annuity	benefit	expense,	which	is	included	in	life	underwriting	income.	In	addition,	our	net	income	is	directly	impacted	by	the	change	in	the	fair	value	of the	GMIB	liability	(FVL),	which	is	classified	as	a	derivative	according	to	FAS	133.	The	fair	value	liability	established	for	a	GMIB	reinsurance	contract represents	the	difference	between	the	fair	value	of	the	contract	and	the	SOP	03-1	reserves.	Changes	in	the	fair	value	of	the	GMIB	liability,	net	of associated	changes	in	the	calculated	SOP	03-1	reserve,	are	reflected	as	realized	gains	or	losses.

ACE	views	our	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.

The	ultimate	risk	to	the	variable	annuity	guaranty	reinsurance	business	is	a	long-term	underperformance	of	investment	returns,	which	can	be exacerbated	by	a	long-term	reduction	in	interest	rates.	Following	a	market	downturn,	continued	market	underperformance	over	a	period	of	five	to	seven years	would	eventually	result	in	a	higher	level	of	paid	claims	as	policyholders	accessed	their	guarantees	through	death	or	annuitization.	However,	if market	conditions	improved	following	a	downturn,	SOP	03-1	reserves	and	fair	value	liability	would	fall	reflecting	a	decreased	likelihood	of	future	claims, which	would	result	in	an	increase	in	both	life	underwriting	income	and	net	income.

As	of	December	31,	2008,	management	established	the	SOP	03-1	reserve	based	on	the	benefit	ratio	calculated	using	actual	market	values	at December	31,	2008.	Management	exercises	judgment	in	determining	the	extent	to	which	short-term	market	movements	impact	the	SOP	03-1	reserve. The	SOP	03-1	reserve	is	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	will,	in	keeping	with	the	language	in	SOP	03-1,	regularly	examine	both	quantitative	and	qualitative	analysis	and management	will	determine	if,	in	its	judgment,	the	change	in	the	calculated	benefit	ratio	is	of	sufficient	magnitude	and	has	persisted	for	a	sufficient duration	to	warrant	a	change	in	the	benefit	ratio	used	to	establish	the	SOP	03-1	reserve.	This	has	no	impact	on	either	premium	received	or	claims	paid nor	does	it	impact	the	long-term	profit	or	loss	of	the	variable	annuity	guarantee	reinsurance.

The	SOP	03-1	reserve	and	fair	value	liability	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	table	below	shows	the	sensitivity,	as	of December	31,	2008,	of	the	SOP	03-1	reserves	and	fair	value	liability	associated	with	the	variable	annuity	guarantee	reinsurance	portfolio.	In	addition,	the tables	below	show	the	sensitivity	of	the	fair	value	of	specific	derivative	instruments	held	(hedge	value),	which	includes	instruments	purchased	in	January 2009,	to	partially	offset	the	risk	in	the	variable	annuity	guarantee	reinsurance	portfolio.	Although	these	derivatives	do	not	receive	hedge	accounting treatment,	some	portion	of	the	change	in	value	may	be	used	to	offset	changes	in	the	SOP	03-1	reserve.

The	following	table	provides	more	information	on	our	exposure	to	variable	annuity	sensitivities	to	equities	and	interest	rates	at	December	31,	2008.

| Interest	Rate	Shock |  | +10% | Flat | -10% | -20% |
| :--- | :--- | :--- | :--- | :--- | :--- |
| (in\tmillions\tof\tU.S.\tdollars) |  |  |  |  |  |
| +100\tbps | (Increase)/decrease\tin\tSOP\treserve | $89 | $25 | $(60) | $\t\t(166) |
|  | (Increase)/decrease\tin\tnet\tFVL | 222 | 135 | 55 | (15) |
|  | (Increase)/decrease\tin\thedge\tvalue | (80) | (20) | 46 | 118 |
|  | (Increase)/decrease\tin\tnet\tincome | $\t\t231 | $140 | $41 | $(63) |
| Flat | (Increase)/decrease\tin\tSOP\treserve | $69 | $– | $(91) | $(204) |
|  | (Increase)/decrease\tin\tnet\tFVL | 91 | – | (89) | (168) |
|  | (Increase)/decrease\tin\thedge\tvalue | (61) | – | 67 | 140 |
|  | (Increase)/decrease\tin\tnet\tincome | $99 | $– | $\t\t(113) | $(232) |
| -100\tbps | (Increase)/decrease\tin\tSOP\treserve | $33 | $(41) | $(138) | $(258) |
|  | (Increase)/decrease\tin\tnet\tFVL | (87) | (189) | (281) | (356) |
|  | (Increase)/decrease\tin\thedge\tvalue | (40) | 22 | 90 | 163 |
|  | (Increase)/decrease\tin\tnet\tincome | $(94) | $\t\t(208) | $(329) | $(451) |

|  | A-rated	Credit	Spreads | A-rated	Credit	Spreads | Interest	Rate	Volatility | Interest	Rate	Volatility | Equity	Volatility | Equity	Volatility |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Sensitivities\tto\tOther\tEconomic\tVariables\n(in\tmillions\tof\tU.S.\tdollars) | +100 | -100 | +2% | -2% | +2% | -2% |
| (Increase)/decrease\tin\tSOP\treserve | $– | $– | $– | $– | $– | $– |
| (Increase)/decrease\tin\tnet\tFVL | \t 65 | (104) | (6) | 7 | (6) | 2 |
| (Increase)/decrease\tin\thedge\tvalue | – | – | – | – | 5 | (5) |
| (Increase)/decrease\tin\tnet\tincome | $65 | $(104) | $(6) | $7 | $(1) | $(3) |
|  |  | Mortality |  | Lapses |  | Annuitization |
| Sensitivities\tto\tActuarial\tAssumptions\n(in\tmillions\tof\tU.S.\tdollars) | +10% | -10% | +25% | -25% | +25% | -25% |
| (Increase)/decrease\tin\tSOP\treserve | $(26) | $27 | $20 | $(23) | $(11) | $14 |
| (Increase)/decrease\tin\tnet\tFVL | 11 | (11) | \t 135 | (166) | (97) | \t 105 |
| (Increase)/decrease\tin\thedge\tvalue | – | – | – | – | – | – |
| (Increase)/decrease\tin\tnet\tincome | $(15) | $16 | $155 | $(189) | $(108) | $119 |

The	above	table	assumes	equity	shocks	impact	all	global	equity	markets	equally	and	that	the	interest	rate	shock	is	a	parallel	shift	in	the	U.S.	yield	curve. Although	our	liabilities	have	sensitivity	to	global	equity	markets	we	would	suggest	using	the	S&P	500	as	a	proxy	and	although	our	liabilities	have sensitivity	to	global	interest	rates	at	various	points	on	the	yield	curve	we	would	suggest	using	the	10-year	U.S.	Treasury	yield	as	a	proxy.	A	change	in	A- rated	credit	spreads	impacts	the	rate	used	to	discount	cash	flows	in	the	fair	value	model.	The	table	above	demonstrates,	for	example,	that	a	10	percent decrease	in	worldwide	equities,	all	else	equal,	would	increase	our	SOP	03-1	reserves	by	$91	million	(subject	to	management	judgment	as	described above)	and	cause	a	net	realized	loss	of	$89	million,	offset	by	an	increase	in	hedge	value	of	$67	million,	for	a	total	reduction	in	net	income	of	$113	million. The	hedge	sensitivity	is	from	December	31,	2008	market	levels,	but	includes	hedges	entered	into	in	January	2009.	Because	the	new	hedges	were purchased	after	December	31,	2008,	the	increase	(decrease)	in	hedge	value	for	each	of	the	above	scenarios	relative	to	December	31,	2008	market conditions,	would	be	$25	million	lower	(higher).

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	SOP	03-1	reserve and	fair	value	liability	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	SOP	03-1	reserve	and	fair	value	liability	as	well	as	the	sensitivities	to	changes in	market	factors	shown	above.

If	the	global	equity	market	were	to	experience	a	20	percent	decrease	from	levels	at	December	31,	2008,	all	else	being	equal,	any	additional incremental	capital	required	over	the	increase	in	SOP	03-1	reserves,	would	be	approximately	offset	by	the	increase	in	value	of	currently	held	hedge assets.	Changes	in	other	market	factors	have	a	minor	impact	on	required	capital.	However,	we	would	be	required	to	post	additional	collateral.

From	inception	(July	2000)	to	December	31,	2008,	the	variable	annuity	guarantee	reinsurance	portfolio	has	produced	the	following	cumulative results.	Any	increase	in	SOP	03-1	reserves	and	fair	value	liability	should	be	taken	in	context	of	these	results:

# Net	premiums	earned	$1.06	billion

# Claims	paid	$104	million

Fair	value	GMIB	liability	held	at	December	31,	2008	$811	million

# Life	underwriting	income	$685	million

Net	loss	$11	million

# ITEM	8. Financial	Statements	and	Supplementary	Data

The	financial	statements	and	supplementary	data	required	by	Regulation	S-X	are	included	in	this	report	on	Form	10-K	commencing	on	page	F-1.

ITEM	9. Changes	in	and	Disagreements	with	Accountants	on	Accounting	and	Financial	Disclosure

There	have	been	no	changes	in,	or	any	disagreements	with,	accountants	on	accounting	and	financial	disclosure	within	the	two	years	ended December	31,	2008.

# ITEM	9A. Controls	and	Procedures

The	Company's	management,	with	the	participation	of	the	Company's	Chief	Executive	Officer	and	Chief	Financial	Officer,	evaluated	the	effectiveness	of the	Company's	disclosure	controls	and	procedures	as	defined	in	Rule	13(a)	-15(e)	and	Rule	15(d)	-15(e)	under	the	Securities	Exchange	Act	of	1934	as	of December	31,	2008.	Based	upon	that	evaluation,	the	Company's	Chief	Executive	Officer	and	Chief	Financial	Officer	concluded	that	the	Company's disclosure	controls	and	procedures	are	effective	in	allowing	information	required	to	be	disclosed	in	reports	filed	under	the	Securities	and	Exchange	Act	of 1934	to	be	recorded,	processed,	summarized,	and	reported	within	time	periods	specified	in	the	rules	and	forms	of	the	SEC,	and	that	such	information	is accumulated	and	communicated	to	the	Company's	management,	including	its	Chief	Executive	Officer	and	Chief	Financial	Officer,	as	appropriate	to	allow timely	decisions	regarding	required	disclosure.

There	has	been	no	change	in	the	Company's	internal	controls	over	financial	reporting	during	the	Company's	quarter	ended	December	31,	2008, that	has	materially	affected,	or	is	reasonably	likely	to	materially	affect,	the	Company's	internal	controls	over	financial	reporting.	The	Company's management	report	on	internal	control	over	financial	reporting	is	included	on	page	F-3	and	PricewaterhouseCoopers	LLP's	audit	report	is	included	on page	F-4.

# ITEM	9A(T). Controls	and	Procedures

# Item	not	applicable.

# ITEM	9B. Other	Information

# PART	III

# ITEM	10. Directors,	Executive	Officers	and	Corporate	Governance

Information	pertaining	to	this	item	is	incorporated	by	reference	to	the	sections	entitled	"Election	of	Directors",	"Corporate	Governance	–	Did	our	Officers and	Directors	Comply	with	Section	16(a)	Beneficial	Ownership	Reporting	in	2007?",	"Corporate	Governance	–	How	are	Directors	Nominated?",	and "Corporate	Governance	–	The	Committees	of	the	Board	–	The	Audit	Committee"	of	the	definitive	proxy	statement	for	the	2009	Annual	General	Meeting	of Shareholders	which	will	be	filed	with	the	SEC	not	later	than	120	days	after	the	close	of	the	fiscal	year	pursuant	to	regulation	14A.

# Code	of	Ethics

The	Company	has	adopted	a	Code	of	Conduct,	which	sets	forth	standards	by	which	all	ACE	employees,	officers,	and	directors	must	abide	as	they	work for	the	Company.	The	Company	has	posted	this	Code	of	Conduct	on	its	Internet	site	(www.acelimited.com,	under	Investor	Information	/	Corporate Governance	/	Code	of	Conduct).	The	Company	intends	to	disclose	on	its	Internet	site	any	amendments	to,	or	waivers	from,	its	Code	of	Conduct	that	are required	to	be	publicly	disclosed	pursuant	to	the	rules	of	the	SEC	or	the	New	York	Stock	Exchange.

# ITEM	11. Executive	Compensation

This	item	is	incorporated	by	reference	to	the	sections	entitled	"Executive	Compensation"	of	the	definitive	proxy	statement	for	the	2009	Annual	General Meeting	of	Shareholders	which	will	be	filed	with	the	SEC	not	later	than	120	days	after	the	close	of	the	fiscal	year	pursuant	to	regulation	14A.

# ITEM	12. Security	Ownership	of	Certain	Beneficial	Owners	and	Management	and	Related	Stockholder	Matters

The	following	table	presents	securities	authorized	for	issuance	under	equity	compensation	plans	at	December	31,	2008:

|  |  |  | Number	of |
| :--- | :--- | :--- | :--- |
|  |  |  | securities |
|  |  | Weighted- | remaining |
|  |  | average | available\tfor |
|  |  | exercise | future |
|  |  | price\tof | issuance |
|  | Number\tof\tsecurities\tto | outstanding | under |
|  | be\tissued\tupon\texercise | options, | equity |
|  | of\toutstanding\toptions, | warrants, | compensation |
| Plan\tCategory | warrants,\tand\trights | and\trights | plans^(1) |
| Equity\tcompensation\tplans\tapproved\tby\tsecurity\tholders (2) | 9,897,977 | $46.32 | 11,580,902 |
| Equity\tcompensation\tplans\tnot\tapproved\tby\tsecurity\tholders (3) | 25,586 | $16.19 | – |
| Total | 9,923,563 | $46.24 | 11,580,902 |

(1) These	totals	include	securities	available	for	future	issuance	under	the	following	plans:

i. ACE	Limited	2004	Long-Term	Incentive	Plan.	(the	"2004	LTIP")	A	total	of	19,000,000	Common	Shares	of	the	Company	are	authorized	to	be	issued	pursuant	to	awards	made	as	options,	stock appreciation	rights,	stock	units,	performance	shares,	performance	units,	restricted	stock,	and	restricted	stock	units.	The	maximum	number	of	shares	that	may	be	delivered	to	participants	and their	beneficiaries	under	the	2004	LTIP	shall	be	equal	to	the	sum	of:	(i)	19,000,000	shares;	and	(ii)	any	shares	that	are	represented	by	awards	granted	under	the	ACE	Limited	1995	Long-Term Incentive	Plan,	the	ACE	Limited	1995	Outside	Directors	Plan,	the	ACE	Limited	1998	Long-Term	Incentive	Plan,	and	the	ACE	Limited	1999	Replacement	Long-Term	Incentive	Plan	(the	"Prior Plans")	that	are	forfeited,	expired,	or	are	canceled	after	the	effective	date	of	the	2004	LTIP	of	February	25,	2004,	without	delivery	of	shares	or	which	result	in	the	forfeiture	of	the	shares	back	to the	Company	to	the	extent	that	such	shares	would	have	been	added	back	to	the	reserve	under	the	terms	of	the	applicable	Prior	Plan.	As	of	December	31,	2008,	a	total	of	10,591,090	shares remain	available	for	future	issuance	under	this	plan.

ii. ACE	Limited	1998	Long-Term	Incentive	Plan.	A	total	of	21,252,007	shares	were	authorized	to	be	issued	pursuant	to	awards	made	as	options,	stock	appreciation	rights,	stock	units,	performance shares,	performance	units,	restricted	stock,	and	restricted	stock	units;	the	number	of	shares	available	for	awards	other	than	options	and	stock	appreciation	rights	was	3,232,485	shares.	This plan	only	remains	in	effect	with	respect	to	outstanding	awards	made	pursuant	to	this	plan.	Future	awards	will	be	made	pursuant	to	the	2004	LTIP.

iii. ACE	Limited	1995	Long-Term	Incentive	Plan.	Shares	were	authorized	to	be	issued	in	an	amount	determined	by	a	formula	described	in	footnote	(2)	below	pursuant	to	awards	to	be	made	as options,	stock	appreciation	rights,	and	restricted	stock.	This	plan	only	remains	in	effect	with	respect	to	outstanding	awards	made	pursuant	to	this	plan.	Future	awards	will	be	made	pursuant	to the	2004	LTIP.

iv. ACE	Limited	1999	Replacement	Long	Term	Incentive	Plan.	A	total	of	4,770,555	shares	were	authorized	to	be	issued	pursuant	to	awards	to	be	made	as	options,	stock	appreciation	rights,	stock units,	performance	shares,	performance	units,	restricted	stock,	and	restricted	stock	units.	This	plan	only	remains	in	effect	with	respect	to	outstanding	awards	made	pursuant	to	this	plan.

v. ACE	Limited	1995	Outside	Directors	Plan.	Shares	were	authorized	to	be	issued	in	an	amount	determined	by	a	formula	described	in	footnote	(2)	below	pursuant	to	awards	made	as	options, restricted	stock,	and	unrestricted	stock.	This	plan	only	remains	in	effect	with	respect	to	outstanding	awards	made	pursuant	to	this	plan.	Future	awards	will	be	made	pursuant	to	the	2004	LTIP.

vi. Employee	Stock	Purchase	Plan.	A	total	of	3,000,000	shares	are	authorized	for	purchase	at	a	discount.	As	of	December	31,	2008,	989,812	shares	remain	available	for	future	issuance	under	this plan.

(2) 	This	plan	category	includes	shares	issuable	pursuant	to	the	following	plans	that	authorize	shares	based	on	a	formula:

i. ACE	Limited	1995	Long-Term	Incentive	Plan.	The	total	number	of	shares	available	for	awards	under	this	plan	in	any	fiscal	year	was	five	percent	of	the	adjusted	average	of	the	outstanding Ordinary	Shares	of	the	Company,	as	that	number	is	determined	by	the	Company,	to	calculate	fully	diluted	earnings	per	share	for	the	preceding	fiscal	year,	reduced	by	any	shares	of	stock granted	pursuant	to	awards	under	this	plan	and	any	shares	of	stock	subject	to	any	outstanding	award	under	this	plan.	This	plan	only	remains	in	effect	with	respect	to	outstanding	awards	made pursuant	to	this	plan.	Future	awards	will	be	made	pursuant	to	the	2004	LTIP.

ii. ACE	Limited	1995	Outside	Directors	Plan.	The	total	number	of	shares	available	for	awards	under	this	plan	in	any	fiscal	year	was	0.5	percent	of	the	adjusted	average	of	the	outstanding	Common Shares	of	the	Company,	as	that	number	was	determined	by	the	Company,	to	calculate	fully	diluted	earnings	per	share	for	the	preceding	fiscal	year,	reduced	by	any	shares	of	stock	granted pursuant	to	awards	under	the	plan	and	any	shares	of	stock	subject	to	any	outstanding	award	under	the	plan.	This	plan	only	remains	in	effect	with	respect	to	outstanding	awards	made	pursuant to	this	plan.	Future	awards	will	be	made	pursuant	to	the	2004	LTIP.

	This	plan	category	consists	of	the	following	plan:

ACE	Limited	1999	Replacement	Stock	Plan.	 This	plan	authorized	awards	to	persons	employed	by	the	Company	in	conjunction	with	the	Company's	acquisition	of	Capital	Re	Corporation	as replacement	for	Capital	Re	Corporation	awards.	A	total	of	25,586	options	with	a	weighted	average	exercise	price	of	$16.19	are	outstanding	as	replacement	awards	under	this	plan.	This	plan	also permitted	awards	to	employees	or	other	persons	providing	services	to	the	Company	or	its	subsidiaries.	A	total	of	25,000	options	with	a	weighted	average	exercise	price	of	$36.30	are	outstanding as	new	awards	made	to	employees	of	the	Company	or	its	subsidiaries	under	this	plan.	This	plan	only	remains	in	effect	with	respect	to	outstanding	awards	made	pursuant	to	this	plan.

Additional	information	is	incorporated	by	reference	to	the	section	entitled	"Information	About	our	Common	Share	Ownership"	of	the	definitive	proxy statement	for	the	2009	Annual	General	Meeting	of	Shareholders	which	will	be	filed	with	the	SEC	not	later	than	120	days	after	the	close	of	the	fiscal	year pursuant	to	regulation	14A.

ITEM	13. Certain	Relationships	and	Related	Transactions	and	Director	Independence

This	item	is	incorporated	by	reference	to	the	sections	entitled	"Corporate	Governance	–	What	Is	Our	Related	Party	Transactions	Approval	Policy	and What	Procedures	Do	We	Use	to	Implement	It?",	"Corporate	Governance	–	What	Related	Person	Transactions	Do	We	Have?",	and	"Corporate Governance	–	Director	Independence	and	Other	Information"	of	the	definitive	proxy	statement	for	the	2009	Annual	General	Meeting	of	Shareholders which	will	be	filed	with	the	SEC	not	later	than	120	days	after	the	close	of	the	fiscal	year	pursuant	to	regulation	14A.

# ITEM	14. Principal	Accounting	Fees	and	Services

This	item	is	incorporated	by	reference	to	the	section	entitled	"Election	of	Auditors	–	Ratification	of	appointment	of	PricewaterhouseCoopers	LLP	(United States)	as	independent	registered	public	accounting	firm	for	purposes	of	United	States	securities	law	reporting	for	the	year	ending	December	31,	2009"	of the	definitive	proxy	statement	for	the	2009	Annual	General	Meeting	of	Shareholders	which	will	be	filed	with	the	SEC	not	later	than	120	days	after	the close	of	the	fiscal	year	pursuant	to	regulation	14A.

# PART	IV

ITEM	15. Exhibits,	Financial	Statement	Schedules

# (a)	Financial	Statements,	Schedules,	and	Exhibits

# 3.	Exhibits

|  |  |  |  |  | SEC	File |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Exhibit |  |  | Original |  | Reference |
| Number | Exhibit\tDescription | Form | Number | Date\tFiled | Number |
| 3.1 | Articles\tof\tAssociation\tof\tthe\tCompany,\tas\tamended\tand\trestated | 8-K | 4 | December\t17,\t2008 | 001-11778 |
| 3.2 | Organizational\tRegulations\tof\tthe\tCompany | 8-K | 4.2 | July\t18,\t2008 | 001-11778 |
| 4.1 | Articles\tof\tAssociation\tof\tthe\tCompany,\tas\tamended\tand\trestated | 8-K | 4 | December\t17,\t2008 | 001-11778 |
| 4.2 | Organizational\tRegulations\tof\tthe\tCompany | 8-K | 4.2 | July\t18,\t2008 | 001-11778 |
| 4.3 | Specimen\tshare\tcertificate\trepresenting\tCommon\tShares | 8-K | 4.3 | July\t18,\t2008 | 000-11778 |
| 4.4 | Indenture,\tdated\tMarch\t15,\t2002,\tbetween\tACE\tLimited\tand\tBank | 8-K | 4.1 | March\t22,\t2002 | 001-11778 |
|  | One\tTrust\tCompany,\tN.A. |  |  |  |  |
| 4.5 | Senior\tIndenture,\tdated\tAugust\t1,\t1999,\tamong\tACE\tINA\tHoldings, | S-3 | 4.5 | August\t12,\t1999 | 333-78841 |
|  | Bank\tof\tChicago),\tas\ttrustee |  |  |  |  |
| 4.6 | Indenture,\tdated\tNovember\t30,\t1999,\tamong\tACE\tINA\tHoldings, | 10-K | 10.38 | March\t29,\t2000 | 001-11778 |
|  | Inc.\tand\tBank\tOne\tTrust\tCompany,\tN.A.,\tas\ttrustee |  |  |  |  |
| 4.7 | Supplemental\tIndenture\tNo.\t1,\tdated\tDecember\t6,\t1999,\tamong | 10-K | 10.39 | March\t29,\t2000 | 001-11778 |

| Exhibit |  |  | Original |  | Reference |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Number | Exhibit\tDescription | Form | Number | Date\tFiled | Number |
| 4.8 | Supplemental\tIndenture\tNo.\t2\tand\twaiver,\tdated\tFebruary\t16,\t2000, | 10-K | 4.11 | March\t16,\t2006 | 011-11778 |
|  | trustee |  |  |  |  |
| 4.9 | Supplemental\tIndenture\tNo.\t3,\tdated\tDecember\t21,\t2007,\tby\tand | 10-K | 4.12 | February\t29,\t2008 | 001-11778 |
| 4.10 |  | 10-K | 10.41 | March\t29,\t2000 | 001-11778 |
|  | Limited\tand\tBank\tOne\tTrust\tCompany,\tNational\tAssociation,\tas\ttrustee |  |  |  |  |
| 4.11 | Supplemental\tindenture\tand\twaiver,\tdated\tFebruary\t16,\t2000,\tbetween | 10-K | 4.14 | March\t16,\t2006 | 011-11778 |
| 4.12 |  | 10-K | 4.15 | March\t16,\t2006 | 011-11778 |
| 4.13 | Supplemental\tindenture\tNo.\t3,\tdated\tSeptember\t1,\t2004,\tbetween\tACE | 10-K | 4.16 | March\t16,\t2006 | 011-11778 |
| 4.14 |  | 10-K | 4.18 | February\t29,\t2008 | 001-11778 |
| 4.15 | Amended\tand\tRestated\tTrust\tAgreement,\tdated\tMarch\t31,\t2000,\tamong | 10-K | 4.17 | March\t16,\t2006 | 011-11778 |
|  | ACE\tINA\tHoldings,\tInc.,\tBank\tOne\tTrust\tCompany,\tNational\tAssociation, |  |  |  |  |
|  | the\tadministrative\ttrustees\tnamed\ttherein |  |  |  |  |
| 4.16 | Common\tSecurities\tGuarantee\tAgreement,\tdated\tMarch\t31,\t2000 | 10-K | 4.18 | March\t16,\t2006 | 011-11778 |
| 4.17 | Capital\tSecurities\tGuarantee\tAgreement,\tdated\tMarch\t31,\t2000 | 10-K | 4.19 | March\t16,\t2006 | 011-11778 |
| 10.1* | Second\tAmended\tand\tRestated\tIndemnification\tAgreement\tin\tthe\tform | 10-Q | 10.1 | August\t7,\t2007 | 011-11778 |

| Exhibit |  |  | Original |  | Reference |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Number | Exhibit\tDescription | Form | Number | Date\tFiled | Number |
| 10.3 | Amendment\tand\twaiver\tto\tthe\tStock\tPurchase\tAgreement\tdated | 10-K | 10.5 | March\t16,\t2006 | 001-11778 |
|  | January\t26,\t2006,\tamong\tCentury\tIndemnity\tCompany,\tACE\tINA |  |  |  |  |
|  | International\tHoldings,\tLtd.\tand\tRandall\t&amp;\tQuilter\tInvestment |  |  |  |  |
|  | Holdings\tLimited |  |  |  |  |
| 10.4 | Stock\tPurchase\tAgreement\tdated\tDecember\t14,\t2007,\tbetween | 10-K | 10.4 | February\t29,\t2008 | 001-11778 |
|  | ACE\tLimited\tand\tAon\tCorporation |  |  |  |  |
| 10.5 | Assurance\tof\tDiscontinuance\tand\tVoluntary\tCompliance\twith\tthe | 8-K | 10.1 | April\t28,\t2006 | 001-11778 |
|  | Office\tof\tthe\tNew\tYork\tAttorney\tGeneral,\tthe\tOffice\tof\tthe\tAttorney |  |  |  |  |
|  | General\tof\tthe\tState\tof\tIllinois\tand\tthe\tAttorney\tGeneral\tof\tthe |  |  |  |  |
|  | State\tof\tConnecticut |  |  |  |  |
| 10.6 | Stipulation\twith\tthe\tNew\tYork\tState\tDepartment\tof\tInsurance | 8-K | 10.2 | April\t28,\t2006 | 001-11778 |
| 10.7 | Settlement\tAgreement\tdated\tMay\t9,\t2007,\tbetween\tACE\tGroup | 8-K | 10.1 | May\t14,\t2007 | 001-11778 |
|  | Holdings,\tInc.,\tand\tcertain\tof\tits\tsubsidiaries,\tand\tthe\tPennsylvania |  |  |  |  |
|  | Insurance\tDepartment\tand\tthe\tPennsylvania\tOffice\tof\tthe\tAttorney |  |  |  |  |
|  | General. |  |  |  |  |
| 10.8 | Ninth\tAmendment\tAgreement\tdated\tas\tof\t10\tJuly,\t2008\tto\tLetter\tof | 8-K | 10.5 | July\t16,\t2008 | 001-11778 |
|  | Credit\tFacility\tAgreement\toriginally\tdated\tas\tof\t19\tNovember,\t1999 |  |  |  |  |
|  | (as\tmost\trecently\tamended\tpursuant\tto\tthe\tSeventh\tAmendment |  |  |  |  |
|  | and\tRestatement\tAgreement\tdated\t17\tNovember,\t2006\tand\tthe |  |  |  |  |
|  | Eighth\tAmendment\tAgreement\tdated\tas\tof\t16\tNovember,\t2007) |  |  |  |  |
|  | between,\tamong\tothers,\tthe\tCompany,\tas\taccount\tparty,\tcertain |  |  |  |  |
|  | subsidiaries\tthereof,\tas\tguarantors,\tvarious\tbanks\tand\tCitibank |  |  |  |  |
|  | International\tplc,\tas\tagent\tand\tsecurity\ttrustee\tfor\tthe\tbanks. |  |  |  |  |
| 10.9 | Credit\tAgreement\tfor\t£100,000,000\tdated\tDecember\t13,\t2005, | 10-K | 10.8 | March\t16,\t2006 | 001-11778 |
|  | among\tACE\tEuropean\tHoldings\tNO.2\tLimited,\tACE\tLimited,\tand |  |  |  |  |
|  | lead\tarrangers\tand\tcertain\tother\tfinancial\tinstitutions |  |  |  |  |
| 10.10 | First\tamendment\tdated\tJune\t22,\t2007,\tamending\tthe\tCredit | 10-Q | 10.5 | August\t7,\t2007 | 001-11778 |

| Exhibit |  |  | Original |  | Reference |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Number | Exhibit\tDescription | Form | Number | Date\tFiled | Number |
| 10.11 | Second\tAmendment\tand\tWaiver\tdated\tas\tof\tJuly\t10,\t2008,\tto\tthe | 8-K | 10.4 | July\t16,\t2008 | 001-11778 |
|  | Credit\tAgreement\tfor\t£100,000,000\tdated\tDecember\t13,\t2005, |  |  |  |  |
|  | among\tACE\tEuropean\tHoldings\tNO.2\tLimited,\tACE\tLimited,\tand |  |  |  |  |
|  | lead\tarrangers\tand\tcertain\tother\tfinancial\tinstitutions |  |  |  |  |
| 10.13 | Amended\tand\tRestated\tCredit\tAgreement\tfor\t$600,000,000\tdated | 10-K | 10.9 | March\t16,\t2006 | 001-11778 |
|  | December\t15,\t2005,\tamong\tACE\tLimited,\tcertain\tsubsidiaries, |  |  |  |  |
|  | various\tlenders\tand\tJ.P.\tMorgan\tSecurities\tand\tBarclays\tCapital\tas |  |  |  |  |
|  | joint\tlead\tarrangers\tand\tjoint\tbookrunners |  |  |  |  |
| 10.14 | First\tamendment\tdated\tJune\t22,\t2007,\tamending\tthe\tAmended | 10-Q | 10.6 | August\t7,\t2007 | 001-11778 |
|  | and\tRestated\tCredit\tAgreement\tdated\tDecember\t15,\t2005,\tamong |  |  |  |  |
|  | ACE\tLimited,\tcertain\tsubsidiaries\tthereof,\tvarious\tlenders\tand |  |  |  |  |
|  | JPMorgan\tChase\tBank,\tN.A.,\tas\tAdministrative\tAgent |  |  |  |  |
| 10.15 | Second\tAmended\tand\tRestated\tReimbursement\tAgreement\tfor | 8-K | 10.1 | November\t14,\t2007 | 001-11778 |
|  | $1,000,000,000\tUnsecured\tLetter\tof\tCredit\tFacility,\tdated\tas\tof |  |  |  |  |
|  | November\t8,\t2007,\tamong\tACE\tLimited,\tcertain\tsubsidiaries, |  |  |  |  |
|  | various\tlenders\tand\tWachovia\tCapital\tMarkets,\tLLC\tand\tBanc\tof |  |  |  |  |
|  | America\tSecurities\tLLC\tas\tjoint\tlead\tarrangers\tand\tjoint |  |  |  |  |
|  | bookrunners |  |  |  |  |
| 10.16 | First\tAmendment\tand\tWaiver\tdated\tas\tof\tJuly\t10,\t2008,\tto\tthe | 8-K | 10.7 | July\t18,\t2008 | 001-11778 |
|  | Second\tAmended\tand\tRestated\tReimbursement\tAgreement\tfor |  |  |  |  |
|  | $1,000,000,000\tUnsecured\tLetter\tof\tCredit\tFacility,\tdated\tas\tof |  |  |  |  |
|  | November\t8,\t2007,\tamong\tACE\tLimited,\tcertain\tsubsidiaries, |  |  |  |  |
|  | various\tlenders\tand\tWachovia\tCapital\tMarkets,\tLLC\tand\tBanc\tof |  |  |  |  |
|  | America\tSecurities\tLLC\tas\tjoint\tlead\tarrangers\tand\tjoint |  |  |  |  |
|  | bookrunners |  |  |  |  |
| 10.17 | First\tamendment\tdated\tJune\t22,\t2007,\tamending\tthe\tunsecured | 10-Q | 10.3 | August\t7,\t2007 | 001-11778 |
|  | Amended\tand\tRestated\tReimbursement\tAgreement\tdated\tJuly\t1, |  |  |  |  |
|  | 2005,\tamong\tACE\tLimited,\tcertain\tsubsidiaries\tthereof,\tvarious |  |  |  |  |
|  | lenders\tand\tWachovia\tBank,\tNational\tAssociation,\tas |  |  |  |  |
|  | administrative\tagent |  |  |  |  |
| 10.18 | Second\tAmended\tand\tRestated\tCredit\tAgreement\tfor | 8-K | 10.2 | November\t14,\t2007 | 001-11778 |

| Exhibit |  |  | Original |  | Reference |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Number | Exhibit\tDescription | Form | Number | Date\tFiled | Number |
| 10.19 | First\tAmendment\tand\tWaiver\tdated\tJuly\t10,\t2008,\tto\tthe\tSecond | 8-K | 10.6 | July\t16,\t2008 | 001-11778 |
|  | Amended\tand\tRestated\tCredit\tAgreement\tfor\t$500,000,000\tdated\tas\tof |  |  |  |  |
|  | November\t8,\t2007,\tamong\tACE\tLimited,\tcertain\tsubsidiaries,\tvarious |  |  |  |  |
|  | arrangers\tand\tjoint\tbookrunners |  |  |  |  |
| 10.20 | First\tamendment\tdated\tJune\t22,\t2007,\tamending\tthe\tsecured\tAmended | 10-Q | 10.4 | August\t7,\t2007 | 001-11778 |
|  | and\tRestated\tReimbursement\tAgreement\tdated\tJuly\t1,\t2005,\tamong |  |  |  |  |
|  | ACE\tLimited,\tcertain\tsubsidiaries\tthereof,\tvarious\tlenders\tand\tWachovia |  |  |  |  |
|  | Bank,\tNational\tAssociation,\tas\tadministrative\tagent |  |  |  |  |
| 10.21 | Term\tloan\tagreement\tdated\tApril\t1,\t2008,\tamong\tACE\tLimited,\tcertain | 10-Q | 10.5 | May\t8,\t2008 | 001-11778 |
|  | subsidiaries,\tvarious\tlenders\tand\tBank\tof\tAmerica,\tN.A.,\tas |  |  |  |  |
|  | administrative\tagent. |  |  |  |  |
| 10.22 | First\tAmendment\tand\tWaiver\tdated\tJuly\t10,\t2008,\tto\tthe\tTerm\tloan | 8-K | 10.8 | July\t16,\t2008 | 001-11778 |
|  | agreement\tdated\tApril\t1,\t2008,\tamong\tACE\tLimited,\tcertain\tsubsidiaries, |  |  |  |  |
|  | various\tlenders\tand\tBank\tof\tAmerica,\tN.A.,\tas\tadministrative\tagent. |  |  |  |  |
| 10.23* | Employment\tTerms\tdated\tOctober\t29,\t2001,\tbetween\tACE\tLimited\tand | 10-K | 10.64 | March\t27,\t2003 | 001-11778 |
|  | Evan\tGreenberg |  |  |  |  |
| 10.24* | Employment\tTerms\tdated\tNovember\t2,\t2001,\tbetween\tACE\tLimited\tand | 10-K | 10.65 | March\t27,\t2003 | 001-11778 |
|  | Philip\tV.\tBancroft |  |  |  |  |
| 10.25* | Executive\tSeverance\tAgreement\tbetween\tACE\tLimited\tand\tPhilip | 10-Q | 10.\t1 | May\t10,\t2004 | 001-11778 |
|  | Bancroft,\teffective\tJanuary\t2,\t2002 |  |  |  |  |
| 10.26* | Employment\tTerms\tdated\tFebruary\t25,\t2005,\tbetween\tACE\tLimited\tand | 10-K | 10.21 | March\t1,\t2007 | 001-11778 |
|  | Robert\tCusumano |  |  |  |  |
| 10.27* | Employment\tTerms\tdated\tApril\t10,\t2006,\tbetween\tACE\tand\tJohn\tKeogh | 10-K | 10.29 | February\t29,\t2008 | 001-11778 |
| 10.28* | Executive\tSeverance\tAgreement\tbetween\tACE\tand\tJohn\tKeogh | 10-K | 10.30 | February\t29,\t2008 | 001-11778 |
| 10.29* | ACE\tLimited\tExecutive\tSeverance\tPlan\tas\tamended\tand\trestated, |  |  |  |  |
|  | effective\tJanuary\t1,\t2009 |  |  |  |  |
| 10.30* | Form\tof\temployment\tagreement\tbetween\tthe\tCompany\t(or\tsubsidiaries | 8-K | 10.1 | July\t16,\t2008 | 001-11778 |

| Exhibit |  |  | Original |  | Reference | Filed |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Number | Exhibit\tDescription | Form | Number | Date\tFiled | Number | Herewith |
| 10.31* | Description\tof\tExecutive\tOfficer\tcash\tcompensation\tfor\t2008 |  |  |  |  | X |
| 10.32* | Director\tcompensation\tunder\tthe\tACE\tLimited\t2004\tLong-Term\tIncentive | 10-K | 10.25 | March\t1,\t2007 | 001-11778 |  |
|  | Plan |  |  |  |  |  |
| 10.33* | ACE\tLimited\tAnnual\tPerformance\tIncentive\tPlan | S-1 | 10.13 | January\t21,\t1993 | 33-57206 |  |
| 10.34* | ACE\tLimited\tElective\tDeferred\tCompensation\tPlan\t(as\tamended\tand | 10-K | 10.24 | March\t16,\t2006 | 001-11778 |  |
|  | restated\teffective\tJanuary\t1,\t2005) |  |  |  |  |  |
| 10.35* | ACE\tUSA\tOfficer\tDeferred\tCompensation\tPlan\t(as\tamended\tthrough | 10-K | 10.25 | March\t16,\t2006 | 001-11778 |  |
|  | January\t1,\t2001) |  |  |  |  |  |
| 10.36* | ACE\tUSA\tOfficer\tDeferred\tCompensation\tPlan\t(as\tamended\tand |  |  |  |  | X |
|  | restated\teffective\tJanuary\t1,\t2009) |  |  |  |  |  |
| 10.37* | ACE\tLimited\tSupplemental\tRetirement\tPlan\t(as\tamended\tand\trestated | 10-Q | 10.1 | November\t14,\t2001 | 001-11778 |  |
|  | effective\tJuly\t1,\t2001) |  |  |  |  |  |
| 10.38* | Amendments\tto\tthe\tACE\tLimited\tSupplemental\tRetirement\tPlan\tand\tthe | 10-K | 10.38 | February\t29,\t2008 | 001-11778 |  |
|  | ACE\tLimited\tElective\tDeferred\tCompensation\tPlan |  |  |  |  |  |
| 10.39* | ACE\tLimited\tElective\tDeferred\tCompensation\tPlan\t(as\tamended\tand |  |  |  |  | X |
|  | restated\teffective\tJanuary\t1,\t2009) |  |  |  |  |  |
| 10.40* | Deferred\tCompensation\tPlan\tAmendments,\teffective\tJanuary\t1,\t2009 |  |  |  |  | X |
| 10.41* | Amendment\tto\tthe\tACE\tLimited\tSupplemental\tRetirement\tPlan | 10-K | 10.39 | February\t29,\t2008 | 001-11778 |  |
| 10.42* | Amendment\tand\trestated\tACE\tLimited\tSupplemental\tRetirement\tPlan, |  |  |  |  | X |
|  | effective\tJanuary\t1,\t2009 |  |  |  |  |  |
| 10.43* | ACE\tUSA\tSupplemental\tEmployee\tRetirement\tSavings\tPlan | 10-Q | 10.6 | May\t15,\t2000 | 001-11778 |  |
| 10.44* | ACE\tUSA\tSupplemental\tEmployee\tRetirement\tSavings\tPlan\t(as | 10-K | 10.30 | March\t1,\t2007 | 001-11778 |  |
|  | amended\tthrough\tthe\tSecond\tAmendment) |  |  |  |  |  |
| 10.45* | ACE\tUSA\tSupplemental\tEmployee\tRetirement\tSavings\tPlan\t(as | 10-K | 10.31 | March\t1,\t2007 | 001-11778 |  |
|  | amended\tthrough\tthe\tThird\tAmendment) |  |  |  |  |  |
| 10.46 | ACE\tUSA\tSupplemental\tEmployee\tRetirement\tSavings\tPlan\t(as |  |  |  |  | X |
|  | amended\tthrough\tthe\tFourth\tAmendment) |  |  |  |  |  |
| 10.47* | The\tACE\tLimited\t1995\tOutside\tDirectors\tPlan\t(as\tamended\tthrough\tthe | 10-Q | 10.1 | August\t14,\t2003 | 001-11778 |  |

| Exhibit |  |  | Original |  | Reference | Filed |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Number | Exhibit\tDescription | Form | Number | Date\tFiled | Number | Herewith |
| 10.48* | ACE\tLimited\t1995\tLong-Term\tIncentive\tPlan\t(as\tamended\tthrough\tthe | 10-K | 10.33 | March\t1,\t2007 | 001-11778 |  |
|  | Third\tAmendment) |  |  |  |  |  |
| 10.49* | ACE\tLimited\t1998\tLong-Term\tIncentive\tPlan\t(as\tamended\tthrough\tthe | 10-K | 10.34 | March\t1,\t2007 | 001-11778 |  |
|  | Fourth\tAmendment) |  |  |  |  |  |
| 10.50* | ACE\tLimited\t1999\tReplacement\tLong-Term\tIncentive\tPlan | 10-Q | 10.1 | November\t15,\t1999 | 001-11778 |  |
| 10.51* | ACE\tLimited\tRules\tof\tthe\tApproved\tU.K.\tStock\tOption\tProgram | 10-Q | 10.2 | February\t13,\t1998 | 001-11778 |  |
| 10.52* | ACE\tLimited\t2004\tLong-Term\tIncentive\tPlan\t(as\tamended\tthrough\tthe | 8-K | 10.2 | July\t16,\t2008 | 001-11778 |  |
|  | Fourth\tAmendment) |  |  |  |  |  |
| 10.53* | Revised\tForm\tof\tRestricted\tStock\tAward\tTerms\tunder\tthe\tACE\tLimited | 10-Q | 10.3 | November\t8,\t2006 | 001-11778 |  |
|  | 2004\tLong-Term\tIncentive\tPlan. |  |  |  |  |  |
| 10.54* | Form\tof\tRestricted\tStock\tAward\tTerms\tunder\tthe\tACE\tLimited\t2004 |  |  |  |  | X |
|  | Long-Term\tIncentive\tPlan. |  |  |  |  |  |
| 10.55* | Form\tof\tRestricted\tStock\tAward\tTerms\tunder\tthe\tACE\tLimited\t2004 |  |  |  |  | X |
|  | Long-Term\tIncentive\tPlan. |  |  |  |  |  |
| 10.56* | Form\tof\tRestricted\tStock\tUnit\tAward\tTerms\tunder\tthe\tACE\tLimited\t2004 | 8-K | 10.3 | September\t13,\t2004 | 001-11778 |  |
|  | Long-Term\tIncentive\tPlan |  |  |  |  |  |
| 10.57* | Form\tof\tRestricted\tStock\tUnit\tAward\tTerms\tunder\tthe\tACE\tLimited\t2004 | 10-Q | 10.4 | November\t8,\t2006 | 001-11778 |  |
|  | Long-Term\tIncentive\tPlan. |  |  |  |  |  |
| 10.58* | Form\tof\tRestricted\tStock\tUnit\tAward\tTerms\tunder\tthe\tACE\tLimited\t2004 | 10-Q | 10.1 | May\t8,\t2008 | 001-11778 |  |
|  | Long-Term\tIncentive\tPlan. |  |  |  |  |  |
| 10.59* | Form\tof\tRestricted\tStock\tUnit\tAward\tTerms\tunder\tthe\tACE\tLimited\t2004 | 10-Q | 10.2 | May\t8,\t2008 | 001-11778 |  |
|  | Long-Term\tIncentive\tPlan. |  |  |  |  |  |
| 10.60* | Form\tof\tRestricted\tStock\tUnit\tAward\tTerms\tunder\tthe\tACE\tLimited\t2004 |  |  |  |  | X |
|  | Long-Term\tIncentive\tPlan. |  |  |  |  |  |
| 10.61* | Form\tof\tIncentive\tStock\tOption\tTerms\tunder\tthe\tACE\tLimited\t2004\tLong- | 8-K | 10.4 | September\t13,\t2004 | 001-11778 |  |
|  | Term\tIncentive\tPlan |  |  |  |  |  |
| 10.62* | Form\tof\tIncentive\tStock\tOption\tTerms\tunder\tthe\tACE\tLimited\t2004\tLong- | 10-Q | 10.4 | May\t8,\t2008 | 001-11778 |  |
|  | Term\tIncentive\tPlan |  |  |  |  |  |
| 10.63* | Form\tof\tIncentive\tStock\tOption\tTerms\tunder\tthe\tACE\tLimited\t2004\tLong- |  |  |  |  | X |
|  | Term\tIncentive\tPlan |  |  |  |  |  |
| 10.64* | Form\tof\tNon-Qualified\tStock\tOption\tTerms\tunder\tthe\tACE\tLimited\t2004 | 8-K | 10.5 | September\t13,\t2004 | 001-11778 |  |

# SIGNATURES

Pursuant	to	the	requirements	of	Section	13	or	15(d)	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.

# Philip	V.	Bancroft

Chief	Financial	Officer

Pursuant	to	the	requirements	of	the	Securities	Exchange	Act	of	1934,	this	report	has	been	signed	below	by	the	following	persons	on	behalf	of	the registrant	and	in	the	capacities	and	on	the	dates	indicated.

# ACE	LIMITED	AND	SUBSIDIARIES

# CONSOLIDATED	FINANCIAL	STATEMENTS

# INDEX	TO	CONSOLIDATED	FINANCIAL	STATEMENTS

# MANAGEMENT'S	RESPONSIBILITY	FOR	FINANCIAL	STATEMENTS	AND	INTERNAL	CONTROL	OVER	FINANCIAL	REPORTING

# Financial	Statements

The	consolidated	financial	statements	of	ACE	Limited	were	prepared	by	management,	who	are	responsible	for	their	reliability	and	objectivity.	The statements	have	been	prepared	in	conformity	with	accounting	principles	generally	accepted	in	the	United	States	of	America	and,	as	such,	include amounts	based	on	informed	estimates	and	judgments	of	management.	Financial	information	elsewhere	in	this	annual	report	is	consistent	with	that	in	the consolidated	financial	statements.

The	Board	of	Directors,	operating	through	its	Audit	Committee,	which	is	composed	entirely	of	directors	who	are	not	officers	or	employees	of	the Company,	provides	oversight	of	the	financial	reporting	process	and	safeguarding	of	assets	against	unauthorized	acquisition,	use	or	disposition.	The	Audit Committee	annually	recommends	the	appointment	of	an	independent	registered	public	accounting	firm	and	submits	its	recommendation	to	the	Board	of Directors	for	approval.

The	Audit	Committee	meets	with	management,	the	independent	registered	public	accountants	and	the	internal	auditor;	approves	the	overall	scope of	audit	work	and	related	fee	arrangements;	and	reviews	audit	reports	and	findings.	In	addition,	the	independent	registered	public	accountants	and	the internal	auditor	meet	separately	with	the	Audit	Committee,	without	management	representatives	present,	to	discuss	the	results	of	their	audits;	the adequacy	of	the	Company's	internal	control;	the	quality	of	its	financial	reporting;	and	the	safeguarding	of	assets	against	unauthorized	acquisition,	use	or disposition.

The	consolidated	financial	statements	have	been	audited	by	an	independent	registered	public	accounting	firm,	PricewaterhouseCoopers	LLP,	who were	given	unrestricted	access	to	all	financial	records	and	related	data,	including	minutes	of	all	meetings	of	the	Board	of	Directors	and	committees	of	the Board.	The	Company	believes	that	all	representations	made	to	our	independent	registered	public	accountants	during	their	audits	were	valid	and appropriate.

# Internal	Control	Over	Financial	Reporting

The	management	of	ACE	Limited	(ACE)	is	responsible	for	establishing	and	maintaining	adequate	internal	control	over	financial	reporting.	Pursuant	to	the rules	and	regulations	of	the	Securities	and	Exchange	Commission,	internal	control	over	financial	reporting	is	a	process	designed	by,	or	under	the supervision	of	our	Chief	Executive	Officer	and	Chief	Financial	Officer	to	provide	reasonable	assurance	regarding	the	reliability	of	financial	reporting	and the	preparation	of	our	consolidated	financial	statements	for	external	purposes	in	accordance	with	accounting	principles	generally	accepted	in	the	United States	of	America.

As	of	December	31,	2008,	management	has	evaluated	the	effectiveness	of	ACE's	internal	control	over	financial	reporting	based	on	the	criteria	for effective	internal	control	over	financial	reporting	established	in	"Internal	Control	–	Integrated	Framework,"	issued	by	the	Committee	of	Sponsoring Organizations	of	the	Treadway	Commission.	Based	on	this	evaluation,	we	have	concluded	that	ACE's	internal	control	over	financial	reporting	was effective	as	of	December	31,	2008.

PricewaterhouseCoopers	LLP,	the	independent	registered	public	accounting	firm	that	audited	the	consolidated	financial	statements	of	ACE included	in	this	Annual	Report,	has	issued	a	report	on	the	effectiveness	of	the	Company's	internal	controls	over	financial	reporting	as	of	December	31, 2008.	The	report,	which	expresses	an	unqualified	opinion	on	the	effectiveness	of	ACE's	internal	control	over	financial	reporting	as	of	December	31,	2008, is	included	in	this	Item	under	"Report	of	Independent	Registered	Public	Accounting	Firm"	and	follows	this	statement.

Evan	G.	Greenberg

Chairman	and	Chief	Executive	Officer

# REPORT	OF	INDEPENDENT	REGISTERED	PUBLIC	ACCOUNTING	FIRM

To	the	Board	of	Directors	and	Shareholders	of	ACE	Limited:

In	our	opinion,	the	accompanying	consolidated	balance	sheets	and	the	related	consolidated	statements	of	operations	and	comprehensive	income,	of shareholders'	equity,	and	of	cash	flows	present	fairly,	in	all	material	respects,	the	financial	position	of	ACE	Limited	and	its	subsidiaries	(the	"Company")	at December	31,	2008	and	December	31,	2007,	and	the	results	of	their	operations	and	their	cash	flows	for	each	of	the	three	years	in	the	period	ended December	31,	2008	in	conformity	with	accounting	principles	generally	accepted	in	the	United	States	of	America.	In	addition,	in	our	opinion,	the	financial statement	schedules	listed	in	the	index	appearing	under	Item	15	(2)	present	fairly,	in	all	material	respects,	the	information	set	forth	therein	when	read	in conjunction	with	the	related	consolidated	financial	statements.	Also	in	our	opinion,	the	Company	maintained,	in	all	material	respects,	effective	internal control	over	financial	reporting	as	of	December	31,	2008,	based	on	criteria	established	in	Internal	Control	–	Integrated	Framework	issued	by	the Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	(COSO).	The	Company's	management	is	responsible	for	these	financial statements	and	financial	statement	schedules,	for	maintaining	effective	internal	control	over	financial	reporting	and	for	its	assessment	of	the effectiveness	of	internal	control	over	financial	reporting,	included	in	Management's	Responsibility	for	Financial	Statements	and	Internal	Controls	Over Financial	Reporting	appearing	under	Item	15	(1).	Our	responsibility	is	to	express	opinions	on	these	financial	statements,	on	the	financial	statement schedules,	and	on	the	Company's	internal	control	over	financial	reporting	based	on	our	integrated	audits.	We	conducted	our	audits	in	accordance	with the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we	plan	and	perform	the	audits	to	obtain reasonable	assurance	about	whether	the	financial	statements	are	free	of	material	misstatement	and	whether	effective	internal	control	over	financial reporting	was	maintained	in	all	material	respects.	Our	audits	of	the	financial	statements	included	examining,	on	a	test	basis,	evidence	supporting	the amounts	and	disclosures	in	the	financial	statements,	assessing	the	accounting	principles	used	and	significant	estimates	made	by	management,	and evaluating	the	overall	financial	statement	presentation.	Our	audit	of	internal	control	over	financial	reporting	included	obtaining	an	understanding	of internal	control	over	financial	reporting,	assessing	the	risk	that	a	material	weakness	exists,	and	testing	and	evaluating	the	design	and	operating effectiveness	of	internal	control	based	on	the	assessed	risk.	Our	audits	also	included	performing	such	other	procedures	as	we	considered	necessary	in the	circumstances.	We	believe	that	our	audits	provide	a	reasonable	basis	for	our	opinions.

A	company's	internal	control	over	financial	reporting	is	a	process	designed	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.	A	company's	internal control	over	financial	reporting	includes	those	policies	and	procedures	that	(i)	pertain	to	the	maintenance	of	records	that,	in	reasonable	detail,	accurately and	fairly	reflect	the	transactions	and	dispositions	of	the	assets	of	the	company;	(ii)	provide	reasonable	assurance	that	transactions	are	recorded	as necessary	to	permit	preparation	of	financial	statements	in	accordance	with	generally	accepted	accounting	principles,	and	that	receipts	and	expenditures of	the	company	are	being	made	only	in	accordance	with	authorizations	of	management	and	directors	of	the	company;	and	(iii)	provide	reasonable assurance	regarding	prevention	or	timely	detection	of	unauthorized	acquisition,	use,	or	disposition	of	the	company's	assets	that	could	have	a	material effect	on	the	financial	statements.

Because	of	its	inherent	limitations,	internal	control	over	financial	reporting	may	not	prevent	or	detect	misstatements.	Also,	projections	of	any	evaluation	of effectiveness	to	future	periods	are	subject	to	the	risk	that	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of compliance	with	the	policies	or	procedures	may	deteriorate.

PricewaterhouseCoopers	LLP Philadelphia,	Pennsylvania February	27,	2009

# CONSOLIDATED	BALANCE	SHEETS

| December	31,	2008	and	2007<br>(in	millions	of	U.S.	dollars,	except	share	and	per	share	data) | December	31<br>2008 | December	31<br>2007 |
| :--- | :--- | :--- |
| Assets |  |  |
| Investments |  |  |
| Fixed\tmaturities\tavailable\tfor\tsale,\tat\tfair\tvalue\t(amortized\tcost\t–\t$33,109\tand\t$32,994)\t(includes\thybrid |  |  |
| financial\tinstruments\tof\t$239\tand\t$282) | $31,155 | $33,184 |
| Fixed\tmaturities\theld\tto\tmaturity,\tat\tamortized\tcost\t(fair\tvalue\t–\t$2,865\tand\t$3,015) | 2,860 | 2,987 |
| Equity\tsecurities,\tat\tfair\tvalue\t(cost\t–\t$1,132\tand\t$1,618) | 988 | 1,837 |
| Short-term\tinvestments,\tat\tfair\tvalue\tand\tamortized\tcost | 3,350 | 2,631 |
| Other\tinvestments\t(cost\t–\t$1,368\tand\t$880) | 1,362 | 1,140 |
| Total\tinvestments | 39,715 | 41,779 |
| Cash | 867 | 510 |
| Securities\tlending\tcollateral | 1,230 | 2,109 |
| Accrued\tinvestment\tincome | 443 | 416 |
| Insurance\tand\treinsurance\tbalances\treceivable | 3,453 | 3,540 |
| Reinsurance\trecoverable\ton\tlosses\tand\tloss\texpenses | 13,917 | 14,354 |
| Reinsurance\trecoverable\ton\tfuture\tpolicy\tbenefits | 259 | 8 |
| Deferred\tpolicy\tacquisition\tcosts | 1,214 | 1,121 |
| Value\tof\tbusiness\tacquired | 823 | – |
| Prepaid\treinsurance\tpremiums | 1,539 | 1,600 |
| Goodwill\tand\tother\tintangible\tassets | 3,747 | 2,838 |
| Deferred\ttax\tassets | 1,835 | 1,087 |
| Investments\tin\tpartially-owned\tinsurance\tcompanies\t(cost\t–\t$737\tand\t$686) | 832 | 773 |
| Other\tassets | 2,183 | 1,955 |
| Total\tassets | $72,057 | $72,090 |
| Liabilities |  |  |
| Unpaid\tlosses\tand\tloss\texpenses | $37,176 | $37,112 |
| Unearned\tpremiums | 5,950 | 6,227 |
| Future\tpolicy\tbenefits | 2,904 | 545 |
| Insurance\tand\treinsurance\tbalances\tpayable | 2,841 | 2,843 |
| Deposit\tliabilities | 345 | 351 |
| Securities\tlending\tpayable | 1,296 | 2,109 |
| Payable\tfor\tsecurities\tpurchased | 740 | 1,798 |
| Accounts\tpayable,\taccrued\texpenses,\tand\tother\tliabilities | 2,635 | 1,825 |
| Income\ttaxes\tpayable | 138 | 111 |
| Short-term\tdebt | 471 | 372 |
| Long-term\tdebt | 2,806 | 1,811 |
| Trust\tpreferred\tsecurities | 309 | 309 |
| Total\tliabilities | 57,611 | 55,413 |
| Commitments\tand\tcontingencies |  |  |
| Shareholders'\tequity |  |  |
| Preferred\tShares | – | 2 |
| 333,645,471\tand\t329,704,531\tshares\toutstanding) | 10,827 | 14 |
| Common\tShares\tin\ttreasury\t(1,768,030\tand\tnil\tshares) | (3) | – |
| Additional\tpaid-in\tcapital | 5,464 | 6,812 |
| Retained\tearnings | 74 | 9,080 |
| Deferred\tcompensation\tobligation | 3 | 3 |
| Accumulated\tother\tcomprehensive\t(loss)\tincome | (1,916) | 769 |
| Common\tShares\tissued\tto\temployee\ttrust | (3) | (3) |
| Total\tshareholders'\tequity | 14,446 | 16,677 |
| Total\tliabilities\tand\tshareholders'\tequity | $72,057 | $72,090 |

# CONSOLIDATED	STATEMENTS	OF	OPERATIONS	AND	COMPREHENSIVE	INCOME

| (in	millions	of	U.S.	dollars,	except	per	share	data) | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Revenues |  |  |  |
| Gross\tpremiums\twritten | $19,242 | $17,740 | $17,401 |
| Reinsurance\tpremiums\tceded | (6,162) | (5,761) | (5,371) |
| Net\tpremiums\twritten | \t 13,080 | \t 11,979 | \t 12,030 |
| Change\tin\tunearned\tpremiums | 123 | 318 | (205) |
| Net\tpremiums\tearned | \t 13,203 | \t 12,297 | \t 11,825 |
| Net\tinvestment\tincome | 2,062 | 1,918 | 1,601 |
| Net\trealized\tgains\t(losses) | (1,633) | (61) | (98) |
| Total\trevenues | \t 13,632 | \t 14,154 | \t 13,328 |
| Expenses |  |  |  |
| Losses\tand\tloss\texpenses | 7,603 | 7,351 | 7,070 |
| Future\tpolicy\tbenefits | 399 | 168 | 123 |
| Policy\tacquisition\tcosts | 2,135 | 1,771 | 1,715 |
| Administrative\texpenses | 1,737 | 1,455 | 1,456 |
| Interest\texpense | 230 | 175 | 176 |
| Other\t(income)\texpense | (39) | 81 | (35) |
| Total\texpenses | \t 12,065 | \t 11,001 | \t 10,505 |
| Income\tbefore\tincome\ttax\tand\tcumulative\teffect\tof\ta\tchange\tin\taccounting\tprinciple | 1,567 | 3,153 | 2,823 |
| Income\ttax\texpense | 370 | 575 | 522 |
| Income\tbefore\tcumulative\teffect\tof\ta\tchange\tin\taccounting\tprinciple | 1,197 | 2,578 | 2,301 |
| Cumulative\teffect\tof\ta\tchange\tin\taccounting\tprinciple | – | – | 4 |
| Net\tincome | $1,197 | $2,578 | $2,305 |
| Other\tcomprehensive\t(loss)\tincome |  |  |  |
| Unrealized\tappreciation\t(depreciation)\tarising\tduring\tthe\tyear | (3,948) | (3) | 289 |
| Reclassification\tadjustment\tfor\tnet\trealized\t(gains)\tlosses\tincluded\tin\tnet\tincome | 1,189 | 27 | 64 |
|  | (2,759) | 24 | 353 |
| Change\tin: |  |  |  |
| Cumulative\ttranslation\tadjustment | (590) | 105 | 135 |
| Pension\tliability | 23 | (4) | 20 |
| Other\tcomprehensive\t(loss)\tincome,\tbefore\tincome\ttax | (3,326) | 125 | 508 |
| Income\ttax\t(expense)\tbenefit\trelated\tto\tother\tcomprehensive\tincome\titems | 647 | (60) | (113) |
| Other\tcomprehensive\t(loss)\tincome | (2,679) | 65 | 395 |
| Comprehensive\t(loss)\tincome | $ (1,482) | $2,643 | $2,700 |
| Basic\tearnings\tper\tshare\tbefore\tcumulative\teffect\tof\ta\tchange\tin\taccounting\tprinciple | $3.57 | $7.79 | $7.01 |
| Cumulative\teffect\tof\ta\tchange\tin\taccounting\tprinciple | – | – | 0.01 |
| Basic\tearnings\tper\tshare | $3.57 | $7.79 | $7.02 |
| Diluted\tearnings\tper\tshare\tbefore\tcumulative\teffect\tof\ta\tchange\tin\taccounting\tprinciple | $3.53 | $7.66 | $6.90 |
| Cumulative\teffect\tof\ta\tchange\tin\taccounting\tprinciple | – | – | 0.01 |
| Diluted\tearnings\tper\tshare | $3.53 | $7.66 | $6.91 |

See	accompanying	notes	to	consolidated	financial	statements

# CONSOLIDATED	STATEMENTS	OF	SHAREHOLDERS'	EQUITY

| (in	millions	of	U.S.	dollars) | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Preferred\tShares |  |  |  |
| Balance\t–\tbeginning\tyear | $2 | $2 | $2 |
| Preferred\tShares\tredeemed | (2) | – | – |
| Balance\t–\tend\tof\tyear | – | 2 | 2 |
| Common\tShares |  |  |  |
| Balance\t–\tbeginning\tof\tyear | 14 | 14 | 13 |
| Exercise\tof\tstock\toptions | 6 | – | – |
| Common\tShares\tstock\tdividend | \t 10,985 | – | – |
| Dividends\tdeclared\ton\tCommon\tShares-par\tvalue\treduction | (178) | – | – |
| Shares\tissued | – | – | 1 |
| Balance\t–\tend\tof\tyear | \t 10,827 | 14 | 14 |
| Common\tShares\tin\ttreasury |  |  |  |
| Balance\t–\tbeginning\tof\tyear | – | – | – |
| Common\tShares\tissued\tin\ttreasury,\tnet\tof\tnet\tshares\tredeemed\tunder\temployee\tshare-based |  |  |  |
| compensation\tplans | (3) | – | – |
| Balance\t–\tend\tof\tyear | (3) | – | – |
| Additional\tpaid-in\tcapital |  |  |  |
| Balance\t–\tbeginning\tof\tyear | 6,812 | \t 6,640 | \t 6,569 |
| Preferred\tShares\tredeemed | (573) | – | – |
| Net\tshares\tredeemed\tunder\temployee\tshare-\tbased\tcompensation\tplans | (14) | (17) | (14) |
| Exercise\tof\tstock\toptions | 91 | 65 | 67 |
| Share-based\tcompensation\texpense | 126 | 100 | 88 |
| Tax\tbenefit\ton\tshare-based\tcompensation\texpense | 12 | 24 | 4 |
| Common\tShares\tstock\tdividend | (990) | – | – |
| Reclassification\tof\tunearned\tstock\tgrant\tcompensation | – | – | (69) |
| Cumulative\teffect\tof\ta\tchange\tin\taccounting\tprinciple | – | – | (5) |
| Balance\t–\tend\tof\tyear | 5,464 | \t 6,812 | \t 6,640 |
| Unearned\tstock\tgrant\tcompensation |  |  |  |
| Balance\t–\tbeginning\tof\tyear | – | – | (69) |
| Reclassification\tof\tunearned\tstock\tgrant\tcompensation | – | – | 69 |
| Balance\t–\tend\tof\tyear | – | – | – |
| Retained\tearnings |  |  |  |
| Balance\t–\tbeginning\tof\tyear | 9,080 | \t 6,906 | \t 4,965 |
| Effect\tof\tpartial\tadoption\tof\tFAS\t157 | (4) | – | – |
| Effect\tof\tadoption\tof\tFAS\t159 | 6 | – | – |
| Effect\tof\tadoption\tof\tFIN\t48 | – | (22) | – |
| Effect\tof\tadoption\tof\tFAS\t155 | – | 12 | – |
| Balance\t–\tbeginning\tof\tyear,\tadjusted\tfor\teffect\tof\tadoption\tof\tnew\taccounting\tprinciples | 9,082 | \t 6,896 | \t 4,965 |
| Net\tincome | 1,197 | \t 2,578 | \t 2,305 |
| Dividends\tdeclared\ton\tCommon\tShares | (186) | (349) | (319) |
| Dividends\tdeclared\ton\tPreferred\tShares | (24) | (45) | (45) |
| Common\tShares\tstock\tdividend | (9,995) | – | – |
| Balance\t–\tend\tof\tyear | 74 | \t 9,080 | \t 6,906 |
| Deferred\tcompensation\tobligation |  |  |  |
| Balance\t–\tbeginning\tof\tyear | 3 | 4 | 6 |
| Decrease\tto\tobligation | – | (1) | (2) |
| Balance\t–\tend\tof\tyear | $3 | $3 | $4 |

# CONSOLIDATED	STATEMENTS	OF	SHAREHOLDERS'	EQUITY	(continued)

| (in	millions	of	U.S.	dollars) | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Accumulated\tother\tcomprehensive\t(loss)\tincome |  |  |  |
| Net\tunrealized\tappreciation\t(depreciation)\ton\tinvestments |  |  |  |
| Balance\t–\tbeginning\tof\tyear | $596 | $607 | $317 |
| Effect\tof\tadoption\tof\tFAS\t159 | (6) | – | – |
| Effect\tof\tadoption\tof\tFAS\t155 | – | (12) | – |
| Balance\t–\tbeginning\tof\tyear,\tadjusted\tfor\teffect\tof\tadoption\tof\tnew\taccounting\tprinciples | 590 | 595 | 317 |
| Change\tin\tyear,\tnet\tof\tincome\ttax\t(expense)\tbenefit\tof\t$457,\t$(23),\tand\t$(63) | (2,302) | 1 | 290 |
| Balance\t–\tend\tof\tyear | (1,712) | 596 | 607 |
| Cumulative\ttranslation\tadjustment |  |  |  |
| Balance\t–\tbeginning\tof\tyear | 231 | 165 | 73 |
| Change\tin\tyear,\tnet\tof\tincome\ttax\t(expense)\tbenefit\tof\t$198,\t$(39),\tand\t$(43) | (392) | 66 | 92 |
| Balance\t–\tend\tof\tyear | (161) | 231 | 165 |
| Pension\tliability\tadjustment |  |  |  |
| Balance\t–\tbeginning\tof\tyear | (58) | (56) | (58) |
| Change\tin\tyear,\tnet\tof\tincome\ttax\t(expense)\tbenefit\tof\t$(8),\t$2,\tand\t$(7) | 15 | (2) | 13 |
| Minimum\tpension\tliability\tdue\tto\tadoption\tof\tFAS\t158,\tnet\tof\tincome\ttax\t(expense)\tbenefit\tof\t$(25)\tin |  |  |  |
| 2006 | – | – | 45 |
| Pension\tliability\tadjustment\tdue\tto\tadoption\tof\tFAS\t158,\tnet\tof\tincome\ttax\t(expense)\tbenefit\tof\t$30\tin |  |  |  |
| 2006 | – | – | (56) |
| Balance\t–\tend\tof\tyear | (43) | (58) | (56) |
| Accumulated\tother\tcomprehensive\t(loss)\tincome | (1,916) | 769 | 716 |
| Common\tShares\tissued\tto\temployee\ttrust |  |  |  |
| Balance\t–\tbeginning\tof\tyear | (3) | (4) | (6) |
| Decrease\tin\tCommon\tShares | – | 1 | 2 |
| Balance\t–\tend\tof\tyear | (3) | (3) | (4) |
| Total\tshareholders'\tequity | $14,446 | $16,677 | $14,278 |

# CONSOLIDATED	STATEMENTS	OF	CASH	FLOWS

| (in	millions	of	U.S.	dollars) | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Cash\tflows\tfrom\toperating\tactivities |  |  |  |
| Net\tincome | $1,197 | $2,578 | $2,305 |
| Adjustments\tto\treconcile\tnet\tincome\tto\tnet\tcash\tflows\tfrom\toperating\tactivities: |  |  |  |
| Net\trealized\t(gains)\tlosses | 1,633 | 61 | 98 |
| Amortization\tof\tpremium/discount\ton\tfixed\tmaturities | (1) | (6) | 10 |
| Deferred\tincome\ttaxes | (141) | 25 | 57 |
| Unpaid\tlosses\tand\tloss\texpenses | 1,300 | 1,194 | 700 |
| Unearned\tpremiums | (128) | (356) | 343 |
| Future\tpolicy\tbenefits | 212 | 27 | (3) |
| Insurance\tand\treinsurance\tbalances\tpayable | (26) | 298 | 41 |
| Accounts\tpayable,\taccrued\texpenses,\tand\tother\tliabilities | 638 | 242 | 66 |
| Income\ttaxes\tpayable/receivable | 46 | (72) | (18) |
| Insurance\tand\treinsurance\tbalances\treceivable | (6) | 155 | (226) |
| Reinsurance\trecoverable\ton\tlosses\tand\tloss\texpenses | (224) | 341 | 765 |
| Reinsurance\trecoverable\ton\tfuture\tpolicy\tbenefits | (9) | 2 | 1 |
| Deferred\tpolicy\tacquisition\tcosts | (185) | (10) | (114) |
| Prepaid\treinsurance\tpremiums | (15) | 35 | (137) |
| Other | (190) | 187 | 217 |
| Net\tcash\tflows\tfrom\toperating\tactivities | 4,101 | 4,701 | 4,105 |
| Cash\tflows\tused\tfor\tinvesting\tactivities |  |  |  |
| Purchases\tof\tfixed\tmaturities\tavailable\tfor\tsale | (24,537) | (25,195) | (23,281) |
| Purchases\tof\tto\tbe\tannounced\tmortgage-backed\tsecurities | (18,969) | (22,923) | (17,914) |
| Purchases\tof\tfixed\tmaturities\theld\tto\tmaturity | (366) | (324) | (533) |
| Purchases\tof\tequity\tsecurities | (971) | (929) | (841) |
| Sales\tof\tfixed\tmaturities\tavailable\tfor\tsale | 21,087 | 19,266 | 17,057 |
| Sales\tof\tto\tbe\tannounced\tmortgage-backed\tsecurities | 18,340 | 21,550 | 16,882 |
| Sales\tof\tequity\tsecurities | 1,164 | 863 | 927 |
| Maturities\tand\tredemptions\tof\tfixed\tmaturities\tavailable\tfor\tsale | 2,780 | 3,232 | 3,409 |
| Maturities\tand\tredemptions\tof\tfixed\tmaturities\theld\tto\tmaturity | 445 | 365 | 543 |
| Net\tproceeds\tfrom\t(payments\tmade\ton)\tthe\tsettlement\tof\tinvestment\tderivatives | 32 | (16) | (40) |
| Acquisition\tof\tsubsidiary\t(net\tof\tcash\tacquired\tof\t$19) | (2,521) | – | – |
| Other | (608) | (419) | 21 |
| Net\tcash\tflows\tused\tfor\tinvesting\tactivities | (4,124) | (4,530) | (3,770) |
| Cash\tflows\tfrom\t(used\tfor)\tfinancing\tactivities |  |  |  |
| Dividends\tpaid\ton\tCommon\tShares | (362) | (341) | (312) |
| Dividends\tpaid\ton\tPreferred\tShares | (24) | (45) | (45) |
| Net\trepayment\tof\tshort-term\tdebt | (89) | (465) | (300) |
| Net\tproceeds\tfrom\tissuance\tof\tlong-term\tdebt | 1,245 | 500 | 298 |
| Redemption\tof\tPreferred\tShares | (575) | – | – |
| Proceeds\tfrom\texercise\tof\tstock\toptions\tfor\tCommon\tShares | 97 | 65 | 67 |
| Proceeds\tfrom\tCommon\tShares\tissued\tunder\tESPP | 10 | 9 | 8 |
| Tax\tbenefit\ton\tshare-based\tcompensation\texpense | 12 | 24 | – |
| Net\tcash\tflows\tfrom\t(used\tfor)\tfinancing\tactivities | 314 | (253) | (284) |
| Effect\tof\tforeign\tcurrency\trate\tchanges\ton\tcash\tand\tcash\tequivalents | 66 | 27 | 2 |
| Net\tincrease\t(decrease)\tin\tcash | 357 | (55) | 53 |
| Cash\t–\tbeginning\tof\tyear | 510 | 565 | 512 |
| Cash\t–\tend\tof\tyear | $867 | $510 | $565 |
| Supplemental\tcash\tflow\tinformation |  |  |  |
| Taxes\tpaid | $403 | $561 | $477 |
| Interest\tpaid | $226 | $177 | $186 |

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS

# 1.	General

ACE	Limited	(ACE	or	the	Company)	is	a	holding	company	which,	until	July	18,	2008,	was	incorporated	with	limited	liability	under	the	Cayman	Islands Companies	Law.	On	March	19,	2008,	the	Company	announced	that	its	Board	of	Directors	(the	Board)	approved	a	proposal	to	move	the	Company's jurisdiction	of	incorporation	from	the	Cayman	Islands	to	Zurich,	Switzerland	(the	Continuation).	On	July	10,	2008,	and	July	14,	2008,	during	ACE's	annual general	meeting,	the	Company's	shareholders	approved	the	Continuation	and	ACE	became	a	Swiss	company	effective	July	18,	2008.

The	Company,	through	its	various	subsidiaries,	provides	a	broad	range	of	insurance	and	reinsurance	products	to	insureds	worldwide.	ACE operates	through	the	following	business	segments:	Insurance	–	North	American,	Insurance	–	Overseas	General,	Global	Reinsurance,	and	Life	Insurance and	Reinsurance.	Refer	to	Note	17.

On	April	1,	2008,	ACE	acquired	all	outstanding	shares	of	Combined	Insurance	Company	of	America	(Combined	Insurance)	and	certain	of	its subsidiaries	from	Aon	Corporation	(Aon)	for	$2.56	billion.	Combined	Insurance	is	a	leading	underwriter	and	distributor	of	specialty	individual	accident	and supplemental	health	insurance	products	targeted	to	middle	income	consumers	in	the	U.S.,	Europe,	Canada,	and	Asia	Pacific.	ACE	recorded	the acquisition	using	the	purchase	method	of	accounting.	The	consolidated	financial	statements	include	the	results	of	Combined	Insurance	from	April	1, 2008.	Based	on	ACE's	purchase	price	allocation,	$883	million	of	goodwill	and	$45	million	of	other	intangible	assets	were	generated	as	a	result	of	the acquisition.	Refer	to	Note	3.

# 2.	Significant	accounting	policies

# a)	Basis	of	presentation

The	accompanying	consolidated	financial	statements,	which	include	the	accounts	of	the	Company	and	its	subsidiaries,	have	been	prepared	in accordance	with	accounting	principles	generally	accepted	in	the	United	States	of	America	(GAAP)	and,	in	the	opinion	of	management,	reflect	all adjustments	(consisting	of	normally	recurring	accruals)	necessary	for	a	fair	statement	of	the	results	and	financial	position	for	such	periods.	All	significant intercompany	accounts	and	transactions	have	been	eliminated.	Certain	items	in	the	prior	year	financial	statements	have	been	reclassified	to	conform	to the	current	year	presentation.

The	preparation	of	financial	statements	in	conformity	with	GAAP	requires	management	to	make	estimates	and	assumptions	that	affect	the	reported amounts	of	assets	and	liabilities,	disclosure	of	contingent	assets	and	liabilities	at	the	date	of	the	financial	statements,	and	the	reported	amounts	of revenues	and	expenses	during	the	reporting	period.	The	Company's	principal	estimates	include:

•	unpaid	losses	and	loss	expense	reserves,	including	asbestos	and	environmental	(A&E)	reserves;

•	the	valuation	of	value	of	business	acquired	(VOBA)	and	amortization	of	deferred	policy	acquisition	costs	and	VOBA;

•	other-than-temporary	impairments	to	the	carrying	value	of	the	investment	portfolio;

•	the	valuation	of	goodwill	and	other	intangible	assets.

While	the	amounts	included	in	the	consolidated	financial	statements	reflect	the	Company's	best	estimates	and	assumptions,	these	amounts	could ultimately	be	materially	different	from	the	amounts	currently	recorded	in	the	consolidated	financial	statements.

# b)	Premiums

Premiums	are	generally	recognized	as	written	upon	inception	of	the	policy.	For	multi-year	policies	for	which	premiums	written	are	payable	in	annual installments,	only	the	current	annual	premium	is	included	as	written	at	policy	inception	due	to	the	ability	of	the	insured/reinsured	to	commute	or	cancel coverage	within	the	term	of	the	policy.	The	remaining	annual	premiums	are	included	as	written	at	each	successive	anniversary	date	within	the	multi-year term.

For	property	and	casualty	(P&C)	insurance	and	reinsurance	products,	premiums	written	are	primarily	earned	on	a	pro-rata	basis	over	the	terms	of the	policies	to	which	they	relate.	Unearned	premiums	represent	the	portion	of	premiums	written	applicable	to	the	unexpired	portion	of	the	policies	in force.	For	retrospectively-rated	policies,	written	premiums	are	adjusted	to	reflect	expected	ultimate	premiums	consistent	with	changes	to	reported	losses, or	other	measures	of	exposure	as	stated	in	the	policy,	and	earned	over	the	coverage	period	of	the	policy.	For	retrospectively-rated	multi-year	policies,	the amount	of	premiums

(continued)

recognized	in	the	current	period	is	computed,	using	a	with-and-without	method,	as	the	difference	between	the	ceding	enterprise's	total	contract	costs before	and	after	the	experience	under	the	contract	as	of	the	reporting	date.	Accordingly,	for	retrospectively-rated	multi-year	policies,	additional	premiums are	generally	written	and	earned	when	losses	are	incurred.

Mandatory	reinstatement	premiums	assessed	on	reinsurance	policies	are	earned	over	the	remaining	coverage	period	beginning	in	the	period	of	the loss	event	that	gave	rise	to	the	reinstatement	premiums.	If	coverage	under	the	original	policy	is	exhausted,	all	remaining	unearned	premium	is recognized	in	that	same	period.

Premiums	from	long	duration	contracts	such	as	certain	term	life,	whole	life,	endowment,	and	certain	long	duration	personal	accident	and	health (A&H)	policies	are	generally	recognized	as	revenue	when	due	from	policyholders.	Traditional	life	policies	include	those	contracts	with	fixed	and guaranteed	premiums	and	benefits.	Benefits	and	expenses	are	matched	with	such	income	to	result	in	the	recognition	of	profit	over	the	life	of	the contracts.

The	Company	underwrites	retroactive	loss	portfolio	transfer	(LPT)	contracts	in	which	the	insured	loss	events	occurred	prior	to	the	inception	of	the contract.	These	contracts	are	evaluated	to	determine	whether	they	meet	the	established	criteria	for	reinsurance	accounting.	If	reinsurance	accounting	is appropriate,	written	premiums	are	fully	earned	and	corresponding	losses	and	loss	expenses	recognized	at	the	inception	of	the	contract.	The	contracts can	cause	significant	variances	in	gross	premiums	written,	net	premiums	written,	net	premiums	earned,	and	net	incurred	losses	in	the	years	in	which they	are	written.	Reinsurance	contracts	sold	not	meeting	the	established	criteria	for	reinsurance	accounting	are	recorded	using	the	deposit	method. Reinsurance	premiums	assumed	are	based	on	information	provided	by	ceding	companies	supplemented	by	the	Company's	own	estimates	of premium	when	the	Company	has	not	received	ceding	company	reports.	The	information	used	in	establishing	these	estimates	is	reviewed	and subsequent	adjustments	are	recorded	in	the	period	in	which	they	are	determined.	These	premiums	are	earned	over	the	coverage	terms	of	the	related reinsurance	contracts	and	can	range	from	one	to	three	years.

# c)	Policy	acquisition	costs

Policy	acquisition	costs	consist	of	commissions,	premium	taxes,	and	underwriting	and	other	costs	that	vary	with,	and	are	primarily	related	to,	the production	of	premium.	A	VOBA	intangible	asset	is	established	upon	the	acquisition	of	blocks	of	long	duration	contracts	and	represents	the	present	value of	estimated	net	cash	flows	for	the	contracts	in	force	at	the	time	of	the	acquisition.	Acquisition	costs	and	VOBA,	collectively	policy	acquisition	costs,	are deferred	and	amortized	over	the	period	in	which	the	related	premiums	are	earned.	For	P&C	contracts,	this	is	generally	ratably	over	the	period	in	which premiums	are	earned.	For	long	duration	contracts,	the	Company	amortizes	policy	acquisition	costs	over	the	estimated	life	of	the	contracts	in	proportion	to premium	revenue	recognized.	Policy	acquisition	costs	are	reviewed	to	determine	if	they	are	recoverable	from	future	income,	including	investment	income. If	such	costs	are	unrecoverable,	they	are	expensed	in	the	period	this	determination	is	made.

Advertising	costs	are	expensed	as	incurred	except	for	direct-response	campaigns,	principally	related	to	A&H	business	produced	by	the	Insurance	– Overseas	General	segment,	which	are	deferred	and	recognized	over	the	expected	future	benefit	period	in	accordance	with	Statement	of	Position	93-7, Reporting	on	Advertising	Costs.	For	individual	direct-response	marketing	campaigns	that	the	Company	can	demonstrate	have	specifically	resulted	in incremental	sales	to	customers	and	such	sales	have	probable	future	economic	benefits,	incremental	costs	directly	related	to	the	marketing	campaigns are	capitalized.	Deferred	marketing	costs	are	reviewed	regularly	for	recoverability	and	amortized	over	five	years,	the	expected	economic	future	benefit period.	The	expected	future	benefit	period	is	evaluated	periodically	based	on	historical	results	and	adjusted	prospectively.	The	amount	of	deferred marketing	costs	reported	in	deferred	policy	acquisition	costs	was	$300	million,	$282	million,	and	$216	million	at	December	31,	2008,	2007,	and	2006, respectively.	The	amortization	expense	for	deferred	marketing	costs	was	$124	million,	$91	million,	and	$52	million	for	the	years	ended	December	31, 2008,	2007,	and	2006,	respectively.

# d)	Reinsurance

The	Company	assumes	and	cedes	reinsurance	with	other	insurance	companies	to	provide	greater	diversification	of	business	and	minimize	the	net	loss potential	arising	from	large	risks.	Ceded	reinsurance	contracts	do	not	relieve	the	Company	of	its	primary	obligation	to	its	policyholders.

For	both	ceded	and	assumed	reinsurance,	risk	transfer	requirements	must	be	met	in	order	to	obtain	reinsurance	status	for	accounting	purposes, principally	resulting	in	the	recognition	of	cash	flows	under	the	contract	as	premiums	and	losses.	To	meet	risk	transfer	requirements,	a	reinsurance contract	must	include	insurance	risk,	consisting	of	both	underwriting	and	timing	risk,	and	a	reasonable	possibility	of	a	significant	loss	for	the	assuming entity.	To	assess	risk	transfer	for	certain	contracts,	ACE	generally	develops	expected	discounted	cash	flow	analyses	at	contract	inception.	If	risk	transfer requirements	are	not	met,	a	contract	is	accounted	for	using	the	deposit	method.	Deposit	accounting	requires	that	consideration	received	or	paid	be recorded

in	the	balance	sheet	as	opposed	to	premiums	written	or	losses	incurred	in	the	statement	of	operations	and	any	non-refundable	fees	earned	based	on	the terms	of	the	contract.	Refer	to	Note	2	k).

Reinsurance	recoverable	includes	the	balances	due	from	reinsurance	companies	for	paid	and	unpaid	losses	and	loss	expenses	and	future	policy benefits	that	will	be	recovered	from	reinsurers,	based	on	contracts	in	force,	and	is	presented	net	of	a	provision	for	uncollectible	reinsurance	determined based	upon	a	review	of	the	financial	condition	of	the	reinsurers	and	other	factors.	The	method	for	determining	the	reinsurance	recoverable	on	unpaid losses	and	loss	expenses	incurred	but	not	reported	(IBNR)	involves	actuarial	estimates	consistent	with	those	used	to	establish	the	associated	liability	for unpaid	loss	and	loss	expenses	as	well	as	a	determination	of	the	Company's	ability	to	cede	unpaid	losses	and	loss	expenses	under	its	existing reinsurance	contracts.	The	provision	for	uncollectible	reinsurance	is	based	on	an	estimate	of	the	amount	of	the	reinsurance	recoverable	balance	that	the Company	will	ultimately	be	unable	to	recover	due	to	reinsurer	insolvency,	a	contractual	dispute,	or	any	other	reason.	The	valuation	of	this	provision includes	several	judgments	including	certain	aspects	of	the	allocation	of	reinsurance	recoverable	on	IBNR	claims	by	reinsurer	and	a	default	analysis	to estimate	uncollectible	reinsurance.	The	primary	components	of	the	default	analysis	are	reinsurance	recoverable	balances	by	reinsurer,	net	of	collateral, and	default	factors	used	to	determine	the	portion	of	a	reinsurer's	balance	deemed	uncollectible.	The	definition	of	collateral	for	this	purpose	requires	some judgment	and	is	generally	limited	to	assets	held	in	an	ACE-only	beneficiary	trust,	letters	of	credit,	and	liabilities	held	with	the	same	legal	entity	for	which ACE	believes	there	is	a	right	of	offset.	The	determination	of	the	default	factor	is	principally	based	on	the	financial	strength	rating	of	the	reinsurer.	Default factors	require	considerable	judgment	and	are	determined	using	the	current	financial	strength	rating,	or	rating	equivalent,	of	each	reinsurer	as	well	as other	key	considerations	and	assumptions.	The	more	significant	considerations	include,	but	are	not	necessarily	limited	to,	the	following:

•	For	reinsurers	that	maintain	a	financial	strength	rating	from	a	major	rating	agency,	and	for	which	recoverable	balances	are	considered	representative	of the	larger	population	(i.e.,	default	probabilities	are	consistent	with	similarly	rated	reinsurers	and	payment	durations	conform	to	averages),	the	financial rating	is	based	on	a	published	source	and	the	default	factor	is	based	on	published	default	statistics	of	a	major	rating	agency	applicable	to	the	reinsurer's particular	rating	class.	When	a	recoverable	is	expected	to	be	paid	in	a	brief	period	of	time	by	a	highly	rated	reinsurer,	such	as	certain	property catastrophe	claims,	a	default	factor	may	not	be	applied;

•	For	balances	recoverable	from	reinsurers	that	are	both	unrated	by	a	major	rating	agency	and	for	which	management	is	unable	to	determine	a	credible rating	equivalent	based	on	a	parent,	affiliate,	or	peer	company,	the	Company	determines	a	rating	equivalent	based	on	an	analysis	of	the	reinsurer	that considers	an	assessment	of	the	creditworthiness	of	the	particular	entity,	industry	benchmarks,	or	other	factors	as	considered	appropriate.	The	Company then	applies	the	applicable	default	factor	for	that	rating	class.	For	balances	recoverable	from	unrated	reinsurers	for	which	the	ceded	reserve	is	below	a certain	threshold,	the	Company	generally	applies	a	default	factor	of	25	percent;

•	For	balances	recoverable	from	reinsurers	that	are	either	insolvent	or	under	regulatory	supervision,	the	Company	establishes	a	default	factor	and resulting	provision	for	uncollectible	reinsurance	based	on	specific	facts	and	circumstances	surrounding	each	company.	Upon	initial	notification	of	an insolvency,	the	Company	generally	recognizes	expense	for	a	substantial	portion	of	all	balances	outstanding,	net	of	collateral,	through	a	combination	of write-offs	of	recoverable	balances	and	increases	to	the	provision	for	uncollectible	reinsurance.	When	regulatory	action	is	taken	on	a	reinsurer,	the Company	generally	recognizes	a	default	factor	by	estimating	an	expected	recovery	on	all	balances	outstanding,	net	of	collateral.	When	sufficient	credible information	becomes	available,	the	Company	adjusts	the	provision	for	uncollectible	reinsurance	by	establishing	a	default	factor	pursuant	to	information received;	and

•	For	other	recoverables,	management	determines	the	provision	for	uncollectible	reinsurance	based	on	the	specific	facts	and	circumstances	of	that dispute.

The	methods	used	to	determine	the	reinsurance	recoverable	balance	and	related	provision	for	uncollectible	reinsurance	are	regularly	reviewed	and updated	and	any	resulting	adjustments	are	reflected	in	earnings	in	the	period	identified.

Prepaid	reinsurance	premiums	represent	the	portion	of	premiums	ceded	to	reinsurers	applicable	to	the	unexpired	coverage	terms	of	the reinsurance	contracts	in	force.

The	value	of	reinsurance	business	assumed	of	$123	million	and	$137	million	at	December	31,	2008	and	2007,	respectively,	included	in	Other assets	in	the	accompanying	consolidated	balance	sheets,	represents	the	excess	of	estimated	ultimate	value	of	the	liabilities	assumed	under	retroactive reinsurance	contracts	over	consideration	received.	The	value	of	reinsurance	business	assumed	is	amortized	and	recorded	to	losses	and	loss	expenses based	on	the	payment	pattern	of	the	losses	assumed	and	ranges	between	3	and	40	years.	The	unamortized	value	is	reviewed	regularly	to	determine	if	it is	recoverable	based	upon	the	terms	of	the	contract,	estimated	losses	and	loss	expenses,	and	anticipated	investment	income.	Amounts	the	Company deems	unrecoverable	are	expensed	in	the	period	identified.

# e)	Investments

Fixed	maturity	investments	are	classified	as	either	available	for	sale	or	held	to	maturity.	The	available	for	sale	portfolio	is	reported	at	fair	value.	The	held to	maturity	portfolio	includes	securities	for	which	the	Company	has	the	ability	and	intent	to	hold	to	maturity	or	redemption	and	is	reported	at	amortized cost.	Equity	securities	are	classified	as	available	for	sale	and	are	recorded	at	fair	value.	Short-term	investments	comprise	securities	due	to	mature	within one	year	of	the	date	of	purchase.	Short-term	investments	include	certain	cash	and	cash	equivalents,	which	are	part	of	investment	portfolios	under	the management	of	external	investment	managers.

Other	investments	principally	comprise	other	direct	equity	investments,	investment	funds,	limited	partnerships,	life	insurance	policies,	policy	loans, and	trading	securities.	Except	for	trading	securities,	other	investments	over	which	the	Company	cannot	exercise	significant	influence	are	carried	at	fair value	with	changes	in	fair	value	recognized	through	accumulated	other	comprehensive	income.	For	these	investments,	investment	income	and	realized gains	are	recognized	as	related	distributions	are	received.	Life	insurance	policies	are	carried	at	policy	cash	surrender	value.	Policy	loans	are	carried	at outstanding	balance.	Trading	securities	are	recorded	on	a	trade	date	basis	and	carried	at	fair	value.	Unrealized	gains	and	losses	on	trading	securities	are reflected	in	net	income.

Upon	adopting	Financial	Accounting	Standard	(FAS)	155,	 Accounting	for	Certain	Hybrid	Financial	Instruments	–	an	amendment	of	FASB Statements	No.	133	and	140	(FAS	155)	on	January	1,	2007,	ACE	elected	to	apply	the	option	provided	in	FAS	155	related	to	hybrid	financial	instruments to	$277	million	of	convertible	bond	investments	that	contain	embedded	derivatives	within	ACE's	available	for	sale	portfolio.	Since	the	convertible	bonds were	previously	carried	at	fair	value,	the	election	did	not	have	an	effect	on	shareholders'	equity.	However,	the	election	resulted	in	a	reduction	of accumulated	other	comprehensive	income	and	an	increase	in	retained	earnings	of	$12	million	as	of	January	1,	2007.	The	Company	recognizes	these hybrid	financial	instruments	at	fair	value	with	changes	in	fair	value	reflected	in	Net	realized	gains	(losses).

Investments	in	partially-owned	insurance	companies	primarily	represent	direct	investments	in	which	the	Company	has	significant	influence	and,	as such,	meet	the	requirements	for	equity	accounting.	The	Company	reports	its	share	of	the	net	income	or	loss	of	the	partially-owned	insurance	companies in	Other	(income)	expense.	Investments	in	partially-owned	insurance	companies	over	which	the	Company	does	not	exert	significant	influence	are	carried at	fair	value.

Realized	gains	or	losses	on	sales	of	investments	are	determined	on	a	first-in,	first-out	basis.	Unrealized	appreciation	(depreciation)	on	investments is	included	as	a	separate	component	of	accumulated	other	comprehensive	income	in	shareholders'	equity.	The	Company	regularly	reviews	its investments	for	other-than-temporary	impairment	based	on:	i)	certain	indicators	of	an	impairment,	including	the	amount	of	time	a	security	has	been	in	a loss	position,	the	magnitude	of	the	loss	position,	and	whether	the	security	is	rated	below	an	investment	grade	level;	ii)	the	period	in	which	cost	is expected	to	be	recovered,	if	at	all,	based	on	various	criteria	including	economic	conditions,	credit	loss	experience,	and	other	issuer-specific developments;	and	iii)	the	Company's	ability	and	intent	to	hold	the	security	to	the	expected	recovery	period.	If	there	is	a	decline	in	a	security's	net realizable	value,	a	determination	is	made	as	to	whether	that	decline	is	temporary	or	other-than-temporary.	If	it	is	believed	that	a	decline	in	value	of	a particular	investment	in	the	available	for	sale	portfolio	is	temporary,	the	decline	is	recorded	as	an	unrealized	loss	in	shareholders'	equity.	If	it	is	believed the	decline	is	other-than-temporary,	the	Company	writes	down	the	book	value	of	the	investment	and	records	a	realized	loss	in	the	consolidated statement	of	operations.	For	fixed	maturity	investments,	the	new	cost	basis	is	then	accreted	up	to	the	amount	recoverable	based	on	anticipated	future cash	flow	through	Net	investment	income.

With	respect	to	securities	where	the	decline	in	value	is	determined	to	be	temporary	and	the	security's	value	is	not	written	down,	a	subsequent decision	may	be	made	to	sell	that	security	and	realize	a	loss.	Subsequent	decisions	on	security	sales	are	the	result	of	changing	or	unforeseen	facts	and circumstances	(e.g.,	arising	from	a	large	insured	loss	such	as	a	catastrophe),	deterioration	of	the	credit-worthiness	of	the	issuer	or	its	industry,	or changes	in	regulatory	requirements.	The	Company	believes	that	subsequent	decisions	to	sell	such	securities	are	consistent	with	the	classification	of	the majority	of	the	portfolio	as	available	for	sale.

The	Company	utilizes	derivative	instruments	including	futures,	options,	swaps,	and	foreign	currency	forward	contracts	for	the	purpose	of	managing certain	investment	portfolio	risk	and	exposures.	Refer	to	Note	10.	Derivatives	are	reported	at	fair	value	and	recorded	in	the	accompanying	consolidated balance	sheets	in	Accounts	payable,	accrued	expenses,	and	other	liabilities	with	changes	in	fair	value	included	in	Net	realized	gains	(losses)	in	the consolidated	statements	of	operations.	Collateral	held	by	brokers	equal	to	a	percentage	of	the	total	value	of	open	futures	contracts	is	included	in	Short- term	investments.

Net	investment	income	includes	interest	and	dividend	income	and	amortization	of	fixed	maturity	market	premiums	and	discounts	and	is	net	of investment	management	and	custody	fees.	For	mortgage-backed	securities,	and	any	other	holdings	for	which	there	is	a	prepayment	risk,	prepayment assumptions	are	evaluated	and	revised	as	necessary.	Any	adjustments	required	due	to	the

resultant	change	in	effective	yields	and	maturities	are	recognized	prospectively.	Prepayment	fees	or	call	premiums	that	are	only	payable	when	a	security is	called	prior	to	its	maturity	are	earned	when	received	and	reflected	in	Net	investment	income.

The	Company	participates	in	a	securities	lending	program	operated	by	a	third	party	banking	institution	whereby	certain	assets	are	loaned	out	to qualified	borrowers	and	from	which	the	Company	earns	an	incremental	return.	Borrowers	of	these	securities	provide	collateral,	in	the	form	of	either	cash or	approved	securities,	of	102%	of	the	fair	value	of	the	loaned	securities.	Each	security	loan	is	deemed	to	be	an	overnight	transaction.	Cash	collateral	is invested	in	a	collateral	pool	which	is	managed	by	the	banking	institution.	The	collateral	pool	is	subject	to	written	investment	guidelines	with	key	objectives which	include	the	safeguard	of	principal	and	adequate	liquidity	to	meet	anticipated	redemptions.	The	fair	value	of	the	loaned	securities	is	monitored	on	a daily	basis,	with	additional	collateral	obtained	or	refunded	as	the	fair	value	of	the	loaned	securities	changes.	The	collateral	is	held	by	the	third	party banking	institution,	and	the	collateral	can	only	be	accessed	in	the	event	that	the	institution	borrowing	the	securities	is	in	default	under	the	lending agreement.	As	a	result	of	these	restrictions,	the	Company	considers	its	securities	lending	activities	to	be	non-cash	investing	and	financing	activities.	An indemnification	agreement	with	the	lending	agent	protects	the	Company	in	the	event	a	borrower	becomes	insolvent	or	fails	to	return	any	of	the	securities on	loan.	The	fair	value	of	the	securities	on	loan	is	included	in	fixed	maturities	and	equity	securities.	The	securities	lending	collateral	is	reported	as	a separate	line	in	total	assets	with	a	corresponding	liability	related	to	the	Company's	obligation	to	return	the	collateral	plus	interest.

Similar	to	securities	lending	arrangements,	securities	sold	under	reverse	repurchase	agreements	are	accounted	for	as	collateralized	investments and	borrowings	and	are	recorded	at	the	contractual	repurchase	amounts	plus	accrued	interest.	Assets	to	be	repurchased	are	the	same,	or	substantially the	same,	as	the	assets	transferred	and	the	transferor,	through	right	of	substitution,	maintains	the	right	and	ability	to	redeem	the	collateral	on	short notice.	The	fair	value	of	the	underlying	securities	is	included	in	fixed	maturities	and	equity	securities.	In	contrast	to	securities	lending	programs,	the	use	of cash	received	is	not	restricted.	The	Company	reports	its	obligation	to	return	the	cash	as	short-term	debt.	Refer	to	Note	9.

Refer	to	Note	15	for	a	discussion	on	the	determination	of	fair	value	for	the	Company's	various	investment	securities.

# f)	Cash

Cash	includes	cash	on	hand	and	deposits	with	an	original	maturity	of	three	months	or	less	at	time	of	purchase.	Cash	held	by	external	money	managers	is included	in	Short-term	investments.

# g)	Goodwill	and	other	intangible	assets

Goodwill	represents	the	excess	of	the	cost	of	acquisitions	over	the	fair	value	of	net	assets	acquired	and	is	not	amortized.	Goodwill	is	assigned	at acquisition	to	the	applicable	reporting	unit	of	the	acquired	entities	giving	rise	to	the	goodwill.	Goodwill	impairment	tests	are	performed	annually,	or	more frequently	if	circumstances	indicate	a	possible	impairment.	The	Company	estimates	a	reporting	unit's	fair	value	using	a	consistently	applied	combination of	the	following	models:	an	earnings	multiple,	a	book	value	multiple,	a	discounted	cash	flow	or	an	allocated	market	capitalization	model.	The	Company's earnings	and	book	value	models	apply	multiples	of	comparable	publicly	traded	companies	to	forecasted	earnings	or	book	value	of	each	reporting	unit	and consider	current	market	transactions.	The	discounted	cash	flow	model	applies	a	discount	to	estimated	cash	flows	including	a	terminal	value	calculation. The	market	capitalization	model	utilized	allocates	the	Company's	market	capitalization	to	each	reporting	unit.	Where	appropriate,	the	Company	considers the	impact	of	a	control	premium.	Goodwill	recorded	in	connection	with	investments	in	partially-owned	insurance	companies	is	recorded	in	Investments	in partially-owned	insurance	companies	and	is	also	measured	for	impairment	annually.

Indefinite	lived	intangible	assets	are	not	subject	to	amortization.	Finite	lived	intangible	assets	are	amortized	over	their	useful	lives,	generally	ranging from	5	to	15	years.	The	carrying	amounts	of	intangible	assets	are	regularly	reviewed	for	indicators	of	impairment.	Impairment	is	recognized	if	the	carrying amount	is	not	recoverable	from	its	undiscounted	cash	flows	and	is	measured	as	the	difference	between	the	carrying	amount	and	fair	value.

# h)	Unpaid	losses	and	loss	expenses

A	liability	is	established	for	the	estimated	unpaid	losses	and	loss	expenses	under	the	terms	of,	and	with	respect	to,	the	Company's	policies	and agreements.	These	amounts	include	provision	for	both	reported	claims	(case	reserves)	and	IBNR	claims.	The	methods	of	determining	such	estimates and	establishing	the	resulting	liability	are	reviewed	regularly	and	any	adjustments	are	reflected	in	operations	in	the	period	in	which	they	become	known. Future	developments	may	result	in	losses	and	loss	expenses	materially	greater	or	less	than	recorded	amounts.

Except	for	net	loss	and	loss	expense	reserves	of	$106	million	net	of	discount	held	at	December	31,	2008,	representing	structured	settlements	for which	the	timing	and	amount	of	future	claim	payments	are	reliably	determinable,	the	Company	does	not	discount	its	P&C	loss	reserves.	Structured settlements	represent	contracts	purchased	from	life	insurance	companies	primarily	to	settle	workers'	compensation	claims,	where	payments	to	the claimant	by	the	life	insurance	company	are	expected	to	be

made	in	the	form	of	an	annuity.	The	Company	retains	the	liability	to	the	claimant	in	the	event	that	the	life	insurance	company	fails	to	pay.	At	December 31,	2008,	the	Company	has	a	gross	liability	of	$668	million	for	the	amount	due	to	claimants	and	reinsurance	recoverables	of	$562	million	for	amounts	due from	the	life	insurance	companies.	For	structured	settlement	contracts	where	payments	are	guaranteed	regardless	of	claimant	life	expectancy,	the amounts	recoverable	from	the	life	insurance	companies	are	included	in	Other	Assets,	as	they	do	not	meet	the	requirements	for	reinsurance	accounting. As	of	December	31,	2008,	there	was	$106	million	included	in	Other	Assets	relating	to	structured	settlements.

Included	in	unpaid	losses	and	loss	expenses	are	liabilities	for	A&E	claims	and	expenses.	These	unpaid	losses	and	loss	expenses	are	principally related	to	claims	arising	from	remediation	costs	associated	with	hazardous	waste	sites	and	bodily-	injury	claims	related	to	asbestos	products	and environmental	hazards.	The	estimation	of	these	liabilities	is	particularly	sensitive	to	changes	in	the	legal	environment,	including	specific	settlements	that may	be	used	as	precedents	to	settle	future	claims.	However,	ACE	does	not	anticipate	future	changes	in	laws	and	regulations	in	setting	its	A&E	reserve levels.

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	premiums	from	previous	accident	years.	For	purposes	of	analysis	and disclosure,	management	views	prior	period	development	to	be	changes	in	the	nominal	value	of	loss	estimates	from	period	to	period	and	excludes changes	in	loss	estimates	that	do	not	arise	from	the	emergence	of	claims,	such	as	those	related	to	uncollectible	reinsurance,	interest,	unallocated	loss adjustment	expenses,	or	foreign	currency.	Accordingly,	specific	items	excluded	from	prior	period	development	include	the	following:	gains/losses	related to	foreign	currency	translation;	losses	recognized	from	the	early	termination	or	commutation	of	reinsurance	agreements	that	principally	relate	to	the	time value	of	money;	changes	in	the	value	of	reinsurance	business	assumed	reflected	in	losses	incurred	but	principally	related	to	the	time	value	of	money;	and losses	that	arise	from	changes	in	estimates	of	earned	premiums	from	prior	accident	years.	Except	for	foreign	currency	revaluation,	which	is	disclosed separately,	these	items	are	included	in	current	year	losses.

# i)	Future	policy	benefits

The	development	of	long	duration	contract	reserves	requires	management	to	make	estimates	and	assumptions	regarding	expenses,	mortality,	morbidity, persistency,	and	investment	yields.	Such	estimates	are	primarily	based	on	historical	experience	and	information	provided	by	ceding	companies	and include	a	margin	for	adverse	deviation.	Interest	rates	used	in	calculating	reserves	range	from	one	percent	to	seven	percent	at	December	31,	2008	and 2007.	Actual	results	could	differ	materially	from	these	estimates.	Management	monitors	actual	experience,	and	where	circumstances	warrant,	will	revise its	assumptions	and	the	related	reserve	estimates.	These	revisions	are	recorded	in	the	period	they	are	determined.

# j)	Assumed	reinsurance	programs	involving	minimum	benefit	guarantees	under	annuity	contracts

The	Company	reinsures	various	death	and	living	benefit	guarantees	associated	with	variable	annuities	issued	primarily	in	the	United	States	and	Japan. Each	reinsurance	treaty	covers	variable	annuities	written	during	a	limited	period,	typically	not	exceeding	two	years.	The	Company	generally	receives	a monthly	premium	during	the	accumulation	phase	of	the	covered	annuities	(in-force)	based	on	a	percentage	of	the	underlying	accumulated	account values.	Depending	on	an	annuitant's	age,	the	accumulation	phase	can	last	many	years.	To	limit	the	Company's	exposure	under	these	programs,	all reinsurance	treaties	include	aggregate	claim	limits	and	many	include	an	aggregate	deductible.

The	guarantees	which	are	payable	on	death,	referred	to	as	guaranteed	minimum	death	benefits	(GMDB),	principally	cover	shortfalls	between accumulated	account	value	at	the	time	of	an	annuitant's	death	and	either	i)	an	annuitant's	total	deposits;	ii)	an	annuitant's	total	deposits	plus	a	minimum annual	return;	or	iii)	the	highest	accumulated	account	value	attained	during	any	policy	anniversary	date.	In	addition,	a	death	benefit	may	be	based	on	a formula	specified	in	the	variable	annuity	contract	that	uses	a	percentage	of	the	growth	of	the	underlying	contract	value.	Liabilities	for	GMDBs	are	based on	cumulative	assessments	or	premiums	to	date	multiplied	by	a	benefit	ratio	that	is	determined	by	estimating	the	present	value	of	benefit	payments	and related	adjustment	expenses	divided	by	the	present	value	of	cumulative	assessment	or	expected	fees	during	the	contract	period.	In	the	event	the Company	was	to	anticipate	an	ultimate	loss	on	the	business	over	the	in-force	period	of	the	underlying	annuities,	an	additional	liability	would	be established	to	recognize	such	losses.

Under	reinsurance	programs	covering	living	benefit	guarantees,	the	Company	assumes	the	risk	of	guaranteed	minimum	income	benefits	(GMIB) associated	with	variable	annuity	contracts.	The	GMIB	risk	is	triggered	if,	at	the	time	the	contract	holder	elects	to	convert	the	accumulated	account	value to	a	periodic	payment	stream	(annuitize),	the	accumulated	account	value	is	not	sufficient	to	provide	a	guaranteed	minimum	level	of	monthly	income.	The Company's	GMIB	reinsurance	product	meets	the	definition	of	a	derivative	for	accounting	purposes	and	is	carried	at	fair	value	with	changes	in	fair	value recognized	in	income	and	classified	as	described	below.	As	the	assuming	entity,	the	Company	is	obligated	to	provide	coverage	until	the

expiration	of	the	underlying	annuities.	Premiums	received	under	the	reinsurance	treaties	are	classified	as	premium.	Expected	losses	allocated	to premiums	received	are	classified	as	Future	policy	benefits	and	valued	similar	to	GMDB	reinsurance.	Other	changes	in	fair	value,	principally	arising	from changes	in	expected	losses	allocated	to	expected	future	premiums,	are	classified	as	Net	realized	gains	(losses).	Fair	value	represents	exit	price	and	thus includes	a	risk	margin.	The	Company	may	recognize	a	realized	loss	for	other	changes	in	fair	value	due	to	adverse	changes	in	the	capital	markets	(i.e., declining	interest	rates	and/or	declining	equity	markets)	and	changes	in	policyholder	behavior	(i.e.,	increased	annuitization	or	decreased	lapse	rates) although	the	Company	expects	the	business	to	be	profitable.	The	Company	believes	this	presentation	provides	the	most	meaningful	disclosure	of changes	in	the	underlying	risk	within	the	GMIB	reinsurance	programs	for	a	given	reporting	period.	Refer	to	Note	5	c).

# k)	Deposit	assets	and	liabilities

Deposit	assets	arise	from	ceded	reinsurance	contracts	purchased	that	do	not	transfer	significant	underwriting	or	timing	risk.	Under	deposit	accounting, consideration	received	or	paid,	excluding	non-refundable	fees,	is	recorded	as	a	deposit	asset	or	liability	in	the	balance	sheet	as	opposed	to	ceded premiums	and	losses	in	the	statement	of	operations.	Interest	income	on	deposits,	representing	the	consideration	received	or	to	be	received	in	excess	of cash	payments	related	to	the	deposit	contract,	is	earned	based	on	an	effective	yield	calculation.	The	calculation	of	the	effective	yield	is	based	on	the amount	and	timing	of	actual	cash	flows	as	of	the	balance	sheet	date	and	the	estimated	amount	and	timing	of	future	cash	flows.	The	effective	yield	is recalculated	periodically	to	reflect	revised	estimates	of	cash	flows.	When	a	change	in	the	actual	or	estimated	cash	flows	occurs,	the	resulting	change	to the	carrying	amount	of	the	deposit	asset	is	reported	as	income	or	expense.	Deposit	assets	of	$77	million	and	$131	million	at	December	31,	2008	and 2007,	respectively,	are	reflected	in	Other	assets	in	the	balance	sheets	and	the	accretion	of	deposit	assets	related	to	interest	pursuant	to	the	effective	yield calculation	is	reflected	in	Net	investment	income	in	the	statement	of	operations.

Non-refundable	fees	are	earned	based	on	contract	terms.	Non-refundable	fees	paid	but	unearned	are	reflected	in	Other	assets	in	the	balance	sheet and	earned	fees	are	reflected	in	Other	(income)	expense	in	the	statement	of	operations.

Deposit	liabilities	include	reinsurance	deposit	liabilities	of	$310	million	and	$325	million	and	contract	holder	deposit	funds	of	$35	million	and	$26 million	at	December	31,	2008	and	2007,	respectively.	The	reinsurance	deposit	liabilities	arise	from	contracts	sold	for	which	there	is	not	a	significant transfer	of	risk.	At	contract	inception,	the	deposit	liability	equals	net	cash	received.	An	accretion	rate	is	established	based	on	actuarial	estimates	whereby the	deposit	liability	is	increased	to	the	estimated	amount	payable	over	the	contract	term.	The	deposit	accretion	rate	is	the	rate	of	return	required	to	fund expected	future	payment	obligations.	The	Company	periodically	reassesses	the	estimated	ultimate	liability	and	related	expected	rate	of	return.	Changes to	the	amount	of	the	deposit	liability	are	reflected	as	an	adjustment	to	earnings	to	reflect	the	cumulative	effect	of	the	period	the	contract	has	been	in	force, and	by	an	adjustment	to	the	future	accretion	rate	of	the	liability	over	the	remaining	estimated	contract	term.

Contract	holder	deposit	funds	represent	a	liability	for	investment	contracts	sold	that	do	not	meet	the	definition	of	an	insurance	contract	and	are	sold with	a	guaranteed	rate	of	return.	The	liability	equals	accumulated	policy	account	values,	which	consist	of	the	deposit	payments	plus	credited	interest,	less withdrawals	and	amounts	assessed	through	the	end	of	the	period.

# l)	Translation	of	foreign	currencies

Financial	statements	of	the	Company's	foreign	divisions	are	valued	in	foreign	currencies,	referred	to	as	the	functional	currency.	Functional	currency assets	and	liabilities	are	translated	into	the	reporting	currency,	U.S.	dollars,	using	period	end	rates	of	exchange	and	the	related	translation	adjustments are	recorded	as	a	separate	component	of	accumulated	other	comprehensive	income.	Functional	statement	of	operations	amounts	expressed	in functional	currencies	are	translated	using	average	exchange	rates.	Gains	and	losses	resulting	from	foreign	currency	transactions	are	recorded	in	Net realized	gains	(losses).

# m)	Income	taxes

Income	taxes	have	been	provided	for	in	accordance	with	the	provisions	of	FAS	No.	109,	 Accounting	for	Income	Taxes	(FAS	109),	for	those	operations which	are	subject	to	income	taxes.	Deferred	tax	assets	and	liabilities	result	from	temporary	differences	between	the	amounts	recorded	in	the consolidated	financial	statements	and	the	tax	basis	of	the	Company's	assets	and	liabilities.	Refer	to	Note	8.	The	effect	on	deferred	tax	assets	and liabilities	of	a	change	in	tax	rates	is	recognized	in	income	in	the	period	that	includes	the	enactment	date.	A	valuation	allowance	against	deferred	tax assets	is	recorded	if	it	is	more	likely	than	not	that	all,	or	some	portion,	of	the	benefits	related	to	deferred	tax	assets	will	not	be	realized.	The	valuation allowance	assessment	considers	tax	planning	strategies,	where	applicable.

Beginning	with	the	adoption	of	FASB	Interpretation	No.	48,	 Accounting	for	Uncertainty	in	Income	Taxes	–	an	interpretation	of	FASB	Statement No.	109	(FIN	48)	as	of	January	1,	2007,	the	Company	recognized	uncertain	tax	positions	deemed	more-likely-than-not	of	being	sustained	upon examination.	Recognized	income	tax	positions	are	measured	at	the	largest	amount	that	is	greater	than	50	percent	likely	of	being	realized.	Changes	in recognition	or	measurement	are	reflected	in	the	period	in	which	the	change	in	judgment	occurs.	Prior	to	the	adoption	of	FIN	48,	the	Company	recognized the	effect	of	income	tax	positions	if	such	positions	were	probable	of	being	sustained.

# n)	Earnings	per	share

Basic	earnings	per	share	is	calculated	using	the	weighted-average	shares	outstanding.	All	potentially	dilutive	securities	including	unvested	restricted stock	and	stock	options	are	excluded	from	the	basic	earnings	per	share	calculation.	In	calculating	diluted	earnings	per	share,	the	weighted-average shares	outstanding	is	increased	to	include	all	potentially	dilutive	securities.	Basic	and	diluted	earnings	per	share	are	calculated	by	dividing	net	income available	to	common	shareholders	by	the	applicable	weighted-average	number	of	shares	outstanding	during	the	year.

# o)	Cash	flow	information

Purchases,	sales,	and	maturities	of	short-term	investments	are	recorded	net	for	purposes	of	the	statements	of	cash	flows	and	are	included	with	fixed maturities.

# p)	Derivatives

The	Company	recognizes	all	derivatives	as	either	assets	or	liabilities	in	the	consolidated	balance	sheets	measured	at	fair	value.	The	Company participates	in	derivative	instruments	in	two	principal	ways:

(i)	To	sell	protection	to	customers	as	an	insurance	or	reinsurance	contract	that	meets	the	definition	of	a	derivative	under	FAS	No.	133, Accounting	for

Derivative	Instruments	and	Hedging	Activities	(FAS	133).	For	2008	and	2007,	the	reinsurance	of	GMIBs	was	the	Company's	primary	product	falling	into this	category;	and

(ii)	To	mitigate	financial	risks,	principally	arising	from	investment	holdings,	products	sold,	or	assets	and	liabilities	held	in	foreign	currencies.	For	these instruments,	changes	in	assets	or	liabilities	measured	at	fair	value	are	recorded	as	realized	gains	or	losses	in	the	consolidated	statement	of	operations. The	Company	did	not	designate	any	derivatives	as	accounting	hedges	during	2008,	2007,	or	2006.

# q)	Share-based	compensation

The	Company	measures	and	records	compensation	cost	for	all	share-based	payment	awards	at	grant-date	fair	value.	Compensation	costs	are recognized	for	share-based	payment	awards	with	only	service	conditions	that	have	graded	vesting	schedules	on	a	straight-line	basis	over	the	requisite service	period	for	each	separately	vesting	portion	of	the	award	as	if	the	award	was,	in	substance,	multiple	awards.	Refer	to	Note	13.

# r)	New	accounting	pronouncements

In	September	2006,	the	FASB	issued	FAS	No.	157,	 Fair	Value	Measurements	(FAS	157).	FAS	157	is	effective	for	financial	statements	issued	for	fiscal years	beginning	after	November	15,	2007,	and	interim	periods	within	those	fiscal	years.	FAS	157	focuses	on	how	to	measure	fair	value	and	establishes	a three-level	hierarchy	for	both	measurement	and	disclosure	purposes.	The	fair	value	hierarchy	gives	the	highest	priority	to	quoted	prices	in	active	markets and	the	lowest	priority	to	unobservable	data.	Under	FAS	157,	fair	value	measurements	are	separately	disclosed	by	level	within	the	fair	value	hierarchy. FAS	157	does	not	expand	the	use	of	fair	value	measurement	to	any	new	circumstances.	The	Company	adopted	FAS	157,	in	part,	as	of	January	1,	2008, and	the	cumulative	effect	of	adoption	resulted	in	a	reduction	to	retained	earnings	of	$4	million	related	to	an	increase	in	risk	margins	included	in	the valuation	of	certain	GMIB	contracts.	The	Company	fully	adopted	FAS	157	effective	January	1,	2009.	For	additional	information	regarding	the	partial adoption	of	FAS	157,	refer	to	the	following	paragraph	and	Note	15.

In	February	2008,	the	FASB	issued	FSP	FAS	157-2,	 Effective	Date	of	FASB	Statement	No.	157	(FSP	FAS	157-2),	which	permits	a	one-year deferral	of	the	application	of	FAS	157	for	all	non-financial	assets	and	non-financial	liabilities,	except	those	that	are	recognized	or	disclosed	at	fair	value	in the	financial	statements	on	a	recurring	basis	(at	least	annually).	FSP	FAS	157-2	is	effective	in	conjunction	with	FAS	157	for	interim	and	annual	financial statements	issued	after	January	1,	2008.	Accordingly,	the	provisions	of	FAS	157	have	not	been	applied	to	Goodwill	and	other	intangible	assets	held	by the	Company	which	are	measured	annually	for	impairment	testing	purposes	only.

In	October	2008,	the	FASB	issued	FSP	FAS	157-3,	 Determining	Fair	Value	of	a	Financial	Asset	in	a	Market	That	is	Not	Active (FSP	FAS	157-3). FSP	FAS	157-3	clarifies	the	application	of	FAS	157	in	an	inactive	market	and	provides	examples	to	illustrate	key	considerations	in	determining	the	fair value	of	a	financial	asset	in	an	inactive	market.	FSP	FAS	157-3	is	effective	for	the	Company	for	and	from	the	three	months	ended	September	30,	2008. The	adoption	of	FSP	FAS	157-3	did	not	have	a	material	impact	on	the	Company's	financial	condition	or	results	of	operations.

# Fair	value	option	for	financial	assets	and	financial	liabilities

In	February	2007,	the	FASB	issued	FAS	No.	159,	 The	Fair	Value	Option	for	Financial	Assets	and	Financial	Liabilities	(FAS	159).	FAS	159	permits	an entity	to	irrevocably	elect	fair	value	on	a	contract-by-contract	basis	as	the	initial	and	subsequent	measurement	attribute	for	many	financial	assets	and liabilities	and	certain	other	items	including	insurance	contracts.	FAS	159	is	effective	for	fiscal	years	beginning	after	November	15,	2007.	Effective January	1,	2008,	the	Company	elected	the	fair	value	option	for	certain	of	its	available	for	sale	equity	securities	to	simplify	the	accounting	and	oversight	of this	portfolio	given	the	portfolio	management	strategy	employed	by	the	external	investment	manager.	Since	the	equity	securities	were	previously	carried at	fair	value,	the	election	did	not	have	an	effect	on	shareholders'	equity.	However,	the	election	resulted	in	an	increase	to	retained	earnings	and	a reduction	to	accumulated	other	comprehensive	income	of	$6	million	($9	million	pre-tax)	as	of	January	1,	2008.	Subsequent	to	this	election,	changes	in	fair value	related	to	these	equity	securities	were	recognized	in	Net	realized	gains	(losses)	in	the	consolidated	statement	of	operations.	For	additional information	regarding	the	adoption	of	FAS	159,	refer	to	Note	15.

# Income	tax	benefits	of	dividends	on	share-based	payment	awards

In	October	2006,	the	FASB	issued	Emerging	Issues	Task	Force	(EITF)	Issue	No.	06-11, Accounting	for	Income	Tax	Benefits	of	Dividends	on	Share- Based	Payment	Awards	(EITF	06-11).	EITF	06-11	provides	guidance	on	the	treatment	of	realized	income	tax	benefits	arising	from	dividend	payments	to employees	holding	equity	shares,	non-vested	equity	share	units,	and	outstanding	equity	share	options.	EITF	06-11	is	applied	prospectively	to	the	income tax	benefits	of	dividends	on	equity-classified	employee	share-based	payment	awards	that	are	declared	in	fiscal	years	beginning	after	December	15, 2007.	The	adoption	of	EITF	06-11	did	not	have	a	material	impact	on	the	Company's	financial	condition	or	results	of	operations.

# The	hierarchy	of	generally	accepted	accounting	principles

In	May	2008,	the	FASB	issued	FAS	No.	162,	 The	Hierarchy	of	Generally	Accepted	Accounting	Principles	(FAS	162).	FAS	162	identifies	the	sources	of accounting	principles	and	the	framework	for	selecting	the	principles	to	be	used	in	the	preparation	of	financial	statements	of	nongovernmental	entities	that are	presented	in	conformity	with	GAAP.	The	adoption	of	FAS	162	effective	September	28,	2008,	did	not	have	a	material	impact	on	the	Company's financial	condition	or	results	of	operations.

# Other-than-temporary	impairments

In	January	2009,	the	FASB	issued	FSP	EITF	No.	99-20-1,	 Amendments	to	the	Impairment	Guidance	of	EITF	99-20 	(FSP	EITF	99-20-1).	FSP	EITF	99- 20-1	amends	EITF	99-20	to	closer	align	its	impairment	guidance	for	purchased	and	retained	beneficial	interests	in	securitized	financial	assets	with	FAS 115,	Accounting	for	Certain	Investments	in	Debt	and	Equity	Securities .	FSP	EITF	99-20-1	is	effective	for	interim	and	annual	reporting	periods	ending after	December	15,	2008.	While	ACE	is	unable	to	quantify	precisely	the	impact	of	adoption	of	FSP	EITF	99-20-1,	ACE	does	not	believe	it	was	material	to the	Company's	financial	condition	and	results	of	operations.

# To	be	adopted	after	2008

# Business	combinations

In	December	2007,	the	FASB	issued	FAS	No.	141	(Revised),	 Business	Combinations	(FAS	141R).	FAS	141R	establishes	standards	that	provide	a definition	of	the	"acquirer"	and	broaden	the	application	of	the	acquisition	method.	FAS	141R	also	establishes	how	an	acquirer	recognizes	and	measures the	assets,	liabilities,	and	any	noncontrolling	interest	in	the	"acquiree";	recognizes	and	measures	goodwill	or	a	gain	from	a	bargain	purchase;	and requires	disclosures	that	enable	users	to	evaluate	the	nature	and	financial	effects	of	the	business	combination.	FAS	141R	shall	be	applied	prospectively to	business	combinations	for	which	the	acquisition	date	is	on	or	after	the	beginning	of	the	first	annual	reporting	period	beginning	on	or	after December	15,	2008.	The	adoption	of	FAS	141R	may	have	a	material	impact	on	any	future	business	combinations	consummated	by	the	Company,	but will	not	have	any	effect	on	previously	consummated	business	acquisitions.

In	November	2008,	the	FASB	issued	EITF	No.	08-7 ,	Accounting	for	Defensive	Intangible	Assets	(EITF	08-7).	EITF	08-7	requires	fair	value	be assigned	to	acquired	defensive	intangible	assets	in	accordance	with	FAS	157	guidance.	EITF	08-7	also	requires	a	useful	life	be	assigned	to	a	defensive intangible	asset	based	on	the	period	over	which	the	reporting	entity	expects	a

defensive	intangible	asset	to	contribute	directly	or	indirectly	to	future	cash	flows.	EITF	08-7	is	effective	for	intangible	assets	acquired	on	or	after	the beginning	of	the	first	annual	reporting	period	beginning	on	or	after	December	15,	2008.	The	Company	does	not	expect	the	adoption	of	EITF	08-7	to	have a	material	impact	on	the	Company's	financial	condition	or	results	of	operations.

# Noncontrolling	interests

In	December	2007,	the	FASB	issued	FAS	No.	160,	 Noncontrolling	Interests	in	Consolidated	Financial	Statements	–	an	Amendment	of	ARB	No.	51 	(FAS 160).	FAS	160	establishes	accounting	and	reporting	standards	that	require	that	ownership	interests	in	subsidiaries	held	by	parties	other	than	the	parent be	presented	in	the	consolidated	statement	of	shareholders'	equity	separately	from	the	parent's	equity;	the	consolidated	net	income	attributable	to	the parent	and	noncontrolling	interest	be	presented	on	the	face	of	the	consolidated	statements	of	operations;	changes	in	a	parent's	ownership	interest	while the	parent	retains	controlling	financial	interest	in	its	subsidiary	be	accounted	for	consistently;	and	sufficient	disclosure	that	identifies	and	distinguishes between	the	interests	of	the	parent	and	noncontrolling	owners.	FAS	160	is	effective	for	fiscal	years,	and	interim	periods	within	those	fiscal	years, beginning	on	or	after	December	15,	2008.	The	Company	does	not	expect	the	adoption	of	FAS	160	to	have	a	material	impact	on	the	Company's	financial condition	or	results	of	operations.

# Disclosures	about	derivative	instruments	and	hedging	activities

In	March	2008,	the	FASB	issued	FAS	No.	161,	 Disclosures	About	Derivative	Instruments	and	Hedging	Activities	(FAS	161).	FAS	161	establishes reporting	standards	that	require	enhanced	disclosures	about	how	and	why	derivative	instruments	are	used,	how	derivative	instruments	are	accounted	for under	FAS	133,	and	how	derivative	instruments	affect	an	entity's	financial	position,	financial	performance,	and	cash	flows.	FAS	161	is	effective	for	fiscal years,	and	interim	periods	within	those	fiscal	years,	beginning	on	or	after	November	15,	2008.

# Determination	of	the	useful	life	of	intangible	assets

In	April	2008,	the	FASB	issued	FASB	Staff	Position	(FSP)	No.	FAS	142-3,	 Determination	of	the	Useful	Life	of	Intangible	Assets 	(FSP	FAS	142-3).	FSP FAS	142-3	amends	the	factors	considered	in	developing	assumptions	used	to	determine	the	useful	life	of	an	intangible	asset	under	FAS	No.	142, Goodwill	and	Other	Intangible	Assets	(FAS	142).	The	intent	of	FSP	FAS	142-3	is	to	improve	the	consistency	between	the	useful	life	of	a	recognized intangible	asset	under	FAS	142	and	the	period	of	expected	cash	flows	used	to	measure	the	fair	value	of	the	asset	under	FAS	141R	and	other	applicable accounting	literature.	FSP	FAS	142-3	is	effective	for	financial	statements	issued	for	fiscal	years	beginning	after	December	15,	2008,	and	must	be	applied prospectively	to	intangible	assets	acquired	after	the	effective	date.	The	Company	does	not	expect	the	adoption	of	FSP	FAS	142-3	to	have	a	material impact	on	the	Company's	financial	condition	or	results	of	operations.

# Financial	guarantee	insurance	contracts

In	May	2008,	the	FASB	issued	FAS	No.	163,	 Accounting	for	Financial	Guarantee	Insurance	Contracts	–	An	interpretation	of	FASB	Statement	No.	60 (FAS	163).	FAS	163	requires	that	an	insurance	enterprise	recognize	a	claim	liability	prior	to	an	event	of	default	when	there	is	evidence	that	credit deterioration	has	occurred	in	an	insured	financial	obligation.	It	also	clarifies	how	FAS	No.	60,	Accounting	and	Reporting	by	Insurance	Enterprises,	applies to	financial	guarantee	insurance	contracts,	including	the	recognition	and	measurement	to	be	used	to	account	for	premium	revenue	and	claim	liabilities, and	requires	expanded	disclosures	about	financial	guarantee	insurance	contracts.	FAS	163	is	effective	for	financial	statements	issued	for	fiscal	years beginning	after	December	15,	2008,	except	for	some	disclosures	about	the	insurance	enterprise's	risk	management	activities.	FAS	163	requires	that disclosures	about	the	risk	management	activities	of	the	insurance	enterprise	be	effective	for	the	first	period	beginning	after	issuance.	Except	for	those disclosures,	earlier	application	is	not	permitted.	ACE's	exposure	to	FAS	163	is	principally	through	its	equity	method	investment	in	Assured	Guaranty	Ltd. The	Company	is	currently	evaluating	the	impact,	if	any,	of	adoption	of	FAS	163	on	its	financial	condition	or	results	of	operations.

# Earnings	per	share

In	June	2008,	the	FASB	issued	FSP	EITF	03-6-1,	 Determining	Whether	Instruments	Granted	in	Share-Based	Payment	Transactions	Are	Participating Securities	(FSP	EITF	03-6-1).	FSP	EITF	03-6-1	provides	additional	guidance	in	the	calculation	of	earnings	per	share	under	FAS	No.	128, Earnings	Per Share,	and	requires	unvested	share-based	payment	awards	that	contain	non-forfeitable	rights	to	dividends	or	dividend	equivalents	(whether	paid	or unpaid)	to	be	included	in	the	computation	of	earnings	per	share	pursuant	to	the	two-class	method.	FSP	EITF	03-6-1	is	effective	for	fiscal	years,	and interim	periods	within	those	fiscal	years,	beginning	after	December	15,	2008.	The	Company	does	not	expect	the	adoption	of	FSP	EITF	03-6-1	to	have	a material	impact	on	the	Company's	financial	condition	or	results	of	operations.

# Equity	method	accounting

In	November	2008,	the	FASB	issued	EITF	No.	08-6,	 Equity	Method	Investment	Accounting	Considerations	(EITF	08-6).	EITF	08-6	provides	guidance	for equity	method	accounting	for	specific	topics.	EITF	08-6	requires	an	equity	method	investor	account	for	share	issuances,	and	resulting	dilutive	effect,	by an	investee	as	if	the	investor	had	sold	a	proportionate	share	of	its	investment	with	the	resulting	gain	or	loss	recognized	in	earnings.	EITF	08-6	is	effective for	fiscal	years,	and	interim	periods	within	those	fiscal	years,	beginning	on	or	after	December	15,	2008.	The	Company	expects	the	adoption	of	EITF	08-6 to	have	a	material	impact	on	the	Company's	result	of	operations	in	2009	due	to	expected	share	issuances	by	Assured	Guaranty	Ltd.	Refer	to	Note	4	d).

# 3.	Acquisition

On	April	1,	2008,	ACE	acquired	all	outstanding	shares	of	Combined	Insurance	and	certain	of	its	subsidiaries	from	Aon	for	$2.56	billion.	Combined Insurance	is	a	leading	underwriter	and	distributor	of	specialty	individual	accident	and	supplemental	health	insurance	products	targeted	to	middle	income consumers	in	the	U.S.,	Europe,	Canada,	and	Asia	Pacific.	This	acquisition	has	diversified	the	Company's	A&H	distribution	capabilities	by	adding	a significant	agent	base,	while	almost	doubling	the	A&H	franchise.

ACE	recorded	the	acquisition	using	the	purchase	method	of	accounting.	The	consolidated	financial	statements	include	the	results	of	Combined Insurance	from	April	1,	2008.	The	most	significant	intangible	asset	attributable	to	the	acquisition	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	profit	emergence	of	the	underlying contracts,	in	a	manner	similar	to	deferred	acquisition	costs,	over	a	period	of	approximately	30	years.	The	VOBA	calculation	is	based	on	many	factors including	mortality,	morbidity,	persistency,	investment	yields,	expenses,	and	the	discount	rate	with	the	discount	rate	being	the	most	significant	factor.	The acquisition	also	generated	$883	million	of	goodwill	(most,	if	not	all,	of	which	is	expected	to	be	deductible	for	income	tax	purposes)	and	$45	million	of	other intangible	assets	based	on	ACE's	purchase	price	allocation.	Goodwill	was	apportioned	to	the	Life	Insurance	and	Reinsurance	and	Insurance	–	Overseas General	segments	in	the	amounts	of	$686	million	and	$197	million,	respectively.	Refer	to	Note	6.	ACE	financed	the	transaction	through	a	combination	of available	cash	($811	million),	reverse	repurchase	agreements	($1	billion),	and	new	private	and	public	long-term	debt	($750	million).	Refer	to	Note	9. The	following	table	summarizes	ACE's	best	estimate	of	fair	value	of	the	assets	acquired	and	liabilities	assumed	from	Combined	Insurance	at April	1,	2008.	Upon	the	adoption	of	FAS	157,	ACE	elected	to	defer	the	fair	value	guidance	applicable	to	valuing	nonfinancial	assets	and	nonfinancial liabilities	that	are	not	recognized	or	disclosed	at	fair	value	on	a	recurring	basis.	Accordingly,	FAS	157	was	not	used	to	determine	the	fair	values	of	the nonfinancial	assets	acquired	and	the	nonfinancial	liabilities	assumed	in	this	business	combination.	ACE	does	not	expect	significant	changes,	if	any,	that would	be	material	to	its	financial	position,	results	of	operations,	or	cash	flows	upon	adoption	of	FAS	157	for	nonfinancial	assets	and	liabilities.

Condensed	Balance	Sheet	of	Combined	Insurance	at	April	1,	2008

| Condensed	Balance	Sheet	of	Combined	Insurance	at	April	1,	2008<br>(in	millions	of	U.S.	dollars) |  |
| :--- | :--- |
| Assets |  |
| Investments\tand\tcash | $3,000 |
| Insurance\tand\treinsurance\tbalances\treceivable | 116 |
| Reinsurance\trecoverable\ton\tlosses\tand\tloss\texpenses | 33 |
| Reinsurance\trecoverable\ton\tfuture\tpolicy\tbenefits | 261 |
| Value\tof\tbusiness\tacquired | \t 1,040 |
| Goodwill\tand\tother\tintangible\tassets | 928 |
| Other\tassets | 136 |
| Total\tassets | $5,514 |
| Liabilities\tand\tShareholder's\tEquity |  |
| Unpaid\tlosses\tand\tloss\texpenses | $386 |
| Unearned\tpremiums | 46 |
| Future\tpolicy\tbenefits | \t 2,272 |
| Other\tliabilities | 270 |
| Total\tliabilities | \t 2,974 |
| Total\tshareholder's\tequity | \t 2,540 |
| Total\tliabilities\tand\tshareholder's\tequity | $5,514 |

The	following	table	presents	unaudited	pro	forma	information	for	the	years	ended	December	31,	2008,	2007,	and	2006,	assuming	the	acquisition	of Combined	Insurance	occurred	on	January	1st	of	each	of	the	respective	years.	The	pro	forma	financial	information	is	presented	for	informational	purposes only	and	is	not	necessarily	indicative	of	the	operating	results	that	would	have	occurred	had	the	acquisition	been	consummated	at	the	beginning	of	each period	presented,	nor	is	it	necessarily	indicative	of	future	operating	results.	Significant	assumptions	used	to	determine	pro	forma	operating	results	include amortization	of	VOBA	and	other	intangible	assets	and	recognition	of	interest	expense	associated	with	debt	financing	used	to	effect	the	acquisition.

| (in	millions	of	U.S.	dollars)	(unaudited) | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Pro\tforma: |  |  |  |
| Net\tpremiums\tearned | $13,596 | $13,823 | $13,200 |
| Total\trevenues | $14,064 | $15,830 | $14,832 |
| Net\tincome | $1,234 | $2,767 | $2,347 |
| Diluted\tearnings\tper\tshare | $3.64 | $8.24 | $7.03 |

# a)	Fixed	maturities

The	fair	values	and	amortized	costs	of	and	the	gross	unrealized	appreciation	(depreciation)	related	to	fixed	maturities	at	December	31,	2008	and	2007, are	as	follows:

| (in	millions	of<br>U.S.	dollars) | Amortized<br>Cost | Gross<br>Unrealized<br>Appreciation | Gross<br>Unrealized<br>Depreciation | Fair	Value | Amortized<br>Cost | Gross<br>Unrealized<br>Appreciation | Gross<br>Unrealized<br>Depreciation | Fair	Value |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Available\tfor\tsale |  |  |  |  |  |  |  |  |
| U.S.\tTreasury\tand\tagency | $1,991 | $133 | $(2) | $2,122 | $2,020 | $56 | $(3) | $2,073 |
| Foreign | 8,625 | 278 | (529) | 8,374 | 7,418 | 109 | (98) | 7,429 |
| Corporate\tsecurities | 10,093 | 89 | (1,121) | 9,061 | 9,669 | 130 | (138) | 9,661 |
| Mortgage-backed\tsecurities | 10,958 | 221 | (1,019) | \t 10,160 | \t 12,680 | 160 | (29) | \t 12,811 |
| States,\tmunicipalities,\tand\tpolitical |  |  |  |  |  |  |  |  |
| subdivisions | 1,442 | 38 | (42) | 1,438 | 1,207 | 10 | (7) | 1,210 |
|  | $33,109 | $759 | $(2,713) | $31,155 | $32,994 | $465 | $(275) | $33,184 |
| Held\tto\tmaturity |  |  |  |  |  |  |  |  |
| U.S.\tTreasury\tand\tagency | $862 | $61 | $– | $923 | $868 | $24 | $– | $892 |
| Foreign | 38 | 1 | (1) | 38 | 63 | – | – | 63 |
| Corporate\tsecurities | 405 | 2 | (15) | 392 | 505 | 3 | (4) | 504 |
| Mortgage-backed\tsecurities | 877 | 11 | (62) | 826 | 921 | 4 | (3) | 922 |
| States,\tmunicipalities,\tand\tpolitical |  |  |  |  |  |  |  |  |
| subdivisions | 678 | 9 | (1) | 686 | 630 | 4 | – | 634 |
|  | $2,860 | $84 | $(79) | $2,865 | $2,987 | $35 | $(7) | $ \t3,015 |

Mortgage-backed	securities	issued	by	U.S.	government	agencies	are	combined	with	all	other	to	be	announced	mortgage	derivatives	held	(refer	to	Note 10	a)	(iii))	and	are	included	in	the	category,	"Mortgage-backed	securities".	Approximately	63	percent	and	58	percent,	respectively,	of	the	total	mortgage- backed	securities	at	December	31,	2008	and	2007,	are	represented	by	investments	in	U.S.	government	agency	bonds.	The	remainder	of	the	mortgage exposure	consists	of	collateralized

mortgage	obligations	and	non-government	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.

Fixed	maturities	at	December	31,	2008	and	2007,	by	contractual	maturity,	are	shown	below.	Expected	maturities	could	differ	from	contractual	maturities because	borrowers	may	have	the	right	to	call	or	prepay	obligations,	with	or	without	call	or	prepayment	penalties.

| (in	millions	of	U.S.	dollars) | Fair	Value | Cost | Fair	Value | Amortized	Cost |
| :--- | :--- | :--- | :--- | :--- |
| Available\tfor\tsale;\tmaturity\tperiod |  |  |  |  |
| Due\tin\t1\tyear\tor\tless | $1,047 | $1,047 | $1,192 | $1,176 |
| Due\tafter\t1\tyear\tthrough\t5\tyears | 9,706 | 9,868 | 8,970 | 8,867 |
| Due\tafter\t5\tyears\tthrough\t10\tyears | 6,867 | 7,330 | 6,643 | 6,635 |
| Due\tafter\t10\tyears | 3,375 | 3,906 | 3,568 | 3,636 |
|  | \t 20,995 | 22,151 | \t 20,373 | 20,314 |
| Mortgage-backed\tsecurities | \t 10,160 | 10,958 | \t 12,811 | 12,680 |
|  | $31,155 | $33,109 | $33,184 | $32,994 |
| Held\tto\tmaturity;\tmaturity\tperiod |  |  |  |  |
| Due\tin\t1\tyear\tor\tless | $327 | $325 | $322 | $321 |
| Due\tafter\t1\tyear\tthrough\t5\tyears | 1,401 | 1,364 | 1,325 | 1,309 |
| Due\tafter\t5\tyears\tthrough\t10\tyears | 227 | 212 | 376 | 367 |
| Due\tafter\t10\tyears | 84 | 82 | 70 | 69 |
|  | 2,039 | 1,983 | 2,093 | 2,066 |
| Mortgage-backed\tsecurities | 826 | 877 | 922 | 921 |
|  | $2,865 | $2,860 | $3,015 | $2,987 |

# b)	Equity	securities

The	fair	value,	cost	of,	and	gross	unrealized	appreciation	(depreciation)	on	equity	securities	at	December	31,	2008	and	2007,	are	as	follows:

| (in	millions	of	U.S.	dollars) | 2008 | 2007 |
| :--- | :--- | :--- |
| Equity\tsecurities\t–\tcost | $1,132 | $1,618 |
| Gross\tunrealized\tappreciation | 74 | 311 |
| Gross\tunrealized\tdepreciation | (218) | (92) |
| Equity\tsecurities\t–\tfair\tvalue | $988 | $1,837 |

# c)	Other	investments

Other	investments	over	which	the	Company	cannot	exercise	significant	influence	are	carried	at	fair	value	with	changes	in	fair	value	reflected	in	other comprehensive	income.	Partially-owned	investment	companies	over	which	the	Company	has	significant	influence	are	carried	under	the	equity	method	of accounting.	Life	insurance	policies	are	carried	at	policy	cash	surrender	value.	Policy	loans	are	carried	at	outstanding	balance.	Trading	securities	are carried	at	fair	value	with	changes	in	fair	value	reflected	in	net	income.	At	December	31,	2008,	trading	securities	included	$37	million	of	equity	securities and	$9	million	of	fixed	maturities,	compared	with	$54	million	and	$5	million,	respectively,	at	December	31,	2007.	The	Company	maintains	rabbi	trusts,	the holdings	of	which	include	all	of	these	life	insurance	policies	and	trading	securities.	Refer	to	Note	12	f).

| (in	millions	of	U.S.	dollars) | Fair	Value | Cost | Fair	Value | Cost |
| :--- | :--- | :--- | :--- | :--- |
| Investment\tfunds | $305 | $244 | $347 | $227 |
| Limited\tpartnerships | 680 | 812 | 482 | 427 |
| Partially-owned\tinvestment\tcompanies | 109 | 120 | 61 | 71 |
| Life\tinsurance\tpolicies | 74 | 74 | 88 | 88 |
| Policy\tloans | 52 | 52 | – | – |
| Trading\tsecurities | 46 | 55 | 59 | 49 |
| Other | 96 | 11 | 103 | 18 |
| Total | $1,362 | $1,368 | $1,140 | $880 |

Investment	funds	include	one	highly	diversified	funds	investment	as	well	as	several	direct	funds	that	employ	a	variety	of	investment	styles	such	as long/short	equity,	global	macro,	and	credit	arbitrage.	Included	in	limited	partnerships	and	partially-owned	investment	companies	are	47	individual	limited partnerships	covering	a	broad	range	of	investment	strategies	including	large	cap	buyouts,	specialist	buyouts,	growth	capital,	distressed,	mezzanine,	real estate,	and	co-investments.	The	underlying	portfolio	consists	of	various	public	and	private	debt	and	equity	securities	of	publicly	traded	and	privately	held companies	and	real	estate	assets.	The	underlying	investments	across	various	partnerships,	geographies,	industries,	asset	types,	and	investment strategies	provide	risk	diversification	within	the	limited	partnership	portfolio	and	the	overall	investment	portfolio.

# d)	Investments	in	partially-owned	insurance	companies

Investments	in	partially-owned	insurance	companies	at	December	31,	2008	and	2007,	are	comprised	of	the	following:

| (in	millions	of	U.S.	dollars,	except<br>percentages) | Carrying<br>Value | Issued	Share<br>Capital | Ownership<br>Percentage | Carrying<br>Value | Share<br>Capital | Ownership<br>Percentage | Domicile |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Freisenbruch-Meyer | $9 | $5 | 40.0% | $9 | $5 | 40.0% | Bermuda |
| Intrepid\tRe\tHoldings\tLimited | 84 | 0.2 | 38.5% | 80 | 0.2 | 38.5% | Bermuda |
| Huatai\tInsurance\tCompany | 215 | 202 | 21.3% | 192 | 188 | 22.1% | China |
| Assured\tGuaranty\tLtd. | 397 | 0.9 | 21.0% | 392 | 0.8 | 23.9% | Bermuda |
| Rain\tand\tHail\tInsurance\tServices,\tInc. | 110 | 533 | 20.7% | 81 | 403 | 20.2% | United |
|  |  |  |  |  |  |  | States |
| Huatai\tLife\tInsurance\tCompany | 13 | 88 | 11.3% | 15 | 46 | 20.0% | China |
| Island\tHeritage | 4 | 27 | 11.0% | 4 | 27 | 11.0% | Cayman |
|  |  |  |  |  |  |  | Islands |
| Total | $832 | $856.1 |  | $773 | $670 |  |  |

Assured	Guaranty	Ltd.	is	a	Bermuda-based	holding	company	which	provides,	through	its	operating	subsidiaries,	credit	enhancement	products	to	the public	finance,	structured	finance,	and	mortgage	markets.	Credit	enhancement	products	are	financial	guarantees	or	other	types	of	support,	including credit	derivatives,	designed	to	improve	the	credit	of	underlying	debt	obligations.	Using	a	quoted	market	price,	the	fair	value	of	the	Company's	investment in	Assured	Guaranty	Ltd.	was	$218	million	and	$508	million	at	December	31,	2008	and	2007,	respectively.

On	November	14,	2008,	Assured	Guaranty	Ltd.	announced	a	definitive	agreement	to	purchase	Financial	Security	Assurance,	Inc.	(FSA)	from Dexia	SA	for	a	purchase	price	of	$722	million.	The	acquisition	is	expected	to	close	in	March	2009.	EITF	08-6	requires	ACE	account	for	Assured	Guaranty Ltd.'s	issuance	of	shares,	and	resulting	dilutive	effect,	as	if	the	Company	had	sold	a	proportionate	share	of	the	investment.	Assuming	completion	of	the planned	share	issuances,	ACE	will	no	longer	be	deemed	to	exert	significant	influence	over	Assured	Guaranty	Ltd.	and	must	account	for	the	investment as	an	available-for-sale	equity	security	in	accordance	with	FAS	115.	FAS	115	requires	that	ACE	then	carry	the	Assured	Guaranty	Ltd.	investment	at	fair value	with	any	unrealized	gains	and	losses	reflected	in	other	comprehensive	income.	Assuming	Assured	Guaranty	Ltd.	completes	its	share	issuances associated	with	the	FSA	acquisition,	the	Company	will	be	required	to	reflect	the	unrealized	loss	on	this	investment	(i.e.,	$179	million	as	of	December	31, 2008)	as	a	reduction	in	shareholders'	equity,	a	portion	of	which	will	be	recognized	as	a	realized	loss	in	accordance	with	EITF	08-6	and	a	portion	of	which will	be	reflected	in	other	comprehensive	income	in	accordance	with	FAS	115.

Huatai	Insurance	Company	and	Huatai	Life	Insurance	Company	are	China-based	entities	which	provide	a	range	of	P&C,	life,	and	investment products.

# e)	Gross	unrealized	loss

As	of	December	31,	2008,	there	were	7,468	fixed	maturities	out	of	a	total	of	14,758	fixed	maturities	in	an	unrealized	loss	position.	The	largest	single unrealized	loss	in	the	fixed	maturities	was	$28.6	million.	There	were	682	equity	securities	out	of	a	total	of	956	equity	securities	in	an	unrealized	loss position.	The	largest	single	unrealized	loss	in	the	equity	securities	was	$9.3	million.	Most	of	the	fixed	maturities	in	an	unrealized	loss	position	were investment	grade,	below	investment	grade,	and	mortgage-backed	securities	for	which	fair	value	declined	primarily	due	to	widening	credit	spreads.

The	following	tables	summarize,	for	all	securities	in	an	unrealized	loss	position	at	December	31,	2008	and	2007	(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 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| December\t31,\t2008 |  | Gross |  | Gross |  | Gross |
| (in\tmillions\tof\tU.S.\tdollars) | Fair\tValue | Unrealized\tLoss | Fair\tValue | Unrealized\tLoss | Fair\tValue | Unrealized\tLoss |
| U.S.\tTreasury\tand\tagency | $605 | $(2.5) | $– | $– | $605 | $(2.5) |
| Foreign | 2,488 | (335.7) | 587 | (194.4) | 3,075 | (530.1) |
| Corporate\tsecurities | 5,815 | (884.2) | 1,228 | (251.3) | 7,043 | (1,135.5) |
| Mortgage-backed\tsecurities | 4,242 | (880.0) | 319 | (200.1) | 4,561 | (1,080.1) |
| States,\tmunicipalities,\tand\tpolitical\tsubdivisions | 331 | (23.1) | 109 | (20.5) | 440 | (43.6) |
| Total\tfixed\tmaturities | \t 13,481 | (2,125.5) | 2,243 | (666.3) | \t 15,724 | (2,791.8) |
| Equity\tsecurities | 694 | (217.7) | 13 | (0.5) | 707 | (218.2) |
| Other\tinvestments | 508 | (175.9) | 58 | (17.3) | 566 | (193.2) |
| Total | $14,683 | $(2,519.1) | $2,314 | $(684.1) | $16,997 | $(3,203.2) |

Included	in	the	"0	–	12	Months"	and	"Over	12	Months"	aging	categories	at	December	31,	2008,	are	fixed	maturities	held	to	maturity	with	combined	fair values	of	$729	million	and	$105	million,	respectively.	The	associated	gross	unrealized	losses	included	in	the	"0	–	12	Months"	and	"Over	12	Months"	aging categories	are	$59	million	and	$20	million,	respectively.	Fixed	maturities	in	a	gross	unrealized	loss	position	for	over	12	months	principally	comprise investment	grade	securities	where	management	anticipates	recovery	to	the	amortized	cost	basis	in	the	near-term	and	has	the	ability	and	intent	to	hold	to recovery.	For	mortgage-backed	securities	in	a	gross	unrealized	loss	position	for	over	12	months,	management	also	considered	credit	enhancement	in concluding	the	securities	were	not	other-than-temporarily	impaired.	Other	investments	in	a	gross	unrealized	loss	position	for	over	12	months	principally comprise	investments	in	limited	partnerships	with	diversified	underlying	portfolios	where	management	anticipates	recovery	in	the	near-term	and	has	the ability	and	intent	to	hold	to	recovery.	Gross	unrealized	gains	as	of	December	31,	2008	were	$1.1	billion.

|  |  | 0	–	12	Months |  | Over	12	Months |  | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| December\t31,\t2007 |  | Gross |  | Gross |  | Gross |
| (in\tmillions\tof\tU.S.\tdollars) | Fair\tValue | Unrealized\tLoss | Fair\tValue | Unrealized\tLoss | Fair\tValue | Unrealized\tLoss |
| U.S.\tTreasury\tand\tagency | $193 | $(2.5) | $31 | $(0.1) | $224 | $(2.6) |
| Foreign | 3,435 | (97.3) | 135 | (0.9) | 3,570 | (98.2) |
| Corporate\tsecurities | 3,951 | (138.5) | 235 | (3.6) | 4,186 | (142.1) |
| Mortgage-backed\tsecurities | 2,967 | (29.8) | 139 | (1.7) | 3,106 | (31.5) |
| States,\tmunicipalities,\tand\tpolitical\tsubdivisions | 569 | (7.1) | 16 | (0.2) | 585 | (7.3) |
| Total\tfixed\tmaturities | \t 11,115 | (275.2) | 556 | (6.5) | \t 11,671 | (281.7) |
| Equity\tsecurities | 589 | (92.5) | – | – | 589 | (92.5) |
| Other\tinvestments | 101 | (16.3) | – | – | 101 | (16.3) |
| Total | $11,805 | $(384.0) | $556 | $(6.5) | $12,361 | $(390.5) |

Included	in	the	"0	–	12	Months"	and	"Over	12	Months"	aging	categories	at	December	31,	2007,	are	fixed	maturities	held	to	maturity	with	combined	fair values	of	$361	million	and	$318	million,	respectively.	The	associated	gross	unrealized	losses	included	in	the	"0	–	12	Months"	and	"Over	12	Months"	aging categories	are	$3	million	and	$4	million,	respectively.	Gross	unrealized	gains	as	of	December	31,	2007	were	$1.1	billion.

Each	quarter,	the	Company	reviews	all	of	its	securities	in	an	unrealized	loss	position	(impaired	securities),	including	fixed	maturity	securities,

securities	on	loan,	equity	securities,	and	other	investments,	to	identify	those	impaired	securities	to	be	specifically	evaluated	for	a	potential	other-than- temporary	impairment	(OTTI).

The	Company	reviews	its	investments	for	OTTI	based	on	the	following:

•	for	fixed	maturities,	the	issuer's	financial	condition	and	the	Company's	assessment	(using	available	market	information)	of	its	ability	to	make	future scheduled	principal	and	interest	payments	on	a	timely	basis;

•	the	Company's	ability	and	intent	to	hold	the	security	to	the	expected	recovery	period;	and

Prior	to	the	third	quarter	of	2008,	the	Company	considered	the	following	by	type	of	security:

# Fixed	maturities	and	equity	securities,	including	securities	on	loan

A	security	that	meets	any	of	the	following	criteria	is	evaluated	for	a	potential	OTTI:

•	securities	that	have	been	in	a	loss	position	for	the	previous	eleven	consecutive	months;

•	those	securities	that	have	been	in	a	loss	position	for	the	previous	nine	consecutive	months	and	market	value	is	less	than	70	percent	of	amortized	cost, or	cost	for	equity	securities;

•	those	securities	that	are	rated	below	investment	grade	by	at	least	one	major	rating	agency;	or

•	those	securities	subject	to	EITF	99-20,	 Recognition	of	Interest	Income	and	Impairment	on	Purchased	Beneficial	Interests	and	Beneficial	Interests	That Continue	to	Be	Held	by	a	Transferor	in	Securitized	Financial	Assets,	with	contractual	cash	flows	including	asset-backed	securities,	whenever	there	is	an adverse	change	in	the	amount	or	timing	of	cash	flows	or	indications	of	a	change	in	credit.

The	Company	evaluates	all	other	fixed	maturity	and	equity	securities	for	a	potential	OTTI	when	the	unrealized	loss	at	the	balance	sheet	date exceeds	a	certain	scope,	based	on	both	a	percentage	(i.e.,	market	value	is	less	than	70	percent	of	amortized	cost,	or	cost	for	equity	securities)	and aggregate	dollar	decline,	and/or	certain	indicators	of	an	OTTI	are	present	including:

•	a	significant	economic	event	has	occurred	that	is	expected	to	adversely	affect	the	industry	in	which	the	issuer	participates;

•	recent	issuer-specific	news	that	is	likely	to	have	an	adverse	affect	on	operating	results	and	cash	flows;	or

•	a	missed	or	late	interest	or	principal	payment	related	to	any	debt	issuance.

For	those	securities	identified	as	having	a	potential	OTTI	based	on	the	above	criteria,	the	Company	estimates	a	reasonable	period	of	time	in	which market	value	is	expected	to	recover	to	a	level	in	excess	of	cost,	if	at	all.	For	fixed	maturity	securities,	factors	considered	include:

•	the	degree	to	which	any	appearance	of	impairment	is	attributable	to	an	overall	change	in	market	conditions	such	as	interest	rates	rather	than	changes in	the	individual	factual	circumstances	and	risk	profile	of	the	issuer;

•	the	performance	of	the	relevant	industry	sector;

•	the	nature	of	collateral	or	other	credit	support;

•	whether	an	issuer	is	current	in	making	principal	and	interest	payments	on	the	debt	securities	in	question;

•	the	issuer's	financial	condition	and	the	Company's	assessment	(using	available	market	information)	of	its	ability	to	make	future	scheduled	principal	and interest	payments	on	a	timely	basis;	and

•	current	financial	strength	or	debt	rating,	analysis,	and	guidance	provided	by	rating	agencies	and	analysts.

For	equity	securities,	factors	considered	include:

•	whether	the	decline	appears	to	be	related	to	general	market	or	industry	conditions	or	is	issuer-specific;	and

•	the	financial	condition	and	near-term	prospects	of	the	issuer,	including	specific	events	that	may	influence	the	issuer's	operations.

Securities	will	be	assessed	to	have	an	OTTI	if	it	is	probable	that	cost	will	not	be	recovered	or	the	Company	does	not	have	the	ability	and	specific intent	to	hold	the	security	until	its	expected	recovery.	The	Company	lacks	this	ability	and	intent	when	such	a	determination	would	be	inconsistent	with management's	investment	objectives	such	as	maximizing	total	return.

# Other	investments

With	respect	to	other	investments	that	are	not	traded	in	a	public	market,	such	as	venture	capital	investment	funds,	the	portfolio	managers,	as	well	as	the

Company's	internal	valuation	committee,	consider	a	variety	of	factors	in	determining	whether	or	not	the	investment	should	be	evaluated	for	OTTI.

Indicators	of	impairment	include:

•	the	fund	has	reported	losses	for	two	consecutive	fiscal	years;

•	a	significant	economic	event	has	occurred	that	is	expected	to	adversely	affect	an	industry	which	the	fund	has	significant	exposure	to;	and

•	recent	issuer-specific	news	that	is	expected	to	adversely	affect	a	significant	holding	in	the	fund.

For	those	investments	identified	as	having	a	possible	OTTI,	the	Company	determines	a	reasonable	period	of	time	in	which	market	value	is expected	to	recover	to	a	level	in	excess	of	cost,	if	at	all.	Factors	considered	include:

•	recent	trends	in	financial	performance	and	future	expectations	of	financial	performance	based	on	the	underlying	assets	held	in	the	portfolio	and	market conditions	affecting	those	assets;

•	an	analysis	of	whether	fundamental	deterioration	has	occurred;	and

•	the	fund's	most	recent	financing	event.

These	investments	will	be	assessed	to	have	an	OTTI	if	cost	is	not	expected	to	be	recovered	or	it	is	concluded	that	the	Company	does	not	have	the ability	and	specific	intent	to	hold	the	security	until	its	expected	recovery.

# Refinement	of	the	OTTI	process

Given	recent	market	conditions,	and	in	light	of	recent	general	guidance	from	the	SEC	and	the	FASB	regarding	the	application	of	existing	guidance	during stressed	market	conditions,	beginning	with	the	third	quarter	of	2008,	the	Company	has	qualitatively	evaluated	its	application	of	the	parameters	under which	it	considers	a	decline	in	value	to	be	other-than-temporary.	Similar	to	prior	quarterly	and	annual	periods,	the	Company	evaluated	investments	in	its portfolio	where	cost	exceeded	fair	value	and	made	certain	judgments	as	to	its	ability	to	recover	its	cost.	The	analysis	beginning	with	the	third	quarter	of 2008,	required	the	Company	to	consider	carefully	the	duration	and	severity	of	decline	and	the	root	causes	thereof.	Specifically,	the	Company	further evaluated	whether	declines	were	related	to	temporary	liquidity	concerns	and	current	market	conditions,	and	therefore	more	likely	to	be	temporary,	or	were instead	related	to	specific	credit	events	or	issuer	performance,	and	therefore	more	likely	to	be	other-than-temporarily	impaired.

In	general,	and	in	consideration	of	the	severity	of	decline	across	equity	and	fixed	income	markets	resulting	from	extreme	investor	risk	aversion,	the Company	allowed	for	a	higher	severity	of	decline	in	its	analysis	given	the	disconnect	between	issuer	fundamentals	and	global	equity	and	fixed	income market	prices.	Also,	the	Company	considered	that	virtually	all	securities	in	an	unrealized	loss	position	for	a	duration	of	less	than	six	months	as	of December	31,	2008	had	declined	principally	as	a	result	of	the	financial	market	crisis	that	escalated	in	the	third	quarter	of	2008.	Further,	for	securities	in	an unrealized	loss	position	for	greater	than	six	months,	the	Company	considered	whether	the	severity	of	the	unrealized	loss	increased	significantly	since	the third	quarter	in	assessing	the	qualitative	aspects	of	the	duration	of	loss.	Using	this	refined	evaluation	process	resulted	in	a	lower	dollar	value	of investments	in	an	unrealized	loss	position	being	deemed	other-than-temporarily	impaired	in	comparison	to	the	previous	evaluation	process.	Given	the judgments	involved	in	its	OTTI	process,	the	Company	is	unable	to	quantify	the	impact	of	refining	its	methodology.	The	Company	believes	the	underlying issuer	fundamentals	and	credit	quality	of	the	portfolio	support	the	use	of	its	modified	approach.

When	there	is	an	OTTI,	the	Company	records	a	write-down	to	estimated	fair	value,	which	reduces	the	cost	basis.	The	new	cost	basis	of	an impaired	security	is	not	adjusted	for	subsequent	increases	in	estimated	fair	value.	For	fixed	maturity	investments,	the	discount	(or	reduced	premium) based	on	the	new	cost	basis	is	accreted	into	net	investment	income	and	included	in	income	in	future	periods	based	upon	the	amount	and	timing	of expected	future	cash	flows	of	the	security.

For	certain	purchased	and	retained	beneficial	interests	in	securitized	financial	assets,	the	Company	adopted	FSP	EITF	99-20-1,	effective December	31,	2008.	Accordingly,	the	Company	included	consideration	of	management's	judgment	of	the	best	estimate	of	cash	flows,	in	contrast	to	prior periods	when	market	participant	assumptions	about	future	cash	flows	were	applied	in	assessing	whether	an	adverse	change	in	the	amount	or	timing	of cash	flows	exists.	While	the	Company	is	unable	to	quantify	the	impact	of	adoption	of	FSP	EITF	99-20-1,	the	Company	does	not	believe	it	was	material	to the	Company's	financial	condition	or	results	of	operations.

# Securities	lending	transactions

The	Company	engages	in	a	securities	lending	program,	which	involves	lending	investments	to	other	institutions	for	short	periods	of	time.	The	Company invests	the	collateral	received	in	short-term	funds	of	high	credit	quality	with	the	objective	of	maintaining	a	stable	principal	balance.	During	the	third	and fourth	quarters	of	2008	certain	investments	in	the	money	market	mutual	funds	purchased	with	the	securities	lending	collateral	declined	in	value	resulting in	a	$66	million	unrealized	loss.	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.	The	Company	concluded	that	the	decline	in	value	was	temporary.

# f)	Net	realized	gains	(losses)	and	change	in	net	unrealized	appreciation	(depreciation)	on	investments

Net	realized	gains	(losses)	and	the	change	in	net	unrealized	appreciation	(depreciation)	on	investments	for	the	years	ended	December	31,	2008,	2007, and	2006,	are	as	follows:

| (in	millions	of	U.S.	dollars) | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Fixed\tmaturities |  |  |  |
| Gross\trealized\tgains | $654 | $ 257 | $ 131 |
| Gross\trealized\tlosses | (740) | (232) | (153) |
| Other-than-temporary\timpairments | (760) | (123) | (198) |
|  | (846) | (98) | (220) |
| Equity\tsecurities |  |  |  |
| Gross\trealized\tgains | 140 | 200 | 182 |
| Gross\trealized\tlosses | (241) | (22) | (9) |
| Other-than-temporary\timpairments | (248) | (16) | (10) |
|  | (349) | 162 | 163 |
| Other\tinvestments\tgains | 1 | 39 | 34 |
| Write-down\tof\tother\tinvestments | (56) | (2) | (6) |
| Foreign\tcurrency\tgains\t(losses) | 23 | 4 | (13) |
| Futures,\toption\tcontracts,\tand\tswaps | (3) | (19) | (18) |
| Fair\tvalue\tadjustment\ton\tinsurance\tderivative | (650) | (185) | – |
| S&amp;P\tput\toption | 164 | 22 | (22) |
| Other\tderivative\tinstruments | 83 | 16 | 7 |
| Sale\tof\tcertain\trun-off\treinsurance\tsubsidiaries | – | – | (23) |
| Net\trealized\tgains\t(losses) | (1,633) | (61) | (98) |
| Change\tin\tnet\tunrealized\tappreciation\t(depreciation)\ton\tinvestments |  |  |  |
| Fixed\tmaturities\tavailable\tfor\tsale | (2,089) | 51 | 139 |
| Fixed\tmaturities\theld\tto\tmaturity | (2) | (3) | (5) |
| Equity\tsecurities | (363) | (122) | 114 |
| Other\tinvestments | (313) | 73 | 101 |
| Investments\tin\tpartially-owned\tinsurance\tcompanies | 8 | 25 | 4 |
| Income\ttax\t(expense)\tbenefit | 457 | (23) | (63) |
| Change\tin\tnet\tunrealized\tappreciation\t(depreciation)\ton\tinvestments | (2,302) | 1 | 290 |
| Total\tnet\trealized\tgains\t(losses)\tand\tchange\tin\tnet\tunrealized\tappreciation\t(depreciation)\ton\ninvestments | $(3,935) | $(60) | $ 192 |

The	increased	level	of	gross	realized	gains	and	losses	in	2008	was	due	to	risk	reduction	efforts	in	reaction	to	specific	credit	events	associated	with the	credit	crisis	in	the	second	half	of	the	year	and	in	connection	with	the	internally	financed	acquisition	of	Combined	Insurance.

# g)	Net	investment	income

Net	investment	income	for	the	years	ended	December	31,	2008,	2007,	and	2006,	was	derived	from	the	following	sources:

| (in	millions	of	U.S.	dollars) | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Fixed\tmaturities | $1,972 | $1,773 | $1,463 |
| Short-term\tinvestments | 109 | 130 | 119 |
| Equity\tsecurities | 93 | 68 | 57 |
| Other | (20) | 25 | 26 |
| Gross\tinvestment\tincome | \t 2,154 | \t 1,996 | \t 1,665 |
| Investment\texpenses | (92) | (78) | (64) |
| Net\tinvestment\tincome | $2,062 | $1,918 | $1,601 |

# h)	Restricted	assets

The	Company	is	required	to	maintain	assets	on	deposit	with	various	regulatory	authorities	to	support	its	insurance	and	reinsurance	operations.	These requirements	are	generally	promulgated	in	the	statutory	regulations	of	the	individual	jurisdictions.	The	assets	on	deposit	are	available	to	settle	insurance and	reinsurance	liabilities.	The	Company	also	utilizes	trust	funds	in	certain	large	transactions	where	the	trust	funds	are	set	up	for	the	benefit	of	the	ceding companies	and	generally	take	the	place	of	letter	of	credit	(LOC)	requirements.	The	Company	also	has	investments	in	segregated	portfolios	primarily	to provide	collateral	or	guarantees	for	LOCs	and	debt	instruments	described	in	Notes	9	and	10.	At	December	31,	2008,	restricted	assets	of	$10.9	billion	are included	in	fixed	maturities	and	short-term	investments.	The	remaining	balance	is	included	in	equity	securities	and	cash.	The	components	of	the	fair value	of	the	restricted	assets	at	December	31,	2008	and	2007,	are	as	follows:

| (in	millions	of	U.S.	dollars) | 2008 | 2007 |
| :--- | :--- | :--- |
| Deposits\twith\tU.S.\tregulatory\tauthorities | $1,165 | $1,069 |
| Deposits\twith\tnon-U.S.\tregulatory\tauthorities | 1,863 | \t 2,101 |
| Other\tpledged\tassets | 805 | 510 |
| Trust\tfunds | 7,712 | \t 5,775 |
|  | $11,545 | $9,455 |

# 5.	Reinsurance

# a)	Consolidated	reinsurance

The	Company	purchases	reinsurance	to	manage	various	exposures	including	catastrophe	risks.	Although	reinsurance	agreements	contractually	obligate the	Company's	reinsurers	to	reimburse	it	for	the	agreed-upon	portion	of	its	gross	paid	losses,	they	do	not	discharge	the	primary	liability	of	the	Company. The	amounts	for	net	premiums	written	and	net	premiums	earned	in	the	consolidated	statements	of	operations	are	net	of	reinsurance.	Direct,	assumed, and	ceded	premiums	for	the	years	ended	December	31,	2008,	2007,	and	2006,	are	as	follows:

| (in	millions	of	U.S.	dollars) | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Premiums\twritten |  |  |  |
| Direct | $15,815 | $14,464 | $13,892 |
| Assumed | 3,427 | 3,276 | 3,509 |
| Ceded | (6,162) | (5,761) | (5,371) |
| Net | $13,080 | $11,979 | $12,030 |
| Premiums\tearned |  |  |  |
| Direct | $16,087 | $14,673 | $13,562 |
| Assumed | 3,260 | 3,458 | 3,461 |
| Ceded | (6,144) | (5,834) | (5,198) |
| Net | $13,203 | $12,297 | $11,825 |

For	the	years	ended	December	31,	2008,	2007,	and	2006,	the	Company	recorded	reinsurance	recoveries	on	losses	and	loss	expenses	incurred	of	$3.3 billion,	$3.5	billion,	and	$2.8	billion,	respectively.

# b)	Reinsurance	recoverable	on	ceded	reinsurance

The	composition	of	the	Company's	reinsurance	recoverable	on	losses	and	loss	expenses	and	future	policy	benefits	at	December	31,	2008	and	2007,	is as	follows:

| (in	millions	of	U.S.	dollars) | 2008 | 2007 |
| :--- | :--- | :--- |
| Reinsurance\trecoverable\ton\tunpaid\tlosses\tand\tloss\texpenses | $13,386 | $13,990 |
| Provision\tfor\tuncollectible\treinsurance\ton\tunpaid\tlosses\tand\tloss\texpenses | (451) | (470) |
| Reinsurance\trecoverable\ton\tunpaid\tlosses\tand\tloss\texpenses,\tnet\tof\ta\tprovision\tfor\tuncollectible\treinsurance | \t 12,935 | \t 13,520 |
| Reinsurance\trecoverable\ton\tpaid\tlosses\tand\tloss\texpenses | 1,122 | 1,050 |
| Provision\tfor\tuncollectible\treinsurance\ton\tpaid\tlosses\tand\tloss\texpenses | (140) | (216) |
| Net\treinsurance\trecoverable\ton\tlosses\tand\tloss\texpenses | $13,917 | $14,354 |
| Reinsurance\trecoverable\ton\tfuture\tpolicy\tbenefits | $259 | $8 |

The	Company	evaluates	the	financial	condition	of	its	reinsurers	and	potential	reinsurers	on	a	regular	basis	and	also	monitors	concentrations	of	credit	risk with	reinsurers.	The	provision	for	uncollectible	reinsurance	is	required	principally	due	to	the	failure	of	reinsurers	to	indemnify	ACE,	primarily	because	of disputes	under	reinsurance	contracts	and	insolvencies.	Provisions	have	been	established	for	amounts	estimated	to	be	uncollectible.

The	following	table	shows	a	breakdown	of	the	Company's	reinsurance	recoverable	on	paid	losses	and	loss	expenses	at	December	31,	2008	and 2007.

|  |  | 2008 |  |  | 2007 |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | %\tof |  |  | %\tof |
| Category | Recoverable |  | Recoverable | Recoverable |  | Recoverable |
| (in\tmillions\tof\tU.S.\tdollars) | Amount | Provision | Amount | Amount | Provision | Amount |
| General\tcollections | $782 | $30 | 3.8% | $774 | $43 | 5.6% |
| Other | 340 | 110 | 32.4% | 276 | 173 | 62.7% |
| Total | $1,122 | $140 | 12.5% | $1,050 | $216 | 20.6% |

General	collections	balances	represent	amounts	in	the	process	of	collection	in	the	normal	course	of	business	for	which	the	Company	has	no	indication	of dispute	or	credit-related	issues.

The	other	category	includes	amounts	recoverable	that	are	in	dispute	or	are	from	companies	who	are	in	supervision,	rehabilitation,	or	liquidation	for the	Brandywine	Group	and	active	operations.	The	Company's	estimation	of	this	reserve	considers	the	merits	of	the	underlying	matter,	the	credit	quality	of the	reinsurer,	and	whether	the	Company	has	received	collateral	or	other	credit	protections	such	as	multi-beneficiary	trusts	and	parental	guarantees.

The	following	tables	provide	a	listing,	at	December	31,	2008,	of	the	categories	of	the	Company's	reinsurers.	The	first	category,	largest	reinsurers, represents	all	reinsurers	where	the	gross	recoverable	exceeds	one	percent	of	ACE's	total	shareholders'	equity.	The	provision	for	uncollectible reinsurance	for	the	largest	reinsurers,	other	reinsurers	rated	A-	or	better,	and	other	reinsurers	with	ratings	lower	than	A-	is	principally	based	on	an analysis	of	the	credit	quality	of	the	reinsurer	and	collateral	balances.	Other	pools	and	government	agencies	include	amounts	backed	by	certain	state	and federal	agencies.	In	certain	states,	insurance	companies	are	required	by	law	to	participate	in	these	pools.	Structured	settlements	include	annuities purchased	from	life	insurance	companies	to	settle	claims.	Since	the	Company	retains	the	ultimate	liability	in	the	event	that	the	life	company	fails	to	pay,	it reflects	the	amount	as	a	liability	and	a	recoverable	for	GAAP	purposes.	Other	captives	include	companies	established	and	owned	by	the	Company's insurance	clients	to	assume	a	significant	portion	of	their	direct	insurance	risk	from	the	Company	(they	are	structured	to	allow	clients	to	self-insure	a	portion of	their	insurance	risk).	It	is	generally	the	Company's	policy	to	obtain	collateral	equal	to	expected	losses;	where	appropriate,	exceptions	are	granted	but only	with	review	and	approval	at	a	senior	officer	level.	The	final	category,	other,	includes	amounts	recoverable	that	are	in	dispute	or	are	from	companies that	are	in	supervision,	rehabilitation,	or	liquidation.	The	Company	establishes	its	provision	for	uncollectible	reinsurance	in	this	category	based	on	a	case by	case	analysis	of	individual	situations	including	credit	and	collateral	analysis	and	consideration	of	the	Company's	collection	experience	in	similar situations.

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS (continued)

| (in	millions	of	U.S.	dollars) | 2008 | Provision | %	of	Gross |
| :--- | :--- | :--- | :--- |
| Categories |  |  |  |
| Largest\treinsurers | $9,189 | $144 | 1.6% |
| Other\treinsurers\tbalances\trated\tA-\tor\tbetter | 1,966 | 26 | 1.3% |
| Other\treinsurers\tbalances\twith\tratings\tlower\tthan\tA-\tor\tnot\trated | 553 | 125 | 22.6% |
| Other\tpools\tand\tgovernment\tagencies | 142 | 10 | 7.0% |
| Structured\tsettlements | 561 | 20 | 3.6% |
| Other\tcaptives | 1,515 | 13 | 0.9% |
| Other | 582 | 253 | 43.5% |
| Total | $14,508 | $591 | 4.1% |

# Largest	Reinsurers

# c)	Assumed	reinsurance	programs	involving	minimum	benefit	guarantees	under	annuity	contracts

The	presentation	of	income	and	expenses	relating	to	GMDB	and	GMIB	reinsurance	for	the	years	ended	December	31,	2008,	2007,	and	2006,	is	as follows:

| (in	millions	of	U.S.	dollars) | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| GMDB |  |  |  |
| Net\tpremiums\tearned | $ 124 | $ 125 | $104 |
| Future\tpolicy\tbenefits | $ 183 | $49 | $45 |
| GMIB |  |  |  |
| Net\tpremiums\tearned | $ 150 | $ 107 | $95 |
| Future\tpolicy\tbenefits | $31 | $27 | $(1) |
| Realized\tgains\t(losses) | $(650) | $(185) | $– |
| Gain\t(loss)\trecognized\tin\tincome | $(531) | $(105) | $96 |
| Effect\tof\tpartial\tadoption\tof\tFAS\t157 | $4 | $– | $– |
| Net\tcash\treceived | $ 150 | $ 107 | $95 |
| Net\tdecrease\t(increase)\tin\tliability | $(685) | $(212) | $1 |

At	December	31,	2008,	reported	liabilities	for	GMDB	and	GMIB	reinsurance	were	$248	million	and	$910	million,	respectively,	compared	with	$137	million and	$225	million,	respectively,	at	December	31,	2007.	The	reported	liability	for	GMIB	reinsurance	in	2008	and	2007	includes	a	fair	value	adjustment	of $811	million	and	$157	million,	respectively.	Reported	liabilities	for	both	GMDB	and	GMIB	reinsurance	are	determined	using	internal	valuation	models. Such	valuations	require	considerable	judgment	and	are	subject	to	significant	uncertainty.	The	valuation	of	these	products	is	subject	to	fluctuations	arising from,	among	other	factors,	changes	in	interest	rates,	changes	in	equity	markets,	changes	in	credit	markets	and,	for	GMIB	reinsurance,	changes	in	the allocation	of	the	investments	underlying	annuitant's	account	value	and	assumptions	regarding	future	policyholder	behavior.	These	models	and	the	related assumptions	are	continually	reviewed	by	management	and	enhanced,	as	appropriate,	based	upon	improvements	in	modeling	assumptions	and availability	of	more	timely	information,	such	as	market	conditions	and	demographics	of	in-force	annuities.

# GMDB	reinsurance

At	December	31,	2008,	the	Company's	net	amount	at	risk	from	its	GMDB	reinsurance	programs	was	$4.7	billion,	compared	with	$1.5	billion	at	December 31,	2007.	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	December	31,	2008;

•	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	SOP	reserve	averaging	between	three	to	four percent.

At	December	31,	2008,	if	all	of	the	Company's	cedants'	policyholders	covered	under	GMDB	reinsurance	agreements	were	to	die	immediately,	the total	claim	amount	payable	by	the	Company,	taking	into	account	all	appropriate	claims	limits,	would	be	approximately	$1.2	billion.	As	a	result	of	the annual	claim	limits	on	the	GMDB	reinsurance	agreements	the	claims	payable	are	lower	in	this	case	than	if	all	the	policyholders	were	to	die	over	time,	all else	equal.

# GMIB	reinsurance

At	December	31,	2008,	the	Company's	net	amount	at	risk	from	its	GMIB	reinsurance	programs	was	$2.1	billion,	compared	with	$14	million	at	December 31,	2007.	For	GMIB	the	net	amount	at	risk	is	defined	as	the	present	value	of	future	claim	payments	under	the	following	assumptions:

•	there	are	no	deaths,	lapses,	or	withdrawals;

•	policyholders	annuitize	at	a	frequency	most	disadvantageous	to	ACE	(e.g.	annuitization	at	a	level	that	maximizes	claims	taking	into	account	the	treaty limits)	under	the	terms	of	the	Company's	reinsurance	contracts;

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

The	average	attained	age	of	all	policyholders	reinsured,	weighted	by	the	guaranteed	value	of	each	reinsured	policy,	is	approximately	65.

# 6.	Goodwill	and	other	intangible	assets

Prior	to	2008,	the	Company	included	intangible	assets	other	than	goodwill	in	Other	assets	in	the	consolidated	balance	sheet.	Effective	June	30,	2008,	the Company	presents	the	aggregate	balance	of	these	intangible	assets	and	goodwill	in	Goodwill	and	other	intangible	assets.	ACE	reclassified	other intangible	assets	from	Other	assets	in	the	prior	year	financial	statements	to	conform	to	the	current	year	presentation.

As	discussed	in	Note	3,	the	acquisition	of	Combined	Insurance	generated	$883	million	of	goodwill	and	$45	million	of	other	intangible	assets	based on	ACE's	purchase	price	allocation.

The	following	table	details	movements	in	Goodwill	by	reporting	segment	for	the	year	ended	December	31,	2008.

|  | Insurance	–<br>North	American | Insurance	–<br>Overseas	General | Global<br>Reinsurance | Life	Insurance<br>and	Reinsurance | ACE<br>Consolidated |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Balance,\tbeginning\tof\tyear | $1,192 | $1,174 | $365 | $— | $2,731 |
| Acquisition\tof\tCombined\tInsurance | — | 197 | — | 686 | 883 |
| Foreign\texchange\trevaluation | — | (38) | — | — | (38) |
| Other | 13 | 33 | — | — | 46 |
| Balance,\tend\tof\tyear | $1,205 | $1,366 | $365 | $686 | $3,622 |

At	December	31,	2008,	the	balance	of	other	intangible	assets	of	$125	million	includes	intangible	assets	subject	to	amortization	and	intangible	assets	not subject	to	amortization	totaling	$47	million	and	$78	million,	respectively.	Intangible	assets	subject	to	amortization	include	trademarks,	agency relationships,	software,	client	lists,	and	renewal	rights,	primarily	attributable	to	the	acquisition	of	Combined	Insurance.	The	majority	of	the	balance	of intangible	assets	not	subject	to	amortization	related	to	Lloyd's	Syndicate	2488	capacity.	Amortization	expense	related	to	other	intangible	assets amounted	to	$12	million,

$2	million,	and	$2	million	for	the	years	ended	December	31,	2008,	2007,	and	2006,	respectively.	Other	intangible	assets	amortization	expense	is estimated	to	be	between	approximately	$7	million	and	$9	million	for	each	of	the	next	five	fiscal	years.

The	table	below	presents	a	roll	forward	of	VOBA	for	the	year	ended	December	31,	2008.

|  | December	31, |
| :--- | :--- |
| (in\tmillions\tof\tU.S.\tdollars) | 2008 |
| Balance,\tbeginning\tof\tyear | $– |
| Acquisition\tof\tCombined\tInsurance | 1,040 |
| Amortization\texpense | (84) |
| Foreign\texchange | (133) |
| Balance,\tend\tof\tyear | $823 |

Estimated	amortization	expense	related	to	VOBA	for	the	next	five	years	is	expected	to	be	as	follows:

|  | Year	ending |
| :--- | :--- |
| (in\tmillions\tof\tU.S.\tdollars) | December\t31 |
| 2009 | $89 |
| 2010 | 77 |
| 2011 | 68 |
| 2012 | 61 |
| 2013 | 56 |
| Total | $351 |

# Property	and	casualty

The	Company	establishes	reserves	for	the	estimated	unpaid	ultimate	liability	for	losses	and	loss	expenses	under	the	terms	of	its	policies	and agreements.	These	reserves	include	estimates	for	both	claims	that	have	been	reported	and	for	IBNR,	and	include	estimates	of	expenses	associated	with processing	and	settling	these	claims.	The	process	of	establishing	reserves	for	P&C	claims	can	be	complex	and	is	subject	to	considerable	variability	as	it requires	the	use	of	informed	estimates	and	judgments.	The	Company's	estimates	and	judgments	may	be	revised	as	additional	experience	and	other	data become	available	and	are	reviewed,	as	new	or	improved	methodologies	are	developed,	or	as	current	laws	change.	The	Company	continually	evaluates its	estimates	of	reserves	in	light	of	developing	information	and	in	light	of	discussions	and	negotiations	with	its	insureds.	While	the	Company	believes	that its	reserves	for	unpaid	losses	and	loss	expenses	at	December	31,	2008,	are	adequate,	new	information	or	trends	may	lead	to	future	developments	in ultimate	losses	and	loss	expenses	significantly	greater	or	less	than	the	reserves	provided.	Any	such	revisions	could	result	in	future	changes	in	estimates of	losses	or	reinsurance	recoverable,	and	would	be	reflected	in	the	Company's	results	of	operations	in	the	period	in	which	the	estimates	are	changed.

The	reconciliation	of	unpaid	losses	and	loss	expenses	for	the	years	ended	December	31,	2008,	2007,	and	2006,	is	as	follows:

| (in	millions	of	U.S.	dollars) | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Gross\tunpaid\tlosses\tand\tloss\texpenses,\tbeginning\tof\tyear | $ 37,112 | $ 35,517 | $ 35,055 |
| Reinsurance\trecoverable\ton\tunpaid\tlosses | (13,520) | (13,509) | (14,597) |
| Net\tunpaid\tlosses\tand\tloss\texpenses,\tbeginning\tof\tyear | 23,592 | 22,008 | 20,458 |
| Acquisition\t(sale)\tof\tsubsidiaries | 353 | – | (472) |
| Total | 23,945 | 22,008 | 19,986 |
| Net\tlosses\tand\tloss\texpenses\tincurred\tin\trespect\tof\tlosses\toccurring\tin: |  |  |  |
| Current\tyear | 8,417 | 7,568 | 7,082 |
| Prior\tyear | (814) | (217) | (12) |
| Total | 7,603 | 7,351 | 7,070 |
| Net\tlosses\tand\tloss\texpenses\tpaid\tin\trespect\tof\tlosses\toccurring\tin: |  |  |  |
| Current\tyear | 2,699 | 1,975 | 1,748 |
| Prior\tyear | 3,628 | 3,959 | 3,711 |
| Total | 6,327 | 5,934 | 5,459 |
| Foreign\tcurrency\trevaluation\tand\tother | (980) | 167 | 411 |
| Net\tunpaid\tlosses\tand\tloss\texpenses,\tend\tof\tyear | 24,241 | 23,592 | 22,008 |
| Reinsurance\trecoverable\ton\tunpaid\tlosses | 12,935 | 13,520 | 13,509 |
| Gross\tunpaid\tlosses\tand\tloss\texpenses,\tend\tof\tyear | $ 37,176 | $ 37,112 | $ 35,517 |

Net	losses	and	loss	expenses	incurred	include	$814	million,	$217	million,	and	$12	million,	of	net	favorable	prior	period	development	in	the	years	ended December	31,	2008,	2007,	and	2006,	respectively.

•	Adverse	development	of	$15	million	in	the	national	accounts	workers'	compensation	portfolios	comprised	two	items	of	significance.	First,

favorable	development	of	$47	million	arising	on	accident	year	2007,	due	to	the	absence	of	multi-claimant	events	such	as	industrial	accidents.	The majority	of	the	exposure	for	these	perils	falls	under	the	national	accounts	high	deductible	and	excess	product	lines.	This	exposure	is	evaluated	on an	annual	basis,	after	the	accident	year	has	closed,	allowing	for	the	late	reporting	or	identification	of	significant	losses	and	for	an	initial	assessment of	the	accident	year.	The	review	in	2008	of	potential	2007	events,	coupled	with	the	initial	assessment	of	the	accident	year	has	led	to	a	decrease	in the	estimate	of	the	required	provision	for	these	claims.	Second,	adverse	development	of	$62	million	relating	to	2003	and	prior	accident	years.	This development	was	the	direct	result	of	reported	loss	activity	greater	than	expected	in	the	prior	review.	During	the	past	year,	a	targeted	open	case reserve	review	was	conducted	by	claims	staff	which	resulted	in	a	number	of	material	case	reserve	increases	that	were	not	anticipated	in	the	prior estimates	of	ultimate	loss;

•	Favorable	development	of	$32	million	in	Insurance	–	North	American's	national	accounts	commercial	auto	and	general	liability	product	lines comprised	two	items	of	significance.	First,	favorable	development	of	$19	million	was	mainly	from	accident	years	2003	and	prior	for	exposures written	on	an	excess	basis.	The	combination	of	continued	lower	than	expected	reported	incurred	loss	activity	for	the	2001-2003	accident	years	as well	as	increased	weighting	on	loss	development	reserving	methods,	as	these	years	mature,	has	driven	the	majority	of	the	improvement	in projected	ultimate	losses.	Second,	favorable	development	of	$13	million	relating	to	the	1999-2002	accident	years	primarily	on	a	block	of	runoff programs	comprising	general	liability,	auto	liability,	and	workers'	compensation	product	coverages.	This	favorable	development	was	a	result	of lower	than	expected	paid	and	case	incurred	development	observed	in	the	most	recent	reserve	review	which	resulted	in	lower	selected	ultimate loss	projections;

•	Adverse	development	of	$10	million	related	to	higher	than	expected	loss	and	allocated	loss	adjustment	expense	activity	on	reported	claims	in Insurance	–	North	American's	small	and	middle	market	guaranteed	cost	workers'	compensation	portfolios,	primarily	affecting	the	2005	and	2006 accident	years.	Recent	case	activity	on	these	portfolios	through	calendar	year	2007	and	into	2008	was	higher	than	expectations	and	led	to adjustments	to	the	estimates	of	ultimate	loss	accordingly.	Prior	estimates	relied	heavily	on	industry	benchmarks	including	average	severity	trends; •	Adverse	development	of	$29	million	on	a	portfolio	of	primary	casualty	business	written	by	ACE	Westchester	impacting	the	2002-2004	accident years.	This	adverse	activity	was	a	function	of	higher	than	expected	loss	and	allocated	expenses	on	business	that	has	a	heavy	concentration	of exposure	to	commercial	contractors.	In	the	past	few	quarters,	both	paid	and	incurred	development	patterns	for	the	tail	period	beyond	60	months have	developed	worse	than	industry	benchmark	factors	which	formed	the	basis	for	the	projections	in	prior	analyses;

•	Favorable	development	of	$19	million	on	excess	casualty	and	umbrella	business	in	the	ACE	Westchester	unit	primarily	impacting	accident	years 2002-2004.	This	favorable	activity	was	a	function	of	a	shift	in	weighting	from	expected	loss	based	reserving	methods	to	direct	projections	of	ultimate losses	as	this	long	tailed	exposure	begins	to	mature	for	these	accident	periods;

•	Adverse	development	of	$10	million	on	an	ACE	Bermuda	professional	lines	claim	in	accident	year	2001	as	a	result	of	a	review	in	2008,	that identified	significant	erosion	below	the	attachment;

•	Adverse	development	of	$29	million	on	the	portfolio	of	Defense	Base	Acts	workers'	compensation	coverage	(covers	employees	of	U.S.

government	contractors	overseas).	Insurance	–	North	American	experienced	higher	than	expected	incurred	loss	development	since	the	last reserve	study	concentrated	in	the	2006	and	2007	accident	years.	The	majority	of	the	development	was	related	to	increases	in	case	reserves	on known	claims	for	these	accident	years,	and	recorded	in	2008.	These	increases	were	judged	to	be	more	than	claim	acceleration	and	resulted	in significant	increases	in	the	2006	and	2007	accident	year	ultimate	loss	projections	given	the	immaturity	of	the	impacted	accident	years	and	long-tail nature	of	the	portfolio;

•	Favorable	development	of	$46	million	on	medical	risk	business,	primarily	the	hospital	professional	liability	portfolio	for	the	2004	and	2005	accident years.	Coverage	is	provided	on	a	claims-made	basis	and	both	paid	and	case	incurred	loss	activity	since	the	last	review	have	been	favorable relative	to	expected.	As	these	accident	periods	have	matured,	the	Company	has	gradually	increased	the	weight	applied	to	experience-based methods,	including	the	Bornhuetter-Ferguson	method,	and	placing	less	weight	on	the	initial	expected	loss	ratio	method;

•	Favorable	development	of	$34	million	in	Insurance	–	North	American's	management	and	professional	liability	product	lines.	This	development was	the	net	result	of	favorable	development	totaling	$117	million	associated	with	the	2005	and	prior	accident	years	and	adverse	development	of $81	million	with	respect	to	the	2007	accident	year.	The	favorable	prior	period	development	was	a	function	of	a	review	of	all	open	claims	in	the	retail management	liability	operation	and	a	reassessment	of	the	potential	ultimate	exposure	on	these	claims.	This	reassessment	of	exposure	and	the maturation	of	these	accident	periods	supported	increasing	the	weight	given	to	experience	based	loss	projections.	The	adverse	development relating	to	the	2007	accident	year	is	due	solely	to	a	claim-by-claim	review	of	exposures	impacted	by	the	ongoing	credit	crisis	including	but	not limited	to	sub-prime	mortgages.	These	claim	file	reviews	occurred	during	the	2008	calendar	year	as	facts	and	circumstances	surrounding	these exposures	continued	to	emerge	and	develop;

•	Favorable	development	of	$51	million	on	the	long-tail	exposures	in	Insurance	–	North	American's	Canadian	P&C	operations,	principally	arising	in the	2005	accident	year	on	excess	casualty,	umbrella,	and	directors	and	officers	(D&O)	product	lines.	Actual	paid	and	case	incurred	loss	activity	has been	lower	than	expected	since	the	prior	analysis.	In	addition,	the	Company	has	increased	the	weighting	given	to	experience-based	methods	from the	initial	expected	loss	ratio	method	as	these	accident	years	mature;

•	Favorable	development	of	$68	million	for	accident	years	2003-2006	due	to	the	expiration	of	a	large,	multi-year	insurance	contract	written	in	the ACE	Financial	Solutions	business	unit.	This	contract	included	a	significant	per	occurrence	limit	excess	of	a	high	attachment	point.	Coverage	was provided	on	an	integrated	occurrence	basis	requiring	notice	of	an	event	during	the	policy	period.	The	Company	completed	a	detailed	claims	audit	in the	fourth	quarter	of	2008	which	led	to	an	adjustment	to	the	booked	loss	and	loss	expense	reserves;

•	Adverse	development	of	$51	million	on	runoff	casualty	reserves,	including	asbestos	and	environmental,	in	the	Brandywine	and	ACE	Westchester business	units	following	completion	of	the	internal	ground-up	review	of	asbestos	and	environmental	liabilities	for	the	most	significant	policyholders identified	to	date.	This	adverse	development	arose	from	several	sources,	the	principal	one	of	which	was	as	a	result	of	increased	defense	costs	in litigating	traditional	tort	defenses	on	asbestos	cases;	and

•	Adverse	development	totaling	$33	million	relating	to	increases	in	the	estimates	of	losses	for	the	2005	hurricanes	primarily	in	ACE	Westchester property	($23	million)	and	ACE	Financial	Services	International	(ACE	FSI)	($10	million).	The	ACE	Westchester	development	was	due	primarily	to settlement	on	several	excess	policies	above	the	prior	case	reserves,	resulting	in	higher	estimates	of	ultimate	loss.	The	claims	handling	associated with	the	2005	hurricanes	involved	complex	and	unique	causation	and	coverage	issues.	These	issues	continue	to	be	present	and	may	have	a further	adverse	impact	on	financial	results,	which	may	be	material.	The	ACE	FSI	development	was	due	to	adverse	development	on	a	retrocessional program	following	a	review	of	the	program's	claim	circumstances;

•	Favorable	development	of	$13	million	relating	to	lower	than	expected	paid	claims	for	the	2007	accident	year	on	a	run-off	portfolio	of	warranty business,	mostly	automobile	extended	warranty	contracts.	The	change	was	driven	primarily	by	recognition	of	recent	paid	claim	experience,	as	a percentage	of	earned	premiums,	which	has	been	lower	than	the	historical	averages	used	in	prior	analyses;

•	Favorable	development	of	$9	million	mainly	in	accident	years	2006	and	2007	for	ACE	Bermuda	political	risk.	This	line	is	subject	to	review	twice	a year;	during	the	fourth	quarter	2008	review,	the	limited	paid	and	case	incurred	loss	activity	relative	to	assumptions	and	known	events	has	been reflected	by	the	releasing	of	$9	million	of	IBNR;

•	Favorable	development	of	$29	million	on	ACE	USA's	property	business,	primarily	associated	with	the	2007	accident	year,	and	a	portfolio	of diverse	global	exposures	written	on	an	excess	basis.	Reported	loss	activity	during	the	2008	year,	has	been	lower	than	anticipated	in	the	prior review;

•	Favorable	development	of	$6	million	in	the	Canadian	P&C	operations	short-tail	lines	concentrated	in	the	2006	and	2007	accident	years,	covering multiple	product	lines	including	property	and	auto	physical	damage.	Reported	loss	activity	on	these	product	lines	was	lower	than	expected;

•	Favorable	development	of	$14	million	on	the	ACE	USA	recreational	marine	business	primarily	associated	with	the	2007	accident	year.	Loss emergence	and/or	development	during	the	2008	calendar	year	were	lower	than	historical	averages	used	in	prior	projections.

•	Adverse	development	on	the	estimates	of	future	allocated	claims	expense	on	two	separate	portfolios	of	workers'	compensation	insurance	totaling $28	million.	This	change	in	estimate	affected	the	national	accounts	workers'	compensation	business	(principally	accident	years	2002-2004)	and	a runoff	portfolio	of	workers'	compensation	servicing	carrier	business	(covering	accident	years	1996	and	prior).	For	the	national	accounts	business, the	change	was	principally	in	the	high	deductible	portfolio.	Based	on	analyses	completed	during	2007,	the	tail	factor	for	allocated	loss	adjustment expenses	(ALAE)	as	well	as	the	ratios	of	ALAE	to	loss	used	in	the	projection	methodologies	were	increased.	Small	movements	in	these assumptions	produce	a	leveraged	increase	in	the	loss	estimates	across	a	number	of	accident	years;

•	Adverse	development	on	the	estimates	of	ultimate	loss	on	a	collection	of	runoff	professional	liability	and	medical	programs	totaling	$20	million. This	adverse	development	was	the	direct	result	of	a	review	of	all	open	claims	that	was	completed	during	2007.	This	claims	review	identified	a number	of	cases	where	adverse	change	in	facts	and	circumstances	led	to	a	significant	deviation	from	the	estimates	of	ultimate	claim	value; •	Favorable	development	of	$52	million	in	workers'	compensation	business	due	to	the	absence	of	multi-claimant	events	such	as	industrial	accidents for	the	2006	accident	year.	The	majority	of	the	exposure	for	these	perils	falls	under	the	national	accounts	high	deductible	line	of	business.	The Company	evaluates	this	exposure	annually	after	the	accident	year	has	closed	allowing	for	the	late	identification	of	significant	losses.	The	review	in 2007	of	potential	2006	accident	year	losses	led	to	a	decrease	in	the	estimate	of	the	required	provision	for	these	claims;

•	Favorable	development	in	the	estimate	of	ultimate	loss	and	ALAE	of	$18	million	in	the	surety	business.	This	improvement	was	heavily concentrated	in	the	2005	and	2006	accident	years.	In	the	2007	calendar	year,	the	level	of	late	reported	claims	and	development	on	known	claims for	this	portfolio	was	significantly	below	historical	levels	for	this	line	of	business	resulting	in	a	reduction	in	all	loss	projection	methods;

•	Favorable	development	on	the	national	accounts	casualty	business,	primarily	general	liability,	of	$21	million	for	the	2002-2004	accident	years. Development	on	these	portfolios	had	been	favorable	relative	to	the	original	assumptions	used	to	price	the	products.	Actual	paid	and	incurred	loss activity	in	2007	was	lower	than	assumed	in	prior	projections	and	estimates	were	modified	accordingly;	and

•	Favorable	development	of	$25	million	on	the	foreign	casualty	portfolio	for	the	2004	and	prior	accident	years.	This	was	partly	due	to	an	adjustment for	a	reserve	established	in	2006	for	a	single	large	claim,	but	also	due	to	low	levels	of	reported	and	paid	loss	activity	on	the	foreign	captive business.	This	particular	line	has	net	exposure	on	a	per	occurrence	basis	excess	of	high	deductibles/self-insured	retentions	and	an	aggregate basis	excess	of	an	aggregate	attachment	point.	Expected	loss	emergence	patterns	used	in	the	2006	review	projected	higher	loss	development	for the	2004	and	prior	accident	years	than	emerged	during	2007	prompting	a	reduction	in	the	projection	of	ultimate	losses.

•	Adverse	development	totaling	$115	million	relating	to	increases	in	estimates	of	loss	for	the	2005	storms	primarily	in	the	ACE	Westchester operation	but	also	some	modest	development	in	the	offshore	energy	business.	This	development	was	due	primarily	to	a	relatively	small	number	of losses	on	excess	policies	with	large	exposed	limits.	These	losses	reached	settlement	during	2007	for	amounts	in	excess	of	the	case	reserves prompting	adjustments	to	projections	of	ultimate	losses.	The	claims	handling	associated	with	the	2005	hurricanes	had	involved	complex	and	unique causation	and	coverage	issues.	These	issues	were	present	in	2007;

•	Favorable	development	in	the	estimates	of	ultimate	losses	for	first	party	lines	including	property	and	auto	physical	damage	in	the	ACE	Canada operations	totaling	$18	million,	affecting	primarily	the	2006	accident	year.	Incurred	loss	development	during	calendar	year	2007	on	the	2006 accident	year	was	lower	than	historical	averages	which	formed	the	basis	for	the	prior	projections.	Given	the	relatively	short	reporting	pattern	for this	business,	the	actual	loss	emergence	was	assigned	greater	credibility	and	the	ultimate	loss	estimates	revised	accordingly;

•	Favorable	development	in	the	estimates	of	ultimate	loss	of	$19	million	on	the	Canadian	A&H	portfolio.	Historical	experience	has	been	limited	for this	product	line.	Losses	were	originally	recorded	using	an	expected	loss	ratio	method.	Actual	loss	emergence	in	calendar	year	2007	has	proven	to be	more	favorable	than	prior	projections.	Given	the	relatively	short	reporting	pattern	for	this	business,	the	actual	loss	emergence	was	assigned credibility	and	the	ultimate	loss	estimates	revised	accordingly;	and

•	Favorable	development	in	the	estimates	of	ultimate	loss	of	$28	million	on	short	tail,	non-catastrophe	losses	in	the	ACE	Westchester	property	and inland	marine	product	lines.	Attritional	incurred	loss	activity	on	the	2005	and	2006	accident	years	in	the	2007	calendar	year	was	lower	than historical	averages	which	formed	the	basis	for	prior	projections.

•	Favorable	development	of	$159	million	from	accident	years	2005	and	prior	in	ACE	International's	financial	lines	and	casualty	(primary	and	excess) portfolios.	Most	of	the	reduction	was	in	accident	years	2002-2005	on	financial	lines,	primary	casualty,	and	supported	casualty	excess.	Additional excess	releases	were	made	in	accident	years	2001	and	prior.	Actual	paid	and	case	incurred	loss	activity	has	been	lower	than	expected	since	the prior	year's	analysis.	In	addition,	the	weighting	given	to	experience-based	methods	has	been	increased	from	the	initial	expected	loss	ratio	method as	these	accident	periods	mature;

•	Net	favorable	development	of	$33	million	in	the	2006	and	prior	accident	years	for	Insurance	–	Overseas	General	long-tail	lines,	primarily	casualty and	financial	lines.	This	favorable	prior	period	development	was	in	response	to	the	annual	review	of	long-tail	lines	completed	during	2007.	There was	$23	million	of	net	favorable	development	for	Insurance	–	Overseas	General	on	the	2003-2005	accident	years	driven	by	reductions	in	loss development	method	indications	and	greater	credibility	being	assigned	to	Bornhuetter-Ferguson	projections	versus	expected	loss	ratio	methods. This	shift	in	credibility	weighting	between	reserving	methods	is	common	practice	and	allows	for	greater	recognition	of	actual	loss	emergence	as accident	years	mature;

•	Favorable	development	of	$84	million	on	short-tail	property	and	fire	lines	primarily	in	the	2006	accident	year	in	ACE	International.	The	favorable development	during	the	past	year	was	due	in	large	part	to	shifting	credibility	away	from	Bornhuetter-Ferguson	methods	and	relying	more	heavily	on loss	development	patterns	as	case	incurred	loss	became	a	more	accurate	predictor	of	ultimate	loss.	This	shift	in	credibility	tended	to	reduce indicated	ultimate	losses	since,	with	hindsight,	the	initial	expected	loss	ratios	have	proven	to	be	conservative;

•	Favorable	prior	period	development	of	$30	million	in	treaty	years	2003	and	2004	in	ACE	Tempest	Re	USA	and	ACE	Tempest	Re	Europe	across	a number	of	portfolios	(professional	liability,	D&O,	casualty,	workers'	compensation	catastrophe,	and	medical	malpractice),	offset	by	$16	million adverse	development	in	treaty	year	2007.	The	lower	loss	estimates	arose	from	the	combined	impact	of	continued	favorable	paid	and	case	incurred loss	trends	and	increased	weighting	given	to	experience-based	methods	away	from	expectations	as	these	treaty	periods	mature,	while	the	2007 treaty	year	development	resulted	from	adverse	incurred	losses	due	to	large	loss	development	in	casualty	lines	of	business.

# Asbestos	and	environmental	(A&E)	and	other	run-off	liabilities

Included	in	the	liabilities	for	losses	and	loss	expenses	are	amounts	for	A&E.	These	A&E	liabilities	principally	relate	to	claims	arising	from	bodily-injury claims	related	to	asbestos	products	and	remediation	costs	associated	with	hazardous	waste	sites.	The	estimation	of	these	liabilities	is	particularly sensitive	to	future	changes	in	the	legal,	social,	and	economic	environment.	The	Company	has	not	assumed	any	such	future	changes	in	setting	the	value of	its	A&E	reserves,	which	include	provisions	for	both	reported	and	IBNR	claims.

The	Company's	exposure	to	A&E	claims	principally	arises	out	of	liabilities	acquired	when	it	purchased	Westchester	Specialty	in	1998	and	the	P&C business	of	CIGNA	in	1999,	with	the	larger	exposure	contained	within	the	liabilities	acquired	in	the	CIGNA	transaction.	In	1996,	prior	to	the	acquisition	of the	P&C	business	of	CIGNA,	the	Pennsylvania	Insurance	Commissioner	approved	a	plan	to	restructure	INA	Financial	Corporation	and	its	subsidiaries (the	Restructuring)	which	included	the	division	of	Insurance	Company	of	North	America	(INA)	into	two	separate	corporations:	(1)	an	active	insurance company	that	retained	the	INA	name	and	continued	to	write	P&C	business	and	(2)	an	inactive	run-off	company,	now	called	Century	Indemnity	Company (Century).	As	a	result	of	the	division,	predominantly	all	A&E	and	certain	other	liabilities	of	INA	were	allocated	to	Century	and	extinguished,	as	a	matter	of Pennsylvania	law,	as	liabilities	of	INA.	As	part	of	the	Restructuring,	most	A&E	liabilities	of	various	U.S.	affiliates	of	INA	were	reinsured	to	Century,	and Century	and	certain	other	run-off	companies	having	A&E	and	other	liabilities	were	contributed	to	Brandywine	Holdings.	As	part	of	the	1999	acquisition	of the	P&C	business	of	CIGNA,	the	Company	acquired	Brandywine	Holdings	and	its	various	subsidiaries.	For	more	information	refer	to	"Brandywine	Run-Off Entities"	below.

During	2008,	ACE	conducted	an	internal,	ground-up	review	of	consolidated	A&E	liabilities	as	of	December	31,	2007.	During	the	same	period,	a team	of	external	actuaries	performed	an	evaluation	as	to	the	adequacy	of	the	reserves	of	Century.	This	external	review	was	conducted	in	accordance with	the	Brandywine	Restructuring	Order,	which	requires	that	an	independent	actuarial	review	of	Century's	reserves	be	completed	every	two	years. Management	takes	full	responsibility	for	the	estimation	of	its	A&E	liabilities.	As	a	result	of	the	Company's	internal	review,	the	Company	increased	net loss	reserves	for	the	Brandywine	operations,	including	A&E,	by	$65	million,	while	the	gross	loss	reserves	increased	by	$143	million.	The	conclusions	of the	external	review	provided	estimates	of	ultimate	net	Brandywine	liabilities	that	are	little	changed	from	a	comparable	study	in	2006.	The	Company	also decreased	net	loss	reserves	for	Westchester	Specialty's	A&E	and	other	liabilities	by	$13	million	(net	of	reinsurance	provided	by	NICO),	while	the	gross loss	reserves	decreased	by	$10	million.

During	2007,	the	Company	conducted	an	internal	review	of	its	consolidated	A&E	liabilities	as	of	June	30,	2007.	As	a	result	of	the	internal	review, the	Company	concluded	that	its	net	loss	reserves	for	the	Brandywine	operations,	including	A&E,	were	adequate	and,	therefore,	no	change	to	the	carried reserve	was	required.	In	2006,	a	team	of	external	actuaries	performed	an	evaluation	as	to	the	adequacy	of	the	reserves	of	Century.	The	results	of	the external	review	were	addressed	with	the	Pennsylvania	Insurance	Department	and	no	changes	to	statutory-basis	loss	reserves	were	deemed	necessary.

The	Company's	A&E	reserves	are	not	discounted,	and	do	not	reflect	any	anticipated	future	changes	in	the	legal,	social,	or	economic	environment, or	any	benefit	from	future	legislative	reforms.

The	table	below	presents	a	roll	forward	of	the	consolidated	A&E	loss	reserves	(excludes	Other	run-off	liabilities),	allocated	and	unallocated	loss expense	reserves	for	A&E	exposures,	and	the	provision	for	uncollectible	paid	and	unpaid	reinsurance	recoverables	for	the	year	ended	December	31, 2008.

|  |  | Asbestos | Environmental^(2) | Environmental^(2) |  | Total |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| (in\tmillions\tof\tU.S.\tdollars) | Gross | Net^(1) | Gross | Net | Gross |  | Net |
| Balance,\tbeginning\tof\tyear | $2,942 | $1,482 | $ 418 | $393 | $3,360 |  | $1,875 |
| Incurred\tactivity | 97 | 2 | 19 | (2) | 116 |  | – |
| Payment\tactivity | (347) | (99) | (123) | (75) | (470) |  | (174) |
| Foreign\tcurrency\trevaluation | (63) | (16) | (4) | (2) | (67) |  | (18) |
| Balance,\tend\tof\tyear | $2,629 | $1,369 | $ 310 | $314 | $2,939 |  | $1,683 |

The	net	figures	in	the	above	table	reflect	third-party	reinsurance	other	than	reinsurance	provided	by	National	Indemnity	Company	(NICO)	under three	aggregate	excess	of	loss	contracts	described	below	(collectively,	the	NICO	contracts).	The	Company	excludes	the	NICO	contracts	as	they	cover non-A&E	liabilities	as	well	as	A&E	liabilities.	The	split	of	coverage	provided	under	the	NICO	contracts	for	A&E	liabilities	as	compared	to	non-A&E liabilities	is	entirely	dependant	on	the	timing	of	the	payment	of	the	related	claims.	The	Company's	ability	to	make	an	estimate	of	this	split	is	not practicable.	The	Company	believes,	instead,	that	the	A&E	discussion	is	best	provided	excluding	the	NICO	contracts,	while	separately	discussing	the NICO	contracts	in	relation	to	the	total	subject	business,	both	A&E	and	non-A&E,	covered	by	those	contracts.	With	certain	exceptions,	the	NICO	contracts provide	coverage	for	the	net	A&E	incurred	losses	and	allocated	loss	expenses	within	the	limits	of	coverage	and	above	ACE's	retention	levels.	These exceptions	include	losses	arising	from	certain	operations	of	Insurance	–	Overseas	General	and	participations	by	ACE	Bermuda	as	a	co-reinsurer	or retrocessionaire	in	the	NICO	contracts.

|  |  | Brandywine |  | NICO | Net	of	NICO |
| :--- | :--- | :--- | :--- | :--- | :--- |
| (in\tmillions\tof\tU.S.\tdollars) | A&amp;E^(1) | Other^(1) | Total | Coverage^(2) | Coverage |
| Balance,\tbeginning\tof\tyear | $1,344 | $1,089 | $2,433 | $1,630 | $803 |
| Incurred\tactivity | 61 | 6 | 67 | – | 67 |
| Payment\tactivity | (115) | (83) | (198) | (213) | 15 |
| Balance,\tend\tof\tyear | $1,290 | $1,012 | $2,302 | $1,417 | $885 |

The	incurred	activity	was	primarily	related	to	the	internal	review	of	consolidated	A&E	liabilities	resulting	in	an	increase	to	net	loss	reserves	for	the Brandywine	operations,	including	A&E,	by	$65	million,	while	the	gross	loss	reserves	increased	by	$143	million.

As	part	of	the	acquisition	of	Westchester	Specialty	in	1998,	NICO	provided	a	75	percent	pro-rata	share	of	$1	billion	of	reinsurance	protection	on	losses and	loss	adjustment	expenses	incurred	on	or	before	December	31,	1996,	in	excess	of	a	retention	of	$721	million	(the	1998	NICO	Agreement).	NICO	has also	provided	an	85	percent	pro-rata	share	of	$150	million	of	reinsurance	protection	on	losses	and	allocated	loss	adjustment	expenses	incurred	on	or before	December	31,	1992,	in	excess	of	a	retention	of	$755	million	(the	1992	NICO	Agreement).	At	December	31,	2008,	the	remaining	unused	incurred limit	under	the	1998	NICO	Agreement	was	$530	million,	which	is	only	available	for	losses	and	loss	adjustment	expenses.	The	increase	in	the	remaining unused	limit	was	primarily	in	connection	with	recording	the	results	of	the	internal	reserve	review.	The	1992	NICO	Agreement	is	exhausted	on	an	incurred basis.

|  |  | Westchester	Specialty |  |  | Net	of	NICO |
| :--- | :--- | :--- | :--- | :--- | :--- |
| (in\tmillions\tof\tU.S.\tdollars) | A&amp;E^(1) | Other^(1) | Total | NICO\tCoverage | Coverage |
| Balance,\tbeginning\tof\tyear | $214 | $130 | $344 | $298 | $46 |
| Incurred\tactivity | (51) | (3) | (54) | (41) | (13) |
| Payment\tactivity | (41) | (2) | (43) | (41) | (2) |
| Balance,\tend\tof\tyear | $122 | $125 | $247 | $216 | $31 |

(1)	The	A&E	balance	at	December	31,	2007,	has	been	reduced	by	$10	million	to	reflect	reserve	classification	between	Asbestos	and	Other.

						Other	reserves,	which	consist	primarily	of	non-A&E	general	liability	and	products	liability	losses	were	increased	by	$10	million	at	December	31,	2007.

The	incurred	activity	was	primarily	related	to	the	internal	review	of	the	consolidated	A&E	liabilities	resulting	in	a	decrease	to	the	net	loss	reserves	for Westchester	Specialty's	A&E	and	other	liabilities	by	$13	million	(net	of	NICO),	while	the	gross	loss	reserves	decreased	by	$10	million.

In	addition	to	housing	a	significant	portion	of	the	A&E	exposure,	the	Brandywine	operations	include	run-off	liabilities	related	to	various	insurance	and reinsurance	businesses.	The	following	companies	comprise	ACE's	Brandywine	operations:	Century	(a	Pennsylvania	insurer),	Century	Re	(a Pennsylvania	insurer),	and	Century	International	Reinsurance	Company	Ltd.	(a	Bermuda	insurer	(CIRC)).	All	of	the	Brandywine	companies	are	direct	or indirect	subsidiaries	of	Brandywine	Holdings.

Effective	December	31,	2004,	ACE	INA	Holdings	contributed	$100	million	to	Century	in	exchange	for	a	surplus	note.	After	giving	effect	to	the contribution	and	issuance	of	the	surplus	note,	the	statutory	surplus	of	Century	at	December	31,	2008,	was	$25	million	and	approximately	$112	million	in statutory-basis	losses	have	been	ceded	to	the	Aggregate	Excess	of	Loss

Agreement	on	an	inception-to-date	basis.	Century	reports	the	amount	ceded	under	the	Aggregate	Excess	of	Loss	Agreement	in	accordance	with statutory	accounting	principles,	which	differ	from	GAAP	by,	among	other	things,	allowing	Century	to	discount	its	liabilities,	including	certain	asbestos related	and	environmental	pollution	liabilities.	The	reduction	in	2008	in	statutory-basis	losses	ceded	to	the	Aggregate	Excess	of	Loss	Agreement	resulted principally	from	the	cession	of	certain	reinsurance	amounts	associated	with	estimates	of	reinsurer	bad	debts	to	affiliated	ACE	companies,	and	from	an increase	in	discount	benefit.	For	GAAP	reporting	purposes,	intercompany	reinsurance	recoverables	related	to	the	Aggregate	Excess	of	Loss	Agreement are	eliminated	upon	consolidation.	To	estimate	ACE's	remaining	claim	exposure	under	the	Aggregate	Excess	of	Loss	Agreement	on	a	GAAP	basis,	the Company	adjusts	the	statutory	cession	to	exclude	the	discount	embedded	in	statutory	loss	reserves	and	adjusts	the	statutory	provision	for	uncollectible reinsurance	to	a	GAAP	basis	amount.	At	December	31,	2008,	approximately	$407	million	in	GAAP	basis	losses	were	ceded	under	the	Aggregate	Excess of	Loss	Agreement,	leaving	a	remaining	limit	of	coverage	under	that	agreement	of	approximately	$393	million.	At	December	31,	2007,	the	remaining	limit of	coverage	under	the	agreement	was	$228	million.	The	reduction	in	GAAP-basis	losses	ceded	to	the	Aggregate	Excess	of	Loss	Agreement	resulted principally	from	the	previously	mentioned	cession	of	certain	reinsurance	bad	debts	to	affiliated	ACE	companies.	While	the	Company	believes	ACE	has	no legal	obligation	to	fund	losses	above	the	Aggregate	Excess	of	Loss	Agreement	limit	of	coverage,	ACE's	consolidated	results	would	nevertheless	continue to	include	any	losses	above	the	limit	of	coverage	for	so	long	as	the	Brandywine	companies	remain	consolidated	subsidiaries	of	ACE.

In	addition	to	the	Dividend	Retention	Fund	and	Aggregate	Excess	of	Loss	Agreement	commitments	described	above,	certain	ACE	entities	are	primarily liable	for	asbestos,	environmental,	and	other	exposures	that	they	have	reinsured	to	Century.	Accordingly,	if	Century	were	to	become	insolvent	and	ACE were	to	lose	control	of	Century,	some	or	all	of	the	recoverables	due	to	these	ACE	companies	from	Century	could	become	uncollectible,	yet	those	ACE entities	would	continue	to	be	responsible	to	pay	claims	to	their	insureds	or	reinsureds.	As	of	December	31,	2008,	the	aggregate	reinsurance	balances ceded	by	the	active	ACE	companies	to	Century	were	approximately	$1.3	billion.	At	December	31,	2008,	Century's	carried	gross	reserves	(including reserves	ceded	by	the	active	ACE	companies	to	Century)	were	$3.1	billion.	The	Company	believes	the	intercompany	reinsurance	recoverables,	which relate	to	liabilities	payable	over	many	years	(i.e.,	25	years	or	more),	are	not	impaired	at	this	time.	A	substantial	portion	of	the	liabilities	ceded	to	Century by	its	affiliates	have	in	turn	been	ceded	by	Century	to	NICO	and,	as	of	December	31,	2008,	approximately	$1.4	billion	of	cover	remains	on	a	paid	basis. Should	Century's	loss	reserves	experience	adverse	development	in	the	future	and	should	Century	be	placed	into	rehabilitation	or	liquidation,	the reinsurance	recoverables,	due	from	Century	to	its	affiliates	would	be	payable	only	after	the	payment	in	full	of	certain	expenses	and	liabilities,	including administrative	expenses	and	direct	policy	liabilities.	Thus,	the	intercompany	reinsurance	recoverables	would	be	at	risk	to	the	extent	of	the	shortage	of assets	remaining	to	pay	these	recoverables.	As	of	December	31,	2008,	losses	ceded	by	Century	to	the	active	ACE	companies	and	other	amounts	owed to	Century	by	the	active	ACE	companies	were	approximately	$465	million	in	the	aggregate.

Under	Swiss	law,	a	resident	company	is	subject	to	income	tax	at	the	federal,	cantonal,	and	communal	levels	that	is	levied	on	net	worldwide	income. Income	attributable	to	permanent	establishments	or	real	estate	located	abroad	is	excluded	from	the	Swiss	tax	base.	ACE	Limited	is	a	holding	company and,	therefore,	is	exempt	from	cantonal	and	communal	income	tax.	As	a	result,	ACE	Limited	is	subject	to	Swiss	income	tax	only	at	the	federal	level. Furthermore,	participation	relief	is	granted	to	ACE	Limited	at	the	federal	level	for	qualifying	dividend	income	and	capital	gains	related	to	the	sale	of qualifying	participations.	It	is	expected	that	the	participation	relief	will	result	in	a	full	exemption	of	participation	income	from	federal	income	tax.	ACE Limited	is	resident	in	the	Canton	and	City	of	Zurich	and,	as	such,	is	subject	to	an	annual	cantonal	and	communal	capital	tax	on	the	taxable	equity	of	ACE Limited	in	Switzerland.

The	Company	has	two	Swiss	operating	subsidiaries	resident	in	the	Canton	and	City	of	Zurich,	an	insurance	company,	ACE	Insurance	(Switzerland) Limited,	which,	in	turn,	owns	a	reinsurance	company,	ACE	Reinsurance	(Switzerland)	Limited.	Both	are	subject	to	federal,	cantonal,	and	communal income	tax	and	to	annual	cantonal	and	communal	capital	tax.

Under	current	Bermuda	law,	ACE	Limited	and	its	Bermuda	subsidiaries	are	not	required	to	pay	any	taxes	on	its	income	or	capital	gains.	If	a Bermuda	law	were	to	be	enacted	that	would	impose	taxes	on	income	or	capital	gains,	ACE	Limited	and	the	Bermuda	subsidiaries	have	received	an undertaking	from	the	Minister	of	Finance	in	Bermuda	that	would	exempt	such	companies	from	Bermudian	taxation	until	March	2016.

Income	from	the	Company's	operations	at	Lloyd's	is	subject	to	United	Kingdom	corporation	taxes.	Lloyd's	is	required	to	pay	U.S.	income	tax	on U.S.	connected	income	(U.S.	income)	written	by	Lloyd's	syndicates.	Lloyd's	has	a	closing	agreement	with	the	Internal	Revenue	Service	(IRS)	whereby the	amount	of	tax	due	on	this	business	is	calculated	by	Lloyd's	and	remitted	directly	to	the	IRS.	These	amounts	are	then	charged	to	the	accounts	of	the Names/Corporate	Members	in	proportion	to	their	participation	in	the	relevant	syndicates.	The	Company's	Corporate	Members	are	subject	to	this arrangement	but,	as	U.K.	domiciled	companies,	will	receive	U.K.	corporation	tax	credits	for	any	U.S.	income	tax	incurred	up	to	the	value	of	the	equivalent U.K.	corporation	income	tax	charge	on	the	U.S.	income.

ACE	Group	Holdings	and	its	respective	subsidiaries	are	subject	to	income	taxes	imposed	by	U.S.	authorities	and	file	a	consolidated	U.S.	tax return.	Combined	Insurance	and	its	subsidiaries	will	file	a	separate	consolidated	U.S.	tax	return	for	tax	years	prior	to	2014.	Should	ACE	Group	Holdings pay	a	dividend	to	the	Company,	withholding	taxes	would	apply.	Currently,	however,	no	withholding	taxes	are	accrued	with	respect	to	such	un-remitted earnings	as	management	has	no	intention	of	remitting	these	earnings.	The	cumulative	amount	that	would	be	subject	to	withholding	tax,	if	distributed,	as well	as	the	determination	of	the	associated	tax	liability	are	not	practicable	to	compute;	however,	such	amount	would	be	material	to	the	Company.	Certain international	operations	of	the	Company	are	also	subject	to	income	taxes	imposed	by	the	jurisdictions	in	which	they	operate.

The	Company	is	not	subject	to	income	taxation	other	than	as	stated	above.	There	can	be	no	assurance	that	there	will	not	be	changes	in	applicable laws,	regulations,	or	treaties	which	might	require	the	Company	to	change	the	way	it	operates	or	become	subject	to	taxation.

| (in	millions	of	U.S.	dollars) | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Current\ttax\texpense | $ 511 | $550 | $465 |
| Deferred\ttax\t(benefit)\texpense | (141) | 25 | 57 |
| Provision\tfor\tincome\ttaxes | $ 370 | $575 | $522 |

The	weighted-average	expected	tax	provision	has	been	calculated	using	pre-tax	accounting	income	(loss)	in	each	jurisdiction	multiplied	by	that jurisdiction's	applicable	statutory	tax	rate.	A	reconciliation	of	the	difference	between	the	provision	for	income	taxes	and	the	expected	tax	provision	at	the weighted-average	tax	rate	for	the	years	ended	December	31,	2008,	2007,	and	2006,	is	provided	below.

| (in	millions	of	U.S.	dollars) | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Expected\ttax\tprovision\tat\tweighted-average\trate | $353 | $599 | $484 |
| Permanent\tdifferences: |  |  |  |
| Tax-exempt\tinterest\tand\tDRD,\tnet\tof\tproration | (25) | (18) | (8) |
| Net\twithholding\ttaxes | 16 | 18 | 21 |
| Other | 25 | (25) | 32 |
| Fines\tand\tpenalties | 1 | 1 | 18 |
| Sale\tof\trun-off\treinsurance\tsubsidiaries | – | – | (25) |
| Total\tprovision\tfor\tincome\ttaxes | $370 | $575 | $522 |

The	components	of	the	net	deferred	tax	assets	as	of	December	31,	2008	and	2007,	are	as	follows:

| (in	millions	of	U.S.	dollars) | 2008 | 2007 |
| :--- | :--- | :--- |
| Deferred\ttax\tassets |  |  |
| Loss\treserve\tdiscount | $906 | $754 |
| Unearned\tpremiums\treserve | 67 | 132 |
| Foreign\ttax\tcredits | 670 | 703 |
| Investments | 214 | 117 |
| Provision\tfor\tuncollectible\tbalances | 132 | 134 |
| Loss\tcarry-forwards | 104 | 45 |
| Cumulative\ttranslation\tadjustment | 114 | – |
| Unrealized\tdepreciation\ton\tinvestments | 308 | – |
| Other,\tnet | 130 | 75 |
| Total\tdeferred\ttax\tassets | \t 2,645 | 1960 |
| Deferred\ttax\tliabilities |  |  |
| Deferred\tpolicy\tacquisition\tcosts | 71 | 111 |
| VOBA/Goodwill | 145 | – |
| Un-remitted\tforeign\tearnings | 559 | 483 |
| Unrealized\tappreciation\ton\tinvestments | – | 153 |
| Cumulative\ttranslation\tadjustment | – | 85 |
| Total\tdeferred\ttax\tliabilities | 775 | 832 |
| Valuation\tallowance | 35 | 41 |
| Net\tdeferred\ttax\tassets | $1,835 | $1,087 |

The	valuation	allowance	of	$35	million	at	December	31,	2008,	and	$41	million	at	December	31,	2007,	reflects	management's	assessment,	based	on available	information,	that	it	is	more	likely	than	not	that	a	portion	of	the	deferred	tax	assets	will	not	be	realized	due	to	the	inability	of	certain	foreign subsidiaries	to	generate	sufficient	taxable	income	and	the	inability	of	ACE	Group	Holdings	and	its	subsidiaries	to	utilize	foreign	tax	credits.	Adjustments	to the	valuation	allowance	are	made	when	there	is	a	change	in	management's	assessment	of	the	amount	of	deferred	tax	assets	that	are	realizable.

At	December	31,	2008,	the	Company	has	a	U.S.	capital	loss	carry-forward	of	$272	million	which,	if	unutilized,	will	expire	in	the	years	2011-2013,	a U.S.	net	operating	loss	carry-forward	of	$17	million,	which,	if	unutilized,	will	expire	in	the	years	2021-2028,	and	a	foreign	tax	credit	carry-forward	in	the amount	of	$81	million	which,	if	unutilized,	will	expire	in	the	years	2015-2017.

A	reconciliation	of	the	beginning	and	ending	amount	of	unrecognized	tax	benefits	for	the	years	ended	December	31,	2008	and	2007	is	as	follows:

The	reduction	for	tax	positions	taken	in	prior	years	during	2008	results	from	a	foreign	currency	translation	adjustment	on	the	tax	position.	The	reduction for	tax	positions	taken	in	prior	years	during	2007	primarily	results	from	a	change	in	the	tax	regulations	during	the	three	months	ended	March	31,	2007.

Included	in	the	balance	at	December	31,	2008	and	2007,	is	$1	million	of	unrecognized	tax	benefits	for	which	the	ultimate	deductibility	is	highly certain	but	for	which	there	is	uncertainty	about	the	timing	of	such	deductibility.	Because	of	the	impact	of	deferred	tax	accounting,	other	than	interest	and penalties,	an	unfavorable	resolution	of	these	temporary	items	would	not	affect	the	annual	effective	tax	rate	but	would	accelerate	the	payment	of	cash	to the	taxing	authority	to	an	earlier	period.	Consequently,	the	total	amount	of	unrecognized	tax	benefits	as	of	December	31,	2008,	that	would	affect	the effective	tax	rate,	if	recognized,	is	$149	million.

The	Company	recognizes	accruals	for	interest	and	penalties,	if	any,	related	to	unrecognized	tax	benefits	in	income	tax	expense.	As	of December	31,	2008	and	2007,	the	Company	has	recorded	$14	million	and	$8	million,	respectively,	in	liabilities	for	tax-related	interest	in	its	consolidated balance	sheet.

The	IRS	has	completed	examinations	of	the	Company's	federal	tax	returns	for	taxable	years	through	2001.	The	outcome	of	the	examinations	did not	have	a	material	effect	on	the	Company's	financial	condition	or	results	of	operations.	The	IRS	completed	its	field	examination	of	the	Company's federal	tax	returns	for	2002,	2003,	and	2004	during	the	third	quarter	of	2007,	and	has	proposed	several	adjustments	principally	involving	transfer	pricing and	other	insurance-related	tax	deductions.	The	Company	subsequently	filed	a	written	protest	with	the	IRS	and	the	case	is	currently	being	reviewed	by the	IRS	Appeals	Division.	While	it	is	reasonably	possible	that	a	significant	increase	or	decrease	in	the	Company's	unrecognized	tax	benefits	could	occur in	the	next	twelve	months,	given	the	uncertainty	regarding	the	timing	and	possible	outcomes	of	the	appeals	process,	a	current	estimate	of	the	range	of reasonably	possible	changes	cannot	be	made.	The	IRS	commenced	its	field	examination	for	tax	years	2005	through	2007	during	the	second	quarter	of 2008	with	no	adjustments	proposed	as	of	December	31,	2008.	With	few	exceptions,	the	Company's	significant	U.K.	subsidiaries	remain	subject	to examination	for	tax	years	2006	and	later.

The	following	table	outlines	the	Company's	debt	as	of	December	31,	2008	and	2007.

| (in	millions	of	U.S.	dollars) | 2008 | 2007 |
| :--- | :--- | :--- |
| Short-term\tdebt |  |  |
| ACE\tINA\tsubordinated\tnotes\tdue\t2009 | $205 | $– |
| ACE\tINA\tterm\tloan\tdue\t2009 | 16 | – |
| Reverse\trepurchase\tagreements | 250 | 35 |
| Australia\tHoldings\tdue\t2008 | – | 87 |
| ACE\tUS\tHoldings\tsenior\tnotes\tdue\t2008 | – | 250 |
|  | $471 | $372 |
| Long-term\tdebt |  |  |
| ACE\tEuropean\tHoldings\tdue\t2010 | $149 | $199 |
| ACE\tINA\tterm\tloan\tdue\t2011 | 50 | – |
| ACE\tINA\tterm\tloan\tdue\t2013 | 450 | – |
| ACE\tINA\tsenior\tnotes\tdue\t2014 | 499 | 499 |
| ACE\tINA\tsenior\tnotes\tdue\t2015 | 446 | – |
| ACE\tINA\tsenior\tnotes\tdue\t2017 | 500 | 500 |
| ACE\tINA\tsenior\tnotes\tdue\t2018 | 300 | – |
| TACE\tINA\tdebentures\tdue\t2029 | 100 | 100 |
| ACE\tINA\tsenior\tnotes\tdue\t2036 | 298 | 298 |
| Other | 14 | 14 |
| ACE\tINA\tsubordinated\tnotes\tdue\t2009 | – | 201 |
|  | $2,806 | $1,811 |
| Trust\tpreferred\tsecurities |  |  |
| ACE\tINA\tcapital\tsecurities\tdue\t2030 | $309 | $309 |

# a)	Short-term	debt

At	December	31,	2008,	short-term	debt	included	$205	million	of	11.2	percent	unsecured	subordinated	notes	maturing	in	December	2009	and	a	$16 million	term	loan,	maturing	in	September	2009,	as	discussed	further	below.

The	Company	has	executed	reverse	repurchase	agreements	with	certain	counterparties	under	which	the	Company	agreed	to	sell	securities	and repurchase	them	at	a	future	date	for	a	predetermined	price.	During	2008,	these	included	reverse	repurchase	agreements	settled	during	the	year	totaling $1	billion	as	part	of	the	financing	of	the	Combined	Insurance	acquisition	and	$250	million	upon	the	repayment	of	the	ACE	US	Holdings	senior	notes discussed	in	Note	9	c)	below.	At	December	31,	2008,	short-term	debt	included	$250	million	of	amounts	owed	to	brokers	under	reverse	repurchase agreements.

In	December	2008,	the	Company	repaid	the	Australia	Holdings	PTY	Ltd.	AUD	$100	million	($87	million	at	December	31,	2007)	syndicated unsecured	term	loan.

# b)	ACE	INA	subordinated	notes

In	1999,	ACE	INA	issued	$300	million	of	11.2	percent	unsecured	subordinated	notes	maturing	in	December	2009.	The	subordinated	notes	are	callable subject	to	certain	call	premiums.	Simultaneously,	the	Company	entered	into	a	notional	$300	million	swap	transaction	that	has	the	economic	effect	of reducing	the	cost	of	debt	to	the	consolidated	group,	excluding	fees	and	expenses,	to	8.41	percent	for	ten	years.	During	2002,	the	Company	repaid	$100 million	of	these	notes	and	swaps.	The	minimum	collateral	in	connection	with	the	swap	transaction	is	$70	million.	In	the	event	that	the	Company terminates	the	swap	prematurely,	the	Company	would	be	liable	for	certain	transaction	costs.	The	swap	counterparty	is	a	highly-rated	major	financial institution	and	the	Company	does	not	anticipate	non-performance.

# c)	ACE	US	Holdings	senior	notes

In	1998,	ACE	US	Holdings	issued	$250	million	in	aggregate	principal	amount	of	unsecured	senior	notes	maturing	and	repaid	in	October	2008.	The	senior notes	were	callable	subject	to	certain	call	premiums.	Simultaneously	upon	issue,	the	Company	entered	into	a	notional	$250	million	swap	transaction	that had	the	economic	effect	of	reducing	the	cost	of	debt	to	the	consolidated	group,	excluding	fees	and	expenses,	to	6.47	percent	for	ten	years.

# d)	ACE	European	Holdings	notes

In	December	2005,	ACE	European	Holdings	No.	2	Ltd.	entered	into	a	£100	million	($149	million)	syndicated	five-year	term	loan	agreement	due December	2010.	The	loan	agreement	is	unsecured	and	repayable	on	maturity.	The	interest	rate	on	the	loan	is	5.25	percent.	The	obligation	of	the borrower	under	the	loan	agreement	is	guaranteed	by	ACE	Limited.

# e)	ACE	INA	notes,	debentures,	and	term	loan

In	December	2008,	ACE	INA	entered	into	a	$66	million	dual	tranche	floating	interest	rate	term	loan	agreement.	The	first	tranche,	a	$50	million	three-year term	loan	due	December	2011,	has	a	floating	interest	rate	based	on	LIBOR.	Simultaneously,	the	Company	entered	into	a	swap	transaction	that	has	the economic	effect	of	fixing	the	interest	rate,	excluding	fees	and	expenses,	at	5.61	percent	for	the	full	term	of	the	loan.	The	second	tranche,	a	$16	million nine-month	term	loan,	due	September	2009,	has	a	floating	interest	rate	based	on	LIBOR.	Simultaneously,	the	Company	entered	into	a	swap	transaction that	has	the	economic	effect	of	fixing	the	interest	rate,	excluding	fees	and	expenses,	at	3.02	percent	for	the	full	term	of	the	loan.	The	swap	counterparty is	a	highly-rated	financial	institution	and	the	Company	does	not	anticipate	non-performance.	The	loan	is	unsecured	and	repayable	on	maturity	and contains	customary	limitations	on	lien	provisions	as	well	as	customary	events	of	default	provisions	which,	if	breached,	could	result	in	the	accelerated maturity	of	such	debt.	The	obligation	of	the	borrower	under	the	loan	agreement	is	guaranteed	by	ACE	Limited.

In	April	2008,	as	part	of	the	financing	of	the	Combined	Insurance	acquisition,	ACE	INA	entered	into	a	$450	million	floating	interest	rate	syndicated term	loan	agreement	due	April	2013.	The	floating	interest	rate	is	based	on	LIBOR	plus	0.65	percent.	Simultaneously,	the	Company	entered	into	a	$450 million	swap	transaction	that	has	the	economic	effect	of	fixing	the	interest	rate	at	4.15	percent	for	the	term	of	the	loan.	The	swap	counterparty	is	a	highly- rated	financial	institution	and	the	Company	does	not	anticipate	non-performance.	The	loan	is	unsecured	and	repayable	on	maturity	and	contains customary	limitations	on	lien	provisions	as	well	as	customary	events	of	default	provisions	which,	if	breached,	could	result	in	the	accelerated	maturity	of such	debt.	The	obligation	of	the	borrower	under	the	loan	agreement	is	guaranteed	by	ACE	Limited.

In	June	2004,	ACE	INA	issued	$500	million	of	5.875	percent	notes	due	June	2014.	These	notes	are	redeemable	at	any	time	at	ACE	INA's	option subject	to	a	"make-whole"	premium	plus	0.20	percent.	The	notes	are	also	redeemable	at	par	plus	accrued	and	unpaid	interest	in	the	event	of	certain changes	in	tax	law.	The	notes	do	not	have	the	benefit	of	any	sinking	fund.	These	senior	unsecured	notes	are	guaranteed	on	a	senior	basis	by	the Company	and	they	rank	equally	with	all	of	the	Company's	other	senior	obligations.	They	also	contain	customary	limitation	on	lien	provisions	as	well	as customary	events	of	default	provisions	which,	if	breached,	could	result	in	the	accelerated	maturity	of	such	senior	debt.

In	May	2008,	ACE	INA	issued	$450	million	of	5.6	percent	senior	notes	due	May	2015.	These	notes	are	redeemable	at	any	time	at	ACE	INA's	option subject	to	a	"make-whole"	premium	plus	0.35	percent.	The	notes	are	also	redeemable	at	par	plus	accrued	and	unpaid	interest	in	the	event	of	certain changes	in	tax	law.	These	senior	unsecured	notes	are	guaranteed	on	a	senior	basis	by	the	Company	and	they	rank	equally	with	all	of	the	Company's other	senior	obligations.	They	also	contain	customary	limitations	on	lien	provisions	as	well	as	customary	events	of	default	provisions	which,	if	breached, could	result	in	the	accelerated	maturity	of	such	senior	debt.	The	proceeds	from	this	debt	offering,	along	with	available	cash,	were	used	to	redeem	the Preferred	Shares	in	June	2008.	Refer	to	Note	11.

In	February	2007,	ACE	INA	issued	$500	million	of	5.7	percent	notes	due	February	2017.	These	notes	are	redeemable	at	any	time	at	ACE	INA's option	subject	to	a	"make-whole"	premium	plus	0.20	percent.	The	notes	are	also	redeemable	at	par	plus	accrued	and	unpaid	interest	in	the	event	of certain	changes	in	tax	law.	These	notes	do	not	have	the	benefit	of	any	sinking	fund.	These	senior	unsecured	notes	are	guaranteed	on	a	senior	basis	by the	Company	and	they	rank	equally	with	all	of	the	Company's	other	senior	obligations.	They	also	contain	customary	limitation	on	lien	provisions	as	well as	customary	events	of	default	provisions	which,	if	breached,	could	result	in	the	accelerated	maturity	of	such	senior	debt.

In	February	2008,	as	part	of	the	financing	of	the	Combined	Insurance	acquisition,	ACE	INA	issued	$300	million	of	5.8	percent	senior	notes	due March	2018.	These	notes	are	redeemable	at	any	time	at	ACE	INA's	option	subject	to	a	"make-whole"	premium	plus	0.35	percent.	The	notes	are	also redeemable	at	par	plus	accrued	and	unpaid	interest	in	the	event	of	certain	changes	in	tax	law.	These	notes	do	not	have	the	benefit	of	any	sinking fund.	These	senior	unsecured	notes	are	guaranteed	on	a	senior	basis	by	the	Company	and	they	rank	equally	with	all	of	the	Company's	other	senior obligations.	They	also	contain	customary	limitations	on	lien	provisions	as	well	as	customary	events	of	default	provisions	which,	if	breached,	could	result	in the	accelerated	maturity	of	such	senior	debt.

In	1999,	ACE	INA	issued	$100	million	of	8.875	percent	debentures	due	August	2029.	Subject	to	certain	exceptions,	the	debentures	are	not redeemable	before	maturity	and	do	not	have	the	benefit	of	any	sinking	fund.	These	unsecured	debentures	are	guaranteed	on	a	senior	basis	by	the Company	and	they	rank	equally	with	all	of	ACE	INA's	other	senior	indebtedness.

In	May	2006,	ACE	INA	issued	$300	million	of	6.7	percent	notes	due	May	2036.	These	notes	are	redeemable	at	any	time	at	ACE	INA's	option subject	to	a	"make-whole"	premium	plus	0.20	percent.	The	notes	are	also	redeemable	at	par	plus	accrued	and	unpaid	interest	in	the	event	of	certain changes	in	tax	law.	These	notes	do	not	have	the	benefit	of	any	sinking	fund.	These	senior	unsecured	notes	are	guaranteed	on	a	senior	basis	by	the Company	and	they	rank	equally	with	all	of	the	Company's	other	senior	obligations.	They	also	contain	customary	limitation	on	lien	provisions	as	well	as customary	events	of	default	provisions	which,	if	breached,	could	result	in	the	accelerated	maturity	of	such	senior	debt.

# f)	ACE	INA	capital	securities

In	2000,	ACE	Capital	Trust	II,	a	Delaware	statutory	business	trust,	publicly	issued	$300	million	of	9.7	percent	Capital	Securities	(the	Capital	Securities).	At the	same	time,	ACE	INA	purchased	$9.2	million	of	common	securities	of	ACE	Capital	Trust	II.

The	Capital	Securities	mature	in	April	2030.	Distributions	on	the	Capital	Securities	are	payable	semi-annually.	ACE	Capital	Trust	II	may	defer	these payments	for	up	to	ten	consecutive	semi-annual	periods	(but	no	later	than	April	1,	2030).	Any	deferred	payments	would	accrue	interest	compounded semi-annually	if	ACE	INA	defers	interest	on	the	Subordinated	Debentures	due	2030	(as	defined	below).

The	sole	assets	of	ACE	Capital	Trust	II	consist	of	$309	million	principal	amount	of	9.7	percent	Junior	Subordinated	Deferrable	Interest	Debentures (the	Subordinated	Debentures)	issued	by	ACE	INA.	The	Subordinated	Debentures	mature	in	April	2030.	Interest	on	the	Subordinated	Debentures	is payable	semi-annually.	ACE	INA	may	defer	such	interest	payments	(but	no	later	than	April	1,	2030),	with	such	deferred	payments	accruing	interest compounded	semi-annually.	ACE	INA	may	redeem	the	Subordinated	Debentures	in	the	event	certain	changes	in	tax	or	investment	company	law	occur	at a	redemption	price	equal	to	accrued	and	unpaid	interest	to	the	redemption	date	plus	the	greater	of	(i)	100	percent	of	the	principal	amount	thereof,	or (ii)	the	sum	of	the	present	value	of	scheduled	payments	of	principal	and	interest	on	the	debentures	from	the	redemption	date	to	April	1,	2030.	The	Capital Securities	and	the	ACE	Capital	Trust	II	Common	Securities	will	be	redeemed	upon	repayment	of	the	Subordinated	Debentures.

The	Company	has	guaranteed,	on	a	subordinated	basis,	ACE	INA's	obligations	under	the	Subordinated	Debentures,	and	distributions	and	other payments	due	on	the	Capital	Securities.	These	guarantees,	when	taken	together	with	the	Company's	obligations	under	expense	agreements	entered into	with	ACE	Capital	Trust	II,	provide	a	full	and	unconditional	guarantee	of	amounts	due	on	the	Capital	Securities.

# g)	Other	long-term	debt

In	August	2005,	due	to	favorable	low-interest	terms,	ACE	American	borrowed	$10	million	from	the	Pennsylvania	Industrial	Development	Authority	(PIDA) at	a	rate	of	2.75	percent	due	September	2020.	The	proceeds	from	PIDA	were	restricted	for	purposes	of	defraying	construction	costs	on	a	new	office building.	Principal	and	interest	are	payable	on	a	monthly	basis.	The	current	balance	outstanding	is	$8	million.

In	addition,	in	1999,	ACE	American	assumed	a	CIGNA	loan	of	$8	million	borrowed	from	the	City	of	Philadelphia	under	the	Urban	Development Action	Grant	with	an	imputed	rate	of	7.1	percent	due	December	2019.	The	current	amount	outstanding	is	$6	million.

# 10.	Commitments,	contingencies,	and	guarantees

# a)	Derivative	instruments

The	Company	maintains	positions	in	derivative	instruments	such	as	futures,	options,	swaps,	and	foreign	currency	forward	contracts	for	which	the	primary purposes	are	to	manage	duration	and	foreign	currency	exposure,	yield	enhancement,	to	obtain	an	exposure	to	a	particular	financial	market,	or	to	limit equity	and	interest	rate	exposure	in	the	GMDB	and	GMIB	block	of	business.	In	addition,	the	Company	also	purchases	to	be	announced	mortgage-backed securities	as	part	of	its	investing	activities.	The	Company	records	changes	in	fair	value	of	these	instruments	as	realized	gains	(losses)	in	the	consolidated statements	of	operations.	None	of	the	derivatives	are	used	as	hedges	for	accounting	purposes.

The	following	table	outlines	the	fair	values	and	notional	values	of	certain	derivative	instruments	at	December	31,	2008	and	2007.

| (in	millions	of	U.S.	dollars) | Fair<br>Value | Notional<br>Value | Fair<br>Value | Notional<br>Value |
| :--- | :--- | :--- | :--- | :--- |
| Foreign\tcurrency\tforward\tcontracts | $ (13.8) | $603 | $1.4 | $1,104 |
| Future\tcontracts\ton\tmoney\tmarket\tinstruments | 10.6 | 3,446 | 13.4 | 9,520 |
| Future\tcontracts\ton\tnotes\tand\tbonds | 3.6 | 849 | 5.0 | 998 |
| Credit\tdefault\tswaps | 76.7 | 315 | 5.3 | 420 |
| Options\ton\tmoney\tmarket\tinstruments | (3.4) | 3,621 | (1.0) | 758 |
| Options\ton\tnotes\tand\tbond\tfutures | (0.1) | 44 | (6.7) | 1,099 |
| Options\ton\tequity\tmarket\tfutures | 280.4 | 1,410 | 69.9 | 1,050 |
| Interest\trate\tswaps | – | – | 5.7 | 850 |
| Total | $354.0 | $10,288 | $93.0 | $15,799 |

Derivatives	on	money	market	instruments	have	durations	of	approximately	3	months	regardless	of	the	maturity	date	of	the	derivative.

# (i)	Foreign	currency	exposure	management

The	Company	uses	foreign	currency	forward	contracts	(forwards)	to	minimize	the	effect	of	fluctuating	foreign	currencies.	The	forwards	purchased	are	not specifically	identifiable	against	cash,	any	single	security,	or	groups	of	securities	denominated	in	those	currencies	and,	therefore,	do	not	qualify	as	hedges for	financial	reporting	purposes.	All	realized	and	unrealized	contract	gains	and	losses	are	reflected	in	Net	realized	gains	(losses)	in	the	consolidated statements	of	operations.

# (ii)	Duration	management	and	market	exposure

# Futures

Exchange	traded	bond	and	note	futures	contracts	may	be	used	in	fixed	maturity	portfolios	as	substitutes	for	ownership	of	the	bonds	and	notes	without significantly	increasing	the	risk	in	the	portfolio.	Investments	in	futures	contracts	may	be	made	only	to	the	extent	that	there	are	assets	under	management not	otherwise	committed.	Futures	contracts	give	the	holder	the	right	and	obligation	to	participate	in	market	movements,	determined	by	the	index	or underlying	security	on	which	the	futures	contract	is	based.	Settlement	is	made	daily	in	cash	by	an	amount	equal	to	the	change	in	value	of	the	futures contract	times	a	multiplier	that	scales	the	size	of	the	contract.

# Interest	rate	swaps

An	interest	rate	swap	is	a	contract	between	two	counterparties	in	which	interest	payments	are	made	based	on	a	notional	principal	amount,	which	itself	is never	paid	or	received.	Under	the	terms	of	an	interest	rate	swap,	one	counterparty	makes	interest	payments	based	on	a	fixed	interest	rate	and	the	other counterparty's	payments	are	based	on	a	floating	rate.	Interest	rate	swap	contracts	are	used	in	the	portfolio	as	protection	against	unexpected	shifts	in interest	rates,	which	would	affect	the	fair	value	of	the	fixed	maturity	portfolio.	By	using	swaps	in	the	portfolio,	the	overall	duration	or	interest	rate sensitivity	of	the	portfolio	can	be	reduced.

# Credit	default	swaps

A	credit	default	swap	is	a	bilateral	contract	under	which	two	counterparties	agree	to	isolate	and	separately	trade	the	credit	risk	of	at	least	one	third-party reference	entity.	Under	a	credit	default	swap	agreement,	a	protection	buyer	pays	a	periodic	fee	to	a	protection	seller	in	exchange	for	a	contingent payment	by	the	seller	upon	a	credit	event	(such	as	a	default	or	failure	to	pay)	related	to	the	reference	entity.	When	a	credit	event	is	triggered,	the protection	seller	either	takes	delivery	of	the	assets	for	the	principal	amount	or	pays	the	protection	buyer	the	difference	between	the	fair	value	of	assets and	the	principal	amount.	The	Company	buys	credit	default	swaps	to	mitigate	global	credit	risk	exposure	from	time	to	time,	primarily	related	to reinsurance	recoverables.

# Options

Option	contracts	may	be	used	in	the	portfolio	as	protection	against	unexpected	shifts	in	interest	rates,	which	would	thereby	affect	the	duration	of	the	fixed maturity	portfolio.	By	using	options	in	the	portfolio,	the	overall	interest	rate	sensitivity	of	the	portfolio	can	be	reduced.	Option	contracts	may	also	be	used as	an	alternative	to	futures	contracts	in	the	Company's	synthetic	equity	strategy	as	described	above.	Another	use	for	option	contracts	may	be	to	limit exposure	to	a	severe	equity	market	decline,	which	would	cause	an	increase	in	expected	claims	and	therefore	reserves	for	GMDB	and	GMIB	reinsurance business.	An	option	contract	conveys	to	the	holder	the	right,	but	not	the	obligation,	to	purchase	or	sell	a	specified	amount	or	value	of	an	underlying security	at	a	fixed	price.	The	price	of	an	option	is	influenced	by	the	underlying	security,	expected	volatility,	time	to	expiration,	and	supply	and	demand.

For	long	option	positions,	the	maximum	loss	is	the	premium	paid	for	the	option.	The	maximum	credit	exposure	is	represented	by	the	fair	value	of the	options	held.	For	short	option	positions,	the	potential	loss	is	the	same	as	having	taken	a	position	in	the	underlying	security.	Short	call	options	are backed	in	the	portfolio	with	the	underlying,	or	highly	correlated,	securities	and	short	put	options	are	backed	by	uncommitted	cash	for	the	in-the-money portion.	The	long	options	had	a	maximum	credit	exposure	of	$280	million	at	December	31,	2008,	and	$70	million	as	of	December	31,	2007.	The	majority of	the	option	positions	held	at	December	31,	2008	and	2007,	have	short-term	expiration	dates.

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.	The performance	of	exchange	traded	instruments	is	guaranteed	by	the	exchange	on	which	they	trade.	For	non-exchange	traded	instruments,	the counterparties	are	principally	banks	which	must	meet	certain	criteria	according	to	the	Company's	investment	guidelines.	These	counterparties	are required	to	have	a	minimum	credit	rating	of	AA-	by	Standard	and	Poor's	or	Aa3	by	Moody's.	In	addition,	certain	contracts	require	that	collateral	be	posted once	pre-determined	thresholds	are	breached	as	a	result	of	market	movements.

# (iii)	To	be	announced	mortgage-backed	securities	(TBA)

By	acquiring	a	TBA,	the	Company	makes	a	commitment	to	purchase	a	future	issuance	of	mortgage-backed	securities.	For	the	period	between	purchase of	the	TBA	and	issuance	of	the	underlying	security,	the	Company's	position	is	accounted	for	as	a	derivative	in	the	consolidated	financial	statements.	At December	31,	2008	and	2007,	the	Company	had	TBA's	with	fair	values	of	$519	million	and	$1.4	billion,	respectively,	and	corresponding	par	amounts	of $506	million	and	$1.4	billion,	respectively.

# (iv)	Convertible	security	investment

A	convertible	bond	is	a	debt	instrument	that	can	be	converted	into	a	predetermined	amount	of	the	issuer's	equity	at	certain	times	prior	to	the	bond's maturity.	The	convertible	option	is	an	embedded	derivative	which	is	marked-to-	market	with	changes	in	fair	value	recognized	in	Net	realized	gains (losses).	The	debt	host	instrument	is	classified	in	the	investment	portfolio	as	available	for	sale.	The	Company	purchases	convertible	bonds	for	their	total return	and	not	specifically	for	the	conversion	feature.

# b)	Concentrations	of	credit	risk

The	investment	portfolio	is	managed	following	prudent	standards	of	diversification.	Specific	provisions	limit	the	allowable	holdings	of	a	single	issue	and issuer.	The	Company	believes	that	there	are	no	significant	concentrations	of	credit	risk	associated	with	its	investments.	The	Company's	three	largest exposures	by	issuer	as	of	December	31,	2008,	were	General	Electric	Company,	JP	Morgan	Chase	&	Co.,	and	Bank	of	America	Corp.	The	Company's largest	exposure	by	industry	as	of	December	31,	2008,	was	financial	services.

The	Company	markets	its	insurance	and	reinsurance	worldwide	primarily	through	insurance	and	reinsurance	brokers.	The	Company	assumes	a degree	of	credit	risk	associated	with	brokers	with	whom	it	transacts	business.	During	the	year	ended	December	31,	2008,	approximately	13	percent	of the	Company's	gross	premiums	written	were	generated	from	or	placed	by	Marsh,	Inc.	and	its	affiliates	and	9	percent	by	Aon	Corporation	and	its	affiliates. Both	of	these	entities	are	large,	well	established	companies	and	there	are	no	indications	that	either	of	them	is	financially	troubled	at	December	31,	2008. No	other	broker	and	no	one	insured	or	reinsured	accounted	for	more	than	ten	percent	of	gross	premiums	written	in	the	three	years	ended	December	31, 2008,	2007,	or	2006.

The	Company	invests	in	limited	partnerships	with	a	carrying	value	of	$773	million	included	in	Other	investments.	In	connection	with	these	investments, the	Company	has	commitments	that	may	require	funding	of	up	to	$863	million	over	the	next	several	years.

# d)	Credit	facilities

In	November	2007,	the	Company	entered	into	a	$500	million	unsecured	revolving	credit	facility	expiring	in	November	2012.	This	facility	is	available	for general	corporate	purposes	and	the	issuance	of	LOCs	and	replaced	an	existing	$600	million	revolving	credit	facility.	On	the	effective	date	of	the	new revolving	credit	facility,	all	outstanding	LOCs	issued	under	the	replaced	facility	were	deemed	to	have	been	issued	under	the	new	revolving	credit	facility and	the	replaced	facility	terminated.	At	December	31,	2008,	the	outstanding	LOCs	issued	under	the	renewed	facility	were	$142	million.	There	were	no other	drawings	or	LOCs	issued	under	this	facility.	This	facility	requires	that	the	Company	and/or	certain	of	its	subsidiaries	continue	to	maintain	certain covenants,	including	a	minimum	consolidated	net	worth	covenant	and	a	maximum	leverage	covenant,	which	have	been	met	at	December	31,	2008.

# e)	Letters	of	credit

In	November	2007,	the	Company	entered	into	a	$1	billion	unsecured	operational	LOC	facility	expiring	in	November	2012.	This	facility	replaced	two	LOC facilities	permitting	up	to	$1.5	billion	of	LOCs.	On	the	effective	date	of	the	new	LOC	facility,	all	outstanding	LOCs	issued	under	the	replaced	facilities	were deemed	to	have	been	issued	under	the	new	LOC	facility	and	the	replaced	facilities	terminated.	At	December	31,	2008,	$811	million	of	this	facility	was utilized.

In	November	2006,	to	satisfy	funding	requirements	of	the	Company's	Lloyd's	of	London	(Lloyd's)	Syndicate	2488	through	2009,	the	Company renewed	its	syndicated,	uncollateralized	LOC	facility	in	the	amount	of	£380	million	($553	million).	In	June	2007,	Syndicate	2488	reduced	the	LOC balance	supporting	its	funds	at	Lloyd's	in	line	with	the	requirements	promulgated	by	Lloyd's.	The	facility	amount	was	also	reduced	to	£300	million	($438 million).	In	November	2007,	the	Company	gained	approval	from	its	bank	group	to	extend	the	term	of	the	facility	by	one	year,	to	satisfy	Syndicate	2488's funding	requirements	through	2010.	LOCs	issued	under	this	facility	will	expire	no	earlier	than	December	2013.	At	December	31,	2008,	£176	million	($256 million)	of	this	facility	was	utilized.

These	facilities	require	that	the	Company	and/or	certain	of	its	subsidiaries	continue	to	maintain	certain	covenants,	including	a	minimum consolidated	net	worth	covenant	and	a	maximum	leverage	covenant,	which	have	been	met	at	December	31,	2008.

# f)	Legal	proceedings

# (i)	Claims	and	other	litigation

The	Company's	insurance	subsidiaries	are	subject	to	claims	litigation	involving	disputed	interpretations	of	policy	coverages	and,	in	some	jurisdictions, direct	actions	by	allegedly-injured	persons	seeking	damages	from	policyholders.	These	lawsuits,	involving	claims	on	policies	issued	by	the	Company's subsidiaries	which	are	typical	to	the	insurance	industry	in	general	and	in	the	normal	course	of	business,	are	considered	in	the	Company's	loss	and	loss expense	reserves.	In	addition	to	claims	litigation,	the	Company	and	its	subsidiaries	are	subject	to	lawsuits	and	regulatory	actions	in	the	normal	course	of business	that	do	not	arise	from,	or	directly	relate	to,	claims	on	insurance	policies.	This	category	of	business	litigation	typically	involves,	amongst

other	things,	allegations	of	underwriting	errors	or	misconduct,	employment	claims,	regulatory	activity,	or	disputes	arising	from	business	ventures.	In	the opinion	of	ACE's	management,	ACE's	ultimate	liability	for	these	matters	is	not	likely	to	have	a	material	adverse	effect	on	ACE's	consolidated	financial condition,	although	it	is	possible	that	the	effect	could	be	material	to	ACE's	consolidated	results	of	operations	for	an	individual	reporting	period.

# (ii)	Business	practices	litigation

Beginning	in	2004,	ACE	and	its	subsidiaries	and	affiliates	received	numerous	subpoenas,	interrogatories,	and	civil	investigative	demands	in	connection with	certain	investigations	of	insurance	industry	practices.	These	inquiries	were	issued	by	a	number	of	attorneys	general,	state	departments	of	insurance, and	other	authorities,	including	the	New	York	Attorney	General	(NYAG)	and	the	Pennsylvania	Insurance	Department.	Such	inquiries	concerned underwriting	practices	and	non-traditional	or	loss	mitigation	insurance	products.

On	April	25,	2006,	ACE	reached	a	settlement	with	the	Attorneys	General	of	New	York,	Illinois,	and	Connecticut	and	the	New	York	Insurance Department	pursuant	to	which	ACE	received	from	these	authorities	an	Assurance	of	Discontinuance.	On	May	9,	2007,	ACE	and	the	Pennsylvania Insurance	Department	(Department)	and	the	Pennsylvania	Office	of	Attorney	General	(OAG)	entered	into	a	settlement	agreement.	This	settlement agreement	resolves	the	issues	raised	by	the	Department	and	the	OAG	arising	from	their	investigation	of	ACE's	underwriting	practices	and	contingent commission	payments.	On	October	24,	2007,	ACE	entered	into	a	settlement	agreement	with	the	Attorneys	General	of	Florida,	Hawaii,	Maryland, Massachusetts,	Michigan,	Oregon,	Texas,	West	Virginia,	the	District	of	Columbia,	and	the	Florida	Department	of	Financial	Services	and	Office	of Insurance	Regulation.	The	agreement	resolves	investigations	of	ACE's	underwriting	practices	and	contingent	commission	payments.

In	June	2008,	in	an	action	filed	by	the	NYAG	against	another	insurer,	the	New	York	Appellate	Division,	First	Department,	confirmed	the	legality	of contingent	commission	agreements	–	one	of	the	focal	points	of	the	NYAG's	investigation.	"Contingent	commission	agreements	between	brokers	and insurers	are	not	illegal,	and,	in	the	absence	of	a	special	relationship	between	parties,	defendants[s]	had	no	duty	to	disclose	the	existence	of	the contingent	commission	agreement."	New	York	v.	Liberty	Mut.	Ins.	Co., 	52	A.D.	3d	378,	379	(2008)	(citing	 Hersch	v.	DeWitt	Stern	Group,	Inc., 	43	A.D.	3d 644,	645	(2007).

In	2006	and	2007,	ACE	entered	into	settlement	agreements	with	a	number	of	attorneys	general	and	state	departments	of	insurance	to	resolve investigations	of	certain	business	practices	and	avoid	possible	litigation.	In	each	instance,	ACE	agreed	to	a	payment	without	admitting	any	liability,	and	to adopt	or	follow	certain	business	reforms.	Settlements	were	made	with	the	following:	Attorneys	General	of	New	York,	Illinois,	Connecticut,	Pennsylvania, Florida,	Hawaii,	Maryland,	Massachusetts,	Michigan,	Oregon,	Texas,	West	Virginia,	and	the	District	of	Columbia;	the	New	York	Insurance	Department, the	Pennsylvania	Insurance	Department,	and	the	Florida	Department	of	Financial	Services	and	Office	of	Insurance	Regulation.	Half	of	ACE's	settlement ($40	million	of	$80	million)	with	the	Attorneys	General	of	New	York,	Illinois,	and	Connecticut	and	the	New	York	Insurance	Department	was	distributed	to eligible	policyholders	who	executed	a	release	of	possible	claims	against	ACE.

ACE,	ACE	INA	Holdings,	Inc.,	and	ACE	USA,	Inc.,	along	with	a	number	of	other	insurers	and	brokers,	were	named	in	a	series	of	federal	putative nationwide	class	actions	brought	by	insurance	policyholders.	The	Judicial	Panel	on	Multidistrict	Litigation	(JPML)	consolidated	these	cases	in	the	District of	New	Jersey.	On	August	1,	2005,	plaintiffs	in	the	New	Jersey	consolidated	proceedings	filed	two	consolidated	amended	complaints	–	one	concerning commercial	insurance	and	the	other	concerning	employee	benefit	plans.	The	employee	benefit	plans	litigation	against	ACE	has	been	dismissed.

In	the	commercial	insurance	complaint,	the	plaintiffs	named	ACE,	ACE	INA	Holdings,	Inc.,	ACE	USA,	Inc.,	ACE	American	Insurance	Co.,	Illinois Union	Insurance	Co.,	and	Indemnity	Insurance	Co.	of	North	America.	They	allege	that	certain	brokers	and	insurers,	including	certain	ACE	entities, conspired	to	increase	premiums	and	allocate	customers	through	the	use	of	"B"	quotes	and	contingent	commissions.	In	addition,	the	complaints	allege that	the	broker	defendants	received	additional	income	by	improperly	placing	their	clients'	business	with	insurers	through	related	wholesale	entities	that acted	as	intermediaries	between	the	broker	and	insurer.	Plaintiffs	also	allege	that	broker	defendants	tied	the	purchase	of	primary	insurance	to	the placement	of	such	coverage	with	reinsurance	carriers	through	the	broker	defendants'	reinsurance	broker	subsidiaries.	The	complaint	asserts	the following	causes	of	action	against	ACE:	Federal	Racketeer	Influenced	and	Corrupt	Organizations	Act	(RICO),	federal	antitrust	law,	state	antitrust	law, aiding	and	abetting	breach	of	fiduciary	duty,	and	unjust	enrichment.

In	2006	and	2007,	the	Court	dismissed	plaintiffs'	first	two	attempts	to	properly	plead	a	case	without	prejudice	and	permitted	plaintiffs	one	final opportunity	to	re-plead.	The	amended	complaint,	filed	on	May	22,	2007,	purported	to	add	several	new	ACE	defendants:	ACE	Group	Holdings,	Inc.,	ACE US	Holdings,	Inc.,	Westchester	Fire	Insurance	Company,	INA	Corporation,	INA	Financial	Corporation,	INA	Holdings	Corporation,	ACE	Property	and Casualty	Insurance	Company,	and	Pacific	Employers	Insurance	Company.	Plaintiffs	also	added	a	new	antitrust	claim	against	Marsh,	ACE,	and	other insurers	based	on	the	same	allegations	as	the	other	claims	but	limited	to	excess	casualty	insurance.	On	June	21,	2007,	defendants

moved	to	dismiss	the	amended	complaint	and	moved	to	strike	the	new	parties	that	plaintiffs	attempted	to	add	to	that	complaint.	The	Court	granted defendants'	motions	and	dismissed	plaintiffs'	antitrust	and	RICO	claims	with	prejudice	on	August	31,	2007,	and	September	28,	2007,	respectively.	The Court	also	declined	to	exercise	supplemental	jurisdiction	over	plaintiffs'	state	law	claims	and	dismissed	those	claims	without	prejudice.	On	October	10, 2007,	plaintiffs	filed	a	Notice	of	Appeal	of	the	antitrust	and	RICO	rulings	to	the	United	States	Court	of	Appeals	for	the	Third	Circuit.	The	appeal	is	fully briefed.	Oral	argument	is	tentatively	scheduled	for	April	20,	2009,	but	the	Third	Circuit	has	not	yet	decided	whether	oral	argument	will	in	fact	be	heard.

There	are	a	number	of	federal	actions	brought	by	policyholders	based	on	allegations	similar	to	the	allegations	in	the	consolidated	federal	actions that	were	filed	in,	or	transferred	to,	the	United	States	District	Court	for	the	District	of	New	Jersey	for	coordination.	All	proceedings	in	these	actions	are currently	stayed.

•	New	Cingular	Wireless	Headquarters	LLC	et	al.	v.	Marsh	&	McLennan	Companies,	Inc.	et	al.	(Case	No.	06-5120;	D.N.J.),	was	originally	filed	in	the Northern	District	of	Georgia	on	April	4,	2006.	ACE	Ltd.,	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.

•	Lincoln	Adventures	LLC	et	al.	v.	Those	Certain	Underwriters	at	Lloyd's,	London	Members	of	Syndicates	0033	et	al.	(Case	No.	07-60991;	D.N.J.)	was originally	filed	in	the	Southern	District	of	Florida	on	July	13,	2007.	Supreme	Auto	Transport	LLC	et	al.	v.	Certain	Underwriters	of	Lloyd's	of	London,	et	al. (Case	No.	07-6703;	D.N.J.)	was	originally	filed	in	the	Southern	District	of	New	York	on	July	25,	2007.	Lloyd's	of	London	Syndicate	2488	AGM,	along	with a	number	of	other	Lloyd's	of	London	Syndicates	and	various	brokers,	are	named	in	both	actions.	The	allegations	in	these	putative	class-action	lawsuits are	similar	to	the	allegations	in	the	consolidated	federal	actions	identified	above,	although	these	lawsuits	focus	on	alleged	conduct	within	the	London insurance	market.

•	Sears,	Roebuck	&	Co.	et	al.	v.	Marsh	&	McLennan	Companies,	Inc.	et	al.	(Case	No.	07-2535;	D.N.J.)	was	originally	filed	in	the	Northern	District	of Georgia	on	October	12,	2007.	ACE	American	Insurance	Co.,	ACE	Bermuda	Insurance	Ltd.,	and	Westchester	Surplus	Lines	Insurance	Co.,	along	with	a number	of	other	insurers	and	brokers,	are	named.

Three	cases	have	been	filed	in	state	courts	with	allegations	similar	to	those	in	the	consolidated	federal	actions	described	above.

•	Van	Emden	Management	Corporation	v.	Marsh	&	McLennan	Companies,	Inc.,	et	al.	(Case	No.	05-0066A;	Superior	Court	of	Massachusetts),	a	class action	in	Massachusetts,	was	filed	on	January	13,	2005.	Illinois	Union	Insurance	Company,	an	ACE	subsidiary,	is	named.	The	Van	Emden	case	has been	stayed	pending	resolution	of	the	consolidated	proceedings	in	the	District	of	New	Jersey	or	until	further	order	of	the	Court.

•	Office	Depot,	Inc.	v.	Marsh	&	McLennan	Companies,	Inc.	et	al.	(Case	No.	502005CA004396;	Circuit	Court	of	the	15th	Judicial	Circuit	in	Palm	Beach County	Florida),	a	Florida	state	action,	was	filed	on	June	22,	2005.	ACE	American	Insurance	Co.,	an	ACE	subsidiary,	is	named.	The	trial	court	originally stayed	this	case,	but	the	Florida	Court	of	Appeals	later	remanded	and	the	trial	court	declined	to	grant	another	stay.	The	court	has	denied	motions	to dismiss,	and	ACE	American	Ins.	Co.	has	filed	an	answer.	Discovery	is	ongoing.

•	State	of	Ohio,	ex.	rel.	Marc	E.	Dann,	Attorney	General	v.	American	Int'l	Group,	Inc.	et	al.	(Case	No.	07-633857;	Court	of	Common	Pleas	in	Cuyahoga County,	Ohio)	is	an	Ohio	state	action	filed	by	the	Ohio	Attorney	General	on	August	24,	2007.	ACE	INA	Holdings,	Inc.,	ACE	American	Insurance	Co.,	ACE Property	&	Casualty	Insurance	Co.,	Insurance	Company	of	North	America,	and	Westchester	Fire	Insurance	Co.,	along	with	a	number	of	other	insurance companies	and	Marsh,	are	named.	Defendants	filed	motions	to	dismiss	in	November	2007.	On	July	2,	2008,	the	court	denied	all	of	the	defendants' motions.	Discovery	is	ongoing.

ACE	was	named	in	four	putative	securities	class	action	suits	following	the	filing	of	a	civil	suit	against	Marsh	by	the	NYAG	on	October	14,	2004.	The suits	were	consolidated	by	the	JPML	in	the	Eastern	District	of	Pennsylvania	and	the	Court	appointed	Sheet	Metal	Workers'	National	Pension	Fund	and Alaska	Ironworkers	Pension	Trust	as	lead	plaintiffs.	Lead	plaintiffs	filed	a	consolidated	amended	complaint	on	September	30,	2005,	naming	ACE,	Evan G.	Greenberg,	Brian	Duperreault,	and	Philip	V.	Bancroft	as	defendants.	Plaintiffs	allege	that	ACE's	public	statements	and	securities	filings	should	have revealed	that	insurers,	including	certain	ACE	entities,	and	brokers	allegedly	conspired	to	increase	premiums	and	allocate	customers	through	the	use	of "B"	quotes	and	contingent	commissions	and	that	ACE's	revenues	and	earnings	were	inflated	by	these	practices.

Plaintiffs	assert	claims	solely	under	Section	10(b)	of	the	Securities	Exchange	Act	of	1934	(the	Exchange	Act),	Rule	10(b)-5	promulgated	thereunder,	and Section	20(a)	of	the	Securities	Act	(control	person	liability).	In	2005,	ACE	and	the	individual	defendants	filed	a	motion	to	dismiss.	The	Court	heard	oral argument	on	November	10,	2008,	but	did	not	rule	on	the	motion.	On	December	16,	2008,	the	parties	entered	into	a	Stipulation	of	Settlement.	If	the	Court approves	the	settlement	and	certifies	a	settlement	class,	ACE	will	pay	the	plaintiffs	$1.95	million	in	exchange	for	a	full	release	of	all	claims.	The	Court has	not	yet	scheduled	the	preliminary	approval	hearing.

ACE	is	named	as	a	defendant	in	a	derivative	suit	filed	in	Delaware	Chancery	Court	by	shareholders	of	Marsh	seeking	to	recover	damages	for Marsh	and	its	subsidiary,	Marsh,	Inc.,	against	officers	and	directors	of	Marsh,	American	International	Group	Inc.	(AIG),	former	AIG	chief	executive	officer Maurice	R.	Greenberg,	and	ACE.	The	suit	alleges	that	the	defendants	breached	their	fiduciary	duty	to	and	thereby	damaged	Marsh	and	Marsh,	Inc.	by participating	in	a	bid	rigging	scheme	and	obtaining	"kickbacks"	in	the	form	of	contingent	commissions,	and	that	ACE	knowingly	participated	in	the	alleged scheme.

ACE,	ACE	USA,	Inc.,	ACE	INA	Holdings,	Inc.,	and	Evan	G.	Greenberg,	as	a	former	officer	and	director	of	AIG	and	current	officer	and	director	of ACE,	are	named	in	one	or	both	of	two	derivative	cases	brought	by	certain	shareholders	of	AIG.	One	of	the	derivative	cases	was	filed	in	Delaware Chancery	Court,	and	the	other	was	filed	in	federal	court	in	the	Southern	District	of	New	York.	The	allegations	against	ACE	concern	the	alleged	bid	rigging and	contingent	commission	scheme	as	similarly	alleged	in	the	federal	commercial	insurance	cases.	Plaintiffs	assert	the	following	causes	of	action	against ACE:	breach	of	fiduciary	duty,	aiding	and	abetting	breaches	of	fiduciary	duties,	unjust	enrichment,	conspiracy,	and	fraud.	On	April	14,	2008,	the shareholder	plaintiffs	filed	an	amended	complaint	(their	third	pleading	effort),	which	drops	Evan	Greenberg	as	a	defendant.	On	June	13,	2008,	ACE moved	to	dismiss	the	newly	amended	complaint.	Briefing	on	ACE's	motion	is	complete	but	the	Court	has	not	yet	scheduled	oral	argument.	Discovery	is currently	stayed.	The	New	York	derivative	action	is	stayed	pending	resolution	of	the	Delaware	derivative	action.

In	all	of	the	lawsuits	described	above,	plaintiffs	seek	compensatory	and	in	some	cases	special	damages	without	specifying	an	amount.	As	a	result, ACE	cannot	at	this	time	estimate	its	potential	costs	related	to	these	legal	matters	and,	accordingly,	no	liability	for	compensatory	damages	has	been established	in	the	consolidated	financial	statements.

ACE's	ultimate	liability	for	these	matters	is	not	likely	to	have	a	material	adverse	effect	on	ACE's	consolidated	financial	condition,	although	it	is possible	that	the	effect	could	be	material	to	ACE's	consolidated	results	of	operations	for	an	individual	reporting	period.

# g)	Lease	commitments

The	Company	and	its	subsidiaries	lease	office	space	in	the	countries	in	which	they	operate	under	operating	leases	which	expire	at	various	dates	through December	2033.	The	Company	renews	and	enters	into	new	leases	in	the	ordinary	course	of	business	as	required.	Total	rent	expense	with	respect	to these	operating	leases	was	$77	million	for	the	year	ended	December	31,	2008,	and	$72	million	for	each	of	the	years	ended	December	31,	2007	and 2006.	Future	minimum	lease	payments	under	the	leases	are	expected	to	be	as	follows:

# h)	Acquisition	of	business	entities

Pursuant	to	the	restructuring	order	that	created	Brandywine,	the	active	ACE	INA	insurance	subsidiaries	are	obligated	to	provide	reinsurance	coverage	to Century	Indemnity	in	the	amount	of	$800	million	under	an	aggregate	excess	of	loss	reinsurance	agreement	if	the	capital	and	surplus	of	Century	Indemnity falls	below	$25	million	or	if	Century	Indemnity	lacks	liquid	assets	with	which	to	pay	claims	as	they	become	due.	Refer	to	Note	7	for	additional	disclosure.

# i)	Sale	of	certain	run-off	reinsurance	subsidiaries

On	July	3,	2006,	the	Company	completed	the	sale	of	ACE	American	Reinsurance	Company	(ACE	American	Re),	Brandywine	Reinsurance	Company (UK)	Ltd	(BRUK),	and	Brandywine	Reinsurance	Company	S.A.-N.V.	to	Randall	&	Quilter	Investment	Holdings	Limited	(R&Q).	Subsequent	to	the	sale,	the Company	maintains	the	following	obligations	related	to	the	three	companies:

•	In	connection	with	the	sale,	a	subsidiary	of	the	Company	issued	an	aggregate	reinsurance	agreement	to	ACE	American	Re	providing	70	percent coverage	of	up	to	$50	million	in	losses	above	net	undiscounted	reserves	of	$346	million,	including	the	provision	for	uncollectible	reinsurance,	held	by	ACE American	Re	on	July	3,	2006.	The	coverage	is	payable	only	if,	and	to	the	extent,	ACE	American	Re	surplus	falls	below	$25	million	at	the	time	losses covered	by	this	agreement	become	due	and	payable;

•	Prior	to	the	sale,	the	Company	entered	into	a	claims	servicing	agreement	with	a	third	party	vendor	that	covers	several	Brandywine	entities	including ACE	American	Re.	In	connection	with	the	sale,	ACE	agreed	to	retain	this	obligation	for	a	specified	period	and	the	Company	will	continue	to	pay	fees arising	from	the	servicing	of	ACE	American	Re	claims.	Accordingly,	at	December	31,	2008,	the	Company	has	a	liability	of	$21	million	related	to	this obligation;

•	Prior	to	the	sale	of	BRUK,	the	Company	guaranteed	certain	insurance	policies	issued	by	BRUK	(the	BRUK	Guarantee).	Subsequent	to	the	sale,	the BRUK	Guarantee	remains	in	force.	As	part	of	the	transaction,	R&Q	has	agreed	to	indemnify	the	Company	in	the	event	the	Company	is	required	to	make payment	under	the	BRUK	Guarantee;	however,	the	Company	has	not	been	relieved	of	its	obligation	to	perform	under	the	BRUK	Guarantee.	At December	31,	2008,	the	unpaid	loss	and	loss	expense	reserves	covered	by	the	BRUK	Guarantee	were	approximately	$17	million.

# 11.	Preferred	Shares

In	2003,	the	Company	sold	twenty	million	depositary	shares	in	a	public	offering,	each	representing	one-tenth	of	one	of	its	7.8	percent	Cumulative Redeemable	Preferred	Shares,	for	$25	per	depositary	share.	Underwriters	exercised	their	over-allotment	option	which	resulted	in	the	issuance	of	an additional	three	million	depositary	shares.

The	shares	had	an	annual	dividend	rate	of	7.8	percent	with	the	first	quarterly	dividend	paid	on	September	1,	2003.	The	shares	were	not	convertible into	or	exchangeable	for	the	Company's	Common	Shares.	The	Company	had	the	option	to	redeem	these	shares	at	any	time	after	May	30,	2008,	at	a redemption	value	of	$25	per	depositary	share	or	at	any	time	under	certain	limited	circumstances.	On	June	13,	2008,	the	Company	redeemed	all	of	the outstanding	Preferred	Shares	for	cash	consideration	of	$575	million.	Following	the	completion	of	the	Preferred	Share	redemption,	the	New	York	Stock Exchange	(NYSE)	halted	trading	in	and	de-listed	the	shares	from	the	NYSE.

# 12.	Shareholders'	equity

# a)	Continuation

In	connection	with	the	Continuation,	the	Company	changed	the	currency	in	which	the	par	value	of	Ordinary	Shares	is	stated	from	U.S.	dollars	to	Swiss francs	and	increased	the	par	value	of	Ordinary	Shares	from	$0.041666667	to	CHF	33.74	(the	New	Par	Value)	through	a	conversion	of	all	issued	Ordinary Shares	into	"stock"	and	re-conversion	of	the	stock	into	Ordinary	Shares	with	a	par	value	equal	to	the	New	Par	Value	(the	Par	Value	Conversion).	The	Par Value	Conversion	was	followed	immediately	by	a	stock	dividend,	to	effectively	return	shareholders	to	the	number	of	Ordinary	Shares	held	before	the	Par Value	Conversion.	The	stock	dividend	did	not	therefore	have	the	affect	of	diluting	earnings	per	share.	Upon	the	effectiveness	of	the	Continuation,	the Company's	Ordinary	Shares	became	Common	Shares.	All	Common	Shares	are	registered	common	shares	under	Swiss	corporate	law.	Notwithstanding the	change	of	the	currency	in	which	the	par	value	of	Common	Shares	is	stated,	the	Company	continues	to	use	U.S.	dollars	as	its	reporting	and	functional currency	for	preparing	the	consolidated	financial	statements.	For	purposes	of	the	consolidated	financial	statements,	the	increase	in	par	value	was accomplished	by	a	corresponding	reduction	first	to	retained	earnings	and	second	to	additional	paid-in	capital	to	the	extent	that	the	increase	in	par	value exhausted	retained	earnings	at	the	date	of	the	Continuation.

Under	Swiss	corporate	law,	dividends,	including	distributions	through	a	reduction	in	par	value	(par	value	distributions),	must	be	declared	by	ACE	in Swiss	francs	though	dividend	payments	are	made	by	the	Company's	transfer	agent	in	U.S.	dollars	converted	at	the	U.S.	dollar/Swiss	franc	exchange	rate shortly	before	the	payment	date.	For	the	foreseeable	future,	the	Company	expects	to	pay	dividends	as	a	repayment	of	share	capital	in	the	form	of	a reduction	in	par	value	or	qualified	paid-in	capital,	which	would	not	be	subject	to	Swiss	withholding	tax.

Under	Swiss	corporate	law,	the	Company	may	not	generally	issue	Common	Shares	below	their	par	value.	In	the	event	there	is	a	need	to	raise common	equity	at	a	time	when	the	trading	price	of	the	Company's	Common	Shares	is	below	par	value,	the	Company	will	need	to	obtain	shareholder approval	to	decrease	the	par	value	of	the	Common	Shares.

# b)	Shares	authorized,	issued,	outstanding,	and	conditional

Following	is	a	table	of	changes	in	Common	Shares	issued	and	outstanding	for	the	years	ended	December	31,	2008,	2007,	and	2006:

|  | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Shares\tissued,\tbeginning\tof\tyear | 329,704,531 | 326,455,468 | 323,322,586 |
| Shares\tissued,\tnet | 3,140,194 | 1,213,663 | 947,373 |
| Exercise\tof\tstock\toptions | 2,365,401 | 1,830,004 | 1,982,560 |
| Shares\tissued\tunder\tEmployee\tStock\tPurchase\tPlan | 203,375 | 205,396 | 202,949 |
| Shares\tissued,\tend\tof\tyear | 335,413,501 | 329,704,531 | 326,455,468 |
| Common\tShares\tin\ttreasury,\tend\tof\tyear | (1,768,030) | – | – |
| Shares\tissued\tand\toutstanding,\tend\tof\tyear | 333,645,471 | 329,704,531 | 326,455,468 |
| Common\tShares\tissued\tto\temployee\ttrust |  |  |  |
| Balance,\tbeginning\tof\tyear | (117,231) | (166,425) | (221,675) |
| Shares\tredeemed | 8,250 | 49,194 | 55,250 |
| Balance,\tend\tof\tyear | (108,981) | (117,231) | (166,425) |

In	July	2008,	prior	to	the	Continuation,	the	Company	issued	and	placed	2,000,000	Common	Shares	in	treasury	principally	for	issuance	upon	the	exercise of	employee	stock	options.	At	December	31,	2008,	1,768,030	Common	Shares	remain	in	treasury	after	net	shares	redeemed	under	employee	share- based	compensation	plans.

Common	Shares	issued	to	employee	trust	are	the	shares	issued	by	the	Company	to	a	rabbi	trust	for	deferred	compensation	obligations	as discussed	in	Note	12	f)	below.

# Shares	authorized

The	Board	is	authorized	to	increase	the	share	capital	from	time	to	time	and	at	any	time	until	July	14,	2010,	by	an	amount	not	exceeding	CHF	3.3	billion through	the	issue	of	up	to	99,750,000	fully	paid	up	Common	Shares	with	a	par	value	of	CHF	33.14	each.

# Conditional	Share	Capital	for	Bonds	and	Similar	Debt	Instruments

At	December	31,	2008,	the	share	capital	of	the	Company	shall	be	increased	by	an	amount	not	exceeding	CHF	1.094	billion	through	the	issue	of	a maximum	of	33,000,000	Common	Shares,	payable	in	full,	each	with	a	par	value	of	CHF	33.14	through	the	exercise	of	conversion	and/or	option	or	warrant rights	granted	in	connection	with	bonds,	notes,	or	similar	instruments,	issued	or	to	be	issued	by	the	Company,	including	convertible	debt	instruments.

# Conditional	Share	Capital	for	Employee	Benefit	Plans

At	December	31,	2008,	the	share	capital	of	the	Company	shall	be	increased	by	an	amount	not	exceeding	CHF	1.088	billion	through	the	issue	from	time to	time	of	a	maximum	of	32,829,840	Common	Shares,	payable	in	full,	each	with	a	par	value	of	CHF	33.14,	in	connection	with	the	exercise	of	option	rights granted	to	any	employee	of	the	Company,	and	any	consultant,	director,	or	other	person	providing	services	to	the	Company.

# c)	ACE	Limited	securities	repurchase	authorization

In	November	2001,	the	Board	authorized	the	repurchase	of	any	ACE	issued	debt	or	capital	securities,	which	includes	ACE's	Common	Shares,	up	to	an aggregate	total	of	$250	million.	These	purchases	may	take	place	from	time	to	time	in	the	open	market	or	in	private	purchase	transactions.	At December	31,	2008,	this	authorization	had	not	been	utilized.

# d)	General	restrictions

The	holders	of	the	Common	Shares	are	entitled	to	receive	dividends	as	proposed	by	the	Board	and	approved	by	the	shareholders.	Holders	of	Common Shares	are	allowed	one	vote	per	share	provided	that,	if	the	controlled	shares	of	any	shareholder	constitute	ten	percent	or	more	of	the	outstanding Common	Shares	of	the	Company,	only	a	fraction	of	the	vote	will	be	allowed	so	as	not	to	exceed	ten	percent.	Entry	of	acquirers	of	Common	Shares	as shareholders	with	voting	rights	in	the	share	register	may	be	refused	if	it	would	confer	voting	rights	with	respect	to	ten	percent	or	more	of	the	registered share	capital	recorded	in	the	commercial	register.

# e)	Dividends	declared

Dividends	declared	on	Common	Shares	amounted	to	$1.09,	$1.06,	and	$0.98	per	Common	Share	for	the	years	ended	December	31,	2008,	2007,	and 2006,	respectively.	The	dividends	declared	during	the	year	ended	December	31,	2008,	include	par	value	distributions	of	CHF	0.60	which	have	been reflected	as	such	through	Common	Shares	in	the	consolidated	statement	of	shareholders'	equity	and	had	the	effect	of	reducing	par	value	per	Common Share	to	CHF	33.14.	Dividends	declared	on	Preferred	Shares	amounted	to	$24	million	for	the	year	ended	December	31,	2008,	and	$45	million	for	each	of the	years	ended	December	31,	2007	and	2006.

# f)	Deferred	compensation	obligation

The	Company	maintains	rabbi	trusts	for	deferred	compensation	plans	principally	for	employees	and	former	directors.	The	shares	issued	by	the	Company to	the	rabbi	trusts	in	connection	with	deferrals	of	share	compensation	are	classified	in	shareholders'	equity	and	accounted	for	at	historical	cost	in	a manner	similar	to	Common	Shares	in	treasury.	These	shares	are	recorded	in	Common	Shares	issued	to	employee	trust	and	the	obligations	are	recorded in	Deferred	compensation	obligation.	Changes	in	the	fair	value	of	the	shares	underlying	the	obligations	are	recorded	in	Accounts	payable,	accrued expenses,	and	other	liabilities	and	the	related	expense	or	income	is	recorded	in	Administrative	expenses.

The	rabbi	trust	also	holds	other	assets,	such	as	fixed	maturities,	equity	securities,	and	life	insurance	policies.	These	assets	of	the	rabbi	trust	are consolidated	with	those	of	the	Company	and	reflected	in	Other	investments.	Except	for	life	insurance	policies	which	are	reflected	at	cash	surrender	value, these	assets	are	classified	as	trading	securities	and	reported	at	fair	value	with	changes	in	fair	value	reflected	in	Other	(income)	expense.	Except	for obligations	related	to	life	insurance	policies	which	are	reflected	at	cash	surrender	value,	the	related	deferred	compensation	obligation	is	carried	at	fair value	and	reflected	in	Accounts	payable,	accrued	expenses,	and	other	liabilities	with	changes	reflected	as	a	corresponding	increase	or	decrease	to	Other (income)	expense.

# 13.	Share-based	compensation

The	Company	has	share-based	compensation	plans	which	currently	provide	for	awards	of	stock	options,	restricted	stock,	and	restricted	stock	units	to	its employees	and	members	of	the	Board.	The	Company	accounts	for	its	share-based	compensation	plans	in	accordance	with	FAS	123R,	which	was adopted	by	the	Company	effective	January	1,	2006.

FAS	123R	requires	all	companies	to	measure	and	record	compensation	cost	for	all	share-based	payment	awards	(including	employee	stock options)	at	grant-date	fair	value.	The	cumulative	effect	of	this	change	in	accounting	principle	was	$4	million,	net	of	income	tax.	This	effect	related	to	the recognition	of	expected	forfeitures	on	restricted	stock	grants	that	had	not	vested	as	of	January	1,	2006.	FAS	123R	also	requires	that	the	excess	tax benefits	of	deductions	resulting	from	share-based	compensation	expense	be	classified	as	cash	flows	from	financing	activities.	Prior	to	the	adoption	of FAS	123R,	the	Company	presented	all	tax	benefits	of	deductions	resulting	from	share-based	compensation	expense	as	operating	cash	flows.

In	adopting	FAS	123R,	the	Company	applied	the	modified	prospective	method.	Under	this	method,	beginning	on	January	1,	2006,	the	Company recognizes	compensation	expense	for	all	share-based	payments	granted,	modified,	or	settled	after	January	1,	2006,	as	well	as	for	any	awards	that	were granted	prior	to	January	1,	2006,	for	which	the	requisite	service	had	not	been	provided	as	of	January	1,	2006	(i.e.,	unvested	awards).	Unvested	awards are	expensed	consistent	with	the	valuation	used	in	previous	disclosures	of	the	pro	forma	effect	of	FAS	123.	The	Company	used	the	Black-Scholes option-pricing	model	to	measure	the	pro	forma	effect	of	FAS	123	and	to	determine	the	fair	value	of	share	compensation	under	FAS	123R.

The	Company	principally	issues	restricted	stock	grants	and	stock	options	on	a	graded	vesting	schedule.	The	Company	recognizes	compensation cost	for	restricted	stock	and	stock	option	grants	with	only	service	conditions	that	have	a	graded	vesting	schedule	on	a	straight-line	basis	over	the requisite	service	period	for	each	separately	vesting	portion	of	the	award	as	if	the	award	was,	in-substance,	multiple	awards.	An	estimate	of	future forfeitures	is	incorporated	into	the	determination	of	compensation	cost	for	both	grants	of	restricted	stock	and	stock	options.

Share-based	compensation	expense	for	stock	options	and	shares	issued	under	the	Employee	Stock	Purchase	Plan	(ESPP)	amounted	to	$24 million	($22	million	after	tax	or	$0.07	per	basic	and	diluted	share),	$23	million	($21	million	after	tax	or	$0.06	per	basic	and	diluted	share),	and	$20	million ($18	million	after	tax	or	$0.05	per	basic	and	diluted	share)	for	the	years	ended	December	31,	2008,	2007,	and	2006,	respectively.	For	the	years	ended December	31,	2008,	2007	and	2006,	the	expense	for	the	restricted	stock	was	$101	million	($71	million	after	tax),	$77	million	($57	million	after	tax),	and $65	million	($49	million	after	tax),	respectively.

During	2004,	the	Company	established	the	ACE	Limited	2004	Long-Term	Incentive	Plan	(the	2004	LTIP).	Once	the	2004	LTIP	was	approved	by shareholders,	it	became	effective	February	25,	2004.	It	will	continue	in	effect	until	terminated	by	the	Board.	This	plan	replaced	the	ACE	Limited	1995 Long-Term	Incentive	Plan,	the	ACE	Limited	1995	Outside	Directors	Plan,	the	ACE	Limited	1998	Long-Term	Incentive	Plan,	and	the	ACE	Limited	1999 Replacement	Long-Term	Incentive	Plan	(the	Prior	Plans)	except	as	to	outstanding	awards.	During	the	Company's	2008	annual	general	meeting, shareholders	voted	to	increase	the	number	of	Common	Shares	authorized	to	be	issued	under	the	2004	LTIP	from	15,000,000	Common	Shares	to 19,000,000	Common	Shares.	Accordingly,	under	the	2004	LTIP,	a	total	of	19,000,000	Common	Shares	of	the	Company	are	authorized	to	be	issued pursuant	to	awards	made	as	stock	options,	stock	appreciation	rights,	performance	shares,	performance	units,	restricted	stock,	and	restricted	stock	units. The	maximum	number	of	shares	that	may	be	delivered	to	participants	and	their	beneficiaries	under	the	2004	LTIP	shall	be	equal	to	the	sum	of: (i)	19,000,000	shares;	and	(ii)	any	shares	that	are	represented	by	awards	granted	under	the	Prior	Plans	that	are	forfeited,	expired,	or	are	canceled	after the	effective	date	of	the	2004	LTIP,	without	delivery	of	shares	or	which	result	in	the	forfeiture	of	the	shares	back	to	the	Company	to	the	extent	that	such shares	would	have	been	added	back	to	the	reserve	under	the	terms	of	the	applicable	Prior	Plan.	As	of	December	31,	2008,	a	total	of	10,591,090	shares remain	available	for	future	issuance	under	this	plan.

Under	the	2004	LTIP,	3,000,000	Common	Shares	are	authorized	to	be	issued	under	the	ESPP.	As	of	December	31,	2008,	a	total	of	989,812 Common	Shares	remain	available	for	issuance	under	the	ESPP.

# Stock	options

The	Company's	2004	LTIP	provides	for	grants	of	both	incentive	and	non-qualified	stock	options	principally	at	an	option	price	per	share	of	100	percent	of the	fair	value	of	the	Company's	Common	Shares	on	the	date	of	grant.	Stock	options	are	generally	granted	with	a	3-year	vesting	period	and	a	10-year term.	The	stock	options	vest	in	equal	annual	installments	over	the	respective	vesting	period,	which	is	also	the	requisite	service	period.

Included	in	the	Company's	share-based	compensation	expense	in	the	year	ended	December	31,	2008,	is	the	cost	related	to	the	unvested	portion of	the	2005-2008	stock	option	grants.	The	fair	value	of	the	stock	options	was	estimated	on	the	date	of	grant	using	the	Black-Scholes	option-pricing	model that	uses	the	assumptions	noted	in	the	following	table.	The	risk-free	interest	rate	is	based	on	the	U.S.	Treasury	yield	curve	in	effect	at	the	time	of	grant. The	expected	life	(estimated	period	of	time	from	grant	to	exercise	date)	was	estimated	using	the	historical	exercise	behavior	of	employees.	Expected volatility	was	calculated	as	a	blend	of	(a)	historical	volatility	based	on	daily	closing	prices	over	a	period	equal	to	the	expected	life	assumption,	(b)	long- term	historical	volatility	based	on	daily	closing	prices	over	the	period	from	ACE's	initial	public	trading	date	through	the	most	recent	quarter,	and (c)	implied	volatility	derived	from	ACE's	publicly	traded	options.

The	fair	value	of	the	options	issued	is	estimated	on	the	date	of	grant	using	the	Black-Scholes	option-pricing	model,	with	the	following	weighted- average	assumptions	used	for	grants	for	the	years	indicated:

|  | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Dividend\tyield | 1.80% | 1.78% | 1.64% |
| Expected\tvolatility | 32.20% | 27.43% | 31.29% |
| Risk-free\tinterest\trate | 3.15% | 4.51% | 4.60% |
| Forfeiture\trate | 7.5% | 7.5% | 7.5% |
| Expected\tlife | 5.7\tyears | 5.6\tyears | 6\tyears |

The	following	table	shows	changes	in	the	Company's	stock	options	for	the	years	ended	December	31,	2008,	2007,	and	2006:

|  | Number	of<br>Options | Weighted<br>Average<br>Exercise	Price |
| :--- | :--- | :--- |
| Options\toutstanding,\tDecember\t31,\t2005 | 12,643,761 | $36.53 |
| Granted | 1,505,215 | $56.29 |
| Exercised | (1,982,560) | $33.69 |
| Forfeited | (413,895) | $39.71 |
| Options\toutstanding,\tDecember\t31,\t2006 | 11,752,521 | $39.43 |
| Granted | 1,549,091 | $56.17 |
| Exercised | (1,830,004) | $35.73 |
| Forfeited | (200,793) | $51.66 |
| Options\toutstanding,\tDecember\t31,\t2007 | 11,270,815 | $42.12 |
| Granted | 1,612,507 | $60.17 |
| Exercised | (2,650,733) | $36.25 |
| Forfeited | (309,026) | $54.31 |
| Options\toutstanding,\tDecember\t31,\t2008 | 9,923,563 | $46.24 |

The	weighted-average	remaining	contractual	term	was	5.8	years	for	the	stock	options	outstanding	and	4.6	years	for	the	stock	options	exercisable	at December	31,	2008.	The	total	intrinsic	value	was	approximately	$66	million	for	stock	options	outstanding	and	$81	million	for	stock	options	exercisable	at December	31,	2008.	The	weighted-average	fair	value	for	the	stock	options	granted	for	the	year	ended	December	31,	2008	was	$17.60.	The	total	intrinsic value	for	stock	options	exercised	during	the	years	ended	December	31,	2008,	2007,	and	2006,	was	approximately	$54	million,	$44	million,	and	$43 million,	respectively.

The	amount	of	cash	received	during	the	year	ended	December	31,	2008,	from	the	exercise	of	stock	options	was	$97	million.

# Restricted	stock

The	Company's	2004	LTIP	also	provides	for	grants	of	restricted	stock.	The	Company	generally	grants	restricted	stock	with	a	4-year	vesting	period,	based on	a	graded	vesting	schedule.	The	restricted	stock	is	granted	at	market	close	price	on	the	date	of	grant.	Included	in	the	Company's	share-based compensation	expense	in	the	year	ended	December	31,	2008,	is	a	portion	of	the	cost	related	to	the	unvested	restricted	stock	granted	in	the	years	2004 to	2008.

The	following	table	shows	changes	in	the	Company's	restricted	stock	for	the	years	ended	December	31,	2008,	2007,	and	2006:

|  | Number	of<br>Restricted	Stock | Average	Grant-<br>Date	Fair	Value |
| :--- | :--- | :--- |
| Unvested\trestricted\tstock,\tDecember\t31,\t2005 | 3,488,668 | $41.26 |
| Granted | 1,632,504 | $56.05 |
| Vested\tand\tissued | (1,181,249) | $40.20 |
| Forfeited | (360,734) | $44.04 |
| Unvested\trestricted\tstock,\tDecember\t31,\t2006 | 3,579,189 | $48.07 |
| Granted | 1,818,716 | $56.45 |
| Vested\tand\tissued | (1,345,412) | $44.48 |
| Forfeited | (230,786) | $51.57 |
| Unvested\trestricted\tstock,\tDecember\t31,\t2007 | 3,821,707 | $53.12 |
| Granted | 1,836,532 | $59.84 |
| Vested\tand\tissued | (1,403,826) | $50.96 |
| Forfeited | (371,183) | $53.75 |
| Unvested\trestricted\tstock,\tDecember\t31,\t2008 | 3,883,230 | $57.01 |

Under	the	provisions	of	FAS	123R,	the	recognition	of	deferred	compensation,	a	contra-equity	account	representing	the	amount	of	unrecognized	restricted stock	expense	that	is	reduced	as	expense	is	recognized,	at	the	date	restricted	stock	is	granted	is	no	longer	permitted.	Therefore,	upon	adoption	of	FAS 123R,	the	amount	of	deferred	compensation	that	had	been	reflected	in	Unearned	stock	grant	compensation	was	reclassified	to	Additional	paid-in	capital in	the	Company's	consolidated	balance	sheet.

# Restricted	stock	units

The	Company's	2004	LTIP	also	provides	for	grants	of	other	awards,	including	restricted	stock	units.	The	Company	generally	grants	restricted	stock	units with	a	4-year	vesting	period,	based	on	a	graded	vesting	schedule.	Each	restricted	stock	unit	represents	the	Company's	obligation	to	deliver	to	the	holder one	share	of	Common	Shares	upon	vesting.	During	2008,	the	Company	awarded	223,588	restricted	stock	units	to	officers	of	the	Company	and	its subsidiaries	with	a	weighted-average	grant	date	fair	value	of	$59.93.	During	2007,	108,870	restricted	stock	units,	with	a	weighted-average	grant	date	fair value	of	$56.29	were	awarded	to	officers	of	the	Company	and	its	subsidiaries.	During	2006,	83,370	restricted	stock	units,	with	a	weighted-average	grant date	fair	value	of	$56.36	were	awarded	to	officers	of	the	Company	and	its	subsidiaries.

The	Company	also	grants	restricted	stock	units	with	a	1-year	vesting	period	to	non-management	directors.	Delivery	of	Common	Shares	on	account of	these	restricted	stock	units	to	non-management	directors	is	deferred	until	six	months	after	the	date	of	the	non-management	directors'	termination	from the	Board.	During	2008,	2007,	and	2006,	40,362	restricted	stock	units,	29,676	restricted	stock	units,	and	23,092	restricted	stock	units,	respectively,	were awarded	to	non-management	directors.

The	ESPP	gives	participating	employees	the	right	to	purchase	Common	Shares	through	payroll	deductions	during	consecutive	"Subscription	Periods." Annual	purchases	by	participants	are	limited	to	the	number	of	whole	shares	that	can	be	purchased	by	an	amount	equal	to	ten	percent	of	the	participant's compensation	or	$25,000,	whichever	is	less.	The	ESPP	has	two	six-month	Subscription	Periods,	the	first	of	which	runs	between	January	1	and	June	30 and	the	second	of	which	runs	between	July	1	and	December	31	of	each	year.	The	amounts	that	have	been	collected	from	participants	during	a Subscription	Period	are	used	on	the	"Exercise	Date"	to	purchase	full	shares	of	Common	Shares.	An	Exercise	Date	is	generally	the	last	trading	day	of	a Subscription	Period.	The	number	of	shares	purchased	is	equal	to	the	total	amount,	as	of	the	Exercise	Date,	that	has	been	collected	from	the	participants through	payroll	deductions	for	that	Subscription	Period,	divided	by	the	"Purchase	Price",	rounded	down	to	the	next	full	share.	Effective	for	and	from	the second	Subscription	Period	of	2007,	the	Purchase	Price	is	85	percent	of	the	fair	value	of	a	Common	Share	on	the	Exercise	Date.	Prior	to	the	second Subscription	Period	of	2007,	the	Purchase	Price	was	calculated	as	the	lower	of	(i)	85	percent	of	the	fair	value	of	a	Common	Share	on	the	first	day	of	the Subscription	Period,	or

(ii)	85	percent	of	the	fair	value	of	a	Common	Share	on	the	Exercise	Date.	Participants	may	withdraw	from	an	offering	before	the	exercise	date	and	obtain a	refund	of	the	amounts	withheld	through	payroll	deductions.	Pursuant	to	the	provisions	of	the	ESPP,	during	2008,	2007,	and	2006,	employees	paid $10.1	million,	$9.7	million,	and	$8.3	million,	respectively,	to	purchase	203,375	shares,	205,396	shares,	and	202,949	shares,	respectively.

As	of	December	31,	2008,	unrecognized	compensation	expense	related	to	the	unvested	portion	of	the	Company's	employee	share-based	awards was	approximately	$123	million	and	is	expected	to	be	recognized	over	a	weighted-average	period	of	approximately	2	years.

The	Company	generally	issues	shares	for	the	exercise	of	stock	options,	for	restricted	stock,	and	for	shares	under	the	ESPP	from	un-issued reserved	shares.

# 14.	Pension	plans

The	Company	provides	pension	benefits	to	eligible	employees	and	their	dependents	through	various	defined	contribution	plans	and	defined	benefit	plans sponsored	by	the	Company.	The	defined	contribution	plans	include	a	capital	accumulation	plan	(401(k))	in	the	United	States.	The	defined	benefit	plans consist	of	various	plans	offered	in	certain	jurisdictions	outside	of	the	United	States	and	Bermuda.

# Defined	contribution	plans	(including	401(k))

Under	these	plans,	employees'	contributions	may	be	supplemented	by	ACE	matching	contributions	based	on	the	level	of	employee	contribution.	These contributions	are	invested	at	the	election	of	each	employee	in	one	or	more	of	several	investment	portfolios	offered	by	a	third	party	investment	advisor.	In addition,	the	Company	may	provide	additional	matching	contributions,	depending	on	its	annual	financial	performance.	Expenses	for	these	plans	totaled $77	million,	$76	million,	and	$74	million	for	the	years	ended	December	31,	2008,	2007,	and	2006,	respectively.

# Defined	benefit	plans

The	Company	maintains	non-contributory	defined	benefit	plans	that	cover	certain	employees,	principally	located	in	Europe	and	Asia.	The	Company	does not	provide	any	such	plans	to	U.S.-based	employees.	The	Company	accounts	for	pension	benefits	using	the	accrual	method,	consistent	with	the requirements	of	FAS	No.	87,	Employers'	Accounting	for	Pensions.	Benefits	under	these	plans	are	based	on	employees'	years	of	service	and compensation	during	final	years	of	service.	All	underlying	defined	benefit	plans	are	subject	to	periodic	actuarial	valuation	by	qualified	local	actuarial	firms using	actuarial	models	in	calculating	the	pension	expense	and	liability	for	each	plan.	The	Company	uses	December	31	as	the	measurement	date	for	its defined	benefit	pension	plans.

In	September	2006,	the	FASB	issued	FAS	No.	158,	 Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans,	an amendment	of	FASB	Statements	No.	87,	88,	106,	and	132(R)	(FAS	158).	FAS	158	requires	an	employer	to	recognize	the	over-funded	or	under-funded status	of	a	defined	benefit	postretirement	plan	as	an	asset	or	liability	in	its	balance	sheet	and	to	recognize	changes	in	funded	status	through comprehensive	income	in	the	year	in	which	the	changes	occur.	The	Company	funds	the	plans	at	the	amount	required	by	local	tax	and	legal requirements.

The	Company	adopted	the	recognition	provisions	of	FAS	158	as	of	December	31,	2006.	Upon	adoption	of	FAS	158,	the	Company	derecognized the	additional	minimum	pension	liability	and	the	related	intangible	asset	through	a	net	benefit	to	shareholders'	equity.	The	initial	impact	of	the	adoption	of FAS	158	due	to	unrecognized	prior	service	costs	and	net	actuarial	gains	or	losses	of	$11	million	were	recognized	by	the	Company	as	a	component	of accumulated	other	comprehensive	income	in	shareholders'	equity.	At	December	31,	2008,	the	fair	value	of	plan	assets	and	the	projected	benefit obligation	were	$250	million	and	$329	million,	respectively.	The	fair	value	of	plan	assets	and	the	projected	benefit	obligation	were	$378	million	and	$463 million,	respectively,	at	December	31,	2007.	The	accrued	pension	liability	of	$79	million	at	December	31,	2008,	and	$85	million	at	December	31,	2007,	is included	in	Accounts	payable,	accrued	expenses,	and	other	liabilities.

The	defined	benefit	pension	plan	contribution	for	2009	is	expected	to	be	$8	million.	The	estimated	net	actuarial	loss	for	the	defined	benefit	pension plans	that	will	be	amortized	from	accumulated	other	comprehensive	income	into	net	benefit	costs	over	the	next	year	is	$1	million.

Benefit	payments	were	approximately	$16	million	in	each	of	2008	and	2007.	Expected	future	payments	are	as	follows:

# a)	Fair	value	hierarchy

The	Company	partially	adopted	the	provisions	of	FAS	157	on	January	1,	2008,	and	the	cumulative	effect	of	adoption	resulted	in	a	reduction	to	retained earnings	of	$4	million	related	to	an	increase	in	risk	margins	included	in	the	valuation	of	certain	GMIB	contracts.	FAS	157	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.	Inputs	in	Level	1	are	unadjusted	quoted	prices	for	identical	assets	or	liabilities	in	active	markets.	Level	2 includes	inputs	other	than	quoted	prices	included	within	Level	1	that	are	observable	for	assets	or	liabilities	either	directly	or	indirectly.	Level	2	inputs include,	among	other	items,	quoted	prices	for	similar	assets	and	liabilities	in	active	markets,	quoted	prices	for	identical	or	similar	assets	and	liabilities	in markets	that	are	not	active,	and	inputs	other	than	quoted	prices	that	are	observable	for	the	asset	or	liability	such	as	interest	rates	and	yield	curves.	Level 3	inputs	are	unobservable	and	reflect	management's	judgments	about	assumptions	that	market	participants	would	use	in	pricing	an	asset	or	liability.	A financial	instrument's	categorization	within	the	valuation	hierarchy	is	based	upon	the	lowest	level	of	input	that	is	significant	to	the	fair	value	measurement. The	following	is	a	description	of	the	valuation	measurements	used	for	the	Company's	financial	instruments	carried	or	disclosed	at	fair	value,	as	well as	the	general	classification	of	such	financial	instruments	pursuant	to	the	valuation	hierarchy.

# Fixed	maturities

Fixed	maturities	with	active	markets	such	as	U.S.	Treasury	and	agency	securities	are	classified	within	Level	1	as	fair	values	are	based	on	quoted	market prices.	For	fixed	maturities	that	trade	in	less	active	markets,	including	corporate	and	municipal	securities,	fair	values	are	based	on	the	output	of	"pricing matrix	models",	the	significant	inputs	into	which	include,	but	are	not	limited	to,	yield	curves,	credit	risks	and	spreads,	measures	of	volatility,	and prepayment	speeds.	These	fixed	maturities	are	classified	within	Level	2.	Fixed	maturities	for	which	pricing	is	unobservable	are	classified	within	Level	3.

# Equity	securities

# Short-term	investments

Fair	values	for	other	investments,	principally	other	direct	equity	investments,	investment	funds,	and	limited	partnerships,	are	based	on	the	net	asset	value or	financial	statements	and	are	included	within	Level	3.	Equity	securities	and	fixed	maturities	held	in	rabbi	trusts	maintained	by	the	Company	for	deferred compensation	plans,	and	included	in	Other	investments,	are	classified	within	the	valuation	hierarchy	on	the	same	basis	as	the	Company's	other	equity securities	and	fixed	maturities.

# Investments	in	partially-owned	insurance	companies

The	fair	value	of	the	Company's	investment	in	Assured	Guaranty	Ltd.	included	in	Investments	in	partially-owned	insurance	companies	is	based	on	a quoted	market	price	and	is	classified	within	Level	1.	Fair	values	for	investments	in	partially-owned	insurance	companies	based	on	the	financial statements	provided	by	those	companies	used	for	equity	accounting	are	classified	within	Level	3.

# Investment	derivative	instruments

For	actively	traded	investment	derivative	instruments,	including	futures,	options,	and	exchange-traded	forward	contracts,	the	Company	obtains	quoted market	prices	to	determine	fair	value.	As	such,	these	instruments	are	included	within	Level	1.	Forward	contracts	that	are	not	exchange-traded	are	priced using	a	pricing	matrix	model	principally	employing	observable	inputs	and,	as	such,	are	classified	within	Level	2.	The	Company's	position	in	interest	rate and	credit	default	swaps	is	typically	classified	within	Level	3.

# Guaranteed	minimum	income	benefits

The	liability	for	GMIBs	arises	from	the	Company's	reinsurance	programs	covering	living	benefit	guarantees	whereby	the	Company	assumes	the	risk	of GMIBs	associated	with	variable	annuity	contracts.	The	cumulative	effect	of	partially	adopting	FAS	157	resulted	in	a	reduction	to	retained	earnings	of	$4 million	related	to	an	increase	in	risk	margins	included	in	the	valuation	of	certain	GMIB	contracts.

The	fair	value	of	GMIB	reinsurance	is	estimated	using	an	internal	valuation	model	which	includes	current	market	information	and	estimates	of policyholder	behavior.	The	fair	value	depends	on	a	number	of	inputs,	including	changes	in	interest	rates,	changes	in	equity	markets,	credit	risk,	current account	value,	changes	in	market	volatility,	expected	annuitization	rates,	changes	in	policyholder	behavior,	and	changes	in	policyholder	mortality.	The model	and	related	assumptions	are	continuously	re-evaluated	by	management	and	enhanced,	as	appropriate,	based	upon	additional	experience	obtained related	to	policyholder	behavior	and	availability	of	more	timely	market	information,	such	as	market	conditions	and	demographics	of	in-force	annuities.	The most	significant	policyholder	behavior	assumptions	include	lapse	rates	and	annuitization	rates	using	the	guaranteed	benefit	(GMIB	annuitization	rate). Assumptions	regarding	lapse	rates	and	GMIB	annuitization	rates	differ	by	treaty	but	the	underlying	methodology	to	determine	rates	applied	to	each	treaty is	comparable.	The	assumptions	regarding	lapse	and	GMIB	annuitization	rates	determined	for	each	treaty	are	based	on	a	dynamic	calculation	that	uses several	underlying	factors.	A	lapse	rate	is	the	percentage	of	in-force	policies	surrendered	in	a	given	calendar	year.	All	else	equal,	as	lapse	rates	increase, ultimate	claim	payments	will	decrease.	The	GMIB	annuitization	rate	is	the	percentage	of	policies	for	which	the	customer	will	elect	to	annuitize	using	the guaranteed	benefit	provided	under	the	GMIB.	All	else	equal,	as	GMIB	annuitization	rates	increase,	ultimate	claim	payments	will	increase,	subject	to	treaty claim	limits.	The	effect	of	changes	in	key	market	factors	on	assumed	lapse	and	annuitization	rates	reflect	emerging	trends	using	actual	data	available from	cedants.	For	treaties	with	limited	experience,	rates	are	established	in	line	with	data	received	from	other	ceding	companies	adjusted	as	appropriate with	industry	estimates.

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

# Short-and	long-term	debt	and	trust	preferred	securities

Where	practical,	fair	values	for	short-term	debt,	long-term	debt,	and	trust	preferred	securities	are	estimated	using	discounted	cash	flow	calculations	based principally	on	observable	inputs	including	the	Company's	incremental	borrowing	rates	for	similar	types	of	borrowings	with	maturities	consistent	with	those remaining	for	the	debt	being	valued.	As	such,	these	instruments	are	classified	within	Level	2.

# Other	derivative	instruments

The	Company	maintains	positions	in	other	derivative	instruments	including	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	GMIB	reinsurance business.	The	fair	value	of	the	majority	of	the	Company's	positions	in	other	derivative	instruments	is	based	on	significant	observable	inputs	including equity	security	and	interest	rate	indices.	Accordingly,	these	are	classified	within	Level	2.	The	Company's	position	in	credit	default	swaps	is	typically included	within	Level	3.

The	following	table	presents,	by	valuation	hierarchy,	the	financial	instruments	carried	or	disclosed	at	fair	value,	and	measured	on	a	recurring	basis, as	of	December	31,	2008.

| December	31,	2008<br>(in	millions	of	U.S.	dollars) | for	Identical<br>Assets	or<br>Liabilities<br>Level	1 | Significant	Other<br>Observable<br>Inputs<br>Level	2 | Significant<br>Unobservable<br>Inputs	Level	3 | Total |
| :--- | :--- | :--- | :--- | :--- |
| Assets: |  |  |  |  |
| Fixed\tmaturities\tavailable\tfor\tsale | $872 | $30,009 | $274 | $31,155 |
| Fixed\tmaturities\theld\tto\tmaturity | 332 | 2,532 | 1 | 2,865 |
| Equity\tsecurities | 962 | 5 | 21 | 988 |
| Short-term\tinvestments | 2,668 | 682 | – | 3,350 |
| Other\tinvestments | 37 | 226 | 1,099 | 1,362 |
| Investments\tin\tpartially-owned\tinsurance\tcompanies | 218 | – | 435 | 653 |
| Other\tderivative\tinstruments | – | 280 | 87 | 367 |
| Total\tassets\tat\tfair\tvalue | $5,089 | $33,734 | $1,917 | $40,740 |
| Liabilities: |  |  |  |  |
| Investment\tderivative\tinstruments | $3 | $– | $– | $3 |
| Guaranteed\tminimum\tincome\tbenefits | – | – | 910 | 910 |
| Short-term\tdebt | – | 479 | – | 479 |
| Long-term\tdebt | – | 2,635 | – | 2,635 |
| Trust\tpreferred\tsecurities | – | 230 | – | 230 |
| Total\tliabilities\tat\tfair\tvalue | $3 | $3,344 | $910 | $4,257 |

The	carrying	amounts	are	equal	to	the	fair	values	of	financial	instruments	at	December	31,	2008,	except	for	investments	in	partially-owned	insurance companies,	short-	and	long-term	debt,	and	trust	preferred	securities	which	had	carrying	values	of	$832	million,	$471	million,	$2.8	billion,	and	$309	million, respectively.

The	fair	values	and	carrying	amounts	of	financial	instruments	at	December	31,	2007,	were	as	follows:

| (in	millions	of	U.S.	dollars) | Fair	Value | Amount |
| :--- | :--- | :--- |
| Assets: |  |  |
| Fixed\tmaturities\tavailable\tfor\tsale | $33,184 | $33,184 |
| Fixed\tmaturities\theld\tto\tmaturity | 3,015 | 2,987 |
| Equity\tsecurities | 1,837 | 1,837 |
| Short-term\tinvestments | 2,631 | 2,631 |
| Other\tinvestments | 1,140 | 1,140 |
| Investments\tin\tpartially-owned\tinsurance\tcompanies | 889 | 773 |
| Investment\tderivative\tinstruments | 18 | 18 |
| Other\tderivative\tinstruments | 75 | 75 |
| Liabilities: |  |  |
| Short-term\tdebt | 378 | 372 |
| Long-term\tdebt | 1,862 | 1,811 |
| Trust\tpreferred\tsecurities | 387 | 309 |
| Guaranteed\tminimum\tincome\tbenefits | 225 | 225 |

# Level	3	financial	instruments

The	following	table	provides	a	reconciliation	of	the	beginning	and	ending	balances	of	financial	instruments	carried	or	disclosed	at	fair	value	using significant	unobservable	inputs	(Level	3)	for	the	year	ended	December	31,	2008.

|  |  |  | Change	in	Net |  |  |  | Financial |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | Unrealized | Purchases, |  |  | Instruments |
|  |  |  | Gains\t(Losses) | Sales, |  |  | Still\tHeld\tat |
|  |  | Net | Included\tin | Issuances, | Transfers |  | December\t31, |
|  | Balance, | Realized | Other | and | Into\t(Out | Balance, | 2008, |
|  | Beginning | Gains/ | Comprehensive | Settlements, | of)\tLevel | End\tof | included\tin |
| (in\tmillions\tof\tU.S.\tdollars) | of\tYear | Losses | Income | Net | 3 | Year | Net\tIncome |
| Assets: |  |  |  |  |  |  |  |
| Fixed\tmaturities\tavailable\tfor\tsale | $601 | $(29) | $(86) | $(8) | $(204) | $274 | $(24) |
| Fixed\tmaturities\theld\tto\tmaturity | – | (2) | – | – | 3 | 1 | (2) |
| Equity\tsecurities | 12 | – | (8) | (8) | 25 | 21 | – |
| Other\tinvestments | 898 | (56) | (270) | 527 | – | 1,099 | (56) |
| Investments\tin\tpartially-owned\tinsurance\tcompanies | 381 | (6) | 28 | 32 | – | 435 | (8) |
| Investment\tderivative\tinstruments | 6 | 5 | – | (11) | – | – | – |
| Other\tderivative\tinstruments | 17 | 47 | – | 23 | – | 87 | 73 |
| Total\tassets\tat\tfair\tvalue | $1,915 | $(41) | $(336) | $555 | $(176) | $1,917 | $(17) |
| Liabilities:\nGuaranteed\tminimum\tincome\tbenefits | $225 | $650 | $– | $35 | $– | 910 | $650 |

# b)	Fair	value	option

Effective	January	1,	2008,	the	Company	elected	the	fair	value	option	for	certain	of	its	available	for	sale	equity	securities	valued	and	carried	at	$161	million on	the	election	date.	The	Company	elected	the	fair	value	option	for	these	particular	equity	securities	to	simplify	the	accounting	and	oversight	of	this portfolio	given	the	portfolio	management	strategy	employed	by	the	external	investment	manager.	The	election	resulted	in	an	increase	in	retained earnings	and	a	reduction	to	accumulated	other	comprehensive	income	of	$6	million	as	of	January	1,	2008.	This	adjustment	reflects	the	net	of	tax unrealized	gains	($9	million	pre-tax)	associated	with	this	particular	portfolio	at	January	1,	2008.	Subsequent	to	this	election,	changes	in	fair	value	related to	these	equity	securities	were	recognized	in	Net	realized	gains	(losses).	During	the	three	months	ended	June	30,	2008,	the	Company	sold	the	entire portfolio.	Accordingly,	the	Company	currently	holds	no	assets	for	which	the	provisions	of	FAS	159	have	been	elected.	For	the	six	months	ended	June	30, 2008,	the	Company	recognized	net	realized	losses	related	to	changes	in	fair	value	of	these	equity	securities	of	$11	million	in	the	consolidated	statement of	operations.	Throughout	2008	to	the	date	of	sale,	all	of	these	equity	securities	were	classified	within	Level	1	in	the	fair	value	hierarchy.

# 16.	Other	(income)	expense

The	following	table	details	the	components	of	Other	(income)	expense	as	reflected	in	the	consolidated	statements	of	operations	for	the	years	ended December	31,	2008,	2007,	and	2006.

| (in	millions	of	U.S.	dollars) | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Equity\tin\tnet\t(income)\tloss\tof\tpartially-owned\tcompanies | $(52) | $39 | $(60) |
| Minority\tinterest\texpense | 11 | 7 | 8 |
| Federal\texcise\tand\tcapital\ttaxes | 16 | \t 18 | 10 |
| Other | (14) | \t 17 | 7 |
| Other\t(income)\texpense | $(39) | $81 | $(35) |

In	2008,	2007,	and	2006,	equity	in	net	(income)	loss	of	partially-owned	companies	includes	$(28)	million,	$68	million,	and	$(57)	million,	respectively,	of (income)	loss	related	to	Assured	Guaranty	Ltd.	Certain	excise	and	capital	taxes	incurred	as	a	result	of	capital	management	initiatives	are	included	in Other	(income)	expense.	As	these	are	considered	capital	transactions,	they	are	excluded	from	underwriting	results.

The	Company	operates	through	the	following	business	segments,	certain	of	which	represent	the	aggregation	of	distinct	operating	segments:	Insurance	– North	American,	Insurance	–	Overseas	General,	Global	Reinsurance,	and	Life	Insurance	and	Reinsurance.	These	segments	distribute	their	products through	various	forms	of	brokers,	agencies,	and	direct	marketing	programs.	Additionally,	Insurance	–	North	American	has	formed	internet	distribution channels	for	some	of	its	products.	Global	Reinsurance,	Insurance	–	North	American,	and	Life	Insurance	and	Reinsurance	have	established	relationships with	reinsurance	intermediaries.	Segment	operating	results	for	the	year	ended	December	31,	2008,	include	the	results	of	Combined	Insurance	from April	1,	2008.	Results	from	Combined	Insurance's	North	American	operations	are	included	in	the	Life	Insurance	and	Reinsurance	segment	and	the results	from	Combined	Insurance's	international	operations	are	included	in	the	Insurance	–	Overseas	General	segment.

The	Insurance	–	North	American	segment	comprises	the	P&C	operation	in	the	U.S.,	Canada,	and	Bermuda.	This	segment	includes	the	operations of	ACE	USA	(including	ACE	Canada),	ACE	Westchester,	ACE	Bermuda,	ACE	Private	Risk	Services,	and	various	run-off	operations.	ACE	USA	provides	a broad	array	of	P&C,	A&H,	and	risk	management	products	and	services	to	a	diverse	group	of	commercial	and	non-commercial	enterprises	and consumers.	ESIS,	ACE	USA's	in-house	third-party	claims	administrator,	performs	claims	management	and	risk	control	services	for	organizations	that self-insure	P&C	exposures.	The	operating	results	of	ESIS	are	included	in	Insurance	–	North	American's	administrative	expenses.	ACE	Westchester specializes	in	the	wholesale	distribution	of	excess,	surplus,	and	specialty	P&C	products.	ACE	Bermuda	provides	commercial	insurance	products	on	an excess	basis	to	a	global	client	base,	covering	risks	that	are	generally	low	in	frequency	and	high	in	severity.	ACE	Private	Risk	Services	provides	personal lines	coverages	(such	as	homeowners	and	automobile)	for	high	net	worth	clients.	The	run-off	operations	include	Brandywine	Holdings	Corporation, Commercial	Insurance	Services,	residual	market	workers'	compensation	business,	pools	and	syndicates	not	attributable	to	a	single	business	group,	and other	exited	lines	of	business.	Run-off	operations	do	not	actively	sell	insurance	products,	but	are	responsible	for	the	management	of	existing	policies	and related	claims.

The	Insurance	–	Overseas	General	segment	consists	of	ACE	International	(excluding	its	life	insurance	business),	the	wholesale	insurance operations	of	ACE	Global	Markets,	and	the	international	A&H	and	life	insurance	business	of	Combined	Insurance.	ACE	International,	the	ACE	INA network	of	indigenous	retail	insurance	operations,	maintains	a	presence	in	every	major	insurance	market	in	the	world	and	is	organized	geographically along	product	lines	that	provide	dedicated	underwriting	focus	to	customers.	ACE	Global	Markets,	the	London-based	excess	and	surplus	lines	business that	includes	Lloyd's	Syndicate	2488	(2008	capacity	of	£330	million	($480	million)),	offers	an	extensive	product	range	through	its	unique	parallel distribution	of	products	via	ACE	European	Group	Limited	(AEGL)	and	Lloyd's	Syndicate	2488.	ACE	provides	funds	at	Lloyd's	to	support	underwriting	by Syndicate	2488	which	is	managed	by	ACE	Underwriting	Agencies	Limited.	AEGL,	the	London-based,	Financial	Services	Authority-U.K.	regulated company,	underwrites	U.K.	and	Continental	Europe	insurance	and	reinsurance	business.	The	reinsurance	operation	of	ACE	Global	Markets	is	included	in the	Global	Reinsurance	segment.	Combined	Insurance	distributes	specialty	individual	accident	and	supplemental	health	and	life	insurance	products targeted	to	middle	income	consumers	in	Europe	and	Asia	Pacific.	The	Insurance	–	Overseas	General	segment	has	four	regions	of	operations:	the	ACE European	Group	(which	comprises	ACE	Europe	and	ACE	Global	Markets	branded	business),	ACE	Asia	Pacific,	ACE	Far	East,	and	ACE	Latin	America. Companies	within	the	Insurance	–	Overseas	General	segment	write	a	variety	of	insurance	products	including	property,	casualty,	professional	lines (Directors	&	Officers	and	Errors	&	Omissions),	marine,	energy,	aviation,	political	risk,	specialty	personal	lines,	consumer	lines	products,	A&H	(principally accident	and	supplemental	health),	and	life	insurance	products.

The	Global	Reinsurance	segment	represents	ACE's	reinsurance	operations	comprising	ACE	Tempest	Re	Bermuda,	ACE	Tempest	Re	USA,	ACE Tempest	Re	Europe,	and	ACE	Tempest	Re	Canada.	These	divisions	provide	a	broad	range	of	property	catastrophe,	casualty,	and	property	reinsurance coverages	to	a	diverse	array	of	primary	P&C	companies.	The	Global	Reinsurance	segment	includes	ACE	Global	Markets'	reinsurance	operations,	as	well as	an	underwriting	presence	at	Lloyd's	Reinsurance	Company	(China)	Limited,	Lloyd's	new	licensed	reinsurance	company	based	in	Shanghai.

The	Life	Insurance	and	Reinsurance	segment	includes	the	operations	of	ACE	Tempest	Life	Re	(ACE	Life	Re),	ACE	International	Life,	and	the North	American	A&H	and	life	business	of	Combined	Insurance.	ACE	Life	Re	provides	reinsurance	coverage

to	other	life	insurance	companies	as	well	as	marketing	traditional	life	reinsurance	products	and	services	for	the	individual	life	business.	ACE	International Life	provides	traditional	life	insurance	protection,	investments,	and	savings	products	to	individuals	in	several	countries	including	China,	Egypt,	Taiwan, Thailand,	the	United	Arab	Emirates	and	Vietnam.	Combined	Insurance	distributes	specialty	individual	accident	and	supplemental	health	and	life insurance	products	targeted	to	middle	income	consumers	in	the	U.S.	and	Canada.

Corporate	and	Other	(Corporate)	includes	ACE	Limited,	ACE	Group	Management	and	Holdings	Ltd.,	ACE	INA	Holdings,	Inc.,	and	intercompany eliminations.	In	addition,	Corporate	includes	the	Company's	proportionate	share	of	Assured	Guaranty	Ltd.'s	earnings	reflected	in	Other	(income) expense.	Included	in	Losses	and	loss	expenses	are	losses	incurred	in	connection	with	the	commutation	of	ceded	reinsurance	contracts	that	resulted from	a	differential	between	the	consideration	received	from	reinsurers	and	the	related	reduction	of	reinsurance	recoverable,	principally	related	to	the	time value	of	money.	Due	to	the	Company's	initiatives	to	reduce	reinsurance	recoverable	balances	and	thereby	encourage	such	commutations,	losses recognized	in	connection	with	the	commutation	of	ceded	reinsurance	contracts	are	generally	not	considered	when	assessing	segment	performance	and, accordingly,	are	directly	allocated	to	Corporate.	Additionally,	the	Company	does	not	consider	the	development	of	loss	reserves	related	to	the September	11	tragedy	in	assessing	segment	performance	as	these	loss	reserves	are	managed	by	Corporate.	As	such,	the	effect	of	the	related	loss reserve	development	on	net	income	is	reported	within	Corporate.	ACE	also	eliminates	the	impact	of	intersegment	LPT	transactions	which	are	not reflected	in	the	results	within	the	statements	of	operations	by	segment.

For	segment	reporting	purposes,	certain	items	have	been	presented	in	a	different	manner	than	in	the	consolidated	financial	statements.

Management	uses	underwriting	income	as	the	main	measure	of	segment	performance.	ACE	calculates	underwriting	income	by	subtracting	losses	and loss	expenses,	future	policy	benefits,	policy	acquisition	costs,	and	administrative	expenses	from	net	premiums	earned.	For	the	life	insurance	and reinsurance	business,	management	also	includes	net	investment	income	as	a	component	of	underwriting	income.	The	following	tables	summarize	the operations	by	segment	for	the	years	ended	December	31,	2008,	2007,	and	2006.

# Statement	of	Operations	by	Segment

|  | Insurance	– | Insurance	– |  | Life	Insurance | Corporate |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| For\tthe\tyear\tended\tDecember\t31,\t2008\n(in\tmillions\tof\tU.S.\tdollars) | North\nAmerican | Overseas\nGeneral | Global\nReinsurance | and\nReinsurance | and\nOther | ACE\nConsolidated |
| Gross\tpremiums\twritten | $10,053 | $6,941 | $921 | $1,327 | $– | $19,242 |
| Net\tpremiums\twritten | 5,636 | 5,332 | 914 | 1,198 | – | 13,080 |
| Net\tpremiums\tearned | 5,679 | 5,337 | 1,017 | 1,170 | – | 13,203 |
| Losses\tand\tloss\texpenses | 4,080 | 2,679 | 524 | 320 | – | 7,603 |
| Future\tpolicy\tbenefits | – | 12 | – | 387 | – | 399 |
| Policy\tacquisition\tcosts | 562 | 1,193 | 192 | 188 | – | 2,135 |
| Administrative\texpenses | 536 | 793 | 56 | 199 | 153 | 1,737 |
| Underwriting\tincome\t(loss) | 501 | 660 | 245 | 76 | (153) | 1,329 |
| Net\tinvestment\tincome | 1,095 | 521 | 309 | 142 | (5) | 2,062 |
| Net\trealized\tgains\t(losses) | (709) | (316) | (163) | (532) | 87 | (1,633) |
| Interest\texpense | 1 | – | – | – | 229 | 230 |
| Other\t(income)\texpense | 7 | (11) | 2 | 12 | (49) | (39) |
| Income\ttax\texpense\t(benefit) | 315 | 100 | 30 | 30 | (105) | 370 |
| Net\tincome\t(loss) | $564 | $776 | $359 | $(356) | $(146) | $1,197 |

|  | Insurance	– | Insurance	– |  | Life	Insurance | Corporate |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| For\tthe\tyear\tended\tDecember\t31,\t2007\n(in\tmillions\tof\tU.S.\tdollars) | North\nAmerican | Overseas\nGeneral | Global\nReinsurance | and\nReinsurance | and\nOther | ACE\nConsolidated |
| Gross\tpremiums\twritten | $9,840 | $6,291 | $1,218 | $391 | $– | $17,740 |
| Net\tpremiums\twritten | 5,833 | 4,568 | 1,197 | 381 | – | 11,979 |
| Net\tpremiums\tearned | 6,007 | 4,623 | 1,299 | 368 | – | 12,297 |
| Losses\tand\tloss\texpenses | 4,269 | 2,420 | 664 | – | (2) | 7,351 |
| Future\tpolicy\tbenefits | – | – | – | 168 | – | 168 |
| Policy\tacquisition\tcosts | 515 | 963 | 248 | 45 | – | 1,771 |
| Administrative\texpenses | 530 | 669 | 64 | 50 | 142 | 1,455 |
| Underwriting\tincome\t(loss) | 693 | 571 | 323 | 105 | (140) | 1,552 |
| Net\tinvestment\tincome | 1,034 | 450 | 274 | 55 | 105 | 1,918 |
| Net\trealized\tgains\t(losses) | 125 | (69) | 21 | (164) | 26 | (61) |
| Interest\texpense | – | – | – | – | 175 | 175 |
| Other\t(income)\texpense | 11 | (20) | 4 | 1 | 85 | 81 |
| Income\ttax\texpense\t(benefit) | 468 | 183 | 32 | (8) | (100) | 575 |
| Net\tincome\t(loss) | $1,373 | $789 | $582 | $3 | $(169) | $2,578 |

| For	the	year	ended	December	31,	2006<br>(in	millions	of	U.S.	dollars) | Insurance	–<br>North<br>American | Insurance	–<br>Overseas<br>General | Global<br>Reinsurance | Life	Insurance<br>and<br>Reinsurance | Corporate<br>and<br>Other | ACE<br>Consolidated |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Gross\tpremiums\twritten | $9,663 | $5,897 | $1,567 | $274 | $– | $17,401 |
| Net\tpremiums\twritten | 5,940 | 4,266 | 1,550 | 274 | – | 12,030 |
| Net\tpremiums\tearned | 5,719 | 4,321 | 1,511 | 274 | – | 11,825 |
| Losses\tand\tloss\texpenses | 4,026 | 2,259 | 784 | – | 1 | 7,070 |
| Future\tpolicy\tbenefits | – | – | – | 123 | – | 123 |
| Policy\tacquisition\tcosts | 530 | 856 | 303 | 26 | – | 1,715 |
| Administrative\texpenses | 502 | 609 | 62 | 35 | 248 | 1,456 |
| Underwriting\tincome\t(loss) | 661 | 597 | 362 | 90 | (249) | 1,461 |
| Net\tinvestment\tincome | 876 | 370 | 221 | 42 | 92 | 1,601 |
| Net\trealized\tgains\t(losses) | (83) | (16) | 10 | (36) | 27 | (98) |
| Interest\texpense | – | – | – | – | 176 | 176 |
| Other\t(income)\texpense | (2) | 10 | 8 | – | (51) | (35) |
| Income\ttax\texpense\t(benefit) | 352 | 206 | 38 | (6) | (68) | 522 |
| Cumulative\teffect\tof\ta\tchange\tin |  |  |  |  |  |  |
| accounting\tprinciple | – | – | – | – | 4 | 4 |
| Net\tincome\t(loss) | $1,104 | $735 | $547 | $102 | $(183) | $2,305 |

Underwriting	assets	are	reviewed	in	total	by	management	for	purposes	of	decision-making.	The	Company	does	not	allocate	assets	to	its	segments.

The	following	table	shows	the	impact	of	the	catastrophe	losses	by	segment	for	the	year	ended	December	31,	2008.

| Catastrophe	Loss	Charges	–	By	Event<br>(in	millions	of	U.S.	dollars) | Insurance	-<br>North<br>American | Insurance-<br>Overseas<br>General | Global<br>Reinsurance | Consolidated |
| :--- | :--- | :--- | :--- | :--- |
| Net\tloss |  |  |  |  |
| Hurricane\t–\tGustav | $50 | $11 | $6 | $67 |
| Hurricane\t–\tIke | 206 | 48 | 174 | 428 |
| Other | 42 | 24 | 6 | 72 |
| Total | $298 | $83 | $186 | $567 |
| Reinstatement\tpremiums\t(earned)\texpensed | 16 | 8 | (21) | 3 |
| Total\tbefore\tincome\ttax | 314 | 91 | 165 | 570 |
| Income\ttax\tbenefit | (99) | (20) | (1) | (120) |
| Total\tafter\tincome\ttax | $215 | $71 | $164 | $450 |

The	following	tables	summarize	the	net	premiums	earned	of	each	segment	by	product	offering	for	the	years	ended	December	31,	2008,	2007,	and	2006.

| Year	ended	December	31,	2008 | Property	&amp; |  | Life,	Accident	&amp; | ACE |
| :--- | :--- | :--- | :--- | :--- |
| (in\tmillions\tof\tU.S.\tdollars) | All\tOther | Casualty | Health | Consolidated |
| Insurance\t–\tNorth\tAmerican | $1,576 | $ 3,857 | $246 | $5,679 |
| Insurance\t–\tOverseas\tGeneral | 1,855 | 1,487 | 1,995 | 5,337 |
| Global\tReinsurance | 523 | 494 | – | 1,017 |
| Life\tInsurance\tand\tReinsurance | – | – | 1,170 | 1,170 |
|  | $3,954 | $ 5,838 | $3,411 | $13,203 |
| Year\tended\tDecember\t31,\t2007 |  |  |  |  |
| Insurance\t–\tNorth\tAmerican | $1,486 | $ 4,298 | $223 | $6,007 |
| Insurance\t–\tOverseas\tGeneral | 1,697 | 1,495 | 1,431 | 4,623 |
| Global\tReinsurance | 628 | 671 | – | 1,299 |
| Life\tInsurance\tand\tReinsurance | – | – | 368 | 368 |
|  | $3,811 | $ 6,464 | $2,022 | $12,297 |
| Year\tended\tDecember\t31,\t2006 |  |  |  |  |
| Insurance\t–\tNorth\tAmerican | $1,296 | $ 4,228 | $195 | $5,719 |
| Insurance\t–\tOverseas\tGeneral | 1,617 | 1,479 | 1,225 | 4,321 |
| Global\tReinsurance | 712 | 799 | – | 1,511 |
| Life\tInsurance\tand\tReinsurance | – | – | 274 | 274 |
|  | $3,625 | $ 6,506 | $1,694 | $11,825 |

The	following	table	summarizes	the	Company's	net	premiums	earned	by	geographic	region.	Allocations	have	been	made	on	the	basis	of	location	of	risk.

| Year	Ended | North	America | Europe | Pacific/Far	East | Latin	America |
| :--- | :--- | :--- | :--- | :--- |
| 2008 | 61% | 22% | 12% | 5% |
| 2007 | 62% | 23% | 10% | 5% |
| 2006 | 64% | 22% | 10% | 4% |

The	following	table	sets	forth	the	computation	of	basic	and	diluted	earnings	per	share	for	the	years	ended	December	31,	2008,	2007,	and	2006.

|  | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Numerator: |  |  |  |
| Net\tincome\tbefore\tcumulative\teffect\tof\ta\tchange\tin\taccounting\tprinciple | $1,197 | $2,578 | $2,301 |
| Dividends\ton\tPreferred\tShares | (24) | (45) | (45) |
| Net\tincome\tavailable\tto\tholders\tof\tCommon\tShares\tbefore\tcumulative\teffect\tof\ta |  |  |  |
| change\tin\taccounting\tprinciple | 1,173 | 2,533 | 2,256 |
| Cumulative\teffect\tof\ta\tchange\tin\taccounting\tprinciple | – | – | 4 |
| Net\tincome\tavailable\tto\tholders\tof\tCommon\tShares | $1,173 | $2,533 | $2,260 |
| Denominator: |  |  |  |
| Denominator\tfor\tbasic\tearnings\tper\tshare: |  |  |  |
| Weighted-average\tshares\toutstanding | \t 328,579,543 | \t 324,938,327 | \t 321,768,672 |
| Denominator\tfor\tdiluted\tearnings\tper\tshare: |  |  |  |
| Share-based\tcompensation\tplans | 3,902,084 | 5,509,394 | 5,463,350 |
| Adjusted\tweighted\taverage\tshares\toutstanding\tand\tassumed\tconversions | \t 332,481,627 | \t 330,447,721 | \t 327,232,022 |
| Basic\tearnings\tper\tshare: |  |  |  |
| Earnings\tper\tshare\tbefore\tcumulative\teffect\tof\ta\tchange\tin\taccounting\tprinciple | $3.57 | $7.79 | $7.01 |
| Cumulative\teffect\tof\ta\tchange\tin\taccounting\tprinciple | – | – | 0.01 |
| Earnings\tper\tshare | $3.57 | $7.79 | $7.02 |
| Diluted\tearnings\tper\tshare: |  |  |  |
| Earnings\tper\tshare\tbefore\tcumulative\teffect\tof\ta\tchange\tin\taccounting\tprinciple | $3.53 | $7.66 | $6.90 |
| Cumulative\teffect\tof\ta\tchange\tin\taccounting\tprinciple | – | – | 0.01 |
| Earnings\tper\tshare | $3.53 | $7.66 | $6.91 |

Excluded	from	adjusted	weighted	average	shares	outstanding	and	assumed	conversions	is	the	impact	of	securities	that	would	have	been	anti-dilutive during	the	respective	years.	For	the	years	ended	December	31,	2008,	2007,	and	2006,	the	potential	anti-dilutive	share	conversions	were	638,401, 233,326,	and	319,397	respectively.

# 19.	Related	party	transactions

The	ACE	Foundation	–	Bermuda	is	an	unconsolidated	not-for-profit	organization	whose	primary	purpose	is	to	fund	charitable	causes	in	Bermuda.	The Trustees	are	principally	comprised	of	ACE	management.	The	Company	maintains	a	non-interest	bearing	demand	note	receivable	from	the	ACE Foundation	–	Bermuda,	the	balance	of	which	was	$34	million,	at	December	31,	2008	and	2007.	The	receivable	is	included	in	Other	assets	in	the accompanying	consolidated	balance	sheets.	The	borrower	has	used	the	related	proceeds	to	finance	investments	in	Bermuda	real	estate,	some	of	which have	been	rented	to	ACE	employees	at	rates	established	by	independent,	professional	real	estate	appraisers.	The	borrower	uses	income	from	the investments	to	both	repay	the	note	and	to	fund	charitable	activities.	Accordingly,	the	Company	reports	the	demand	note	at	the	lower	of	its	principal	value or	the	fair	value	of	assets	held	by	the	borrower	to	repay	the	loan,	including	the	real	estate	properties.

# 20.	Statutory	financial	information

The	Company's	insurance	and	reinsurance	subsidiaries	are	subject	to	insurance	laws	and	regulations	in	the	jurisdictions	in	which	they	operate.	These regulations	include	restrictions	that	limit	the	amount	of	dividends	or	other	distributions,	such	as	loans	or	cash	advances,	available	to	shareholders	without prior	approval	of	the	insurance	regulatory	authorities.

There	are	no	statutory	restrictions	on	the	payment	of	dividends	from	retained	earnings	by	any	of	the	Bermuda	subsidiaries	as	the	minimum statutory	capital	and	surplus	requirements	are	satisfied	by	the	share	capital	and	additional	paid-in	capital	of	each	of	the	Bermuda	subsidiaries.

The	Company's	U.S.	subsidiaries	file	financial	statements	prepared	in	accordance	with	statutory	accounting	practices	prescribed	or	permitted	by insurance	regulators.

Statutory	accounting	differs	from	GAAP	in	the	reporting	of	certain	reinsurance	contracts,	investments,	subsidiaries,	acquisition	expenses,	fixed assets,	deferred	income	taxes,	and	certain	other	items.	The	statutory	capital	and	surplus	of	the	U.S.	subsidiaries	met	regulatory	requirements	for	2008, 2007,	and	2006.	The	amount	of	dividends	available	to	be	paid	in	2009,	without	prior	approval	from	the	state	insurance	departments,	totals	$835	million.

The	combined	statutory	capital	and	surplus	and	statutory	net	income	of	the	Bermuda	and	U.S.	subsidiaries	as	of	and	for	the	years	ended December	31,	2008,	2007,	and	2006,	are	as	follows:

|  |  | Bermuda	Subsidiaries |  |  | U.S.	Subsidiaries |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| (in\tmillions\tof\tU.S.\tdollars) | 2008 | 2007 | 2006 | 2008 | 2007 | 2006 |
| Statutory\tcapital\tand\tsurplus | $7,001 | $8,579 | $7,605 | $5,337 | $5,321 | $4,431 |
| Statutory\tnet\tincome | $684 | $1,535 | $1,527 | $798 | $873 | $724 |

As	permitted	by	the	Restructuring	discussed	previously	in	Note	7,	certain	of	the	Company's	U.S.	subsidiaries	discount	certain	A&E	liabilities,	which increased	statutory	capital	and	surplus	by	approximately	$211	million,	$140	million,	and	$157	million	as	of	December	31,	2008,	2007,	and	2006, respectively.

The	Company's	international	subsidiaries	prepare	statutory	financial	statements	based	on	local	laws	and	regulations.	Some	jurisdictions	impose complex	regulatory	requirements	on	insurance	companies	while	other	jurisdictions	impose	fewer	requirements.	In	some	countries,	the	Company	must obtain	licenses	issued	by	governmental	authorities	to	conduct	local	insurance	business.	These	licenses	may	be	subject	to	reserves	and	minimum	capital and	solvency	tests.	Jurisdictions	may	impose	fines,	censure,	and/or	criminal	sanctions	for	violation	of	regulatory	requirements.

# Other	disclosures	required	by	Swiss	law

# (i)	Expenses

Total	personnel	expenses	amounted	to	$1.4	billion	for	the	year	ended	December	31,	2008,	and	$1.1	billion	for	each	of	the	years	ended	December	31, 2007	and	2006.	Amortization	expense	related	to	tangible	property	amounted	to	$90	million,	$77	million,	and	$64	million	for	the	years	ended	December	31, 2008,	2007,	and	2006,	respectively.

# (ii)	Fire	insurance	values	of	property	and	equipment

Total	fire	insurance	values	of	property	and	equipment	amounted	to	$680	million	and	$464	million	at	December	31,	2008	and	2007,	respectively.

# (iii)	Risk	assessment	and	management

The	management	of	ACE	is	responsible	for	assessing	risks	related	to	the	financial	reporting	process	and	for	establishing	and	maintaining	adequate internal	control	over	financial	reporting.	Internal	control	over	financial	reporting	is	a	process	designed	by,	or	under	the	supervision	of	the	Chief	Executive Officer	and	Chief	Financial	Officer	to	provide	reasonable	assurance	regarding	the	reliability	of	financial	reporting	and	the	preparation	of	ACE's consolidated	financial	statements	for	external	purposes	in	accordance	with	GAAP.

The	Board,	operating	through	its	Audit	Committee	composed	entirely	of	directors	who	are	not	officers	or	employees	of	the	Company,	provides oversight	of	the	financial	reporting	process	and	safeguarding	of	assets	against	unauthorized	acquisition,	use,	or	disposition.	The	Audit	Committee	meets with	management,	the	independent	registered	public	accountants	and	the	internal	auditor;	approves	the	overall	scope	of	audit	work	and	related	fee arrangements;	and	reviews	audit	reports	and	findings.	In	addition,	the	independent	registered	public	accountants	and	the	internal	auditor	meet	separately with	the	Audit	Committee,	without	management	representatives	present,	to	discuss	the	results	of	their	audits;	the	adequacy	of	the	Company's	internal control;	the	quality	of	its	financial	reporting;	and	the	safeguarding	of	assets	against	unauthorized	acquisition,	use,	or	disposition.

ACE's	management	is	responsible	for	assessing	operational	risks	facing	the	Company	and	sets	policies	designed	to	address	such	risks.	Examples of	key	areas	addressed	by	ACE's	risk	management	processes	follow.

# a)	Underwriting

The	Company's	underwriting	strategy	is	to	employ	consistent,	disciplined	pricing	and	risk	selection.	Clearly	defined	underwriting	authorities,	standards, and	guidelines	are	in	place	in	each	of	the	local	operations	and	global	profit	centers.	Global	product	boards	ensure	consistency	of	approach	and	the establishment	of	best	practices	throughout	the	world.	ACE's	priority	is	to	help	ensure	adherence	to	criteria	for	risk	selection	by	maintaining	high	levels	of experience	and	expertise	in	the	underwriting	staff.	In	addition,	ACE	employs	a	business	review	structure	that	helps	ensure	control	of	risk	quality	and conservative	use	of	policy	limits	and	terms	and	conditions.

Qualified	actuaries	in	each	region	work	closely	with	the	underwriting	teams	to	provide	additional	expertise	in	the	underwriting	process.	The Company	uses	sophisticated	catastrophe	loss	and	risk	modeling	techniques	designed	to	ensure	appropriate	spread	of	risk	and	to	analyze	correlation	of risk	across	different	product	lines	and	territories.

# b)	Reinsurance	protection

As	part	of	the	Company's	risk	management	strategy,	ACE	purchases	reinsurance	protection	to	mitigate	exposure	to	losses,	including	catastrophes,	to	an acceptable	level.	In	certain	countries,	reinsurer	selection	is	limited	by	local	laws	or	regulations.	In	those	areas	where	there	is	more	freedom	of	choice,	the counterparty	is	selected	based	upon	its	financial	strength,	management,	line	of	business	expertise,	and	its	price	for	assuming	the	risk	transferred.	In support	of	this	process,	the	Company	maintains	an	ACE	authorized	reinsurer	list	that	stratifies	these	authorized	reinsurers	by	classes	of	business	and acceptable	limits.	This	list	is	maintained	by	the	Reinsurance	Security	Committee	(RSC),	a	committee	comprised	of	senior	management	personnel,	and	a dedicated	reinsurer	security	team.	Changes	to	the	list	are	authorized	by	the	RSC	and	recommended	to	the	Chair	of	the	Enterprise	Risk	Management Board.	The	reinsurers	on	the	authorized	list	and	potential	new	markets	are	regularly	reviewed,	and	the	list	may	be	modified	following	these	reviews.	In addition	to	the	authorized	list,	there	is	a	formal	exception	process	that	allows	authorized	reinsurance	buyers	to	use	reinsurers	already	on	the	authorized list	for	higher	limits	or	different	lines	of	business,	for	example,	or	other	reinsurers	not	on	the	authorized	list	if	their	use	is	supported	by	compelling business	reasons	for	a	particular	reinsurance	program.

# c)	Investments

ACE's	principal	investment	objective	is	to	ensure	that	funds	will	be	available	to	meet	primary	insurance	and	reinsurance	obligations.	Within	this	broad liquidity	constraint,	the	investment	portfolio's	structure	seeks	to	maximize	return	subject	to	specifically-approved	guidelines	of	overall	asset	classes,	credit quality,	liquidity,	and	volatility	of	expected	returns.

The	management	of	the	investment	portfolio	is	the	responsibility	of	ACE	Asset	Management.	ACE	Asset	Management,	an	indirect	wholly-owned subsidiary	of	ACE,	operates	principally	to	guide	and	direct	the	investment	process.	In	this	regard,	ACE	Asset	Management:

•	provides	the	analysis,	evaluation,	and	selection	of	external	investment	advisors;

•	provides	governance	over	the	investment	process	for	each	of	the	operating	companies	to	ensure	consistency	of	approach	and	adherence	to	investment guidelines.

For	the	portfolio,	ACE	determines	allowable,	targeted	asset	allocation	and	ranges	for	each	of	the	operating	segments.	These	asset	allocation targets	are	derived	from	sophisticated	asset	and	liability	modeling	that	measures	correlated	histories	of	returns	and	volatility	of	returns.	Allowable investment	classes	are	further	refined	through	analysis	of	the	Company's	operating	environment,	including	expected	volatility	of	cash	flows,	overall capital	position,	regulatory,	and	rating	agency	considerations.

The	Finance	and	Investment	Committee	of	the	Board	of	Directors	approves	asset	allocation	targets	and	reviews	investment	policy	to	ensure	that	it is	consistent	with	overall	goals,	strategies,	and	objectives.	Overall	investment	guidelines	are	reviewed	and	approved	by	the	Finance	and	Investment Committee	to	ensure	that	appropriate	levels	of	portfolio	liquidity,	credit	quality,	diversification,	and	volatility	are	maintained.	In	addition,	the	Finance	and Investment	Committee	systematically	reviews	the	portfolio's	exposures	to	capture	any	potential	violations	of	investment	guidelines.

# 21.	Information	provided	in	connection	with	outstanding	debt	of	subsidiaries

The	following	tables	present	condensed	consolidating	financial	information	at	December	31,	2008	and	2007,	and	for	the	years	ended	December	31,	2008, 2007,	and	2006,	for	ACE	Limited	(the	"Parent	Guarantor")	and	its	"Subsidiary	Issuer",	ACE	INA	Holdings,	Inc.	The	Subsidiary	Issuer	is	an	indirect	100 percent-owned	subsidiary	of	the	Parent	Guarantor.	Investments	in	subsidiaries	are	accounted	for	by	the	Parent	Guarantor	under	the	equity	method	for purposes	of	the	supplemental	consolidating	presentation.	Earnings	of	subsidiaries	are	reflected	in	the	Parent	Guarantor's	investment	accounts	and earnings.	The	Parent	Guarantor	fully	and	unconditionally	guarantees	certain	of	the	debt	of	the	Subsidiary	Issuer.

# Condensed	Consolidating	Balance	Sheet	at	December	31,	2008

|  |  | ACE	INA | Other	ACE |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | ACE | Holdings, | Limited |  |  |
|  | Limited | Inc. | Subsidiaries |  |  |
|  | (Parent | (Subsidiary | and | Consolidating | ACE\tLimited |
| (in\tmillions\tof\tU.S.\tdollars) | Guarantor) | Issuer) | Eliminations^(1) | Adjustments^(2) | Consoli\dated |
| Assets |  |  |  |  |  |
| Investments | $143 | $20,323 | $19,249 | $– | $39,715 |
| Cash | (52) | 442 | 477 | – | 867 |
| Insurance\tand\treinsurance\tbalances\treceivable | – | 2,944 | 509 | – | 3,453 |
| Reinsurance\trecoverable\ton\tlosses\tand\tloss\texpenses | – | 16,880 | (2,963) | – | 13,917 |
| Reinsurance\trecoverable\ton\tfuture\tpolicy\tbenefits | – | 625 | (366) | – | 259 |
| Value\tof\tbusiness\tacquired | – | 823 | – | – | 823 |
| Goodwill\tand\tother\tintangible\tassets | – | 3,199 | 548 | – | 3,747 |
| Investments\tin\tsubsidiaries | 13,697 | – | – | (13,697) | – |
| Due\tfrom\t(to)\tsubsidiaries\tand\taffiliates,\tnet | 784 | (389) | 389 | (784) | – |
| Other\tassets | 12 | 7,398 | 1,866 | – | 9,276 |
| Total\tassets | $14,584 | $52,245 | $19,709 | $(14,481) | $72,057 |
| Liabilities |  |  |  |  |  |
| Unpaid\tlosses\tand\tloss\texpenses | $– | $29,127 | $8,049 | $– | $37,176 |
| Unearned\tpremiums | – | 4,804 | 1,146 | – | 5,950 |
| Future\tpolicy\tbenefits | – | 2,249 | 655 | – | 2,904 |
| Short-term\tdebt | – | 471 | – | – | 471 |
| Long-term\tdebt | – | 2,806 | – | – | 2,806 |
| Trust\tpreferred\tsecurities | – | 309 | – | – | 309 |
| Other\tliabilities | 138 | 5,932 | 1,925 | – | 7,995 |
| Total\tliabilities | 138 | 45,698 | 11,775 | – | 57,611 |
| Total\tshareholders'\tequity | 14,446 | 6,547 | 7,934 | (14,481) | 14,446 |
| Total\tliabilities\tand\tshareholders'\tequity | $14,584 | $52,245 | $19,709 | $(14,481) | $72,057 |

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

(2)	Includes	ACE	Limited	parent	company	eliminations.

|  |  | ACE	INA | Other	ACE |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | ACE\tLimited | Holdings,\tInc. | Limited |  |  |
|  | (Parent | (Subsidiary | Subsidiaries\tand | Consolidating | ACE\tLimited |
| (in\tmillions\tof\tU.S.\tdollars) | Guarantor) | Issuer) | Eliminations^(1) | Adjustments^(2) | Consolidated |
| Assets |  |  |  |  |  |
| Investments | $62 | $20,671 | $21,046 | $– | $41,779 |
| Cash | – | 310 | 251 | (51) | 510 |
| Insurance\tand\treinsurance\tbalances\treceivable | – | 2,961 | 579 | – | 3,540 |
| Reinsurance\trecoverable\ton\tlosses\tand\tloss\texpenses | – | 16,742 | (2,388) | – | 14,354 |
| Reinsurance\trecoverable\ton\tfuture\tpolicy\tbenefits | – | – | 8 | – | 8 |
| Goodwill\tand\tother\tintangible\tassets | – | 2,267 | 571 | – | 2,838 |
| Investments\tin\tsubsidiaries | 16,669 | – | – | (16,669) | – |
| Due\tfrom\t(to)\tsubsidiaries\tand\taffiliates,\tnet | 174 | 45 | (45) | (174) | – |
| Other\tassets | 14 | 6,333 | 2,714 | – | 9,061 |
| Total\tassets | $16,919 | $49,329 | $22,736 | $(16,894) | $72,090 |
| Liabilities |  |  |  |  |  |
| Unpaid\tlosses\tand\tloss\texpenses | $– | $28,984 | $8,128 | $– | $37,112 |
| Unearned\tpremiums | – | 4,930 | 1,297 | – | 6,227 |
| Future\tpolicy\tbenefits | – | – | 545 | – | 545 |
| Short-term\tdebt | 51 | 87 | 285 | (51) | 372 |
| Long-term\tdebt | – | 1,811 | – | – | 1,811 |
| Trust\tpreferred\tsecurities | – | 309 | – | – | 309 |
| Other\tliabilities | 191 | 6,199 | 2,647 | – | 9,037 |
| Total\tliabilities | 242 | 42,320 | 12,902 | (51) | 55,413 |
| Total\tshareholders'\tequity | 16,677 | 7,009 | 9,834 | (16,843) | 16,677 |
| Total\tliabilities\tand\tshareholders'\tequity | $16,919 | $49,329 | $22,736 | $(16,894) | $72,090 |

# Condensed	Consolidating	Statement	of	Operations

|  |  | ACE	INA | Other	ACE |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | ACE\tLimited | Holdings,\tInc. | Limited |  |  |
| For\tthe\tyear\tended\tDecember\t31,\t2008\n(in\tmillions\tof\tU.S.\tdollars) | (Parent\nGuarantor) | (Subsidiary\nIssuer) | Subsidiaries\tand\nEliminations^(1) | Consolidating\nAdjustments^(2) | ACE\tLimited\nConsolidated |
| Net\tpremiums\twritten | $– | $7,267 | $5,813 | $– | $13,080 |
| Net\tpremiums\tearned | – | 7,424 | 5,779 | – | 13,203 |
| Net\tinvestment\tincome | (16) | 1,068 | 1,010 | – | 2,062 |
| Equity\tin\tearnings\tof\tsubsidiaries | 1,150 | – | – | (1,150) | – |
| Net\trealized\tgains\t(losses) | 90 | (572) | (1,151) | – | (1,633) |
| Losses\tand\tloss\texpenses | – | 4,427 | 3,176 | – | 7,603 |
| Future\tpolicy\tbenefits | – | 125 | 274 | – | 399 |
| Policy\tacquisition\tcosts\tand\tadministrative\texpenses | 73 | 2,218 | 1,604 | (23) | 3,872 |
| Interest\texpense | (38) | 241 | (2) | 29 | 230 |
| Other\t(income)\texpense | (15) | 1 | (25) | – | (39) |
| Income\ttax\texpense | 7 | 346 | 17 | – | 370 |
| Net\tincome | $1,197 | $562 | $594 | $(1,156) | $1,197 |

|  |  | ACE	INA | Other	ACE |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | ACE\tLimited | Holdings,\tInc. | Limited |  |  |
| For\tthe\tyear\tended\tDecember\t31,\t2007\n(in\tmillions\tof\tU.S.\tdollars) | (Parent\nGuarantor) | (Subsidiary\nIssuer) | Subsidiaries\tand\nEliminations^(1) | Consolidating\nAdjustments^(2) | ACE\tLimited\nConsolidated |
| Net\tpremiums\twritten | $– | $7,033 | $4,946 | $– | $11,979 |
| Net\tpremiums\tearned | – | 7,193 | 5,104 | – | 12,297 |
| Net\tinvestment\tincome | 14 | 935 | 969 | – | 1,918 |
| Equity\tin\tearnings\tof\tsubsidiaries | 2,633 | – | – | (2,633) | – |
| Net\trealized\tgains\t(losses) | 21 | – | (82) | – | (61) |
| Losses\tand\tloss\texpenses | – | 4,724 | 2,627 | – | 7,351 |
| Future\tpolicy\tbenefits | – | 43 | 125 | – | 168 |
| Policy\tacquisition\tcosts\tand\tadministrative\texpenses | 87 | 1,835 | 1,324 | (20) | 3,226 |
| Interest\texpense\t(income) | (10) | 165 | 12 | 8 | 175 |
| Other\t(income)\texpense | 10 | 14 | 57 | – | 81 |
| Income\ttax\texpense | 3 | 462 | 110 | – | 575 |
| Net\tincome | $2,578 | $885 | $1,736 | $(2,621) | $2,578 |

|  |  | ACE	INA | Other	ACE |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | ACE\tLimited | Holdings,\tInc. | Limited |  |  |
| For\tthe\tyear\tended\tDecember\t31,\t2006\n(in\tmillions\tof\tU.S.\tdollars) | (Parent\nGuarantor) | (Subsidiary\nIssuer) | Subsidiaries\tand\nEliminations^(1) | Consolidating\nAdjustments^(2) | ACE\tLimited\nConsolidated |
| Net\tpremiums\twritten | $– | $6,609 | $5,421 | $– | $12,030 |
| Net\tpremiums\tearned | – | 6,630 | 5,195 | – | 11,825 |
| Net\tinvestment\tincome | 6 | 805 | 790 | – | 1,601 |
| Equity\tin\tearnings\tof\tsubsidiaries | 2,412 | – | – | (2,412) | – |
| Net\trealized\tgains\t(losses) | 11 | (58) | (51) | – | (98) |
| Losses\tand\tloss\texpenses | – | 4,199 | 2,871 | – | 7,070 |
| Future\tpolicy\tbenefits | – | 14 | 109 | – | 123 |
| Policy\tacquisition\tcosts\tand\tadministrative\texpenses | 115 | 1,812 | 1,281 | (37) | 3,171 |
| Interest\texpense\t(income) | – | 156 | (1) | 21 | 176 |
| Other\t(income)\texpense | 2 | 14 | (51) | – | (35) |
| Income\ttax\texpense | 8 | 425 | 89 | – | 522 |
| Cumulative\teffect\tof\ta\tchange\tin\taccounting\tprinciple | 1 | 2 | 1 | – | 4 |
| Net\tincome | $2,305 | $759 | $1,637 | $(2,396) | $2,305 |

# Condensed	Consolidating	Statement	of	Cash	Flows

|  |  | ACE	INA | Other	ACE |  |
| :--- | :--- | :--- | :--- | :--- |
|  | ACE\tLimited | Holdings,\tInc. | Limited |  |
| For\tthe\tyear\tended\tDecember\t31,\t2008\n(in\tmillions\tof\tU.S.\tdollars) | (Parent\nGuarantor) | (Subsidiary\nIssuer) | Subsidiaries\tand\nEliminations\t^(1) | ACE\tLimited\nConsolidated |
| Net\tcash\tflows\tfrom\toperating\tactivities | $1,613 | $886 | $1,602 | $4,101 |
| Cash\tflows\tfrom\t(used\tfor)\tinvesting\tactivities |  |  |  |  |
| Purchases\tof\tfixed\tmaturities\tavailable\tfor\tsale | (94) | (15,535) | (27,877) | (43,506) |
| Purchases\tof\tfixed\tmaturities\theld\tto\tmaturity | – | (351) | (15) | (366) |
| Purchases\tof\tequity\tsecurities | – | (492) | (479) | (971) |
| Sales\tof\tfixed\tmaturities\tavailable\tfor\tsale | – | 14,117 | 25,310 | 39,427 |
| Sales\tof\tequity\tsecurities | – | 749 | 415 | 1,164 |
| Maturities\tand\tredemptions\tof\tfixed\tmaturities\tavailable\tfor\tsale | – | 1,355 | 1,425 | 2,780 |
| Maturities\tand\tredemptions\tof\tfixed\tmaturities\theld\tto\tmaturity | – | 332 | 113 | 445 |
| Net\tproceeds\tfrom\t(payments\tmade\ton)\tthe\tsettlement\tof\tinvestment |  |  |  |  |
| derivatives | 11 | – | 21 | 32 |
| Capitalization\tof\tsubsidiary | (215) | – | 215 | – |
| Advances\t(to)\tfrom\taffiliates | (475) | – | 475 | – |
| Acquisition\tof\tsubsidiary\t(net\tof\tcash\tacquired\tof\t$19) | – | (2,521) | – | (2,521) |
| Other | 13 | (150) | (471) | (608) |
| Net\tcash\tflows\tfrom\t(used\tfor)\tinvesting\tactivities | (760) | (2,496) | (868) | (4,124) |
| Cash\tflows\tfrom\t(used\tfor)\tfinancing\tactivities |  |  |  |  |
| Dividends\tpaid\ton\tCommon\tShares | (362) | – | – | (362) |
| Dividends\tpaid\ton\tPreferred\tShares | (24) | – | – | (24) |
| Net\trepayment\tof\tshort-term\tdebt | (51) | 196 | (234) | (89) |
| Net\tproceeds\tfrom\t(repayment\tof)\tissuance\tof\tlong-term\tdebt | – | 1,245 | – | 1,245 |
| Redemption\tof\tPreferred\tShares | (575) | – | – | (575) |
| Proceeds\tfrom\texercise\tof\toptions\tfor\tCommon\tShares | 97 | – | – | 97 |
| Proceeds\tfrom\tCommon\tShares\tissued\tunder\tESPP | 10 | – | – | 10 |
| Advances\t(to)\tfrom\taffiliates | – | 234 | (234) | – |
| Tax\tbenefit\ton\tshare-based\tcompensation\texpense | – | – | 12 | 12 |
| Net\tcash\tflows\tfrom\t(used\tfor)\tfinancing\tactivities | (905) | 1,675 | (456) | 314 |
| Effect\tof\tforeign\tcurrency\trate\tchanges\ton\tcash\tand\tcash\tequivalents | – | 67 | (1) | 66 |
| Net\t(decrease)\tincrease\tin\tcash | (52) | 132 | 277 | 357 |
| Cash\t–\tbeginning\tof\tyear | – | 310 | 200 | 510 |
| Cash\t–\tend\tof\tyear | $(52) | $442 | $477 | $867 |

|  |  | ACE	INA | Other	ACE |  |
| :--- | :--- | :--- | :--- | :--- |
|  | ACE\tLimited | Holdings,\tInc. | Limited |  |
| For\tthe\tyear\tended\tDecember\t31,\t2007\n(in\tmillions\tof\tU.S.\tdollars) | (Parent\nGuarantor) | (Subsidiary\nIssuer) | Subsidiaries\tand\nEliminations^(1) | ACE\tLimited\nConsolidated |
| Net\tcash\tflows\tfrom\toperating\tactivities | $241 | $1,612 | $2,848 | $4,701 |
| Cash\tflows\tfrom\t(used\tfor)\tinvesting\tactivities |  |  |  |  |
| Purchases\tof\tfixed\tmaturities\tavailable\tfor\tsale | – | (18,092) | (30,026) | (48,118) |
| Purchases\tof\tfixed\tmaturities\theld\tto\tmaturity | – | (319) | (5) | (324) |
| Purchases\tof\tequity\tsecurities | – | (603) | (326) | (929) |
| Sales\tof\tfixed\tmaturities\tavailable\tfor\tsale | 3 | 15,127 | 25,686 | 40,816 |
| Sales\tof\tequity\tsecurities | – | 456 | 407 | 863 |
| Maturities\tand\tredemptions\tof\tfixed\tmaturities\tavailable\tfor\tsale | – | 1,764 | 1,468 | 3,232 |
| Maturities\tand\tredemptions\tof\tfixed\tmaturities\theld\tto\tmaturity | – | 256 | 109 | 365 |
| Net\tproceeds\tfrom\t(payments\tmade\ton)\tthe\tsettlement\tof\tinvestment |  |  |  |  |
| derivatives | 14 | – | (30) | (16) |
| Advances\t(to)\tfrom\taffiliates | 496 | – | (496) | – |
| Other | (6) | (166) | (247) | (419) |
| Net\tcash\tflows\tfrom\t(used\tfor)\tinvesting\tactivities | 507 | (1,577) | (3,460) | (4,530) |
| Cash\tflows\tfrom\t(used\tfor)\tfinancing\tactivities |  |  |  |  |
| Dividends\tpaid\ton\tCommon\tShares | (341) | – | – | (341) |
| Dividends\tpaid\ton\tPreferred\tShares | (45) | – | – | (45) |
| Net\trepayment\tof\tshort-term\tdebt | (449) | – | (16) | (465) |
| Net\tproceeds\tfrom\tissuance\tof\tlong-term\tdebt | – | 500 | – | 500 |
| Proceeds\tfrom\texercise\tof\toptions\tfor\tCommon\tShares | 65 | – | – | 65 |
| Proceeds\tfrom\tCommon\tShares\tissued\tunder\tESPP | 9 | – | – | 9 |
| Advances\t(to)\tfrom\taffiliates | – | (483) | 483 | – |
| Tax\tbenefit\ton\tshare-based\tcompensation\texpense | – | 21 | 3 | 24 |
| Net\tcash\tflows\tfrom\t(used\tfor)\tfinancing\tactivities | (761) | 38 | 470 | (253) |
| Effect\tof\tforeign\tcurrency\trate\tchanges\ton\tcash\tand\tcash\tequivalents | – | 24 | 3 | 27 |
| Net\t(decrease)\tincrease\tin\tcash | (13) | 97 | (139) | (55) |
| Cash\t–\tbeginning\tof\tyear | 13 | 213 | 339 | 565 |
| Cash\t–\tend\tof\tyear | $– | $310 | $200 | $510 |

|  |  | ACE	INA | Other	ACE |  |
| :--- | :--- | :--- | :--- | :--- |
|  | ACE\tLimited | Holdings,\tInc. | Limited |  |
| For\tthe\tyear\tended\tDecember\t31,\t2006\n(in\tmillions\tof\tU.S.\tdollars) | (Parent\nGuarantor) | (Subsidiary\nIssuer) | Subsidiaries\tand\nEliminations^(1) | ACE\tLimited\nConsolidated |
| Net\tcash\tflows\tfrom\toperating\tactivities | $502 | $2,033 | $1,570 | $4,105 |
| Cash\tflows\tused\tfor\tinvesting\tactivities |  |  |  |  |
| Purchases\tof\tfixed\tmaturities\tavailable\tfor\tsale | – | (13,159) | (28,036) | (41,195) |
| Purchases\tof\tfixed\tmaturities\theld\tto\tmaturity | – | (474) | (59) | (533) |
| Purchases\tof\tequity\tsecurities | – | (508) | (333) | (841) |
| Sales\tof\tfixed\tmaturities\tavailable\tfor\tsale | 12 | 9,279 | 24,648 | 33,939 |
| Sales\tof\tequity\tsecurities | – | 427 | 500 | 927 |
| Maturities\tand\tredemptions\tof\tfixed\tmaturities\tavailable\tfor\tsale | – | 1,836 | 1,573 | 3,409 |
| Maturities\tand\tredemptions\tof\tfixed\tmaturities\theld\tto\tmaturity | – | 445 | 98 | 543 |
| Net\tproceeds\tfrom\t(payments\tmade\ton)\tthe\tsettlement\tof\tinvestment |  |  |  |  |
| derivatives | 11 | – | (51) | (40) |
| Capitalization\tof\tsubsidiaries | (15) | – | 15 | – |
| Advances\t(to)\tfrom\taffiliates | (237) | – | 237 | – |
| Sale\tof\tsubsidiary\t(net\tof\tcash\tsold\tof\t$2) | – | (2) | – | (2) |
| Other | 2 | (134) | 155 | 23 |
| Net\tcash\tflows\tused\tfor\tinvesting\tactivities | (227) | (2,290) | (1,253) | (3,770) |
| Cash\tflows\tfrom\t(used\tfor)\tfinancing\tactivities |  |  |  |  |
| Dividends\tpaid\ton\tCommon\tShares | (312) | – | – | (312) |
| Dividends\tpaid\ton\tPreferred\tShares | (45) | – | – | (45) |
| Repayment\tof\tshort-term\tdebt | – | (300) | – | (300) |
| Net\tproceeds\tfrom\tissuance\tof\tlong-term\tdebt | – | 298 | – | 298 |
| Proceeds\tfrom\texercise\tof\toptions\tfor\tCommon\tShares | 67 | – | – | 67 |
| Proceeds\tfrom\tCommon\tShares\tissued\tunder\tESPP | 8 | – | – | 8 |
| Advances\t(to)\tfrom\taffiliates | – | 194 | (194) | – |
| Net\tcash\tflows\tfrom\t(used\tfor)\tfinancing\tactivities | (282) | 192 | (194) | (284) |
| Effect\tof\tforeign\tcurrency\trate\tchanges\ton\tcash\tand\tcash\tequivalents | – | 2 | – | 2 |
| Net\tincrease\t(decrease)\tin\tcash | (7) | (63) | 123 | 53 |
| Cash\t–\tbeginning\tof\tyear | 20 | 276 | 216 | 512 |
| Cash\t–\tend\tof\tyear | $13 | $213 | $339 | $565 |

# 22.	Condensed	unaudited	quarterly	financial	data

|  | Quarter	Ended | Quarter	Ended | Quarter	Ended | Quarter	Ended |
| :--- | :--- | :--- | :--- | :--- |
|  | March\t31, | June\t30, | September\t30, | December\t31, |
| (in\tmillions\tof\tU.S.\tdollars,\texcept\tper\tshare\tdata) | 2008 | 2008 | 2008 | 2008 |
| Net\tpremiums\tearned | $2,940 | $3,428 | $3,609 | $3,226 |
| Net\tinvestment\tincome | 489 | 532 | 520 | 521 |
| Net\trealized\tgains\t(losses) | (353) | (126) | (510) | (644) |
| Total\trevenues | $3,076 | $3,834 | $3,619 | $3,103 |
| Losses\tand\tloss\texpenses | $1,579 | $1,895 | $2,369 | $1,760 |
| Future\tpolicy\tbenefits | $63 | $89 | $91 | $156 |
| Net\tincome | $377 | $746 | $54 | $20 |
| Basic\tearnings\tper\tshare | $1.12 | $2.23 | $0.16 | $0.06 |
| Diluted\tearnings\tper\tshare | $1.10 | $2.20 | $0.16 | $0.06 |

|  | Quarter	Ended | Quarter	Ended | Quarter	Ended | Quarter	Ended |
| :--- | :--- | :--- | :--- | :--- |
|  | March\t31, | June\t30, | September\t30, | December\t31, |
| (in\tmillions\tof\tU.S.\tdollars,\texcept\tper\tshare\tdata) | 2007 | 2007 | 2007 | 2007 |
| Net\tpremiums\tearned | $3,082 | $3,008 | $3,150 | $3,057 |
| Net\tinvestment\tincome | 451 | 471 | 492 | 504 |
| Net\trealized\tgains\t(losses) | 16 | (11) | – | (66) |
| Total\trevenues | $3,549 | $3,468 | $3,642 | $3,495 |
| Losses\tand\tloss\texpenses | $1,860 | $1,793 | $1,910 | $1,788 |
| Future\tpolicy\tbenefits | $36 | $33 | $39 | $60 |
| Net\tincome | $701 | $649 | $656 | $572 |
| Basic\tearnings\tper\tshare | $2.13 | $1.96 | $1.98 | $1.72 |
| Diluted\tearnings\tper\tshare | $2.10 | $1.93 | $1.95 | $1.69 |

# SCHEDULE	I

# SUMMARY	OF	INVESTMENTS	–	OTHER	THAN	INVESTMENTS	IN	RELATED	PARTIES

| December	31,	2008<br>(in	millions	of	U.S.	dollars) | Cost	or<br>Amortized	Cost | Fair	Value | the<br>balance	sheet |
| :--- | :--- | :--- | :--- |
| Fixed\tmaturities\tavailable\tfor\tsale: |  |  |  |
| Bonds: |  |  |  |
| U.S.\tTreasury\tand\tagency | $1,991 | $2,122 | $2,122 |
| Foreign | 8,625 | 8,374 | 8,374 |
| Corporate\tsecurities | 10,093 | 9,061 | 9,061 |
| Mortgage-backed\tsecurities | 10,958 | \t 10,160 | 10,160 |
| States,\tmunicipalities,\tand\tpolitical\tsubdivisions | 1,442 | 1,438 | 1,438 |
| Total\tfixed\tmaturities | 33,109 | \t 31,155 | 31,155 |
| Fixed\tmaturities\theld\tto\tmaturity: |  |  |  |
| Bonds: |  |  |  |
| U.S.\tTreasury\tand\tagency | 862 | 923 | 862 |
| Foreign | 38 | 38 | 38 |
| Corporate\tsecurities | 405 | 392 | 405 |
| Mortgage-backed\tsecurities | 877 | 826 | 877 |
| States,\tmunicipalities,\tand\tpolitical\tsubdivisions | 678 | 686 | 678 |
| Total\tfixed\tmaturities | 2,860 | 2,865 | 2,860 |
| Equity\tsecurities: |  |  |  |
| Common\tstock: |  |  |  |
| Public\tutilities | 28 | 26 | 26 |
| Banks,\ttrust,\tand\tinsurance\tcompanies | 132 | 96 | 96 |
| Industrial,\tmiscellaneous,\tand\tall\tother | 972 | 866 | 866 |
| Total\tequity\tsecurities | 1,132 | 988 | 988 |
| Short-term\tinvestments | 3,350 | 3,350 | 3,350 |
| Other\tinvestments | 1,368 | 1,362 | 1,362 |
|  | 4,718 | 4,712 | 4,712 |
| Total\tinvestments\t–\tother\tthan\tinvestments\tin\trelated\tparties | $41,819 | $39,720 | $39,715 |

# SCHEDULE	II

# CONDENSED	FINANCIAL	INFORMATION	OF	REGISTRANT

# BALANCE	SHEETS	(Parent	Company	Only)

| (in	millions	of	U.S.	dollars) | 2008 | 2007 |
| :--- | :--- | :--- |
| Assets |  |  |
| Investments\tin\tsubsidiaries\tand\taffiliates\ton\tequity\tbasis | $13,697 | $16,669 |
| Short-term\tinvestments | 97 | 3 |
| Other\tinvestments,\tat\tcost | 46 | 59 |
| Total\tinvestments | \t 13,840 | \t 16,731 |
| Cash | (52) | – |
| Due\tfrom\tsubsidiaries\tand\taffiliates,\tnet | 784 | 174 |
| Other\tassets | 12 | 14 |
| Total\tassets | $14,584 | $16,919 |
| Liabilities |  |  |
| Accounts\tpayable,\taccrued\texpenses,\tand\tother\tliabilities | $47 | $102 |
| Dividends\tpayable | 91 | 89 |
| Short-term\tdebt | – | 51 |
| Total\tliabilities | 138 | 242 |
| Shareholders'\tequity |  |  |
| Preferred\tShares | – | 2 |
| Common\tShares | \t 10,827 | 14 |
| Common\tShares\tin\ttreasury | (3) | – |
| Additional\tpaid-in\tcapital | 5,464 | 6,812 |
| Retained\tearnings | 74 | 9,080 |
| Deferred\tcompensation\tobligation | 3 | 3 |
| Accumulated\tother\tcomprehensive\tincome | (1,916) | 769 |
| Common\tShares\tissued\tto\temployee\ttrust | (3) | (3) |
| Total\tshareholders'\tequity | \t 14,446 | \t 16,677 |
| Total\tliabilities\tand\tshareholders'\tequity | $14,584 | $16,919 |

# SCHEDULE	II	(continued)

# STATEMENTS	OF	OPERATIONS	(Parent	Company	Only)

| (in	millions	of	U.S.	dollars) | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Revenues |  |  |  |
| Investment\tincome,\tincluding\tintercompany |  |  |  |
| interest\tincome\t(expense) | $14 | $22 | $27 |
| Equity\tin\tnet\tincome\tof\tsubsidiaries\tand\taffiliates | \t 1,150 | \t 2,633 | \t 2,412 |
| Net\trealized\tgains\t(losses) | 90 | 21 | 11 |
|  | \t 1,254 | \t 2,676 | \t 2,450 |
| Expenses |  |  |  |
| Administrative\tand\tother\texpenses | 65 | 100 | 124 |
| Interest\texpense\t(income) | (8) | (2) | 21 |
|  | 57 | 98 | 145 |
| Net\tincome | $1,197 | $2,578 | $2,305 |

# STATEMENTS	OF	CASH	FLOWS	(Parent	Company	Only)

| (in	millions	of	U.S.	dollars) | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- |
| Cash\tflows\tfrom\toperating\tactivities |  |  |  |
| Net\tincome | $1,197 | $2,578 | $2,305 |
| Adjustments\tto\treconcile\tnet\tincome\tto\tnet\tcash\tflows\tfrom\toperating\tactivities: |  |  |  |
| Equity\tin\tnet\tincome\tof\tsubsidiaries\tand\taffiliates | (1,150) | (2,633) | (2,412) |
| Dividends\treceived\tfrom\tsubsidiaries | 1,662 | 168 | 616 |
| Net\trealized\t(gains)\tlosses | (90) | (21) | (11) |
| Amounts\tdue\tto\tsubsidiaries\tand\taffiliates,\tnet | 40 | 90 | (8) |
| Accounts\tpayable,\taccrued\texpenses,\tand\tother\tliabilities | (61) | 4 | (18) |
| Accrued\tinterest\ton\tadvances\tfrom\taffiliate | (7) | 7 | (4) |
| Other | 22 | 48 | 34 |
| Net\tcash\tflows\tfrom\toperating\tactivities | 1,613 | 241 | 502 |
| Cash\tflows\tfrom\t(used\tfor)\tinvesting\tactivities |  |  |  |
| Purchases\tof\tfixed\tmaturities\tavailable\tfor\tsale | (94) | – | – |
| Sales\tof\tfixed\tmaturities\tavailable\tfor\tsale |  | 3 | 12 |
| Net\tproceeds\tfrom\tthe\tsettlement\tof\tinvestment\tderivatives | 11 | 14 | 11 |
| Capitalization\tof\tsubsidiaries | (215) | – | (15) |
| Advances\t(to)\tfrom\taffiliates | (475) | 496 | (237) |
| Other | 13 | (6) | 2 |
| Net\tcash\tflows\tfrom\t(used\tfor)\tinvesting\tactivities | (760) | 507 | (227) |
| Cash\tflows\t(used\tfor)\tfrom\tfinancing\tactivities |  |  |  |
| Dividends\tpaid\ton\tCommon\tShares | (362) | (341) | (312) |
| Dividends\tpaid\ton\tPreferred\tShares | (24) | (45) | (45) |
| Net\trepayment\tof\tshort-term\tdebt | (51) | (449) | – |
| Redemption\tof\tPreferred\tShares | (575) | – | – |
| Proceeds\tfrom\texercise\tof\toptions\tfor\tCommon\tShares | 97 | 65 | 67 |
| Proceeds\tfrom\tCommon\tShares\tissued\tunder\tESPP | 10 | 9 | 8 |
| Net\tcash\tflows\t(used\tfor)\tfrom\tfinancing\tactivities | (905) | (761) | (282) |
| Net\t(decrease)\tincrease\tin\tcash | (52) | (13) | (7) |
| Cash\t–\tbeginning\tof\tyear | – | 13 | 20 |
| Cash\t–\tend\tof\tyear | $(52) | $– | $13 |

# SCHEDULE	IV	(continued)

# SUPPLEMENTAL	INFORMATION	CONCERNING	REINSURANCE

# Premiums	Earned

|  |  | Ceded	To | Assumed |  | Amount |
| :--- | :--- | :--- | :--- | :--- | :--- |
| For\tthe\tyears\tended\tDecember\t31,\t2008,\t2007,\tand\t2006 | Direct | Other | From\tOther |  | Assumed\tto |
| (in\tmillions\tof\tU.S.\tdollars) | Amount | Companies | Companies | Net\tAmount | Net |
| 2008 | $16,087 | $6,144 | $3,260 | $13,203 | 25% |
| 2007 | $14,673 | $5,834 | $3,458 | $12,297 | 28% |
| 2006 | $13,562 | $5,198 | $3,461 | $11,825 | 29% |

# SCHEDULE	VI

# SUPPLEMENTARY	INFORMATION	CONCERNING	PROPERTY	AND	CASUALTY	OPERATIONS

|  |  | Net	Reserves |  |  |  | Net	Losses	and	Loss | Net	Losses	and	Loss | Amortization |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Deferred | for\tUnpaid |  |  |  |  | Expenses | of\tDeferred | Net\tPaid |  |
|  | Policy | Losses |  | Net | Net | Incurred\tRelated\tto | Incurred\tRelated\tto | Policy | Losses | Net |
|  | Acquisition\nCosts | and\tLoss\nExpenses | Unearned\nPremiums | Premiums\nEarned | Investment\nIncome | Current\nYear | Prior\nYear | Acquisition\nCosts | and\tLoss\nExpenses | Premiums\nWritten |
| 2008 | \t $1,192 | \t\t $24,241 | \t\t $5,924 | \t\t $12,742 | \t\t $1,966 | \t\t $8,417 | \t\t $(814) | \t\t $2,087 | \t\t $6,327 | \t\t $12,594 |
| 2007 | \t $1,109 | \t\t $23,592 | \t\t $6,215 | \t\t $11,929 | \t\t $1,863 | \t\t $7,568 | \t\t $(217) | \t\t $1,726 | \t\t $5,934 | \t\t $11,598 |
| 2006 | \t $1,074 | \t\t $22,008 | \t\t $6,434 | \t\t $11,551 | \t\t $1,559 | \t\t $7,082 | \t\t $(12) | \t\t $1,689 | \t\t $5,459 | \t\t $11,756 |



Question: what is the growth rate in the net income of bermuda subsidiaries from 2007 to 2008?
Calculation: bermuda_subsidiaries_2008 = 684
bermuda_subsidiaries_2007 = 1535
bermuda_subsidiaries_2006 = 1527
change = bermuda_subsidiaries_2008 - bermuda_subsidiaries_2007
percent_change = change / bermuda_subsidiaries_2007
answer = percent_change * 100
Answer: -55.4%