ACE LTD – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations

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  Net premiums written, which reflect the premiums we retain after purchasing reinsurance protection increased in 2011, compared with 2010. Our North American wholesale and specialty division benefited from the acquisition of Rain and Hail in December 2010, reporting significant premium growth in ACE Agriculture. Our North American retail division reported less net premiums written due to lower production across several lines of business reflecting competitive market conditions and adherence to our underwriting strategies as well as less assumed loss portfolio business. Our International retail business reported growth, partially offset by reinstatement premiums expensed in connection with first quarter catastrophe activity. Our Global Reinsurance operations reported a decline in net premiums written in 2011, compared with 2010, primarily due to competitive market conditions and lower exposures. The Life segment reported an increase in net premiums written due primarily to the acquisition of New York Life's Korea operations and Hong Kong operations.    Net premiums earned reflect the portion of net premiums written that were recorded as revenues for the period as the exposure periods expire. Net premiums earned increased in 2011, compared with 2010, primarily due to increases in net premiums earned in ACE Agriculture, A&H and international retail businesses, partially offset by less assumed loss portfolio transfers and lower production within our Global Reinsurance segment and London wholesale businesses.    

The following table provides a consolidated breakdown of net premiums earned by line of business for the periods indicated:

                                                                                                              % Change (in millions of U.S. dollars,                                                                    2011 vs.            2010 vs. except for percentages)                     2011               2010               2009               2010                2009 Property and all other                $    5,712         $    3,898         $    4,023                47%                  (3 )% Casualty                                   5,340              5,752              5,587               (7)%                   3 % Subtotal                                  11,052              9,650              9,610                15%                   0 % Personal accident (A&H)                    3,594              3,331              3,198                 8%                   4 % Life                                         741                523                432                42%                  21 % Net premiums earned                   $   15,387         $   13,504         $   13,240                 14 %                 2 %                                            2011                  2010                  2009                                  % of total            % of total            % of total

     Property and all other             37%                   29%          

        30%      Casualty                           35%                   43%                   42%      Subtotal                           72%                   72%                   72%

     Personal accident (A&H)            23%                   25%          

        25%      Life                                5%                    3%                    3%      Net premiums earned                100 %                 100 %                 100 %     Net investment income increased in 2011, compared with 2010, primarily due to positive operating cash flows and the impact of acquisitions which have resulted in a higher overall average invested asset base, partially offset by lower yields on new investments and short-term securities. Refer to "Net Investment Income" and "Investments".    In evaluating our segments excluding Life, we use the combined ratio, the loss and loss expense ratio, the policy acquisition cost ratio, and the administrative expense ratio. We calculate these ratios by dividing the respective expense amounts by net premiums earned. We do not calculate these ratios for the Life segment as we do not use these measures to monitor or manage that segment. The combined ratio is determined by adding the loss and loss expense ratio, the policy acquisition cost ratio, and the administrative expense ratio. A combined ratio under 100 percent indicates underwriting income and a combined ratio exceeding 100 percent indicates underwriting loss.    The following table shows our consolidated loss and loss expense ratio, policy acquisition cost ratio, administrative expense ratio, and combined ratio for the periods indicated:                                                  2011            2010            2009            Loss and loss expense ratio       65.7%           59.2%           58.8%            Policy acquisition cost ratio     16.0%           17.4%           16.2%            Administrative expense ratio      12.9%           13.6%           13.3%            Combined ratio                    94.6%           90.2%           88.3%                                                                                   61 

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

                                                                2011             2010             2009 Loss and loss expense ratio, as reported                   65.7%            59.2%            58.8% 

Catastrophe losses and related reinstatement premiums (6.4)% (3.2)%

           (1.2)% Prior period development                                    4.1%             4.6%             4.9% Large assumed loss portfolio transfers                      0.0%           (0.3)%           (0.8)% Loss and loss expense ratio, adjusted                      63.4%            60.3%            61.7%    

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

Catastrophe Loss Charges - Full Year 2011

                                                Insurance -            Insurance -                                                    North               Overseas                 Global (in millions of U.S. dollars)                   American                General            Reinsurance           Total Net loss Q2 US storms                               $         128          $          21          $          31          $  180 Japan Earthquake                                      35                     64                     55             154 New Zealand Earthquakes                                1                     65                     70             136 Thailand Floods                                       27                     91                      -             118 Hurricane Irene                                       76                     17                     11             104 Q1 Australian Storms                                   3                     47                     10              60 Cyclone Yasi                                           -                      8                     17              25 Other events throughout the year                      77                     16                     14             107 Global Cat Recovery                                    -                      -                    (25 )           (25 ) Total                                      $         347          $         329          $         183          $  859 Reinstatement premiums (earned) expensed               5                     42                     (7 )            40 Total before income tax                    $         352          $         371          $         176          $  899 Income tax benefit                                   (86 )                  (43 )                   (3 )          (132 ) Total after income tax                     $         266          $         328          $         173          $  767     We experienced total net pre-tax catastrophe losses of $859 million, before reinstatement premiums expensed, in 2011, compared with net pre-tax catastrophe losses of $366 million, before reinstatement premiums expensed, in 2010. The catastrophe losses incurred in 2011, were primarily related to earthquakes in Japan and New Zealand, the flooding in Thailand, storms in Australia and other severe weather related events in the U.S. including Hurricane Irene. Reinsurance recoverables are due from highly rated reinsurers.    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 $556 million of net favorable prior period development in 2011. This compares with net favorable prior period development of $503 million in 2010. Refer to "Prior Period Development" for additional information.    Our policy acquisition costs include commissions, premium taxes, underwriting, and other costs that vary with, and are primarily related to, the production of premium. Administrative expenses include all other operating costs. Our policy acquisition cost ratio decreased in 2011, compared with 2010. Insurance - North American reported a decline in its policy acquisition cost ratio primarily reflecting a shift in the mix of business towards lower acquisition cost lines of business, primarily Agriculture. This favorable impact on the policy acquisition cost ratio was offset by changes in business mix and the impact of reinstatement premiums expensed, mainly within the Insurance - Overseas General segment.   

Our administrative expense ratio decreased in 2011, compared with 2010, primarily due to the growth of low expense ratio business generated by Agriculture partially offset by the impact of reinstatement premiums expensed and less assumed loss portfolio business. Assumed loss portfolio transfers typically generate minimal expenses.

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  Our effective income tax rate, which we calculate as income tax expense divided by income before income tax, is dependent upon the mix of earnings from different jurisdictions with various tax rates. A change in the geographic mix of earnings would change the effective income tax rate. Our effective income tax rate was 24 percent in 2011, compared with 15 percent and 17 percent in 2010 and 2009, respectively. The increase in our effective income tax rate in 2011 was primarily due to a higher percentage of net realized losses being generated in lower tax-paying jurisdictions. The 2010 year included a decrease in the amount of unrecognized tax benefits resulting from a settlement with the Internal Revenue Service regarding federal tax returns for the years 2002-2004, and the recognition of a non-taxable gain related to the acquisition of Rain and Hail. The 2009 year included a reduction of a deferred tax valuation allowance related to investments.    Prior Period Development  The favorable prior period development of $556 million during 2011 was the net result of several underlying favorable and adverse movements. In the sections following the tables below, significant prior period movements within each reporting segment are discussed in more detail. Long-tail lines include lines such as workers' compensation, general liability, and professional liability; while short-tail lines include lines such as most property lines, energy, personal accident, aviation, and marine (including associated liability-related exposures).   

The following table summarizes (favorable) and adverse prior period development by segment for the periods indicated:

    Year Ended December 31                                                                                    % of net (in millions of U.S. dollars, except for                                                                    unpaid percentages)                                   Long-tail           Short-tail           Total            reserves* 

2011

Insurance - North American - active $ (186 ) $ (111 ) $ (297 )

                1.9 % Insurance - North American - runoff**                102                    -             102                  0.6 % Insurance - Overseas General                        (154 )               (136 )          (290 )                4.2 % Global Reinsurance                                   (58 )                (13 )           (71 )                3.1 % Total                                        $      (296 )        $      (260 )        $ (556 )                2.2 % 2010

Insurance - North American - active $ (102 ) $ (137 ) $ (239 )

                1.5 % Insurance - North American - runoff**                132                    -             132                  0.8 % Insurance - Overseas General                        (159 )               (131 )          (290 )                4.3 % Global Reinsurance                                   (72 )                (34 )          (106 )                4.7 % Total                                        $      (201 )        $      (302 )        $ (503 )                2.0 % 2009

Insurance - North American - active $ (162 ) $ (105 ) $ (267 )

                1.7 % Insurance - North American - runoff**                 88                    -              88                  0.5 % Insurance - Overseas General                        (140 )               (115 )          (255 )                4.2 % Global Reinsurance                                   (93 )                (49 )          (142 )                5.6 % Total                                        $      (307 )        $      (269 )        $ (576 )                2.4 %    

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

** Brandywine Holdings and Westchester Specialty operations in respect of 1996 and prior years, and Commercial Insurance Services (CIS) workers' compensation.

    Insurance - North American  Insurance - North American's active operations experienced net favorable prior period development of $297 million in 2011 which was the net result of several underlying favorable and adverse movements driven by the following principal changes:   

•Net favorable development of $186 million on long-tail business, including:

    •Favorable development of $82 million on our D&O portfolios affecting the 2006 and prior accident years. The favorable movement was due to lower than expected case incurred activity, including reductions in individual large claims, and greater weight given to experienced based projection methods;    •Favorable development of $54 million in our excess casualty businesses affecting the 2005 and prior accident years. Incurred losses have continued to be favorable relative to our projections; in addition, as these accident years have matured, more weight has been given to experience-based methods which has also resulted in a refinement of our estimate;                                                                                  63 

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  •Favorable development of $43 million in our medical risk operations, primarily impacting the 2006 and prior accident years. This portfolio, composed largely of excess hospital professional liability insurance, experienced continued low levels of reported and paid loss activity leading to reduced estimates of ultimate loss versus our prior review;    •Favorable development of $28 million on our national accounts portfolios which consist of commercial auto liability, general liability, and workers' compensation lines of business. The favorable development is the net impact of favorable and unfavorable movements, including:    •Favorable development of $40 million on the 2010 accident year primarily relating to our annual assessment of multi-claimant events including industrial accidents. Consistent with prior years, we reviewed these potential exposures after the close of the accident year to allow for late reporting or identification of significant losses;    •Favorable development of $33 million on the 2003 through 2007 accident years, primarily in workers' compensation. Case activity in these portfolios, especially in our excess and high deductible products, has continued to be lower than expected. As these accident years matured, greater weight has been given to experience-based methods. The combination of this lower than expected activity and shift in weighting methodology has resulted in this favorable development; and   

•Adverse development of $45 million on the 2002 and prior accident years, primarily in workers' compensation. This adverse activity is due in part to data refinements and analysis relating to these accident periods.

    • Favorable development of $26 million on the 2002 though 2010 accident years in our financial solutions business unit relating to a single account. This development is due to more refined claimant level information provided by the insured in 2011. Analysis of this data led to reduction in our estimates of future losses as well as a recovery of past overpayments;    • Favorable development of $26 million in our foreign casualty product affecting the 2007 and prior accident years. The paid and reported loss activity on the general liability and employers liability lines for this product were lower than expectations based on our prior review, resulting in reductions in ultimate losses for these coverage lines;    • Favorable development of $21 million on surety business, primarily impacting the 2009 accident year. Case emergence and development for this accident year continues to be more favorable than anticipated in our prior review, as well as in our original pricing for the policies written covering this period. We had assumed higher claims frequency due to recession, however this did not materialize in our portfolio;    • Adverse development of $40 million on errors and omissions coverage primarily affecting the 2007 and 2008 accident years. This development was due to increases on specific claims where new facts, including adverse legal verdicts, emerged since our last review;    • Adverse development of $29 million in our environmental liability product line concentrated in the 2005 through 2007 accident years. There was adverse movement on specific large remediation cost cap policies observed in the 2011 calendar year, which prompted an increase in our estimate of ultimate loss and loss expenses under these insurance programs; and    • Remaining adverse development of $25 million relates to other lines across a number of accident years, none of which was significant individually or in the aggregate.   

• Net favorable development of $111 million on short-tail business, including:

    • Favorable development of $48 million in our property portfolios primarily affecting the 2009 and 2010 accident years as our assessment of ultimate losses, including catastrophe losses, developed favorably during calendar year 2011; and    

• Favorable development of $63 million on other lines across a number of accident years, primarily following better than expected loss emergence, none of which was significant individually or in the aggregate.

    Insurance - North American's runoff operations incurred net adverse prior period development of $102 million in our Westchester and Brandywine run-off operations during 2011, which was the net result of favorable and adverse movements impacting accident years 2000 and prior, driven by the following principal changes:    •Adverse development of $82 million related to the completion of the reserve review during 2011. The development primarily arose from case specific asbestos and environmental claims related to increased loss and defense cost payment activity. Further, we experienced increased paid loss and case reserve activity on our assumed reinsurance portfolio;    

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•Adverse development of $17 million on unallocated loss adjustment expenses due to run-off operating expenses paid during 2011; and

•The remaining $3 million of adverse development arose on other run-off lines, none of which was significant individually or in the aggregate.

    Insurance - North American's active operations experienced net favorable prior period development of $239 million in 2010, resulting from several underlying favorable and adverse movements, driven by the following principal changes:    

•Net favorable development of $102 million on long-tail business, including:

    •Favorable development of $105 million in our D&O and E&O portfolios following detailed claim and actuarial reviews of case activity in 2010. This development was the net of favorable movements primarily in the 2006 and prior accident years, partially offset by adverse movements in the 2007-2009 years;    •Favorable development of $54 million on our national accounts portfolio. The favorable development was a function of two primary factors. First, this development related to our annual assessment in 2010 of multi-claimant events including industrial accidents. Consistent with prior years, we reviewed these potential exposures for accident year 2009, after the close of the accident year to allow for late reporting or identification of significant losses. Second, there was better than expected loss emergence reported in 2010 on the 2005 and 2006 accident years and greater weighting assigned to experienced-based methods;    

•Favorable development of $49 million within our financial solutions business driven by the favorable impact of a settlement in 2010 on a major contract, primarily in the 2000 and prior accident years;

•Adverse development of $91 million in our excess casualty businesses principally arising in the 2007 accident year following case specific developments on several open claims;

    •Adverse development of $30 million in our small and middle market guaranteed cost workers' compensation portfolios that was driven by an increasing trend in claims frequency and allocated claims expenses on accident years 2008 and subsequent; and    •Favorable development of $15 million on other lines across a number of accident years, primarily following better than expected loss emergence, none of which was significant individually or in the aggregate.    

•Net favorable development of $137 million on short-tail business, including:

•Favorable development of $96 million in property, aviation, inland and recreational marine, political risk, and other short-tailed exposures principally in accident years 2007-2009 following lower than expected loss emergence; and

    •Favorable development of $41 million in our crop/hail business associated with recording the most recent bordereaux for the 2009 and prior crop years. The $41 million reflects the net of improvement in the loss estimate ($86 million) and a corresponding increase in profit share commission expense ($45 million).    Insurance - North American's runoff operations experienced net adverse prior period development of $132 million in 2010, which was the net result of several underlying favorable and adverse movements impacting accident years 2000 and prior, driven by the following principal changes:    •Adverse development of $114 million in our Westchester and Brandywine runoff operations. This development includes $89 million related to the completion of the reserve review during 2010 and is comprised primarily of adverse development for asbestos claims related to increased loss and defense cost payment activity on a limited number of accounts and adverse development for assumed reinsurance due to increased paid loss and case reserve activity in recent years, partially offset by increased distributions received from insolvent reinsurers and commutations. This also includes additional adverse development of $19 million for unallocated loss adjustment expenses due to runoff operating expenses paid during the current year; and    

•Adverse development of $18 million on runoff CIS workers' compensation following emergence of higher than expected medical costs.

Insurance - North American active operations experienced net favorable prior period development of $267 million in 2009, representing 1.7 percent of the segment's beginning of period net unpaid loss and loss expense reserves.

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  Insurance - North American runoff operations incurred net adverse prior period development of $88 million in 2009, representing 0.5 percent of the segment's beginning of period net unpaid loss and loss expense reserves.    

Insurance - Overseas General

Insurance - Overseas General experienced net favorable prior period development of $290 million in 2011, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:

• Net favorable development of $154 million on long-tail business, including:

    • Favorable development of $337 million in casualty (primary and excess) and financial lines for accident years 2007 and prior. We have recognized the impact of favorable loss emergence since the prior study and assigned increased weight to experience-based methods; and    • Adverse development of $183 million in casualty (primary and excess) and financial lines for accident years 2008-2010 in response to claims emergence in 2011. First, the impact of notified large claims and a high level review of potential ultimate exposure from large claims across these lines led to a $140 million increase across these accident years. Second, the completion of a claims review related to the exposure from financial fraud and subprime claims led to another increase of $20 million. Finally, reserves were strengthened by $20 million in response to increasing frequency and severity trends within European primary casualty.    • Net favorable development of $136 million on short-tail business, including property, marine, A&H, and energy lines across multiple geographical regions, and within both retail and wholesale operations, principally as a result of lower than expected loss emergence, principally on accident years 2008-2009.    

Insurance - Overseas General experienced net favorable prior period development of $290 million in 2010, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:

• Net favorable development of $159 million on long-tail business, including:

    • Favorable development of $241 million in casualty (primary and excess) and financial lines for accident years 2006 and prior that recognized both favorable loss emergence and a greater weight to experience-based methods as years mature; and    •Adverse development of $82 million in casualty (primary and excess) and financial lines for accident years 2007-2009 principally arising from a claims review of financial crisis-related claims (adverse $57 million impact) and emergence of adverse frequency and severity trends within certain portfolios (adverse $24 million impact).    •Net favorable development of $131 million on short-tail business, including property, marine, A&H, and energy lines across multiple geographical regions, and within both retail and wholesale operations, principally as a result of lower than expected loss emergence, principally on accident years 2007-2009.    Insurance - Overseas General incurred net favorable prior period development of $255 million in 2009, representing 4.2 percent of the segment's beginning of period net unpaid loss and loss expense reserves.    

Global Reinsurance

  Global Reinsurance experienced net favorable prior period development of $71 million in 2011, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:    •Net favorable development of $58 million on long-tail business, including net favorable prior period development of $79 million principally in treaty years 2007 and prior across a number of portfolios (professional liability, D&O, casualty, and medical malpractice). The lower loss estimates arose from a combination of favorable paid and incurred loss trends and increased weighting to experience-based methods; and    •Net favorable development of $13 million on short-tail business, including net favorable prior period development of $34 million principally in treaty years 2009 and prior across property lines, including property catastrophe, trade credit and surety principally as a result of lower than anticipated loss emergence.    Global Reinsurance experienced net favorable prior period development of $106 million in 2010, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:      66 

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  •Net favorable development of $72 million on long-tail business, including net favorable prior period development of $96 million principally in treaty years 2003-2006 across a number of portfolios (professional liability, D&O, casualty, and medical malpractice). The lower loss estimates arose from a combination of favorable incurred loss trends and increased weighting to experience-based methods.    •Net favorable development of $34 million on short-tail business, primarily in treaty years 2003-2008 across property lines, including property catastrophe, trade credit and surety principally as a result of lower than anticipated loss emergence.    Global Reinsurance experienced net favorable prior period development of $142 million in 2009, representing 5.6 percent of the segment's beginning of period net unpaid loss and loss expense reserves.  

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Segment Operating Results - Years Ended December 31, 2011, 2010, and 2009

The discussions that follow include tables that show our segment operating results for the years ended December 31, 2011, 2010, and 2009.

We operate through the following business segments: Insurance - North American, Insurance - Overseas General, Global Reinsurance, and Life. For additional information on each of our segments refer to "Segment Information" under Item 1.

    Insurance - North American  The Insurance - North American segment comprises our operations in the U.S., Canada, and Bermuda. This segment includes our retail divisions ACE USA (including ACE Canada), ACE Commercial Risk Services, and ACE Private Risk Services; our wholesale and specialty divisions ACE Westchester, ACE Agriculture and ACE Bermuda; and various run-off operations, including Brandywine Holdings Corporation (Brandywine).                                                                                                        % Change (in millions of U.S. dollars, except                                                        2011 vs.           2010 vs. for percentages)                            2011            2010             2009               2010               2009 Net premiums written                     $ 6,851         $ 5,797          $ 5,641                18%                 3% Net premiums earned                        6,911           5,651            5,684                22%               (1)% Losses and loss expenses                   5,276           3,918            4,013                35%               (2)% Policy acquisition costs                     613             625              517               (2)%                21% Administrative expenses                      592             561              572                 6%               (2)% Underwriting income                          430             547              582              (21)%               (6)% Net investment income                      1,170           1,138            1,094                 3%                 4% Net realized gains (losses)                   34             417               10              (92)%                 NM Interest expense                              15               9                1                67%                 NM Other (income) expense                         5             (22 )             36                 NM                 NM Income tax expense                           394             436              384              (10)%                14% Net income                               $ 1,220         $ 1,679          $ 1,265              (27)%                33% Loss and loss expense ratio                76.3%           69.3%            70.6% Policy acquisition cost ratio               8.9%           11.1%            

9.1%

 Administrative expense ratio                8.6%            9.9%            10.1% Combined ratio                             93.8%           90.3%            89.8%     Insurance - North American reported an increase in net premiums written in 2011, compared with 2010. Our wholesale and specialty division reported significantly higher premiums in 2011, compared with 2010, specifically in Agriculture due to the acquisition of Rain and Hail in December 2010. This increase was partially offset by lower wholesale casualty production due to competitive market conditions and our adherence to underwriting standards. Our retail division also reported less net premiums written in 2011, compared with 2010, due to lower production in many of our retail property and casualty lines reflecting competitive market conditions and our adherence to underwriting standards. In addition, our retail division wrote less assumed loss portfolio transfer business in 2011, compared with 2010. These decreases were partially offset by growth in targeted classes, including A&H and certain property and professional lines. Also, our personal lines business reported higher written premiums in 2011, compared with 2010, reflecting growth in homeowners and automobile business, as well as other                                                                                  67 

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  specialty offerings. Insurance - North American reported an increase in net premiums written in 2010, compared with 2009. For 2010, compared with 2009, the retail division reported growth in A&H, worker's compensation, commercial risk and new program business as well as increased premium retention in professional risk lines and favorable foreign exchange impact on Canadian business. The retail division also benefited from one-time premium-related adjustments totaling $80 million in the fourth quarter of 2010. Our personal lines business reported growth in homeowners and auto insurance as well as specialty offerings in 2010. These increases were partially offset by less new business and renewed policies across several lines of business, reflecting a decline in value of exposures, competitive market conditions, and our adherence to underwriting discipline. These factors were especially evident in our national accounts, as well as aerospace and energy lines of business. Growth in the retail division was also offset by a decline in assumed loss portfolio business. Net premiums written in our wholesale division increased in 2010, compared with 2009, primarily due to higher premium retention and increases in professional lines business. These increases were partially offset by lower crop production primarily reflecting the impact of crop settlements. In 2010, we received the results from the previous crop reinsurance year which required us to make adjustments to previously estimated premiums, losses and loss expenses, and profit share commission.    Insurance - North American reported an increase in net premiums earned in 2011, compared with 2010. This increase was primarily attributable to higher wholesale and specialty premiums in ACE Agriculture due to the acquisition of Rain and Hail in December 2010. Our retail businesses generated lower net earned premiums mainly in the property and casualty risk lines of business reflecting lower writings in these lines due to adherence to underwriting standards and less premiums associated with assumed loss portfolio transfer business in 2011, compared with 2010. These decreases were partially offset by growth in certain lines of business within our professional risk, A&H and program operations. Net premiums earned for the personal lines business increased in 2011, compared with 2010, due to continued expansion of the ACE Private Risk Services product offerings. Insurance-North American reported a decline in net premiums earned in 2010, compared with 2009. This decline was attributable to less assumed loss portfolio transfer business, lower risk management business in the retail division, lower professional and casualty business and less favorable crop settlements in ACE Agriculture. These decreases were partially offset by increases in worker's compensation, professional risk, A&H, and personal lines business, favorable foreign exchange impact, a one-time premium-related adjustment totaling $80 million and new program business.    

The following two tables provide a line of business breakdown of Insurance - North American's net premiums earned for the periods indicated:

                                                                                                       % Change (in millions of U.S. dollars, except                                                       2011 vs.           2010 vs. for percentages)                            2011            2010            2009               2010               2009 Property and all other                   $ 1,232         $ 1,180         $ 1,137                 4%                 4% Agriculture                                1,942             398             553                 NM              (28)% Casualty                                   3,380           3,777           3,734              (11)%                 1% Personal accident (A&H)                      357             296             260                21%                14% Net premiums earned                      $ 6,911         $ 5,651         $ 5,684                22%               (1)%                                          2011                2010                2009                                % of Total          % of Total          % of Total     Property and all other            18%                 21%                 20%     Agriculture                       28%                  7%                 10%     Casualty                          49%                 67%                 66%     Personal accident (A&H)            5%                  5%                  4%     Net premiums earned              100%                100%                100%       68 

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

                                                                2011             2010             2009 Loss and loss expense ratio, as reported                   76.3%            69.3%            70.6% 

Catastrophe losses and related reinstatement premiums (5.1)% (2.6)%

           (1.0)% Prior period development                                    2.9%             2.7%             3.1% Large assumed loss portfolio transfers                      0.0%           (0.5)%           (1.2)% Loss and loss expense ratio, adjusted                      74.1%            68.9%            71.5%     Insurance - North American's net catastrophe losses, excluding reinstatement premiums, were $347 million in 2011, compared with $143 million in 2010 and $58 million in 2009. Catastrophe losses in 2011 were related to severe weather-related events in the U.S., including Hurricane Irene and flooding, as well as exposure from the Japan earthquake and the flooding in Thailand. Catastrophe losses in 2010 were primarily related to severe weather-related events in the U.S. and earthquakes in Haiti and Chile. Catastrophe losses in 2009 were related to several weather-related events in the U.S. and an earthquake in Asia. Insurance - North American experienced net favorable prior period development of $195 million in 2011 compared with net favorable prior period development of $107 million and $179 million in 2010 and 2009, respectively. Refer to "Prior Period Development" for more information. The adjusted loss and loss expense ratio increased in 2011, compared with 2010, primarily due to the increase in Agriculture, partially offset by lower assumed loss portfolio business, both of which are written at a higher loss ratio than our other types of business. The adjusted loss and loss expense ratio decreased in 2010, compared with 2009, primarily due to the impact of lower crop settlements in Agriculture, non-recurring premium adjustments in 2010 and the reduction in assumed loss portfolio business.    Insurance - North American's policy acquisition cost ratio decreased in 2011, compared with 2010, primarily reflecting a shift in mix of business towards lower acquisition cost lines of business, primarily Agriculture. Partially offsetting the growth in the low expense ratio business was targeted growth in several higher acquisition ratio lines of business, including personal and professional lines, as well as commercial risk program business. The policy acquisition cost ratio increased in 2010, compared with 2009, due to a shift in the mix of business towards higher commission specialty casualty business, professional and personal lines, and a decline in assumed loss portfolio business which generates minimal expense.    Insurance - North American's administrative expense ratio decreased in 2011, compared with 2010, primarily due to the growth of low expense ratio business generated by Agriculture. This decrease was partially offset by lower net results generated by our third party claims administration business, ESIS, of $25 million in 2011, compared with net results of $85 million in 2010, when ESIS was engaged in the administration role for claims generated by the Deepwater Horizon oil leak catastrophe. The administrative expense ratio decreased in 2010, compared with 2009, primarily due to higher net results generated by ESIS. ESIS net results were $26 million in 2009.                                                                                  69 

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Insurance - Overseas General

  The Insurance - Overseas General segment comprises ACE International, our retail business serving territories outside the U.S., Bermuda, and Canada; the international A&H and life business of Combined Insurance; and the wholesale insurance business of ACE Global Markets, our London-based excess and surplus lines business that includes Lloyd's Syndicate 2488. The reinsurance operation of ACE Global Markets is included in the Global Reinsurance segment.                                                                                                           % Change (in millions of U.S. dollars, except for                                                       2011 vs.           2010 vs. percentages)                                  2011            2010             2009                2010               2009 Net premiums written                       $ 5,756         $ 5,280          $ 5,145                  9%                 3% Net premiums earned                          5,737           5,240            5,147                  9%                 2% Losses and loss expenses                     3,073           2,647            2,597                 16%                 2% Policy benefits                                  -               4                4                  NM                 0% Policy acquisition costs                     1,393           1,251            1,202                 11%                 4% Administrative expenses                        945             840              783                 13%                 7% Underwriting income                            326             498              561               (35)%              (11)% Net investment income                          548             475              479                 15%               (1)% Net realized gains (losses)                     33             123              (20 )             (73)%                 NM Interest expense                                 5               1                -                  NM                 NM Other (income) expense                           -             (13 )             20                  NM                 NM Income tax expense                             169             173              186                (2)%               (7)% Net income                                 $   733         $   935          $   814               (22)%                15% Loss and loss expense ratio                  53.6%           50.6%            50.5% Policy acquisition cost ratio                24.2%           23.9%          

23.3%

 Administrative expense ratio                 16.5%           16.0%            15.2% Combined ratio                               94.3%           90.5%            89.0%     Insurance - Overseas General conducts business internationally and in most major foreign currencies. The following table summarizes by major product line the approximate effect of changes in foreign currency exchange rates on the growth of net premiums written and earned for the periods indicated:                                                                  2011                           2010             2009                                               P&C             A&H          Total            Total            Total Net premiums written: Growth in original currency                  4.1%            5.2%           4.5%             0.2%             2.9% Foreign exchange effect                      3.7%            5.7%           4.5%             2.4%           (6.4)% Growth as reported in U.S. dollars           7.8%           10.9%           9.0%             2.6%           (3.5)% Net premiums earned: Growth in original currency                  3.9%            5.1%           4.3%           (0.4)%             3.2% Foreign exchange effect                      4.5%            6.1%           5.2%             2.2%           (6.8)% Growth as reported in U.S. dollars           8.4%           11.2%           9.5%             1.8%           (3.6)%     Insurance - Overseas General's net premiums written increased in 2011, compared with 2010, primarily due to growth in our international retail operations and the acquisition of Jerneh Insurance Berhad in December 2010, and favorable foreign exchange, partially offset by reinstatement premiums of approximately $42 million expensed in connection with the first quarter 2011 catastrophe activity. Our international retail businesses reported growth in all regions but primarily in Asia Pacific and Latin America. In addition, A&H and personal lines business experienced growth due to an increase in retention as well new business in all regions. Our London wholesale business unit reported declines of 3 percent, mainly due to results in Financial Lines, where business is lapsing due to inadequate pricing. Insurance - Overseas General's net premiums written increased in 2010, compared with 2009, primarily due to growth in our international retail operations and favorable foreign exchange impact,    

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  partially offset by reinstatement premiums of approximately $33 million expensed in connection with the first quarter 2010 catastrophe activity. Our growth was mainly driven by new business in Asia Pacific and Latin America. In 2010, compared with 2009, our London wholesale business unit reported lower production in most product lines due to declinations of business where we did not believe rates were acceptable relative to risk.    Insurance - Overseas General's net premiums earned increased in 2011, compared with 2010, primarily due to the growth in the international retail operations and favorable foreign exchange impact, partially offset by lower wholesale writings and the reinstatement premiums expensed in connection with first quarter 2011 catastrophe activity. On a constant dollar basis, net premiums earned increased due to growth in P&C and A&H production in our international retail operations. Our London wholesale operations reported a decline in net premiums earned due to lower production over the last year. Insurance - Overseas General's net premiums earned increased in 2010, compared with 2009, primarily due to the growth in our P&C and A&H production and favorable foreign exchange impact, partially offset by lower wholesale writings and reinstatement premiums expensed in connection with first quarter 2010 catastrophe activity.    

The following two tables provide a line of business and regional breakdown of Insurance - Overseas General's net premiums earned for the periods indicated:

                                                                                                       % Change (in millions of U.S. dollars, except                                                       2011 vs.           2010 vs. for percentages)                            2011            2010            2009               2010               2009 Line of Business Property and all other                   $ 2,080         $ 1,800         $ 1,787                16%                 1% Casualty                                   1,415           1,424           1,420               (1)%                 0% Personal accident (A&H)                    2,242           2,016           1,940                11%                 4% Net premiums earned                      $ 5,737         $ 5,240         $ 5,147                 9%                 2%  Region Europe                                   $ 2,317         $ 2,284         $ 2,348                 1%               (3)% Asia Pacific                               1,115             847             754                32%                12% Far East                                     519             465             451                12%                 3% Latin America                              1,071             905             772                18%                17%                                            5,022           4,501           4,325                12%                 4% ACE Global Markets                           715             739             822               (3)%              (10)% Net premiums earned                      $ 5,737         $ 5,240         $ 5,147                 9%                 2%                                             2011           2010           2009                                         % of           % of           % of                                        Total          Total          Total             Line of Business             Property and all other       36%            34%            34%             Casualty                     25%            27%            28%             Personal accident (A&H)      39%            39%            38%             Net premiums earned         100%           100%           100%              Region             Europe                       40%            44%            45%             Asia Pacific                 20%            16%            15%             Far East                      9%             9%             9%             Latin America                19%            17%            15%                                          88%            86%            84%             ACE Global Markets           12%            14%            16%             Net premiums earned         100%           100%           100%                                                                                   71 

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

                                                                2011             2010             2009 Loss and loss expense ratio, as reported                   53.6%            50.6%            50.5% 

Catastrophe losses and related reinstatement premiums (6.1)% (2.8)%

           (1.0)% Prior period development                                    5.0%             5.5%             5.0% Loss and loss expense ratio, adjusted                      52.5%            53.3%            54.5%     Net catastrophe losses, excluding reinstatement premiums, were $329 million in 2011, compared with $132 million in 2010 and $51 million in 2009, respectively. Catastrophe losses in 2011 included flooding in Thailand, earthquakes in New Zealand and Japan and storms in the U.S. and Australia. Catastrophe losses in 2010 were primarily related to earthquakes in Chile and Mexico, and storms in Australia and Europe. Catastrophe losses in 2009 were primarily related to floods and windstorms in Europe. Insurance - Overseas General experienced net favorable prior period development of $290 million, $290 million and $255 million in 2011, 2010 and 2009, respectively. Refer to "Prior Period Development" for more information.    Insurance - Overseas General's policy acquisition cost ratio increased in 2011, compared with 2010, as well as in 2010, compared with 2009, primarily due to the impact of catastrophe-related reinstatement premiums expensed and changes in mix of business.    Insurance - Overseas General's administrative expense ratio increased in 2011, compared with 2010, primarily due to the impact of reinstatement premiums expensed, and reduced wholesale net earned premiums. Insurance - Overseas General's administrative expense ratio increased in 2010, compared with 2009, primarily due to the inclusion of Combined Insurance for the full year and the impact of reinstatement premiums.    

Global Reinsurance

  The Global Reinsurance segment represents our reinsurance operations comprising ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re International, and ACE Tempest Re Canada. Global Reinsurance markets its reinsurance products worldwide under the ACE Tempest Re brand name and provides a broad range of coverage to a diverse array of primary P&C companies.                                                                                                           % Change (in millions of U.S. dollars, except                                                           2011 vs.           2010 vs. for percentages)                             2011             2010             2009                2010               2009 Net premiums written                      $   979          $ 1,075          $ 1,038                (9)%                 4% Net premiums earned                         1,003            1,071              979                (6)%                 9% Losses and loss expenses                      621              518              330                 20%                57% Policy acquisition costs                      185              204              195                (9)%                 5% Administrative expenses                        52               55               55                (5)%                 0% Underwriting income                           145              294              399               (51)%              (26)% Net investment income                         287              288              278                (0)%                 4% Net realized gains (losses)                   (50 )             93              (17 )                NM                 NM Interest expense                                2                -                -                  NM                 NM Other (income) expense                         (1 )            (23 )              2                 96%                 NM Income tax expense                             30               42               46               (29)%               (9)% Net income                                $   351          $   656          $   612               (46)%                 7% Loss and loss expense ratio                 62.0%            48.4%            33.7% Policy acquisition cost ratio               18.4%            19.0%          

19.9%

 Administrative expense ratio                 5.2%             5.1%             5.6% Combined ratio                              85.6%            72.5%            59.2%       72 

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  Global Reinsurance reported a decrease in net premiums written in 2011, compared with 2010, primarily due to competitive market conditions and lower exposures, partially offset by reductions in retrocessions. Net premiums written increased in 2010, compared with 2009, primarily due to a significant new workers' compensation treaty recorded during 2010 in our U.S. operation, partially offset by generally competitive conditions across most of Global Reinsurance's product lines and regions of operations.    Global Reinsurance's net premiums earned decreased in 2011, compared with 2010, primarily due to 2011 decreases in production and exposures. Global Reinsurance's net premiums earned increased in 2010, compared with 2009 due to the new workers' compensation business and higher casualty reinsurance production in our U.S. operations.    

The following tables provide a line of business breakdown of Global Reinsurance's net premiums earned for the periods indicated:

                                                                                                         % Change (in millions of U.S. dollars, except for                                                   2011 vs.             2010 vs. percentages)                                   2011            2010          2009              2010                 2009 Property and all other                      $   177         $   239         $ 262               (26 )%                (9 )% Casualty                                        545             551           433                (1 )%                27 % Property catastrophe                            281             281           284                 0 %                 (1 )% Net premiums earned                         $ 1,003         $ 1,071         $ 979                (6 )%                 9 %                                        2011                  2010                  2009                              % of Total            % of Total            % of Total   Property and all other             18 %                  22 %                  27 %   Casualty                           54 %                  51 %                  44 %   Property catastrophe               28 %                  27 %                  29 %   Net premiums earned               100 %                 100 %                 100 %    

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

                                                         2011               2010               2009 Loss and loss expense ratio, as reported             62.0 %             48.4 %             33.7 % Catastrophe losses and related reinstatement premiums                                           (18.0) %            (8.4) %            (2.8) % Prior period development                              7.7 %             10.0 %             14.5 % Loss and loss expense ratio, adjusted                51.7 %             50.0 %             45.4 %     Global Reinsurance recorded net catastrophe losses, excluding reinstatement premiums, of $183 million in 2011, compared with net catastrophe losses of $91 million and $28 million in 2010 and 2009, respectively. Catastrophe losses in 2011 were primarily related to earthquakes in Japan and New Zealand. Catastrophe losses in 2010 were primarily related to storms in Australia and earthquakes in Chile and New Zealand. Catastrophe losses in 2009 were primarily related to various Canadian storms and Hurricane Klaus. Global Reinsurance experienced net favorable prior period development of $71 million (which is net of $13 million of unfavorable premium adjustments to loss sensitive treaties), $106 million and $142 million in 2011, 2010, and 2009, respectively. Refer to "Prior Period Development" for additional information.    Global Reinsurance's adjusted loss and loss expense ratio increased in 2011, compared with 2010, due to a full year of earnings on a workers' compensation treaty and a medical malpractice loss portfolio transfer (LPT), both with high loss ratios. The adjusted loss and loss expense ratio increased in 2010, compared with 2009 due to six months of earnings on the new workers' compensation treaty with a high loss ratio, reserve increases in U.S. property and U.S. auto lines of business and an increase in casualty business written in 2010.    Global Reinsurance's policy acquisition costs ratio decreased in 2011, compared with 2010, as a result of lower commission in our U.S. operations, primarily due to additional earned premium from the workers' compensation treaty and the new medical malpractice LPT business, both of which did not generate acquisition costs, as well as the favorable impact of the change                                                                                  73 

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  in the mix of business earned. These lower commissions were partially offset by reductions in catastrophe retrocession profit commissions. Global Reinsurance's policy acquisition cost ratio decreased in 2010, compared with 2009, as a result of lower commission in our U.S. operations, primarily due to the new workers' compensation treaty business which did not generate acquisition costs.    The administrative expense ratio was flat in 2011, compared with 2010, as lower administrative expenses were offset by a decrease in net premiums earned. The administrative expenses were flat in 2010, compared with 2009, but the ratio decreased due to the increase in net premiums earned.    

Life

  The Life segment includes our international life operations (ACE Life), ACE Tempest Life Re (ACE Life Re), and the North American supplemental A&H and life business of Combined Insurance. We assess the performance of our life business based on life underwriting income which includes net investment income and gains (losses) from separate account assets that do not qualify for separate account reporting under GAAP.                                                                                                       % Change (in millions of U.S. dollars, except                                                       2011 vs.           2010 vs. for percentages)                            2011            2010            2009               2010               2009 Net premiums written                     $ 1,786         $ 1,556         $ 1,475                15%                 5% Net premiums earned                        1,736           1,542           1,430                13%                 8% Losses and loss expenses                     549             496             482                11%                 3% Policy benefits                              401             353             321                14%                10% Losses from separate account assets           36               -               -                 NM                 NM Policy acquisition costs                     255             257             216               (1)%                19% Administrative expenses                      295             228             243                29%               (6)% Net investment income                        224             172             176                30%               (2)% Life underwriting income                     424             380             344                12%                10% Net realized gains (losses)                (806)           (192)            (15)                 NM                 NM Interest expense                              11               3               -                 NM                 NM Other (income) expense                        18              20               2              (10)%                 NM Income tax expense                            50              62              48              (19)%                29% Net income                               $ (461)         $   103         $   279                 NM              (63)%    

The following table provides a line of business breakdown of life net premiums written for the periods indicated:

                                                                                                           % Change (in millions of U.S. dollars, except for                                                      2011 vs.             2010 vs. percentages)                                   2011            2010            2009               2010                 2009 Life reinsurance                            $   344         $   358         $   366                 (4 )%                (2 )% Life insurance                                  446             184              97                 NM                   90 % A&H                                             996           1,014           1,012                 (2 )%                 0 % Life net premiums written                   $ 1,786         $ 1,556         $ 1,475                 15 %                  5 %     Life reinsurance net premiums written decreased in 2011, compared with 2010, because there is no new life reinsurance business currently being written. Life insurance net premiums written increased in 2011, compared with 2010, primarily due to the acquisition of New York Life's Korea operations and Hong Kong operations. A&H net premiums written decreased in 2011, compared with 2010, due to the effects of the economy resulting in lower new business.    Net realized gains (losses), which are excluded from life underwriting income, relate primarily to the change in the net fair value of reported GLB reinsurance liabilities and changes in the fair value of derivatives used to partially offset the risk in the variable annuity guarantee portfolio. During 2011, realized losses were associated with an increased value of GLB liabilities due to falling interest rates, falling international equity markets and the annual collection of premium. During 2010, realized losses were primarily associated with an increasing net fair value of reported GLB liabilities resulting substantially from the    74 

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  impact of lower interest rates. The 2010 realized loss was also impacted by a reduction in the value of hedge instruments and increasing GLB liabilities due to the annual collection of premium, offset by decreasing GLB liabilities due to rising equity markets and model enhancements. During 2009, realized losses were due to the combination of a reduction in the value of hedge instruments as well as modeling changes, which more than offset a decrease in the net fair value of reported GLB reinsurance liabilities and the gain from foreign exchange.    

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Net Investment Income                                                                Years Ended December 31           (in millions of U.S. dollars)      2011             2010          

2009

           Fixed maturities                $ 2,196          $ 2,071          

$ 1,985

          Short-term investments               43               34               38           Equity securities                    36               26               54           Other                                62               44               48           Gross investment income           2,337            2,175         

2,125

           Investment expenses                 (95 )           (105 )        

(94 )

           Net investment income           $ 2,242          $ 2,070          $ 2,031     Net investment income is influenced by a number of factors including the amounts and timing of inward and outward cash flows, the level of interest rates, and changes in overall asset allocation. Net investment income increased eight percent in 2011 compared with 2010 resulting from a higher overall average invested asset base from acquisitions and higher private equity fund distributions, partially offset by lower yields on new investments. Net investment income increased two percent in 2010 compared with 2009 resulting from positive operating cash flows and a higher average invested asset base, partially offset by lower yields on new investments and short-term securities.    

The investment portfolio's average market yield on fixed maturities was 3.1 percent, 3.6 percent, and 4.3 percent at December 2011, 2010, and 2009, respectively. Average market yield on fixed maturities represents the weighted average yield to maturity of our fixed income portfolio based on the market prices of the holdings at that date.

    The yield on short-term investments reflects the global nature of our insurance operations (1.5 percent - 2.0 percent yield). For example, yields on short-term investments in Malaysia, China, and Ecuador range from 3.1 percent to 4.7 percent.    The yield on our equity securities portfolio is high relative to the yield on the S&P 500 Index because we classify our strategic emerging debt portfolio, which is a mutual fund, as equity (4.5 percent - 7.3 percent yield). The strategic emerging debt portfolio represents approximately 60 percent of our equity securities portfolio.    

The following table shows the return on average invested assets:

                                                                               Years Ended December 31 (in millions of U.S. dollars, except for percentages)       2011             2010             2009 Average invested assets                                 $ 52,093         $ 48,044         $ 43,767 Net investment income                                   $  2,242         $  2,070         $  2,031 Return on average invested assets                           4.3%             4.3%             4.6%   

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Net Realized and Unrealized Gains (Losses)

  We take a long-term view with our investment strategy, and our investment managers manage our investment portfolio to maximize total return within certain specific guidelines designed to minimize risk. The majority of our investment portfolio is available for sale and reported at fair value. Our held to maturity investment portfolio is reported at amortized cost.    The effect of market movements on our available for sale investment portfolio impacts net income (through net realized gains (losses)) when securities are sold or when we record an Other-than-temporary impairment (OTTI) charge in net income. For a discussion related to how we assess OTTI for all of our investments, including credit-related OTTI, and the related impact on net income, refer to Note 3 d) to the Consolidated Financial Statements. Additionally, net income is impacted through the reporting of changes in the fair value of derivatives, including financial futures, options, swaps, and GLB reinsurance. Changes                                                                                  75 

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  in unrealized appreciation and depreciation on available for sale securities, which result from the revaluation of securities held, are reported as a separate component of accumulated other comprehensive income in shareholders' equity.    The following tables present our pre-tax net realized and unrealized gains (losses), as well a breakdown of our OTTI and other net realized gains (losses) on investments:                                                                           Year Ended December 31, 2011                                 Year Ended December 31, 2010                                                        Net                     Net                                   Net                    Net                                                   Realized              Unrealized                              Realized             Unrealized                                                      Gains                   Gains              Net                Gains                  Gains              Net (in millions of U.S. dollars)                     (Losses)                (Losses)           Impact             (Losses)               (Losses)           Impact Fixed maturities                                 $     164            $        480          $   644          $       380           $        973          $ 1,353 Fixed income derivatives                              (143 )                     -             (143 )                 58                      -               58 Total fixed maturities                                  21                     480              501                  438                    973            1,411 Public equity                                            9                     (47 )            (38 )                 84                    (44 )             40 Other                                                  (25 )                    15              (10 )                161                    (92 )             69 Subtotal                                                 5                     448              453                  683                    837            1,520 Derivatives Fair value adjustment on insurance derivatives        (779 )                     -             (779 )                (28 )                    -              (28 ) S&P put option and futures                              (4 )                     -               (4 )               (150 )                    -             (150 ) Fair value adjustment on other derivatives              (4 )                     -               (4 )                (19 )                    -              (19 ) Subtotal derivatives                                  (787 )                     -             (787 )               (197 )                    -             (197 ) Foreign exchange gains (losses)                        (13 )                     -              (13 )                (54 )                    -              (54 ) Total gains (losses)                             $    (795 )          $        448          $  (347 )        $       432           $        837          $ 1,269                                                                       Year Ended December 31, 2011                                Year Ended December 31, 2010                                                                   Other Net                Net                                 Other Net               Net                                                                    Realized           Realized                                  Realized          Realized                                                                       Gains              Gains                                     Gains             Gains (in millions of U.S. dollars)                 OTTI                 (Losses)           (Losses)             OTTI                 (Losses)          (Losses) Fixed maturities                           $   (46 )            $       210          $     164          $   (46 )            $       426         $     380 Public equity                                   (1 )                     10                  9                -                       84                84 Other                                           (3 )                    (22 )              (25 )            (13 )                    174               161 Total                                      $   (50 )            $       198          $     148          $   (59 )            $       684         $     625     Our net realized gains (losses) for the year ended December 31, 2011, included write-downs of $50 million as a result of an other-than-temporary decline in fair value of certain securities. This compares with write-downs of $59 million and $397 million in 2010 and 2009, respectively. Included in Other net realized gains (losses) in 2010 was a realized gain of $175 million related to the acquisition of Rain and Hail. Refer to Note 2 to the Consolidated Financial Statements for additional information.    At December 31, 2011, our investment portfolios held by U.S. legal entities include approximately $120 million of gross unrealized losses on fixed income investments. Our tax planning strategy related to these losses is based on our view that we will hold these fixed income investments until they recover their cost. As such, we have recognized a deferred tax asset of approximately $42 million related to these fixed income investments. This strategy allows us to recognize the associated deferred tax asset related to these fixed income investments as we do not believe these losses will ever be realized.    We engage in a securities lending program which involves lending investments to other institutions for short periods of time. ACE invests the collateral received in securities of high credit quality and liquidity, with the objective of maintaining a stable principal balance. Certain investments purchased with the securities lending collateral declined in value resulting in an unrealized loss of $10 million at December 31, 2011. The unrealized loss is attributable to fluctuations in market values of the underlying performing debt instruments held by the respective mutual funds, rather than default of a debt issuer. It is our view that the decline in value is temporary.    

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Table of Contents -------------------------------------------------------------------------------- Other Income and Expense Items

                                                                                 Years Ended December 31 (in millions of U.S. dollars)                                 2011             2010             2009 Losses from separate account assets                        $    36            $   -            $   - 

Equity in net (income) loss of partially-owned entities (40 )

     (81 )             39 Federal excise and capital taxes                                20               19               16 Amortization of intangible assets                               29                9               11 Noncontrolling interest expense                                  2               14                3 Other(1)                                                        26               23               16 Other (income) expense                                     $    73            $ (16 )          $  85    

(1) Included in Other are acquisition-related costs of $5 million and $14 million in 2011 and 2010, respectively. Acquisition-related costs were immaterial in 2009.

    Other (income) expense includes losses from separate account assets that do not qualify for separate account reporting under GAAP (failed separate accounts). The offsetting movement in the separate account liabilities is included in Policy benefits. Equity in net (income) loss of partially-owned entities includes our share of net (income) loss related to investment funds, limited partnerships, partially-owned investment companies, and partially-owned insurance companies. Certain federal excise and capital taxes incurred as a result of capital management initiatives are included in Other (income) expense in the consolidated statements of operations. As these are considered capital transactions, they are excluded from underwriting results.  

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Investments

  Our investment portfolio is invested primarily in publicly traded, investment grade fixed income securities with an average credit quality of A/Aa as rated by the independent investment rating services Standard and Poor's (S&P)/ Moody's Investors Service (Moody's). This average credit quality rating reflects the recent downgrade by S&P of the credit rating of securities issued by the U.S. government. The portfolio is externally managed by independent, professional investment managers and is broadly diversified across geographies, sectors, and issuers. Our Other investments principally comprise direct investments, investment funds, and limited partnerships. We hold no collateralized debt obligations or collateralized loan obligations in our investment portfolio and we provide no credit default protection. We have long-standing global credit limits for our entire portfolio across the organization. Exposures are aggregated, monitored, and actively managed by our Global Credit Committee, comprised of senior executives, including our Chief Financial Officer, our Chief Risk Officer, our Chief Investment Officer, and our Treasurer. We also have well-established, strict contractual investment rules requiring managers to maintain highly diversified exposures to individual issuers and closely monitor investment manager compliance with portfolio guidelines.    As part of our fixed income diversification strategy and because we intend to hold them to maturity, we transferred securities with a fair value of $6.8 billion in 2010 from Fixed maturities available for sale to Fixed maturities held to maturity. There were no transfers in 2011.    The average duration of our fixed income securities, including the effect of options and swaps was 3.7 years at both December 31, 2011 and 2010. We estimate that a 100 basis point (bps) increase in interest rates would reduce our book value by approximately $1.9 billion at December 31, 2011.    The following table shows the fair value and cost/amortized cost of our invested assets:                                                                December 31, 2011                        December 31, 2010                                                                         Cost/                                    Cost/                                                                     Amortized                                Amortized (in millions of U.S. dollars)                  Fair Value                Cost           Fair Value                Cost 

Fixed maturities available for sale $ 41,967$ 40,450$ 37,539$ 36,542 Fixed maturities held to maturity

                   8,605               8,447                9,461               9,501 Short-term investments                              2,301               2,301                1,983               1,983                                                    52,873              51,198               48,983              48,026 Equity securities                                     647                 671                  692                 666 Other investments                                   2,314               2,112                1,692               1,511 Total investments                            $     55,834         $    53,981         $     51,367         $    50,203                                                                                   77 

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The fair value of our total investments increased $4.5 billion during 2011, primarily due to the investing of operating cash flows, unrealized appreciation, and the acquisition of New York Life's Hong Kong operations and Korea operations.

The following tables show the market value of our fixed maturities and short-term investments at December 31, 2011 and 2010. The first table lists investments according to type and the second according to S&P credit rating:

                                                               December 31, 2011                           December 31, 2010 (in millions of U.S. dollars, except                              Percentage                                  Percentage for percentages)                            Market Value            of Total            Market Value            of Total Treasury                                 $         2,361                  5%         $         2,075                  4% Agency                                             1,725                  3%                   2,015                  4% Corporate and asset-backed securities             17,030                 32%                  15,900                 33% Mortgage-backed securities                        13,237                 25%                  12,362                 25% Municipal                                          2,888                  6%                   2,449                  5% Non-U.S.                                          13,331                 25%                  12,199                 25% Short-term investments                             2,301                  4%                   1,983                  4% Total                                    $        52,873                100%         $        48,983                100% AAA                                      $         9,284                 18%         $        23,718                 48% AA                                                20,562                 39%                   4,714                 10% A                                                 10,106                 19%                   8,482                 17% BBB                                                6,152                 12%                   5,487                 11% BB                                                 3,755                  7%                   3,357                  7% B                                                  2,428                  4%                   2,393                  5% Other                                                586                  1%                     832                  2% Total                                    $        52,873                100%         $        48,983                100%     As part of our overall investment strategy, we may invest in states, municipalities, and other political subdivisions fixed maturity securities (Municipal). We apply the same investment selection process described previously to our Municipal investments. The portfolio is highly diversified primarily in state general obligation bonds and essential service revenue bonds including education, and utilities (water, power, and sewers). As of December 31, 2011, one state, including political subdivisions and other municipal issuers within the state, represented approximately 20 percent of our Municipal investments. A majority of the single state exposure represents special revenue bonds. Over 71 percent of our Municipal investments carry an S&P rating of AA- or better and none carry fair values that reflect a significantly different risk compared to those ratings. These Municipal investments are split 38 percent and 62 percent between general obligation and special revenue bonds, respectively.    Our exposure to the Euro results primarily from ACE European Group which is headquartered in London and offers a broad range of coverages throughout the European Union, Central, and Eastern Europe. ACE primarily invests in Euro denominated investments to support its local currency insurance obligations and required capital levels. ACE's local currency investment portfolios have strict contractual investment guidelines requiring managers to maintain a high quality and diversified portfolio to both sector and individual issuers. Investment portfolios are monitored daily to ensure investment manager compliance with portfolio guidelines.    Our non-U.S. investment grade fixed income portfolios are currency-matched with the insurance liabilities of our non-U.S. operations. We have 80 percent of our non-U.S. fixed income portfolio denominated in G7 currencies. The average credit quality of our non-U.S. fixed income securities is AA and 54 percent of our holdings are rated AAA or guaranteed by governments or quasi-government agencies. Within the context of these investment portfolios, our government and corporate bond holdings are highly diversified across industries and geographies. Issuer limits are based on credit rating (AA-two percent, A-one percent, BBB-0.5 percent of the total portfolio) and are monitored on a daily basis by ACE via an internal compliance system. Because of this investment approach we do not have a direct exposure to troubled sovereign borrowers in Europe. We manage our indirect exposure using the same credit rating based investment approach. Accordingly, we do not believe our indirect exposure is material.      78 

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  The table below summarizes the market value and amortized cost of our Non-U.S. fixed income portfolio by country/sovereign for Non-U.S. government securities at December 31, 2011:    (in millions of U.S. dollars)                            Market Value            Amortized Cost United Kingdom                                         $        1,161           $         1,113 Canada                                                            912                       877 Republic of Korea                                                 448                       426 Japan                                                             398                       397 Germany                                                           344                       333 Province of Ontario                                               227                       216 Federative Republic of Brazil                                     190                       185 France                                                            152                       151 Province of Quebec                                                151                       141 Swiss Confederation                                               141                       134 People's Republic of China                                        129                       126 Kingdom of Thailand                                               126                       121 Federation of Malaysia                                            125                       124 State of Queensland                                               114                       109 Commonwealth of Australia                                         107                        98 United Mexican States                                              91                        86 State of New South Wales                                           77                        73 Taiwan                                                             54                        52 State of Victoria                                                  54                        51 Socialist Republic of Vietnam                                      39                        39 State of Qatar                                                     38                        37 Province of Manitoba                                               36                        34 Republic of Austria                                                36                        35 Russian Federation                                                 36                        35 Dominion of New Zealand                                            36                        35 Other Non-U.S. Government(1)                                      509                       491 Non-U.S. Government Securities                                  5,731                     5,519 Eurozone Non-U.S. Corporate (excluding United Kingdom)(2)                                                     2,347                     2,339 Other Non-U.S. Corporate                                        5,253                     5,102 Total                                                  $       13,331           $        12,960    

(1) Includes investments in Spain and Italy of $0.4 million. There are no investments in Portugal, Ireland, or Greece. Our gross and net Eurozone Non-U.S. Government securities exposure is the same.

(2) Refer to the following table for further detail on Eurozone Non-U.S Corporate securities. Our gross and net Eurozone Non-U.S. Corporate securities exposure is the same.

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  The table below summarizes the market value and amortized cost of our Eurozone fixed income portfolio (excluding United Kingdom) by industry at December 31, 2011:                                                                           Market Value by Industry                                      Amortized Cost (in millions of U.S. dollars)               Bank           Financial       

   Industrial           Utility           Total Netherlands                                $ 202         $       129         $        239         $     130         $   700         $            684 France                                       126                  31                  113               142             412                      421 Germany                                      292                   9                   68                 7             376                      366 Luxembourg                                    27                  10                  214                88             339                      345 Euro Supranational                           197                   -                    -                 -             197                      193 Spain                                         52                   4                   55                 6             117                      120 Ireland                                       20                   -                   75                19             114                      113 Italy                                         26                   1                   12                 2              41                       46 Austria                                       20                   -                    4                 -              24                       24 Finland                                        7                   -                    3                 3              13                       13 Belgium                                        -                   -                   12                 1              13                       12 Portugal                                       -                   -                    1                 -               1                        2

Eurozone Non-U.S. Corporate Securities$ 969 $ 184

 $        796         $     398         $ 2,347         $          2,339     The table below summarizes the market value and amortized cost of the top 10 Eurozone bank exposures within our Eurozone fixed income portfolio (excluding United Kingdom) at December 31, 2011:            (in millions of U.S. dollars)     Market Value           Amortized Cost         KFW                              $         184         $            180         European Investment Bank                   178                      175         Rabobank Nederland NV                       99                       98         Deutsche Bank AG                            47                       46         Bank Nederlandse Gemeenten                  34                       34         Credit Agricole Groupe                      31                       31         BNP Paribas SA                              29                       30         Hypo Real Estate Holding AG                 25                       25         Nederlandse Waterschapsbank NV              24                       24         ABN AMRO Group NV                           24                       24    

The table below summarizes the market value and amortized cost of the top 10 Eurozone corporate exposures within our Eurozone fixed income portfolio (excluding United Kingdom) at December 31, 2011:

            (in millions of U.S. dollars)    Market Value           Amortized Cost          EDF SA                          $          76         $             80          ING Groep NV                               74                       77          Deutsche Telekom AG                        70                       64          Royal Dutch Shell PLC                      65                       60          Intelsat SA                                52                       51          Telefonica SA                              46                       46          Telecom Italia SpA                         43                       45          Gazprom OAO                                40                       39          Liberty Global Inc                         39                       37          ArcelorMittal                              36                       37     80 

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The table below summarizes our largest exposures to corporate bonds by market value at December 31, 2011:

                    (in millions of U.S. dollars)       Market Value                  General Electric Co                $         429                  JP Morgan Chase & Co                         428                  Citigroup Inc                                345                  The Goldman Sachs Group Inc                  315                  Bank of America Corp                         301                  Verizon Communications Inc                   289                  Morgan Stanley                               277                  AT&T INC                                     241                  Wells Fargo & Co                             200                  HSBC Holdings Plc                            194                  Lloyds Banking Group Plc                     172                  Comcast Corp                                 170                  Kraft Foods Inc                              165                  Royal Bank of Scotland Group Plc             156                  Time Warner Cable Inc                        140                  ConocoPhillips                               131                  BP Plc                                       121                  Credit Suisse Group                          121                  Pfizer Inc                                   118                  American Express Co                          117                  Dominion Resources Inc/VA                    115                  Philip Morris International Inc              111                  Anheuser-Busch InBev NV                      111                  Enterprise Products Partners LP              108                  UBS AG                                       107  

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Mortgage-backed securities

Additional details on the mortgage-backed component of our investment portfolio at December 31, 2011, are provided below:

                              Mortgage-backed securities                                    Market Value                                                                                 S&P Credit Rating                                                                                                          BB and (in millions of U.S. dollars)                   AAA               AA            A          BBB            below            Total Mortgage-backed securities Agency residential mortgage-backed (RMBS)   $     -         $ 11,118         $  -         $  -         $      -         $ 11,118 Non-agency RMBS                                 201               31           25           18              520              795 Commercial mortgage-backed                    1,286               22           10            6                -            1,324 Total mortgage-backed securities            $ 1,487         $ 11,171         $ 35         $ 24         $    520         $ 13,237                                                                                     81 

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  Table of Contents                             Mortgage-backed securities                                   Amortized Cost                                                                                S&P Credit Rating                                                                                                         BB and (in millions of U.S. dollars)                  AAA               AA            A          BBB            below            Total Mortgage-backed securities Agency RMBS                                $     -         $ 10,705         $  -         $  -         $      -         $ 10,705 Non-agency RMBS                                210               33           28           20              679              970 Commercial mortgage-backed                   1,219               19            9            6                -            1,253 Total mortgage-backed securities           $ 1,429         $ 10,757         $ 37         $ 26         $    679         $ 12,928     Our mortgage-backed securities are rated predominantly AA and comprise approximately 25 percent of our fixed income portfolio. This compares with a 34 percent mortgage-backed weighting in representative indices of the U.S. fixed income market at the end of 2011. The minimum rating for initial purchases of mortgage-backed securities is AA for agency mortgages and AAA for non-agency mortgages.    Agency RMBS represent securities which have been issued by Federal agencies (Government National Mortgage Association, Federal National Mortgage Association, and Federal Home Loan Mortgage Corporation) with implied or explicit government guarantees. These represent 93 percent of our total RMBS portfolio. Our non-agency RMBS are backed primarily by prime collateral and are broadly diversified in over 129,000 loans. This portfolio's loan-to-value ratio is approximately 68 percent with an average Fair Isaac Corporation (FICO) score of 730. With this conservative loan-to-value ratio and subordinated collateral of seven percent, the cumulative 5-year foreclosure rate would have to rise to 12 percent from current levels before principal is impaired. The current foreclosure rate of our non-agency RMBS portfolio is nine percent.    Our commercial mortgage-backed securities (CMBS) are rated predominantly AAA, broadly diversified with over 14,000 loans with 60 percent of the portfolio issued before 2006 and 27 percent issued after 2009. The average loan-to-value ratio is approximately 65 percent with a debt service coverage ratio in excess of 1.7 and weighted-average subordinated collateral of 33 percent. The cumulative foreclosure rate would have to rise to 43 percent before principal is impaired. The foreclosure rate for our CMBS portfolio at the end of 2011 was approximately 2.7 percent.   

Below-investment grade corporate fixed income portfolio

  Below-investment grade securities have different characteristics than investment grade corporate debt securities. Risk of loss from default by the borrower is greater with below-investment grade securities. Below-investment grade securities are generally unsecured and are often subordinated to other creditors of the issuer. Also, issuers of below-investment grade securities usually have higher levels of debt and are more sensitive to adverse economic conditions, such as recession or increasing interest rates, than are investment grade issuers. At December 31, 2011, our fixed income investment portfolio included below-investment grade and non-rated securities which, in total, comprised approximately 12 percent of our fixed income portfolio. Our below-investment grade and non-rated portfolio includes over 900 issuers, with the greatest single exposure being $81 million.    We manage high yield bonds as a distinct and separate asset class from investment grade bonds. The allocation to high yield bonds is explicitly set by internal management and is targeted to securities in the upper tier of credit quality (BB/B). Our minimum rating for initial purchase is BB/B. Six external investment managers are responsible for high yield security selection and portfolio construction. Our high yield managers have a conservative approach to credit selection and very low historical default experience. Holdings are highly diversified across industries and subject to a 1.5 percent issuer limit as a percentage of high yield allocation. We monitor position limits daily through an internal compliance system. Derivative and structured securities (e.g. credit default swaps and collateralized loan obligations) are not permitted in the high-yield portfolio.      82 

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Table of Contents -------------------------------------------------------------------------------- Reinsurance recoverable on ceded reinsurance

  The following table shows a composition of our reinsurance recoverable for the periods indicated:    (in millions of U.S. dollars)                                       2011               2010

Reinsurance recoverable on unpaid losses and loss expenses, net of a provision for uncollectible reinsurance

$   11,602

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

                     787                722 

Net reinsurance recoverable on losses and loss expenses $ 12,389

      $   12,871 Reinsurance recoverable on policy benefits                    $      249         $      281     We evaluate the financial condition of our reinsurers and potential reinsurers on a regular basis and also monitor concentrations of credit risk with reinsurers. The provision for uncollectible reinsurance is required principally due to the failure of reinsurers to indemnify us, primarily because of disputes under reinsurance contracts and insolvencies. The provision for uncollectible reinsurance is based on a default analysis applied to gross reinsurance recoverables, net of approximately $2.8 billion of collateral. The decrease in net reinsurance recoverable on losses and loss expenses was primarily due to favorable prior period development on ceded reserves and cash collections on our run-off stop loss covers.  

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Asbestos and environmental (A&E) and other run-off liabilities

  Included in ACE's liabilities for losses and loss expenses are amounts for A&E (A&E liabilities). The A&E liabilities principally relate to claims arising from bodily-injury claims related to asbestos products and remediation costs associated with hazardous waste sites. The estimation of ACE's A&E liabilities is particularly sensitive to future changes in the legal, social, and economic environment. ACE has not assumed any such future changes in setting the value of our A&E reserves, which include provisions for both reported and IBNR claims. Refer to Note 7 to the Consolidated Financial Statements, under Item 8, for more information.    Reserving considerations  For asbestos, ACE faces claims relating to policies issued to manufacturers, distributors, installers, and other parties in the chain of commerce for asbestos and products containing asbestos. Claims can be filed by individual claimants or groups of claimants with the potential for hundreds of individual claimants at one time. Claimants will generally allege damages across an extended time period which may coincide with multiple policies for a single insured.    

Environmental claims present exposure for remediation and defense costs associated with the contamination of property as a result of pollution. It is common, especially for larger defendants, to be named as a potentially responsible party at multiple sites.

    The table below summarizes count information for asbestos and environmental claims for the years ended December 31, 2011 and 2010, for direct policies only:                                                       2011            2010                 Asbestos (by causative agent)                 Open at the beginning of year     1,025           1,023                 Newly reported                       65              66                 Closed or otherwise disposed         30              64                 Open at end of year               1,060           1,025                 Environmental (by site)                 Open at the beginning of year     3,332           3,371                 Newly reported                      129             133                 Closed or otherwise disposed         48             172                 Open at end of year               3,413           3,332     Closed or otherwise disposed claims were significantly lower in 2011, compared with 2010, due to a review in the prior year of inactive files that revealed that payment was no longer sought on the files; therefore, the files were closed.                                                                                  83 

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  The following table shows our gross and net survival ratios for our A&E loss reserves and allocated loss adjustment expense (ALAE) reserves at December 31, 2011 and 2010:                                                       2011 Survival Ratios                                2010 Survival Ratios                           3 Year                       1 Year                       3 Year                    1 Year                  Gross           Net          Gross           Net          Gross           Net          Gross           Net Asbestos           5.9           5.9            6.3           5.1            6.4           9.0            6.6           8.4 Environmental      3.4           3.1            2.9           2.4            3.6           4.2            4.3           4.8 Total              5.4           5.1            5.5           4.3            5.8           7.4            6.2           7.3     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 2011 (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 net survival ratio decreased in 2011, compared with 2010, primarily due to higher net asbestos and environmental payments in 2011.

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Catastrophe management

We actively monitor our catastrophe risk accumulation around the world. The following modeled loss information reflects our in-force portfolio at October 1, 2011 and reinsurance program at January 1, 2012.

    The table below shows our modeled annual aggregate pre-tax probable maximum loss (PML), net of reinsurance, for 100-year and 250-year return periods for U.S. hurricanes and California earthquakes at December 31, 2011, and December 31, 2010. The table also shows ACE's corresponding share of pre-tax industry losses for each of the return periods for U.S. hurricanes and California earthquakes at December 31, 2011. For example, according to the model, for the 1-in-100 return period scenario, there is a one percent chance that our losses incurred in any year from U.S. hurricanes could be in excess of $1.8 billion (or seven percent of our total shareholders' equity at December 31, 2011). We estimate that at such hypothetical loss levels, ACE's share of aggregate industry losses would be approximately one percent.                                                                                 U.S. Hurricanes                                                           

California Earthquakes

December 31,                               December 31,                              December 31,                             December 31,                                                                        2011                                       2010                                      2011                                     2010                                                                        % of Total                                                                          % of Total Modeled Annual                                                      Shareholders'               % of                                                    Shareholders'               % of Aggregate Net PML                                     ACE                  Equity           Industry                    ACE               ACE         

        Equity           Industry                   ACE                                                                                                    (in millions of U.S. dollars, except for percentages) 1-in-100                                      $     1,812                      7%               1.0%         $        1,182         $     869                      4%               2.2%         $         798 1-in-250                                      $     2,385                     10%               0.9%         $        1,570         $   1,065                      4%               1.7%         $         912     The modeling estimates of both ACE and industry loss levels are inherently uncertain owing to key assumptions. First, while the use of third-party catastrophe modeling packages to simulate potential hurricane and earthquake losses is prevalent within the insurance industry, the models are reliant upon significant meteorology, seismology, and engineering assumptions to estimate hurricane and earthquake losses. In particular, modeled hurricane and earthquake events are not always a representation of actual events and ensuing additional loss potential. Second, there is no universal standard in the preparation of insured data for use in the models and the running of the modeling software. Third, we are reliant upon third-party estimates of industry insured exposures and there is significant variation possible around the relationship between our loss and that of the industry following an event. Fourth, we assume that our reinsurance recoveries following an event are fully collectible. These loss estimates do not represent our potential maximum exposures and it is highly likely that our actual incurred losses would vary materially from the modeled estimates.      84 

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  During 2011, ACE conducted an in-depth review of hurricane risk, including assessment of the latest third-party hurricane model which had a significant increase in hazard and vulnerability estimates. The above hurricane PMLs reflect the findings from that review, including full implementation of the revised models, a multi-model framework for risk assessment, and custom model output adjustments to better reflect ACE's underlying exposure profile.  

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Natural catastrophe property reinsurance program

  ACE's core property catastrophe reinsurance program provides protection against natural catastrophes impacting its primary property operations (i.e., excluding assumed reinsurance) and consists of two separate towers.    We regularly review our reinsurance protection and corresponding property catastrophe exposures. This may or may not lead to the purchase of additional reinsurance prior to a program's renewal date. In addition, prior to each renewal date, we consider how much, if any, coverage we intend to buy and we may make material changes to the current structure in light of various factors, including modeled PML assessment at various return periods, reinsurance pricing, our risk tolerance and exposures, and various other structuring considerations.    The following table summarizes ACE's coverage under its General Catastrophe Treaty for both the North American and International towers, effective for the coverage periods indicated. With respect to Tower 1 - North American, our Core Program renewed on January 1, 2012, for a period of one year as follows (all dollar amounts are approximate):                                                                      Percentage                                Coverage                           Placed with      Loss Location              Period         Layer of Loss      Reinsurers             Comments                Notes Tower 1 - North American Core Program North America                100% retained      $0 million -      0%              Losses retained by ACE               (a )                                                 $500 million North America                January 2012      $500 million -     100%            One reinstatement                               - December        $1.1 billion                                  2012 Global                       January 2012      U.S.earthquake     100%            No reinstatement                     (b )                                    -           and hurricane                              December 2012     $1.1 billion -                                                $1.175 billion North America                January 2012      $1.1 billion -     100%            All property perils                  (c )                                    -            $1.2 billion                      other than earthquake.                              December 2012                                        One reinstatement.                                                                                   Global layer above                                                                                   inures to the benefit                                                                                   of this layer if Global                                                                                   layer is not exhausted. Calabash Program  We have a multi-year, peril-specific program from a major reinsurer that is backed by its strong credit worthiness and the issuance of fully collateralized catastrophe bonds (the Calabash program). The program's expected loss is kept the same each year by the annual adjustment, either up or down, of the attachment point based upon an independent modeling firm's review of the exposure data underlying each program. Due to exposure change, the attachment point for the Calabash program increased from $750 million in 2011 to $766 million in 2012, for the $86 million of wind protection and from approximately $1.173 billion in 2011 to approximately $1.191 billion in 2012, for earthquake protection. The Calabash program expires June 15, 2012.    North America Maine to Texas                                     $766                      No reinstatement Windstorm or                                     million                                     Multi-year      -                                     program        $966     43% part of                                     ending       million    $200 million                                     June 2012       or      or California, Pacific NW, and                       $1.191 Central U.S. Earthquake                          billion                                                     -                                                   $1.291    86% part of                                                  billion    $100 million California, Pacific NW, and                       $1.191                     No reinstatement Central U.S. Earthquake             Multi-year   billion                                     program         -                                     ending        $1.291    14% part of                                     June 2012    billion    $100 million    (a) Ultimate retention will depend upon the nature of the loss and the interplay between the underlying per risk programs and certain other catastrophe programs purchased by individual business units. These other catastrophe programs have the potential to reduce our effective retention below $500 million.    

(b) The Global layer was added to the Core Program effective January 1, 2012. This layer covers both U.S. and International risks. As such, it may be exhausted in one region and not available in the other.

(c) This layer was added to the Core Program effective January 1, 2012.

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                                                  Percentage                          Coverage    Layer of    Placed with     Loss Location         Period       Loss      Reinsurers           Comments          Notes Tower 2 - International July 1, 2011 - June 30, 2012 Program (unless otherwise noted) Core Program  International              100%         $0                 0%   Losses retained             (d )                          retained    million                    by ACE                                         -                                        $75                                      million  International            July 2011     $75      3.33% part of   Two reinstatements (including Alaska and        -       million      $75 million Hawaii)                  June 2012      -                                        $150                                      million  International            July 2011     $100       15% part of   One reinstatement (including Alaska and        -       million      $50 million Hawaii)                  June 2012      -                                        $150                                      million  International            July 2011     $150              100%   One reinstatement (including Alaska and        -       million Hawaii)                  June 2012      -                                        $300                                      million  International            July 2011     $300              100%   Two reinstatements. (including Alaska and        -       million                    Covers all perils Hawaii)                  June 2012      -                       Europe and worldwide                                        $450                     earthquake exposure                                      million                    (excludes contiguous                                                                 U.S.).  International            July 2011     $450              100%   One reinstatement (including Alaska and        -       million Hawaii)                  June 2012      -                                        $500                                      million  International            July 2011     $500              100%   One reinstatement (including Alaska and        -       million Hawaii)                  June 2012      -                                        $550                                      million  Global                    January    Outside             100%   No reinstatement            (e )                            2012        U.S.                     $400 million                          -December     $400                     attachment - all                            2012      million                    perils other than                                         -                       earthquake and                                        $475                     outside of Europe                                      million                    $550 million                                         or                      attachment - Europe                                        $550                     all perils and                                      million                    earthquake outside                                         -                       U.S.                                        $625                                      million     (d) Ultimate retention will depend upon the nature of the loss and the interplay between the underlying per risk programs, certain other catastrophe programs purchased by individual business units, and territories and regions around the world.   

(e) The Global layer was added to the Core Program effective January 1, 2012. This layer covers both U.S. and International risks. As such, it may be exhausted in one region and not available in the other.

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Political Risk, Trade Credit, and Structured Trade Credit

  Political risk insurance is a specialized coverage that provides clients with protection against unexpected, catastrophic political or macroeconomic events, primarily in developing markets. We participate in this market through our wholly owned subsidiary Sovereign Risk Insurance Ltd. (Sovereign), and through a unit of our London-based ACE Global Markets operation. Sovereign is one of the world's leading underwriters of political risk insurance and has a global portfolio spread across more than 100 countries. Its clients include financial institutions, national export credit agencies, leading multilateral agencies, and multinational corporations. ACE Global Markets writes political risk, trade credit, and structured trade credit business out of underwriting offices in London, Hamburg, New York, Los Angeles, and Singapore.    Our political risk insurance provides protection to commercial lenders against defaults on cross border loans, insulates investors against equity losses, and protects exporters against defaults on contracts. Commercial lenders, our largest client segment, are covered for missed scheduled loan repayments due to acts of confiscation, expropriation or nationalization by the host    

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  government; currency inconvertibility or exchange transfer restrictions, or war or other acts of political violence. In addition, in the case of loans to government-owned entities or loans that have a government guarantee, political risk policies cover scheduled payments against risks of nonpayment or non-honoring of government guarantees. Equity investors and corporations receive similar coverage to that of lenders, except they are protected against financial losses, inability to repatriate dividends, and physical damage to their operations caused by covered events. Our export contracts protection provides coverage for both exporters and their financing banks against the risk of contract frustration due to government actions, including non-payment by government entities.    ACE Global Markets' trade credit and structured trade credit businesses cover losses due to insolvency, protracted default, and political risk perils including export and license cancellation. It provides trade credit coverage to larger companies that have sophisticated credit risk management systems, with exposure to multiple customers and that have the ability to self-insure losses up to a certain level through excess of loss coverage. Its structured trade credit business provides coverage to trade finance banks, exporters, and trading companies, with exposure to trade-related financing instruments.    We have implemented structural features in our policies in order to control potential losses within the political risk, trade credit, and structured credit businesses. These include basic loss sharing features that include co-insurance and deductibles, and in the case of trade credit, the use of non-qualifying losses that drop smaller exposures deemed too difficult to assess. Ultimate loss severity is also limited by using waiting periods to enable the insurer and insured to agree on recovery strategies, and the subrogation of the rights of the lender/exporter to the insurer following a claim. We have the option to pay claims over the original loan payment schedule, rather than in a lump sum in order to provide insureds and the insurer additional time to remedy problems and work towards full recoveries. It is important to note that political risk, trade credit, and structured trade credit policies are named peril conditional contracts, not financial guarantees, and claims are only paid after conditions and warranties are fulfilled. Political risk, trade credit, and structured trade credit insurance do not cover currency devaluations, bond defaults, any form of derivatives, movements in overseas equity markets, transactions deemed illegal, or situations where corruption or misrepresentation has occurred, or debt that is not legally enforceable. In addition to assessing and mitigating potential exposure on a policy-by-policy basis, we also have specific risk management measures in place to manage overall exposure and risk. These measures include placing country and individual transaction limits based on country risk and credit ratings, combined single loss limits on multi-country policies, the use of reinsurance protection, and regular modeling and stress-testing of the portfolio.  

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Crop insurance

  We are, and have been since the 1980s, one of the leading writers of crop insurance in the U.S. and have conducted that business through an MGA subsidiary of Rain and Hail. We provide protection throughout the U.S. and are therefore geographically diversified, which reduces the risk of exposure to a single event or a heavy accumulation of losses in any one region. Our crop insurance business comprises two components - Multi-Peril Crop Insurance (MPCI) and hail insurance.    The MPCI program is a partnership with the U.S. Department of Agriculture (USDA). The policies cover revenue shortfalls or production losses due to natural causes such as drought, excessive moisture, hail, wind, frost, insects, and disease. Generally, policies have deductibles ranging from 10 percent to 50 percent of the insured's risk. The USDA'sRisk 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). The SRA sets out the relationship between private insurance companies and the Federal Crop Insurance Corporation (FCIC) concerning the terms and conditions regarding the risks each will bear as well as the timing of the annual settlement and the Administrative and Operating expense payment (A&O subsidy). Each year the RMA issues a final SRA for the subsequent reinsurance year which runs July 1 through June 30.    In July 2010, the RMA released the 2011 SRA which established the terms and conditions applicable for the 2011 reinsurance year (i.e., July 1, 2010 through June 30, 2011). Similar to the 2010 SRA, the 2011 SRA contained the pro-rata and state stop-loss provisions which continued to allow companies to limit the exposure of any one state or group of states on their underwriting results. Generally, it also continued to allow companies to selectively retain the more attractive risks while ceding the historically less profitable risks to the federal government. While the 2011 SRA reduced the potential underwriting profit, it also decreased the maximum underwriting loss, compared with the 2010 SRA. Despite the potential underwriting profitability reduction, we believe the 2011 SRA allowed for an acceptable rate of return. 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 state stop-loss reinsurance in the private market place. The                                                                                  87 

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  2011 SRA amended the provisions related to the annual settlement. Prior to the 2011 SRA, the annual settlement (where our portion of any underwriting gain or loss is determined and paid) occurred in the first quarter following the close of the reinsurance year. Effective with the 2011 SRA, the annual settlement will occur in the fourth quarter following the close of the reinsurance year. The application of this amendment had no impact on our 2011 financial results.    In July 2011, the RMA released the 2012 SRA which establishes the terms and conditions for the 2012 reinsurance year (i.e., July 1, 2011 through June 30, 2012). The 2012 SRA amends the provisions related to the A&O subsidy. Prior to the 2012 SRA, the A&O subsidy was paid monthly during the reinsurance year. Effective with the 2012 SRA, the A&O subsidy will be paid in the fourth quarter following the end of the reinsurance year. The application of this amendment had no impact on our 2011 financial results.    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. and these reports allow us to determine the actual premium associated with the liability that is being planted. The MPCI program has specific timeframes as to when producers must report acreage to us and in certain cases, the reporting occurs after the close of the respective reinsurance year. Once the net premium written has been booked, the premium is then earned over the growing season for the crops. A majority of the crops that are covered in the program are typically subject to the SRA in effect at the beginning of the year. Given the major crops covered in the program, we typically see a substantial written and earned premium impact in the second and third quarters. For our 2011 fiscal year results, winter wheat planting was the only significant planting subject to the 2012 SRA. Given that the winter wheat crop does not represent a significant portion of our crop business, the application of the 2012 SRA had minimal impact on our 2011 financial results.    The rating of MPCI premium is determined using a number of factors including commodity prices and related volatility. For instance, in most states the rating for the MPCI Revenue Product for corn includes a factor that is based on the average price in February of the Chicago Board of Trade December corn futures. To the extent that the corn commodity prices are higher in February than they were in the previous February, and all other factors are the same, the increase in corn prices will increase the corn premium year over year.    Prior to the acquisition of Rain and Hail, we regularly received reports relating to the previous reinsurance year(s), resulting in adjustments to previously reported premiums, losses and loss expenses, and profit share commissions. The adjustments were typically more significant in the first quarter of the year compared with other periods. Following the Rain and Hail acquisition on December 28, 2010, we have access to such information sooner. Accordingly, the more significant changes in estimate that previously occurred in the first quarter now occur one quarter earlier.    Our hail program is a private offering. Premium is earned on the hail program over the coverage period of the policy. Given the very short nature of the growing season, most hail business is typically written in the second and third quarters with the earned premium also more heavily occurring during this time frame. We 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 state stop-loss reinsurance on our net retained hail business.  

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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, ACE Limited's cash flows 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.    We anticipate that positive cash flows from operations (underwriting activities and investment income) should be sufficient to cover cash outflows under most loss scenarios through 2012. Should the need arise, we generally have access to capital markets and available credit facilities. Refer to "Credit Facilities" below for additional information. Our access to funds under existing credit facilities is dependent on the ability of the banks that are parties to the facilities to meet their funding commitments. Our existing credit facilities have remaining terms expiring between 2012 and 2015 and require that we maintain    88 

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  certain financial covenants, all of which we met at December 31, 2011. Should any of our existing credit providers experience financial difficulty, we may be required to replace credit sources, possibly in a difficult market. There has also been recent consolidation in the banking industry which could lead to increased reliance on and exposure to particular institutions. If we cannot obtain adequate capital or sources of credit on favorable terms, on a timely basis or at all, our business, operating results, and financial condition could be adversely affected. To date, we have not experienced difficulty accessing any of our credit facilities.    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. 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 duration tends to be longer. Given the current low interest rate environment, at December 31, 2011, the average duration of our fixed maturity investments (3.7 years) is less than the average expected duration of our insurance liabilities (4.5 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, large uncollectible reinsurance recoverables on paid losses (as a result of coverage disputes, reinsurers' credit problems or 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 investments, 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. During 2011, we were able to meet all of our obligations, including the payments of dividend distributions on our Common Shares with our net cash flows.    We assess which subsidiaries to draw dividends from based on a number of factors. Considerations such as regulatory and legal restrictions as well as the subsidiary's financial condition are paramount to the dividend decision. The legal restrictions on the payment of dividends from retained earnings by our Bermuda subsidiaries are currently satisfied by the share capital and additional paid-in capital of each of the Bermuda subsidiaries. ACE Limited received dividends of $560 million and $200 million from its Bermuda subsidiaries in 2011 and 2010, respectively.   

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 Limited received dividends from ACE Global Markets of $180 million and nil in 2011 and 2010, respectively.

    The U.S. insurance subsidiaries of ACE INA may pay dividends, without prior regulatory approval, subject to restrictions set out in state law of the subsidiary's domicile (or, if applicable, commercial domicile). ACE INA's international subsidiaries are also subject to insurance laws and regulations particular to the countries in which the subsidiaries operate. These laws and regulations sometimes include restrictions that limit the amount of dividends payable without prior approval of regulatory insurance authorities. ACE Limited did not receive any dividends from ACE INA in 2011 and 2010. Debt issued by ACE INA is serviced by statutorily permissible distributions by ACE INA's insurance subsidiaries to ACE INA as well as other group resources.                                                                                  89 

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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 comprise 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 of 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 2011 and 2010.   

The operating cash flows reflect net income for each period, adjusted for non-cash items and changes in working capital.

    Our consolidated net cash flows from operating activities were $3.5 billion in both 2011 and 2010. Net loss and loss expenses paid were $8.9 billion in 2011, compared with $7.4 billion in the prior year. In 2011, operating cash flow included $203 million of cash collateral received related to a large insurance transaction, net of collateral returned. Some or all of the cash collateral may change to non-cash collateral, which would ultimately result in a reduction in future operating cash flows.    Our consolidated net cash flows used for investing activities were $3.0 billion in 2011, compared with $4.2 billion in the prior year. Net investing activities for the indicated periods were related primarily to net purchases of fixed maturities. Acquisition of subsidiaries in 2011 included New York Life's Korea operations and Hong Kong operations, PMHC, and Rio Guayas and in 2010 included Rain and Hail and Jerneh Insurance Berhad.    Our consolidated net cash flows used for financing activities were $565 million in 2011, compared with cash flows from financing activities of $732 million in the prior year. In 2011 and 2010 financing activities included dividends paid on our Common Shares of $459 million and $435 million, respectively. Net cash flows used for financing activities in 2011 included $5.0 billion of reverse repurchase settlements, the repayment of $300 million of short-term debt, and $195 million of Common Share repurchases, partially offset by net proceeds of $5.2 billion for reverse repurchase agreements, and $133 million of proceeds from share-based compensation plans. Net cash flows from financing activities in 2010 included net proceeds of $699 million from the issuance of long-term debt, $1.0 billion in reverse repurchase agreements, and $300 million in credit facility borrowings. This was partially offset by repayment of $659 million in debt and $235 million of share repurchases settled in 2010.    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.    In the current low-interest rate environment, we utilize reverse repurchase agreements as a low-cost alternative for short-term funding needs and to address short-term cash timing differences without disrupting our investment portfolio holdings. We subsequently settle these transactions with future operating cash flows. At December 31, 2011, there were $1.3 billion in reverse repurchase agreements outstanding.    In addition to cash from operations, routine sales of investments, and financing arrangements, we have agreements with a third party bank provider which implemented two international multi-currency notional cash pooling programs to enhance cash management efficiency during periods of short-term timing mismatches between expected inflows and outflows of cash by currency. The programs allow us to optimize investment income by avoiding portfolio disruption. In each program, participating ACE entities establish deposit accounts in different currencies with the bank provider. 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 all participating ACE entities 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 commingled between legal entities. ACE entities may incur overdraft balances as a means to address short-term liquidity needs. Any overdraft balances incurred under this program by an ACE entity would be guaranteed by ACE Limited (up to $350 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.    90 

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Capital Resources

Capital resources consist of funds deployed or available to be deployed to support our business operations. The following table summarizes the components of our capital resources:

    (in millions of U.S. dollars, except for                 December 31             December 31 percentages)                                                    2011                    2010 Short-term debt                                        $       1,251           $       1,300 Long-term debt                                                 3,360                   3,358 Total debt                                                     4,611                   4,658 Trust preferred securities                                       309                     309 Total shareholders' equity                                    24,516                  22,974 Total capitalization                                   $      29,436           $      27,941 Ratio of debt to total capitalization                          15.7%                   16.7% Ratio of debt plus trust preferred securities to total capitalization                                           16.7%                   17.8%    

Our ratios of debt to total capitalization and debt plus trust preferred securities to total capitalization have decreased due to the increase in shareholders' equity (discussed below) and slight decrease in short-term debt.

    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. We generally maintain the ability to issue certain classes of debt and equity securities via an unlimited SEC shelf registration which is renewed every three years. This allows us capital market access for refinancing as well as for unforeseen or opportunistic capital needs. Our current shelf registration on file with the SEC expires in December 2014.    The following table reports the significant movements in our shareholders' equity:                                                                         December 31 (in millions of U.S. dollars)                                               2011 Balance at beginning of year                                       $      22,974 Net income                                                                 1,585 Dividends on Common Shares                                                  (467 ) Change in net unrealized appreciation on investments, net of tax            

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 Common Shares repurchased                                                   (132 ) Share-based compensation expense and other                                   139 Exercise of stock options                                                     63 Other movements, net of tax                                                   38 Balance at end of year                                             $      24,516     As part of our capital management program, in August 2011, our Board of Directors authorized the repurchase of up to $303 million of ACE's Common Shares through December 31, 2012. The amount authorized in August 2011 was in addition to the $197 million balance remaining under a $600 million share repurchase approved in November 2010. Under the November 2010 authorization, we repurchased $303 million of ACE's Common Shares as of December 31, 2010. We repurchased $132 million and $303 million of Common Shares in a series of open market transactions in 2011 and 2010, respectively. At December 31, 2011, a total of $468 million in share repurchase authorization remained through December 31, 2012 pursuant to the November 2010 and August 2011 Board of Directors authorizations. As of December 31, 2011 there were 5,905,136 Common Shares in treasury with a weighted average cost of $55.36.    

Short-term debt

At December 31, 2011 short-term debt includes reverse repurchase agreements totaling $1.3 billion. During 2011, $300 million in borrowings against ACE's revolving credit facility outstanding at December 31, 2010 were repaid.

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Long-term debt

At December 31, 2011 our total long-term debt was $3.4 billion as described in detail in Note 9 to the Consolidated Financial Statements, under Item 8.

    In November 2010, ACE INA issued $700 million of 2.6 percent senior notes due November 2015. These senior unsecured notes are guaranteed on a senior basis by ACE and they rank equally with all of our other senior obligations.    

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 sheets as a liability. Additional information with respect to the trust preferred securities is contained in Note 9 d) to the Consolidated Financial Statements, under Item 8.    

Common Shares

Our Common Shares had a par value of CHF 30.27 each at December 31, 2011.

    Under Swiss corporate law, dividends, including distributions through a reduction in par value (par value reductions), must be stated by ACE in Swiss francs though dividend payments are made by ACE in U.S. dollars. Dividend distributions following ACE's redomestication to Switzerland in July 2008 through March 31, 2011 were paid in the form of a par value reduction (under the methods approved by our shareholders at our Annual General Meetings) and had the effect of reducing par value per Common Share each time a dividend was distributed. In light of a January 1, 2011 Swiss tax law change, shareholders at our May 2011 Annual General Meeting approved a dividend for the following year from capital contribution reserves (Additional paid in capital), a subaccount of legal reserves. Dividend distributions on Common Shares amounted to CHF 1.22($1.38) for the year ended December 31, 2011 (including par value reductions of CHF 0.30).    In November 2011, the Board of Directors recommended that our shareholders approve a resolution to increase our quarterly dividend 34 percent from $0.35 per share to $0.47 per share for the payment made on January 31, 2012 and the payment to be made by the end of April 2012. This proposed increase was approved by our shareholders at the January 9, 2012 Extraordinary General Meeting.    

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Table of Contents -------------------------------------------------------------------------------- Contractual Obligations and Commitments

The table below shows our contractual obligations and commitments including our payments due by period at December 31, 2011:

                                                                       Payments Due By Period                                                                             2013               2015 (in millions of U.S. dollars)           Total             2012          and 2014           and 2016           There-after Payment amounts determinable from the respective contracts Deposit liabilities                  $    663         $     31         $      53         $       36         $         543 Purchase obligations                      315              100               127                 88                     - Limited partnerships - funding commitments                               777              235               384                158                     - Operating leases                          497               93               132                106                   166 Short-term debt                         1,251            1,251                 -                  -                     - Long-term debt                          3,363                -               500              1,150                 1,713 Trust preferred securities                309                -                 -                  -                   309 Interest on debt obligations            1,900              208               399                296                   997 Total obligations in which payment amounts are determinable from the respective contracts                    9,075            1,918             1,595              1,834                 3,728 Payment amounts not determinable from the respective contracts Estimated gross loss payments under insurance and reinsurance contracts                              37,477            9,449             9,517              5,433                13,078 Estimated payments for future life and annuity policy benefits             9,487              301               623                573                 7,990 Total contractual obligations and commitments                          $ 56,039         $ 11,668         $  11,735         $    7,840         $      24,796    

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 13 to the Consolidated Financial Statements, under Item 8, for additional information.

    Liabilities for unrecognized tax benefits: The liability for unrecognized tax benefits, excluding interest, was $134 million at December 31, 2011. We recognize accruals for interest and penalties, if any, related to unrecognized tax benefits in income tax expense in the consolidated statements of operations. At December 31, 2011, we had $22 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 $318 million and contract holder deposit funds of $345 million at December 31, 2011. 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 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 1 k) to the Consolidated Financial Statements, under Item 8.

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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 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 February 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, 2011, 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. 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 reflected net of fees or premiums due from the underlying contracts. 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.  

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Credit Facilities

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

The following table shows our main credit facilities by credit line, usage, and expiry date at December 31, 2011:

                                                  Credit    (in millions of U.S. dollars)              Line(1)           Usage          Expiry Date    Syndicated Letter of Credit Facility      $  1,000         $   948            Nov. 2012    Revolving Credit/LOC Facility(2)               500              55            Nov. 2012    Bilateral Letter of Credit Facility            500             500           Sept. 2014    Funds at Lloyds's Capital Facilities(3)        400             392            Dec. 2015    Total                                     $  2,400         $ 1,895    

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

(2) May also be used for LOCs.

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

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  In November 2010, we entered into four LOC facility agreements which collectively permit the issuance of up to $400 million of LOCs. We expect that most of the LOCs issued under the LOC agreements will be used to support the ongoing Funds at Lloyd's requirements of Syndicate 2488, but LOCs may also be used for other general corporate purposes.    It is anticipated that our 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 LOCs required is driven by, among other things, statutory liabilities reported by variable annuity guarantee reinsurance clients, 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, 2011. These covenants include:

(i) Maintenance of a minimum consolidated net worth in an amount not less than

the "Minimum Amount". For the purpose of this calculation, the Minimum Amount

is an amount equal to the sum of the base amount (currently $16.1 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, 2011, (a) the minimum consolidated net worth requirement under the covenant described in (i) above was $16.5 billion and our actual consolidated net worth as calculated under that covenant was $22.8 billion and (b) our ratio of debt to total capitalization was 0.157 to 1, which is below the maximum debt to total capitalization ratio of 0.35 to 1 as described in (ii) above.    Our failure to comply with the covenants under any credit facility would, subject to grace periods in the case of certain covenants, result in an event of default. This could require us to repay any outstanding borrowings or to cash collateralize LOCs under such facility. A failure by ACE Limited (or any of its subsidiaries) to pay an obligation due for an amount exceeding $50 million would result in an event of default under all of the facilities described above.  

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Ratings

ACE Limited and its subsidiaries are assigned credit and financial strength (insurance) ratings from internationally recognized rating agencies, including S&P, A.M. Best, Moody's, 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.acegroup.com, also contains some information about our ratings, which can be found under the Investor Information tab but such information on our website is not incorporated by reference into this report.    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.    

Credit ratings assess a company's ability to make timely payments of principal and interest on its debt.

    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. Also, we have insurance and reinsurance contracts which contain rating triggers. In the event the S&P or A.M. Best financial strength                                                                                  95 

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  ratings of ACE fall 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, 2011, a one-notch downgrade of our S&P or A.M. Best financial strength ratings would result in an immaterial loss of premium or requirement for collateral to be posted.  

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Recent Accounting Pronouncements

Refer to Note 1 to the Consolidated Financial Statements, under Item 8. for a discussion of new accounting pronouncements.

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