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

Edgar Online, Inc.

 The following is a discussion of our results of operations, financial condition, and liquidity and capital resources as of and for the three and six months ended June 30, 2013.  

All comparisons in this discussion are to the corresponding prior year periods unless otherwise indicated.

  Our results of operations and cash flows for any interim period are not necessarily indicative of our results for the full year. This discussion should be read in conjunction with our consolidated financial statements and related notes and our Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2012 (2012 Form 10-K).  Effective first quarter 2013, the Insurance - North American segment is presented in two distinct reportable segments: Insurance - North American P&C and Insurance - North American Agriculture. Prior year amounts contained in this report have been adjusted to conform to the new segment presentation.  Other Information We routinely post important information for investors on our website (www.acegroup.com) under the Investor Information section. We use this website as a means of disclosing material, non-public information and for complying with our disclosure obligations under Securities and Exchange Commission (SEC) Regulation FD (Fair Disclosure). Accordingly, investors should monitor the Investor Information portion of our website, in addition to following our press releases, SEC filings, public conference calls, and webcasts. The information contained on, or that may be accessed through, our website is not incorporated by reference into, and is not a part of, this report. MD&A Index                                                           Page   Forward-Looking Statements                                         42   Overview                                                           44   Financial Highlights                                               45   Consolidated Operating Results                                     45   Prior Period Development                                           48   Segment Operating Results                                          52   Other (Income) and Expense Items                                   61   Net Investment Income                                              62   Net Realized and Unrealized Gains (Losses)                         62   Investments                                                        64   Critical Accounting Estimates                                      69   Reinsurance Recoverable on Ceded Reinsurance                       69   Unpaid Losses and Loss Expenses                                    70   Asbestos and Environmental (A&E) and Other Run-off Liabilities     70   Fair Value Measurements                                            70   Guaranteed Living Benefits (GLB) Derivatives                       71   Catastrophe Management                                             74   Natural Catastrophe Property Reinsurance Program                   74   Crop Insurance                                                     75   Liquidity                                                          75   Capital Resources                                                  77                                                                                    41

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 Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Any written or oral statements made by us or on our behalf may include forward-looking statements that reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks, uncertainties, and other factors that could, should potential events occur, cause actual results to differ materially from such statements. These risks, uncertainties, and other factors, which are described in more detail elsewhere herein and in other documents we file with the U.S. Securities and Exchange Commission (SEC), include but are not limited to: •   developments in global financial markets, including changes in interest 

rates, stock markets, and other financial markets, increased government

involvement or intervention in the financial services industry, the cost and

availability of financing, and foreign currency exchange rate fluctuations

(which we refer to in this report as foreign exchange and foreign currency

exchange), which could affect our statement of operations, investment

portfolio, financial condition, and financing plans;

• general economic and business conditions resulting from volatility in the

stock and credit markets and the depth and duration of recession;

• losses arising out of natural or man-made catastrophes such as hurricanes,

typhoons, earthquakes, floods, climate change (including effects on weather

patterns; greenhouse gases; sea; land and air temperatures; sea levels; rain

and snow), nuclear accidents or terrorism which could be affected by:

• the number of insureds and ceding companies affected;

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

• the impact of these losses on our reinsurers and the amount and timing of

reinsurance recoverable actually received;

• the cost of building materials and labor to reconstruct properties or to

         perform environmental remediation following a catastrophic event; and   •       complex coverage and regulatory issues such as whether losses occurred

from storm surge or flooding and related lawsuits;

• actions that rating agencies may take from time to time, such as financial

strength or credit ratings downgrades or placing these ratings on credit

watch negative or the equivalent;

• global political conditions, the occurrence of any terrorist attacks,

including any nuclear, radiological, biological, or chemical events, or the

outbreak and effects of war, and possible business disruption or economic

contraction that may result from such events;

• the ability to collect reinsurance recoverable, credit developments of

reinsurers, and any delays with respect thereto and changes in the cost,

quality, or availability of reinsurance;

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

claim payments;

• the uncertainties of the loss-reserving and claims-settlement processes,

including the difficulties associated with assessing environmental damage and

asbestos-related latent injuries, the impact of aggregate-policy-coverage

limits, and the impact of bankruptcy protection sought by various asbestos

producers and other related businesses and the timing of loss payments;

• changes to our assessment as to whether it is more likely than not that we

will be required to sell, or have the intent to sell, available for sale

fixed maturity investments before their anticipated recovery;

• infection rates and severity of pandemics and their effects on our business

operations and claims activity;

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

settlement terms;

• the effects of public company bankruptcies and/or accounting restatements, as

well as disclosures by and investigations of public companies relating to

possible accounting irregularities, and other corporate governance issues,

including the effects of such events on:

• the capital markets;

• the markets for directors and officers (D&O) and errors and omissions

       (E&O) insurance; and   •      claims and litigation arising out of such disclosures or practices by        other companies;     42

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• uncertainties relating to governmental, legislative and regulatory policies,

developments, actions, investigations and treaties, which, among other

things, could subject us to insurance regulation or taxation in additional

jurisdictions or affect our current operations;

• the actual amount of new and renewal business, market acceptance of our

products, and risks associated with the introduction of new products and

services and entering new markets, including regulatory constraints on exit

strategies;

• the competitive environment in which we operate, including trends in pricing

or in policy terms and conditions, which may differ from our projections and

changes in market conditions that could render our business strategies

ineffective or obsolete;

• acquisitions made by us performing differently than expected, our failure to

realize anticipated expense-related efficiencies or growth from acquisitions,

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

acquisitions not closing;

• risks associated with being a Swiss corporation, including reduced

flexibility with respect to certain aspects of capital management and the

potential for additional regulatory burdens;

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

terrorism;

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

facilities;

• the adequacy of collateral supporting funded high deductible programs;

• changes in the distribution or placement of risks due to increased

consolidation of insurance and reinsurance brokers;

• material differences between actual and expected assessments for guaranty

funds and mandatory pooling arrangements;

• the effects of investigations into market practices in the property and

casualty (P&C) industry;

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

recession;

• the amount of dividends received from subsidiaries;

• loss of the services of any of our executive officers without suitable

replacements being recruited in a reasonable time frame;

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

• management's response to these factors and actual events (including, but not

limited to, those described above).

   The words "believe," "anticipate," "estimate," "project," "should," "plan," "expect," "intend," "hope," "feel," "foresee," "will likely result," or "will continue," and variations thereof and similar expressions, identify forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future events or otherwise.                                                                                 43

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Overview

ACE Limited is the Swiss-incorporated holding company of the ACE Group of Companies. ACE opened its business office in Bermuda in 1985 and continues to maintain operations in Bermuda. ACE, which is headquartered in Zurich, Switzerland, and its direct and indirect subsidiaries, are a global insurance and reinsurance organization, serving the needs of a diverse group of clients around the world. We are predominantly a global P&C insurance company with both a commercial and specialty product orientation. We offer commercial insurance, specialty products and accident and health (A&H) solutions and are expanding our personal lines and international life insurance businesses. As we have grown, we have developed products and diversified our offerings to meet the needs of our customers. At June 30, 2013, we had total assets of $94 billion and shareholders' equity of $27 billion.  

We operate through the following business segments: Insurance - North American P&C, Insurance - North American Agriculture, Insurance - Overseas General, Global Reinsurance, and Life.

  The Insurance - North American P&C segment includes retail divisions ACE USA (including ACE Canada), ACE Commercial Risk Services and ACE Private Risk Services; our wholesale and specialty divisions ACE Westchester, and ACE Bermuda; and various run-off operations, including Brandywine Holdings Corporation (Brandywine). Our retail products range from commercial lines with service offerings such as risk management, loss control and engineering programs, specialty commercial P&C, and A&H coverages to personal lines homeowners, automobile, liability, valuables, and marine coverages. Our wholesale and specialty products include excess and surplus property, D&O, professional liability, inland marine, specialty casualty, environmental, and political risk.  The Insurance - North American Agriculture segment provides coverage for agriculture business, writing a variety of commercial coverages including comprehensive Multiple Peril Crop Insurance (MPCI), crop-hail and farm P&C insurance protection to customers in the U.S. and Canada through Rain and Hail Insurance Service, Inc. (Rain and Hail) as well as specialty P&C insurance coverages offered by ACE Agribusiness to companies that manufacture, process and distribute agriculture products. The MPCI program is offered in conjunction with the U.S. Department of Agriculture (USDA). 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 including the pro-rata and state stop-loss provisions which allow companies to limit the exposure of any one state or group of states on their underwriting results. In addition to the pro-rata and excess of loss reinsurance protections inherent in the SRA, we also purchase third party proportional and stop-loss reinsurance for our MPCI business to reduce our exposure.  The Insurance - Overseas General segment comprises ACE International, our retail business serving territories outside the U.S., Bermuda, and Canada; the international A&H business of Combined Insurance (Combined); and the wholesale insurance business of ACE Global Markets (AGM). ACE International has a presence in major developed markets and growing economies serving multinational clients and local customers. A significant amount of our global business is with local companies, offering traditional and specialty P&C products including D&O and professional liability, specialty personal lines, and energy products. ACE International expanded its global business through the acquisitions of ABA Seguros on May 2, 2013 and Fianzas Monterrey on April 1, 2013. Refer to Note 2 to the Consolidated Financial Statements for additional information on these acquisitions. The consolidated financial statements include the results of the acquired businesses from the acquisition dates. Our international A&H business primarily focuses on personal accident and supplemental medical. AGM offers specialty products including aviation, marine, financial lines, energy, and political risk.  The Global Reinsurance segment represents our reinsurance operations comprising ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re International, ACE Tempest Re Canada, and the reinsurance operations of AGM. Global Reinsurance provides solutions for customers ranging from small commercial insureds to multinational ceding companies. Global Reinsurance offers products such as property and workers' compensation catastrophe, D&O, professional liability, specialty casualty and specialty property.  

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.

For more information on our segments refer to "Segment Information" in our 2012 Form 10-K.

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Financial Highlights for the Three Months Ended June 30, 2013

 •     Net income was $891 million compared with $328 million in the prior year       period.  

• Total company net premiums written increased 6.3 percent, or 7.6 percent on

a constant-dollar basis.

• Total pre-tax and after-tax catastrophe losses including reinstatement

premiums were $81 million (2.3 percentage points of the combined ratio) and

$66 million, respectively, compared with $55 million and $41 million,       respectively, in the prior year period.  

• Favorable prior period development pre-tax was $128 million, representing

3.6 percentage points of the combined ratio, compared with $113 million in

the prior year period.

• The P&C combined ratio was 87.9 percent compared with 88.7 percent in the

prior year period.

• The P&C expense ratio was 29.2 percent, unchanged from the prior year period.

• The current accident year P&C combined ratio excluding catastrophe losses

was 89.2 percent compared with 90.4 percent in the prior year period.

• Operating cash flow was $895 million.

• Net investment income was $534 million compared to $537 million in the

prior year period as lower reinvestment rates were offset by higher private

equity and other distributions.

• Acquisitions closed in the quarter include Fianzas Monterrey on April 1,

2013, for $293 million in cash and ABA Seguros on May 2, 2013, for $690

       million in cash.    

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 Consolidated Operating Results - Three and Six Months Ended June 30, 2013 and 2012                                          Three Months Ended                         Six Months Ended                                                     June 30     % Change                     June 30       % Change (in millions of U.S. dollars,                                   Q-13 vs.                                 YTD-13 vs. except for percentages)                2013            2012         Q-12            2013        2012         YTD-12 Net premiums written             $    4,391$ 4,130          6.3  %   $    8,189$ 7,702            6.3  % Net premiums earned                   4,067           3,783          7.5  %        7,640       7,164            6.6  % Net investment income                   534             537         (0.6 )%        1,065       1,081           (1.5 )% Net realized gains (losses)             104            (394 )         NM             310        (134 )           NM Total revenues                        4,705           3,926         19.8  %        9,015       8,111           11.1  % Losses and loss expenses              2,250           2,119          6.2  %        4,176       3,923            6.4  % Policy benefits                         110             102          7.8  %          241         249           (3.2 )% Policy acquisition costs                665             619          7.4  %        1,279       1,201            6.5  % Administrative expenses                 564             514          9.7  %        1,078       1,024            5.3  % Interest expense                         73              62         17.7  %          133         124            7.3  % Other (income) expense                   37              34          8.8  %           27          31          (12.9 )% Total expenses                        3,699           3,450          7.2  %        6,934       6,552            5.8  % Income before income tax              1,006             476        111.3  %        2,081       1,559           33.5  % Income tax expense                      115             148        (22.3 )%          237         258           (8.1 )% Net income                       $      891$   328        171.2  %   $    1,844$ 1,301           41.7  % NM - not meaningful                                                                                    45

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   The following table presents the approximate effect of changes in foreign currency exchange rates on the growth of net premiums written and earned for the periods indicated:                                    Three Months Ended      Six Months Ended                                         June 30, 2013         June 30, 2013 Net premiums written: Growth in original currency                       7.6  %                7.0  % Foreign exchange effect                          (1.3 )%               (0.7 )% Growth as reported in U.S. dollars                6.3  %                6.3  % Net premiums earned: Growth in original currency                       8.6  %                7.3  % Foreign exchange effect                          (1.1 )%               (0.7 )% Growth as reported in U.S. dollars                7.5  %                6.6 

%

    Net premiums written reflect the premiums we retain after purchasing reinsurance protection. Net premiums written increased for the three and six months ended June 30, 2013 primarily in our Insurance - North American P&C segment retail division reflecting growth across a broad range of our product portfolio including our risk management and personal lines businesses, and specialty casualty, property and professional lines reflecting rate increases, exposure changes, strong renewal retention, and new business. Our wholesale and specialty division contributed to the increase in net premiums written from higher production. Net premiums written increased in our Insurance - Overseas General segment for the three and six months ended June 30, 2013. The growth was driven by the acquisitions of ABA Seguros in May 2013, Fianzas Monterrey in April 2013, and Jaya Proteksi in September 2012. In addition, growth was reported in our retail operations in all of our product lines - P&C, A&H, and personal lines. To a lesser extent, our Life segment added to growth in net premiums written for the three and six months ended June 30, 2013 primarily due to growth in certain A&H program business, which offset the decrease in our Life reinsurance business as no new Life reinsurance business is currently being written. Additionally, life deposits collected for the three and six months ended June 30, 2013 increased over 60 percent primarily due to growth in our Asian markets. However, our Insurance - North American Agriculture segment reported decreases in net premiums written for the three and six months ended June 30, 2013 primarily due to the purchase of proportional reinsurance on the MPCI business for the 2013 crop year, which is in addition to the excess of loss reinsurance coverage historically purchased. The reinsurance related decrease was partially offset by increased production in the MPCI business and in our agriculture's unit property and casualty business. Our Global Reinsurance segment also reported a decrease in net premiums written for the three months ended June 30, 2013 due primarily to increased property catastrophe cessions to a newly formed reinsurance sidecar, Altair Re, that more than offset strong renewal retention and new business written. For the six months ended June 30, 2013, Global Reinsurance net premiums written were relatively flat as the increased cessions were substantially offset by higher premiums written, primarily in our U.S. property and U.S. automobile lines of business.  Net premiums earned for short-duration contracts, typically P&C contracts, generally reflect the portion of net premiums written that were recorded as revenues for the period as the exposure periods expire.  Net premiums earned for long-duration contracts, typically traditional life contracts, generally are recognized as earned when due from policyholders. Net premiums earned increased for the three and six months ended June 30, 2013 in the Insurance - North American P&C segment primarily due to the increase in net premiums written as described above. Growth in our retail division was partially offset by lower earned premiums from our program business. Net premiums earned increased for the three and six months ended June 30, 2013 in our Insurance - Overseas General segment driven by strong performances in all product lines and the acquisitions described above. Net premiums earned increased for the three and six months ended June 30, 2013 in our Global Reinsurance segment primarily in our U.S. property line of business from higher premiums written in the current and prior years. Net premiums earned increased for the three and six months ended June 30, 2013 in our Life segment primarily due to growth in our Asian markets. However, net premiums earned decreased for the three and six months ended June 30, 2013 in our Insurance - North American Agriculture segment primarily due to higher reinsurance costs for the MPCI business.  In evaluating our segments excluding Life, we use the combined ratio, the loss and loss expense ratio, the policy acquisition cost ratio, and the administrative expense ratio. We calculate these ratios by dividing the respective expense amounts by net premiums earned. We do not calculate these ratios for the Life segment as we do not use these measures to monitor or manage that segment. The combined ratio is determined by adding the loss and loss expense ratio, the policy acquisition cost ratio, and the administrative expense ratio. A combined ratio under 100 percent indicates underwriting income and a combined ratio exceeding 100 percent indicates underwriting loss.   

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    The following table presents our consolidated loss and loss expense ratio, policy acquisition cost ratio, administrative expense ratio, and combined ratio for the periods indicated:                                    Three Months Ended          Six Months Ended                                               June 30                   June 30                                   2013           2012        2013          2012 Loss and loss expense ratio       58.7 %         59.5 %      58.0 %        58.3 % Policy acquisition cost ratio     15.9 %         16.1 %      16.5 %        16.7 % Administrative expense ratio      13.3 %         13.1 %      13.6 %        13.9 % Combined ratio                    87.9 %         88.7 %      88.1 %        88.9 %   

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

                                                           Three Months Ended          Six Months Ended                                                                       June 30                   June 30                                                          2013            2012        2013          2012 Loss and loss expense ratio, as reported                 58.7  %         59.5  %     58.0  %       58.3  % Catastrophe losses and related reinstatement premiums    (2.3 )%         (1.7 )%     (1.7 )%       (1.2 )% Prior period development                                  3.6  %          3.4  %      3.0  %        3.3  % Loss and loss expense ratio, adjusted                    60.0  %         

61.2 % 59.3 % 60.4 %

   Total net pre-tax catastrophe losses, excluding related reinstatement premiums, were $81 million and $113 million for the three and six months ended June 30, 2013, compared with $55 million and $74 million in the prior year periods, respectively. Catastrophe losses through June 30, 2013 were primarily related to flooding in Canada and Australia and severe weather-related events in the U.S. Catastrophe losses in the prior year periods were primarily related to severe weather-related events in the U.S. The adjusted loss and loss expense ratio decreased for the three and six months ended June 30, 2013 primarily due to an improved current accident year loss ratio in several lines of business in several regions.  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 net favorable prior period development of $128 million and $198 million for the three and six months ended June 30, 2013, respectively. This compares with net favorable prior period development of $113 million and $206 million in the prior year periods, respectively. Refer to "Prior Period Development" for additional information.  Net investment income for the three and six months ended June 30, 2013 was $534 million and $1.1 billion compared with $537 million and $1.1 billion for the prior year periods, respectively. Refer to "Net Investment Income" and "Investments" for additional information.  Policy acquisition costs consist of commissions, premium taxes, and certain underwriting costs related directly to the successful acquisition of a new or renewal insurance contract. Our policy acquisition cost ratio decreased for the three and six months ended June 30, 2013 primarily due to the acquisitions described above, which carry a lower acquisition rate than our other businesses.  Our administrative expense ratio increased slightly for the three months ended June 30, 2013 due primarily to an expense adjustment in the current period. The administrative expense ratio improved slightly for the six months ended June 30, 2013 primarily due to the favorable impact of a legal settlement, offset by expense adjustments in the current year period.  Our effective income tax rate, which we calculate as income tax expense divided by income before income tax, is dependent upon the mix of earnings from different jurisdictions with various tax rates. A change in the geographic mix of earnings would change the effective income tax rate. Our effective income tax rate was 11.5 percent and 11.4 percent for the three and six months ended June 30, 2013, respectively. Our effective income tax rate was 31.0 percent and 16.6 percent for the three and six months ended June 30, 2012, respectively. The decrease in effective tax rate was primarily due to net realized losses on derivatives generated in lower tax paying jurisdictions in the prior year. In addition, the effective tax rate was lower due to net                                                                               

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realized gains on derivatives as well as a higher percentage of earnings being generated in lower tax paying jurisdictions during the current year.

  Prior Period Development The favorable prior period development (PPD) of $128 million and $198 million during the three and six months ended June 30, 2013, respectively, was the net result of several underlying favorable and adverse movements. For the three and six months ended June 30, 2012, we experienced favorable PPD of $113 million and $206 million, respectively. 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, marine (including associated liability-related exposures) and agriculture.  

The following tables summarize (favorable) and adverse PPD by segment:

  Three Months Ended June 30                                                                                           % of net                                                                                                                        unpaid 

(in millions of U.S. dollars, except for percentages) Long-tail

        Short-tail           Total     reserves(1) 

2013

 Insurance - North American P&C                             $           (19 )    $         (28 )   $       (47 )           0.3 % Insurance - North American Agriculture                                   -                  -               -               - Insurance - Overseas General                                             1                (53 )           (52 )           0.7 % Global Reinsurance                                                     (27 )               (2 )           (29 )           1.3 % Total                                                      $           (45 )    $         (83 )   $      (128 )           0.5 % 2012 Insurance - North American P&C                             $           (24 )    $         (33 )   $       (57 )           0.4 % Insurance - North American Agriculture                                   -                 (2 )            (2 )           0.5 % Insurance - Overseas General                                             -                (39 )           (39 )           0.5 % Global Reinsurance                                                     (15 )                -             (15 )           0.7 % Total                                                      $           (39 )    $         (74 )   $      (113 )           0.4 % 

(1) Calculated based on the segment's total beginning of period net unpaid loss and loss expenses reserves.

   Six Months Ended June 30                                                                                             % of net                                                                                                                        unpaid

(in millions of U.S. dollars, except for percentages) Long-tail

        Short-tail           Total     reserves(1) 

2013

 Insurance - North American P&C                             $           (48 )     $        (39 )$       (87 )           0.5 % Insurance - North American Agriculture                                   -                 (3 )            (3 )           0.9 % Insurance - Overseas General                                             1                (75 )           (74 )           0.9 % Global Reinsurance                                                     (29 )               (5 )           (34 )           1.5 % Total                                                      $           (76 )     $       (122 )$      (198 )           0.7 % 2012 Insurance - North American P&C                             $           (74 )     $        (34 )$      (108 )           0.7 % Insurance - North American Agriculture                                   -                (11 )           (11 )           2.4 % Insurance - Overseas General                                             -                (61 )           (61 )           0.8 % Global Reinsurance                                                     (16 )              (10 )           (26 )           1.1 % Total                                                      $           (90 )     $       (116 )$      (206 )           0.8 % 

(1) Calculated based on the segment's total beginning of period net unpaid loss and loss expenses reserves.

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   Insurance - North American P&C Insurance - North American P&C experienced net favorable PPD of $47 million in the three months ended June 30, 2013, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:  

• Net favorable development of $19 million on long-tail business, including:

   •      Net favorable development of $28 million on our national accounts        portfolios which consist of commercial auto, general liability and        workers' compensation lines of business. This favorable movement was the        net impact of favorable and adverse movements, including:   

• Favorable development of $40 million impacting the 2012 accident year

related 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 $14 million impacting the 2009 accident year

primarily related to lower than expected case incurred loss activity in

           first dollar product lines within our national accounts portfolio;    •         Net favorable development of $14 million impacting the 2008 accident           year which consisted of $14 million adverse development in excess

automobile and general liability and $28 million favorable development

          on excess and high deductible workers' compensation lines. The adverse           activity in automobile and general liability was a function of higher

than expected incurred activity on a small number of large losses. The

favorable activity in workers' compensation was due to lower levels of

          reported losses than anticipated in our prior review and original           pricing assumptions; and    •         Adverse development of $40 million primarily impacting the 2006 and           prior accident years. The adverse loss activity was predominantly in

workers' compensation related product lines across a number of accident

years. The development was a function of higher than expected reported

          loss activity, higher allocated loss adjustment expenses, as well as           changes in weighting applied to experience-based methods.   

• Net favorable development of $11 million in our wholesale D&O product line

affecting accident years 2004 through 2008. The favorable development was

       largely due to reductions in estimates of ultimate exposure on a few large        claims;   

• Net adverse development of $24 million on our Brandywine run-off portfolios

of general liability and workers' compensation product lines impacting the

      1995 and prior accident years. Loss activity was higher than expected in       these portfolios; and    •     Net favorable development of $4 million across a number of lines and       accident years, none of which was significant individually or in the       aggregate.   

• Net favorable development of $28 million on short-tail business, including:

• Net favorable development of $15 million on wholesale property, primarily

impacting the 2011 and 2012 accident years. Paid and reported loss activity

was lower than expected since our prior review for these accident years;

      and    •     Net favorable development of $13 million across a number of lines and       accident years, none of which was significant individually or in the       aggregate.    Insurance - North American P&C experienced net favorable PPD of $57 million in the three months ended June 30, 2012, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:  

• Net favorable development of $24 million on long-tail business, including:

   •      Net favorable development of $38 million on our national accounts        portfolios which consist of commercial automobile liability, general

liability, and workers' compensation lines of business. This favorable

       development was the net impact of favorable and adverse movements,        including:                                                                                    49

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• Favorable development of $41 million on the 2011 accident year related

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 $34 million in the 2007 accident year,           primarily in workers' compensation. Loss activity through March 31,

2012 was lower than expected and was included in the review completed

during the three months ended June 30, 2012, in which we have increased

the weighting on experience-based methods. The favorable development

          was the combined effect of this lower than expected incurred loss           activity and our change in method weights; and    •         Adverse development of $37 million affecting the 2006 and prior           accident years largely in workers' compensation. The causes for this           adverse movement were numerous and included large increases in a small

number of claims, higher than expected loss activity in a few accident

          years, changes in our weighting of experience-based methods, and a           refinement of our treatment of ceded reinsurance recoveries on a few

select treaties due to information which became known since our prior

          review.   

• Adverse development of $14 million in other long-tail business across a

       number of lines and accident years, none of which was significant        individually or in the aggregate.   

• Favorable development of $33 million on short-tail business, including:

• Favorable development of $23 million in our general aviation product

lines (both hull and liability) affecting the 2009 and prior accident

          years. Actual paid and incurred loss activity continued to be lower           than expected based on long term historical averages leading to a           reduction in our estimate of ultimate losses; and   

• Favorable development of $10 million in other short-tail business

          across a number of lines and accident years, none of which was           significant individually or in the aggregate.    Insurance - North American Agriculture Insurance - North American Agriculture experienced favorable PPD of nil and $2 million in the three months ended June 30, 2013 and 2012, respectively, on short-tail business across a number of accident years, none of which was significant individually or in the aggregate.  Insurance - Overseas General Insurance - Overseas General experienced net favorable PPD of $52 million in the three months ended June 30, 2013, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:  

• Net adverse development of $1 million on long-tail business across a number

    of accident years, none of which was significant individually or in the     aggregate.   

• Favorable development of $53 million on short-tail business, including:

• Favorable development of $38 million across short-tail business in

accident years 2009 through 2012. Favorable emergence on large losses

across the wholesale energy book in accident years 2011 and 2012 and

favorable general emergence across the remainder of the short-tail lines

       was reflected in the quarter; and   

• Favorable development of $15 million on accident years 2007 and prior for

property claims and marine liability. Loss development from these more

mature years is mainly the result of favorable developments on specific

       litigated claims.      50

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   Insurance - Overseas General experienced net favorable PPD of $39 million in the three months ended June 30, 2012, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:  

• There was no overall adverse or favorable development on long-tail business

in the three months ended June 30, 2012.

• Net favorable development of $39 million on short-tail business, including:

• Favorable development of $20 million on wholesale marine business.

Favorable loss emergence across much of the short-tail first party marine

business in accident years 2010 and 2011 led to lower experience-based

       indications. In addition, case reductions on specific claims in older        accident years drove reserve releases;    •      Net favorable development of $15 million on short-tail property and

technical lines in Continental Europe, excluding catastrophes. Favorable

loss emergence in the boiler and machinery (B&M) business, driven by

better than expected loss activity on large accounts, primarily in

accident years 2010 and 2011 drove most of the reserve release. Adverse

movement in fire business in accident year 2011 driven by unfavorable loss

       emergence across the region mitigated the impact of the favorable B&M        reserve release; and   

• Favorable development of $4 million in other short-tail business across a

       number of lines and accident years, none of which was significant        individually or in the aggregate.    Global Reinsurance Global Reinsurance experienced net favorable PPD of $29 million in the three months ended June 30, 2013, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:  

• Net favorable development of $27 million on long-tail business, including:

• Favorable development of $18 million in the casualty line of business

principally in treaty years 2007 and prior. Following the reserve studies

completed in the three months ended June 30, 2013, we reflected a greater

weighting towards experience-based methods. Since experience has tended to

be generally favorable compared with assumptions, the changes resulted in

       the favorable development referenced above;   

• Favorable development of $18 million in the professional liability/D&O

line of business principally in treaty years 2008 and prior. Following the

       reserve studies completed in the three months ended June 30, 2013, we        reflected a greater weighting towards experience-based methods. Since

experience has tended to be generally favorable compared with assumptions,

       the changes resulted in the favorable development referenced above; and   

• Net adverse development of $9 million in the automobile line of business.

       There was $16 million of adverse development related to treaty years 2008        through 2011 where the loss experience was unfavorable due to higher than

expected reported claims and greater reliance on experience-based methods.

       There was also favorable development of $7 million in treaty years 2007        and prior, where experience was generally more favorable.    •   Net favorable development of $2 million on short-tail business across a

number of treaty years, none of which was significant individually or in the

     aggregate.    

Global Reinsurance experienced net favorable PPD of $15 million in the three months ended June 30, 2012, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:

• Net favorable development of $15 million on long-tail business, including:

• Favorable development of $36 million in the casualty line of business

principally in treaty years 2007 and prior. Following the reserve studies

completed in the three months ended June 30, 2012, we reflected a greater

weighting towards experience-based methods. Since experience has tended to

be generally favorable compared with assumptions, the changes resulted in

       the favorable development referenced above;   

• Net adverse development of $18 million in the professional liability/D&O

line of business. There was $26 million of adverse development related to

        treaty years 2006 through 2010 where the loss experience was unfavorable        due to                                                                                   51

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   higher than expected reported claims and greater reliance on experience-based methods. There was also favorable development of $8 million in treaty years 2004 and prior, where experience was generally more favorable; and  

• Adverse development of $3 million in other long-tail business across a

number of treaty years, none of which was significant individually or in

       the aggregate.   

• There was no prior period development on short-tail business in the three

months ended June 30, 2012.

__________________________________________________________________________________________________________

 Segment Operating Results - Three and Six Months Ended June 30, 2013 and 2012 The discussions that follow include tables that show our segment operating results for the three and six months ended June 30, 2013 and 2012. We operate through the following business segments: Insurance - North American P&C, Insurance - North American Agriculture, Insurance - Overseas General, Global Reinsurance, and Life. For additional information on our segments refer to "Segment Information" in our 2012 Form 10-K under Item 1. Insurance - North American Insurance - North American P&C The Insurance - North American P&C 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 and ACE Bermuda; and various run-off operations, including Brandywine Holdings Corporation (Brandywine).                                      Three Months Ended                        Six Months Ended                                                 June 30     % Change                    June 30       % Change (in millions of U.S. dollars,                               Q-13 vs.                                YTD-13 vs. except for percentages)               2013         2012         Q-12           2013        2012         YTD-12 Net premiums written            $    1,529$ 1,368         11.8  %   $   2,813$ 2,542           10.7  % Net premiums earned                  1,428        1,268         12.7  %       2,766       2,496           10.8  % Losses and loss expenses               950          844         12.6  %       1,828       1,655           10.5  % Policy acquisition costs               142          135          5.2  %         285         272            4.8  % Administrative expenses                159          153          3.9  %         284         303           (6.3 )% Underwriting income                    177          136         30.1  %         369         266           38.7  % Net investment income                  250          265         (5.7 )%         501         532           (5.8 )% Net realized gains (losses)             28           18         55.6  %          54          17          217.6  % Interest expense                         3            3            -              1           6          (83.3 )% Other (income) expense                 (10 )          2           NM            (25 )        (7 )        257.1  % Income tax expense                      91           96         (5.2 )%         185         179            3.4  % Net income                      $      371$   318         16.7  %   $     763$   637           19.8  % Loss and loss expense ratio           66.6 %       66.6 %                      66.1 %      66.3 % Policy acquisition cost ratio          9.9 %       10.6 %                      10.3 %      10.9 % Administrative expense ratio          11.1 %       12.1 %                      10.3 %      12.1 % Combined ratio                        87.6 %       89.3 %                      86.7 %      89.3 %    Net premiums written increased for the three and six months ended June 30, 2013 in our retail division reflecting growth across a broad range of our product portfolio including our risk management business, and specialty casualty, property and professional lines of business reflecting rate increases, exposure changes, strong renewal retention, and new business. In addition, we continued to generate higher personal lines production including growth in the homeowners, automobile, and umbrella business offered through ACE Private Risk Services. Our wholesale and specialty division contributed to the increase in net premiums written for the three and six months ended June 30, 2013 due to higher production from our property and   

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   professional lines of business. For the six months ended June 30, 2013, we also produced higher wholesale casualty written premiums. Net premiums earned increased for the three and six months ended June 30, 2013 primarily due to the increase in net premiums written as described above. Growth in net premiums earned for the retail division was partially offset by lower earned premiums from our program business. The following tables present a line of business breakdown of Insurance - North American P&C net premiums earned for the periods indicated:                                         Three Months Ended                               Six Months Ended                                                    June 30     % Change                           June 30       % Change (in millions of U.S. dollars, except for                                            Q-13 vs.                                       YTD-13 vs. percentages)                        2013              2012         Q-12             2013             2012         YTD-12

Property and all other $ 368$ 347 6.1 % $ 715$ 669

            6.9 % Casualty                             967               828         16.8 %          1,869            1,645           13.6 % Personal accident (A&H)               93                93            -              182              182              - Net premiums earned          $     1,428$      1,268         12.7 %   $      2,766$      2,496           10.8 %                                      2013              2012                          2013             2012                               % of Total        % of Total                    % of Total       % of Total Property and all other                26 %              27 %                          26 %             27 % Casualty                              68 %              65 %                          67 %             66 % Personal accident (A&H)                6 %               7 %                           7 %              7 % Net premiums earned                  100 %             100 %                         100 %            100 %  

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

                                                   Three Months Ended            Six Months Ended                                                               June 30                     June 30                                                  2013            2012         2013           2012

Loss and loss expense ratio, as reported 66.6 % 66.6 %

   66.1  %        66.3  % Catastrophe losses and related reinstatement premiums                                         (3.5 )%         (3.5 )%      (2.2 )%        (2.4 )% Prior period development                          3.4  %          4.5  %       3.2  %         4.4  % Loss and loss expense ratio, adjusted            66.5  %         67.6  %    

67.1 % 68.3 %

   Net pre-tax catastrophe losses, excluding reinstatement premiums, were $50 million and $61 million for the three and six months ended June 30, 2013, compared with $45 million and $59 million for the prior year periods, respectively. Catastrophe losses through June 30, 2013 and 2012 were primarily from flooding in Canada and severe weather-related events in the U.S. Net favorable prior period development was $47 million and $87 million for the three and six months ended June 30, 2013, compared with $57 million and $108 million in the prior year periods, respectively. Refer to the "Prior Period Development" section for additional information. For the three and six months ended June 30, 2013, the adjusted loss and loss expense ratio decreased as a result of a decrease in the loss and loss expense ratio in several of our professional, personal, and property lines where execution of detailed portfolio management plans has resulted in improved current accident year loss ratio performance, and to a lesser extent due to lower large losses.  The policy acquisition cost ratio decreased for the three and six months ended June 30, 2013 due to growth in certain businesses, primarily risk management, which incur lower acquisition expenses.  The administrative expense ratio decreased for the three and six months ended June 30, 2013 primarily due to growth in certain businesses which incur lower administrative expenses, and for the six months, from the favorable impact of a $29 million legal settlement in the current year. Insurance - North American Agriculture                                                                               

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   The Insurance - North American Agriculture segment comprises our North American based businesses that provide a variety of coverages in the U.S. and Canada including crop insurance, primarily MPCI and crop-hail through Rain and Hail as well as farm and ranch and specialty P&C commercial insurance products and services through our newly formed ACE Agribusiness unit.                                         Three Months Ended                   

Six Months Ended

                                                   June 30      % Change                      June 30        % Change (in millions of U.S. dollars,                                  Q-13 vs.                                   YTD-13 vs. except for percentages)              2013            2012          Q-12          2013           2012          YTD-12 Net premiums written            $     453$     492          (8.0 )%   $    566$    611            (7.4 )% Net premiums earned                   351             384          (8.8 )%        403            443            (9.1 )% Losses and loss expenses              293             319          (8.2 )%        325            357            (9.0 )% Policy acquisition costs               20              22          (9.1 )%         24             12           100.0  % Administrative expenses                 3               -            NM             8             (3 )            NM Underwriting income                    35              43         (18.6 )%         46             77           (40.3 )% Net investment income                   7               6          16.7  %         13             13               - Net realized gains (losses)             1               -            NM             1              -              NM Other (income) expense                  8               8             -            16             16               - Income tax expense                      8              11         (27.3 )%         10             19           (47.4 )% Net income                      $      27$      30         (10.0 )%   $     34$     55           (38.2 )% Loss and loss expense ratio          83.4 %          83.0  %                     80.6 %         80.5  % Policy acquisition cost ratio         5.6 %           5.9  %                      5.8 %          2.8  % Administrative expense ratio          0.9 %          (0.2 )%                      2.2 %         (0.6 )% Combined ratio                       89.9 %          88.7  %                     88.6 %         82.7  %   Net premiums written decreased for the three and six months ended June 30, 2013 primarily due to the purchase of proportional reinsurance on the MPCI business for the 2013 crop year, which is in addition to the excess of loss reinsurance coverage historically purchased.  The reinsurance related decrease in net premiums written was partially offset by increased production in the MPCI business and in our agriculture unit's property and casualty business. Net premiums earned decreased for the three and six months ended June 30, 2013 primarily due to higher reinsurance costs for the MPCI business.  

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

                                                   Three Months Ended            Six Months Ended                                                               June 30                     June 30                                                  2013            2012         2013           2012

Loss and loss expense ratio, as reported 83.4 % 83.0 %

   80.6  %        80.5  % Catastrophe losses and related reinstatement premiums                                         (0.8 )%         (1.1 )%      (0.7 )%        (1.3 )% Prior period development                            -             0.5  %       0.8  %         2.4  % Loss and loss expense ratio, adjusted            82.6  %         82.4  %    

80.7 % 81.6 %

   Net pre-tax catastrophe losses, excluding reinstatement premiums, were $3 million for both the three and six months ended June 30, 2013, compared with $4 million and $6 million for the prior year periods, respectively. Net favorable prior period development was nil and $3 million for the three and six months ended June 30, 2013, compared with $2 million and $11 million in the prior year periods, respectively. The adjusted loss and loss expense ratio was relatively flat for the three months ended June 30, 2013. For the six months ended June 30, 2013, the adjusted loss and loss expense ratio decreased due to a decrease in current accident year loss adjustment expenses reflecting a revision in estimated claim handling costs.    

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   The policy acquisition cost ratio decreased slightly for the three months ended June 30, 2013. The policy acquisition cost ratio increased for the six months ended June 30, 2013 primarily due to a $14 million benefit in the prior year period related to a revision in estimated agent profit share commissions for the MPCI business. A similar benefit did not occur in the current year.  The administrative expense ratio increased for the three and six months ended June 30, 2013 primarily reflecting higher Administrative and Operating expense (A&O) reimbursements on the MPCI business in the prior year period mainly due to additional reimbursements earned for high loss ratio states and underserved states. Insurance - Overseas General The Insurance - Overseas General segment comprises ACE International, our retail commercial P&C, A&H, and personal lines businesses serving territories outside the U.S., Bermuda, and Canada; the international supplemental A&H business of Combined Insurance; and the wholesale insurance business of AGM, our London-based excess and surplus lines business that includes Lloyd's of London Syndicate 2488. The reinsurance operation of AGM is included in the Global Reinsurance segment.                                       Three Months Ended                        Six Months Ended                                                  June 30     % Change                    June 30       % Change (in millions of U.S. dollars,                                Q-13 vs.                                YTD-13 vs. except for percentages)                2013         2012         Q-12           2013        2012         YTD-12 Net premiums written             $    1,630$ 1,475         10.5  %   $   3,250$ 3,003            8.2  % Net premiums earned                   1,563        1,420         10.1  %       3,022       2,811            7.5  % Losses and loss expenses                768          703          9.2  %       1,515       1,408            7.6  % Policy acquisition costs                360          332          8.4  %         699         667            4.8  % Administrative expenses                 251          233          7.7  %         487         462            5.4  % Underwriting income                     184          152         21.1  %         321         274           17.2  % Net investment income                   136          128          6.3  %         268         259            3.5  % Net realized gains (losses)               8           26        (69.2 )%          42          46           (8.7 )% Interest expense                          2            1        100.0  %           3           2           50.0  % Other (income) expense                   17            6        183.3  %          16           6          166.7  % Income tax expense                       50           51         (2.0 )%          96          89            7.9  % Net income                       $      259$   248          4.4  %   $     516$   482            7.1  % Loss and loss expense ratio            49.1 %       49.6 %                      50.1 %      50.1 % Policy acquisition cost ratio          23.0 %       23.4 %                      23.1 %      23.7 % Administrative expense ratio           16.1 %       16.3 %                      16.2 %      16.5 % Combined ratio                         88.2 %       89.3 %                      89.4 %      90.3 %                                                                                   55

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   Insurance - Overseas General conducts business internationally and in most major foreign currencies. The following table summarizes by major product line the approximate effect of changes in foreign currency exchange rates on the growth of net premiums written and earned for the periods indicated:                                           Three Months Ended               Six Months Ended                                                June 30, 2013                  June 30, 2013                                     P&C       A&H      Total       P&C       A&H      Total Net premiums written: Growth in original currency        17.2  %    7.8  %    13.7  %   12.8  %    4.9  %     9.9  % Foreign exchange effect            (3.8 )%   (2.3 )%    (3.2 )%   (2.3 )%   (0.8 )%    (1.7 )% Growth as reported in U.S. dollars 13.4  %    5.5  %    10.5  %   10.5  %    4.1  %     8.2  % Net premiums earned: Growth in original currency        19.5  %    2.0  %    13.0  %   13.7  %    2.1  %     9.3  % Foreign exchange effect            (3.6 )%   (1.6 )%    (2.9 )%   (2.6 )%   (0.5 )%    (1.8 )% Growth as reported in U.S. dollars 15.9  %    0.4  %    10.1  %   11.1  %   

1.6 % 7.5 %

    Net premiums written increased for the three and six months ended June 30, 2013. The growth was driven by the acquisitions of ABA Seguros in May 2013, Fianzas Monterrey in April 2013, and Jaya Proteksi in September 2012. In addition, growth was reported in our retail operations in all of our product lines - P&C, A&H, and personal lines. P&C growth was reported across all regions of our retail operations, led by the U.K. which was driven by moderate price increases, strong renewal retention, and improved new business writings. A&H growth was primarily driven by strong results in Latin America, Asia, and Europe. Personal lines growth reflected new business opportunities in Europe and Asia. A slight decline in wholesale operations, as well as the unfavorable impact of foreign exchange, partially offset this growth. Net premiums earned increased for the three and six months ended June 30, 2013 driven by strong performance in all product lines and from the acquisitions described above. Regionally, the increase was in our European, Latin American, and Asian operations. The following tables present a line of business breakdown of Insurance - Overseas General net premiums earned for the periods indicated:                                         Three Months Ended                               Six Months Ended                                                    June 30     % Change                           June 30       % Change (in millions of U.S. dollars, except for                                            Q-13 vs.                                       YTD-13 vs. percentages)                        2013              2012         Q-12             2013             2012         YTD-12

Property and all other $ 658$ 552 19.2 % $ 1,243$ 1,090

           14.0 % Casualty                             374               338         10.7 %            713              671            6.3 % Personal accident (A&H)              531               530          0.2 %          1,066            1,050            1.5 % Net premiums earned          $     1,563$      1,420         10.1 %   $      3,022$      2,811            7.5 %                                      2013              2012                          2013             2012                               % of Total        % of Total                    % of Total       % of Total Property and all other                42 %              39 %                          41 %             39 % Casualty                              24 %              24 %                          24 %             24 % Personal accident (A&H)               34 %              37 %                          35 %             37 % Net premiums earned                  100 %             100 %                         100 %            100 %     56

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

                                                   Three Months Ended            Six Months Ended                                                               June 30                     June 30                                                  2013            2012         2013           2012

Loss and loss expense ratio, as reported 49.1 % 49.6 %

   50.1  %        50.1  % Catastrophe losses and related reinstatement premiums                                         (1.1 )%         (0.4 )%      (1.3 )%        (0.2 )% Prior period development                          3.3  %          2.7  %       2.5  %         2.1  % Loss and loss expense ratio, adjusted            51.3  %         51.9  %    

51.3 % 52.0 %

    Net pre-tax catastrophe losses, excluding reinstatement premiums, were $17 million and $38 million for the three and six months ended June 30, 2013, compared with $5 million and $7 million in the prior year periods, respectively. Catastrophe losses through June 30, 2013 were primarily related to flooding in Australia and Canada. Catastrophe losses through June 30, 2012 were primarily a result of flooding in the U.K. Net favorable prior period development was $52 million and $74 million for the three and six months ended June 30, 2013, compared with $39 million and $61 million in the prior year periods, respectively. Refer to the "Prior Period Development" section for additional information. The adjusted loss and loss expense ratio decreased for the three and six months ended June 30, 2013 due primarily to the reduction in the current accident year loss ratio across several lines of business in several regions and a favorable change in the mix of business. In addition, the decrease for the six months reflects large property losses in the prior year period that did not occur in the current year.  The policy acquisition cost ratio decreased for the three and six months ended June 30, 2013 primarily due to the acquisitions described above, which carry a lower acquisition rate than our other businesses. The administrative expense ratio decreased for the three and six months ended June 30, 2013 due to the acquisitions described above, which generate lower expenses than our other businesses, and A&H regulatory fees paid in Europe in the prior year period.                                                                                 57

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  Table of Contents   Global Reinsurance  The Global Reinsurance segment represents our reinsurance operations comprising ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re International, and ACE Tempest Re Canada. Global Reinsurance markets its reinsurance products worldwide under the ACE Tempest Re brand name and provides a broad range of coverage to a diverse array of primary P&C companies.                                         Three Months Ended                  

Six Months Ended

                                                    June 30     % Change                      June 30       % Change (in millions of U.S. dollars,                                  Q-13 vs.                                  YTD-13 vs. except for percentages)               2013            2012         Q-12          2013           2012         YTD-12 Net premiums written             $     292$     309         (5.3 )%   $    571$    572           (0.1 )% Net premiums earned                    245             237          3.6  %        492            467            5.4  % Losses and loss expenses                93             102         (8.8 )%        199            204           (2.5 )% Policy acquisition costs                48              42         14.3  %         96             85           12.9  % Administrative expenses                 12              13         (7.7 )%         24             25           (4.0 )% Underwriting income                     92              80         15.0  %        173            153           13.1  % Net investment income                   71              70          1.4  %        143            141            1.4  % Net realized gains (losses)             31             (17 )         NM            51             (4 )           NM Interest expense                         1               1            -             2              2              - Other (income) expense                   2               3        (33.3 )%         (6 )           (2 )        200.0  % Income tax expense                       7               -           NM            15              6          150.0  % Net income                       $     184$     129         42.6  %   $    356$    284           25.4  % Loss and loss expense ratio           37.7 %          42.5 %                     40.3 %         43.5 % Policy acquisition cost ratio         19.9 %          17.8 %                     19.6 %         18.3 % Administrative expense ratio           4.6 %           5.8 %                      4.9 %          5.3 % Combined ratio                        62.2 %          66.1 %                     64.8 %         67.1 %    Net premiums written decreased for the three months ended June 30, 2013 due to increased property catastrophe cessions to a newly formed reinsurance sidecar, Altair Re, that more than offset strong renewal retention and new business written, primarily in our U.S. property and U.S. automobile lines of business. For the six months ended June 30, 2013, net premiums written were relatively flat as the increased cessions substantially offset the higher premiums written, primarily in our U.S. property and U.S. automobile lines of business.  Net premiums earned increased for the three and six months ended June 30, 2013 primarily in our U.S. property line of business from higher premiums written in the current and prior years.   58

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

                                            Three Months Ended                                 Six Months Ended                                                      June 30     % Change                             June 30        % Change (in millions of U.S. dollars, except for                                              Q-13 vs.                                         YTD -13 vs. percentages)                         2013               2012         Q-12              2013              2012         YTD -12 Property and all other       $         59       $         42         40.5  %   $        119$        84            42.0  % Casualty                              113                123         (8.1 )%            225               243            (7.0 )% Property catastrophe                   73                 72          1.4  %            148               140             6.0  % Net premiums earned          $        245$        237          3.6  %   $        492$       467             5.4  %                                       2013               2012                           2013              2012                                % of Total         % of Total                     % of Total        % of Total

Property and all other                 24 %               18 %                           24 %              18 % Casualty                               46 %               52 %                           46 %              52 % Property catastrophe                   30 %               30 %                           30 %              30 % Net premiums earned                   100 %              100 %                          100 %             100 %  

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

                                                    Three Months Ended            Six Months Ended                                                               June 30                     June 30                                                  2013            2012         2013           2012

Loss and loss expense ratio, as reported 37.7 % 42.5 %

   40.3  %        43.5  % Catastrophe losses and related reinstatement premiums                                         (4.6 )%         (0.7 )%      (2.2 )%        (0.5 )% Prior period development                         12.2  %          6.5  %       7.0  %         5.5  % Loss and loss expense ratio, adjusted            45.3  %         48.3  %    

45.1 % 48.5 %

   Net pre-tax catastrophe losses were $11 million for both the three and six months ended June 30, 2013, compared with $1 million and $2 million in the prior year periods, respectively. Catastrophe losses through June 30, 2013 were primarily related to flooding in Canada and Europe. Net favorable prior period development was $29 million and $34 million for the three and six months ended June 30, 2013, compared with $15 million and $26 million in the prior year periods, respectively. Refer to the "Prior Period Development" section for additional information. The adjusted loss and loss expense ratio decreased for the three and six months ended June 30, 2013 primarily due to a change in the mix of business towards lower loss ratio products.  The policy acquisition cost ratio increased for the three and six months ended June 30, 2013 primarily due to a change in the mix of business towards products that have a higher acquisition cost ratio.  

The administrative expense ratio decreased for the three and six months ended June 30, 2013 as a result of the increase in net premiums earned.

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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 fair value changes in separate account assets that do not qualify for separate account reporting under GAAP.                                     Three Months Ended                       

Six Months Ended

                                               June 30     % Change                   June 30       % Change (in millions of U.S. dollars,                             Q-13 vs.                               YTD-13 vs. except for percentages)               2013       2012         Q-12           2013       2012         YTD-12 Net premiums written             $     487$  486          0.2  %   $     989$  974            1.6  % Net premiums earned                    480        474          0.9  %         957        947            1.0  % Losses and loss expenses               145        151         (4.0 )%         302        299            1.0  % Policy benefits                        110        102          7.8  %         241        249           (3.2 )% (Gains) losses from fair value changes in separate account assets(1)                               11         14        (21.4 )%           7         (4 )           NM Policy acquisition costs                95         88          8.0  %         175        164            6.7  % Administrative expenses                 86         78         10.3  %         171        156            9.6  % Net investment income                   63         62          1.6  %         126        123            2.4  % Life underwriting income                96        103         (6.8 )%         187        206           (9.2 )% Net realized gains (losses)             36       (421 )         NM            163       (190 )           NM Interest expense                         4          3         33.3  %           8          6           33.3  % Other (income) expense(1)                3          5        (40.0 )%           3         14          (78.6 )% Income tax expense                      10         19        (47.4 )%          23         30          (23.3 )% Net income (loss)                $     115$ (345 )         NM      $     316$  (34 )           NM  

(1) (Gains) losses from fair value changes in separate account assets that do

not qualify for separate account reporting under GAAP are reclassified from

Other (income) expense for purposes of presenting Life underwriting income.

   The following table presents a line of business breakdown of Life net premiums written and deposits collected on universal life and investment contracts for the periods indicated:                                      Three Months Ended                       Six Months Ended                                                June 30     % Change                   June 30       % Change (in millions of U.S. dollars,                              Q-13 vs.                               YTD-13 vs. except for percentages)               2013        2012         Q-12           2013       2012         YTD-12 A&H                              $     252$   244          3.3  %   $     513$  487            5.3  % Life insurance                         163         166         (1.8 )%         330        326            1.2  % Life reinsurance                        72          76         (5.3 )%         146        161           (9.3 )% Net premiums written (excludes deposits below)                  $     487$   486          0.2  %   $     989$  974            1.6  %  Deposits collected on universal life and investment contracts    $     222$   133         66.9  %   $     424$  261           62.5  %    A&H net premiums written increased for the three and six months ended June 30, 2013 due to growth in certain program business and higher production. Life insurance net premiums written were relatively flat for the three and six months ended June 30, 2013. Life reinsurance net premiums written decreased for the three and six months ended June 30, 2013 because no new life reinsurance business is currently being written.  

Deposits collected on universal life and investment contracts (life deposits) are not reflected as revenues in our consolidated

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   statements of operations in accordance with GAAP. New life deposits are an important component of production and key to our efforts to grow our business. Although life deposits do not significantly affect current period income from operations, they are an important indicator of future profitability. The increase in life deposits collected for the three and six months ended June 30, 2013 is primarily due to growth in our Asian markets.  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 the three and six months ended June 30, 2013, realized gains of $101 million and $470 million, respectively, were associated with net decreases in the value of GLB liabilities; these decreases were primarily due to rising equity levels, higher interest rates, and a weakening yen, partially offset by an increased value of GLB liabilities due to the unfavorable impact of discounting future claims for one and two fewer quarters, respectively. In addition, we experienced realized losses of $68 million and $318 million for the three and six months ended June 30, 2013, respectively, due to a decrease in the value of the derivative instruments, which decrease in value when the S&P 500 index increases.  

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Other (Income) and Expense Items

                                                          Three Months Ended              Six Months Ended                                                                     June 30                       June 30 (in millions of U. S. dollars)                      2013               2012          2013            2012 Amortization of intangible assets             $       23$       12$      38$      24 Equity in net (income) loss of partially-owned entities                             (14 )                5           (49 )           (14 ) (Gains) losses from fair value changes in separate account assets                               11                 14             7              (4 ) Federal excise and capital taxes                       6                  5            11               9 Acquisition-related costs                              2                  1             2               3 Other                                                  9                 (3 )          18              13 Other (income) expense                        $       37$       34$      27$      31    Other (income) expense includes Amortization of intangible assets, which is higher in 2013 due primarily to the acquisitions of Fianzas Monterrey (completed April 1, 2013) and ABA Seguros (completed May 2, 2013). 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. Also included in Other (income) expense are (Gains) losses from fair value changes in separate account assets that do not qualify for separate account reporting under GAAP. The offsetting movement in the separate account liabilities is included in Policy benefits in the consolidated statements of operations. Certain federal excise and capital taxes incurred as a result of capital management initiatives are included in Other (income) expense as these are considered capital transactions and are excluded from underwriting results.  The following table presents, as of June 30, 2013, the estimated amortization expense related to intangible assets for the third and fourth quarters of 2013 and the next five years: For the Year Ending December 31 (in millions of U.S. dollars)       Amortization of intangible assets Third and fourth quarters of 2013 $                                53 2014                                                               87 2015                                                               73 2016                                                               55 2017                                                               49 2018                                                               46 Total                             $                               363                                                                                    61

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Net Investment Income                                      Three Months Ended          Six Months Ended                                                 June 30                   June 30 (in millions of U.S. dollars)      2013            2012          2013        2012 Fixed maturities              $     518$     527$   1,034$ 1,071 Short-term investments                7               9            13          18 Equity securities                    12               9            20          17 Other investments                    26              20            57          28 Gross investment income             563             565         1,124       1,134 Investment expenses                 (29 )           (28 )         (59 )       (53 ) Net investment income         $     534$     537$   1,065$ 1,081    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 decreased one percent and two percent for the three and six months ended June 30, 2013, respectively, compared with the prior year periods. The decline in net investment income was primarily due to lower reinvestment rates offset by a higher overall average invested asset base and higher private equity and other distributions.  The investment portfolio's average market yield on fixed maturities was 2.9 percent and 2.8 percent at June 30, 2013 and 2012, 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 1.2 percent and 1.1 percent yields on short-term investments for the three and six months ended June 30, 2013, respectively, reflect the global nature of our insurance operations. For example, yields on short-term investments in Malaysia, Mexico and Indonesia range from 3.0 percent to 6.5 percent.  The yield on our equity securities portfolio is high relative to the yield on the S&P 500 Index because of dividends on preferred equity securities and because we classify our strategic emerging debt portfolio, which is a mutual fund, as equity. The preferred equity securities and strategic emerging debt portfolio represent approximately 58 percent of our equity securities portfolio.  

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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 c) to the consolidated financial statements. Additionally, Net income is impacted through the reporting of changes in the fair value of derivatives, including financial futures, options, swaps, and GLB reinsurance. Changes in unrealized appreciation and depreciation on available for sale securities, which result from the revaluation of securities held, are reported as a separate component of Accumulated other comprehensive income in Shareholders' equity in the consolidated balance sheets.    

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The following tables present our pre-tax net realized and unrealized gains (losses) as well as a breakdown of our OTTI and other net realized gains (losses) on investments for the periods indicated:

                                            Three Months Ended June 30, 2013                  Three Months Ended June 30, 2012                                         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                 $       31$     (1,466 )$ (1,435 )$        68$        251$    319 Fixed income derivatives                 40                  -            40             (49 )                -            (49 ) Total fixed maturities                   71             (1,466 )      (1,395 )            19                251            270 Public equity                             7                (57 )         (50 )            (5 )               (9 )          (14 ) Private equity                           (1 )               15            14              (5 )               16             11 Other                                     -                  -             -               2                 (3 )           (1 ) Subtotal                                 77             (1,508 )      (1,431 )            11                255            266 Derivatives Fair value adjustment on insurance derivatives                   101                  -           101            (467 )                -           (467 ) S&P put option and futures              (68 )                -           (68 )            70                  -             70 Fair value adjustment on other derivatives                              (1 )                -            (1 )             1                  -              1 Subtotal derivatives                     32                  -            32            (396 )                -           (396 ) Foreign exchange losses                  (5 )                -            (5 )            (9 )                -             (9 ) Total gains (losses)             $      104$     (1,508 )$ (1,404 )$      (394 )$        255$   (139 )                                                 Six Months Ended June 30, 2013                  Six Months Ended June 30, 2012                                         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                 $       67$     (1,657 )$ (1,590 )$       102$        494$    596 Fixed income derivatives                 58                  -           58              (7 )                -           (7 ) Total fixed maturities                  125             (1,657 )     (1,532 )            95                494          589 Public equity                             6                (43 )        (37 )            (4 )               29           25 Private equity                           (2 )               40           38              (7 )               23           16 Other                                     -                  1            1               -                  1            1 Subtotal                                129             (1,659 )     (1,530 )            84                547          631 Derivatives Fair value adjustment on insurance derivatives                   429                  -          429             (39 )                -          (39 ) S&P put option and futures             (318 )                -         (318 )          (161 )                -         (161 ) Fair value adjustment on other derivatives                              (1 )                -           (1 )            (4 )                -           (4 ) Subtotal derivatives                    110                  -          110            (204 )                -         (204 ) Foreign exchange gains (losses)          71                  -           71             (14 )                -          (14 ) Total gains (losses)             $      310$     (1,659 )$ (1,349 )$      (134 )$        547$    413                                                                                    63

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                                                   Three Months Ended June 30, 2013               Three Months Ended June 30, 2012                                                         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                 $         (6 )       $        37$       31$      (1 )$       69$      68 Public equity                               -                   7              7            (4 )             (1 )            (5 ) Private equity                             (1 )                 -             (1 )          (5 )              -              (5 ) Other                                       -                   -              -             -                2               2 Total                            $         (7 )       $        44$       37$     (10 )$       70$      60                                                    Six Months Ended June 30, 2013                 Six Months Ended June 30, 2012                                                         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                 $         (7 )       $        74$       67$      (8 )$      110$     102 Public equity                              (1 )                 7              6            (5 )              1              (4 ) Private equity                             (2 )                 -             (2 )          (7 )              -              (7 ) Total                            $        (10 )$        81$       71$     (20 )$      111$      91    Our Net realized gains (losses) for the three and six months ended June 30, 2013, included write-downs of $7 million and $10 million, respectively, as a result of an other-than-temporary decline in fair value of certain securities. This compares with write-downs of $10 million and $20 million for the three and six months ended June 30, 2012, respectively.  At June 30, 2013, our investment portfolios held by U.S. legal entities included approximately $213 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 $75 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 $3 million at June 30, 2013. 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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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). The portfolio is externally managed by independent, professional investment managers and is broadly diversified across geographies, sectors, and issuers. 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, comprising senior executives, including our Chief Financial Officer, our Chief Risk Officer, our Chief Investment Officer, and our Treasurer. We also have well-established, strict contractual investment rules requiring managers to maintain highly diversified exposures to individual issuers and closely monitor investment manager compliance with portfolio guidelines.  The average duration of our fixed income securities, including the effect of options and swaps, was 4.1 years and 3.9 years at June 30, 2013 and December 31, 2012, respectively. We estimate that a 100 basis point (bps) increase in interest rates would reduce the valuation of our fixed income portfolio by approximately $2.3 billion at June 30, 2013.    

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   The following table shows the fair value and cost/amortized cost of our invested assets:                                               June 30, 2013             December 31, 2012                                                       Cost/                         Cost/                                         Fair      Amortized           Fair      Amortized (in millions of U.S. dollars)          Value           Cost          Value  

Cost

Fixed maturities available for sale $ 47,016$ 45,988$ 47,306

$    44,666 Fixed maturities held to maturity      6,762          6,576          7,633          7,270 Short-term investments                 2,425          2,425          2,228          2,228                                       56,203         54,989         57,167         54,164 Equity securities                        837            843            744            707 Other investments                      2,836          2,543          2,716          2,465 Total investments                   $ 59,876$    58,375$   60,627$    57,336    The fair value of our total investments decreased $751 million during the six months ended June 30, 2013, primarily due to the negative impact of rising interest rates on the valuation of our portfolio and unfavorable foreign exchange, partially offset by the investing of operating cash flows. The following tables show the market value of our fixed maturities and short-term investments at June 30, 2013 and December 31, 2012. The first table lists investments according to type and the second according to S&P credit rating:                                                         June 30, 2013           December 31, 2012 (in millions of U.S. dollars, except for        Market     Percentage       Market     Percentage percentages)                                     Value       of Total        Value       of Total Treasury                                      $  2,578              5 %   $  2,794              5 % Agency                                           1,586              3 %      2,024              4 % Corporate and asset-backed securities           18,972             34 %     18,983             33 % Mortgage-backed securities                      11,445             20 %     12,589             22 % Municipal                                        4,451              8 %      3,872              7 % Non-U.S.                                        14,746             26 %     14,677             25 % Short-term investments                           2,425              4 %      2,228              4 % Total                                         $ 56,203            100 %   $ 57,167            100 % AAA                                           $  9,408             17 %   $  9,285             16 % AA                                              20,557             36 %     22,014             39 % A                                               11,105             20 %     10,760             19 % BBB                                              6,765             12 %      6,591             12 % BB                                               3,940              7 %      4,146              7 % B                                                4,056              7 %      3,846              6 % Other                                              372              1 %        525              1 % Total                                         $ 56,203            100 %   $ 57,167            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 June 30, 2013, the state of California, including political subdivisions and other municipal issuers within the state, represented approximately 14 percent of our Municipal investments. A majority of the state of California exposure represents special revenue bonds. Over 77 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 46 percent and 54 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

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   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 73 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 A 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 daily 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. 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 June 30, 2013: (in millions of U.S. dollars)                                   Market Value      Amortized Cost United Kingdom                                                $        1,067     $         1,067 Canada                                                                   843                 835 Republic of Korea                                                        588                 558 United Mexican States                                                    463                 462 France                                                                   391                 388 Germany                                                                  385                 383 Japan                                                                    309                 309 Kingdom of Thailand                                                      232                 233 Federative Republic of Brazil                                            220                 222 Province of Ontario                                                      215                 210 Province of Quebec                                                       179                 176 Commonwealth of Australia                                                178                 172 State of Queensland                                                      139                 133 Federation of Malaysia                                                   125                 125 Swiss Confederation                                                      118                 115 People's Republic of China                                               114                 112 Taiwan                                                                    85                  84 Socialist Republic of Vietnam                                             83                  78 State of New South Wales                                                  72                  68 Russian Federation                                                        59                  60 State of Victoria                                                         50                  48 Republic of Indonesia                                                     48                  50 Republic of Colombia                                                      47                  48 Arab Republic of Egypt                                                    41                  39 Dominion of New Zealand                                                   39                  39 Other Non-U.S. Government(1)                                             759                 751 Non-U.S. Government Securities                                         6,849               6,765 Eurozone Non-U.S. Corporate (excluding United Kingdom)(2)              2,270               2,198 Other Non-U.S. Corporate                                               5,627               5,461 Total                                                         $       14,746$        14,424

(1) There are no investments in Portugal, Ireland, Italy, Greece or Spain. 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.     66

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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 June 30, 2013:                                                             Market Value by Industry                           Amortized Cost (in millions of U.S. dollars)            Bank       Financial       Industrial       Utility       Total Netherlands                            $  195$       123$        332$     160$   810     $            780 France                                    116              35              183           154         488                  476 Luxembourg                                  9               5              255            78         347                  339 Germany                                   204               -               62             5         271                  263 Euro Supranational                        131               -                -             -         131                  127 Ireland                                    12               1              100            12         125                  120 Belgium                                    10               -               36             -          46                   45 Finland                                    10               -               10             3          23                   22 Austria                                    19               -                3             -          22                   20 Spain                                       6               -                -             -           6                    6 Portugal                                    -               -                1             -           1                    -

Eurozone Non-U.S. Corporate Securities$ 712$ 164$ 982$ 412$ 2,270 $ 2,198

   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 June 30, 2013: (in millions of U.S. dollars)  Market Value      Amortized Cost KFW                           $         135    $            131 Rabobank Nederland NV                   109                 104 European Investment Bank                103                 100 Bank Nederlandse Gemeenten               40                  39 Credit Agricole Groupe                   34                  34 BNP Paribas SA                           32                  31 Erste Abwicklungsanstalt                 24                  23 Groupe BPCE                              24                  23 Societe Generale SA                      18                  17 EUROFIMA                                 16                  15    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 June 30, 2013: (in millions of U.S. dollars)  Market Value      Amortized Cost Intelsat SA                   $          90    $             88 Electricite de France SA                 89                  87 Royal Dutch Shell PLC                    71                  69 ING Groep NV                             71                  68 Deutsche Telekom AG                      64                  59 LyondellBasell Industries NV             56                  51 France Telecom SA                        40                  39 NIBC Holding NV                          33                  32 Porsche Automobil Holding SE             32                  32 General Electric Co                      31                  29                                                                                    67

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   The table below summarizes our largest exposures to corporate bonds by market value at June 30, 2013: (in millions of U.S. dollars)     Market Value JP Morgan Chase & Co             $         479 Goldman Sachs Group Inc                    430 General Electric Co                        388 Citigroup Inc                              303 Bank of America Corp                       274 Morgan Stanley                             269 Verizon Communications Inc                 246 Wells Fargo & Co                           236 AT&T INC                                   212 HSBC Holdings Plc                          207 Comcast Corp                               185 Mondelez International Inc                 154 Anheuser-Busch InBev NV                    144 BP Plc                                     132 Pfizer Inc                                 123 Time Warner Cable Inc                      120 Duke Energy Corp                           116 Barclays Plc                               114 American Express Co                        111 Enterprise Products Partners LP            110 Rabobank Nederland NV                      109 Philip Morris International Inc            108 Royal Bank of Scotland Group Plc           106 UBS AG                                     103 Twenty-First Century Fox Inc                98   

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 Mortgage-backed securities Additional details on the mortgage-backed component of our investment portfolio at June 30, 2013, are provided below:                                                                 S&P Credit 

Rating

                                                                                       BB and (in millions of U.S. dollars)             AAA          AA          A        BBB        below        Total Market value: Agency residential mortgage-backed (RMBS)                                $     -     $ 9,671     $    -     $    -     $      -     $  9,671 Non-agency RMBS                            68          11         30         23          198          330 Commercial mortgage-backed              1,414          13         10          7            -        1,444 Total mortgage-backed securities, at market value                          $ 1,482$ 9,695$   40$   30$    198$ 11,445 Amortized cost: Agency RMBS                           $     -     $ 9,570     $    -     $    -     $      -     $  9,570 Non-agency RMBS                            67          10         29         23          210          339 Commercial mortgage-backed              1,399          11          9          6            -        1,425 Total mortgage-backed securities, at amortized cost                        $ 1,466$ 9,591$   38$   29$    210$ 11,334     68

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    Our mortgage-backed securities are rated predominantly AA and comprise 20 percent of our fixed income portfolio. This compares with a 31 percent mortgage-backed weighting in representative indices of the U.S. fixed income market at June 30, 2013. The minimum rating for our 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 97 percent of our total RMBS portfolio.

  Our commercial mortgage-backed securities (CMBS) are rated predominantly AAA and broadly diversified with over 13,000 loans with 29 percent of the portfolio issued before 2006 and 52 percent issued after 2009. The average loan-to-value ratio is approximately 64 percent with a debt service coverage ratio in excess of 1.9 and weighted-average subordinated collateral of 31 percent. The cumulative foreclosure rate would have to rise to 44 percent before principal is impaired. The foreclosure rate of our CMBS portfolio at June 30, 2013 was 1.9 percent.  Below-investment grade corporate fixed income portfolio Below-investment grade securities have different characteristics than investment grade corporate debt securities. Risk of loss from default by the borrower is greater with below-investment grade securities. Below-investment grade securities are generally unsecured and are often subordinated to other creditors of the issuer. Also, issuers of below-investment grade securities usually have higher levels of debt and are more sensitive to adverse economic conditions, such as recession or increasing interest rates, than are investment grade issuers. At June 30, 2013, our corporate fixed income investment portfolio included below-investment grade and non-rated securities which, in total, comprised approximately 14 percent of our fixed income portfolio. Our below-investment grade and non-rated portfolio includes approximately 1,075 issuers, with the greatest single exposure being $97 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.  

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 Critical Accounting Estimates As of June 30, 2013, there were no material changes to our critical accounting estimates. For full discussion of our critical accounting estimates, refer to Item 7 in our 2012 Form 10-K.  Reinsurance recoverable on ceded reinsurance The following table presents a composition of our reinsurance recoverable for the periods indicated:                                                                   June 30       December 31 (in millions of U.S. dollars)                                        2013              2012 

Reinsurance recoverable on unpaid losses and loss expenses (1) $ 10,738

$      11,399 Reinsurance recoverable on paid losses and loss expenses (1)          704               679 

Net reinsurance recoverable on losses and loss expenses $ 11,442

$      12,078 Reinsurance recoverable on policy benefits                     $      240     $         241   (1)  Net of provision for uncollectible reinsurance    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 potential 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 $2.4

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   billion and $2.5 billion of collateral at June 30, 2013 and December 31, 2012, respectively. The decrease in net reinsurance recoverable on losses and loss expenses was primarily due to crop activity, the impact of foreign exchange, and favorable PPD.  Unpaid losses and loss expenses As an insurance and reinsurance company, we are required by applicable laws and regulations and GAAP to establish loss and loss expense reserves for the estimated unpaid portion of the ultimate liability for losses and loss expenses under the terms of our policies and agreements with our insured and reinsured customers. The estimate of the liabilities includes provisions for claims that have been reported but are unpaid at the balance sheet date (case reserves) and for obligations on claims that have been incurred but not reported (IBNR) at the balance sheet date. IBNR may also include provisions to account for the possibility that reported claims may settle for amounts that differ from the established reserves. Loss reserves also include an estimate of expenses associated with processing and settling unpaid claims (loss expenses). At June 30, 2013, our gross unpaid loss and loss expense reserves were $37.3 billion and our net unpaid loss and loss expense reserves were $26.6 billion. With the exception of certain structured settlements, for which the timing and amount of future claim payments are reliably determinable, and certain reserves for unsettled claims that are discounted in statutory filings, our loss reserves are not discounted for the time value of money.  

The following table presents a roll-forward of our unpaid losses and loss expenses:

                                                   Gross         Reinsurance 

Net

 (in millions of U.S. dollars)                    Losses      Recoverable(1) 

Losses

 Balance at December 31, 2012                   $ 37,946$        11,399$ 26,547 Losses and loss expenses incurred                 5,490               1,314 

4,176

 Losses and loss expenses paid                    (5,784 )            (1,873 )     (3,911 ) Other (including foreign exchange translation)     (309 )              (102 )       (207 ) Balance at June 30, 2013                       $ 37,343$        10,738$ 26,605

(1) Net of provision for uncollectible reinsurance

    The process of establishing loss reserves for property and casualty claims can be complex and is subject to considerable uncertainty as it requires the use of informed estimates and judgments based on circumstances known at the date of accrual.  

The following table presents our total reserves segregated between case reserves (including loss expense reserves) and IBNR reserves:

                                                  June 30, 2013                    December 31, 2012 (in millions of U.S. dollars)    Gross       Ceded         Net        Gross       Ceded         Net Case reserves                 $ 16,102$  4,791$ 11,311$ 16,804$  5,406$ 11,398 IBNR reserves                   21,241       5,947      15,294       21,142       5,993      15,149 Total                         $ 37,343$ 10,738$ 26,605$ 37,946$ 11,399$ 26,547

Asbestos and Environmental (A&E) and Other Run-off Liabilities There was no unexpected A&E reserve activity during the six months ended June 30, 2013. Refer to our 2012 Form 10-K for additional information.

  Fair value measurements The accounting guidance on fair value measurements defines fair value as the price to sell an asset or transfer a liability in an orderly transaction between market participants and establishes a three-level valuation hierarchy in which inputs into valuation techniques used to measure fair value are classified.  The fair value hierarchy gives the highest priority to quoted prices in active markets (Level 1 inputs) and the lowest priority to unobservable data (Level 3 inputs). Inputs in Level 1 are unadjusted quoted prices for identical assets or liabilities in active markets. Level 2 includes inputs other than quoted prices included within Level 1 that are observable for assets or liabilities either directly or indirectly. Level 2 inputs include, among other items, quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and inputs other than quoted   70

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   prices that are observable for the asset or liability such as interest rates and yield curves. Level 3 inputs are unobservable and reflect our judgments about assumptions that market participants would use in pricing an asset or liability.  We categorize financial instruments within the valuation hierarchy at the balance sheet date based upon the lowest level of inputs that are significant to the fair value measurement. Accordingly, transfers between levels within the valuation hierarchy occur when there are significant changes to the inputs, such as increases or decreases in market activity, changes to the availability of current prices, changes to the transparency to underlying inputs, and whether there are significant variances in quoted prices. Transfers in and/or out of any level are assumed to occur at the end of the period.  While we obtain values for the majority of the investment securities we hold from one or more pricing services, it is ultimately management's responsibility to determine whether the values obtained and recorded in the financial statements are representative of fair value. We periodically update our understanding of the methodologies used by our pricing services in order to validate that the prices obtained from those services are consistent with the GAAP definition of fair value as an exit price. Based on our understanding of the methodologies, our pricing services only produce an estimate of fair value if there is observable market information that would allow them to make a fair value estimate. Based on our understanding of the market inputs used by our pricing services, all applicable investments have been valued in accordance with GAAP valuation principles. We have controls to review significant price changes and stale pricing, and to ensure that prices received from pricing services have been accurately reflected in the consolidated financial statements. We do not typically adjust prices obtained from pricing services.  Additionally, the valuation of fixed maturities is more subjective when markets are less liquid due to the lack of market based inputs (i.e., stale pricing), which may increase the potential that the estimated fair value of an investment is not reflective of the price at which an actual transaction would occur. For a small number of fixed maturities, we obtain a quote from a broker (typically a market maker). Due to the disclaimers on the quotes that indicate that the price is indicative only, we include these fair value estimates in Level 3.  At June 30, 2013, Level 3 assets represented five percent of assets that are measured at fair value and three percent of total assets. Level 3 liabilities represented 100 percent of liabilities that are measured at fair value and one percent of our total liabilities. During the three and six months ended June 30, 2013, we transferred assets of $48 million and $63 million, respectively, into our Level 3 assets from other levels of the valuation hierarchy. During the three and six months ended June 30, 2013, we transferred assets of $41 million and $71 million, respectively, out of our Level 3 assets to other levels of the valuation hierarchy. Refer to Note 4 to the consolidated financial statements for a description of the valuation techniques and inputs used to determine fair values for our financial instruments measured or disclosed at fair value by valuation hierarchy (Levels 1, 2, and 3) as well as a roll-forward of Level 3 financial instruments measured at fair value for the three and six months ended June 30, 2013 and 2012.  Guaranteed living benefits (GLB) derivatives Under life reinsurance programs covering living benefit guarantees, we assumed the risk of GLBs associated with variable annuity (VA) contracts. We ceased writing this business in 2007. Our GLB reinsurance product meets the definition of a derivative for accounting purposes and is therefore carried at fair value. We believe that the most meaningful presentation of these derivatives is to reflect cash inflows or revenue as net premiums earned, and to record estimates of the average modeled value of future cash outflows as incurred losses. Accordingly, we recognize benefit reserves consistent with the accounting guidance related to accounting and reporting by insurance enterprises for certain non-traditional long-duration contracts and for separate accounts. Changes in the benefit reserves are reflected as Policy benefits expense, which is included in life underwriting income. The incremental difference between fair value and benefit reserves is reflected in Accounts payable, accrued expenses, and other liabilities in the consolidated balance sheets and related changes in fair value are reflected in Net realized gains (losses) in the consolidated statement of operations. We intend to hold these derivative contracts to maturity (i.e., the expiration of the underlying liabilities through lapse, annuitization, death, or expiration of the reinsurance contract). To partially offset the risk in the VA guarantee reinsurance portfolio, we invest in derivative hedge instruments. At maturity, the cumulative gains and losses will net to zero (excluding cumulative hedge gains or losses) because, over time, the insurance liability will be increased or decreased to equal our obligation. For a sensitivity discussion of the effect of changes in interest rates, equity indices, and other assumptions on the fair value of GLBs, and the resulting impact on our net income, refer to Item 3.  The fair value of GLB reinsurance is estimated using an internal valuation model, which includes current market information and estimates of policyholder behavior from the perspective of a theoretical market participant that would assume these liabilities. All of our treaties contain claim limits, which are factored into the valuation model. The fair value depends on a number of                                                                               

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   factors, including interest rates, current account value, market volatility, expected annuitization rates and other policyholder behavior, and changes in policyholder mortality. The model and related assumptions are continuously re-evaluated by management and enhanced, as appropriate, based upon additional experience obtained related to policyholder behavior and availability of more timely market information, such as market conditions and demographics of in-force annuities. Due to the inherent uncertainties of the assumptions used in the valuation models to determine the fair value of these derivative products, actual experience may differ from the estimates reflected in our consolidated financial statements, and the differences may be material. For further information on the estimates and assumptions used in determining the fair value of GLB reinsurance, refer to Note 4 to the consolidated financial statements.  

During the six months ended June 30, 2013, no material changes were made to actuarial or behavioral assumptions.

  During the three and six months ended June 30, 2013, realized gains of $101 million and $470 million, respectively, were associated with a decreased value of GLB liabilities primarily due to rising equity levels and the favorable impact of foreign exchange and interest rate movements partially offset by the impact of discounting future claims for one and two fewer quarters, respectively. This excludes realized losses of $68 million and $318 million during the three and six months ended June 30, 2013, respectively, on derivative hedge instruments held to partially offset the risk in the VA guarantee reinsurance portfolio. These derivatives do not receive hedge accounting treatment. Refer to the "Net Realized and Unrealized Gains (Losses)" section for a breakdown of the realized gains (losses) on GLB reinsurance and derivatives for the three and six months ended June 30, 2013 and 2012.  ACE Tempest Life Re employs a strategy to manage the financial market and policyholder behavior risks embedded in the reinsurance of VA guarantees. Risk management begins with underwriting a prospective client and guarantee design, with particular focus on protecting our position from policyholder options that, because of anti-selective behavior, could adversely impact our obligation.  A second layer of risk management is the structure of the reinsurance contracts. All VA guarantee reinsurance contracts include some form of annual or aggregate claim limit(s). The different categories of claim limits are described below:  

• Reinsurance programs covering guaranteed minimum death benefits (GMDB) with

an annual claim limit of two percent of account value. This category accounts

for approximately 60 percent of the total reinsured GMDB guaranteed value.

    Approximately one percent of the guaranteed value in this category has     additional reinsurance coverage for GLB.   

• Reinsurance programs covering GMDB with claim limit(s) that are a function of

the underlying guaranteed value. This category accounts for approximately 25

percent of the total reinsured GMDB guaranteed value. The annual claim limit

expressed as a percentage of guaranteed value ranges from 0.4 percent to 2

percent. Approximately 65 percent of guaranteed value in this category is

also subject to annual claim deductibles that range from 0.1 percent to 0.2

percent of guaranteed value (i.e., our reinsurance coverage would only pay

total annual claims in excess of 0.1 percent to 0.2 percent of the total

guaranteed value). Approximately 50 percent of guaranteed value in this

category is also subject to an aggregate claim limit which was approximately

$382 million as of June 30, 2013. Approximately 75 percent of guaranteed

value in this category has additional reinsurance coverage for GLB.

• Reinsurance programs covering GMDB and guaranteed minimum accumulation

benefits (GMAB). This category accounts for approximately 15 percent of the

total reinsured GLB guaranteed value and 15 percent of the total reinsured

GMDB guaranteed value. These reinsurance programs are quota-share agreements

with the quota-share decreasing as the ratio of account value to guaranteed

value decreases. The quota-share is 100 percent for ratios between 100

percent and 75 percent, 60 percent for additional losses on ratios between 75

percent and 45 percent, and 30 percent for further losses on ratios below 45

percent. Approximately 35 percent of guaranteed value in this category is

also subject to a claim deductible of 8.8 percent of guaranteed value (i.e.,

our reinsurance coverage would only pay when the ratio of account value to

guaranteed value is below 91.2 percent).

• Reinsurance programs covering GMIB with an annual claim limit. This category

accounts for approximately 55 percent of the total reinsured GLB guaranteed

value. The annual claim limit is 10 percent of guaranteed value on over 95

percent of the guaranteed value in this category. Additionally, reinsurance

programs in this category have an annual annuitization limit that ranges

between 17.5 percent and 30 percent with approximately 40 percent of

guaranteed value subject to an annuitization limit of 20 percent or under,

and the remaining 60 percent subject to an annuitization limit of 30 percent.

Approximately 40 percent of guaranteed value in this category is also subject

    to minimum annuity conversion factors that     72

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limit the exposure to low interest rates. Approximately 40 percent of guaranteed value in this category has additional reinsurance coverage for GMDB.

• Reinsurance programs covering GMIB with aggregate claim limit. This category

accounts for approximately 30 percent of the total reinsured GLB guaranteed

value. The aggregate claim limit for reinsurance programs in this category is

approximately $1.9 billion. Additionally, reinsurance programs in this

category have an annual annuitization limit of 20 percent and approximately

60 percent of guaranteed value in this category is also subject to minimum

annuity conversion factors that limit the exposure to low interest rates.

Approximately 40 percent of guaranteed value in this category has additional

reinsurance coverage for GMDB.

    A third layer of risk management is the hedging strategy which looks to mitigate both long-term economic loss over time as well as dampen income statement volatility. ACE Tempest Life Re owned financial market instruments as part of the hedging strategy with a fair value asset of $39 million and $24 million at June 30, 2013 and December 31, 2012, respectively. The instruments are substantially collateralized by our counterparties, on a daily basis.  We also limit the aggregate amount of variable annuity reinsurance guarantee risk we are willing to assume. The last substantive U.S. transaction was quoted in mid-2007 and the last transaction in Japan was quoted in late 2007. The aggregate number of policyholders is currently decreasing through policyholder withdrawals, annuitizations, and deaths at a rate of 5 percent - 10 percent annually.  Note that GLB claims cannot occur for any reinsured policy until it has reached the end of its "waiting period". The vast majority of policies we reinsure reach the end of their "waiting periods" in 2013 or later, as shown in the table below.                                   Percent of living benefit Year of first payment eligibility            account values June 30, 2013 and prior                      18% Remainder of 2013                            12% 2014                                         18% 2015                                         6% 2016                                         6% 2017                                         19% 2018                                         15% 2019                                         5% 2020 and after                               1% Total                                       100%    The following table presents the historical cash flows under these policies for the periods indicated. The amounts represent accrued past premium received and claims paid, split by benefit type.                                                Three Months Ended          

Six Months Ended

                                                           June 30                   June 30 (in millions of U.S. dollars)                 2013           2012         2013         2012 Death Benefits (GMDB) Premium                                  $      20$   21$     40$   43 Less paid claims                                22             26           42           52 Net                                      $      (2 )$   (5 )$     (2 )$   (9 ) Living Benefits (Includes GMIB and GMAB) Premium                                  $      37$   40$     76$   80 Less paid claims                                 6              1           13            2 Net                                      $      31$   39$     63$   78 Total VA Guaranteed Benefits Premium                                  $      57$   61$    116$  123 Less paid claims                                28             27           55           54 Net                                      $      29$   34$     61$   69                                                                                   73

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  Table of Contents    Death Benefits (GMDB) For premiums and claims from VA contracts reinsuring GMDBs, at current market levels, we expect approximately $57 million of claims and $71 million of premium on death benefits over the next 12 months.  GLB (includes GMIB and GMAB) Our GLBs predominantly include premiums and claims from VA contracts reinsuring GMIB and GMAB. Approximately 80 percent of our living benefit reinsurance clients' policyholders are currently ineligible to trigger a claim payment. The vast majority of these policyholders become eligible between years 2013 and 2018. At current market levels, we expect approximately $11 million of claims and $141 million of premium on living benefits over the next 12 months.  

Collateral

 ACE Tempest Life Re holds collateral on behalf of most of its clients in the form of qualified assets in trust or letters of credit, typically in an amount sufficient for the client to obtain statutory reserve credit for the reinsurance. The timing of the calculation and amount of the collateral varies by client according to the particulars of the reinsurance treaty and the statutory reserve guidelines of the client's domicile.  

____________________________________________________________________________________________________________

Catastrophe management We actively monitor our catastrophe risk accumulation around the world. The following modeled loss information reflects our in-force portfolio and reinsurance program at April 1, 2013.

  The table below presents our modeled annual aggregate pre-tax probable maximum loss (PML), net of reinsurance, for 100-year and 250-year return periods for U.S. hurricanes and California earthquakes at June 30, 2013 and 2012. The table also presents ACE's corresponding share of pre-tax industry losses for each of the return periods for U.S. hurricanes and California earthquakes at June 30, 2013 and 2012. 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 $1,714 million (or 6.3 percent of our total shareholders' equity at June 30, 2013). 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                                  June 30                    June 30                     June 30                      June 30                                   2013                        2012                        2013                        2012 Modeled Annual                 % of Total                                              % of Total Aggregate Net                 Shareholders'      % of                                 Shareholders'      % of PML                 ACE          Equity        Industry       ACE          ACE           Equity        Industry        ACE (in millions of U.S. dollars, except for percentages) 1-in-100         $ 1,714            6.3 %         1.0 %    $  1,648$    802            2.9 %         2.0 %    $     778 1-in-250         $ 2,263            8.3 %         0.9 %    $  2,201$  1,005            3.7 %         1.6 %    $     995    The modeling estimates of both ACE and industry loss levels are inherently uncertain owing to key assumptions. First, while the use of third-party catastrophe modeling packages to simulate potential hurricane and earthquake losses is prevalent within the insurance industry, the models are reliant upon significant meteorology, seismology, and engineering assumptions to estimate hurricane and earthquake losses. In particular, modeled hurricane and earthquake events are not always a representation of actual events and ensuing additional loss potential. Second, there is no universal standard in the preparation of insured data for use in the models and the running of the modeling software. Third, we are reliant upon third-party estimates of industry insured exposures and there is significant variation possible around the relationship between our loss and that of the industry following an event. Fourth, we assume that our reinsurance recoveries following an event are fully collectible. These loss estimates do not represent our potential maximum exposures and it is highly likely that our actual incurred losses would vary materially from the modeled estimates.  

____________________________________________________________________________________________________________

 Natural catastrophe property reinsurance program ACE's core property catastrophe reinsurance program provides protection against natural catastrophes impacting its primary property operations (i.e., excluding our Global Reinsurance and Life segments) and consists of two separate towers.  We regularly review our reinsurance protection and corresponding property catastrophe exposures. This may or may not lead to the purchase of additional reinsurance prior to a program's renewal date. In addition, prior to each renewal date, we consider how much, if any, coverage we intend to buy and we may make material changes to the current structure in light of various factors, including modeled PML assessment at various return periods, reinsurance pricing, our risk tolerance and exposures, and various other structuring considerations.  There were no significant changes to ACE's coverage under its North American Core Property Catastrophe Program during the second quarter.  However, with respect to our International Property Catastrophe Program, we renewed the layers of reinsurance protection in excess of $150 million on our Core Program for the period from July 1, 2013 through June 30, 2014. We expanded our all perils coverage from $250 million to $350 million (by expanding perils covered in what was historically the $300 million to $450 million layer) and eliminated the $500 million to $550 million layer of coverage. There is an additional $75 million global top layer that continues to sit above the International Property Catastrophe Program and the North American Core Program that expires at January 1st and now attaches at $500 million on our International Program. There were no other significant changes in coverage from the expiring program. Refer to our 2012 Form 10-K for additional information.    

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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 a managing general agent subsidiary of Rain and Hail. We provide protection throughout the U.S. on a variety of crops 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 - Multiple Peril Crop Insurance (MPCI) and crop-hail insurance.  The MPCI program is offered in conjunction 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 including the pro-rata and state stop-loss provisions which allows companies to limit the exposure of any one state or group of states on their underwriting results. In addition to the pro-rata and excess of loss reinsurance protections inherent in the SRA, we also purchase third party proportional and stop-loss reinsurance for our MPCI business to reduce our exposure.  Each year the RMA issues a final SRA for the subsequent reinsurance year. In June 2013, the RMA released the 2014 SRA which establishes the terms and conditions for the 2014 reinsurance year (i.e., July 1, 2013 through June 30, 2014) that replaced the 2013 SRA.  There were no significant changes in the terms and conditions.  On the MPCI business, we recognize net premiums written as soon as estimable, which is generally when we receive acreage reports from the policyholders on the various crops throughout the U.S. This allows us to best determine the 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 recorded, 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.  The pricing of MPCI premium is determined using a number of factors including commodity prices and related volatility. For instance, in most states the pricing 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.  Our crop-hail program is a private offering. Premium is earned on the crop-hail program over the coverage period of the policy. Given the very short nature of the growing season, most crop-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 crop-hail exposures through the use of township liability limits and third party proportional and stop-loss reinsurance on our net retained hail business.  

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Liquidity

 We anticipate that positive cash flows from operations (underwriting activities and investment income) should be sufficient to cover cash outflows under most loss scenarios for the near term. 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. Should the need arise, we generally have access to capital markets and available credit facilities. At June 30, 2013, our available credit lines totaled $1.9 billion and usage to support issued letters of credit was $1.3 billion. 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 2014 and 2017 and require that we maintain certain financial covenants, all of which we met at June 30, 2013. Should any   

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   of our existing credit providers experience financial difficulty, we may be required to replace credit sources, possibly in a difficult market. If we cannot obtain adequate capital or sources of credit on favorable terms, on a timely basis, or at all, our business, operating results, and financial condition could be adversely affected. To date, we have not experienced difficulty accessing any of our credit facilities. Refer to "Credit Facilities" in our 2012 Form 10-K.  The payment of dividends or other statutorily permissible distributions from our operating companies are subject to the laws and regulations applicable to each jurisdiction as well as the need to maintain capital levels adequate to support the insurance and reinsurance operations, including financial strength ratings issued by independent rating agencies. During the six months ended June 30, 2013, we were able to meet all of our obligations, including the payments of dividends 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. ACE Limited did not receive any dividends from its Bermuda subsidiaries during the six months ended June 30, 2013 and 2012.  The payment of any dividends from AGM 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 AGM is subject to regulations promulgated by the Society of Lloyd's. The U.S. insurance subsidiaries of ACE INA may pay dividends, without prior regulatory approval, subject to restrictions set out in state law of the subsidiary's domicile (or, if applicable, commercial domicile). ACE INA's international subsidiaries are also subject to insurance laws and regulations particular to the countries in which the subsidiaries operate. These laws and regulations sometimes include restrictions that limit the amount of dividends payable without prior approval of regulatory insurance authorities. ACE Limited did not receive any dividends from AGM or ACE INA during the six months ended June 30, 2013 and 2012. Debt issued by ACE INA is serviced by statutorily permissible distributions by ACE INA's insurance subsidiaries to ACE INA as well as other group resources.  Cash Flows Sources of liquidity include cash from operations, routine sales of investments, and financing arrangements. The following is a discussion of our cash flows for the six months ended June 30, 2013 and 2012.  Our consolidated net cash flows from operating activities were $1.8 billion in the six months ended June 30, 2013, compared with $1.4 billion in the prior year period. The increase in operating cash flows was primarily due to higher net premiums collected of $187 million and lower income taxes paid of $171 million.  Our consolidated net cash flows used for investing activities were $2.4 billion in the six months ended June 30, 2013, compared with $1.3 billion in the prior year period. The increase in cash flows used for investing activities was primarily due to the acquisitions of ABA Seguros and Fianzas Monterrey in the second quarter 2013.  Our consolidated net cash flows from financing activities were $658 million in the six months ended June 30, 2013, compared with net cash flows used for financing activities of $123 million in the prior year period. Financing cash flows for the six months ended June 30, 2013 included $947 million</money> of proceeds from the issuance of long-term debt. Refer to Note 6 to the Consolidated Financial Statements for additional information on the long-term debt issuance. The prior year period financing cash flows included $151 million from the issuance of short-term debt, net of repayments. Share repurchases and dividends paid on Common Shares were $212 million and $169 million, respectively, in the six months ended June 30, 2013, compared with $11 million and $318 million, respectively. Dividends paid on Common Shares decreased due to the accelerated payment of the fourth quarter 2012 dividend in December 2012, which would normally have been paid during the first quarter 2013.  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 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 June 30, 2013, there were $1.4 billion in repurchase agreements outstanding.    76

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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:                                                                June 30       December 31 (in millions of U.S. dollars, except for percentages)             2013              2012 Short-term debt                                             $    1,901$       1,401 Long-term debt                                                   3,807             3,360 Total debt                                                       5,708             4,761 Trust preferred securities                                         309               309 Total shareholders' equity                                      27,295            27,531 Total capitalization                                        $   33,312$      32,601 Ratio of debt to total capitalization                             17.1 %            14.6 % Ratio of debt plus trust preferred securities to total capitalization                                                    18.1 %            15.6 %   

In June 2013, we reclassified $500 million of 5.875 percent senior notes, due to mature on June 15, 2014, from Long-term debt to Short-term debt in the consolidated balance sheet.

  Our ratios of debt to total capitalization and debt plus trust preferred securities to total capitalization increased primarily due to the issuance of $475 million of 2.7 percent senior notes due March 2023 and $475 million of 4.15 percent senior notes due March 2043 during the six months ended June 30, 2013. The proceeds from the debt issuance are expected to be used to repay at maturity the $500 million 5.875 percent senior notes due June 2014 and the $450 million 5.6 percent senior notes due May 2015.  The following table reports the significant movements in our shareholders' equity:                                                                       Six Months Ended (in millions of U.S. dollars)                                            June 30, 2013 Balance - beginning of period                                       $           27,531 Net income                                                                       1,844 Change in net unrealized depreciation on investments, net of tax                (1,315 ) Dividends on Common Shares                                                        (342 ) Change in net cumulative translation, net of tax                                  (324 ) Repurchase of shares                                                              (212 ) Exercise of stock options                                                           54 Other movements, net of tax                                                         59 Balance - end of period                                             $           27,295    During the six months ended June 30, 2013, we repurchased $212 million of Common Shares in a series of open market transactions under the November 2012, August 2011 and November 2010 Board of Directors authorizations, primarily to offset dilution from our incentive compensation plans. At June 30, 2013, $249 million in share repurchase authorizations remained through December 31, 2013. At June 30, 2013 there were 2,746,143 Common Shares in treasury with a weighted average cost of $79.57 per share.  We generally maintain the ability to issue certain classes of debt and equity securities via an unlimited Securities and Exchange Commission (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.                                                                                  77

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Dividends

 We have paid dividends each quarter since we became a public company in 1993. Under Swiss law, dividends must be stated in Swiss francs though dividend payments are made by ACE in U.S. dollars. Following ACE's redomestication to Switzerland in July 2008March 2011, dividends were distributed by way of a par value reduction. At our May 2011 annual general meeting, our shareholders approved dividend distributions from capital contribution reserves (Additional paid-in capital) through the transfer of dividends from Additional paid-in capital to Retained earnings. At our May 2012 annual general meeting, our shareholders approved an annual dividend distribution for the following year by way of a par value reduction equal to $1.96 per share, or CHF 1.80 per share, calculated using the USD/CHF exchange rate as published in the Wall Street Journal on May 10, 2012. At our May 2013 annual general meeting, our shareholders approved an annual dividend distribution for the following year by way of a par value reduction equal to $2.04 per share, or CHF 1.92 per share, calculated using the USD/CHF exchange rate as published in the Wall Street Journal on May 10, 2013.  The annual dividend is payable in four quarterly installments, with each installment equaling $0.51 per share, provided that the Swiss franc equivalent of that amount per share (based on the then-current USD/CHF exchange rate), taken together with the Swiss franc equivalents of all other installments of this annual dividend, will not exceed 150 percent of CHF 1.92 (the aggregate distribution cap). If the Swiss franc equivalent of an upcoming dividend installment would cause the aggregate distribution cap to be exceeded, then that dividend installment will be reduced to equal the Swiss franc amount remaining available under the aggregate distribution cap, and the U.S. dollar amount distributed for that installment will be the then-applicable U.S. dollar equivalent of the remaining Swiss franc amount.  The following table represents dividends paid per Common Share to shareholders of record on each of the following dates: Shareholders of record as of:   Dividends paid as of: March 28, 2013                  April 12, 2013          $0.49 (CHF 0.46) July 23, 2013                   August 13, 2013         $0.51 (CHF 0.48)   

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