The following is a discussion of our results of operations, financial condition, and liquidity and capital resources as of and for the three and nine months ended September 30, 2008. 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, 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, 2007 and "Risk Factors" set forth in Item 1A of Part II of this report as well as in Item 1A. of Part I of our 2007 Annual Report on Form 10-K and in Item 1A. of Part II of our quarterly reports on Form 10-Q for the quarters ended June 30, 2008, and March 31, 2008.

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

• developments in global financial markets, including changes in interest rates, stock markets and other financial markets, the cost and availability of financing, and foreign currency exchange rate fluctuations, which could affect our statement of operations, investment portfolio, and financing plans;

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

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

• the number of insureds and ceding companies affected,

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

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

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

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

• actions that rating agencies may take from time to time, such as changes in our claims-paying ability, financial strength or credit ratings or placing these ratings on credit watch negative or the equivalent;

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

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

• the occurrence of catastrophic events or other insured or reinsured events with a frequency or severity exceeding our estimates;

• 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;

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

• the capital markets,

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

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

• uncertainties relating to governmental, legislative and regulatory policies, developments, actions, investigations and treaties, which, among other things, could subject us to insurance regulation or taxation in additional jurisdictions or affect our current operations;

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

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

• Combined Insurance Company of America (Combined Insurance) and its subsidiaries, or any other acquisitions made by us, performing differently than expected or the failure to realize anticipated expense-related efficiencies from acquisitions;

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

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

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

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

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

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

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

• the amount of dividends received from subsidiaries;

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

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

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

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

Overview

ACE Limited ("ACE") and its direct and indirect subsidiaries (collectively, ACE, the Company, we, us or our) are a global insurance and reinsurance organization, servicing the insurance needs of commercial and individual customers in more than 140 countries and jurisdictions. Our product and geographic diversification differentiates us from the vast majority of our competitors and has been a source of stability during periods of industry volatility. Our long-term business strategy focuses on sustained growth in book value achieved through a combination of underwriting and investment income. By doing so, we provide value to our clients and shareholders through the utilization of our substantial capital base in the insurance and reinsurance markets.

Redomestication to Zurich, Switzerland

On July 10, 2008, and July 14, 2008, our shareholders approved the transfer of our domicile from the Cayman Islands to Zurich in Switzerland, our new jurisdiction of incorporation (the Continuation). As a result of the Continuation, we are deregistered in the Cayman Islands and are now subject to Swiss corporate law. We do not expect the re-domestication to have a material impact on the way we operate our business or on our financial condition or results of operations.

In connection with the Continuation, we changed the currency in which the par value of Ordinary Shares is stated from U.S. dollars to Swiss francs and increased the par value of Ordinary Shares from $0.041666667 to CHF 33.74. Upon the effectiveness of the Continuation, our Ordinary Shares became Common Shares. All Common Shares are registered common shares under Swiss corporate law. Notwithstanding the change of the currency in which the par value of Common Shares is stated, we continue to use U.S. dollars as our reporting and functional currency for preparing our Consolidated Financial Statements. For purposes of the Consolidated Financial Statements, the increase in par value was accomplished by a corresponding reduction first to retained earnings and second to additional paid-in capital to the extent that the increase in par value exhausted retained earnings at the date of the Continuation. On September 30, 2008, we reduced the par value by CHF 0.30 to CHF 33.44 in connection with the quarterly dividend declaration. For the foreseeable future, we expect to pay dividends as a repayment of share capital in the form of a reduction in par value or qualified paid-in capital, which would not be subject to Swiss withholding tax. Refer to "Liquidity and Capital Resources" below and Note 11 to our Consolidated Financial Statements for more information.

The Combined Insurance Acquisition

On April 1, 2008, ACE acquired all of the outstanding shares of Combined Insurance and certain of its subsidiaries from AON Corporation for $2.56 billion. ACE financed the transaction through a combination of available cash, the use of reverse repurchase agreements, and new private and public long-term debt (refer to "Capital Resources" for more information). Combined Insurance, which was founded in 1919 and headquartered in Glenview, Illinois, is a leading underwriter and distributor of specialty individual accident and supplemental health insurance products targeted to middle income consumers in the U.S., Europe, Canada, and Asia Pacific. Combined Insurance serves more than four million policyholders worldwide. This acquisition has diversified our accident and health (A&H) distribution capabilities by adding thousands of agents, while almost doubling our A&H franchise. We believe this will provide significant long-term growth opportunities. Our A&H operations have represented an increasing portion of our business in recent years. Within our A&H operations (including Combined Insurance), our primary business is personal accident. We are not in the primary health care business. Our products include, but are not limited to, accidental death, accidental disability, supplemental medical, hospital indemnity, and income protection coverages. With respect to our supplemental medical and hospital indemnity products, we typically pay fixed amounts for claims and are, therefore, insulated from rising health care costs. ACE recorded the acquisition using the purchase method of accounting. The interim Consolidated Financial Statements include the results of Combined Insurance beginning April 1, 2008. The acquisition generated $936 million of goodwill and other intangible assets, based on ACE's preliminary purchase price allocation. Results from Combined Insurance's North American operations are included in ACE's Life Insurance and Reinsurance segment and the results from Combined Insurance's international operations are included in ACE's Insurance - Overseas General segment. Refer to Note 3 to our Consolidated Financial Statements for more information.

Market Conditions

The property and casualty insurance industry began 2008 with excess underwriting capacity, as defined by availability of capital. Since then, natural catastrophes and financial market losses have destroyed a great deal of this excess capital. Additionally, downgrades and government ownership are impairing the ability of a number of companies to deploy their capital and operate in the same manner as they have in the past. Moreover, the cost of debt and equity capital has soared for all industries globally, including the insurance and reinsurance industry, and we believe this will be true for some time to come.

Refer to "Overview" in our "Management's Discussion and Analysis of Financial Condition and Results of Operations" included under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2007 (2007 Form 10-K).

Fair Value Measurements

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

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

Volatility and widening credit spreads during the quarter ended September 30, 2008, adversely affected the values of certain of our securities. However, we believe there was sufficient market activity to price securities under FAS 157 in a manner consistent with prior periods.

At September 30, 2008, our Level 3 assets represented approximately four percent of our assets that are measured at fair value and two percent of our total assets. Our Level 3 liabilities represented approximately 99 percent of our liabilities that are measured at fair value and less than one percent of our total liabilities at September 30, 2008. During the quarter ended September 30, 2008, we transferred $14 million out of Level 3. The following is a description of the valuation measurements used for our financial instruments (Levels 1, 2, and 3) carried or disclosed at fair value, as well as the general classification of such financial instruments pursuant to the valuation hierarchy.

• Fixed maturities with active markets such as U.S. Treasury and agency securities are classified within Level 1 as fair values are based on quoted market prices. For fixed maturities that trade in less active markets, including corporate and municipal securities, fair values are based on the output of "pricing matrix models", the significant inputs into which include, but are not limited to, yield curves, credit

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

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

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

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

• We maintain positions in other derivative instruments including option contracts designed to limit long-term exposure to a severe equity market decline or decrease in interest rates, which would cause an increase in expected claims and, therefore, reserves for guaranteed minimum death benefits (GMDB) and guaranteed minimum income benefits (GMIB) reinsurance business. The fair value of the majority of our positions in other derivative instruments is based on significant observable inputs including equity security and interest rate indices. Accordingly, these are classified within Level 2. Our position in credit default swaps is typically included within Level 3.

• For GMIB reinsurance, we estimate fair value using an internal valuation model which includes the use of management estimates and current market information. The cumulative effect of partially adopting FAS 157 resulted in a reduction to retained earnings of $4 million related to an increase in risk margins included in the valuation of certain GMIB contracts. The fair value depends on a number of inputs, including changes in interest rates, changes in equity markets, changes in market volatility, changes in policyholder behavior, and changes in policyholder mortality. The model and related assumptions are continuously re-evaluated by management and enhanced, as appropriate, based upon improvements in modeling techniques and availability of more timely market information, such as market conditions and demographics of in-force annuities. The two most significant policyholder behavior assumptions include lapse rates and annuitization rates using the guaranteed benefit (GMIB annuitization rate). A lapse rate is the percentage of in-force policies surrendered in a given calendar year. All else equal, as lapse rates increase, ultimate claim payments will decrease. The GMIB annuitization rate is the percentage of policies for which the customer will elect to annuitize using the guaranteed benefit provided under the GMIB. All else equal, as GMIB annuitization rates increase, ultimate claim payments will increase, subject to treaty claim limits. Assumptions regarding lapse rates and GMIB annuitization rates differ by treaty but the underlying methodology to determine rates applied to each treaty is comparable. The assumptions regarding lapse and GMIB annuitization rates determined for each treaty are based on a dynamic calculation that uses several underlying factors. The effect of changes in key market factors on assumed lapse and annuitization rates reflect emerging trends where data is available from cedants. For treaties with limited experience, rates are established in line with industry estimates. We view our variable annuity reinsurance business as having a similar risk profile to that of catastrophe reinsurance, with the probability of a cumulative long-term economic net loss

Change in Assumption

As a part of the quarterly reserve review we made a change to the volatility assumption used to calculate the fair value of the GMIB liabilities. To be more in-line with market valuations of GMIB liabilities, we changed the volatility assumption to be consistent with using short-term market-consistent implied volatilities grading to long-term historical average volatilities over time. The impact of this change was a reduction in the fair value of the GMIB liabilities of approximately $64 million.

Note 4 to our Consolidated Financial Statements presents a break-down of our
financial instruments carried or disclosed at fair value by valuation hierarchy as well as a roll-forward of Level 3 financial instruments for the three and nine months ended September 30, 2008.

GMIB/GMDB Reinsurance

Our net income is directly impacted by changes in the reserves calculated in connection with the reinsurance of variable annuity guarantees, primarily GMDB and GMIB. These reserves are calculated in accordance with AICPA Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Non-traditional Long-duration Contracts and for Separate Accounts (SOP 03-1). Changes in these reserves are reflected as future policy benefits, which is included in life underwriting income. In addition, our net income is directly impacted by the change in the fair value of the GMIB liability, which is classified as a derivative according to Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133). The fair value liability established for a GMIB reinsurance contract represents the difference between the fair value of the contract and the SOP 03-1 reserves. Changes in the fair value of the GMIB liability, net of associated changes in the calculated SOP 03-1 reserves, are reflected as realized gains or losses.

During the three and nine months ended September 30, 2008, we recorded $189 million and $319 million of net realized losses, respectively, in connection with changes in reported liabilities on GMIB reinsurance carried at fair value. For the quarter ended September 30, 2008, the change was caused by unfavorable market conditions, including a decrease in long-term interest rates, and an increase in implied volatility for both equity markets and interest rates. The change for the nine months ended September 30, 2008, which resulted in net realized losses, was caused by adverse financial market conditions, primarily poor equity market performance.

The SOP 03-1 reserves and fair value liability calculations are directly affected by market factors, the most significant of which are equity levels, interest rate levels, and implied equity volatilities. The table below shows the sensitivity, as of September 30, 2008, of the SOP 03-1 reserves and fair value liability associated with the variable annuity guarantee reinsurance portfolio. Note that the change in the fair value liability includes offsetting changes in the fair value of specific derivative instruments held to partially offset the risk in the variable annuity guarantee reinsurance portfolio. These derivatives do not receive hedge accounting treatment.

                                                      Impact of 100 bp           Long-term               Long-term
                                10% Worldwide            Decrease in           Equity Implied          Interest Rate
                               Equity Decrease         Interest Rates          Volatility Up          Volatility Up 2%
                                                            (in millions of U.S. dollars)
Increase in SOP 03-1
reserves/ reduction in
life underwriting
income                        $              36       $              14       $             -        $               -
Increase in fair value
liability, net                               99                     187                      7                       25

Reduction in net income $ 135 $ 201 $ 7 $ 25

The table above demonstrates, for example, that a 10 percent decrease in worldwide equities would reduce our life underwriting income by $36 million and cause a net realized loss of $99 million, for a total reduction in net income of $135 million. The sensitivity of the liabilities to market risks will change over time and these changes could be significant. Equivalent opposite changes to the above market factors would have similar but not identical positive impacts. Factors affecting the sensitivities include changes in account values and guaranteed values of the variable annuity policies reinsured, receipt of reinsurance premium and payment of reinsurance claims, policyholder deaths, lapses, annuitization withdrawals, and asset reallocation, the addition of new reinsurance treaties, changes in equity and interest rate levels and volatility, model changes and improvements, and the passage of time.

Capital

As of September 30, 2008, the capital required to support the variable annuity guaranty business is approximately $400 million. If the Standard & Poor's (S&P) 500 Index were to drop to a level of 900, the additional capital required net of the increase in value of currently held hedge assets would be approximately $250 million. Excess capital currently existing within ACE Tempest Life Reinsurance . . .