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

Overview

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

Our product and geographic diversification differentiates us from the vast majority of our competitors and has been a source of stability during periods of industry volatility. Our long-term business strategy focuses on sustained growth in book value achieved through a combination of underwriting and investment income. By doing so, we provide value to our clients and shareholders through the utilization of our substantial capital base in the insurance and reinsurance markets.

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

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

Redomestication to Zurich, Switzerland

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

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

The Combined Insurance Acquisition

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

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

Market Conditions

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

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

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

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

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

Critical Accounting Estimates

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

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

• future policy benefits reserves;

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

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

• reinsurance recoverable, including a provision for uncollectible reinsurance;

• impairments to the carrying value of our investment portfolio;

• the valuation of deferred tax assets;

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

• the valuation of goodwill.

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

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 unpaid at the balance sheet date (case reserves) and for future obligations from claims that have been incurred but not reported (IBNR) at the balance sheet date (IBNR may also include a provision for additional development on reported claims in instances where the case reserve is viewed to be potentially insufficient). The reserves provide for liabilities that exist for the Company as of the balance sheet date. The loss reserve also includes an estimate of expenses associated with processing and settling these unpaid claims (loss expenses). At December 31, 2008, our gross unpaid loss and loss expense reserves were $37.2 billion and our net unpaid loss and loss expense reserves were $24.2 billion. With the exception of certain structured settlements, for which the timing and amount of future claim payments are reliably determinable, our loss reserves are not discounted for the time value of money. In connection with such structured settlements, we carry reserves of $106 million (net of discount).

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

                                                    Gross            Reinsurance
(in millions of U.S. dollars)                      Losses            Recoverable            Net Losses
Balance at December 31, 2006                      $ 35,517         $       13,509         $      22,008
Losses and loss expenses incurred                   10,831                  3,480                 7,351
Losses and loss expenses paid                       (9,516 )               (3,582 )              (5,934 )
Other (including foreign exchange revaluation)         280                    113                   167
Balance at December 31, 2007                        37,112                 13,520                23,592
Losses and loss expenses incurred                   10,944                  3,341                 7,603
Losses and loss expenses paid                       (9,899 )               (3,572 )              (6,327 )
Other (including foreign exchange revaluation)      (1,367 )                 (387 )                (980 )
Losses and loss expenses acquired                      386                     33                   353
Balance at December 31, 2008                      $ 37,176         $       12,935         $      24,241

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

                                                                         2008                                         2007
(in millions of U.S. dollars)             Gross          Ceded            Net          Gross          Ceded            Net
Case reserves                          $ 16,583       $  6,539       $ 10,044       $ 15,625       $  6,077       $  9,548
IBNR                                     20,593          6,396         14,197         21,487          7,443         14,044
Total                                  $ 37,176       $ 12,935       $ 24,241       $ 37,112       $ 13,520       $ 23,592

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

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

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

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

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

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

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

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

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

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