Chubb Ltd - Quarter Report: 2014 September (Form 10-Q)

Large accelerated filer þ

Accelerated filer ¨

Non-accelerated filer ¨

(Do not check if a smaller reporting company)

Smaller reporting company ¨

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2014



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission File No. 1-11778

ACE LIMITED

(Exact name of registrant as specified in its charter)



Switzerland	98-0091805
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

Baerengasse 32

Zurich, Switzerland CH-8001

(Address of principal executive offices) (Zip Code)

+41 (0)43 456 76 00

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES þ NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ¨ NO þ

The number of registrant’s Common Shares (CHF 25.40 par value) outstanding as of October 15, 2014 was 331,737,541.

Table of Contents

ACE LIMITED

INDEX TO FORM 10-Q



			Page
Part I.	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Balance Sheets (Unaudited) September 30, 2014 and December 31, 2013		3
	Consolidated Statements of Operations and Comprehensive Income (Unaudited) Three and Nine Months Ended September 30, 2014 and 2013		4
	Consolidated Statements of Shareholders' Equity (Unaudited) Nine Months Ended September 30, 2014 and 2013		5
	Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2014 and 2013		6
	Notes to Consolidated Financial Statements (Unaudited)
	Note 1.	General	7
	Note 2.	Acquisitions	7
	Note 3.	Investments	8
	Note 4.	Fair value measurements	14
	Note 5.	Assumed life reinsurance programs involving minimum benefit guarantees under annuity contracts	24
	Note 6.	Debt	26
	Note 7.	Commitments, contingencies, and guarantees	26
	Note 8.	Shareholders’ equity	30
	Note 9.	Share-based compensation	31
	Note 10.	Segment information	31
	Note 11.	Earnings per share	35
	Note 12.	Information provided in connection with outstanding debt of subsidiaries	35
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		42
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		80
Item 4.	Controls and Procedures		83

Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings		83
Item 1A.	Risk Factors		83
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities		83
Item 6.	Exhibits		83

Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1. Financial Statements

CONSOLIDATED BALANCE SHEETS (Unaudited)

ACE Limited and Subsidiaries



	September 30			December 31
(in millions of U.S. dollars, except share and per share data)	2014			2013
Assets
Investments
Fixed maturities available for sale, at fair value (amortized cost – $47,688 and $48,406)	$	49,148		$	49,254
(includes hybrid financial instruments of $279 and $302)
Fixed maturities held to maturity, at amortized cost (fair value – $7,763 and $6,263)	7,548			6,098
Equity securities, at fair value (cost – $480 and $841)	546			837
Short-term investments, at fair value and amortized cost	2,753			1,763
Other investments (cost – $2,910 and $2,671)	3,259			2,976
Total investments	63,254			60,928
Cash	806			579
Securities lending collateral	1,440			1,632
Accrued investment income	567			556
Insurance and reinsurance balances receivable	5,189			5,026
Reinsurance recoverable on losses and loss expenses	10,945			11,227
Reinsurance recoverable on policy benefits	228			218
Deferred policy acquisition costs	2,592			2,313
Value of business acquired	491			536
Goodwill and other intangible assets	5,425			5,404
Prepaid reinsurance premiums	1,711			1,675
Deferred tax assets	408			616
Investments in partially-owned insurance companies	495			470
Other assets	4,006			3,330
Total assets	$	97,557		$	94,510
Liabilities
Unpaid losses and loss expenses	$	37,447		$	37,443
Unearned premiums	8,020			7,539
Future policy benefits	4,782			4,615
Insurance and reinsurance balances payable	3,804			3,628
Securities lending payable	1,441			1,633
Accounts payable, accrued expenses, and other liabilities	5,829			4,810
Short-term debt	1,851			1,901
Long-term debt	4,057			3,807
Trust preferred securities	309			309
Total liabilities	67,540			65,685
Commitments and contingencies
Shareholders’ equity
Common Shares (CHF 25.40 and CHF 27.04 par value; 342,832,412 shares issued; 332,111,557 and 339,793,935 shares outstanding)	8,278			8,899
Common Shares in treasury (10,720,855 and 3,038,477 shares)	(1,057		)	(255		)
Additional paid-in capital	5,099			5,238
Retained earnings	16,089			13,791
Accumulated other comprehensive income (AOCI)	1,608			1,152
Total shareholders’ equity	30,017			28,825
Total liabilities and shareholders’ equity	$	97,557		$	94,510

See accompanying notes to the consolidated financial statements

Table of Contents

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Unaudited)

ACE Limited and Subsidiaries



	Three Months Ended						Nine Months Ended
	September 30						September 30
(in millions of U.S. dollars, except per share data)	2014			2013			2014			2013
Revenues
Net premiums written	$	4,729		$	4,620		$	13,473		$	12,809
Decrease (increase) in unearned premiums	25			(10		)	(417		)	(559		)
Net premiums earned	4,754			4,610			13,056			12,250
Net investment income	566			522			1,675			1,587
Net realized gains (losses):
Other-than-temporary impairment (OTTI) losses gross	(5		)	(4		)	(30		)	(14		)
Portion of OTTI losses recognized in other comprehensive income (OCI)	1			—			3			—
Net OTTI losses recognized in income	(4		)	(4		)	(27		)	(14		)
Net realized gains (losses) excluding OTTI losses	(116		)	44			(270		)	364
Total net realized gains (losses) (includes $(38), $24, $(11), and $97 reclassified from AOCI)	(120		)	40			(297		)	350
Total revenues	5,200			5,172			14,434			14,187
Expenses
Losses and loss expenses	2,684			2,655			7,233			6,831
Policy benefits	125			138			383			379
Policy acquisition costs	825			678			2,311			1,957
Administrative expenses	554			563			1,655			1,641
Interest expense	70			72			213			205
Other (income) expense	(19		)	(5		)	(61		)	22
Total expenses	4,239			4,101			11,734			11,035
Income before income tax	961			1,071			2,700			3,152
Income tax expense (includes $5, $4, $7, and $16 on reclassified unrealized gains and losses)	176			155			402			392
Net income	$	785		$	916		$	2,298		$	2,760
Other comprehensive income (loss)
Unrealized appreciation (depreciation)	$	(375	)	$	16		$	733		$	(1,570	)
Reclassification adjustment for net realized (gains) losses included in net income	38			(24		)	11			(97		)
	(337		)	(8		)	744			(1,667		)
Change in:
Cumulative translation adjustment	(251		)	149			(131		)	(237		)
Pension liability	7			(2		)	(6		)	17
Other comprehensive income (loss), before income tax	(581		)	139			607			(1,887		)
Income tax (expense) benefit related to OCI items	94			(25		)	(151		)	374
Other comprehensive income (loss)	(487		)	114			456			(1,513		)
Comprehensive income	$	298		$	1,030		$	2,754		$	1,247
Earnings per share
Basic earnings per share	$	2.35		$	2.68		$	6.82		$	8.09
Diluted earnings per share	$	2.32		$	2.66		$	6.75		$	8.02

See accompanying notes to the consolidated financial statements

Table of Contents

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)

ACE Limited and Subsidiaries



	Nine Months Ended
	September 30
(in millions of U.S. dollars)	2014			2013
Common Shares
Balance – beginning of period	$	8,899		$	9,591
Dividends declared on Common Shares – par value reduction	(621		)	(518		)
Balance – end of period	8,278			9,073
Common Shares in treasury
Balance – beginning of period	(255		)	(159		)
Common Shares repurchased	(1,019		)	(233		)
Net shares redeemed under employee share-based compensation plans	217			170
Balance – end of period	(1,057		)	(222		)
Additional paid-in capital
Balance – beginning of period	5,238			5,179
Net shares redeemed under employee share-based compensation plans	(167		)	(129		)
Exercise of stock options	(44		)	(34		)
Share-based compensation expense and other	153			184
Funding of dividends declared to Retained earnings	(81		)	—
Balance – end of period	5,099			5,200
Retained earnings
Balance – beginning of period	13,791			10,033
Net income	2,298			2,760
Funding of dividends declared from Additional paid-in capital	81			—
Dividends declared on Common Shares	(81		)	—
Balance – end of period	16,089			12,793
Accumulated other comprehensive income
Net unrealized appreciation on investments
Balance – beginning of period	1,174			2,633
Change in period, before reclassification from AOCI, net of income tax (expense) benefit of $(168) and $337	565			(1,233		)
Amounts reclassified from AOCI, net of income tax benefit of $7 and $16	18			(81		)
Change in period, net of income tax (expense) benefit of $(161) and $353	583			(1,314		)
Balance – end of period	1,757			1,319
Cumulative translation adjustment
Balance – beginning of period	63			339
Change in period, net of income tax benefit of $7 and $27	(124		)	(210		)
Balance – end of period	(61		)	129
Pension liability adjustment
Balance – beginning of period	(85		)	(85		)
Change in period, net of income tax (expense) benefit of $3 and $(6)	(3		)	11
Balance – end of period	(88		)	(74		)
Accumulated other comprehensive income	1,608			1,374
Total shareholders’ equity	$	30,017		$	28,218

See accompanying notes to the consolidated financial statements

Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

ACE Limited and Subsidiaries



	Nine Months Ended
	September 30
(in millions of U.S. dollars)	2014			2013
Cash flows from operating activities
Net income	$	2,298		$	2,760
Adjustments to reconcile net income to net cash flows from operating activities
Net realized (gains) losses	297			(350		)
Amortization of premiums/discounts on fixed maturities	159			207
Deferred income taxes	41			169
Unpaid losses and loss expenses	180			33
Unearned premiums	449			603
Future policy benefits	181			149
Insurance and reinsurance balances payable	181			163
Accounts payable, accrued expenses, and other liabilities	(130		)	(176		)
Income taxes payable	94			2
Insurance and reinsurance balances receivable	(191		)	(657		)
Reinsurance recoverable on losses and loss expenses	253			550
Reinsurance recoverable on policy benefits	(6		)	6
Deferred policy acquisition costs	(306		)	(391		)
Prepaid reinsurance premiums	(41		)	(69		)
Other	(237		)	(263		)
Net cash flows from operating activities	3,222			2,736
Cash flows from investing activities
Purchases of fixed maturities available for sale	(11,867		)	(16,360		)
Purchases of to be announced mortgage-backed securities	—			(54		)
Purchases of fixed maturities held to maturity	(185		)	(374		)
Purchases of equity securities	(222		)	(217		)
Sales of fixed maturities available for sale	6,306			7,982
Sales of to be announced mortgage-backed securities	—			30
Sales of equity securities	322			99
Maturities and redemptions of fixed maturities available for sale	4,814			5,538
Maturities and redemptions of fixed maturities held to maturity	617			1,233
Net change in short-term investments	(984		)	525
Net derivative instruments settlements	(170		)	(376		)
Acquisition of subsidiaries (net of cash acquired of $4 and $38)	(172		)	(977		)
Other	(147		)	(188		)
Net cash flows used for investing activities	(1,688		)	(3,139		)
Cash flows from financing activities
Dividends paid on Common Shares	(646		)	(343		)
Common Shares repurchased	(1,007		)	(233		)
Proceeds from issuance of long-term debt	699			947
Proceeds from issuance of short-term debt	1,827			1,721
Repayment of long-term debt	(501		)	—
Repayment of short-term debt	(1,827		)	(1,720		)
Proceeds from share-based compensation plans, including windfall tax benefits	94			112
Other	121			68
Net cash flows (used for) from financing activities	(1,240		)	552
Effect of foreign currency rate changes on cash and cash equivalents	(67		)	4
Net increase in cash	227			153
Cash – beginning of period	579			615
Cash – end of period	$	806		$	768
Supplemental cash flow information
Taxes paid	$	250		$	150
Interest paid	$	186		$	169

See accompanying notes to the consolidated financial statements

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

ACE Limited and Subsidiaries

1. General

Basis of presentation

ACE Limited is a holding company incorporated in Zurich, Switzerland. ACE Limited, through its subsidiaries, provides a broad range of insurance and reinsurance products to insureds worldwide. ACE operates through five business segments: Insurance – North American P&C, Insurance – North American Agriculture, Insurance – Overseas General, Global Reinsurance, and Life. Refer to Note 10 for additional information.

The interim unaudited consolidated financial statements, which include the accounts of ACE Limited and its subsidiaries (collectively, ACE, we, us, or our), have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and, in the opinion of management, reflect all adjustments (consisting of normally recurring accruals) necessary for a fair statement of the results and financial position for such periods. All significant intercompany accounts and transactions have been eliminated.

The results of operations and cash flows for any interim period are not necessarily indicative of the results for the full year. These consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in our 2013 Form 10-K.

Goodwill and other intangible assets

During the third quarter of 2014, we changed our annual goodwill impairment testing date from December 31 to September 30 of each year. We believe this change is preferable as it more closely aligns the goodwill impairment testing date with the timing of our strategic business planning process. This change does not result in any delay, acceleration or avoidance of impairment. Based on our impairment testing for 2014, we determined no impairment was required and none of our reporting units were at risk for impairment.

2. Acquisitions

Large Corporate P&C Insurance Business of Itaú Seguros, S.A. (Itaú Seguros)

On July 4, 2014, we announced that we reached a definitive agreement to acquire the large corporate property and casualty (P&C) insurance business of Itaú Seguros, Brazil's leading carrier for that business, for approximately $630 million, at current exchange rates. This transaction, which has received all regulatory approvals needed for closing, is expected to close on October 31, 2014.

The Siam Commercial Samaggi Insurance PCL (Samaggi)

We and our local partner acquired 60.86 percent of Samaggi, a general insurance company in Thailand, from Siam Commercial Bank on April 28, 2014, and subsequently acquired an additional 32.17 percent ownership, through a mandatory tender offer, which expired on June 17, 2014. The purchase price for 93.03 percent of the company was $176 million in cash. This acquisition expands our presence in Thailand and Southeast Asia.

The acquisition generated $46 million of goodwill, attributable to expected growth and profitability, none of which is expected to be deductible for income tax purposes, and other intangible assets of $80 million based on ACE’s preliminary purchase price allocation. The other intangible assets primarily relate to a bancassurance agreement.

ABA Seguros

On May 2, 2013, we acquired ABA Seguros, a property and casualty insurer in Mexico that provides automobile, homeowners, and small business coverages for approximately $690 million in cash.

The acquisition generated $285 million of goodwill, attributable to expected growth and profitability, none of which is expected to be deductible for income tax purposes, and other intangible assets of $140 million based on ACE’s purchase price allocation. The other intangible assets primarily relate to distribution channels.

Fianzas Monterrey

On April 1, 2013, we acquired Fianzas Monterrey, a leading surety lines company in Mexico offering administrative performance bonds primarily to clients in the construction and industrial sectors, for approximately $293 million in cash. This acquisition greatly expanded our global franchise in the surety business and enhanced our existing commercial lines and personal accident insurance business in Mexico.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

The acquisition generated $137 million of goodwill, attributable to expected growth and profitability, none of which is expected to be deductible for income tax purposes, and other intangible assets of $73 million, based on ACE's purchase price allocation. The other intangible assets primarily relate to customer lists.

Goodwill and other intangible assets arising from the acquisitions of Samaggi, ABA Seguros, and Fianzas Monterrey are included in our Insurance – Overseas General segment.

3. Investments

a) Transfers of securities

During the third quarter of 2014, we decided to transfer securities, considered essential holdings in a diversified portfolio, with a total fair value of $2.0 billion from Fixed maturities available for sale to Fixed maturities held to maturity. These securities, which we have the intent and ability to hold to maturity, were transferred given the growth in ACE’s investment portfolio over the last several years, as well as continued efforts to manage the diversification of our global portfolio. The net unrealized appreciation at the date of the transfer continues to be reported in the carrying value of the transferred investments and is being amortized through OCI over the remaining life of the securities using the effective interest method in a manner consistent with the amortization of any premium or discount. This transfer represents a non-cash transaction and does not impact the Consolidated Statements of Cash Flows.

b) Fixed maturities



September 30, 2014	Amortized Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation			Fair Value		OTTI Recognized in AOCI
(in millions of U.S. dollars)	Amortized Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation			Fair Value		OTTI Recognized in AOCI
Available for sale
U.S. Treasury and agency	$	2,627	$	70	$	(19	)	$	2,678	$	—
Foreign	14,741		542		(52		)	15,231		(1		)
Corporate securities	16,715		716		(93		)	17,338		(2		)
Mortgage-backed securities	10,159		237		(72		)	10,324		(1		)
States, municipalities, and political subdivisions	3,446		138		(7		)	3,577		—
	$	47,688	$	1,703	$	(243	)	$	49,148	$	(4	)
Held to maturity
U.S. Treasury and agency	$	804	$	16	$	(3	)	$	817	$	—
Foreign	937		42		(1		)	978		—
Corporate securities	2,443		86		(4		)	2,525		—
Mortgage-backed securities	2,087		46		(3		)	2,130		—
States, municipalities, and political subdivisions	1,277		38		(2		)	1,313		—
	$	7,548	$	228	$	(13	)	$	7,763	$	—

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries



December 31, 2013	Amortized Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation			Fair Value		OTTI Recognized in AOCI
(in millions of U.S. dollars)	Amortized Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation			Fair Value		OTTI Recognized in AOCI
Available for sale
U.S. Treasury and agency	$	2,946	$	62	$	(59	)	$	2,949	$	—
Foreign	14,336		377		(122		)	14,591		—
Corporate securities	16,825		777		(132		)	17,470		(6		)
Mortgage-backed securities	10,937		184		(227		)	10,894		(34		)
States, municipalities, and political subdivisions	3,362		65		(77		)	3,350		—
	$	48,406	$	1,465	$	(617	)	$	49,254	$	(40	)
Held to maturity
U.S. Treasury and agency	$	820	$	16	$	(4	)	$	832	$	—
Foreign	864		33		—			897		—
Corporate securities	1,922		83		—			2,005		—
Mortgage-backed securities	1,341		39		(1		)	1,379		—
States, municipalities, and political subdivisions	1,151		16		(17		)	1,150		—
	$	6,098	$	187	$	(22	)	$	6,263	$	—

As discussed in Note 3 d), if a credit loss is incurred on an impaired fixed maturity, an OTTI is considered to have occurred and the portion of the impairment not related to credit losses (non-credit OTTI) is recognized in OCI. Included in the “OTTI Recognized in AOCI” columns above are the cumulative amounts of non-credit OTTI recognized in OCI adjusted for subsequent sales, maturities, and redemptions. OTTI recognized in AOCI does not include the impact of subsequent changes in fair value of the related securities. In periods subsequent to a recognition of OTTI in OCI, changes in the fair value of the related fixed maturities are reflected in Unrealized appreciation (depreciation) in the consolidated statement of shareholders’ equity. For the three and nine months ended September 30, 2014, $1 million and $6 million, respectively, of net unrealized appreciation related to such securities is included in OCI. For the three and nine months ended September 30, 2013, $1 million of net unrealized depreciation and $24 million of net unrealized appreciation, respectively, related to such securities is included in OCI. There was no non-credit OTTI recognized in AOCI at September 30, 2014. At December 31, 2013, AOCI included cumulative net unrealized depreciation of $4 million related to securities remaining in the investment portfolio for which ACE has recognized a non-credit OTTI.

Mortgage-backed securities (MBS) issued by U.S. government agencies are combined with all other to be announced mortgage derivatives held (refer to Note 7 a) (iv)) and are included in the category, “Mortgage-backed securities”. Approximately 83 percent of the total mortgage-backed securities at September 30, 2014 and December 31, 2013 are represented by investments in U.S. government agency bonds. The remainder of the mortgage exposure consists of collateralized mortgage obligations and non-government mortgage-backed securities, the majority of which provide a planned structure for principal and interest payments and carry a rating of AAA by the major credit rating agencies.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

The following table presents fixed maturities by contractual maturity:



			September 30				December 31
			2014				2013
(in millions of U.S. dollars)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Available for sale
Due in 1 year or less	$	2,292	$	2,316	$	2,387	$	2,411
Due after 1 year through 5 years	14,833		15,310		14,139		14,602
Due after 5 years through 10 years	15,872		16,323		16,200		16,535
Due after 10 years	4,532		4,875		4,743		4,812
	37,529		38,824		37,469		38,360
Mortgage-backed securities	10,159		10,324		10,937		10,894
	$	47,688	$	49,148	$	48,406	$	49,254
Held to maturity
Due in 1 year or less	$	417	$	421	$	401	$	405
Due after 1 year through 5 years	2,670		2,763		2,284		2,363
Due after 5 years through 10 years	1,401		1,443		1,686		1,723
Due after 10 years	973		1,006		386		393
	5,461		5,633		4,757		4,884
Mortgage-backed securities	2,087		2,130		1,341		1,379
	$	7,548	$	7,763	$	6,098	$	6,263

Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.

c) Equity securities



	September 30			December 31
(in millions of U.S. dollars)	2014			2013
Cost	$	480		$	841
Gross unrealized appreciation	71			63
Gross unrealized depreciation	(5		)	(67		)
Fair value	$	546		$	837

During the third quarter of 2014, we elected to exchange our interest in a strategic emerging debt portfolio, a mutual fund classified as an equity security investment, for direct ownership of certain of the underlying fixed maturities, and the remainder in cash. This transaction increased realized losses and decreased unrealized losses with no impact to shareholders' equity. The non-cash portion of the transaction was $219 million and does not impact the Consolidated Statements of Cash Flows.

d) Net realized gains (losses)

In accordance with guidance related to the recognition and presentation of OTTI, when an impairment related to a fixed maturity has occurred, OTTI is required to be recorded in Net income if management has the intent to sell the security or it is more likely than not that we will be required to sell the security before the recovery of its amortized cost. Further, in cases where we do not intend to sell the security and it is more likely than not that we will not be required to sell the security, ACE must evaluate the security to determine the portion of the impairment, if any, related to credit losses. If a credit loss is incurred, an OTTI is considered to have occurred and any portion of the OTTI related to credit losses must be reflected in Net income while the portion of OTTI related to all other factors is recognized in OCI. For fixed maturities held to maturity, OTTI recognized in OCI is accreted from AOCI to the amortized cost of the fixed maturity prospectively over the remaining term of the securities.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

Each quarter, securities in an unrealized loss position (impaired securities), including fixed maturities, securities lending collateral, equity securities, and other investments, are reviewed to identify impaired securities to be specifically evaluated for a potential OTTI.

For all non-fixed maturities, OTTI is evaluated based on the following:


•	the amount of time a security has been in a loss position and the magnitude of the loss position;


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


•	ACE’s ability and intent to hold the security to the expected recovery period.

As a general rule, we also consider that equity securities in an unrealized loss position for twelve consecutive months are other than temporarily impaired. For mutual funds included in equity securities in our consolidated balance sheet, we employ analysis similar to fixed maturities, when applicable.

We review each fixed maturity in an unrealized loss position to assess whether the security is a candidate for credit loss. Specifically, we consider credit rating, market price, and issuer-specific financial information, among other factors, to assess the likelihood of collection of all principal and interest as contractually due. Securities for which we determine that credit loss is likely are subjected to further analysis to estimate the credit loss recognized in Net income, if any. In general, credit loss recognized in Net income equals the difference between the security’s amortized cost and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security. All significant assumptions used in determining credit losses are subject to change as market conditions evolve.

Projected cash flows for corporate securities (principally senior unsecured bonds) are driven primarily by assumptions regarding probability of default and also the timing and amount of recoveries associated with defaults. ACE developed projected cash flows for corporate securities using market observable data, issuer-specific information, and credit ratings. We use historical default data by Moody’s Investors Service (Moody’s) rating category to calculate a 1-in-100 year probability of default, which results in a default assumption in excess of the historical mean default rate. Consistent with management's approach, ACE assumed a 32 percent recovery rate (the par value of a defaulted security that will be recovered) across all rating categories rather than using Moody's historical mean recovery rate of 42 percent. We believe that use of a default assumption in excess of the historical mean is conservative in light of current market conditions.

For the three and nine months ended September 30, 2014, credit losses recognized in Net income for corporate securities were $4 million and $14 million, respectively. For the three and nine months ended September 30, 2013, credit losses recognized in Net income for corporate securities were $1 million and $8 million, respectively.

For mortgage-backed securities, credit impairment is assessed using a cash flow model that estimates the cash flows on the underlying mortgages, using the security-specific collateral and transaction structure. The model estimates cash flows from the underlying mortgage loans and distributes those cash flows to various tranches of securities, considering the transaction structure and any subordination and credit enhancements that exist in that structure. The cash flow model incorporates actual cash flows on the mortgage-backed securities through the current period and then projects the remaining cash flows using a number of assumptions, including default rates, prepayment rates, and loss severity rates (the par value of a defaulted security that will not be recovered) on foreclosed properties.

For the three and nine months ended September 30, 2014 and 2013, there were no credit losses recognized in Net income for mortgage-backed securities.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

The following table presents the Net realized gains (losses) and the losses included in Net realized gains (losses) and OCI as a result of conditions which caused us to conclude the decline in fair value of certain investments was “other-than-temporary”:



	Three Months Ended						Nine Months Ended
	September 30						September 30
(in millions of U.S. dollars)	2014			2013			2014			2013
Fixed maturities:
OTTI on fixed maturities, gross	$	(5	)	$	(4	)	$	(20	)	$	(11	)
OTTI on fixed maturities recognized in OCI (pre-tax)	1			—			3			—
OTTI on fixed maturities, net	(4		)	(4		)	(17		)	(11		)
Gross realized gains excluding OTTI	73			37			163			163
Gross realized losses excluding OTTI	(51		)	(16		)	(97		)	(68		)
Total fixed maturities	18			17			49			84
Equity securities:
OTTI on equity securities	—			—			(7		)	(1		)
Gross realized gains excluding OTTI	4			8			8			18
Gross realized losses excluding OTTI	(60		)	(1		)	(61		)	(4		)
Total equity securities	(56		)	7			(60		)	13
OTTI on other investments	—			—			(3		)	(2		)
Foreign exchange gains (losses)	(19		)	(26		)	(42		)	45
Investment and embedded derivative instruments	(13		)	4			(53		)	62
Fair value adjustments on insurance derivative	(80		)	134			(126		)	563
S&P put options and futures	(15		)	(95		)	(106		)	(413		)
Other derivative instruments	45			(1		)	52			(2		)
Other	—			—			(8		)	—
Net realized gains (losses)	$	(120	)	$	40		$	(297	)	$	350

The following table presents a roll-forward of pre-tax credit losses related to fixed maturities for which a portion of OTTI was recognized in OCI:



	Three Months Ended						Nine Months Ended
	September 30						September 30
(in millions of U.S. dollars)	2014			2013			2014			2013
Balance of credit losses related to securities still held – beginning of period	$	24		$	40		$	37		$	43
Additions where no OTTI was previously recorded	2			1			9			5
Additions where an OTTI was previously recorded	2			—			5			3
Reductions for securities sold during the period	(11		)	(3		)	(34		)	(13		)
Balance of credit losses related to securities still held – end of period	$	17		$	38		$	17		$	38

e) Gross unrealized loss

At September 30, 2014, there were 5,799 fixed maturities out of a total of 25,735 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $3 million. There were 64 equity securities out of a total of 238 equity securities in an unrealized loss position. The largest single unrealized loss in the equity securities was $1 million. Fixed maturities in an unrealized loss position at September 30, 2014, comprised both investment grade and below investment grade securities for which fair value declined primarily due to widening credit spreads since the date of purchase.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

The following tables present, for all securities in an unrealized loss position (including securities on loan), the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:



	0 – 12 Months					Over 12 Months					Total
September 30, 2014	Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss
(in millions of U.S. dollars)	Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss
U.S. Treasury and agency	$	439	$	(2	)	$	943	$	(20	)	$	1,382	$	(22	)
Foreign	2,420		(34		)	916		(19		)	3,336		(53		)
Corporate securities	4,943		(72		)	854		(25		)	5,797		(97		)
Mortgage-backed securities	2,206		(11		)	2,050		(64		)	4,256		(75		)
States, municipalities, and political subdivisions	311		(1		)	673		(8		)	984		(9		)
Total fixed maturities	10,319		(120		)	5,436		(136		)	15,755		(256		)
Equity securities	67		(5		)	—		—			67		(5		)
Other investments	78		(3		)	—		—			78		(3		)
Total	$	10,464	$	(128	)	$	5,436	$	(136	)	$	15,900	$	(264	)



	0 – 12 Months					Over 12 Months					Total
December 31, 2013	Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss
(in millions of U.S. dollars)	Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss
U.S. Treasury and agency	$	1,794	$	(57	)	$	31	$	(6	)	$	1,825	$	(63	)
Foreign	4,621		(114		)	201		(8		)	4,822		(122		)
Corporate securities	3,836		(118		)	194		(14		)	4,030		(132		)
Mortgage-backed securities	5,248		(197		)	384		(31		)	5,632		(228		)
States, municipalities, and political subdivisions	2,164		(90		)	84		(4		)	2,248		(94		)
Total fixed maturities	17,663		(576		)	894		(63		)	18,557		(639		)
Equity securities	498		(67		)	—		—			498		(67		)
Other investments	67		(9		)	—		—			67		(9		)
Total	$	18,228	$	(652	)	$	894	$	(63	)	$	19,122	$	(715	)

f) Restricted assets

ACE is required to maintain assets on deposit with various regulatory authorities to support its insurance and reinsurance operations. These requirements are generally promulgated in the statutory regulations of the individual jurisdictions. The assets on deposit are available to settle insurance and reinsurance liabilities. ACE is also required to restrict assets pledged under repurchase agreements, which represent ACE's agreement to sell securities and repurchase them at a future date for a predetermined price. We also use trust funds in certain large reinsurance transactions where the trust funds are set up for the benefit of the ceding companies and generally take the place of letter of credit (LOC) requirements. We also have investments in segregated portfolios primarily to provide collateral or guarantees for LOC and derivative transactions. Included in restricted assets at September 30, 2014 and December 31, 2013, are investments, primarily fixed maturities, totaling $15.7 billion and $16.3 billion, respectively, and cash of $72 million and $162 million, respectively.

The following table presents the components of restricted assets:



	September 30		December 31
(in millions of U.S. dollars)	2014		2013
Trust funds	$	10,497	$	11,315
Deposits with non-U.S. regulatory authorities	2,014		1,970
Assets pledged under repurchase agreements	1,454		1,435
Deposits with U.S. regulatory authorities	1,324		1,334
Other pledged assets	435		391
	$	15,724	$	16,445

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

4. Fair value measurements

a) Fair value hierarchy

Fair value of financial assets and financial liabilities is estimated based on the framework established in the fair value accounting guidance. The guidance defines fair value as the price to sell an asset or transfer a liability (an exit price) in an orderly transaction between market participants and establishes a three-level valuation hierarchy based on the reliability of the inputs. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data.

The three levels of the hierarchy are as follows:


•	Level 1 – Unadjusted quoted prices for identical assets or liabilities in active markets;


•	Level 2 – Includes, among other items, inputs other than quoted prices that are observable for the asset or liability such as

interest rates and yield curves, quoted prices for similar assets and liabilities in active markets, and quoted prices for identical or similar assets and liabilities in markets that are not active; and


•	Level 3 – Inputs that are unobservable and reflect management’s 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.

We use pricing services to obtain fair value measurements for the majority of our investment securities. Based on management’s understanding of the methodologies used, these 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 the pricing services, all applicable investments have been valued in accordance with GAAP. We do not adjust prices obtained from pricing services. The following is a description of the valuation techniques and inputs used to determine fair values for financial instruments carried at fair value, as well as the general classification of such financial instruments pursuant to the valuation hierarchy.

Fixed maturities

We use pricing services to estimate fair value measurements for the majority of our fixed maturities. The pricing services use market quotations for fixed maturities that have quoted prices in active markets; such securities are classified within Level 1. For fixed maturities other than U.S. Treasury securities that generally do not trade on a daily basis, the pricing services prepare estimates of fair value measurements using their pricing applications, which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. Additional valuation factors that can be taken into account are nominal spreads, dollar basis, and liquidity adjustments. The pricing services evaluate each asset class based on relevant market and credit information, perceived market movements, and sector news. The market inputs used in the pricing evaluation, listed in the approximate order of priority include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. The extent of the use of each input is dependent on the asset class and the market conditions. Given the asset class, the priority of the use of inputs may change, or some market inputs may not be relevant. Additionally, fixed maturities valuation 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 an investment's estimated fair value is not reflective of the price at which an actual transaction would occur. The overwhelming majority of fixed maturities are classified within Level 2 because the most significant inputs used in the pricing techniques are observable. 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.

Equity securities

Equity securities with active markets are classified within Level 1 as fair values are based on quoted market prices. For equity securities in markets which are less active, fair values are based on market valuations and are classified within Level 2. Equity securities for which pricing is unobservable are classified within Level 3.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

Short-term investments

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 approximates fair value. Short-term investments for which pricing is unobservable are classified within Level 3.

Other investments

Fair values for the majority of Other investments including investments in partially-owned investment companies, investment funds, and limited partnerships are based on their respective net asset values or equivalent (NAV). The majority of these investments, for which NAV was used as a practical expedient to measure fair value, are classified within Level 3 because either ACE will never have the contractual option to redeem the investments or will not have the contractual option to redeem the investments in the near term. The remainder of such investments is classified within Level 2. Certain of our long-duration contracts are supported by assets that do not qualify for separate account reporting under GAAP. These assets comprise mutual funds classified within Level 1 in the valuation hierarchy on the same basis as other equity securities traded in active markets. Other investments also includes equity securities and fixed maturities held in rabbi trusts maintained by ACE for deferred compensation plans, which are classified within the valuation hierarchy on the same basis as other equity securities and fixed maturities.

Securities lending collateral

The underlying assets included in Securities lending collateral in the consolidated balance sheets are fixed maturities which are classified in the valuation hierarchy on the same basis as other fixed maturities. Excluded from the valuation hierarchy is the corresponding liability related to ACE’s obligation to return the collateral plus interest as it is reported at contract value and not fair value in the consolidated balance sheets.

Investment derivative instruments

Actively traded investment derivative instruments, including futures, options, and forward contracts are classified within Level 1 as fair values are based on quoted market prices. The fair value of cross-currency swaps are based on market valuations and are classified within Level 2. Investment derivative instruments are recorded in either Other assets or Accounts payable, accrued expenses, and other liabilities in the consolidated balance sheets.

Other derivative instruments

We maintain positions in other derivative instruments including exchange-traded equity futures contracts and option contracts designed to limit exposure to a severe equity market decline, which would cause an increase in expected claims and, therefore, reserves for our guaranteed minimum death benefits (GMDB) and guaranteed living benefits (GLB) reinsurance business. Our position in exchange-traded equity futures contracts is classified within Level 1. The fair value of the majority of the remaining 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. Other derivative instruments are recorded in either Other assets or Accounts payable, accrued expenses, and other liabilities in the consolidated balance sheets.

Separate account assets

Separate account assets represent segregated funds where investment risks are borne by the customers, except to the extent of certain guarantees made by ACE. Separate account assets comprise mutual funds classified in the valuation hierarchy on the same basis as other equity securities traded in active markets and are classified within Level 1. Separate account assets also include fixed maturities classified within Level 2 because the most significant inputs used in the pricing techniques are observable. Excluded from the valuation hierarchy are the corresponding liabilities as they are reported at contract value and not fair value in the consolidated balance sheets. Separate account assets are recorded in Other assets in the consolidated balance sheets.

Guaranteed living benefits

The GLB arises from life reinsurance programs covering living benefit guarantees whereby we assume the risk of guaranteed minimum income benefits (GMIB) and guaranteed minimum accumulation benefits (GMAB) associated with variable annuity contracts. GLB’s are recorded in Accounts payable, accrued expenses, and other liabilities and Future policy benefits in the consolidated balance sheets. For GLB reinsurance, ACE estimates fair value using an internal valuation model which includes current market information and estimates of policyholder behavior. All of the treaties contain claim limits, which are factored into the valuation model. The fair value depends on a number of inputs, including changes in interest rates, changes in equity

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

markets, credit risk, current account value, changes in market volatility, expected annuitization rates, changes in policyholder behavior, and changes in policyholder mortality.

The most significant policyholder behavior assumptions include lapse rates and the GMIB annuitization rates. Assumptions regarding lapse rates and GMIB annuitization rates differ by treaty, but the underlying methodologies to determine rates applied to each treaty are comparable. The assumptions regarding lapse and GMIB annuitization rates determined for each treaty are based on a dynamic calculation that uses several underlying factors.

A lapse rate is the percentage of in-force policies surrendered in a given calendar year. All else equal, as lapse rates increase, ultimate claim payments will decrease.

GMIB annuitization rate is the percentage of policies for which the policyholder will elect to annuitize using the guaranteed benefit provided under the GMIB. All else equal, as GMIB annuitization rates increase, ultimate claim payments will increase, subject to treaty claim limits.

The effect of changes in key market factors on assumed lapse and annuitization rates reflect emerging trends using data available from cedants. For treaties with limited experience, rates are established in line with data received from other ceding companies adjusted, as appropriate, with industry estimates. The model and related assumptions are regularly re-evaluated by management and enhanced, as appropriate, based upon additional experience obtained related to policyholder behavior and availability of more information, such as market conditions, market participant assumptions, and demographics of in-force annuities. During the three and nine months ended September 30, 2014, no material changes were made to actuarial or behavioral assumptions. We made minor technical refinements to the model with an unfavorable net income impact of approximately nil and $2 million for the three and nine months ended September 30, 2014, respectively. For detailed information on our lapse and annuitization rate assumptions, refer to Note 4 to the Consolidated Financial Statements of our 2013 Form 10-K.

We view the variable annuity reinsurance business as having a similar risk profile to that of catastrophe reinsurance, with the probability of a cumulative long-term economic net loss relatively small at the time of pricing. However, adverse changes in market factors and policyholder behavior will have an adverse impact on net income, which may be material. Because of the significant use of unobservable inputs including policyholder behavior, GLB reinsurance is classified within Level 3.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

The following tables present, by valuation hierarchy, the financial instruments measured at fair value on a recurring basis:



September 30, 2014	Level 1		Level 2		Level 3		Total
(in millions of U.S. dollars)	Level 1		Level 2		Level 3		Total
Assets:
Fixed maturities available for sale
U.S. Treasury and agency	$	1,490	$	1,188	$	—	$	2,678
Foreign	202		15,017		12		15,231
Corporate securities	—		17,130		208		17,338
Mortgage-backed securities	—		10,309		15		10,324
States, municipalities, and political subdivisions	—		3,577		—		3,577
	1,692		47,221		235		49,148
Equity securities	520		24		2		546
Short-term investments	1,253		1,500		—		2,753
Other investments	336		252		2,671		3,259
Securities lending collateral	—		1,440		—		1,440
Investment derivative instruments	23		—		—		23
Other derivative instruments	11		2		—		13
Separate account assets	1,389		90		—		1,479
Total assets measured at fair value	$	5,224	$	50,529	$	2,908	$	58,661
Liabilities:
Investment derivative instruments	$	5	$	—	$	—	$	5
Other derivative instruments	—		2		—		2
GLB⁽¹⁾	—		—		317		317
Total liabilities measured at fair value	$	5	$	2	$	317	$	324


⁽¹⁾	Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as Future policy benefits in the consolidated balance sheets. Refer to Note 5 for additional information.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries



December 31, 2013	Level 1		Level 2		Level 3		Total
(in millions of U.S. dollars)	Level 1		Level 2		Level 3		Total
Assets:
Fixed maturities available for sale
U.S. Treasury and agency	$	1,626	$	1,323	$	—	$	2,949
Foreign	223		14,324		44		14,591
Corporate securities	—		17,304		166		17,470
Mortgage-backed securities	—		10,886		8		10,894
States, municipalities, and political subdivisions	—		3,350		—		3,350
	1,849		47,187		218		49,254
Equity securities	373		460		4		837
Short-term investments	953		803		7		1,763
Other investments	305		231		2,440		2,976
Securities lending collateral	—		1,632		—		1,632
Investment derivative instruments	19		—		—		19
Other derivative instruments	—		6		—		6
Separate account assets	1,145		81		—		1,226
Total assets measured at fair value	$	4,644	$	50,400	$	2,669	$	57,713
Liabilities:
Investment derivative instruments	$	6	$	—	$	—	$	6
Other derivative instruments	60		2		—		62
GLB⁽¹⁾	—		—		193		193
Total liabilities measured at fair value	$	66	$	2	$	193	$	261


⁽¹⁾	Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as Future policy benefits in the consolidated balance sheets. Refer to Note 5 for additional information.

The following table presents transfers of financial instruments between Level 1 and Level 2:



	Three Months Ended				Nine Months Ended
	September 30				September 30
(in millions of U.S. dollars)	2014		2013		2014		2013
Transfers from Level 1 to Level 2	$	—	$	—	$	—	$	19
Transfers from Level 2 to Level 1	$	—	$	—	$	—	$	—

Fair value of alternative investments

Included in Other investments in the fair value hierarchy are investment funds, limited partnerships, and partially-owned investment companies measured at fair value using NAV as a practical expedient. At September 30, 2014 and December 31, 2013, there were no probable or pending sales related to any of the investments measured at fair value using NAV.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

The following table presents, by investment category, the expected liquidation period, fair value, and maximum future funding commitments of alternative investments:



				September 30				December 31
	Expected Liquidation Period of Underlying Assets			2014				2013
(in millions of U.S. dollars)	Expected Liquidation Period of Underlying Assets	Fair Value		Maximum Future Funding Commitments		Fair Value		Maximum Future Funding Commitments
Financial	5 to 9 Years	$	266	$	127	$	256	$	129
Real estate	3 to 9 Years	304		43		322		92
Distressed	6 to 9 Years	289		132		180		230
Mezzanine	6 to 9 Years	300		213		276		252
Traditional	3 to 8 Years	960		388		813		456
Vintage	1 to 3 Years	10		—		13		—
Investment funds	Not Applicable	384		—		428		—
		$	2,513	$	903	$	2,288	$	1,159

Included in all categories in the above table except for Investment funds are investments for which ACE will never have the contractual option to redeem but receives distributions based on the liquidation of the underlying assets. Further, for all categories except for Investment funds, ACE does not have the ability to sell or transfer the investments without the consent from the general partner of individual funds.



Investment Category		Consists of investments in private equity funds:
Financial		targeting financial services companies such as financial institutions and insurance services worldwide
Real estate		targeting global distress opportunities, value added U.S. properties, and global mezzanine debt securities in the commercial real estate market
Distressed		targeting distressed debt/credit and equity opportunities in the U.S.
Mezzanine		targeting private mezzanine debt of large-cap and mid-cap companies in the U.S. and worldwide
Traditional		employing traditional private equity investment strategies such as buyout and venture with different geographical focuses including Brazil, Asia, Europe, and the U.S.
Vintage		made before 2002 and where the funds’ commitment periods had already expired

Investment funds

ACE’s investment funds employ various investment strategies such as long/short equity and arbitrage/distressed. Included in this category are investments for which ACE has the option to redeem at agreed upon value as described in each investment fund’s subscription agreement. Depending on the terms of the various subscription agreements, investment fund investments may be redeemed monthly, quarterly, semi-annually, or annually. If ACE wishes to redeem an investment fund investment, it must first determine if the investment fund is still in a lock-up period (a time when ACE cannot redeem its investment so that the investment fund manager has time to build the portfolio). If the investment fund is no longer in its lock-up period, ACE must then notify the investment fund manager of its intention to redeem by the notification date prescribed by the subscription agreement. Subsequent to notification, the investment fund can redeem ACE’s investment within several months of the notification. Notice periods for redemption of the investment funds range between 5 and 120 days. ACE can redeem its investment funds without consent from the investment fund managers.

Level 3 financial instruments

The fair values of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) consist of various inputs and assumptions that management makes when determining fair value. Management analyzes changes in fair value measurements classified within Level 3 by comparing pricing and returns of our investments to benchmarks, including month-over-month movements, investment credit spreads, interest rate movements, and credit quality of securities.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

The following table presents the significant unobservable inputs used in the Level 3 liability valuations. Excluded from the table below are inputs used to determine the fair value of Level 3 assets which are based on single broker quotes or net asset value and contain no quantitative unobservable inputs developed by management.

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

Fair Value

Valuation

Technique

Significant

Unobservable Inputs

Ranges

September 30, 2014

December 31, 2013

GLB⁽¹⁾

317

193

Actuarial model

Lapse rate

1% – 30%

Annuitization rate

0% – 55%


⁽¹⁾	Discussion of the most significant inputs used in the fair value measurement of GLB and the sensitivity of those assumptions is included within Note 4 a) Guaranteed living benefits.

The following tables present a reconciliation of the beginning and ending balances of financial instruments measured at fair value using significant unobservable inputs (Level 3):



	Assets													Liabilities
Three Months Ended	Available-for-Sale Debt Securities								Equity securities		Other investments			GLB⁽¹⁾
September 30, 2014	Foreign			Corporate securities			MBS
(in millions of U.S. dollars)	Foreign			Corporate securities			MBS
Balance–Beginning of Period	$	12		$	204		$	7	$	2	$	2,640		$	241
Transfers into Level 3	1			5			—		—		—			—
Transfers out of Level 3	—			—			—		—		—			—
Change in Net Unrealized Gains (Losses) included in OCI	—			(1		)	—		—		(8		)	—
Net Realized Gains/Losses	—			2			—		—		—			76
Purchases	—			20			8		—		170			—
Sales	(1		)	(9		)	—		—		(3		)	—
Settlements	—			(13		)	—		—		(128		)	—
Balance–End of Period	$	12		$	208		$	15	$	2	$	2,671		$	317
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date	$	—		$	—		$	—	$	—	$	—		$	76


⁽¹⁾	Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as Future policy benefits in the consolidated balance sheets. Refer to Note 5 for additional information.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries



	Assets																Liabilities
Three Months Ended	Available-for-Sale Debt Securities								Equity securities		Short-term investments			Other investments			GLB⁽¹⁾
September 30, 2013	Foreign			Corporate securities			MBS
(in millions of U.S. dollars)	Foreign			Corporate securities			MBS
Balance–Beginning of Period	$	48		$	114		$	9	$	4	$	9		$	2,349		$	652
Transfers into Level 3	1			12			—		—		1			—			—
Transfers out of Level 3	(8		)	(1		)	—		—		(2		)	—			—
Change in Net Unrealized Gains (Losses) included in OCI	2			(1		)	—		—		—			(1		)	—
Net Realized Gains/Losses	—			(1		)	—		—		—			—			(138		)
Purchases	12			6			—		—		—			138			—
Sales	(13		)	(4		)	—		—		—			(1		)	—
Settlements	—			(4		)	—		—		—			(96		)	—
Balance–End of Period	$	42		$	121		$	9	$	4	$	8		$	2,389		$	514
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date	$	—		$	—		$	—	$	—	$	—		$	—		$	(138	)

⁽¹⁾

Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as Future policy benefits in the consolidated balance sheets. The liability for GLB reinsurance was $746 million at September 30, 2013, and $880 million at June 30, 2013, which includes a fair value derivative adjustment of $514 million and $652 million, respectively.



	Assets																		Liabilities
Nine Months Ended	Available-for-Sale Debt Securities									Equity securities			Short-term investments			Other investments			GLB⁽¹⁾
September 30, 2014	Foreign			Corporate securities			MBS
(in millions of U.S. dollars)	Foreign			Corporate securities			MBS
Balance–Beginning of Period	$	44		$	166		$	8		$	4		$	7		$	2,440		$	193
Transfers into Level 3	3			35			—			—			—			—			—
Transfers out of Level 3	(34		)	(22		)	—			(2		)	(7		)	—			—
Change in Net Unrealized Gains (Losses) included in OCI	(1		)	1			—			1			—			40			—
Net Realized Gains/Losses	1			2			—			—			—			(3		)	124
Purchases	2			65			8			1			—			522			—
Sales	(3		)	(17		)	—			(2		)	—			(6		)	—
Settlements	—			(22		)	(1		)	—			—			(322		)	—
Balance–End of Period	$	12		$	208		$	15		$	2		$	—		$	2,671		$	317
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date	$	—		$	—		$	—		$	—		$	—		$	(3	)	$	124


⁽¹⁾	Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as Future policy benefits in the consolidated balance sheets. Refer to Note 5 for additional information.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries



	Assets																		Liabilities
Nine Months Ended	Available-for-Sale Debt Securities									Equity securities			Short-term investments			Other investments			GLB⁽¹⁾
September 30, 2013	Foreign			Corporate securities			MBS
(in millions of U.S. dollars)	Foreign			Corporate securities			MBS
Balance–Beginning of Period	$	60		$	102		$	13		$	3		$	—		$	2,252		$	1,119
Transfers into Level 3	33			29			—			7			8			—			—
Transfers out of Level 3	(49		)	(30		)	—			(1		)	(2		)	—			—
Change in Net Unrealized Gains (Losses) included in OCI	(2		)	(1		)	—			(5		)	—			34			—
Net Realized Gains/Losses	1			(2		)	—			4			—			(2		)	(605		)
Purchases	15			39			—			1			2			387			—
Sales	(15		)	(4		)	(3		)	(5		)	—			(10		)	—
Settlements	(1		)	(12		)	(1		)	—			—			(272		)	—
Balance–End of Period	$	42		$	121		$	9		$	4		$	8		$	2,389		$	514
Net Realized Gains/Losses Attributable to Changes in Fair Value at the Balance Sheet Date	$	—		$	—		$	—		$	—		$	—		$	(2	)	$	(605	)

⁽¹⁾

Our GLB reinsurance product meets the definition of a derivative instrument for accounting purposes and is accordingly carried at fair value. Excluded from the table above is the portion of the GLB derivative liability classified as Future policy benefits in the consolidated balance sheets. The liability for GLB reinsurance was $746 million at September 30, 2013, and $1.4 billion at December 31, 2012, which includes a fair value derivative adjustment of $514 million and $1.1 billion, respectively.

b) Financial instruments disclosed, but not measured, at fair value

ACE uses various financial instruments in the normal course of its business. Our insurance contracts are excluded from fair value of financial instruments accounting guidance, and therefore, are not included in the amounts discussed below.

The carrying values of cash, other assets, other liabilities, and other financial instruments not included below approximated their fair values.

Investments in partially-owned insurance companies

Fair values for investments in partially-owned insurance companies are based on ACE’s share of the net assets based on the financial statements provided by those companies.

Short- and long-term debt and trust preferred securities

Where practical, fair values for short-term debt, long-term debt, and trust preferred securities are estimated using discounted cash flow calculations based principally on observable inputs including incremental borrowing rates, which reflect ACE’s credit rating, for similar types of borrowings with maturities consistent with those remaining for the debt being valued.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

The following tables present fair value, by valuation hierarchy, and carrying value of the financial instruments not measured at fair value:



September 30, 2014	Fair Value								Carrying Value
(in millions of U.S. dollars)	Level 1		Level 2		Level 3		Total		Carrying Value
Assets:
Fixed maturities held to maturity
U.S. Treasury and agency	$	625	$	192	$	—	$	817	$	804
Foreign	—		978		—		978		937
Corporate securities	—		2,510		15		2,525		2,443
Mortgage-backed securities	—		2,130		—		2,130		2,087
States, municipalities, and political subdivisions	—		1,313		—		1,313		1,277
	625		7,123		15		7,763		7,548
Partially-owned insurance companies	—		—		495		495		495
Total assets	$	625	$	7,123	$	510	$	8,258	$	8,043
Liabilities:
Short-term debt	$	—	$	1,864	$	—	$	1,864	$	1,851
Long-term debt	—		4,349		—		4,349		4,057
Trust preferred securities	—		459		—		459		309
Total liabilities	$	—	$	6,672	$	—	$	6,672	$	6,217



December 31, 2013	Fair Value								Carrying Value
(in millions of U.S. dollars)	Level 1		Level 2		Level 3		Total		Carrying Value
Assets:
Fixed maturities held to maturity
U.S. Treasury and agency	$	596	$	236	$	—	$	832	$	820
Foreign	—		897		—		897		864
Corporate securities	—		1,990		15		2,005		1,922
Mortgage-backed securities	—		1,379		—		1,379		1,341
States, municipalities, and political subdivisions	—		1,150		—		1,150		1,151
	596		5,652		15		6,263		6,098
Partially-owned insurance companies	—		—		470		470		470
Total assets	$	596	$	5,652	$	485	$	6,733	$	6,568
Liabilities:
Short-term debt	$	—	$	1,913	$	—	$	1,913	$	1,901
Long-term debt	—		4,088		—		4,088		3,807
Trust preferred securities	—		438		—		438		309
Total liabilities	$	—	$	6,439	$	—	$	6,439	$	6,017

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

5. Assumed life reinsurance programs involving minimum benefit guarantees under annuity contracts

The following table presents income and expenses relating to GMDB and GLB reinsurance. GLBs include GMIBs as well as some GMABs originating in Japan.



	Three Months Ended					Nine Months Ended
	September 30					September 30
(in millions of U.S. dollars)	2014			2013		2014			2013
GMDB
Net premiums earned	$	17		$	19	$	54		$	59
Policy benefits and other reserve adjustments	$	12		$	14	$	40		$	58
GLB
Net premiums earned	$	35		$	36	$	105		$	112
Policy benefits and other reserve adjustments	8			9		27			20
Net realized gains (losses)	(76		)	138		(124		)	608
Gain (loss) recognized in income	$	(49	)	$	165	$	(46	)	$	700
Net cash received	$	31		$	31	$	93		$	94
Net (increase) decrease in liability	$	(80	)	$	134	$	(139	)	$	606

Net realized gains (losses) in the table above include gains (losses) related to foreign exchange and fair value adjustments on insurance derivatives and exclude gains (losses) on S&P put options and futures held to partially offset the risk in the GLB reinsurance portfolio. Refer to Note 7 for additional information.

At September 30, 2014, reported liabilities for GMDB and GLB reinsurance were $108 million and $566 million, respectively, compared with $100 million and $427 million, respectively, at December 31, 2013. The reported liability for GLB reinsurance of $566 million at September 30, 2014, and $427 million at December 31, 2013, includes a fair value derivative adjustment of $317 million and $193 million, respectively. Reported liabilities for both GMDB and GLB reinsurance are determined using internal valuation models. Such valuations require considerable judgment and are subject to significant uncertainty. The valuation of these products is subject to fluctuations arising from, among other factors, changes in interest rates, changes in equity markets, changes in credit markets, changes in the allocation of the investments underlying annuitants’ account values, and assumptions regarding future policyholder behavior. These models and the related assumptions are continually reviewed by management and enhanced, as appropriate, based upon improvements in modeling assumptions and availability of more information, such as market conditions and demographics of in-force annuities.

Variable Annuity Net Amount at Risk

(i) Reinsurance covering the GMDB risk only

At September 30, 2014 and December 31, 2013, the net amount at risk from reinsurance programs covering the GMDB risk only was $520 million and $586 million, respectively.

For reinsurance programs covering the GMDB risk only, the net amount at risk is defined as the present value of future claim payments under the following assumptions:


•	policy account values and guaranteed values are fixed at the valuation date (September 30, 2014 and December 31, 2013, respectively);


•	there are no lapses or withdrawals;


•	mortality according to 100 percent of the Annuity 2000 mortality table;


•	future claims are discounted in line with the discounting assumption used in the calculation of the benefit reserve averaging between 2.0 percent and 3.0 percent; and


•	reinsurance coverage ends at the earlier of the maturity of the underlying variable annuity policy or the reinsurance treaty.

The total claim amount payable on reinsurance programs covering the GMDB risk only, if all the cedants’ policyholders were to die immediately at September 30, 2014 was approximately $629 million. This takes into account all applicable reinsurance treaty claim limits.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

(ii) Reinsurance covering the GLB risk only

At September 30, 2014 and December 31, 2013, the net amount at risk from reinsurance programs covering the GLB risk only was $241 million and $136 million, respectively.

For reinsurance programs covering the GLB risk only, the net amount at risk is defined as the present value of future claim payments under the following assumptions:


•	policy account values and guaranteed values are fixed at the valuation date (September 30, 2014 and December 31, 2013, respectively);


•	there are no deaths, lapses, or withdrawals;


•	policyholders annuitize at a frequency most disadvantageous to ACE (in other words, annuitization at a level that maximizes claims taking into account the treaty limits) under the terms of the reinsurance contracts;


•	for annuitizing policyholders, the GMIB claim is calculated using interest rates in line with those used in calculating the reserve;


•	future claims are discounted in line with the discounting assumption used in the calculation of the benefit reserve averaging between 3.5 percent and 4.5 percent; and


•	reinsurance coverage ends at the earlier of the maturity of the underlying variable annuity policy or the reinsurance treaty.

(iii) Reinsurance covering both the GMDB and GLB risks on the same underlying policyholders

At September 30, 2014 and December 31, 2013, the GMDB net amount at risk from reinsurance programs covering both the GMDB and GLB risks on the same underlying policyholders was $75 million and $73 million, respectively.

At September 30, 2014 and December 31, 2013, the GLB net amount at risk from reinsurance programs covering both the GMDB and GLB risks on the same underlying policyholders was $168 million and $141 million, respectively.

These net amounts at risk reflect the interaction between the two types of benefits on any single policyholder (eliminating double-counting), and therefore the net amounts at risk should be considered additive.

For reinsurance programs covering both the GMDB and GLB risks on the same underlying policyholders, the net amount at risk is defined as the present value of future claim payments under the following assumptions:


•	policy account values and guaranteed values are fixed at the valuation date (September 30, 2014 and December 31, 2013, respectively);


•	there are no lapses or withdrawals;


•	mortality according to 100 percent of the Annuity 2000 mortality table;


•	policyholders annuitize at a frequency most disadvantageous to ACE (in other words, annuitization at a level that maximizes claims taking into account the treaty limits) under the terms of the reinsurance contracts;


•	for annuitizing policyholders, the GMIB claim is calculated using interest rates in line with those used in calculating the reserve;


•	future claims are discounted in line with the discounting assumption used in the calculation of the benefit reserve averaging between 3.5 percent and 4.5 percent; and


•	reinsurance coverage ends at the earlier of the maturity of the underlying variable annuity policy or the reinsurance treaty.

The total claim amount payable on reinsurance programs covering both the GMDB and GLB risks on the same underlying policyholders, if all of the cedants’ policyholders were to die immediately at September 30, 2014 was approximately $39 million. This takes into account all applicable reinsurance treaty claim limits. Although there would be an increase in death claims resulting from 100 percent immediate mortality of all policyholders, the GLB claims would be zero.

The average attained age of all policyholders under sections i), ii), and iii) above, weighted by the guaranteed value of each reinsured policy, is approximately 69 years.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

6. Debt

In May 2014, ACE INA Holdings Inc. issued $700 million of 3.35 percent senior notes due May 2024. These senior notes are redeemable at any time at ACE INA Holdings Inc.'s option subject to a “make-whole” premium (the present value of the remaining principal and interest discounted at the applicable U.S. Treasury rate plus 0.15 percent). The notes are also redeemable at par plus accrued and unpaid interest in the event of certain changes in tax law. These notes do not have the benefit of any sinking fund. These senior unsecured notes are guaranteed on a senior basis by ACE Limited and they rank equally with all of ACE's other senior obligations. They also contain customary limitations on lien provisions as well as customary events of default provisions which, if breached, could result in the accelerated maturity of such senior debt.

In May 2014, we reclassified ACE INA Holdings Inc.'s $450 million of 5.6 percent senior notes, due to mature on May 15, 2015, from Long-term debt to Short-term debt in the consolidated balance sheet.

In June 2014, ACE INA Holdings Inc.'s $500 million of 5.875 percent senior notes matured and were fully paid.

7. Commitments, contingencies, and guarantees

a) Derivative instruments

Derivative instruments employed

ACE maintains positions in derivative instruments such as futures, options, swaps, and foreign currency forward contracts for which the primary purposes are to manage duration and foreign currency exposure, yield enhancement, or to obtain an exposure to a particular financial market. ACE also maintains positions in convertible securities that contain embedded derivatives. Investment derivative instruments are recorded in either Other assets (OA) or Accounts payable, accrued expenses, and other liabilities (AP), convertible bonds are recorded in Fixed maturities available for sale (FM AFS) and convertible equity securities are recorded in Equity securities (ES) in the consolidated balance sheets. These are the most numerous and frequent derivative transactions.

In addition, ACE from time to time purchases to be announced mortgage-backed securities (TBAs) as part of its investing activities.

Under reinsurance programs covering GLBs, ACE assumes the risk of GLBs, including GMIB and GMAB, associated with variable annuity contracts. The GMIB risk is triggered if, at the time the contract holder elects to convert the accumulated account value to a periodic payment stream (annuitize), the accumulated account value is not sufficient to provide a guaranteed minimum level of monthly income. The GMAB risk is triggered if, at contract maturity, the contract holder’s account value is less than a guaranteed minimum value. The GLB reinsurance product meets the definition of a derivative instrument. Benefit reserves in respect of GLBs are classified as Future policy benefits (FPB) while the fair value derivative adjustment is classified within AP. ACE also maintains positions in exchange-traded equity futures contracts and options on equity market indices to limit equity exposure in the GMDB and GLB blocks of business.

In relation to certain debt issuances, ACE from time to time enters into interest rate swap transactions for the purpose of either fixing or reducing borrowing costs. Although the use of these interest rate swaps has the economic effect of fixing or reducing borrowing costs on a net basis, gross interest expense on the related debt issuances is included in Interest expense while the settlements related to the interest rate swaps are reflected in Net realized gains (losses) in the consolidated statements of operations. At September 30, 2014, ACE had no in-force interest rate swaps.

All derivative instruments are carried at fair value with changes in fair value recorded in Net realized gains (losses) in the consolidated statements of operations. None of the derivative instruments are designated as hedges for accounting purposes.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

The following table presents the balance sheet locations, fair values of derivative instruments in an asset or (liability) position, and notional values/payment provisions of our derivative instruments:



				September 30, 2014							December 31, 2013
	Consolidated Balance Sheet Location	Fair Value					Notional Value/ Payment Provision		Fair Value					Notional Value/ Payment Provision
(in millions of U.S. dollars)	Consolidated Balance Sheet Location	Derivative Asset		Derivative (Liability)			Notional Value/ Payment Provision		Derivative Asset		Derivative (Liability)			Notional Value/ Payment Provision
Investment and embedded derivative instruments
Foreign currency forward contracts	OA / (AP)	$	14	$	(2	)	$	1,010	$	3	$	(4	)	$	1,202
Cross-currency swaps	OA / (AP)	—		—			95		—		—			50
Futures contracts on money market instruments	OA / (AP)	2		—			1,000		3		—			3,910
Options/Futures contracts on notes and bonds	OA / (AP)	7		(3		)	1,145		13		(2		)	871
Convertible securities⁽¹⁾	FM AFS / ES	303		—			268		302		—			254
		$	326	$	(5	)	$	3,518	$	321	$	(6	)	$	6,287
Other derivative instruments
Futures contracts on equities⁽²⁾	OA / (AP)	$	11	$	—		$	1,427	$	—	$	(60	)	$	1,692
Options on equity market indices⁽²⁾	OA / (AP)	2		—			250		6		—			250
Other	OA / (AP)	—		(2		)	8		—		(2		)	8
		$	13	$	(2	)	$	1,685	$	6	$	(62	)	$	1,950
GLB⁽³⁾	(AP) / (FPB)	$	—	$	(566	)	$	409	$	—	$	(427	)	$	277


⁽¹⁾	Includes fair value of embedded derivatives.


⁽²⁾	Related to GMDB and GLB blocks of business.


⁽³⁾	Includes both future policy benefits reserves and fair value derivative adjustment. Refer to Note 5 for additional information. Note that the payment provision related to GLB is the net amount at risk. The concept of a notional value does not apply to the GLB reinsurance contracts.

At September 30, 2014 and December 31, 2013, derivative assets of $25 million and derivative liabilities of $41 million, respectively, included in the table above were subject to a master netting agreement. The remaining derivatives included in the table above were not subject to a master netting agreement.

ACE participates in a securities lending program operated by a third-party banking institution whereby certain assets are loaned to qualified borrowers and from which we earn an incremental return. At September 30, 2014 and December 31, 2013, our securities lending payable was $1,441 million and $1,633 million, respectively, and our securities lending collateral was $1,440 million and $1,632 million, respectively. The securities lending collateral can only be accessed in the event that the institution borrowing the securities is in default under the lending agreement. An indemnification agreement with the lending agent protects us in the event a borrower becomes insolvent or fails to return any of the securities on loan. At both September 30, 2014 and December 31, 2013, our repurchase agreement obligations of $1,401 million were fully collateralized. In contrast to securities lending programs, the use of cash received is not restricted for the repurchase obligations.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

The following table presents net realized gains (losses) related to derivative instrument activity in the consolidated statements of operations:



	Three Months Ended						Nine Months Ended
	September 30						September 30
(in millions of U.S. dollars)	2014			2013			2014			2013
Investment and embedded derivative instruments
Foreign currency forward contracts	$	19		$	(9	)	$	15		$	8
All other futures contracts and options	(15		)	6			(55		)	46
Convertible securities⁽¹⁾	(17		)	6			(13		)	7
TBAs	—			1			—			1
Total investment and embedded derivative instruments	$	(13	)	$	4		$	(53	)	$	62
GLB and other derivative instruments
GLB⁽²⁾	$	(80	)	$	134		$	(126	)	$	563
Futures contracts on equities⁽³⁾	(15		)	(90		)	(103		)	(393		)
Options on equity market indices⁽³⁾	—			(5		)	(3		)	(20		)
Other	45			(1		)	52			(2		)
Total GLB and other derivative instruments	$	(50	)	$	38		$	(180	)	$	148
	$	(63	)	$	42		$	(233	)	$	210


⁽¹⁾	Includes embedded derivatives.


⁽²⁾	Excludes foreign exchange gains (losses) related to GLB.


⁽³⁾	Related to GMDB and GLB blocks of business.

Derivative instrument objectives

(i) Foreign currency exposure management

A foreign currency forward contract (forward) is an agreement between participants to exchange specific foreign currencies at a future date. ACE uses forwards to minimize the effect of fluctuating foreign currencies.

(ii) Duration management and market exposure

Futures

Futures contracts give the holder the right and obligation to participate in market movements, determined by the index or underlying security on which the futures contract is based. Settlement is made daily in cash by an amount equal to the change in value of the futures contract times a multiplier that scales the size of the contract. Exchange-traded futures contracts on money market instruments, notes and bonds are used in fixed maturity portfolios to more efficiently manage duration, as substitutes for ownership of the money market instruments, bonds and notes without significantly increasing the risk in the portfolio. Investments in futures contracts may be made only to the extent that there are assets under management not otherwise committed.

Exchange-traded equity futures contracts are used to limit exposure to a severe equity market decline, which would cause an increase in expected claims and therefore, reserves for GMDB and GLB reinsurance business.

Options

An option contract conveys to the holder the right, but not the obligation, to purchase or sell a specified amount or value of an underlying security at a fixed price. Option contracts are used in the investment portfolio as protection against unexpected shifts in interest rates, which would affect the duration of the fixed maturity portfolio. By using options in the portfolio, the overall interest rate sensitivity of the portfolio can be reduced. Option contracts may also be used as an alternative to futures contracts in the synthetic strategy as described above.

Another use for option contracts is to limit exposure to a severe equity market decline, which would cause an increase in expected claims and therefore, reserves for GMDB and GLB reinsurance business.

The price of an option is influenced by the underlying security, expected volatility, time to expiration, and supply and demand.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

The credit risk associated with the above derivative financial instruments relates to the potential for non-performance by counterparties. Although non-performance is not anticipated, in order to minimize the risk of loss, management monitors the creditworthiness of its counterparties and obtains collateral. The performance of exchange-traded instruments is guaranteed by the exchange on which they trade. For non-exchange-traded instruments, the counterparties are principally banks which must meet certain criteria according to our investment guidelines.

Cross-currency swaps

Cross-currency swaps are agreements under which two counterparties exchange interest payments and principal denominated in different currencies at a future date. We use cross-currency swaps to reduce the foreign currency and interest rate risk by converting cash flows back into local currency. We invest in foreign currency denominated investments to improve credit diversification and also to obtain better duration matching to our liabilities that is limited in the local currency market.

Other

Included within Other are derivatives intended to reduce potential losses which may arise from certain exposures in our insurance business. The economic benefit provided by these derivatives is similar to purchased reinsurance. For example, ACE may enter into crop derivative contracts to protect underwriting results in the event of a significant decline in commodity prices. Also included within Other are certain life insurance products that meet the definition of a derivative instrument for accounting purposes.

(iii) Convertible security investments

A convertible security is a debt instrument or preferred stock that can be converted into a predetermined amount of the issuer’s equity. The convertible option is an embedded derivative within the host instruments which are classified in the investment portfolio as either available for sale or as an equity security. ACE purchases convertible securities for their total return and not specifically for the conversion feature.

(iv) TBA

By acquiring TBAs, we make a commitment to purchase a future issuance of mortgage-backed securities. For the period between purchase of the TBAs and issuance of the underlying security, we account for our position as a derivative in the consolidated financial statements. ACE purchases TBAs both for their total return and for the flexibility they provide related to our mortgage-backed security strategy.

(v) GLB

Under the GLB program, as the assuming entity, ACE is obligated to provide coverage until the expiration or maturity of the underlying deferred annuity contracts or the expiry of the reinsurance treaty. Premiums received under the reinsurance treaties are classified as premium. Expected losses allocated to premiums received are classified as Future policy benefits and valued similar to GMDB reinsurance. Other changes in fair value, principally arising from changes in expected losses allocated to expected future premiums, are classified as Net realized gains (losses). Fair value represents management’s estimate of exit price and thus, includes a risk margin. We may recognize a realized loss for other changes in fair value due to adverse changes in the capital markets (e.g., declining interest rates and/or declining equity markets) and changes in actual or estimated future policyholder behavior (e.g., increased annuitization or decreased lapse rates) although we expect the business to be profitable. We believe this presentation provides the most meaningful disclosure of changes in the underlying risk within the GLB reinsurance programs for a given reporting period.

b) Other investments

At September 30, 2014, included in Other investments in the consolidated balance sheet are investments in limited partnerships and partially-owned investment companies with a carrying value of $2.1 billion. In connection with these investments, we have commitments that may require funding of up to $903 million over the next several years.

c) Taxation

At September 30, 2014, $28 million of unrecognized tax benefits remains outstanding. It is reasonably possible that over the next twelve months, the amount of unrecognized tax benefits may change resulting from the re-evaluation of unrecognized tax benefits arising from examinations of taxing authorities. With few exceptions, ACE is no longer subject to state and local or non-U.S. income tax examinations for years before 2005.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

d) Letters of credit

We did not renew our $500 million bilateral letter of credit facility that expired in June 2014. We elected instead to satisfy our collateral obligations primarily with insurance trusts supported by our investment portfolio. Refer to our 2013 Form 10-K for additional information on our credit facilities.

e) Legal proceedings

Our insurance subsidiaries are subject to claims litigation involving disputed interpretations of policy coverages and, in some jurisdictions, direct actions by allegedly-injured persons seeking damages from policyholders. These lawsuits, involving claims on policies issued by our subsidiaries which are typical to the insurance industry in general and in the normal course of business, are considered in our loss and loss expense reserves. In addition to claims litigation, we are subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on insurance policies. This category of business litigation typically involves, among other things, allegations of underwriting errors or misconduct, employment claims, regulatory activity, or disputes arising from our business ventures. In the opinion of management, our ultimate liability for these matters could be, but we believe is not likely to be, material to our consolidated financial condition and results of operations.

8. Shareholders’ equity

All of ACE’s Common Shares are authorized under Swiss corporate law. Though the par value of Common Shares is stated in Swiss francs, ACE continues to use U.S. dollars as its reporting currency for preparing consolidated financial statements. Under Swiss corporate law, dividends, including distributions through a reduction in par value (par value reduction) or from legal reserves, must be stated in Swiss francs though dividend payments are made by ACE in U.S. dollars. At our May 2013 annual general meeting, our shareholders approved an annual dividend for the following year of $2.04 per share, payable in four quarterly installments of $0.51 per share after the annual general meeting in the form of a distribution by way of a par value reduction. At the January 10, 2014 extraordinary general meeting, our shareholders approved a resolution to increase our quarterly dividend from $0.51 per share to $0.63 per share for the final two quarterly installments (made on January 31, 2014 and April 17, 2014) that had been earlier approved at our 2013 annual general meeting. The $0.12 per share increase for each installment was distributed from capital contribution reserves (Additional paid-in capital), a subaccount of legal reserves, and transferred to free reserves (Retained earnings) for payment, while the existing $0.51 per share was distributed by way of a par value reduction.

At our May 2014 annual general meeting, our shareholders approved an annual dividend for the following year of $2.60 per share, payable in four quarterly installments of $0.65 per share after the annual general meeting in the form of a distribution by way of a par value reduction.

The following table presents the dividends per Common Share for the three and nine months ended September 30, 2014, in Swiss francs (CHF) and U.S. dollars (USD).



	Three Months Ended								Nine Months Ended
	September 30								September 30
	2014				2013				2014				2013
Dividends – par value reduction	CHF	0.61	$	0.65	CHF	0.46	$	0.51	CHF	1.64	$	1.81	CHF	1.40	$	1.51
Dividends – distributed from capital contribution reserves	—		—		—		—		0.20		0.24		—		—
Total dividends per common share	CHF	0.61	$	0.65	CHF	0.46	$	0.51	CHF	1.84	$	2.05	CHF	1.40	$	1.51

Par value reductions have been reflected as such through Common Shares in the consolidated statements of shareholders' equity and had the effect of reducing par value per Common Share to CHF 25.40 at September 30, 2014.

Common Shares in treasury are used principally for issuance upon the exercise of employee stock options, grants of restricted stock, and purchases under the Employee Stock Purchase Plan (ESPP). At September 30, 2014, 10,720,855 Common Shares remain in treasury after net shares redeemed under employee share-based compensation plans.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

ACE Limited securities repurchase authorization

The following table presents 2014 share repurchases of ACE's Common Shares conducted in a series of open market transactions under the November 2013 Board authorization of a share repurchase program of up to $2.0 billion through December 31, 2014:



(in millions of U.S. dollars, except share data)	Three Months Ended	Nine Months Ended	October 1, 2014 through October 28, 2014
(in millions of U.S. dollars, except share data)	September 30, 2014	September 30, 2014	October 1, 2014 through October 28, 2014
Number of shares repurchased	4,349,302	10,143,184	699,965
Dollar value of shares repurchased	$450	$1,019	$74
Repurchase authorization remaining at end of period	$924	$924	$850

9. Share-based compensation

The ACE Limited 2004 Long-Term Incentive Plan (the 2004 LTIP) permits grants of both incentive and non-qualified stock options principally at an option price per share equal to the grant date fair value of ACE’s Common Shares. Stock options are generally granted with a 3-year vesting period and a 10-year term. Stock options typically vest in equal annual installments over the vesting period, which is also the requisite service period. On February 27, 2014, ACE granted 1,779,074 stock options with a weighted-average grant date fair value of $18.00 each. The fair value of the options issued is estimated on the date of grant using the Black-Scholes option pricing model.

The 2004 LTIP also permits grants of restricted stock and restricted stock units. ACE generally grants restricted stock and restricted stock units with a 4-year vesting period, based on a graded vesting schedule. The restricted stock is granted at market close price on the grant date. On February 27, 2014, ACE granted 1,492,290 restricted stock awards and 276,992 restricted stock units to employees and officers with a grant date fair value of $96.76 each. Each restricted stock unit represents our obligation to deliver to the holder one Common Share upon vesting.

10. Segment information

ACE operates through five business segments: Insurance – North American P&C, Insurance – North American Agriculture, Insurance – Overseas General, Global Reinsurance, and Life. These segments distribute their products through various forms of brokers, agencies, and direct marketing programs. All business segments have established relationships with reinsurance intermediaries.

For segment reporting purposes, certain items have been presented in a different manner below than in the consolidated financial statements. Management uses underwriting income as the main measure of segment performance. ACE calculates underwriting income by subtracting Losses and loss expenses, Policy benefits, Policy acquisition costs, and Administrative expenses from Net premiums earned. For the Insurance – North American Agriculture segment, management includes gains and losses on crop derivatives as a component of underwriting income. For example, for the three months ended September 30, 2014, underwriting income in our Insurance – North American Agriculture segment was $81 million. This amount includes $45 million of realized gains related to crop derivatives which are included in Net realized gains (losses) below. For the Life segment, management 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 as components of Life underwriting income. For example, for the three months ended September 30, 2014, Life underwriting income of $88 million includes Net investment income of $69 million and losses from fair value changes in separate account assets of $6 million.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

The following tables present the Statement of Operations by segment:



For the Three Months Ended September 30, 2014	Insurance – North American P&C			Insurance – North American Agriculture		Insurance – Overseas General			Global Reinsurance			Life			Corporate			ACE Consolidated
(in millions of U.S. dollars)	Insurance – North American P&C			Insurance – North American Agriculture		Insurance – Overseas General			Global Reinsurance			Life			Corporate			ACE Consolidated
Net premiums written	$	1,541		$	764	$	1,719		$	208		$	497		$	—		$	4,729
Net premiums earned	1,518			766		1,726			255			489			—			4,754
Losses and loss expenses	1,053			686		707			92			145			1			2,684
Policy benefits	—			—		—			—			125			—			125
Policy acquisition costs	169			41		418			74			123			—			825
Administrative expenses	165			3		258			13			71			44			554
Underwriting income (loss)	131			36		343			76			25			(45		)	566
Net investment income	277			6		130			81			69			3			566
Net realized gains (losses) including OTTI	(5		)	45		(75		)	6			(89		)	(2		)	(120		)
Interest expense	2			—		2			1			4			61			70
Other (income) expense:
(Gains) losses from fair value changes in separate account assets	—			—		—			—			6			—			6
Other	(31		)	7		6			(10		)	(3		)	6			(25		)
Income tax expense (benefit)	73			23		97			11			12			(40		)	176
Net income (loss)	$	359		$	57	$	293		$	161		$	(14	)	$	(71	)	$	785



For the Three Months Ended September 30, 2013	Insurance – North American P&C			Insurance – North American Agriculture		Insurance – Overseas General			Global Reinsurance			Life			Corporate			ACE Consolidated
(in millions of U.S. dollars)	Insurance – North American P&C			Insurance – North American Agriculture		Insurance – Overseas General			Global Reinsurance			Life			Corporate			ACE Consolidated
Net premiums written	$	1,500		$	805	$	1,571		$	265		$	479		$	—		$	4,620
Net premiums earned	1,444			849		1,611			239			467			—			4,610
Losses and loss expenses	963			746		712			93			141			—			2,655
Policy benefits	—			—		—			—			138			—			138
Policy acquisition costs	159			32		349			52			86			—			678
Administrative expenses	153			5		263			12			85			45			563
Underwriting income (loss)	169			66		287			82			17			(45		)	576
Net investment income	254			6		128			66			61			7			522
Net realized gains (losses) including OTTI	9			—		(8		)	(5		)	43			1			40
Interest expense	3			—		1			2			4			62			72
Other (income) expense:
(Gains) losses from fair value changes in separate account assets	—			—		—			—			(14		)	—			(14		)
Other	(13		)	8		14			(7		)	4			3			9
Income tax expense (benefit)	79			14		78			16			10			(42		)	155
Net income (loss)	$	363		$	50	$	314		$	132		$	117		$	(60	)	$	916

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries



For the Nine Months Ended September 30, 2014	Insurance – North American P&C			Insurance – North American Agriculture		Insurance – Overseas General			Global Reinsurance			Life			Corporate			ACE Consolidated
(in millions of U.S. dollars)	Insurance – North American P&C			Insurance – North American Agriculture		Insurance – Overseas General			Global Reinsurance			Life			Corporate			ACE Consolidated
Net premiums written	$	4,594		$	1,346	$	5,250		$	794		$	1,489		$	—		$	13,473
Net premiums earned	4,547			1,199		5,047			800			1,463			—			13,056
Losses and loss expenses	3,009			1,099		2,354			327			442			2			7,233
Policy benefits	—			—		—			—			383			—			383
Policy acquisition costs	480			69		1,206			201			355			—			2,311
Administrative expenses	501			5		764			41			212			132			1,655
Underwriting income (loss)	557			26		723			231			71			(134		)	1,474
Net investment income	812			19		398			238			199			9			1,675
Net realized gains (losses) including OTTI	(25		)	51		(71		)	(17		)	(237		)	2			(297		)
Interest expense	7			—		4			4			10			188			213
Other (income) expense:
(Gains) losses from fair value changes in separate account assets	—			—		—			—			(5		)	—			(5		)
Other	(75		)	24		8			(39		)	8			18			(56		)
Income tax expense (benefit)	247			21		189			31			34			(120		)	402
Net income (loss)	$	1,165		$	51	$	849		$	456		$	(14	)	$	(209	)	$	2,298



For the Nine Months Ended September 30, 2013	Insurance – North American P&C			Insurance – North American Agriculture		Insurance – Overseas General		Global Reinsurance			Life			Corporate			ACE Consolidated
(in millions of U.S. dollars)	Insurance – North American P&C			Insurance – North American Agriculture		Insurance – Overseas General		Global Reinsurance			Life			Corporate			ACE Consolidated
Net premiums written	$	4,313		$	1,371	$	4,821	$	836		$	1,468		$	—		$	12,809
Net premiums earned	4,210			1,252		4,633		731			1,424			—			12,250
Losses and loss expenses	2,791			1,071		2,227		292			443			7			6,831
Policy benefits	—			—		—		—			379			—			379
Policy acquisition costs	444			56		1,048		148			261			—			1,957
Administrative expenses	437			13		750		36			256			149			1,641
Underwriting income (loss)	538			112		608		255			85			(156		)	1,442
Net investment income	755			19		396		209			187			21			1,587
Net realized gains (losses) including OTTI	63			1		34		46			206			—			350
Interest expense	4			—		4		4			12			181			205
Other (income) expense:
(Gains) losses from fair value changes in separate account assets	—			—		—		—			(7		)	—			(7		)
Other	(38		)	24		30		(13		)	7			19			29
Income tax expense (benefit)	264			24		174		31			33			(134		)	392
Net income (loss)	$	1,126		$	84	$	830	$	488		$	433		$	(201	)	$	2,760

Underwriting assets are reviewed in total by management for purposes of decision-making. Other than goodwill and other intangible assets, ACE does not allocate assets to its segments.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

The following table presents net premiums earned for each segment by product:



(in millions of U.S. dollars)	Property & All Other		Casualty		Life, Accident & Health		ACE Consolidated
For the Three Months Ended September 30, 2014	Property & All Other		Casualty		Life, Accident & Health		ACE Consolidated
Insurance – North American P&C	$	420	$	993	$	105	$	1,518
Insurance – North American Agriculture	766		—		—		766
Insurance – Overseas General	744		394		588		1,726
Global Reinsurance	149		106		—		255
Life	—		—		489		489
	$	2,079	$	1,493	$	1,182	$	4,754
For the Three Months Ended September 30, 2013
Insurance – North American P&C	$	388	$	957	$	99	$	1,444
Insurance – North American Agriculture	849		—		—		849
Insurance – Overseas General	689		375		547		1,611
Global Reinsurance	141		98		—		239
Life	—		—		467		467
	$	2,067	$	1,430	$	1,113	$	4,610

(in millions of U.S. dollars)	Property & All Other		Casualty		Life, Accident & Health		ACE Consolidated
For the Nine Months Ended September 30, 2014	Property & All Other		Casualty		Life, Accident & Health		ACE Consolidated
Insurance – North American P&C	$	1,248	$	2,992	$	307	$	4,547
Insurance – North American Agriculture	1,199		—		—		1,199
Insurance – Overseas General	2,164		1,158		1,725		5,047
Global Reinsurance	435		365		—		800
Life	—		—		1,463		1,463
	$	5,046	$	4,515	$	3,495	$	13,056
For the Nine Months Ended September 30, 2013
Insurance – North American P&C	$	1,103	$	2,826	$	281	$	4,210
Insurance – North American Agriculture	1,252		—		—		1,252
Insurance – Overseas General	1,932		1,088		1,613		4,633
Global Reinsurance	408		323		—		731
Life	—		—		1,424		1,424
	$	4,695	$	4,237	$	3,318	$	12,250

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

11. Earnings per share



	Three Months Ended				Nine Months Ended
	September 30				September 30
(in millions of U.S. dollars, except share and per share data)	2014		2013		2014		2013
Numerator:
Net income	$	785	$	916	$	2,298	$	2,760
Denominator:
Denominator for basic earnings per share:
Weighted-average shares outstanding	334,472,324		340,888,648		337,083,498		340,905,322
Denominator for diluted earnings per share:
Share-based compensation plans	3,201,656		2,929,089		3,298,569		3,146,728
Weighted-average shares outstanding and assumed conversions	337,673,980		343,817,737		340,382,067		344,052,050
Basic earnings per share	$	2.35	$	2.68	$	6.82	$	8.09
Diluted earnings per share	$	2.32	$	2.66	$	6.75	$	8.02

Potential anti-dilutive share conversions	1,227,575		1,215,884		1,410,340		1,429,514

Excluded from weighted-average shares outstanding and assumed conversions is the impact of securities that would have been anti-dilutive during the respective periods.

12. Information provided in connection with outstanding debt of subsidiaries

The following tables present condensed consolidating financial information at September 30, 2014 and December 31, 2013, and for the three and nine months ended September 30, 2014 and 2013 for ACE Limited (Parent Guarantor) and ACE INA Holdings Inc. (Subsidiary Issuer). The Subsidiary Issuer is an indirect 100 percent-owned subsidiary of the Parent Guarantor. The Parent Guarantor fully and unconditionally guarantees certain of the debt of the Subsidiary Issuer. Condensed consolidating financial information of the Parent Guarantor and Subsidiary Issuer are presented on the equity method of accounting. The revenues and expenses and cash flows of the subsidiaries of the Subsidiary Issuer are presented in the Other ACE Limited Subsidiaries column on a combined basis.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

Condensed Consolidating Balance Sheet at September 30, 2014



(in millions of U.S. dollars)	ACE Limited (Parent Guarantor)		ACE INA Holdings Inc. (Subsidiary Issuer)		Other ACE Limited Subsidiaries		Consolidating Adjustments and Eliminations			ACE Limited Consolidated
Assets
Investments	$	31	$	25	$	63,198	$	—		$	63,254
Cash⁽¹⁾	8		12		1,391		(605		)	806
Insurance and reinsurance balances receivable	—		—		6,149		(960		)	5,189
Reinsurance recoverable on losses and loss expenses	—		—		19,948		(9,003		)	10,945
Reinsurance recoverable on policy benefits	—		—		1,236		(1,008		)	228
Value of business acquired	—		—		491		—			491
Goodwill and other intangible assets	—		—		5,425		—			5,425
Investments in subsidiaries	30,065		19,054		—		(49,119		)	—
Due from subsidiaries and affiliates, net	768		—		—		(768		)	—
Other assets	4		272		14,669		(3,726		)	11,219
Total assets	$	30,876	$	19,363	$	112,507	$	(65,189	)	$	97,557
Liabilities
Unpaid losses and loss expenses	$	—	$	—	$	46,003	$	(8,556	)	$	37,447
Unearned premiums	—		—		9,828		(1,808		)	8,020
Future policy benefits	—		—		5,790		(1,008		)	4,782
Due to (from) subsidiaries and affiliates, net	—		556		212		(768		)	—
Affiliated notional cash pooling programs⁽¹⁾	573		32		—		(605		)	—
Short-term debt	—		450		1,401		—			1,851
Long-term debt	—		4,045		12		—			4,057
Trust preferred securities	—		309		—		—			309
Other liabilities	286		1,432		12,681		(3,325		)	11,074
Total liabilities	859		6,824		75,927		(16,070		)	67,540
Total shareholders’ equity	30,017		12,539		36,580		(49,119		)	30,017
Total liabilities and shareholders’ equity	$	30,876	$	19,363	$	112,507	$	(65,189	)	$	97,557

⁽¹⁾

ACE maintains two notional multicurrency cash pools (Pools) with a third-party bank. Various ACE entities participate in one or the other of the Pools, pursuant to which credit and debit balances in individual ACE accounts are translated daily into a single currency and pooled on a notional basis. Individual ACE entities are permitted to overdraw on their individual accounts provided the overall Pool balances do not fall below zero. At September 30, 2014, the cash balance of one or more entities was negative; however, the overall Pool balances were positive.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

Condensed Consolidating Balance Sheet at December 31, 2013



(in millions of U.S. dollars)	ACE Limited (Parent Guarantor)		ACE INA Holdings Inc. (Subsidiary Issuer)		Other ACE Limited Subsidiaries		Consolidating Adjustments and Eliminations			ACE Limited Consolidated
Assets
Investments	$	32	$	10	$	60,886	$	—		$	60,928
Cash⁽¹⁾	—		16		748		(185		)	579
Insurance and reinsurance balances receivable	—		—		5,835		(809		)	5,026
Reinsurance recoverable on losses and loss expenses	—		—		20,057		(8,830		)	11,227
Reinsurance recoverable on policy benefits	—		—		1,215		(997		)	218
Value of business acquired	—		—		536		—			536
Goodwill and other intangible assets	—		—		5,404		—			5,404
Investments in subsidiaries	28,351		18,105		—		(46,456		)	—
Due from subsidiaries and affiliates, net	844		—		—		(844		)	—
Other assets	5		258		13,788		(3,459		)	10,592
Total assets	$	29,232	$	18,389	$	108,469	$	(61,580	)	$	94,510
Liabilities
Unpaid losses and loss expenses	$	—	$	—	$	45,714	$	(8,271	)	$	37,443
Unearned premiums	—		—		9,242		(1,703		)	7,539
Future policy benefits	—		—		5,612		(997		)	4,615
Due to (from) subsidiaries and affiliates, net	—		714		130		(844		)	—
Affiliated notional cash pooling programs⁽¹⁾	185		—		—		(185		)	—
Short-term debt	—		500		1,401		—			1,901
Long-term debt	—		3,795		12		—			3,807
Trust preferred securities	—		309		—		—			309
Other liabilities	222		1,318		11,655		(3,124		)	10,071
Total liabilities	407		6,636		73,766		(15,124		)	65,685
Total shareholders’ equity	28,825		11,753		34,703		(46,456		)	28,825
Total liabilities and shareholders’ equity	$	29,232	$	18,389	$	108,469	$	(61,580	)	$	94,510

⁽¹⁾

ACE maintains two notional multicurrency cash pools (Pools) with a third-party bank. Various ACE entities participate in one or the other of the Pools, pursuant to which credit and debit balances in individual ACE accounts are translated daily into a single currency and pooled on a notional basis. Individual ACE entities are permitted to overdraw on their individual accounts provided the overall Pool balances do not fall below zero. At December 31, 2013, the cash balance of one or more entities was negative; however, the overall Pool balances were positive.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

Condensed Consolidating Statements of Operations and Comprehensive Income



For the Three Months Ended September 30, 2014	ACE Limited (Parent Guarantor)			ACE INA Holdings Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries			Consolidating Adjustments and Eliminations			ACE Limited Consolidated
(in millions of U.S. dollars)	ACE Limited (Parent Guarantor)			ACE INA Holdings Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries			Consolidating Adjustments and Eliminations			ACE Limited Consolidated
Net premiums written	$	—		$	—		$	4,729		$	—		$	4,729
Net premiums earned	—			—			4,754			—			4,754
Net investment income	1			—			565			—			566
Equity in earnings of subsidiaries	745			258			—			(1,003		)	—
Net realized gains (losses) including OTTI	—			46			(166		)	—			(120		)
Losses and loss expenses	—			—			2,684			—			2,684
Policy benefits	—			—			125			—			125
Policy acquisition costs and administrative expenses	18			6			1,355			—			1,379
Interest (income) expense	(7		)	68			9			—			70
Other (income) expense	(54		)	2			33			—			(19		)
Income tax expense (benefit)	4			(11		)	183			—			176
Net income	$	785		$	239		$	764		$	(1,003	)	$	785
Comprehensive income	$	298		$	33		$	276		$	(309	)	$	298

Condensed Consolidating Statements of Operations and Comprehensive Income



For the Three Months Ended September 30, 2013	ACE Limited (Parent Guarantor)			ACE INA Holdings Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries		Consolidating Adjustments and Eliminations			ACE Limited Consolidated
(in millions of U.S. dollars)	ACE Limited (Parent Guarantor)			ACE INA Holdings Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries		Consolidating Adjustments and Eliminations			ACE Limited Consolidated
Net premiums written	$	—		$	—		$	4,620	$	—		$	4,620
Net premiums earned	—			—			4,610		—			4,610
Net investment income	1			—			521		—			522
Equity in earnings of subsidiaries	863			322			—		(1,185		)	—
Net realized gains (losses) including OTTI	—			(2		)	42		—			40
Losses and loss expenses	—			—			2,655		—			2,655
Policy benefits	—			—			138		—			138
Policy acquisition costs and administrative expenses	13			4			1,224		—			1,241
Interest (income) expense	(8		)	69			11		—			72
Other (income) expense	(62		)	6			51		—			(5		)
Income tax expense (benefit)	5			(14		)	164		—			155
Net income	$	916		$	255		$	930	$	(1,185	)	$	916
Comprehensive income	$	1,030		$	339		$	1,043	$	(1,382	)	$	1,030

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

Condensed Consolidating Statements of Operations and Comprehensive Income



For the Nine Months Ended September 30, 2014	ACE Limited (Parent Guarantor)			ACE INA Holdings Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries			Consolidating Adjustments and Eliminations			ACE Limited Consolidated
(in millions of U.S. dollars)	ACE Limited (Parent Guarantor)			ACE INA Holdings Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries			Consolidating Adjustments and Eliminations			ACE Limited Consolidated
Net premiums written	$	—		$	—		$	13,473		$	—		$	13,473
Net premiums earned	—			—			13,056			—			13,056
Net investment income	2			1			1,672			—			1,675
Equity in earnings of subsidiaries	2,192			669			—			(2,861		)	—
Net realized gains (losses) including OTTI	—			53			(350		)	—			(297		)
Losses and loss expenses	—			—			7,233			—			7,233
Policy benefits	—			—			383			—			383
Policy acquisition costs and administrative expenses	57			20			3,889			—			3,966
Interest (income) expense	(26		)	209			30			—			213
Other (income) expense	(146		)	22			63			—			(61		)
Income tax expense (benefit)	11			(66		)	457			—			402
Net income	$	2,298		$	538		$	2,323		$	(2,861	)	$	2,298
Comprehensive income	$	2,754		$	810		$	2,778		$	(3,588	)	$	2,754

Condensed Consolidating Statements of Operations and Comprehensive Income



For the Nine Months Ended September 30, 2013	ACE Limited (Parent Guarantor)			ACE INA Holdings Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries		Consolidating Adjustments and Eliminations			ACE Limited Consolidated
(in millions of U.S. dollars)	ACE Limited (Parent Guarantor)			ACE INA Holdings Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries		Consolidating Adjustments and Eliminations			ACE Limited Consolidated
Net premiums written	$	—		$	—		$	12,809	$	—		$	12,809
Net premiums earned	—			—			12,250		—			12,250
Net investment income	2			2			1,583		—			1,587
Equity in earnings of subsidiaries	2,619			767			—		(3,386		)	—
Net realized gains (losses) including OTTI	12			(2		)	340		—			350
Losses and loss expenses	—			—			6,831		—			6,831
Policy benefits	—			—			379		—			379
Policy acquisition costs and administrative expenses	40			13			3,545		—			3,598
Interest (income) expense	(23		)	200			28		—			205
Other (income) expense	(157		)	21			158		—			22
Income tax expense (benefit)	13			(80		)	459		—			392
Net income	$	2,760		$	613		$	2,773	$	(3,386	)	$	2,760
Comprehensive income (loss)	$	1,247		$	(195	)	$	1,259	$	(1,064	)	$	1,247

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

Condensed Consolidating Statement of Cash Flows



For the Nine Months Ended September 30, 2014	ACE Limited (Parent Guarantor)			ACE INA Holdings Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries			Consolidating Adjustments and Eliminations			ACE Limited Consolidated
(in millions of U.S. dollars)
Net cash flows from operating activities	$	168		$	139		$	3,115		$	(200	)	$	3,222
Cash flows from investing activities
Purchases of fixed maturities available for sale	—			—			(11,870		)	3			(11,867		)
Purchases of fixed maturities held to maturity	—			—			(185		)	—			(185		)
Purchases of equity securities	—			—			(222		)	—			(222		)
Sales of fixed maturities available for sale	—			—			6,309			(3		)	6,306
Sales of equity securities	—			—			322			—			322
Maturities and redemptions of fixed maturities available for sale	—			—			4,814			—			4,814
Maturities and redemptions of fixed maturities held to maturity	—			—			617			—			617
Net change in short-term investments	1			(16		)	(969		)	—			(984		)
Net derivative instruments settlements	—			53			(223		)	—			(170		)
Acquisition of subsidiaries (net of cash acquired of $4)	—			—			(172		)	—			(172		)
Capital contribution	—			(230		)	—			230			—
Other	—			(9		)	(138		)	—			(147		)
Net cash flows from (used for) investing activities	1			(202		)	(1,717		)	230			(1,688		)
Cash flows from financing activities
Dividends paid on Common Shares	(646		)	—			—			—			(646		)
Common Shares repurchased	—			—			(1,007		)	—			(1,007		)
Proceeds from issuance of long-term debt	—			699			—			—			699
Repayment of long-term debt	—			(500		)	(1		)	—			(501		)
Proceeds from share-based compensation plans, including windfall tax benefits	—			—			94			—			94
Dividend to parent company	—			—			(200		)	200			—
Advances (to) from affiliates	97			(166		)	69			—			—
Capital contribution	—			—			230			(230		)	—
Net proceeds from (payments to) affiliated notional cash pooling programs⁽¹⁾	388			32			—			(420		)	—
Other	—			(6		)	127			—			121
Net cash flows (used for) from financing activities	(161		)	59			(688		)	(450		)	(1,240		)
Effect of foreign currency rate changes on cash and cash equivalents	—			—			(67		)	—			(67		)
Net increase (decrease) in cash	8			(4		)	643			(420		)	227
Cash – beginning of period⁽¹⁾	—			16			748			(185		)	579
Cash – end of period⁽¹⁾	$	8		$	12		$	1,391		$	(605	)	$	806

⁽¹⁾

ACE maintains two notional multicurrency cash pools (Pools) with a third-party bank. Various ACE entities participate in one or the other of the Pools, pursuant to which credit and debit balances in individual ACE accounts are translated daily into a single currency and pooled on a notional basis. Individual ACE entities are permitted to overdraw on their individual accounts provided the overall Pool balances do not fall below zero. At September 30, 2014 and December 31, 2013, the cash balance of one or more entities was negative; however, the overall Pool balances were positive.

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – continued (Unaudited)

ACE Limited and Subsidiaries

Condensed Consolidating Statement of Cash Flows



For the Nine Months Ended September 30, 2013	ACE Limited (Parent Guarantor)			ACE INA Holdings Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries			Consolidating Adjustments and Eliminations			ACE Limited Consolidated
(in millions of U.S. dollars)
Net cash flows from operating activities	$	80		$	2		$	2,654		$	—		$	2,736
Cash flows from investing activities
Purchases of fixed maturities available for sale	—			—			(16,517		)	103			(16,414		)
Purchases of fixed maturities held to maturity	—			—			(374		)	—			(374		)
Purchases of equity securities	—			—			(217		)	—			(217		)
Sales of fixed maturities available for sale	—			—			8,115			(103		)	8,012
Sales of equity securities	—			—			99			—			99
Maturities and redemptions of fixed maturities available for sale	—			—			5,538			—			5,538
Maturities and redemptions of fixed maturities held to maturity	—			—			1,233			—			1,233
Net change in short-term investments	—			4			521			—			525
Net derivative instruments settlements	—			(1		)	(375		)	—			(376		)
Acquisition of subsidiaries (net of cash acquired of $38)	—			—			(977		)	—			(977		)
Capital contribution	(133		)	(1,010		)	—			1,143			—
Other	—			(5		)	(183		)	—			(188		)
Net cash flows used for investing activities	(133		)	(1,012		)	(3,137		)	1,143			(3,139		)
Cash flows from financing activities
Dividends paid on Common Shares	(343		)	—			—			—			(343		)
Common Shares repurchased	—			—			(233		)	—			(233		)
Proceeds from issuance of long-term debt	—			947			—			—			947
Net proceeds from issuance of short-term debt	—			—			1			—			1
Proceeds from share-based compensation plans, including windfall tax benefits	7			—			105			—			112
Advances (to) from affiliates	(575		)	575			—			—			—
Capital contribution	—			—			1,143			(1,143		)	—
Net proceeds from (payments to) affiliated notional cash pooling programs⁽¹⁾	872			(349		)	—			(523		)	—
Other	—			—			68			—			68
Net cash flows from (used for) financing activities	(39		)	1,173			1,084			(1,666		)	552
Effect of foreign currency rate changes on cash and cash equivalents	—			—			4			—			4
Net (decrease) increase in cash	(92		)	163			605			(523		)	153
Cash – beginning of period⁽¹⁾	103			2			859			(349		)	615
Cash – end of period⁽¹⁾	$	11		$	165		$	1,464		$	(872	)	$	768

⁽¹⁾

ACE maintains two notional multicurrency cash pools (Pools) with a third-party bank. Various ACE entities participate in one or the other of the Pools, pursuant to which credit and debit balances in individual ACE accounts are translated daily into a single currency and pooled on a notional basis. Individual ACE entities are permitted to overdraw on their individual accounts provided the overall Pool balances do not fall below zero. At September 30, 2013 and December 31, 2012, the cash balance of one or more entities was negative; however, the overall Pool balances were positive.

Table of Contents

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of our results of operations, financial condition, and liquidity and capital resources as of and for the three and nine months ended September 30, 2014.

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, 2013 (2013 Form 10-K).

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	43
Overview	45
Financial Highlights	45
Consolidated Operating Results	46
Prior Period Development	49
Segment Operating Results	55
Other Income and Expense Items	64
Net Investment Income	65
Net Realized and Unrealized Gains (Losses)	65
Investments	67
Critical Accounting Estimates	70
Reinsurance Recoverable on Ceded Reinsurance	70
Unpaid Losses and Loss Expenses	71
Asbestos and Environmental (A&E) and Other Run-off Liabilities	71
Fair Value Measurements	71
Guaranteed Living Benefits (GLB) Derivatives	72
Catastrophe Management	75
Natural Catastrophe Property Reinsurance Program	75
Crop Insurance	76
Liquidity	77
Capital Resources	78

Table of Contents

______________________________________________________________________________________________________________________

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:


•	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; and 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;


•	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, 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;

•

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 potential recession;


•	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;


•	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;

Table of Contents


•	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, including information systems and security, to perform as anticipated such as with respect to preventing material information technology failures or third-party infiltrations or hacking resulting in consequences adverse to ACE or its customers or partners; 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.

Table of Contents

______________________________________________________________________________________________________________________

Overview

ACE Limited is the Swiss-incorporated holding company of the ACE Group of Companies. ACE Limited, which is headquartered in Zurich, Switzerland, and its direct and indirect subsidiaries (collectively, the ACE Group of Companies, ACE, we, us, or our) are a global insurance and reinsurance organization, serving the needs of a diverse group of clients worldwide. At September 30, 2014, we had total assets of $98 billion and shareholders’ equity of $30 billion. ACE opened its first business office in Bermuda, in 1985, and continues to maintain operations in Bermuda.

We have grown our business through increased premium volume, expansion of product offerings and geographic reach, and acquisitions of other companies. The Insurance – Overseas General segment has recently expanded its operations through the following acquisitions:


•	The Siam Commercial Samaggi Insurance PCL (Samaggi) (we and our local partner acquired 60.86 percent ownership on April 28, 2014, and subsequently acquired an additional 32.17 percent ownership through a mandatory tender offer, which expired on June 17, 2014);


•	ABA Seguros (May 2, 2013); and


•	Fianzas Monterrey (April 1, 2013).

The consolidated financial statements include results of acquired businesses from the acquisition dates. Refer to Note 2 to the Consolidated Financial Statements for additional information on our acquisitions.

______________________________________________________________________________________________________________________

Financial Highlights for the Three Months Ended September 30, 2014


•	Net income was $785 million compared with $916 million in the prior year period.


•	Total company net premiums written increased 2.4 percent.


•	The P&C combined ratio was 86.3 percent compared with 86.5 percent in the prior year period. The GAAP combined ratio was 87.3 percent compared with 86.5 percent in the prior year period.


•	The current accident year P&C combined ratio excluding catastrophe losses was 89.8 percent, unchanged from the prior year period.


•	The P&C expense ratio was 27.8 percent compared with 25.8 percent in the prior year period. The current quarter ratio increased primarily due to purchase accounting adjustments which favorably impacted the prior year ratio.


•	Total pre-tax and after-tax catastrophe losses including reinstatement premiums were $86 million (2.1 percentage points of the combined ratio) and $76 million, respectively, compared with $78 million (1.8 percentage points of the combined ratio) and $70 million, respectively, in the prior year period.


•	Favorable prior period development pre-tax and after-tax were $232 million (5.6 percentage points of the combined ratio) and $172 million, respectively, compared with $210 million (5.1 percentage points of the combined ratio) and $162 million, respectively, in the prior year period.


•	Operating cash flow was $1.1 billion for the quarter.


•	Net investment income increased 8.5 percent to $566 million primarily due to an increase in the invested asset base, an increase in private equity distributions, and an increase in call activity in our corporate bond portfolio.


•	Share repurchases totaled $450 million, or approximately 4.3 million shares, during the quarter.

Table of Contents

__________________________________________________________________________________________________________

Consolidated Operating Results – Three and Nine Months Ended September 30, 2014 and 2013



	Three Months Ended								Nine Months Ended
	September 30						% Change		September 30					% Change
(in millions of U.S. dollars, except for percentages)	2014			2013			Q-14 vs. Q-13		2014			2013		YTD-14 vs. YTD-13
Net premiums written	$	4,729		$	4,620		2.4	%	$	13,473		$	12,809	5.2	%
Net premiums earned	4,754			4,610			3.1	%	13,056			12,250		6.6	%
Net investment income	566			522			8.5	%	1,675			1,587		5.6	%
Net realized gains (losses)	(120		)	40			NM		(297		)	350		NM
Total revenues	5,200			5,172			0.5	%	14,434			14,187		1.7	%
Losses and loss expenses	2,684			2,655			1.1	%	7,233			6,831		5.9	%
Policy benefits	125			138			(9.4	)%	383			379		1.1	%
Policy acquisition costs	825			678			21.7	%	2,311			1,957		18.1	%
Administrative expenses	554			563			(1.6	)%	1,655			1,641		0.9	%
Interest expense	70			72			(2.8	)%	213			205		3.9	%
Other (income) expense	(19		)	(5		)	NM		(61		)	22		NM
Total expenses	4,239			4,101			3.4	%	11,734			11,035		6.3	%
Income before income tax	961			1,071			(10.3	)%	2,700			3,152		(14.3	)%
Income tax expense	176			155			13.5	%	402			392		2.6	%
Net income	$	785		$	916		(14.2	)%	$	2,298		$	2,760	(16.7	)%
NM – not meaningful

Table of Contents

The following tables present a breakdown of consolidated net premiums written for the periods indicated:



	Three Months Ended								Nine Months Ended
	September 30						% Change		September 30						% Change
(in millions of U.S. dollars, except for percentages)	2014			2013			Q-14 vs. Q-13		2014			2013			YTD-14 vs. YTD-13
Commercial P&C (retail and wholesale)	$	1,981		$	1,929		2.6	%	$	6,057		$	5,775		4.9	%
Personal and small commercial lines	591			509			16.1	%	1,715			1,400			22.5	%
Reinsurance	208			265			(21.2	)%	794			836			(5.0	)%
Property, casualty, and all other	2,780			2,703			2.8	%	8,566			8,011			6.9	%
Agriculture	764			805			(5.2	)%	1,346			1,371			(1.8	)%
Personal accident (A&H)	937			879			6.6	%	2,815			2,718			3.6	%
Life	248			233			6.5	%	746			709			5.2	%
Total consolidated	$	4,729		$	4,620		2.4	%	$	13,473		$	12,809		5.2	%
Total consolidated - constant dollars (C$)⁽¹⁾				$	4,636		2.0	%				$	12,733		5.8	%

	2014 % of Total			2013 % of Total					2014 % of Total			2013 % of Total
Commercial P&C (retail and wholesale)	42		%	42		%			45		%	45		%
Personal and small commercial lines	13		%	11		%			13		%	11		%
Reinsurance	4		%	6		%			5		%	6		%
Property, casualty, and all other	59		%	59		%			63		%	62		%
Agriculture	16		%	17		%			10		%	11		%
Personal accident (A&H)	20		%	19		%			21		%	21		%
Life	5		%	5		%			6		%	6		%
Total consolidated	100		%	100		%			100		%	100		%


⁽¹⁾	On a constant-dollar basis. Amounts are calculated by translating prior period results using the same local currency rates as the comparable current period.

Net premiums written reflect the premiums we retain after purchasing reinsurance protection. Net premiums written increased for the three months ended September 30, 2014 in our Insurance – Overseas General segment on a constant-dollar basis from new business writings in our retail operations in all product lines – A&H, personal lines, and P&C and from the acquisition of Samaggi in April 2014. Foreign exchange favorably impacted growth on an as reported basis. Our Insurance – North American P&C segment also reported an increase in net premiums written for the three months ended September 30, 2014 in our retail division from growth in risk management, specialty P&C, and A&H businesses reflecting higher production and strong renewal retention. In addition, we grew net premiums written in our Commercial Risk Services division, primarily specialty and program business, and our personal lines division, primarily in the homeowners and automobile business offered through ACE Private Risk Services. Our wholesale division contributed to the increase in net premiums written from higher production in our property, casualty, and professional lines of business. Our Global Reinsurance segment reported a decrease in net premiums written for the three months ended September 30, 2014 primarily due to the non-renewal of a large workers' compensation treaty, partially offset by new business. Our Insurance – North American Agriculture segment reported a decrease in net premiums written for the three months ended September 30, 2014 primarily due to lower Multiple Peril Crop Insurance (MPCI) production reflecting lower commodity prices, partially offset by higher premium retention primarily as a result of the non-renewal of a third-party proportional reinsurance agreement.

For the nine months ended September 30, 2014, net premiums written increased primarily due to the factors described above. For our Insurance – North American P&C segment, net premiums written growth also came from surety, professional, casualty and A&H lines of business. In addition, the acquisitions of Fianzas Monterrey in April 2013 and ABA Seguros in May 2013 (Mexican acquisitions) also added to premium growth. Foreign exchange adversely impacted growth in our Insurance - Overseas General segment.

Table of Contents

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 nine months ended September 30, 2014 primarily due to the increase in net premiums written as described above.

In evaluating our segments excluding Life, we use the combined ratio, the loss and loss expense ratio, the policy acquisition cost ratio, and the administrative expense ratio. We calculate these ratios by dividing the respective expense amounts by net premiums earned. We do not calculate these ratios for the Life segment as we do not use these measures to monitor or manage that segment. The combined ratio is determined by adding the loss and loss expense ratio, the policy acquisition cost ratio, and the administrative expense ratio. A combined ratio under 100 percent indicates underwriting income, and a combined ratio exceeding 100 percent indicates underwriting loss.

The following table presents the components of GAAP combined ratio as well as a reconciliation of GAAP combined ratio to P&C combined ratio. The P&C combined ratio is a non-GAAP financial measure and includes the impact of realized gains and losses on crop derivatives. These derivatives were purchased to provide economic benefit, in a manner similar to reinsurance protection, in the event that a significant decline in commodity pricing impacts underwriting results. We view gains and losses on these derivatives as part of the results of our underwriting operations.



	Three Months Ended				Nine Months Ended
	September 30				September 30
	2014		2013		2014		2013
Loss and loss expense ratio	59.5	%	60.7	%	58.5	%	59.0	%
Policy acquisition cost ratio	16.5	%	14.3	%	16.9	%	15.7	%
Administrative expense ratio	11.3	%	11.5	%	12.5	%	12.8	%
GAAP combined ratio	87.3	%	86.5	%	87.9	%	87.5	%
Gains on crop derivatives	(1.0	)%	—	%	(0.4	)%	—	%
P&C combined ratio	86.3	%	86.5	%	87.5	%	87.5	%

The following table presents the impact of catastrophe losses and related reinstatement premiums and prior period reserve development on our consolidated loss and loss expense ratio, including gains on crop derivatives:



	Three Months Ended				Nine Months Ended
	September 30				September 30
	2014		2013		2014		2013
Loss and loss expense ratio, including gains on crop derivatives	58.5	%	60.7	%	58.1	%	59.0	%
Catastrophe losses and related reinstatement premiums	(2.0	)%	(1.9	)%	(1.9	)%	(1.8	)%
Prior period development	5.7	%	5.3	%	3.7	%	3.9	%
Loss and loss expense ratio, adjusted	62.2	%	64.1	%	59.9	%	61.1	%

Total net pre-tax catastrophe losses, excluding related reinstatement premiums, were $87 million and $220 million for the three and nine months ended September 30, 2014, compared with $80 million and $193 million in the prior year periods, respectively. Catastrophe losses through September 30, 2014 were primarily related to severe weather-related events in the U.S., Japan, and Australia; flooding and hailstorms in Europe; and a hurricane in Mexico. Catastrophe losses in the prior year periods were primarily related to flooding in Canada and Australia and severe weather-related events in the U.S. The adjusted loss and loss expense ratio was lower for the three and nine months ended September 30, 2014 due to the prior year decline in commodity prices that resulted in higher losses in our MPCI program for the 2013 crop year, mix of business, and underwriting actions improving loss ratios on several portfolios.

Prior period development arises from changes to loss estimates recognized in the current year that relate to loss events that occurred 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 $232 million and $420 million for the three and nine months ended September 30, 2014, respectively. This compares with net favorable prior period development of $210 million and $408 million in the prior year periods, respectively. Refer to “Prior Period Development” for additional information.

Table of Contents

Net investment income for the three and nine months ended September 30, 2014 was $566 million and $1.7 billion compared with $522 million and $1.6 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 increased for the three and nine months ended September 30, 2014 primarily due to purchase accounting adjustments related to our Mexican acquisitions which favorably impacted the prior year ratio. As a result of purchase accounting requirements, the unearned premiums at the date of purchase related to the businesses acquired are recognized over the remaining coverage period with no expense for the associated historical acquisition costs that were incurred to underwrite those policies. In addition, the policy acquisition cost ratio increased for both periods due to a change in the overall mix of business towards A&H and personal lines products in regions that have higher acquisition cost ratios.

Our administrative expense ratio decreased for the three months ended September 30, 2014 primarily due to growth in net premiums earned that outpaced the growth in administrative expenses. In addition, the administrative expense ratio decreased due to increased spending in the prior year to support growth, primarily related to our Mexican acquisitions.

Our administrative expense ratio decreased for the nine months ended September 30, 2014 primarily due to growth in net premiums earned that outpaced the growth in administrative expenses, which was partially offset by the favorable impact of a prior year legal settlement.

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 18.3 percent and 14.9 percent for the three and nine months ended September 30, 2014, respectively. Our effective income tax rate was 14.4 percent and 12.4 percent for the three and nine months ended September 30, 2013, respectively. The increase in effective tax rate was primarily due to both net realized losses and a lower percentage of operating earnings being generated in lower tax paying jurisdictions.

Prior Period Development

The following tables summarize (favorable) and adverse prior period development (PPD) by segment. 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. Significant prior period movements by segment, principally driven by reserve reviews completed during each respective period, are discussed in more detail below. The remaining net development for long-tail and short-tail business for each segment comprises numerous favorable and adverse movements across a number of lines and accident years, none of which is significant individually or in the aggregate.



Three Months Ended September 30	Long-tail			Short-tail			Total			% of net unpaid reserves⁽¹⁾
(in millions of U.S. dollars, except for percentages)	Long-tail			Short-tail			Total			% of net unpaid reserves⁽¹⁾
2014
Insurance – North American P&C	$	25		$	(14	)	$	11		0.1	%
Insurance – North American Agriculture	—			(3		)	(3		)	0.7	%
Insurance – Overseas General	(185		)	(34		)	(219		)	2.6	%
Global Reinsurance	(26		)	5			(21		)	1.1	%
Total	$	(186	)	$	(46	)	$	(232	)	0.9	%
2013
Insurance – North American P&C	$	(21	)	$	2		$	(19	)	0.1	%
Insurance – North American Agriculture	—			(10		)	(10		)	2.6	%
Insurance – Overseas General	(121		)	(28		)	(149		)	1.9	%
Global Reinsurance	(28		)	(4		)	(32		)	1.4	%
Total	$	(170	)	$	(40	)	$	(210	)	0.8	%

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

Table of Contents



Nine Months Ended September 30	Long-tail			Short-tail			Total			% of net unpaid reserves⁽¹⁾
(in millions of U.S. dollars, except for percentages)	Long-tail			Short-tail			Total			% of net unpaid reserves⁽¹⁾
2014
Insurance – North American P&C	$	(55	)	$	(41	)	$	(96	)	0.6	%
Insurance – North American Agriculture	—			35			35			7.0	%
Insurance – Overseas General	(181		)	(124		)	(305		)	3.7	%
Global Reinsurance	(49		)	(5		)	(54		)	2.5	%
Total	$	(285	)	$	(135	)	$	(420	)	1.6	%
2013
Insurance – North American P&C	$	(69	)	$	(37	)	$	(106	)	0.7	%
Insurance – North American Agriculture	—			(13		)	(13		)	4.0	%
Insurance – Overseas General	(120		)	(103		)	(223		)	2.8	%
Global Reinsurance	(57		)	(9		)	(66		)	2.9	%
Total	$	(246	)	$	(162	)	$	(408	)	1.5	%

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

Insurance – North American P&C

2014

For the three months ended September 30, 2014, net adverse PPD was $11 million, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:


•	Net adverse development of $25 million in long-tail business, primarily from:


•	Favorable development of $40 million in our medical risk operations, primarily impacting the 2009 and 2010 accident years. Paid and reported loss activity for these businesses has been less than previously expected. In addition, we have also increased our weighting towards experience-based methods for several accident years resulting in a reduction in our estimate of losses for those years;


•	Favorable development of $33 million in our financial solutions business, primarily in the 2010 and prior accident years. Net favorable development principally resulted from the recognition of lower than expected loss activity on two large excess liability transactions;


•	Net adverse development of $26 million in our workers’ compensation lines, with adverse development in the 2013 accident year and favorable development in accident years 2009 and 2010. Adverse development in the 2013 accident year is being driven by one large account which is experiencing higher than expected claims frequency and severity; and

•

Adverse development of $69 million in Brandywine, including adverse development of $61 million for environmental liabilities and adverse development of $8 million for other exposures including unallocated loss adjustment expenses for the run-off operations, impacting accident years 1996 and prior. Adverse development in environmental was largely a function of changes in individual account estimates for a small number of insureds experiencing higher costs to remediate as well as higher defense costs.


•	Net favorable development of $14 million in short-tail business, driven by net favorable development of $20 million in our energy and technical risk property business, primarily impacting the 2012 and 2013 accident years. Across most lines, paid and reported loss activity was lower than expected.

Table of Contents

For the nine months ended September 30, 2014, net favorable PPD was $96 million, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:


•	Net favorable development of $55 million in long-tail business, primarily from:


•	Favorable development of $67 million in our excess casualty and umbrella businesses. Resolution of a disputed matter on an individual claim led to a release of $42 million in the 2003 accident year, and lower than expected reported activity across a number of years drove the remaining improvement;


•	Favorable development of $40 million in our medical risk operations due to the same factors experienced for the three months ended September 30, 2014 as described above;


•	Favorable development of $33 million in our financial solutions business due to the same factors experienced for the three months ended September 30, 2014 as described above;


•	Favorable development of $26 million in our surety business, primarily from favorable claims emergence in the 2012 accident year;


•	Adverse development of $26 million in our workers’ compensation lines due to the same factors experienced for the three months ended September 30, 2014 as described above;


•	Net favorable development of $21 million in our auto liability excess lines primarily impacting the 2009 accident year. Reported activity on loss and allocated loss expenses was lower than expected based on estimates from our prior review and original pricing assumptions; and

•

Net adverse development of $105 million in our Brandywine environmental and run-off portfolios, primarily in general and products liability and workers’ compensation lines, including unallocated loss adjustment expenses, impacting the 1996 and prior accident years. Adverse development in environmental was largely a function of changes in individual account estimates for a small number of insureds experiencing higher costs to remediate as well as higher defense costs. Adverse development in individual accounts and specific claims emergence drove the increase in general liability and workers' compensation.


•	Net favorable development of $41 million in short-tail business, driven by net favorable development of $20 million in our energy and technical risk property business, due to the same factors experienced for the three months ended September 30, 2014 as described above.

2013

For the three months ended September 30, 2013, net favorable PPD was $19 million, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:


•	Net favorable development of $21 million in long-tail business, primarily from:


•	Favorable development of $61 million in our medical risk operations, primarily impacting the 2007 to 2009 accident years. Paid and reported loss activity for this business in these accident years continues to be lower than expected and we have increased our weighting applied to experience-based methods;


•	Favorable development of $25 million in our foreign casualty Controlled Master Program and Cash Flow portfolios affecting the 2009 and prior accident years. Paid and reported loss activity for this business in these accident years continue to be lower than expected and we have increased our weighting applied to experience-based methods; and

•

Adverse development of $59 million in our Brandywine environmental liabilities and adverse development of $2 million for other exposures including unallocated loss adjustment expenses for the runoff operations, impacting accident years 1996 and prior. The increase was due to a number of factors including adverse court rulings, higher future cost estimates, and higher than expected payment activity.

For the nine months ended September 30, 2013, net favorable PPD was $106 million, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:

Table of Contents


•	Net favorable development of $69 million in long-tail business, primarily from:


•	Favorable development of $61 million in our medical risk operations, primarily impacting the 2007 to 2009 accident years due to the same factors experienced for the three months ended September 30, 2013 as described above;


•	Favorable development of $50 million in our U.S. excess casualty and umbrella businesses primarily affecting the 2007 and prior accident years. Reported activity on loss and allocated loss expenses was lower than expected based on estimates from our prior review. In addition, increased weighting was applied to experience-based methods in the current review for these accident periods;


•	Net favorable development of $28 million in 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 related to our annual assessment of multi-claimant events including industrial accidents, impacting the 2012 accident year. 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;


•	Adverse development of $40 million predominantly in workers' compensation, primarily impacting the 2006 and prior accident years. The development was a function of higher than expected reported loss activity, higher allocated loss adjustment expenses, as well as an increase in weighting applied to experience-based methods; and


•	Net favorable development of $28 million across a number of lines and accident years, none of which was significant individually or in the aggregate.


•	Favorable development of $25 million in our foreign casualty Controlled Master Program and Cash Flow portfolios affecting the 2009 and prior accident years due to the same factors experienced for the three months ended September 30, 2013 as described above;


•	Favorable development of $22 million in our surety business primarily affecting the 2011 accident year. Reported claims to date in the 2011 accident year are lower than historical averages which in turn has generated lower than expected reported loss activity since our prior review;


•	Adverse development of $23 million in our construction business affecting the 2012 and prior accident years. The adverse development was realized in both our workers' compensation and general liability product lines where loss activity was higher than expected since our prior review; and


•	Net adverse development of $92 million in our Brandywine environmental and run-off portfolios of general liability and workers' compensation, including unallocated loss adjustment expenses due to the same factors experienced for the three months ended September 30, 2013 as described above.

•

Net favorable development of $37 million in short-tail business primarily in our U.S. retail and wholesale property and inland marine portfolios. Retail property improved across all accident years, primarily in 2010 and 2011, mainly due to favorable case incurred emergence and favorable settlements of several large claims. Wholesale estimates for prior year improved, primarily in the 2011 and 2012 accident years as paid and reported loss activity were lower than expected.

Insurance – North American Agriculture

For the three months ended September 30, 2014, net favorable PPD was $3 million compared to net favorable PPD of $10 million in the prior year period in short-tail business across a number of accident years, none of which was significant individually or in the aggregate.

For the nine months ended September 30, 2014, adverse PPD was $35 million compared with favorable PPD of $13 million for the prior year period. Actual claim development in the first quarter of 2014 for the Multiple Peril Crop Insurance (MPCI) business was higher than our year-end 2013 expectations for the 2013 crop year.

Table of Contents

Insurance – Overseas General

2014

For the three months ended September 30, 2014, net favorable PPD was $219 million, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:


•	Net favorable development of $185 million in long-tail business, primarily from:


•	Net favorable development of $104 million in casualty lines with favorable development of $149 million in accident years 2010 and prior due to favorable loss experience and adverse development of $45 million in accident years 2011 to 2013, predominantly due to large loss experience in U.K. primary and excess lines.


•	Favorable development of $52 million on an older liability case. This release follows discussions with defense counsel, a review of key legal briefing, and a coverage analysis, all of which was completed in the third quarter of 2014 and after which it was concluded that these reserves were no longer required.


•	Net favorable development of $28 million in financial lines with favorable development of $99 million in accident years 2010 and prior due to favorable loss experience and adverse development of $71 million in accident years 2011 to 2013. The adverse development was primarily due to large loss experience in D&O and financial institutions.


•	Favorable development of $34 million in short-tail business, primarily in aviation lines. Favorable loss experience was mainly in accident years 2008 to 2011 in the aviation products, airlines and airport liability lines.

For the nine months ended September 30, 2014, net favorable PPD was $305 million, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:


•	Net favorable development of $181 million in long-tail business due primarily to the same factors experienced for the three months ended September 30, 2014 as described above.


•	Favorable development of $124 million in short-tail lines, primarily from:


•	Favorable development of $49 million in property lines with favorable development of $29 million in accident year 2013 due to favorable large loss experience, and favorable development of $20 million in accident years 2012 and prior due to favorable development on specific claims and an increase in weighting applied to experience-based methods;


•	Favorable development of $30 million in aviation lines due to the same factors experienced for the three months ended September 30, 2014 as described above; and


•	Favorable development of $35 million in marine and personal lines with favorable development of $25 million in accident years 2010 to 2013 due to an increase in weighting applied to experience-based methods and favorable development of $10 million in accident years 2009 and prior due to case specific claim reductions.

2013

For the three months ended September 30, 2013 net favorable PPD was $149 million, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:


•	Net favorable development of $121 million in long-tail business, primarily from:

•

Favorable development of $86 million in casualty (primary and excess). Actuarial reviews indicated favorable claim activity of $118 million in accident years 2009 and prior. These reviews reflected an increase in weighting applied to experience-based methods as these accident years continued to mature. Adverse development of $32 million in accident years 2010 to 2012 was primarily due to development on specific individual large claims and also on several accounts now exposed on an excess basis following adverse loss development of the underlying aggregate retention layer; and

Table of Contents

•

Favorable development of $35 million in financial lines. Actuarial reviews indicated favorable claim activity of $63 million in accident years 2009 and prior. These reviews reflected an increase in weighting applied to experience-based methods as these accident years continued to mature. Adverse development of $28 million in accident year 2012 was incurred due to notifications on specific large claims.


•	Net favorable development of $28 million in short-tail business primarily in aviation lines, mainly in accident years 2009 and prior. Case specific claim reductions since the last actuarial review was the predominant reason for the releases.

For the nine months ended September 30, 2013 net favorable PPD was $223 million, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:


•	Net favorable development of $120 million in long-tail business due to the same factors experienced for the three months ended September 30, 2013 as described above.


•	Net favorable development of $103 million in short-tail business, primarily from:

•

Net favorable development of $47 million in property and marine lines. Favorable development of $34 million was in accident years 2009 to 2012 and was spread across most of the individual property and marine lines. There was no predominant source of this emergence which reflects generally favorable experience. Favorable development of $13 million in accident years 2007 and prior was due to developments on specific litigated claims;


•	Net favorable development of $34 million across all other short-tail lines. The favorable development was predominantly for A&H and personal lines businesses in accident years 2010 to 2012. Favorable case developments led to lower experience-based indications in these lines and accident years; and


•	Net favorable development of $22 million in aviation lines, mainly in accident years 2009 and prior. Case specific claim reductions since the last actuarial review was the predominant reason for the releases.

Global Reinsurance

2014

For the three and nine months ended September 30, 2014, net favorable PPD was $21 million and $54 million, respectively, which was the net result of several underlying favorable and adverse movements across a number of lines and across a number of treaty years, none of which was significant individually or in the aggregate.

2013

For the three months ended September 30, 2013, net favorable PPD was $32 million which was the net result of several underlying favorable and adverse movements, driven by the following principal change:


•	Net favorable development of $28 million in long-tail business primarily in medical malpractice business principally in treaty years 2005 to 2010. Following reserve studies, we reflected an increase in weighting applied to experience-based methods. Since experience has tended to be generally favorable, compared with assumptions, the changes resulted in favorable development.

For the nine months ended September 30, 2013, net favorable PPD was $66 million, which was the net result of several underlying favorable and adverse movements, driven by the following principal changes:


•	Net favorable development of $57 million in long-tail business, primarily from:


•	Favorable development of $20 million in medical malpractice business principally in treaty years 2005 to 2010 due to the same factors experienced for the three months ended September 30, 2013 as described above; and

•

Favorable development of $43 million comprised of $18 million in the casualty line of business principally in treaty years 2007 and prior, and $25 million in the professional liability/D&O line of business principally in treaty years 2008 and prior. Following reserve studies, we reflected an increase in weighting applied to experience-based methods. Since experience has tended to be generally favorable compared with assumptions, the changes resulted in the favorable development referenced above.

Table of Contents

__________________________________________________________________________________________________________

Segment Operating Results – Three and Nine Months Ended September 30, 2014 and 2013

We operate through five 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 2013 Form 10-K under Item 1. The discussions that follow include tables that show our segment operating results for the three and nine months ended September 30, 2014 and 2013.

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 of ACE Westchester, and ACE Bermuda; and various run-off operations, including Brandywine Holdings Corporation (Brandywine).



	Three Months Ended								Nine Months Ended
	September 30						% Change		September 30						% Change
(in millions of U.S. dollars, except for percentages)	2014			2013			Q-14 vs. Q-13		2014			2013			YTD-14 vs. YTD-13
Net premiums written	$	1,541		$	1,500		2.7	%	$	4,594		$	4,313		6.5	%
Net premiums earned	1,518			1,444			5.1	%	4,547			4,210			8.0	%
Losses and loss expenses	1,053			963			9.3	%	3,009			2,791			7.8	%
Policy acquisition costs	169			159			6.3	%	480			444			8.1	%
Administrative expenses	165			153			7.8	%	501			437			14.6	%
Underwriting income	131			169			(22.5	)%	557			538			3.5	%
Net investment income	277			254			9.1	%	812			755			7.5	%
Net realized gains (losses)	(5		)	9			NM		(25		)	63			NM
Interest expense	2			3			(33.3	)%	7			4			75.0	%
Other (income) expense	(31		)	(13		)	138.5	%	(75		)	(38		)	97.4	%
Income tax expense	73			79			(7.6	)%	247			264			(6.4	)%
Net income	$	359		$	363		(1.1	)%	$	1,165		$	1,126		3.5	%
Loss and loss expense ratio	69.3		%	66.7		%			66.2		%	66.3		%
Policy acquisition cost ratio	11.1		%	11.1		%			10.5		%	10.6		%
Administrative expense ratio	11.0		%	10.5		%			11.1		%	10.3		%
Combined ratio	91.4		%	88.3		%			87.8		%	87.2		%

Net premiums written increased for the three and nine months ended September 30, 2014 in our retail division from growth in risk management, specialty P&C, and A&H businesses reflecting higher production and strong renewal retention. This was partially offset by reductions in our retail property division due to lower new business reflecting a more competitive market. For the nine months ended September 30, 2014, growth in net premiums written in our retail division also reflected higher production across a broad range of our product portfolio including general and specialty casualty, surety and professional lines of business. Net premiums written grew for the three and nine months ended September 30, 2014 in our Commercial Risk Services division, primarily specialty and program business, and our personal lines division, primarily in the homeowners and automobile business offered through ACE Private Risk Services. Our wholesale division contributed to the increase in net premiums written for the three and nine months ended September 30, 2014 from higher production in our property, casualty, and professional lines of business.

Net premiums earned increased for the three and nine months ended September 30, 2014 primarily due to the increase in net premiums written as described above.

Table of Contents

The following tables present a line of business breakdown of Insurance – North American P&C net premiums earned:



	Three Months Ended								Nine Months Ended
	September 30						% Change		September 30						% Change
(in millions of U.S. dollars, except for percentages)	2014			2013			Q-14 vs. Q-13		2014			2013			YTD-14 vs. YTD-13
Commercial P&C (retail and wholesale)	$	1,182		$	1,137		4.0	%	$	3,567		$	3,329		7.2	%
Personal and small commercial lines	231			208			10.8	%	673			600			12.1	%
Personal accident (A&H)	105			99			6.0	%	307			281			8.7	%
Net premiums earned	$	1,518		$	1,444		5.1	%	$	4,547		$	4,210		8.0	%

	2014 % of Total			2013 % of Total					2014 % of Total			2013 % of Total
Commercial P&C (retail and wholesale)	78		%	79		%			78		%	79		%
Personal and small commercial lines	15		%	14		%			15		%	14		%
Personal accident (A&H)	7		%	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:



	Three Months Ended				Nine Months Ended
	September 30				September 30
	2014		2013		2014		2013
Loss and loss expense ratio, as reported	69.3	%	66.7	%	66.2	%	66.3	%
Catastrophe losses and related reinstatement premiums	(2.3	)%	(1.5	)%	(2.3	)%	(2.0	)%
Prior period development	(0.1	)%	1.7	%	2.3	%	2.7	%
Loss and loss expense ratio, adjusted	66.9	%	66.9	%	66.2	%	67.0	%

Net pre-tax catastrophe losses, excluding reinstatement premiums, were $35 million and $103 million for the three and nine months ended September 30, 2014, compared with $21 million and $82 million in the prior year periods, respectively. Catastrophe losses through September 30, 2014 were primarily from severe weather-related events in the U.S. and a hurricane in Mexico. Catastrophe losses through September 30, 2013 were primarily from flooding in Canada and severe weather-related events in the U.S. Net prior period development was $11 million unfavorable and $96 million favorable for the three and nine months ended September 30, 2014, compared with net favorable prior period development of $19 million and $106 million in the prior year periods, respectively. Refer to “Prior Period Development” for additional information. The adjusted loss and loss expense ratio for the three months ended September 30, 2014 was consistent with the prior year. For the nine months ended September 30, 2014, the adjusted loss and loss expense ratio decreased due to lower loss ratios in several of our lines where a combination of the execution of detailed portfolio management plans, product mix and earned rate changes have resulted in improved current accident year loss ratio performance. The improvement also reflects a reduction in loss adjustment expenses due to a change in estimated claim handling costs. These reductions were partially offset by higher non-catastrophe large losses in the current year.

The policy acquisition cost ratio remained flat for the quarter and decreased slightly for the nine months ended September 30, 2014, compared with the same periods last year.

The administrative expense ratio was higher for the three months ended September 30, 2014, compared with the prior year period due primarily to increased investment in selected businesses. For the nine months ended September 30, 2014, the administrative expense ratio was higher compared to the prior year ratio which included a 0.7 point favorable impact related to a $29 million legal settlement. Excluding the impact of the legal settlement, the administrative expense ratio increased slightly for the nine-month period compared with the prior year.

Table of Contents

Insurance – North American Agriculture

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 ACE Agribusiness unit.



	Three Months Ended								Nine Months Ended
	September 30						% Change		September 30						% Change
(in millions of U.S. dollars, except for percentages)	2014			2013			Q-14 vs. Q-13		2014			2013			YTD-14 vs. YTD-13
Net premiums written	$	764		$	805		(5.2	)%	$	1,346		$	1,371		(1.8	)%
Net premiums earned	766			849			(9.8	)%	1,199			1,252			(4.2	)%
Losses and loss expenses ⁽¹⁾	641			747			(14.2	)%	1,048			1,072			(2.2	)%
Policy acquisition costs	41			32			28.1	%	69			56			23.2	%
Administrative expenses	3			5			(40.0	)%	5			13			(61.5	)%
Underwriting income	81			65			24.6	%	77			111			(30.6	)%
Net investment income	6			6			—	%	19			19			—	%
Net realized gains (losses) excluding gains (losses) on crop derivatives ⁽¹⁾	—			1			NM		—			2			NM
Other (income) expense	7			8			(12.5	)%	24			24			—	%
Income tax expense	23			14			64.3	%	21			24			(12.5	)%
Net income	$	57		$	50		14.0	%	$	51		$	84		(39.3	)%
Loss and loss expense ratio	83.7		%	88.0		%			87.4		%	85.6		%
Policy acquisition cost ratio	5.4		%	3.8		%			5.8		%	4.4		%
Administrative expense ratio	0.4		%	0.5		%			0.4		%	1.1		%
Combined ratio	89.5		%	92.3		%			93.6		%	91.1		%


⁽¹⁾	(Gains) losses on crop derivatives are reclassified from Net realized gains (losses) to Losses and loss expenses for purposes of presenting Insurance - North American Agriculture underwriting income. Refer to Note 7 and Note 10 to the consolidated financial statements for more information on these derivatives.

Net premiums written decreased for the three and nine months ended September 30, 2014 principally due to lower MPCI production reflecting lower commodity prices partially offset by higher premium retention as a result of the non-renewal of a third-party proportional reinsurance agreement. For the nine months ended September 30, 2014, the decrease in net premiums written was also partially offset by lower premium cessions to the U.S. government in 2014 related to the 2013 crop year as a result of the government's crop insurance profit and loss calculation formula, which typically results in higher retained premiums when losses increase.

Net premiums earned decreased for the three and nine months ended September 30, 2014 primarily due to the factors described above.

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:



	Three Months Ended				Nine Months Ended
	September 30				September 30
	2014		2013		2014		2013
Loss and loss expense ratio, as reported	83.7	%	88.0	%	87.4	%	85.6	%
Catastrophe losses and related reinstatement premiums	(0.3	)%	(0.3	)%	(1.0	)%	(0.4	)%
Prior period development	0.4	%	1.2	%	(3.5	)%	1.1	%
Loss and loss expense ratio, adjusted	83.8	%	88.9	%	82.9	%	86.3	%

Net pre-tax catastrophe losses, excluding reinstatement premiums, were $2 million and $12 million for the three and nine months ended September 30, 2014, compared with $2 million and $5 million in the prior year periods, respectively. For the three and nine months ended September 30, 2014, net prior period development was $3 million favorable and $35 million

Table of Contents

unfavorable, respectively. For the nine month period, the amount includes an increase in incurred losses of $39 million for higher than expected MPCI losses for the 2013 crop year, as well as $36 million of unfavorable MPCI losses offset by a favorable increase in net premiums earned related to the government's crop insurance profit and loss calculation formula. For the three and nine months ended September 30, 2013, net favorable prior period development was $10 million and $13 million, respectively. Refer to “Prior Period Development” for additional information. The adjusted loss and loss expense ratio was lower for the three and nine months ended September 30, 2014 due to lower commodity prices in the prior year that resulted in higher losses in our MPCI program for the 2013 crop year. The lower adjusted loss and loss expense ratio also reflects the net impact of lower commodity prices on the 2014 crop year which resulted in a realized gain recognized on our crop derivative that was partially offset by higher estimated commodity price losses on our crop policies. Partially offsetting these reductions in the adjusted loss and loss expense ratio were higher estimated losses in our hail business resulting from severe weather related events for the current year, which was greater than non-catastrophe large losses in our Agribusiness units for the prior year.

The policy acquisition cost ratio increased for the three and nine months ended September 30, 2014, primarily due to lower MPCI production as a result of lower commodity prices and lower ceded commission benefits on third-party reinsurance primarily due to the non-renewal of a third-party proportional reinsurance agreement.

The administrative expense ratio decreased for the three and nine months ended September 30, 2014 due to lower expenses incurred that outpaced the reduction in net premiums earned.

Insurance – Overseas General

The Insurance – Overseas General segment comprises ACE International, ACE Global Markets (AGM), and the international supplemental A&H business of Combined Insurance. ACE International comprises our retail commercial P&C, A&H, and personal lines businesses serving territories outside the U.S., Bermuda, and Canada. AGM comprises the segment's London-based wholesale insurance business for excess and surplus lines; this includes Lloyd’s of London Syndicate 2488. The reinsurance operations of AGM are included in the Global Reinsurance segment.



	Three Months Ended									Nine Months Ended
	September 30						% Change			September 30						% Change
(in millions of U.S. dollars, except for percentages)	2014			2013			Q-14 vs. Q-13			2014			2013			YTD-14 vs. YTD-13
Net premiums written	$	1,719		$	1,571		9.4	%	⁽¹⁾	$	5,250		$	4,821		8.9	%	⁽¹⁾
Net premiums earned	1,726			1,611			7.2	%		5,047			4,633			9.0	%
Losses and loss expenses	707			712			(0.7	)%		2,354			2,227			5.7	%
Policy acquisition costs	418			349			19.8	%		1,206			1,048			15.1	%
Administrative expenses	258			263			(1.9	)%		764			750			1.9	%
Underwriting income	343			287			19.5	%		723			608			18.9	%
Net investment income	130			128			1.6	%		398			396			0.5	%
Net realized gains (losses)	(75		)	(8		)	NM			(71		)	34			NM
Interest expense	2			1			100.0	%		4			4			—	%
Other (income) expense	6			14			(57.1	)%		8			30			(73.3	)%
Income tax expense	97			78			24.4	%		189			174			8.6	%
Net income	$	293		$	314		(6.7	)%		$	849		$	830		2.3	%
Loss and loss expense ratio	40.9		%	44.2		%				46.6		%	48.1		%
Policy acquisition cost ratio	24.3		%	21.6		%				23.9		%	22.6		%
Administrative expense ratio	14.9		%	16.4		%				15.2		%	16.2		%
Combined ratio	80.1		%	82.2		%				85.7		%	86.9		%

⁽¹⁾ For the three and nine months ended September 30, 2014, net premiums written increased $129 million or 8.1% on a constant-dollar basis and $466 million or 9.7% on a constant-dollar basis, respectively. Amounts are calculated by translating prior period results using the same local currency rates as the comparable current period.

Net premiums written increased for the three and nine months ended September 30, 2014 on a constant-dollar basis from new business writings in our retail operations in all product lines – A&H, personal lines, and P&C and from the acquisition of

Table of Contents

Samaggi in April 2014, which added $40 million of growth to premiums in the quarter. A&H growth was driven by strong results in all regions except Europe, and the increase in personal lines reflected growth in all regions, except Japan. P&C growth was driven primarily by new business writings in Asia and Latin America. For the nine months ended September 30, 2014 the acquisitions of Fianzas Monterrey, acquired in April 2013, ABA Seguros, acquired in May 2013, and Samaggi added $245 million of growth to premiums. Foreign exchange favorably impacted growth for the three months ended September 30, 2014 and adversely impacted growth for the nine months ended September 30, 2014 on an as reported basis.

Net premiums earned increased for the three and nine months ended September 30, 2014 primarily due to the increase in net premiums written as described above.

Insurance – Overseas General conducts business internationally and in most major foreign currencies. The following tables present a line of business and regional breakdown of Insurance – Overseas General net premiums earned:



	Three Months Ended September 30										% Change
(in millions of U.S. dollars, except for percentages)	2014		2014 % of Total		2013		2013 % of Total		C$⁽¹⁾ 2013		Q-14 vs. Q-13		C$⁽¹⁾ Q-14 vs. Q-13
Line of Business
Commercial P&C (retail and wholesale)	$	797	46	%	$	770	48	%	$	784	3.5	%	1.7	%
Personal and small commercial lines	341		20	%	294		18	%	289		16.0	%	18.0	%
Personal accident (A&H)	588		34	%	547		34	%	555		7.5	%	6.0	%
Net premiums earned	$	1,726	100	%	$	1,611	100	%	$	1,628	7.2	%	6.0	%
Region
Europe / U.K.	$	778	45	%	$	765	48	%	$	812	1.7	%	(4.2	)%
Asia Pacific	420		24	%	338		21	%	319		24.3	%	31.7	%
Far East	112		7	%	117		7	%	112		(4.3	)%	—	%
Latin America	416		24	%	391		24	%	385		6.4	%	8.1	%
Net premiums earned	$	1,726	100	%	$	1,611	100	%	$	1,628	7.2	%	6.0	%



	Nine Months Ended September 30										% Change
(in millions of U.S. dollars, except for percentages)	2014		2014 % of Total		2013		2013 % of Total		C$⁽¹⁾ 2013		YTD-14 vs. YTD-13		C$⁽¹⁾YTD-14 vs. YTD-13
Line of Business
Commercial P&C (retail and wholesale)	$	2,358	47	%	$	2,281	49	%	$	2,296	3.4	%	2.7	%
Personal and small commercial lines	964		19	%	739		16	%	703		30.4	%	37.1	%
Personal accident (A&H)	1,725		34	%	1,613		35	%	1,593		7.0	%	8.3	%
Net premiums earned	$	5,047	100	%	$	4,633	100	%	$	4,592	9.0	%	9.9	%
Region
Europe / U.K.	$	2,331	46	%	$	2,231	48	%	$	2,385	4.5	%	(2.3	)%
Asia Pacific	1,158		23	%	1,030		22	%	919		12.4	%	26.0	%
Far East	326		7	%	341		8	%	317		(4.4	)%	2.8	%
Latin America	1,232		24	%	1,031		22	%	971		19.5	%	26.9	%
Net premiums earned	$	5,047	100	%	$	4,633	100	%	$	4,592	9.0	%	9.9	%

⁽¹⁾ On a constant-dollar basis. Amounts are calculated by translating prior period results using the same local currency rates as the comparable current period.

Table of Contents

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:



	Three Months Ended				Nine Months Ended
	September 30				September 30
	2014		2013		2014		2013
Loss and loss expense ratio, as reported	40.9	%	44.2	%	46.6	%	48.1	%
Catastrophe losses and related reinstatement premiums	(2.3	)%	(2.0	)%	(1.6	)%	(1.6	)%
Prior period development	12.7	%	9.2	%	6.1	%	4.8	%
Loss and loss expense ratio, adjusted	51.3	%	51.4	%	51.1	%	51.3	%

Net pre-tax catastrophe losses, excluding reinstatement premiums, were $39 million and $82 million for the three and nine months ended September 30, 2014, compared with $33 million and $71 million in the prior year periods, respectively. Catastrophe losses through September 30, 2014 were primarily related to flooding in Europe, severe storms in Japan, and a hurricane in Mexico. Catastrophe losses through September 30, 2013 were primarily related to flooding in Australia, Europe, and Canada; hurricanes in Latin America; and the earthquake in New Zealand. Net favorable prior period development was $219 million and $305 million for the three and nine months ended September 30, 2014, compared with $149 million and $223 million in the prior year periods, respectively. Refer to “Prior Period Development” for additional information. The adjusted loss and loss expense ratio decreased for the three and nine months ended September 30, 2014 due primarily to both mix of business and underwriting actions which improved loss ratios on several portfolios, partially offset by higher non-catastrophe large losses in the current year.

The policy acquisition cost ratio increased for the three and nine months ended September 30, 2014 primarily due to purchase accounting adjustments related to our Mexican acquisitions which favorably impacted the prior year quarter policy acquisition cost ratio by 2.1 points. As a result of purchase accounting requirements, the unearned premiums at the date of purchase related to the businesses acquired are recognized over the remaining coverage period with no expense for the associated historical acquisition costs that were incurred to underwrite those policies. In addition, the policy acquisition cost ratio increased for both periods due to a change in the overall mix of business towards A&H and personal lines products in regions that have higher acquisition cost ratios.

The administrative expense ratio decreased for the three and nine months ended September 30, 2014 due primarily to growth in net premiums earned that outpaced the growth in administrative expenses. In addition, the administrative expense ratio decreased due to increased spending in the prior year to support growth, primarily related to our acquisitions of Fianzas Monterrey and ABA Seguros.

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								Nine Months Ended
	September 30						% Change		September 30						% Change
(in millions of U.S. dollars, except for percentages)	2014			2013			Q-14 vs. Q-13		2014			2013			YTD-14 vs. YTD-13
Net premiums written	$	208		$	265		(21.2	)%	$	794		$	836		(5.0	)%
Net premiums earned	255			239			6.3	%	800			731			9.3	%
Losses and loss expenses	92			93			(1.1	)%	327			292			12.0	%
Policy acquisition costs	74			52			42.3	%	201			148			35.8	%
Administrative expenses	13			12			8.3	%	41			36			13.9	%
Underwriting income	76			82			(7.3	)%	231			255			(9.4	)%
Net investment income	81			66			22.7	%	238			209			13.9	%
Net realized gains (losses)	6			(5		)	NM		(17		)	46			NM
Interest expense	1			2			(50.0	)%	4			4			—	%
Other (income) expense	(10		)	(7		)	42.9	%	(39		)	(13		)	200.0	%
Income tax expense	11			16			(31.3	)%	31			31			—	%
Net income	$	161		$	132		22.0	%	$	456		$	488		(6.6	)%
Loss and loss expense ratio	36.2		%	38.9		%			40.9		%	39.9		%
Policy acquisition cost ratio	28.8		%	21.7		%			25.0		%	20.2		%
Administrative expense ratio	5.2		%	5.2		%			5.2		%	5.0		%
Combined ratio	70.2		%	65.8		%			71.1		%	65.1		%

Net premiums written decreased for the three and nine months ended September 30, 2014 primarily due to the non-renewal of a $79 million workers' compensation treaty, partially offset by new business.

Net premiums earned increased for the three and nine months ended September 30, 2014 primarily from the shorter earning period on certain of the new business written this year including two non-recurring short-term treaties.

Table of Contents

The following tables present a line of business breakdown of Global Reinsurance net premiums earned:



	Three Months Ended								Nine Months Ended
	September 30						% Change		September 30						% Change
(in millions of U.S. dollars, except for percentages)	2014			2013			Q-14 vs. Q-13		2014			2013			YTD -14 vs. YTD -13
Property and all other	$	86		$	66		30.3	%	$	242		$	185		30.8	%
Casualty	106			98			8.2	%	365			323			13.0	%
Property catastrophe	63			75			(16.0	)%	193			223			(13.5	)%
Net premiums earned	$	255		$	239		6.3	%	$	800		$	731		9.3	%

	2014 % of Total			2013 % of Total					2014 % of Total			2013 % of Total
Property and all other	34		%	28		%			30		%	25		%
Casualty	41		%	41		%			46		%	44		%
Property catastrophe	25		%	31		%			24		%	31		%
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:



	Three Months Ended				Nine Months Ended
	September 30				September 30
	2014		2013		2014		2013
Loss and loss expense ratio, as reported	36.2	%	38.9	%	40.9	%	39.9	%
Catastrophe losses and related reinstatement premiums	(4.0	)%	(9.3	)%	(2.8	)%	(4.5	)%
Prior period development	10.6	%	15.0	%	7.4	%	9.5	%
Loss and loss expense ratio, adjusted	42.8	%	44.6	%	45.5	%	44.9	%

Net pre-tax catastrophe losses, excluding reinstatement premiums, were $11 million and $23 million for the three and nine months ended September 30, 2014, compared with $24 million and $35 million in the prior year periods, respectively. Catastrophe losses through September 30, 2014 were related to severe storms in Japan, European hailstorms, and severe weather-related events in the U.S. Catastrophe losses through September 30, 2013 were primarily related to flooding in Canada and Europe. Net favorable prior period development was $21 million and $54 million for the three and nine months ended September 30, 2014, compared with $32 million and $66 million in the prior year periods, respectively. Refer to “Prior Period Development” for additional information.

The adjusted loss and loss expense ratio decreased for the three months ended September 30, 2014, primarily due to the non-renewal of a large workers' compensation treaty which incurred a higher loss ratio, partially offset by a change in the mix of business towards higher loss ratio products. For the nine months ended September 30, 2014, the decrease noted above was more than offset by a change in the mix of business towards higher loss ratio products.

The policy acquisition cost ratio increased for the three and nine months ended September 30, 2014 primarily due to a change in the mix of business towards products written in the U.S. that have a higher acquisition cost ratio than in other regions and the impact of the non-renewal of a large workers' compensation treaty which incurred no acquisition costs.

The administrative expense ratio was flat for the quarter. The administrative expense ratio increased for the nine months ended September 30, 2014 as the prior year included the favorable impact of a $2 million expense adjustment that reduced the administrative expense ratio in the prior year period. Excluding this adjustment, the administrative expense ratio decreased slightly for the nine months ended September 30, 2014.

Table of Contents

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								Nine Months Ended
	September 30						% Change		September 30						% Change
(in millions of U.S. dollars, except for percentages)	2014			2013			Q-14 vs. Q-13		2014			2013			YTD-14 vs. YTD-13
Net premiums written	$	497		$	479		3.8	%	$	1,489		$	1,468		1.4	%
Net premiums earned	489			467			4.8	%	1,463			1,424			2.8	%
Losses and loss expenses	145			141			2.8	%	442			443			(0.2	)%
Policy benefits	125			138			(9.4	)%	383			379			1.1	%
(Gains) losses from fair value changes in separate account assets⁽¹⁾	6			(14		)	NM		(5		)	(7		)	(28.6	)%
Policy acquisition costs	123			86			43.0	%	355			261			36.0	%
Administrative expenses	71			85			(16.5	)%	212			256			(17.2	)%
Net investment income	69			61			13.1	%	199			187			6.4	%
Life underwriting income	88			92			(4.3	)%	275			279			(1.4	)
Net realized gains (losses)	(89		)	43			NM		(237		)	206			NM
Interest expense	4			4			—	%	10			12			(16.7	)%
Other (income) expense⁽¹⁾	(3		)	4			NM		8			7			14.3	%
Income tax expense	12			10			20.0	%	34			33			3.0	%
Net income (loss)	$	(14	)	$	117		NM		$	(14	)	$	433		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:



	Three Months Ended						Nine Months Ended
	September 30				% Change		September 30				% Change
(in millions of U.S. dollars, except for percentages)	2014		2013		Q-14 vs. Q-13		2014		2013		YTD-14 vs. YTD-13
A&H	$	249	$	246	1.2	%	$	743	$	759	(2.1	)%
Life insurance	182		163		11.7	%	548		493		11.2	%
Life reinsurance	66		70		(5.7	)%	198		216		(8.3	)%
Net premiums written (excludes deposits below)	$	497	$	479	3.8	%	$	1,489	$	1,468	1.4	%

Deposits collected on universal life and investment contracts	$	246	$	183	34.4	%	$	730	$	607	20.3	%

A&H net premiums written increased for the three months ended September 30, 2014 primarily due to growth in certain program business. For the nine months ended September 30, 2014, this increase was more than offset by the non-renewal of several large accounts and a catch-up in premium registrations in the prior year period. Life insurance net premiums written increased for the three and nine months ended September 30, 2014 primarily due to growth in our Asian and Latin American markets. Life reinsurance net premiums written decreased for the three and nine months ended September 30, 2014 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 statements of operations in accordance with GAAP. New life deposits are an important component of production and key to our

Table of Contents

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. Life deposits collected for the three and nine months ended September 30, 2014 increased compared to prior year 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 months ended September 30, 2014, realized losses of $76 million were associated with a net increase in the value of GLB liabilities; this increase was primarily due to broader global and domestic equity markets underperforming benchmark indices and the unfavorable impact of discounting future claims for one fewer quarter. During the nine months ended September 30, 2014, realized losses of $124 million were associated with a net increase in the value of GLB liabilities; this increase was primarily due to lower interest rates and the unfavorable impact of discounting future claims for three fewer quarters, partially offset by rising U.S. equity levels. In addition, we experienced realized losses of $15 million and $106 million for the three and nine months ended September 30, 2014, respectively, due to a decrease in the value of the derivative instruments, which decrease in value when the S&P 500 index increases.

______________________________________________________________________________________________________________________

Other Income and Expense Items



	Three Months Ended						Nine Months Ended
	September 30						September 30
(in millions of U. S. dollars)	2014			2013			2014			2013
Amortization of intangible assets	$	27		$	30		$	78		$	68
Equity in net (income) loss of partially-owned entities	(67		)	(32		)	(166		)	(81		)
(Gains) losses from fair value changes in separate account assets	6			(14		)	(5		)	(7		)
Federal excise and capital taxes	6			7			15			18
Acquisition-related costs	4			1			10			3
Other	5			3			7			21
Other (income) expense	$	(19	)	$	(5	)	$	(61	)	$	22

Other (income) expense includes Amortization of intangible assets. 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 September 30, 2014, the estimated pre-tax amortization expense related to intangible assets for the fourth quarter of 2014 and the next five years. The amounts below are expected to increase in future periods upon completion of the acquisition of the large corporate P&C insurance business of Itaú Seguros, S.A. (expected to be completed on October 31, 2014).



For the Year Ending December 31	Amortization of intangible assets
(in millions of U.S. dollars)	Amortization of intangible assets
Fourth quarter of 2014	$	26
2015	81
2016	68
2017	61
2018	57
2019	53
Total	$	346

Table of Contents

______________________________________________________________________________________________________________________

Net Investment Income



	Three Months Ended						Nine Months Ended
	September 30						September 30
(in millions of U.S. dollars)	2014			2013			2014			2013
Fixed maturities	$	549		$	516		$	1,634		$	1,550
Short-term investments	11			7			29			20
Equity securities	11			9			30			29
Other investments	25			19			72			76
Gross investment income	596			551			1,765			1,675
Investment expenses	(30		)	(29		)	(90		)	(88		)
Net investment income	$	566		$	522		$	1,675		$	1,587

Net investment income is influenced by a number of factors including the amounts and timing of inward and outward cash flows, the level of interest rates, and changes in overall asset allocation. Net investment income increased 8.5 percent and 5.6 percent for the three and nine months ended September 30, 2014, respectively, compared with the prior year periods. The increase in net investment income was primarily due to an increase in the invested asset base, an increase in private equity distributions, and an increase in call activity in our corporate bond portfolio.

The investment portfolio’s average market yield on fixed maturities was 2.8 percent and 2.9 percent at September 30, 2014 and 2013, 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 1.9 percent and 1.7 percent yield on short-term investments for the three and nine months ended September 30, 2014, respectively, reflect the global nature of our insurance operations. For example, yields on short-term investments in Brazil, Malaysia, Indonesia, and Ecuador range from 3.3 percent to 11.0 percent.

The 5.7 percent yield on our equity securities portfolio for both the three and nine months ended September 30, 2014 is high relative to the yield on the S&P 500 Index because of dividends on preferred equity securities and because we classified our strategic emerging debt portfolio, which is a mutual fund, as equity. The preferred equity securities and strategic emerging debt portfolio represented 63 percent and 68 percent of the gross equity securities investment income for the three and nine months ended September 30, 2014, respectively. During the third quarter of 2014, we elected to exchange our interest in the strategic emerging debt portfolio for direct ownership of certain of the underlying fixed maturities, and the remainder in cash.

______________________________________________________________________________________________________________________

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.

Table of Contents

The following tables present our pre-tax net realized and unrealized gains (losses) on investments:



	Three Months Ended September 30, 2014									Three Months Ended September 30, 2013
(in millions of U.S. dollars)	Net Realized Gains (Losses)⁽¹⁾			Net Unrealized Gains (Losses)			Net Impact			Net Realized Gains (Losses) ⁽¹⁾			Net Unrealized Gains (Losses)			Net Impact
Fixed maturities	$	18		$	(361	)	$	(343	)	$	17		$	(4	)	$	13
Fixed income derivatives	(13		)	—			(13		)	4			—			4
Total fixed maturities	5			(361		)	(356		)	21			(4		)	17
Public equity	(56		)	36			(20		)	7			2			9
Private equity	—			(5		)	(5		)	—			(6		)	(6		)
Other	—			(7		)	(7		)	—			—			—
Subtotal	(51		)	(337		)	(388		)	28			(8		)	20
Derivatives
Fair value adjustment on insurance derivatives	(80		)	—			(80		)	134			—			134
S&P put option and futures	(15		)	—			(15		)	(95		)	—			(95		)
Other derivatives	45			—			45			(1		)	—			(1		)
Subtotal derivatives	(50		)	—			(50		)	38			—			38
Foreign exchange losses	(19		)	—			(19		)	(26		)	—			(26		)
Total gains (losses)	$	(120	)	$	(337	)	$	(457	)	$	40		$	(8	)	$	32


⁽¹⁾	For the three months ended September 30, 2014, other-than-temporary impairments included $4 million for fixed maturities. For the three months ended September 30, 2013, other-than-temporary impairments included $4 million for fixed maturities.



	Nine Months Ended September 30, 2014									Nine Months Ended September 30, 2013
(in millions of U.S. dollars)	Net Realized Gains (Losses)⁽¹⁾			Net Unrealized Gains (Losses)			Net Impact			Net Realized Gains (Losses) ⁽¹⁾			Net Unrealized Gains (Losses)			Net Impact
Fixed maturities	$	49		$	638		$	687		$	84		$	(1,661	)	$	(1,577	)
Fixed income derivatives	(53		)	—			(53		)	62			—			62
Total fixed maturities	(4		)	638			634			146			(1,661		)	(1,515		)
Public equity	(60		)	70			10			13			(41		)	(28		)
Private equity	(3		)	43			40			(2		)	34			32
Other	(8		)	(7		)	(15		)	—			1			1
Subtotal	(75		)	744			669			157			(1,667		)	(1,510		)
Derivatives
Fair value adjustment on insurance derivatives	(126		)	—			(126		)	563			—			563
S&P put option and futures	(106		)	—			(106		)	(413		)	—			(413		)
Other derivatives	52			—			52			(2		)	—			(2		)
Subtotal derivatives	(180		)	—			(180		)	148			—			148
Foreign exchange gains (losses)	(42		)	—			(42		)	45			—			45
Total gains (losses)	$	(297	)	$	744		$	447		$	350		$	(1,667	)	$	(1,317	)


⁽¹⁾	For the nine months ended September 30, 2014, other-than-temporary impairments included $17 million for fixed maturities, $3 million for private equity, and $7 million for public equity. For the nine months ended September 30, 2013, other-than-temporary impairments included $11 million for fixed maturities, $2 million for private equity, and $1 million for public equity.

Table of Contents

At September 30, 2014, our investment portfolios held by U.S. legal entities included approximately $56 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 $20 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.

______________________________________________________________________________________________________________________

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 4.0 years at September 30, 2014 and December 31, 2013, respectively. We estimate that a 100 basis point (bps) increase in interest rates would reduce the valuation of our fixed income portfolio by approximately $2.4 billion at September 30, 2014.

The following table shows the fair value and cost/amortized cost of our invested assets:



	September 30, 2014				December 31, 2013
(in millions of U.S. dollars)	Fair Value		Cost/ Amortized Cost		Fair Value		Cost/ Amortized Cost
Fixed maturities available for sale	$	49,148	$	47,688	$	49,254	$	48,406
Fixed maturities held to maturity	7,763		7,548		6,263		6,098
Short-term investments	2,753		2,753		1,763		1,763
	59,664		57,989		57,280		56,267
Equity securities	546		480		837		841
Other investments	3,259		2,910		2,976		2,671
Total investments	$	63,469	$	61,379	$	61,093	$	59,779

The fair value of our total investments increased $2.4 billion during the nine months ended September 30, 2014, primarily due to the investing of operating cash flows and unrealized appreciation, partially offset by share repurchases, and the impact of unfavorable foreign exchange.

Table of Contents

The following tables present the market value of our fixed maturities and short-term investments at September 30, 2014 and December 31, 2013. The first table lists investments according to type and second according to S&P credit rating:



	September 30, 2014				December 31, 2013
(in millions of U.S. dollars, except for percentages)	Market Value		% of Total		Market Value		% of Total
Treasury	$	2,223	4	%	$	2,327	4	%
Agency	1,272		2	%	1,454		3	%
Corporate and asset-backed securities	19,863		33	%	19,475		34	%
Mortgage-backed securities	12,454		21	%	12,273		21	%
Municipal	4,890		8	%	4,500		8	%
Non-U.S.	16,209		27	%	15,488		27	%
Short-term investments	2,753		5	%	1,763		3	%
Total	$	59,664	100	%	$	57,280	100	%
AAA	$	9,105	15	%	$	8,677	15	%
AA	21,783		37	%	21,520		38	%
A	11,640		19	%	11,168		19	%
BBB	8,397		14	%	7,193		12	%
BB	4,607		8	%	4,418		8	%
B	3,939		7	%	3,940		7	%
Other	193		—	%	364		1	%
Total	$	59,664	100	%	$	57,280	100	%

Corporate and asset-backed securities

The following table presents our 10 largest global exposures to corporate bonds by market value at September 30, 2014:



(in millions of U.S. dollars)	Market Value
JP Morgan Chase & Co	$	451
General Electric Co	420
Goldman Sachs Group Inc	353
Verizon Communications Inc	270
Wells Fargo & Co	264
HSBC Holdings Plc	258
Morgan Stanley	252
Bank of America Corp	233
AT&T Inc	218
Citigroup Inc	210

Mortgage-backed securities



	S&P Credit Rating										Market Value		Amortized Cost
September 30, 2014 (in millions of U.S. dollars)	AAA		AA		A		BBB		BB and below		Total		Total
Agency residential mortgage-backed (RMBS)	$	—	$	10,303	$	—	$	—	$	—	$	10,303	$	10,110
Non-agency RMBS	44		6		19		13		17		99		97
Commercial mortgage-backed	2,023		14		12		3		—		2,052		2,039
Total mortgage-backed securities	$	2,067	$	10,323	$	31	$	16	$	17	$	12,454	$	12,246

Table of Contents

Municipal

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).

Non-U.S.

Our exposure to the Euro results primarily from ACE European Group which is headquartered in London and offers a broad range of coverages throughout the European Union, Central, and Eastern Europe. ACE primarily invests in Euro denominated investments to support its local currency insurance obligations and required capital levels. ACE’s local currency investment portfolios have strict contractual investment guidelines requiring managers to maintain a high quality and diversified portfolio to both sector and individual issuers. Investment portfolios are monitored daily to ensure investment manager compliance with portfolio guidelines.

Our non-U.S. investment grade fixed income portfolios are currency-matched with the insurance liabilities of our non-U.S. operations. The average credit quality of our non-U.S. fixed income securities is A and 52 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 following table 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 September 30, 2014:



(in millions of U.S. dollars)	Market Value		Amortized Cost
United Kingdom	$	991	$	986
Republic of Korea	795		722
Canada	541		530
United Mexican States	517		513
Kingdom of Thailand	404		394
Province of Ontario	385		374
Federative Republic of Brazil	279		274
Province of Quebec	261		251
Japan	254		253
France	221		203
Other Non-U.S. Government Securities⁽¹⁾	2,837		2,747
Total	$	7,485	$	7,247


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

Table of Contents

The following table summarizes the market value and amortized cost of our non-U.S. fixed income portfolio by country/sovereign for non-U.S. corporate securities at September 30, 2014:



(in millions of U.S. dollars)	Market Value		Amortized Cost
United Kingdom	$	1,584	$	1,511
Canada	1,107		1,061
Australia	637		617
United States	619		597
France	558		538
Netherlands	523		502
Germany	421		401
Switzerland	309		297
Euro Supranational	276		268
Brazil	260		260
Other Non-U.S. Corporate Securities	2,430		2,379
Total	$	8,724	$	8,431

The countries that are listed in the non-U.S. corporate fixed income portfolio above represent the ultimate parent company's country of risk. Non-U.S. corporate securities could be issued by foreign subsidiaries of U.S. corporations.

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 September 30, 2014, 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 over 1,250 issuers, with the greatest single exposure being $95 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.

____________________________________________________________________________________________________________

Critical Accounting Estimates

As of September 30, 2014, there were no material changes to our critical accounting estimates. For a full discussion of our critical accounting estimates, refer to Item 7 in our 2013 Form 10-K.

Reinsurance recoverable on ceded reinsurance



	September 30		December 31
(in millions of U.S. dollars)	2014		2013
Reinsurance recoverable on unpaid losses and loss expenses ⁽¹⁾	$	10,336	$	10,612
Reinsurance recoverable on paid losses and loss expenses⁽¹⁾	609		615
Net reinsurance recoverable on losses and loss expenses	$	10,945	$	11,227
Reinsurance recoverable on policy benefits	$	228	$	218


⁽¹⁾	Net of provision for uncollectible reinsurance

Table of Contents

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 billion and $2.3 billion of collateral at September 30, 2014 and December 31, 2013, respectively. The decrease in net reinsurance recoverable on losses and loss expenses was primarily due to favorable PPD, collections relating to run-off operations, and the impact of foreign exchange.

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. At September 30, 2014, our gross unpaid loss and loss expense reserves were $37.4 billion and our net unpaid loss and loss expense reserves were $27.1 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:



(in millions of U.S. dollars)	Gross Losses			Reinsurance Recoverable⁽¹⁾			Net Losses
Balance at December 31, 2013	$	37,443		$	10,612		$	26,831
Losses and loss expenses incurred	9,306			2,073			7,233
Losses and loss expenses paid	(9,102		)	(2,301		)	(6,801		)
Other (including foreign exchange translation)	(200		)	(48		)	(152		)
Balance at September 30, 2014	$	37,447		$	10,336		$	27,111


⁽¹⁾	Net of provision for uncollectible reinsurance

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 case reserves. Loss reserves also include an estimate of expenses associated with processing and settling unpaid claims (loss expenses).

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



	September 30, 2014						December 31, 2013
(in millions of U.S. dollars)	Gross		Ceded		Net		Gross		Ceded		Net
Case reserves	$	16,281	$	4,638	$	11,643	$	16,558	$	4,790	$	11,768
IBNR reserves	21,166		5,698		15,468		20,885		5,822		15,063
Total	$	37,447	$	10,336	$	27,111	$	37,443	$	10,612	$	26,831

Asbestos and Environmental (A&E) and Other Run-off Liabilities

During the three months ended September 30, 2014, an internal review was conducted to evaluate the adequacy of environmental liabilities. As a result of the internal review, we increased environmental gross reserves for Brandywine and Westchester Specialty operations by $65 million while the net loss reserves increased by $63 million. Refer to our 2013 Form 10-K for additional information on A&E and Other Run-off Liabilities.

Fair value measurements

Accounting guidance defines fair value as the price to sell an asset or transfer a liability (an exit price) in an orderly transaction between market participants and establishes a three-level valuation hierarchy based on the reliability of the inputs.

Table of Contents

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):


•	Level 1 inputs 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.

While we obtain values for the majority of our investment securities from pricing services, it is ultimately our responsibility to determine whether the values obtained 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 adjust prices obtained from pricing services.

Additionally, fixed maturities valuation 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 an investment's estimated fair value 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 both September 30, 2014 and December 31, 2013, Level 3 assets represented five percent of assets measured at fair value and three percent of total assets. Level 3 liabilities represented 98 percent and 74 percent of liabilities measured at fair value at September 30, 2014 and December 31, 2013, respectively, and less than one percent of our total liabilities at both September 30, 2014 and December 31, 2013. During the three and nine months ended September 30, 2014, we transferred assets of $6 million and $38 million into our Level 3 assets from other levels of the valuation hierarchy. During the three and nine months ended September 30, 2014, we transferred assets of nil and $65 million 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 nine months ended September 30, 2014 and 2013.

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.,

Table of Contents

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 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 regularly 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 of our 2013 Form 10-K.

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) that would reduce our obligation. For further information on the different categories of claim limits, refer to "Guaranteed living benefits derivatives" in our 2013 Form 10-K under Item 7.

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 (liability) of $13 million and $(54) million at September 30, 2014 and December 31, 2013, 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 at a rate of 7 percent – 15 percent per annum due to policyholder lapses, annuitizations, and deaths.

Note that GLB claims cannot occur for any reinsured policy until it has reached the end of its “waiting period”. The majority of policies we reinsure reach the end of their “waiting periods” in 2014 or later, as shown in the table below.



Year of first payment eligibility	Percent of living benefit account values
September 30, 2014 and prior	43	%
Remainder of 2014	4	%
2015	6	%
2016	6	%
2017	20	%
2018	13	%
2019	3	%
2020	1	%
2021 and after	4	%
Total	100	%

Table of Contents

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				Nine Months Ended
	September 30				September 30
(in millions of U.S. dollars)	2014		2013		2014		2013
Death Benefits (GMDB)
Premium	$	17	$	19	$	54	$	59
Less paid claims	11		11		32		53
Net	$	6	$	8	$	22	$	6
Living Benefits (Includes GMIB and GMAB)
Premium	$	35	$	37	$	105	$	113
Less paid claims	4		6		12		19
Net	$	31	$	31	$	93	$	94
Total VA Guaranteed Benefits
Premium	$	52	$	56	$	159	$	172
Less paid claims	15		17		44		72
Net	$	37	$	39	$	115	$	100

Death Benefits (GMDB)

For premiums and claims from VA contracts reinsuring GMDBs, at current market levels, we expect approximately $37 million of claims and $63 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. More than 56 percent of our living benefit reinsurance clients’ policyholders, measured by account value, are currently ineligible to trigger a claim payment. At current market levels, we expect approximately $8 million of claims and $128 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.

Table of Contents

____________________________________________________________________________________________________________

Catastrophe management

We actively monitor our catastrophe risk accumulation around the world. 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 a U.S. hurricane and a California earthquake at September 30, 2014 and 2013. The table also presents ACE’s corresponding share of pre-tax industry losses for each of the return periods for a U.S. hurricane and a California earthquake. 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 a U.S. hurricane could be in excess of $1,727 million (or 5.8 percent of our total shareholders’ equity at September 30, 2014). We estimate that at such hypothetical loss levels, ACE’s share of aggregate industry losses would be approximately 1.1 percent.



	U.S. Hurricane								California Earthquake
			September 30				September 30				September 30				September 30
			2014				2013				2014				2013
Modeled Annual Aggregate Net PML	ACE		% of Total Shareholders’ Equity		% of Industry		ACE		ACE		% of Total Shareholders’ Equity		% of Industry		ACE
(in millions of U.S. dollars, except for percentages)
1-in-100	$	1,727	5.8	%	1.1	%	$	1,693	$	815	2.7	%	2.0	%	$	771
1-in-250	$	2,344	7.8	%	1.0	%	$	2,268	$	1,076	3.6	%	1.7	%	$	1,015

The above modeled loss information reflects our in-force portfolio and reinsurance program at July 1, 2014. Effective July 1, 2014, ACE established a new Global Property Catastrophe Program for our North American and International operations that provided global natural catastrophe and terrorism coverage. Refer to "Natural catastrophe property reinsurance program" for additional information.

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).

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.

ACE established a new Global Catastrophe Program for our North American and International operations. The program is effective July 1, 2014 through June 30, 2015, and consists of two layers in excess of losses retained by ACE. Approximately 20 percent of the coverage was placed with reinsurers providing upfront collateral equal to the limit of their participation and without a reinstatement. The remaining coverage was placed without upfront collateral and with one additional reinstatement limit in the event of a natural peril loss. In addition, we also purchased terrorism coverage (excluding nuclear, biological, chemical and radiation coverage) for the United States from July 1, 2014 to June 30, 2015 with the same limits and retention

Table of Contents

and percentage placed except that the majority of terrorism coverage is on an aggregate basis above our retentions without a reinstatement.



Loss Location	Layer of Loss	Comments	Notes
United States (excluding Alaska and Hawaii)	$0 million - $500 million	Losses retained by ACE	(a)
United States (excluding Alaska and Hawaii)	$500 million - $1.0 billion	All natural perils, and terrorism (excluding nuclear, biological, chemical and radiation)	(b)
United States (excluding Alaska and Hawaii)	$1.0 billion - $1.275 billion	All natural perils, and terrorism (excluding nuclear, biological, chemical and radiation)	(c)
International (including Alaska and Hawaii)	$0 million - $150 million	Losses retained by ACE	(a)
International (including Alaska and Hawaii)	$150 million - $650 million	All natural perils, and terrorism (excluding nuclear, biological, chemical and radiation)	(b)
Alaska, Hawaii, and Canada	$650 million - $925 million	All natural perils, and terrorism (excluding nuclear, biological, chemical and radiation)	(c)

^(a) Ultimate retention will depend upon the nature of the loss and the interplay between the underlying per risk programs and certain other catastrophe programs purchased by individual business units. These other catastrophe programs have the potential to reduce our effective retention below the stated levels.
^(b) These coverages are both part of the same Core layer within the Global Catastrophe Program and are approximately 90% placed with Reinsurers. As such, it may be exhausted in one region and not available in the other.
^(c) These coverages are both part of the same Second layer within the Global Catastrophe Program and are approximately 98% placed with Reinsurers. As such, it may be exhausted in one region and not available in the other.

____________________________________________________________________________________________________________

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's Risk Management Agency (RMA) sets the policy terms and conditions, rates and forms, and is also responsible for setting compliance standards. As a participating company, we report all details of policies underwritten to the RMA and are party to a Standard Reinsurance Agreement (SRA). 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. We may also enter into crop derivative contracts to further manage our risk exposure.

Each year the RMA issues a final SRA for the subsequent reinsurance year. In June 2014, the RMA released the 2015 SRA which establishes the terms and conditions for the 2015 reinsurance year (i.e., July 1, 2014 through June 30, 2015) that replaced the 2014 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

Table of Contents

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.

______________________________________________________________________________________________________________________

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 September 30, 2014, our available credit lines totaled $1.4 billion and usage of these credit lines was $630 million. 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 November 2017 and December 2017 and require that we maintain certain financial covenants, all of which we met at September 30, 2014. We did not renew our $500 million bilateral letter of credit facility that expired in June 2014. We elected instead to satisfy our collateral obligations primarily with insurance trusts supported by our investment portfolio. Should any 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 2013 Form 10-K for additional information.

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 nine months ended September 30, 2014, 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 received no dividends from its Bermuda subsidiaries during the nine months ended September 30, 2014 and 2013.

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 received no dividends from AGM or ACE INA during the nine months ended September 30, 2014 and 2013. 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. ACE INA received dividends of $200 million from its subsidiaries during the nine months ended September 30, 2014 and received no dividends during the nine months ended September 30, 2013.

Table of Contents

Cash Flows

Our 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 nine months ended September 30, 2014 and 2013.

Operating cash flows were $3.2 billion in the nine months ended September 30, 2014, compared with $2.7 billion in the prior year period, primarily due to $1.1 billion of higher net premiums collected, partially offset by higher losses paid of $596 million.

Cash used for investing was $1.7 billion in the nine months ended September 30, 2014, compared with $3.1 billion in the prior year period. The decrease in cash flows used for investing activities was primarily due to cash paid for acquisitions in the prior year of $977 million compared with $172 million in the current year. Refer to Note 2 to the Consolidated Financial Statements for additional information on our acquisitions.

Cash used for financing was $1.2 billion in the nine months ended September 30, 2014, compared with cash flows from financing of $552 million in the prior year period. Cash used for financing for the nine months ended September 30, 2014 included $1.0 billion of share repurchases, $646 million of dividends paid on Common Shares, and $501 million of repayments of long-term debt, partially offset by proceeds from the issuance of long-term debt of $699 million. Cash flows from financing for the nine months ended September 30, 2013 included $947 million of proceeds from the issuance of long-term debt, partially offset by $343 million of dividends paid on Common Shares and $233 million of share repurchases. Dividends paid were lower in the prior year 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 use 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. At September 30, 2014, there were $1.4 billion in repurchase agreements outstanding.

__________________________________________________________________________________________________________

Capital Resources

Capital resources consist of funds deployed or available to be deployed to support our business operations.



	September 30			December 31
(in millions of U.S. dollars, except for percentages)	2014			2013
Short-term debt	$	1,851		$	1,901
Long-term debt	4,057			3,807
Total debt	5,908			5,708
Trust preferred securities	309			309
Total shareholders’ equity	30,017			28,825
Total capitalization	$	36,234		$	34,842
Ratio of debt to total capitalization	16.3		%	16.4		%
Ratio of debt plus trust preferred securities to total capitalization	17.2		%	17.3		%

In May 2014, we reclassified $450 million of 5.6 percent senior notes, due to mature on May 15, 2015, from Long-term debt to Short-term debt in the consolidated balance sheet. In May 2014, we issued $700 million of 3.35 percent senior notes due May 2024. The proceeds from the debt issuance are expected to be used to repay at maturity the $700 million of 2.6 percent senior notes due November 2015. In June 2014, ACE INA Holdings Inc.'s $500 million of 5.875 percent senior notes matured and were fully paid.

Table of Contents

The following table presents the significant movements in our shareholders’ equity:



	Nine Months Ended
(in millions of U.S. dollars)	September 30, 2014
Balance – beginning of period	$	28,825
Net income	2,298
Net unrealized appreciation on investments, net of tax	583
Share-based compensation expense	116
Repurchase of shares	(1,019		)
Dividends on Common Shares	(702		)
Change in cumulative translation, net of tax	(124		)
Exercise of stock options	63
Other movements, net of tax	(23		)
Balance – end of period	$	30,017

For the nine months ended September 30, 2014 and 2013, we repurchased $1.0 billion and $233 million, respectively, of Common Shares in a series of open market transactions under existing Board authorizations. As of September 30, 2014, $924 million in repurchase authorization remained through December 31, 2014. Refer to Note 8 to the Consolidated Financial Statements for additional information on the repurchase authorization. As of September 30, 2014, there were 10,720,855 Common Shares in treasury with a weighted average cost of $98.57 per share. For the period October 1, 2014 through October 28, 2014, we repurchased 699,965 Common Shares for a total of $74 million in a series of open market transactions. At October 28, 2014, $850 million in share repurchase authorization remained through December 31, 2014.

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. We expect to file a new unlimited shelf registration to replace the one that expires in December 2014.

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. Refer to Note 8 to the Consolidated Financial Statements for a discussion of our dividend methodology. 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 approved in May 2013 was paid in four quarterly installments, in accordance with the shareholder resolution.

At our January 10, 2014 extraordinary general meeting, our shareholders approved a resolution to increase our quarterly dividend 24 percent from $0.51 per share to $0.63 per share for the payment made on January 31, 2014 and April 17, 2014, with the $0.12 per share increase for each installment distributed from capital contribution reserves (and the $0.51 per share distributed by way of par value reduction).

At our May 2014 annual general meeting, our shareholders approved an annual dividend distribution for the following year by way of a par value reduction equal to $2.60 per share, or CHF 2.28 per share, calculated using the USD/CHF exchange rate as published in the Wall Street Journal on May 9, 2014, payable in four quarterly installments.

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:
January 13, 2014	January 31, 2014	$0.63 (CHF 0.55)
March 28, 2014	April 17, 2014	$0.63 (CHF 0.55)
July 23, 2014	August 13, 2014	$0.65 (CHF 0.58)
September 30, 2014	October 21, 2014	$0.65 (CHF 0.61)

Table of Contents

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Refer to Item 7A included in our 2013 Form 10-K.

Reinsurance of GMDB and GLB guarantees

Net income is directly impacted by changes in benefit reserves calculated in connection with reinsurance of variable annuity guarantees, primarily GMDB and GLB. Benefit reserves are calculated in accordance with guidance related to accounting and reporting by insurance enterprises for certain non-traditional long-duration contracts and for separate accounts. Changes in benefit reserves are reflected as policy benefits expense, which is included in life underwriting income. In addition, net income is directly impacted by the change in the fair value of the GLB liability (FVL), which is classified as a derivative for accounting purposes. The FVL established for a GLB reinsurance contract represents the difference between the fair value of the contract and the benefit reserves. Changes in the FVL, net of associated changes in the calculated benefit reserves, are reflected as realized gains or losses.

ACE views its variable annuity reinsurance business as having a similar risk profile to that of catastrophe reinsurance with the probability of long-term economic loss relatively small, at the time of pricing. Adverse changes in market factors and policyholder behavior will have an impact on both life underwriting income and net income. When evaluating these risks, we expect to be compensated for taking both the risk of a cumulative long-term economic net loss, as well as the short-term accounting variations caused by these market movements. Therefore, we evaluate this business in terms of its long-term economic risk and reward.

At September 30, 2014, management established benefit reserves based on the benefit ratio calculated using assumptions reflecting management’s best estimate of the future performance of the variable annuity line of business. Management exercises judgment in determining the extent to which short-term market movements impact the benefit reserves. The benefit reserves are based on the calculation of a long-term benefit ratio (or loss ratio) for the variable annuity guarantee reinsurance. Despite the long-term nature of the risk, the benefit ratio calculation is impacted by short-term market movements that may be judged by management to be temporary or transient. Management’s best estimate reflected a judgment that the equity markets will exhibit growth somewhat lower than historical average levels. Management regularly examines both quantitative and qualitative analysis and for the quarter ended September 30, 2014, determined that no change to the benefit ratio was warranted.

The guidance requires us to “regularly evaluate estimates used and adjust the liability balance... if actual experience or other evidence suggests that earlier assumptions should be revised.” ACE evaluates its estimates regularly and management uses judgment to determine the extent to which assumptions underlying the benefit ratio calculation used to establish benefit reserves should be adjusted. The benefit ratio is calculated based on management’s expectation for the short-term and long-term performance of the variable annuity guarantee liability. Management’s quantitative analysis includes a review of the differential between the benefit ratio used at the most recent valuation date and the benefit ratio calculated on subsequent dates.

Benefit reserves and FVL calculations are directly affected by market factors, including equity levels, interest rate levels, credit risk, and implied volatilities, as well as policyholder behaviors, such as annuitization and lapse rates. The tables below assume no changes to the benefit ratio used to establish benefit reserves at September 30, 2014 and show the sensitivity, at September 30, 2014, of the FVL associated with the variable annuity guarantee reinsurance portfolio. In addition, the tables below present the sensitivity of the fair value of specific derivative instruments held (hedge value) to partially offset the risk in the variable annuity guarantee reinsurance portfolio. The tables below are estimates of the sensitivities to instantaneous changes in economic inputs or actuarial assumptions.

The tables below do not reflect the expected quarterly run rate of net income generated by the variable annuity guarantee reinsurance portfolio if markets remain unchanged during the period. All else equal, if markets remain unchanged during the period, the Gross FVL will increase, resulting in a realized loss. The realized loss occurs primarily because, during the period, we will collect premium while paying little or no claims on our GLB reinsurance (since most policies are not eligible to annuitize until after September 30, 2014). This increases the Gross FVL because future premiums are lower by the amount collected in the quarter, and also because future claims are discounted for a shorter period. We refer to this increase in Gross FVL as “timing effect”. The unfavorable impact of timing effect on our Gross FVL in a quarter is not reflected in the sensitivity tables below. For this reason, when using the tables below to estimate the sensitivity of Gross FVL in the fourth quarter to various changes, it is necessary to assume an additional $5 million to $45 million increase in Gross FVL and realized losses. However, the impact to Net income is substantially mitigated because this realized loss is expected to be exceeded by the positive quarterly run rate of life underwriting income generated by the variable annuity guarantee reinsurance portfolio if markets remain unchanged during

Table of Contents

the period. Note that both the timing effect and the quarterly run rate of life underwriting income change over time as the book ages.



Interest Rate Shock		Worldwide Equity Shock
(in millions of U.S. dollars)		+10%			Flat			-10%			-20%			-30%			-40%
+100 bps	(Increase)/decrease in Gross FVL	$	353		$	243		$	45		$	(239	)	$	(600	)	$	(1,057	)
	Increase/(decrease) in hedge value	(134		)	2			139			279			422			573
	Increase/(decrease) in net income	$	219		$	245		$	184		$	40		$	(178	)	$	(484	)
Flat	(Increase)/decrease in Gross FVL	$	207		$	—		$	(273	)	$	(621	)	$	(1,059	)	$	(1,579	)
	Increase/(decrease) in hedge value	(134		)	2			140			280			424			575
	Increase/(decrease) in net income	$	73		$	2		$	(133	)	$	(341	)	$	(635	)	$	(1,004	)
-100 bps	(Increase)/decrease in Gross FVL	$	(91	)	$	(357	)	$	(698	)	$	(1,122	)	$	(1,629	)	$	(2,209	)
	Increase/(decrease) in hedge value	(134		)	2			140			280			424			577
	Increase/(decrease) in net income	$	(225	)	$	(355	)	$	(558	)	$	(842	)	$	(1,205	)	$	(1,632	)

Sensitivities to Other Economic Variables		AA-rated Credit Spreads						Interest Rate Volatility						Equity Volatility
(in millions of U.S. dollars)		+100			-100			+2%			-2%			+2%			-2%
(Increase)/decrease in Gross FVL		$	55		$	(61	)	$	(2	)	$	—		$	(22	)	$	20
Increase/(decrease) in hedge value		—			—			—			—			3			2
Increase/(decrease) in net income		$	55		$	(61	)	$	(2	)	$	—		$	(19	)	$	22

Sensitivities to Actuarial Assumptions								Mortality
(in millions of U.S. dollars)								+20%			+10%			-10%			-20%
(Increase)/decrease in Gross FVL								$	22		$	11		$	(12	)	$	(23	)
Increase/(decrease) in hedge value								—			—			—			—
Increase/(decrease) in net income								$	22		$	11		$	(12	)	$	(23	)

								Lapses
(in millions of U.S. dollars)								+50%			+25%			-25%			-50%
(Increase)/decrease in Gross FVL								$	192		$	106		$	(131	)	$	(274	)
Increase/(decrease) in hedge value								—			—			—			—
Increase/(decrease) in net income								$	192		$	106		$	(131	)	$	(274	)

								Annuitization
(in millions of U.S. dollars)								+50%			+25%			-25%			-50%
(Increase)/decrease in Gross FVL								$	(258	)	$	(143	)	$	163		$	295
Increase/(decrease) in hedge value								—			—			—			—
Increase/(decrease) in net income								$	(258	)	$	(143	)	$	163		$	295

The above tables assume equity shocks impact all global equity markets equally and that the interest rate shock is a parallel shift in the U.S. yield curve. Our liabilities are sensitive to global equity markets in the following proportions: 70 percent—80 percent U.S. equity, 10 percent—20 percent international equity ex-Japan, 5 percent—15 percent Japan equity. Our current hedge portfolio is sensitive to global equity markets in the following proportions: 100 percent U.S. equity. We would suggest using the S&P 500 index as a proxy for U.S. equity, the MSCI EAFE index as a proxy for international equity, and the TOPIX as a proxy for Japan equity.

Our liabilities are also sensitive to global interest rates at various points on the yield curve, mainly the U.S. Treasury curve in the following proportions: 0 percent—10 percent short-term rates (maturing in less than 5 years), 20 percent—30 percent medium-term rates (maturing between 5 years and 10 years, inclusive), and 65 percent—75 percent long-term rates (maturing

Table of Contents

beyond 10 years). A change in AA-rated credit spreads (AA-rated credit spreads are a proxy for both our own credit spreads and the credit spreads of the ceding insurers) impacts the rate used to discount cash flows in the fair value model. The hedge sensitivity is from September 30, 2014 market levels and includes the impact of adjustments to the hedge portfolio made subsequent to that date.

The above sensitivities are not directly additive because changes in one factor will affect the sensitivity to changes in other factors. Also, the sensitivities do not scale linearly and may be proportionally greater for larger movements in the market factors. Sensitivities may also vary due to foreign exchange rate fluctuations. The calculation of the FVL is based on internal models that include assumptions regarding future policyholder behavior, including lapse, annuitization, and asset allocation. These assumptions impact both the absolute level of the FVL as well as the sensitivities to changes in market factors shown above. Additionally, actual sensitivity of our net income may differ from those disclosed in the tables above due to differences between short-term market movements and management judgment regarding the long-term assumptions implicit in our benefit ratios. Furthermore, the sensitivities above could vary by multiples of the sensitivities in the tables above.

Variable Annuity Net Amount at Risk

The tables below present the net amount at risk at September 30, 2014 following an immediate change in equity market levels, assuming all global equity markets are impacted equally. For further information on the net amount at risk, refer to Note 5 to the Consolidated Financial Statements.

a) Reinsurance covering the GMDB risk only



	Equity Shock
(in millions of U.S. dollars, except percentages)	+20%		Flat		-20%		-40%		-60%		-80%
GMDB net amount at risk	$	359	$	520	$	1,092	$	1,616	$	1,626	$	1,386
Claims at 100% immediate mortality	751		629		295		274		250		227

The treaty claim limits function as a ceiling on the net amount at risk as equity markets fall. In addition, the claims payable if all of the policyholders were to die immediately declines as equity markets fall due to the specific nature of these claim limits, many of which are annual claim limits calculated as a percentage of the reinsured account value. There is also some impact due to a small portion of the GMDB reinsurance under which claims are positively correlated to equity markets (claims decrease as equity markets fall).

b) Reinsurance covering the GLB risk only



	Equity Shock
(in millions of U.S. dollars, except percentages)	+20%		Flat		-20%		-40%		-60%		-80%
GLB net amount at risk	$	82	$	241	$	829	$	1,786	$	2,567	$	2,879

The treaty claim limits cause the net amount at risk to increase at a declining rate as equity markets fall.

c) Reinsurance covering both the GMDB and GLB risks on the same underlying policyholders



	Equity Shock
(in millions of U.S. dollars, except percentages)	+20%		Flat		-20%		-40%		-60%		-80%
GMDB net amount at risk	$	51	$	75	$	111	$	146	$	175	$	199
GLB net amount at risk	65		168		498		1,100		1,690		2,199
Claims at 100% immediate mortality	19		39		354		546		729		911

The treaty limits control the increase in the GMDB net amount at risk as equity markets fall. The GMDB net amount at risk continues to grow as equity markets fall because most of these reinsurance treaties do not have annual claim limits calculated as a percentage of the underlying account value.

The treaty limits cause the GLB net amount at risk to increase at a declining rate as equity markets fall.

Table of Contents

ITEM 4. Controls and Procedures

ACE’s management, with the participation of ACE’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of ACE’s disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934 as of September 30, 2014. Based upon that evaluation, ACE’s Chief Executive Officer and Chief Financial Officer concluded that ACE’s disclosure controls and procedures are effective in allowing information required to be disclosed in reports filed under the Securities and Exchange Act of 1934 to be recorded, processed, summarized, and reported within time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to ACE’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There has been no change in ACE’s internal controls over financial reporting during the three months ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, ACE’s internal controls over financial reporting.

PART II OTHER INFORMATION

ITEM 1. Legal Proceedings

The information required with respect to this item is included in Note 7 e) to the Consolidated Financial Statements which is hereby incorporated by reference.

ITEM 1A. Risk Factors

Refer to “Risk Factors” under Item 1A of Part I of our 2013 Form 10-K. There have been no material changes to the risk factors disclosed in Item 1A of Part I of our 2013 Form 10-K.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds and Issuer Repurchases of Equity Securities

Issuer’s Repurchases of Equity Securities

The following table provides information with respect to purchases by ACE of its Common Shares during the three months ended September 30, 2014:



Period	Total Number of Shares Purchased⁽¹⁾	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan⁽²⁾	Approximate Dollar Value of Shares that May Yet be Purchased Under the Plan⁽³⁾
July 1 through July 31	1,823,800	$	103.26	1,821,630	$	1,186	million
August 1 through August 31	1,484,981	$	102.17	1,477,672	$	1,035	million
September 1 through September 30	1,052,457	$	106.00	1,050,000	$	924	million
Total	4,361,238			4,349,302


⁽¹⁾	This column primarily represents open market share repurchases. Other activity during the three months ended September 30, 2014 is related to the surrender to ACE of Common Shares to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees and the exercising of options by employees.

⁽²⁾ The aggregate value of shares purchased in the three months ended September 30, 2014 as part of the publicly announced plan was $450 million.


⁽³⁾	Refer to Note 8 to the Consolidated Financial Statements for more information on the ACE Limited securities repurchase authorization. For the period October 1, 2014 through October 28, 2014, we repurchased 699,965 Common Shares for a total of $74 million in a series of open market transactions. At October 28, 2014, $850 million in share repurchase authorization remained through December 31, 2014.

ITEM 6. Exhibits

Refer to the Exhibit Index.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	ACE LIMITED
	(Registrant)

October 29, 2014	/s/ Evan G. Greenberg
	Evan G. Greenberg
	Chairman, President, and Chief Executive Officer

October 29, 2014	/s/ Philip V. Bancroft
	Philip V. Bancroft
	Chief Financial Officer

Table of Contents



		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	Original Number	Date Filed	Filed Herewith
3.1	Articles of Association of the Company, as amended and restated	8-K	3	October 1, 2014

3.2	Organizational Regulations of the Company, as amended and restated	8-K	3	August 18, 2014

4.1	Articles of Association of the Company, as amended and restated	8-K	4	October 1, 2014

4.2	Organizational Regulations of the Company, as amended and restated	8-K	4	August 18, 2014

4.3	Form of 3.35 percent Senior Notes due 2024	8-K	4.1	May 27, 2014

18.1	Preferability Letter of Independent Registered Public Accounting Firm				X

31.1	Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002				X

31.2	Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002				X

32.1	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002				X

32.2	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002				X

101.1	The following financial information from ACE Limited’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014 formatted in XBRL: (i) Consolidated Balance Sheets at September 30, 2014, and December 31, 2013; (ii) Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2014 and 2013; (iii) Consolidated Statements of Shareholders’ Equity for the nine months ended September 30, 2014 and 2013; (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013; and (v) Notes to Consolidated Financial Statements				X