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Table of Contents

NNOOTTEESS TTOO CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS(continued)

ACE Limited and Subsidiaries

The following table presents a reconciliation of unpaid losses and loss expenses:

Years Ended December 31(in millions of U.S. dollars) 2012 2011 2010Gross unpaid losses and loss expenses, beginning of year $ 37,477 $ 37,391 $ 37,783Reinsurance recoverable on unpaid losses(1) (11,602) (12,149) (12,745)Net unpaid losses and loss expenses, beginning of year 25,875 25,242 25,038Acquisition of subsidiaries 14 92 145Total 25,889 25,334 25,183Net losses and loss expenses incurred in respect of lossesoccurring in: Current year 10,132 10,076 8,082Prior years (479) (556) (503)Total 9,653 9,520 7,579Net losses and loss expenses paid in respect of losses occurring in: Current year 4,325 4,209 2,689Prior years 4,894 4,657 4,724Total 9,219 8,866 7,413Foreign currency revaluation and other 224 (113) (107)Net unpaid losses and loss expenses, end of year 26,547 25,875 25,242Reinsurance recoverable on unpaid losses(1) 11,399 11,602 12,149Gross unpaid losses and loss expenses, end of year $ 37,946 $ 37,477 $ 37,391(1) Net of provision for uncollectible reinsurance. Net losses and loss expenses incurred includes $479 million, $556 million, and $503 million, of net favorable priorperiod development in the years ended December 31, 2012, 2011, and 2010, respectively. The following is asummary of prior period development for the periods indicated. The remaining net development for long-tail andshort-tail business for each segment comprises numerous favorable and adverse movements across lines andaccident years.

Insurance North AmericanInsurance North American's active operations experienced net favorable prior period development of $360 millionin 2012, representing 2.2 percent of net unpaid reserves at December 31, 2011. Net prior period development wasthe net result of several underlying favorable and adverse movements. Net favorable development of $245 million

on long-tail business included favorable development of $73 million on umbrella and excess casualty businessprimarily affecting the 2007 and prior accident years; $67 million in the directors and officers (D&O) portfolioaffecting the 2007 and prior accident years; $57 million on medical risk operations primarily affecting the 2007 andprior accident years; and $39 million on the national accounts portfolios (commercial auto liability, general liability,and workers' compensation lines of business). Net prior period development also included favorable development of$9 million across a number of lines and accident years, none of which was significant individually or in theaggregate. Favorable development of $115 million on short-tail business included favorable development of $88million in the property, inland marine and commercial marine portfolios primarily arising on the 2009 through 2011accident years and favorable development of $27 million on aviation product lines affecting the 2009 and prior

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accident years.

Insurance North American's run-off operations incurred net adverse prior period development of $168 million inthe Westchester and Brandywine run-off operations during 2012, which was the net result of adverse movementsimpacting accident years 2001 and prior, representing one percent of net unpaid reserves at December 31, 2011.Net adverse prior period development was driven by adverse development of $150 million related to the completionof the reserve review during 2012 and $18 million of unallocated loss adjustment expenses due to run-off operatingexpenses reserved and paid during 2012.

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