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Table of Contents

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 at 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 at 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 occurringin:

Current year 4,325 4,209 2,689Prior years 4,894 4,657 4,724

Total 9,219 8,866 7,413Foreign currency revaluation and other 224 (113) (107)Net unpaid losses and loss expenses at 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 at end of year $ 37,946 $ 37,477 $ 37,391(1) Net of provision for uncollectible reinsurance.

Net losses and loss expenses incurred for 2012 were $9.7 billion, compared with $9.5 billion in 2011, and $7.6billion in 2010. Net losses and loss expenses incurred for 2012, 2011, and 2010, includes $479 million, $556 million,and $503 million of net favorable prior period development, respectively. For additional information, refer to thePrior Period Development section of Item 7._____________________________________________________________________________________________Investments

Our objective is to maximize investment income and total return while ensuring an appropriate level of liquidity,investment quality and diversification. As such, ACE's investment portfolio is invested primarily in investment-gradefixed-income securities as measured by the major rating agencies. We do not allow leverage or complex creditstructures in our investment portfolio.

The critical aspects of the investment process are controlled by ACE Asset Management, an indirect wholly-ownedsubsidiary of ACE. These aspects include asset allocation, portfolio and guideline design, risk management andoversight of external asset managers. In this regard, ACE Asset Management:

conducts formal asset allocation modeling for each of the ACE subsidiaries, providing formal recommendationsfor the portfolio's structure;

establishes recommended investment guidelines that are appropriate to the prescribed asset allocation targets;

provides the analysis, evaluation, and selection of our external investment advisors;

establishes and develops investment-related analytics to enhance portfolio engineering and risk control;

ACE-12.31.2012-10K http://www.sec.gov/Archives/edgar/data/896159/000089615

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