3.	Investments

a)	Fixed maturities

The following tables present the amortized cost and fair value of fixed maturities and related OTTI recognized in AOCI:


March 31, 2012
	Amortized Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation			Fair Value		OTTI Recognized in AOCI
	(in millions of U.S. dollars)
Available for sale
U.S. Treasury and agency	$	3,012	$	139	$	(10	)	$	3,141	$	—
Foreign		12,417		507		(38	)		12,886		(2	)
Corporate securities		14,452		878		(66	)		15,264		(12	)
Mortgage-backed securities		9,721		392		(97	)		10,016		(119	)
States, municipalities, and political subdivisions		2,059		109		(7	)		2,161		—

	$	41,661	$	2,025	$	(218	)	$	43,468	$	(133	)


Held to maturity
U.S. Treasury and agency	$	1,081	$	40	$	—		$	1,121	$	—
Foreign		941		20		(6	)		955		—
Corporate securities		2,298		64		(8	)		2,354		—
Mortgage-backed securities		2,693		93		(2	)		2,784		—
States, municipalities, and political subdivisions		1,104		34		(4	)		1,134		—

	$	8,117	$	251	$	(20	)	$	8,348	$	—


	December 31, 2011
	Amortized Cost		Gross Unrealized Appreciation		Gross Unrealized Depreciation			Fair Value		OTTI Recognized in AOCI
	(in millions of U.S. dollars)
Available for sale
U.S. Treasury and agency	$	2,774	$	186	$	—		$	2,960	$	—
Foreign		12,025		475		(99	)		12,401		(2	)
Corporate securities		14,055		773		(135	)		14,693		(22	)
Mortgage-backed securities		9,979		397		(175	)		10,201		(151	)
States, municipalities, and political subdivisions		1,617		96		(1	)		1,712		—

	$	40,450	$	1,927	$	(410	)	$	41,967	$	(175	)


Held to maturity
U.S. Treasury and agency	$	1,078	$	48	$	—		$	1,126	$	—
Foreign		935		18		(23	)		930		—
Corporate securities		2,338		44		(45	)		2,337		—
Mortgage-backed securities		2,949		90		(3	)		3,036		—
States, municipalities, and political subdivisions		1,147		32		(3	)		1,176		—

	$	8,447	$	232	$	(74	)	$	8,605	$	—

As discussed in Note 3 c), if a credit loss is indicated 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 months ended March 31, 2012 and 2011, $68 million and $18 million, respectively, of net unrealized appreciation related to such securities is included in OCI. At March 31, 2012 and December 31, 2011, AOCI includes net unrealized depreciation of $87 million and $155 million, respectively, related to securities remaining in the investment portfolio at those dates 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 6 a) (iv)) and are included in the category, "Mortgage-backed securities". Approximately 85 percent and 84 percent of the total mortgage-backed securities at March 31, 2012 and December 31, 2011, respectively, 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.

The following table presents fixed maturities by contractual maturity:


	March 31, 2012				December 31, 2011
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(in millions of U.S. dollars)
Available for sale
Due in 1 year or less	$	2,324	$	2,354	$	2,321	$	2,349
Due after 1 year through 5 years		12,606		13,091		12,325		12,722
Due after 5 years through 10 years		13,180		13,929		12,379		12,995
Due after 10 years		3,830		4,078		3,446		3,700

		31,940		33,452		30,471		31,766
Mortgage-backed securities		9,721		10,016		9,979		10,201

	$	41,661	$	43,468	$	40,450	$	41,967


Held to maturity
Due in 1 year or less	$	591	$	598	$	393	$	396
Due after 1 year through 5 years		1,922		1,967		2,062		2,090
Due after 5 years through 10 years		2,242		2,307		2,376		2,399
Due after 10 years		669		692		667		684

		5,424		5,564		5,498		5,569
Mortgage-backed securities		2,693		2,784		2,949		3,036

	$	8,117	$	8,348	$	8,447	$	8,605

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

b)	Equity securities

The following table presents the cost and fair value of equity securities:


	March 31 2012			December 31 2011
	(in millions of U.S. dollars)
Cost	$	662		$	671
Gross unrealized appreciation		29			18
Gross unrealized depreciation		(12	)		(42	)

Fair value	$	679		$	647

c)	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 indicated, 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.

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 impaired.

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. We develop these estimates using information based on market observable data, issuer-specific information, and credit ratings. ACE developed its default assumption by using 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. We believe that use of a default assumption in excess of the historical mean is reasonable in light of current market conditions.

For the three months ended March 31, 2012 and 2011, credit losses recognized in net income for corporate securities were $3 million and nil, 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.

Credit losses recognized in net income for mortgage-backed securities for the three months ended March 31, 2012 and 2011 were $3 million and $1 million, respectively.

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 March 31
	2012			2011
	(in millions of U.S. dollars)
Fixed maturities:
OTTI on fixed maturities, gross	$	(7	)	$	(5	)
OTTI on fixed maturities recognized in OCI (pre-tax)		—			1

OTTI on fixed maturities, net		(7	)		(4	)
Gross realized gains excluding OTTI		112			109
Gross realized losses excluding OTTI		(71	)		(56	)

Total fixed maturities		34			49


Equity securities:
OTTI on equity securities		(1	)		—
Gross realized gains excluding OTTI		2			8
Gross realized losses excluding OTTI		—			(1	)

Total equity securities		1			7


OTTI on other investments		(2	)		—
Foreign exchange losses		(5	)		(79	)
Investment and embedded derivative instruments		42			(20	)
Fair value adjustments on insurance derivative		428			71
S&P put options and futures		(231	)		(71	)
Other derivative instruments		(5)			(1)
Other		(2	)		(1	)

Net realized gains (losses)	$	260		$	(45	)

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 March 31
	2012			2011
	(in millions of U.S. dollars)
Balance of credit losses related to securities still held - beginning of period	$	74		$	137
Additions where no OTTI was previously recorded		1			—
Additions where an OTTI was previously recorded		5			1
Reductions for securities sold during the period		(25	)		(42	)

Balance of credit losses related to securities still held - end of period	$	55		$	96

d)	Gross unrealized loss

At March 31, 2012, there were 2,900 fixed maturities out of a total of 22,584 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $7 million. There were approximately 62 equity securities out of a total of 174 equity securities in an unrealized loss position. The largest single unrealized loss in the equity securities was $8 million. Fixed maturities in an unrealized loss position at March 31, 2012 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. Equity securities in an unrealized loss position include foreign fixed income securities held in a commingled fund structure for which fair value declined primarily due to widening credit spreads since the date of purchase.

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
	Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss
	(in millions of U.S. dollars)
March 31, 2012
U.S. Treasury and agency	$	820	$	(9.5	)	$	—	$	—		$	820	$	(9.5	)
Foreign		1,558		(25.7	)		430		(18.3	)		1,988		(44.0	)
Corporate securities		1,937		(56.4	)		201		(17.8	)		2,138		(74.2	)
Mortgage-backed securities		464		(4.4	)		500		(95.0	)		964		(99.4	)
States, municipalities, and political subdivisions		480		(7.2	)		62		(3.5	)		542		(10.7	)

Total fixed maturities		5,259		(103.2	)		1,193		(134.6	)		6,452		(237.8	)
Equity securities		489		(12.0	)		—		—			489		(12.0	)
Other investments		156		(5.7	)		—		—			156		(5.7	)

Total	$	5,904	$	(120.9	)	$	1,193	$	(134.6	)	$	7,097	$	(255.5	)


	0 – 12 Months					Over 12 Months					Total
	Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss
	(in millions of U.S. dollars)
December 31, 2011
Foreign	$	1,801	$	(82.2	)	$	529	$	(40.0	)	$	2,330	$	(122.2	)
Corporate securities		3,084		(148.2	)		268		(32.2	)		3,352		(180.4	)
Mortgage-backed securities		440		(7.5	)		586		(170.2	)		1,026		(177.7	)
States, municipalities, and political subdivisions		30		(0.4	)		98		(3.5	)		128		(3.9	)

Total fixed maturities		5,355		(238.3	)		1,481		(245.9	)		6,836		(484.2	)
Equity securities		484		(42.3	)		—		—			484		(42.3	)
Other investments		88		(8.3	)		—		—			88		(8.3	)

Total	$	5,927	$	(288.9	)	$	1,481	$	(245.9	)	$	7,408	$	(534.8	)

e)	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 reverse repurchase agreements. 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 LOCs and derivative transactions. Included in restricted assets at March 31, 2012 and December 31, 2011, are fixed maturities and short-term investments totaling $15.6 billion and $14.9 billion, respectively, and cash of $291 million and $179 million, respectively.

The following table presents the components of restricted assets:


	March 31 2012		December 31 2011
	(in millions of U.S. dollars)
Trust funds	$	10,605	$	9,940
Deposits with non-U.S. regulatory authorities		2,126		2,240
Deposits with U.S. regulatory authorities		1,293		1,307
Assets pledged under reverse repurchase agreements		1,401		1,251
Other pledged assets		451		364

	$	15,876	$	15,102