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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
 
x 
Annual Report Pursuant to Section 13 or 15(d) of	
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003
OR
¨ 
Transition Report Pursuant to Section 13 or 15(d) of	
the Securities Exchange Act of 1934
Commission File Number 1-11778

ACE Limited
(Exact name of registrant as specified in its charter)

Cayman Islands
(Jurisdiction of Incorporation)	  	98-0091805
(I.R.S. Employer Identification No.)	
 
ACE Global Headquarters
17 Woodbourne Avenue
Hamilton HM 08
Bermuda
(441) 295-5200
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 
Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	 	Name of Exchange on which Registered	
		
Ordinary Shares, par value $0.041666667 per share	 	New York Stock Exchange	
		
ACE Capital Trust I 8.875 percent Trust Originated
Preferred Securities mature 2029	 	New York Stock Exchange	
		
Capital Re LLC 7.65 percent Trust Preferred Securities
of Subsidiary Trust (and registrant’s guaranty with respect
thereto) mature 2044	 	New York Stock Exchange	
		
Depository Shares, each representing one-tenth of a share of 7.80 percent Cumulative Redeemable Preferred Shares, Series C (Liquidation Preference $25.00 per Depository Share)	 	New York Stock Exchange	
 
Securities registered pursuant to Section 12(g) of the Act: None

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 periods 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 registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No ¨ 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference into Part III of this form 10-K or any amendment to this form 10-K. þ 
 
As of March 8, 2004, there were 281,150,572 Ordinary Shares par value $0.041666667 of the registrant outstanding. The aggregate market value of voting stock held by non-affiliates as of June 30, 2003 was approximately $8.1 billion. For the purposes of this computation, shares held by directors and officers of the registrant have been excluded. Such exclusion is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant.

Documents Incorporated by Reference
Certain portions of registrant’s definitive proxy statement relating to its Annual General Meeting of Shareholders scheduled to be held on May 27, 2004, are incorporated by reference to Part III of this report.

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 ACE  LIMITED INDEX  TO  10-K

PART I	    	 	  	Page	
	
Item 1.	    	Business	  	2	
	
Item 2.	    	Properties	  	23	
	
Item 3.	    	Legal Proceedings	  	23	
	
Item 4.	    	Submission of Matters to a Vote of Security Holders	  	23	
			
PART II	    	 	  	 	
	
Item 5.	    	Market for the Registrant’s Ordinary Shares and Related Stockholder Matters	  	25	
	
Item 6.	    	Selected Financial Data	  	26	
	
Item 7.	    	Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	27	
	
Item 7A.	    	Quantitative and Qualitative Disclosures about Market Risk	  	64	
	
Item 8.	    	Financial Statements and Supplementary Data	  	65	
	
Item 9.	    	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	  	65	
	
Item 9A.	    	Controls and Procedures	  	65	
			
PART III	    	 	  	 	
	
Item 10.	    	Directors and Executive Officers of the Registrant	  	66	
	
Item 11.	    	Executive Compensation	  	66	
	
Item 12.	    	Security Ownership of Certain Beneficial Owners and Management	  	66	
	
Item 13.	    	Certain Relationships and Related Transactions	  	66	
	
Item 14.	    	Principal Accountant Fees and Services	  	66	
			
PART IV	    	 	  	 	
	
Item 15.	    	Exhibits, Financial Statement Schedules and Reports on Form 8-K	  	67	

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Cautionary Statement Regarding Forward-Looking Information
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 uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors (which are described in more detail elsewhere herein and in other documents we file with the Securities and Exchange Commission (SEC)) include but are not limited to:
 
• global political conditions, the occurrence of any terrorist attacks, including any nuclear, biological or chemical events, or the outbreak and effects of war, and possible business disruption or economic contraction that may result from such events;
• the ability to collect reinsurance recoverable, credit developments of reinsurers, and any delays with respect thereto;
• the occurrence of catastrophic events or other insured or reinsured events with a frequency or severity exceeding our estimates;
• actual loss experience from insured or reinsured events;
• 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, and the impact of bankruptcy protection sought by various asbestos producers and other related businesses;
• judicial decisions and rulings, new theories of liability, and legal tactics;
• 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 and errors and omissions insurance; and
• claims and litigation arising out of such disclosures or practices by other companies;
• the impact of the September 11 tragedy and its aftermath on our insureds, reinsureds, and on the insurance and reinsurance industry;
• uncertainties relating to governmental, legislative and regulatory policies, developments 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;
• actions that rating agencies may take from time to time, such as changes in our claims-paying, financial strength or credit ratings;
• developments in global financial markets, including changes in interest rates, stock markets and other financial markets, and foreign currency exchange rate fluctuations, which could affect our investment portfolio, financing plans, and planned public offering of our financial guaranty business;
• changing rates of inflation and other economic conditions;
• 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 technology to perform as anticipated; and
• management’s response to these factors.
 
The words “believe”, “anticipate”, “estimate”, “project”, “should”, “plan”, “expect”, “intend”, “hope”, “will likely result” or “will continue”, and variations thereof and similar expressions, identify forward-looking statements. Readers 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. 
 
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PART I

 ITEM 1. Business

General Development of Business
ACE Limited (ACE) is the Bermuda-based holding company of the ACE Group of Companies, incorporated with limited liability under the Cayman Islands Companies Law. We opened our business office in Bermuda in 1985 when we initially incorporated the Company and we continue to maintain our business office in Bermuda. Through our various operating subsidiaries, we provide a broad range of insurance and reinsurance products to insureds worldwide through operations in the U. S. and almost 50 other countries. At December 31, 2003, we had total assets of $49.5 billion and shareholders’ equity of $8.8 billion. We derive our revenue principally from premiums, fees and investment income.
Our long-term business strategy focuses on achieving underwriting profits and providing value to our clients and shareholders through the utilization of our substantial capital base in the insurance and reinsurance markets. As part of this strategy, we have made a number of acquisitions and have entered into strategic alliances that diversify our operations, both geographically and by product type. Each completed transaction filled a particular niche and added additional expertise and market access to the group. In addition, we continue to review, and adjust where appropriate, our portfolio of products. As a result, we have evolved from a highly specialized corporate insurer focusing on excess liability and directors and officers liability (D&O) to a widely diversified global insurance and reinsurance operation servicing clients in every major insurance market in the world.
We entered the property catastrophe reinsurance market in 1996 with the acquisition of Tempest Reinsurance Company Ltd. (ACE Tempest Re) and added to our existing market position when we acquired CAT Limited in 1998. We also entered the Lloyd’s market in 1996 which broadened our international exposure through Lloyd’s worldwide insurance licenses. In 1998, we added to our position in the Lloyd’s market through the acquisition of the Charman syndicates. Combined with our original acquisitions in 1996, we became, and remain, one of the largest capital providers in the Lloyd’s market. We entered the U.S. market in early 1998 with the acquisition of the Westchester group (ACE Westchester Specialty). This acquisition gave us insurance licenses in the U.S. for the first time. In 1999, we acquired the international and domestic property and casualty (P&C) businesses of CIGNA Corporation (ACE INA) which made us one of the few P&C insurers to operate on a truly global scale. In 1999, we also acquired Capital Re Corporation which added depth, expertise and new products to our financial reinsurance capabilities.
On March 8, 2004, Assured Guaranty Ltd. (Assured Guaranty), formerly AGC Holdings, filed an amendment to the registration statement filed on December 23, 2003 on Form S-1 for an initial public offering (IPO). Assured Guaranty is a wholly owned subsidiary of ACE Limited. Upon completion of the IPO, Assured Guaranty will be the holding company for the operating units now known as ACE Guaranty Corp. and ACE Capital Re International. We expect to retain as much as 25-35 percent of our interest in Assured Guaranty depending on market conditions. We believe this transaction will allow us to allocate more capital to our P&C business and further strengthen our balance sheet. Our website, under the “Investor Information” tab, has a link to the Form S-1 as filed with the SEC.
On March 11, 2004, we announced that the Board of Directors has elected Evan G. Greenberg, President of ACE Limited, to the additional position of Chief Executive Officer effective May 27, 2004. Brian Duperreault, who has been Chairman and Chief Executive Officer since 1994, will remain as Chairman of ACE Limited.

Employees
At December 31, 2003, we employed a total of 8,994 employees. Approximately 1,200 of our employees are represented by various collective bargaining agreements, all of which are outside the U.S., U.K. and Bermuda. We believe that employee relations are satisfactory.

Customers
For most of the commercial lines of business that we offer, insureds typically use the services of an insurance broker. An insurance broker acts as an agent for the insureds, offering advice on the types and amount of insurance to purchase and also assisting in the negotiation of price and terms and conditions. We obtain business from all of the major international insurance brokers and typically pay a commission to brokers for any business accepted and bound. In our opinion, no material part of our business is dependent upon a single customer or group of customers. We do not believe that the loss of any one customer would have a materially adverse effect on us and no one customer or group of affiliated customers accounts for as much as ten percent of our consolidated revenues.
 
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Competition
Competition in the domestic and international insurance and reinsurance marketplace is substantial. Competition varies by type of business and geographic area. We compete for business not only on the basis of price, but also on the basis of availability of coverage desired by customers and quality of service. Our ability to compete is dependent on a number of factors, particularly our ability to maintain the appropriate financial strength ratings as assigned by independent rating agencies. Our strong capital position and global platform affords us opportunities for growth not available to smaller insurance companies. While most of the sectors in which we operate have experienced significant improvement in both price and coverage terms over the past two years, competition continues to be considerable, partly because new capital has been invested in the industry to meet capacity shortages in certain lines of business. Competitive information by segment is included in each of the segment discussions.

Trademarks and Trade Names
We use various trademarks and trade names in our business. These trademarks and trade names protect names of certain of the products and services we offer and are important to the extent they provide goodwill and name recognition in the insurance industry. We use commercially reasonable efforts to protect these proprietary rights, including trade secret and trademark laws. One or more of the trademarks and trade names could be material to our ability to sell our products and services. We have taken appropriate steps to protect our ownership of key names and we believe it is unlikely that anyone would be able to prevent us from using names in places or circumstances material to our operations.

Web Site Information
We make available free of charge through our internet site (acelimited.com, under Investor Information / Financial Reports) our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Exchange Act (15 U.S.C. 78m (a) or 78o(d)) as soon as reasonably practicable after we file such material with, or furnish it to, the SEC.
We also make available free of charge through our internet site (under Investor Information / Corporate Governance) links to our Corporate Governance Guidelines, our Code of Conduct and Charters for our Board Committees. These documents are also available in print to any shareholder who requests them from our Investor Relations Department by:
telephone (441) 299-9283
facsimile (441) 292-8675
e-mail investorrelations@ace.bm

Segment Information
We operate through four business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance and Financial Services. These business segments were determined under the Statement of Financial Accounting Standard (FAS) No. 131, “Disclosures about Segments of an Enterprise and Related Information” (FAS 131).
The following table sets forth an analysis of gross premiums written by segment for the years ended December 31, 2003, 2002 and 2001. Additional financial information about our segments, including revenues by geographic area, is included in Note 17 of the Consolidated Financial Statements.

 	 	 	
 	 		
Years ended December 31
(in millions of U.S. dollars)	 	2003
Gross Premiums
Written	 	Percentage
Change	 	 	2002
Gross Premiums
Written	 	Percentage
Change	 	 	2001
Gross Premiums
Written	
 	 		
Insurance – North American	 	$	6,895	 	13	%	 	6,116	 	35	%	 	$	4,521	
Insurance – Overseas General	 	 	5,191	 	26	 	 	4,114	 	25	 	 	 	3,289	
Global Reinsurance – P&C	 	 	1,312	 	48	 	 	887	 	93	 	 	 	460	
Global Reinsurance – Life	 	 	193	 	17	 	 	165	 	(60	)	 	 	414	
Financial Services	 	 	1,046	 	(32	)	 	1,537	 	4	 	 	 	1,481	
	
 	 	$	14,637	 	14	%	 	12,819	 	26	%	 	 	10,165	

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Insurance – North American
 
Background
Insurance – North American segment includes the operations of ACE USA, ACE Canada and ACE Bermuda, excluding the financial solutions business in both the U.S. and Bermuda, which are included in the Financial Services segment.
ACE USA comprises the U.S. and Canadian operations of ACE INA, which were acquired in 1999, and the operations of ACE Westchester, which were acquired in 1998. ACE USA operates through several insurance companies using a network of offices throughout the U.S. and Canada. These operations provide a broad range of P&C insurance and reinsurance products to a diverse group of commercial and non-commercial enterprises and consumers. These products include excess liability, excess property, workers’ compensation, general liability, automobile liability, professional lines, aerospace, accident and health (A&H) coverages and claim and risk management products and services. The operations of ACE USA also include run-off operations, which are discussed below.
Following our acquisition of ACE USA, we made substantial structural and operational changes to enhance profitability and operating controls. These changes included restructuring the operating divisions of ACE USA from three large groups to the niche product business groups discussed below. These restructuring changes were made to enhance ACE USA’s ability to focus on profitable underwriting and to better cross-market products between our U.S. operating groups and our other segments. ACE USA also consolidated locations and closed offices throughout the U.S., outsourced the information technology function, and reduced staff by approximately 2,000 people. Over the past four years, these cost reduction efforts have had a positive impact on our combined ratio.
ACE USA focuses on higher profit potential business in order to achieve its long-term goal of producing an underwriting profit. As a result, ACE USA continually evaluates its lines of business and adjusts its portfolio of products where appropriate. Since 1999 ACE USA has diversified into several new areas, or increased emphasis in areas, and exited contracts and lines of business that did not have a long-term strategic fit. For example, in 1999, the renewal rights to the Commercial Insurance Services (CIS) business were sold and this line of business was placed into run-off, and in 2000, certain unprofitable and non-strategic businesses were culled, which resulted in a reduction of gross premiums written of approximately $160 million. ACE USA’s efforts continued with the sale of the Financial Institution Specialists Division in 2001, and de-emphasized heavily reinsured group casualty program business in late 2002. Our focus on profitable business, together with a commitment to promote cost reduction efforts, has enabled ACE USA to produce an underwriting profit in two of the last four years (the exceptions being 2001 which was impacted by the September 11 tragedy and 2002 which was impacted by our A&E reserve strengthening). The cost-savings initiatives, combined with our focus on higher profit potential business, have left ACE USA well positioned to grow in the current, improved insurance market.
ACE USA’s run-off operations include Brandywine Holdings Corporation (Brandywine), CIS, residual market workers’ compensation business, pools and syndicates not attributable to a single business group, the run-off of open market facilities and the run-off results of various other smaller exited lines of business. Run-off operations do not actively sell insurance products, but are responsible for the management of existing policies and related claims.
The Brandywine run-off operation was created in 1995 (prior to our acquisition of ACE INA) by the restructuring of INA’s U.S. operations into two separate operations, ongoing and run-off. Although there are some asbestos claims in ACE Westchester Specialty, Brandywine contains substantially all of ACE INA’s asbestos and environmental pollution (A&E) exposures, as well as various run-off insurance and reinsurance businesses.
ACE Bermuda provides commercial insurance products to a global client base, covering risks that are generally low in frequency and high in severity. Generally, this operation retains significant insurance risk on the contracts that it writes (up to $90 million per risk after reinsurance).
 
Products and Distribution
ACE USA primarily distributes its insurance products through a limited group of retail and wholesale brokers with whom it has forged long-term relationships. In addition to using brokers, certain ACE USA products are also distributed through channels such as general agents, independent agents, wholesale brokers, managing general agents, managing general underwriters and direct marketing operations. ACE USA has also established internet distribution channels for some of its products, primarily at ACE Select Markets and ACE Casualty Risk.
 
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ACE USA’s on-going operations are organized into distinct business groups, each offering specialized products and services targeted at specific niche markets.
• ACE Westchester Specialty specializes in the wholesale distribution of excess and surplus lines property, inland marine and casualty coverages and products. ACE Westchester Specialty also provides coverage for agriculture businesses and specialty programs through its Program Division.
• ACE Risk Management (ARM) offers custom coverage solutions for large companies and national accounts. These programs are designed to help large insureds effectively handle the significant costs of financing risk. Products offered include workers’ compensation, general liability and auto liability coverage and stand-alone excess workers’ compensation catastrophe protection. ARM does not discount its reserve for workers’ compensation. ARM also offers wrap-up programs, which protect contractors and project sponsors with multi-risk coverage on large single- and multi-location construction projects, and custom casualty programs, which offer liability coverage to commercial customers characterized as having challenging exposures.
• ACE Diversified Risk (Diversified Risk) offers management and professional liability products and commercial surety coverage through a variety of distribution channels, including brokers, agents and direct marketing. In 2002, Diversified Risk recognized opportunities within certain segments of the medical liability market and began offering specialized risk coverage for medical professionals. Within Diversified Risk, the aerospace division provides satellite and specialized aviation and airport coverage. Reported within the Diversified Risk group are ACE USA’s Canadian operations which offer a broad range of P&C products as well as Life and A&H coverages. The Canadian operations specialize in providing customized P&C and A&H products to commercial and industrial clients as well as to groups and associations, operating nationally or internationally.
• ACE U.S. International (formerly referred to as Specialty P&C) provides worldwide risk protection by offering P&C coverages for U.S.-based multi-national companies. The group also serves the commercial marine market and provides engineering risk control services and specific risk protection for the power generation industry.
• ACE Accident & Health, which was formed in 2001, works with employers, travel agencies and affinity organizations to offer a variety of personal accident, health and travel insurance coverage to employees, customers and group members.
• ACE Select Markets (formerly referred to as Consumer Solutions), formed in 2001, provides specialty personal lines products, including coverage for recreational marine, recreational vehicles, collector automobiles, motorcycles, credit card enhancement programs and disaster mortgage protection. ACE Select Markets distributes its products through large specialty agents, alliances and affinity groups, utilizing internet technology.
• ACE Casualty Risk offers a variety of commercial casualty products. This group was established in 2002 after we determined that there was a shortage of casualty market capacity for customers outside of the Fortune 1000 size category. This operation provides up to $25 million in catastrophic coverage, both on a lead umbrella and an excess layer basis. Small businesses can purchase workers’ compensation coverage through ACE Casualty Risk’s internet-based ACE Comp lete sm product. ACE Casualty Risk also provides a range of environmental liability insurance products for commercial and industrial risks.
• ESIS Inc. (ESIS), ACE USA’s in-house, third party claims administrator, provides clients with claim management and loss-cost reduction services, including comprehensive medical managed care, integrated disability services and pre-loss control and risk management services. ESIS is a nationally recognized leader in the third party claims management field. Additional insurance-related services are offered by Recovery Services International, which sells salvage and subrogation and health care recovery services.
The principal lines of business for ACE Bermuda are excess liability, professional lines, excess property and political risk—the latter being written on a subscription basis by Sovereign Risk, a managing agent in which ACE Bermuda has a 50 percent interest. All policy applications (both for renewals and new policies) to ACE Bermuda are subject to underwriting and acceptance by underwriters in its Bermuda office. A substantial number of policyholders meet with ACE Bermuda outside of the U.S. each year to discuss their insurance coverage. ACE Bermuda accesses its clients primarily through the Bermuda offices of major, internationally recognized insurance brokers located outside of the U.S. and believes that conducting its operations through its offices in Bermuda has not materially or adversely affected its underwriting and marketing activities to date.
 
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Underwriting
Operating in a market in which capacity and price adequacy for products can change dramatically, ACE USA’s underwriting strategy is to employ consistent, disciplined pricing and risk selection in order to maintain a profitable book of business. ACE USA’s priority is to ensure that its underwriting professionals closely adhere to criteria for risk selection by maintaining high levels of experience and expertise in its underwriting staff. In addition, ACE USA has established a business review structure that ensures control of risk quality and conservative use of policy limits, terms and conditions. ACE USA also employs sophisticated catastrophe loss and risk modeling techniques to ensure that risks are well distributed and that loss potentials are contained within its financial capacity. In this regard, ACE USA also purchases reinsurance, which provides the means for greater diversification of risk and serves to further limit the net loss potential of catastrophes and large or unusually hazardous risks. Due to the dramatically improved market conditions during the past two years, ACE USA has consciously been retaining a greater proportion of the business that it writes. As a result, the percentage of net written premiums to gross written premiums (retention rate) has increased to 56 percent in 2003, compared with 46 percent for 2002.
Reinsurers utilized by ACE USA must meet certain financial and experience requirements and are subjected to a stringent financial review process in order to be pre-approved by our Reinsurance Security Committee, comprising senior management personnel. As a result of these controls, reinsurance is placed with a select group of only the most financially secure and experienced companies in the reinsurance industry.
ACE USA has the ability to write business on an admitted basis using forms and rates as filed with state insurance regulators and on a non-admitted, or surplus lines basis, using flexible forms and rates not filed with state insurance regulators. Having access to non-admitted carriers provides the pricing flexibility needed to write non-standard coverage.
An integral part of the ACE USA operating strategy is to maximize the efficiency and effectiveness of its operations while reducing operating costs. As part of this strategy, ACE USA continues to invest in technology. Numerous existing policy issuance and claims systems have already been replaced or will be replaced with an integrated product currently being utilized by other ACE operating units. This action will further facilitate the streamlining of ACE USA’s underwriting and claims-processing operations.
ACE Bermuda emphasizes quality of underwriting rather than volume of business to obtain a suitable spread of risk. This enables it to operate with a relatively small number of employees and, together with the reduced costs of operating in a favorable regulatory environment, results in a favorable administrative expense ratio relative to other companies in its industry.
 
Competitive Environment
ACE USA operates in what has historically been a highly competitive industry and has faced competition from both domestic and foreign insurers. Since late 2001, there has been a noticeable reduction in capacity in many of the niche markets in which ACE USA participates. The September 11 tragedy and the concentration of associated losses in the reinsurance industry have significantly reduced capacity. In addition, several insurers and reinsurers have withdrawn capacity due to inadequate financial strength and/or poor operating performance, which in many cases has resulted in rating agency downgrades to levels below those necessary to sustain a competitive standing in the market.
The resultant decline in capacity has directly impacted many of the markets where customer demand is now quite strong, for example, excess liability, including workers’ compensation, professional liability and medical malpractice markets. High-profile corporate failures as well as allegations of public company management impropriety have greatly increased demand for management and professional risk coverage, including errors and omissions (E&O), D&O, and surety coverage. All of these factors have led to increases in premium levels, some substantial, in most of ACE USA’s lines of business. Despite a recent leveling off of premium rate increases for property exposures, rates in these lines have generally reached levels that are expected to produce reasonable risk-adjusted returns. Casualty lines require continued higher pricing in order to sustain profitable levels above loss cost trends. As a result of the continued rate adequacy in P&C lines during 2003, ACE USA’s premiums rose in 2003, with casualty lines representing a greater proportion of total premium writings. Based on current information, we do not anticipate an end to the current favorable market conditions in the near term.
Traditionally, the markets in which ACE USA competes are subject to significant cycles of fluctuating capacity and wide disparities in price adequacy. Although ACE USA currently enjoys exceptionally strong demand for its products, it continues to strive to offer superior service, which we believe has differentiated ACE USA from its competitors. The ACE USA operations pursue a specialist strategy and focus on market opportunities where it can compete effectively based on service levels and product design, while still achieving an
 
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adequate level of profitability. ACE USA offers experienced claims-handling, loss control and risk management staff with proven expertise in specialty fields, including large-risk P&C, recreational and ocean marine, aviation, professional risk and workers’ compensation. A competitive advantage is also achieved through ACE USA’s innovative product offerings, such as ARM bundled business, which combines tailored coverage solutions for large insureds with expert claims management and loss reduction functions provided by ESIS. An additional competitive strength of all the domestic commercial units is the ability to deliver global products and coverages to customers in concert with our other segments. A significant source of ACE USA’s growth has resulted from the leveraging of cross-marketing opportunities with our other operations to take advantage of our organization’s global presence.
ACE Bermuda maintains its competitive edge through the continued development of its policy forms and the levels of risk retained, which requires less reliance on reinsurance markets. Its competitors tend to be large international and national multi-line insurance companies, which vary by line of business.
 
Insurance – Overseas General
 
Background
The Insurance – Overseas General segment consists of ACE International, which comprises our network of indigenous insurance operations, and the insurance operations of ACE Global Markets. This segment has four regions of operations: ACE Asia Pacific, ACE Far East, ACE Latin America and the ACE European Group (which comprises ACE Europe and ACE Global Markets). The Insurance – Overseas General segment writes a variety of insurance products including property, casualty, professional lines (D&O and E&O), marine, energy, aviation, political risk, consumer-oriented products and A&H – principally being supplemental accident.
ACE International’s global franchise was created in 1984 through the merger of the Insurance Company of North America, which started its international operations over 100 years ago, and the American Foreign Insurance Association. ACE International provides insurance coverage on a worldwide basis.
ACE Global Markets comprises our insurance operations within ACE INA UK Limited and at Lloyd’s via Syndicate 2488. ACE provides funds at Lloyd’s to support underwriting by Syndicate 2488 – the only Moody’s AA rated syndicate at Lloyd’s. Syndicate 2488 is managed by ACE Underwriting Agencies Limited and was one of the largest syndicates trading at Lloyd’s for the 2003 year, with an underwriting capacity of £725 million (approximately $1.2 billion), which represented approximately five percent of total Lloyd’s capacity for 2003. In 2002, we acquired all of the remaining Syndicate 2488 capacity not already owned by us for the 2003 year, moving our ownership level from 99.6 percent in 2002 to 100 percent in 2003. The run-off of Syndicate 1171, a life syndicate acquired as part of the Capital Re acquisition, is managed by Ridge Underwriting Agencies Limited. Syndicate 1171 ceased underwriting as of December 31, 2000.
In late 2002, we received approval from the Financial Services Authority (FSA-U.K.), the U.K. insurance regulator, to use ACE INA UK, as our London-based, FSA-U.K. regulated company to underwrite U.K. and Continental Europe insurance and reinsurance business. ACE INA UK will become the ACE European Group’s primary London-based U.S. excess and surplus lines carrier in 2004 and will provide a greater product diversification and distribution network. ACE INA UK is eligible to underwrite E&S business in 33 U.S. states and a greater proportion of ACE Global Markets’ business is expected to be written through ACE INA UK. As a result, Syndicate 2488’s capacity will be reduced to £550 million for the 2004-underwriting year, however the syndicate will continue to retain a diverse book of business, with an emphasis on specialty lines most suited to Lloyd’s.
 
Products and Distribution
ACE International maintains a sales or operational presence in every major insurance market in the world. Its P&C business is generally written, on both a direct and assumed basis, through major international, regional and local brokers. A&H and other consumer lines products are distributed through brokers, agents, direct marketing programs and sponsor relationships.
ACE International’s P&C operations are organized geographically along product lines that provide dedicated underwriting focus to customers. Its international organization offers capacity and technical expertise in underwriting and servicing clients from large and complex risks to general market customer segments as well as individual coverages in selected markets. Property insurance products include traditional commercial fire coverage as well as energy industry-related and other technical coverages. Principal casualty products are commercial general liability and liability coverage for multi-national organizations. Through its professional lines, ACE Inter
 
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national provides D&O and professional indemnity coverages for medium to large clients. Marine cargo and hull coverages are written in the London market as well as in marine markets throughout the world. The A&H insurance operations provide products that are designed to meet the insurance needs of individuals and groups outside of U.S. insurance markets. These products include accidental death, medical, and hospital indemnity and income protection coverages. ACE International’s consumer products division provides specialty products and services designed to meet the needs of specific target markets and include warranty, auto, homeowners, personal liability and recreational marine.
Following is a discussion on ACE International’s four regional teams: ACE European Group, ACE Asia Pacific, ACE Far East and ACE Latin America.
• ACE European Group is headquartered in London and offers a broad range of P&C and specialty coverages principally directed at large and mid-sized corporations, as well as individual consumers. ACE European Group operates in every major market in the European Union. Commercial products are principally distributed through brokers while consumer products (mainly A&H) are distributed through brokers as well as through direct marketing programs.
• ACE Asia Pacific is headquartered in Singapore and serves Australia, Hong Kong, India, Indonesia, Korea, Malaysia, New Zealand, The Philippines, Singapore, Taiwan, Thailand and Vietnam. ACE Asia Pacific offers a broad range of P&C and specialty coverages principally directed at large and mid-sized corporations as well as individual consumers.
• ACE Far East is headquartered in Tokyo and offers a broad range of P&C and A&H insurance products and services to businesses and consumers, principally delivered through an extensive agency network.
• ACE Latin America is headquartered in Miami and serves Argentina, Brazil, Chile, Colombia, Ecuador, Mexico and Puerto Rico. ACE Latin America focuses on providing P&C and A&H insurance products and services to both large and small commercial clients as well as individual consumers. ACE Latin America distributes its products through brokers (for its commercial business) and direct marketing and sponsored programs (for its consumer business).
ACE Global Markets primarily underwrites P&C insurance through Lloyd’s Syndicate 2488 and ACE INA UK. All business underwritten by ACE Global Markets is accessed through registered brokers. The main lines of business include aviation, property, energy, professional lines, marine, political risk and A&H. A number of smaller niche business lines, such as bloodstock, were discontinued in 2002. During 2002, the reinsurance business written through ACE Global Markets was branded as ACE Tempest Re Europe and is discussed within the Global Reinsurance segment. With effect from January 1, 2002, all business written via ACE Global Market’s service company, ACE Underwriting Services Limited, was transferred to ACE Europe. In addition, a number of accounts (particularly A&H risks) previously written within Syndicate 2488’s portfolio, but better suited to distribution by a company underwriting platform, were migrated to ACE Europe. ACE Global Markets is an established lead underwriter on a significant portion of the risks underwritten, particularly within the aviation and marine lines of business, and hence is able to set the policy terms and conditions of many of the policies written.
ACE Global Markets transacts business throughout the year; however, a significant proportion of the portfolio incepts at January 1. Some lines of business have distinct renewal periods, for example the airline book, which tends to renew during the fourth quarter of each year, and aviation products and airports accounts, which tend to renew April 1. ACE Global Markets also writes a number of delegated binding authorities, largely within the property book and, to a lesser extent, in the professional lines arena.
 
Underwriting
Insurance – Overseas General’s operations are diversified by line of business and the geographic spread of risk. A global approach to risk management allows each local operation to underwrite and accept large insurance accounts. A global approach such as this requires substantial control over each process to ensure best practices and standards are maintained around the world. To do this, the regions are managed as one integrated team.
Clearly defined underwriting authorities, standards, and guidelines are in place in each of the local operations. Global profit centers and product boards ensure consistency of approach and the establishment of best practices throughout the world. A formal underwriting review process is in place to periodically test compliance against standards and guidelines. Experienced underwriting teams maintain underwriting discipline through the use of pricing models, sophisticated catastrophe and risk management methodologies and strict risk selection criteria. Qualified actuaries in each region work closely with the underwriting teams to provide additional expertise in the underwriting process. Centrally-coordinated reinsurance management facilitates appropriate risk transfer and efficient cost-effective use
 
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of external reinsurance markets. Reinsurers utilized by Insurance – Overseas General must meet certain financial and experience requirements and are put through a stringent financial review process in order to be pre-approved by our Reinsurance Security Committee, comprising senior management personnel. As a result of these controls, reinsurance is placed with a select group of only the most financially secure and experienced companies in the reinsurance industry. Insurance – Overseas General’s global claims management team ensures there is a consistent approach to reserving practices and the settlement of claims. The oversight process includes regular operational claims reviews throughout the world to ensure adherence to established guidelines.
In addition to these internal controls and peer reviews, all of the operating units and functional areas are subject to review by the corporate audit team that regularly carries out operational audits.
 
Competitive Environment
ACE International’s primary competitors include U.S.-based companies with global operations, as well as other, non-U.S. global carriers and indigenous companies in regional and local markets. For the A&H lines of business, locally-based competitors include financial institutions and bank-owned insurance subsidiaries.
Our international operations have the distinct advantage of being one of a few international insurance groups with a global network of licensed companies able to write policies on a locally admitted basis. The principal competitive factors that affect the international operations are underwriting expertise and pricing, relative operating efficiency, product differentiation, producer relations and the quality of policyholder services. A competitive strength of our international operations is our global network and breadth of insurance programs, which assist individuals and business organizations to meet their risk management objectives. Insurance operations in nearly 50 countries also represent a competitive advantage in terms of depth of local technical expertise, accomplishing a spread of risk and offering a global network to service multi-national accounts.
ACE Global Markets holds a position of significant influence in the London market. Not withstanding the significant improvement in market conditions during 2002 and 2003, all lines of business face competition, depending on the business class, from Lloyd’s syndicates, the Institute of London Underwriters companies and other major international insurers and reinsurers. Competition for international risks is also seen from domestic insurers in the country of origin of the insured.
 
Global Reinsurance – Property and Casualty
 
Background
The Global Reinsurance P&C segment comprises ACE Tempest Re Bermuda, ACE Tempest Re USA, and ACE Tempest Re Europe. ACE Tempest Life Re (ACE Life Re), our Bermuda-based life reinsurance operation is discussed separately. The Global Reinsurance P&C segment markets its reinsurance products worldwide under the ACE Tempest Re brand name and provides a broad range of coverages to a diverse range of primary P&C companies.
ACE Tempest Re Bermuda principally provides property catastrophe reinsurance globally to insurers of commercial and personal property. Property catastrophe reinsurance on an occurrence basis protects a ceding company against an accumulation of losses covered by its issued insurance policies, arising from a common event or occurrence. ACE Tempest Re Bermuda underwrites reinsurance principally on an excess of loss basis, meaning that its exposure only arises after the ceding company’s accumulated losses have exceeded the attachment point of the reinsurance policy. ACE Tempest Re Bermuda also writes other types of reinsurance on a limited basis for selected clients. Examples include proportional property (reinsurer shares a proportional part of the premiums and losses of the ceding company) and per risk excess of loss treaty reinsurance (coverage applies on a per risk basis rather than per event or aggregate basis), together with specialty lines (catastrophe workers’ compensation and terrorism).
In 2000, ACE Tempest Re initiated plans aimed at building a leading global multi-line reinsurance business within ACE. This expansion has reduced volatility by diversifying ACE Tempest Re’s business to offer a comprehensive range of products to satisfy client demand. For the year ended December 31, 2003, approximately 40 percent of net premiums written came from the property catastrophe business and the remainder from traditional non-property catastrophe lines. This compares to an approximately 50 percent split in 2002. We consider an expanded product offering vital to competing effectively in the reinsurance market, but not at the expense of profitability.
 
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ACE Tempest Re USA, located in Stamford, Connecticut, was established in 2000 as a wholly-owned subsidiary of ACE INA and acts as an underwriting agency on behalf of three of our U.S. companies. The focus of ACE Tempest Re USA has been on writing property per risk and casualty reinsurance, including marine and surety, principally on a treaty basis, with a weighting toward casualty. After the successful launch of ACE Tempest Re USA, ACE Tempest Re Europe was established in 2002, with locations in London and Dublin. The new operation writes all lines of traditional and non-traditional property, casualty, marine, aviation, and medical malpractice but is oriented to specialty and short-tail products. ACE Tempest Re Europe offers clients coverage through our Lloyd’s Syndicate 2488 and ACE INA UK in London, as well as coverage through ACE European Markets Reinsurance Limited in Dublin.
 
Products and Distribution
The Global Reinsurance segment services clients globally through its three major units: ACE Tempest Re Bermuda, ACE Tempest Re USA and ACE Tempest Re Europe. Through these three operations, we are able to provide a complete portfolio of products on a global basis to clients using the access point of their choice. Major international brokers submit business to one or more of these units’ underwriting teams who have built strong relationships with both key brokers and clients by explaining their approach and demonstrating consistently open, responsive and dependable service.
ACE Tempest Re Bermuda offers catastrophe reinsurance products on a global basis through reinsurance intermediaries. ACE Tempest Re USA writes all lines of traditional and non-traditional P&C business for the North American market. This unit underwrites a diversified treaty reinsurance portfolio produced through reinsurance intermediaries. Through ACE Tempest Re Europe, the Global Reinsurance segment provides treaty reinsurance of P&C business of insurance companies worldwide, with emphasis on non-U.S. and London market risks. The London-based division of ACE Tempest Re Europe focuses on the development of business sourced through London market brokers and consequently writes a diverse book of international business. The Dublin-based division, established late in 2002, focuses on providing reinsurance to continental European insurers via continental European brokers. ACE Tempest Re Europe’s underwriting capabilities include property treaty, casualty treaty and specialty.
 
Underwriting
Global Reinsurance underwrites through its offices in Bermuda, the U.S. (Stamford, Connecticut) and Europe (London and Dublin). We believe by operating through a small number of offices, underwriting expertise is centralized in a few locations which allows us to provide consistent service while providing additional control over the underwriting process. Global Reinsurance is a disciplined underwriter and has built an underwriting environment, involving both underwriters and actuaries, to provide the necessary controls over the underwriting process. In addition to substantial management oversight, these controls include regular underwriting audits (by peer groups), actuarial pricing and reserve support, catastrophe exposure management (using sophisticated modeling software) and regular reviews by our corporate internal audit department. Global Reinsurance also establishes zonal and peril accumulation limits to avoid concentrations of risk from natural perils.
Rates, policy limits, retentions and other reinsurance terms and conditions are generally established in a worldwide competitive market that evaluates exposure and balances demand for property catastrophe coverage against the available supply. ACE Tempest Re is considered a lead reinsurer and is typically involved in the negotiation and quotation of the terms and conditions of the majority of the contracts in which it participates. Deals are structured and priced by teams of underwriters and actuaries using a comprehensive suite of experience and exposure-based actuarial models. This process is designed to ensure that full consideration is given to a complete understanding of the underlying risk profile of the product and that the terms and conditions are appropriate. Each deal is peer-reviewed and approved by other underwriters and actuaries.
Because ACE Tempest Re Bermuda underwrites property catastrophe reinsurance and has large aggregate exposures to natural and man-made disasters, its claims experience generally will involve infrequent events of considerable severity. ACE Tempest Re Bermuda seeks to diversify its property catastrophe reinsurance portfolio to moderate the impact of this severity. The principal means of diversification are by geographic coverage and by varying attachment points and imposing coverage limits per program. Furthermore, ACE Tempest Re Bermuda applies an underwriting process for property catastrophe risks based on models that use exposure data submitted by prospective reinsureds in accordance with requirements set by its underwriters. The data is analyzed using a suite of catastrophe analysis tools, including externally developed event based models licensed from credible vendors as well as proprietary models developed in-house. The output from these catastrophe analysis tools is fed into ACE Tempest Re’s proprietary risk management
 
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platform (Heuron), enabling it to extensively simulate possible combinations of events affecting the portfolio and price coverages accordingly. Heuron measures the accumulation of exposures and assigns risk-based capital to each new risk that is being underwritten. The amount of risk-based capital required to support the new risk will vary according to the contribution that the new risk makes to existing portfolio accumulations. This unique analytical approach requires exposure data from each cedant within the portfolio. Heuron also provides decision support analysis for capital management, including the purchase of retrocessional coverages.
 
Competitive Environment
The Global Reinsurance segment competes worldwide with major U.S. and non-U.S. reinsurers as well as reinsurance departments of numerous multi-line insurance organizations. Global Reinsurance competes effectively in P&C markets worldwide because of its strong capital position, the quality of service provided to customers, the leading role it plays in setting the terms, pricing and conditions in negotiating contracts, and its customized approach to risk selection. While consolidation and closures have reduced its number of competitors, there is still meaningful competition in the marketplace.
 
Global Reinsurance – Life Reinsurance
 
Background
ACE Life Re was formed in 2001 as a niche player in the life reinsurance market. ACE Life Re’s strategic focus is to differentiate itself in its targeted business, which is principally to provide reinsurance coverage to other life insurance companies focusing on guarantees included in certain annuity products (fixed and variable). ACE Life Re does not compete on a traditional basis for pure mortality business. The reinsurance transactions entered into typically help clients (ceding companies) to manage mortality, morbidity, and/or lapse risks embedded in their book of business.
 
Products and Distribution
ACE Life Re markets its products directly to clients as well as through reinsurance intermediaries. The marketing plan seeks to capitalize on the relationships developed by our executive officers and underwriters with members of the actuarial profession and executives at client companies. ACE Life Re targets potential ceding insurers that it believes would benefit from its reinsurance products based on analysis of publicly available information and other industry data. In addition, reinsurance transactions are often placed by reinsurance intermediaries and consultants. ACE Life Re works with such third party marketers in an effort to maintain a high degree of visibility in the reinsurance marketplace.
ACE Life Re’s strategy and business does not depend on a single client or a few clients. To date, reinsurance agreements have been entered into with over 20 clients. However, like most start-up operations, a single large transaction can account for a significant percentage of total revenue. We anticipate that as business continues to grow, ACE Life Re will have a reasonably diversified source of revenue by number of clients and by lines of business.
 
Underwriting
ACE Life Re underwrites transactions on a qualitative and quantitative basis. The underwriters in this unit are individuals with specialized experience and expertise in the specific products we write. Underwriting guidelines have been developed with the objective of controlling the risks of the reinsurance policies written as well as to determine appropriate pricing levels. The guidelines are amended from time to time in response to changing industry conditions, market developments, changes in technology and other factors.
In implementing the underwriting guidelines, an experienced underwriting team is utilized to select opportunities with acceptable risk/return profiles. Reinsurance business is assumed only after considering many factors, including the type of risks to be covered, actuarial evaluations, historical performance data for the client and the industry as a whole, the client’s retention, the product to be reinsured, pricing assumptions, underwriting standards, reputation and financial strength of the client, the likelihood of establishing a long term relationship with the client, and the market share of the client. Pricing of reinsurance products is based on ACE Life Re’s sophisticated actuarial and investment models which incorporate a number of factors. These factors include assumptions for mortality, morbidity, expenses, demographics, persistency and investment returns, as well as certain macroeconomic factors such as inflation, taxation and certain regulatory factors such as surplus requirements.
 
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Competitive Environment
The life reinsurance industry is highly competitive. Most of the reinsurance companies are well established, have significant operating histories, strong claims-paying ability ratings, and long-standing client relationships through existing treaties with ceding companies. ACE Life Re competes effectively by leveraging the strength of its client relationships, underwriting expertise and capacity, and our brand name and capital position.
 
Financial Services
 
Background
The Financial Services segment includes the financial guaranty business of ACE Guaranty Corp. and ACE Capital Re International and the financial solutions business in the U.S. and Bermuda.
In December 1999, we diversified our product offering by acquiring ACE Guaranty Corp. and ACE Capital Re International through the acquisition of Capital Re Corporation. This transaction added depth and expertise to our financial reinsurance capabilities and represented a strategic complement to our portfolio by establishing us as a key financial guaranty reinsurer. The financial guaranty business provides credit enhancement products to the municipal finance, structured finance, credit derivatives and mortgage markets. We apply our credit expertise, risk management skills and capital markets experience to develop products that meet the needs of our customers.
On March 8, 2004, Assured Guaranty, formerly AGC Holdings, filed an amendment to the registration statement filed with the SEC on December 23, 2003 on Form S-1 for an initial public offering (IPO). Assured Guaranty is a wholly owned subsidiary of ACE Limited. Upon completion of the IPO, Assured Guaranty will be the holding company for the operating units now known as ACE Guaranty Corp. and ACE Capital Re International. ACE expects to retain as much as 25-35 percent of its interest in Assured Guaranty depending on market conditions. Assured Guaranty was incorporated in Bermuda in August 2003 for the sole purpose of becoming a holding company for ACE’s subsidiaries conducting its financial and mortgage guaranty businesses. We are considering strategic alternatives with respect to other lines of business written by the insurance and reinsurance subsidiaries of Assured Guaranty.
The financial solutions business is the other broad category of the Financial Services segment. This business is primarily conducted through ACE Financial Solutions (AFS) and ACE Financial Solutions International (AFSI). AFS was established in April 2000 as an operating division of ACE USA, with employees based in Philadelphia, PA, and New York, NY. AFS consists of three lines of business: securitization and risk trading (SRT), finite and structured risk products (FSRP), and retroactive contracts in the form of loss portfolio transfers (LPTs). The structured life and A&H lines of business were discontinued in December 2002. AFSI started in 1995 as a line of business within ACE Bermuda. Based in Bermuda, AFSI offers FSRPs and LPTs.
 
Products and Distribution
The financial guaranty operation insures and reinsures investment grade financial guaranty exposures, including credit default swap transactions. In addition to financial guaranty our product line includes mortgage guaranty reinsurance, title reinsurance and trade credit insurance.
• Financial guaranty insurance is a type of credit enhancement, similar to a surety, which is regulated under the insurance laws of various jurisdictions. Financial guaranty insurance provides an unconditional and irrevocable guaranty that protects the holder of a financial obligation against non-payment of principal and interest when due. Financial guaranty reinsurance indemnifies another financial guarantor, the ceding company, against part or all the loss the ceding company may sustain.
• Mortgage guaranty insurance protects mortgage lenders against the default of borrowers on mortgage loans. Mortgage guaranty reinsurance indemnifies the mortgage guaranty insurer, the ceding company, against part or all of the loss the ceding company may sustain.
• Title insurance essentially provides the acquirer or the mortgagee of real property with two forms of coverage. The first assures that the search and examination of the real estate records, upon which the acquirer or mortgagee is relying for good and clean title, was properly performed. The second form of coverage assures that all previously existing mortgages and liens will be paid off from the proceeds of the sale or refinancing of the property.
• Trade credit insurance protects the sellers of goods and services from the risk of non-payment of trade receivables in the event a buyer becomes insolvent or other external factors affect payment from the buyer and is a large, well-established specialty insurance
 
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product, particularly in Western Europe. Trade credit policyholders are typically covered for short-term exposures (generally less than 180 days and averaging 60-90 days) for insolvency or payment defaults by domestic and/or foreign buyers.
Over the past 15 years the financial guaranty companies have established strong relationships with key participants in their markets. Relationships are maintained with major U.S. primary financial guaranty insurers, investment banks, mortgage guaranty insurers, title insurers and major European trade credit insurers. Additionally, a portion of the financial guaranty operation’s business is developed through relationships with brokers and reinsurance intermediaries. The title reinsurance business has developed substantially all of its business opportunities through direct contacts with primary title insurers.
The financial solutions operation of this segment provides the SRT, FSRP and LPT management lines of business.
• SRTs provide solutions for trading highly structured private and capital markets transactions, focusing on assuming and trading highly structured financial risks, principally credit risk, in the mezzanine layers (A, BBB and BB, as rated by Standard & Poor’s) of risk.
• FSRPs are programs written to facilitate economic efficiency for clients by providing insurance protection, liquidity, capital efficiency and optimal tax treatment. FSRP structures are commonly multi-year term with defined limits with a combination of risk transfer and loss funding.
• LPTs are contracts which are structured to assume liabilities incurred by corporations, public entities, insurance companies, captives, self-insured groups and state funds. These liabilities consist mainly of workers’ compensation, but also include general liability, product liability, auto liability, warranty and medical. These contracts, which meet the established criteria for insurance or reinsurance accounting under accounting principles generally accepted in the U.S. (GAAP) are recorded in the statement of operations when written and generally result in large, one-time written and earned premiums with comparable incurred losses.
Due to the nature of the financial solutions business, premium volume can vary significantly from period to period and therefore premiums written in any one period are not indicative of premiums to be written in future periods.
 
Underwriting
The financial guaranty operations have a disciplined approach to underwriting that emphasizes profitability over market share. We have substantial experience in developing innovative credit enhancement solutions to satisfy the diverse risk and financial management demands of our customers. We emphasize an analytical underwriting process organized around integrated teams consisting of credit and quantitative analysts, risk management professionals and lawyers. Additionally, finance personnel review the proposed exposure for compliance with applicable accounting standards and investment guidelines.
Within the Financial Services segment, the financial solutions operations provide one-off insurance and reinsurance solutions to clients with unique or complex risks which are not adequately addressed in the traditional insurance market. Each financial solutions contract is structured to meet the needs of each client. These one-off contracts may provide coverage for multiple exposure lines, may include profit-sharing features and often insure events over a multi-year period. Underwriting profit emerges over the term of the contract as the risk of loss on the underlying business diminishes. From time to time, a financial solutions contract may be written where the loss payments are expected to exceed the premiums and therefore the contract produces an underwriting loss over the life of the contract. These contracts are written, in part, because the amount of investment income generated by the contract is expected to exceed the underwriting loss and produce a meaningful economic benefit to ACE.
LPTs written within the Financial Services segment insure a client’s liability for future payments related to loss events that have occurred in the past, and therefore the coverage provided is considered retroactive. Although the events have occurred in the past, the future amount and timing of loss payments associated with those events are uncertain, creating the demand for insurance or reinsurance. Loss payments on an LPT are often anticipated to occur over a lengthy future period. Similar to financial solutions contracts, loss payments may be expected to exceed the premiums thereby producing underwriting losses over the life of the contract. We write this business, in part, because the investment income earned over the life of the contract is expected to exceed the underwriting losses and produce a meaningful economic benefit to ACE.
Retroactive contracts do not significantly impact earnings in the year of inception, but rather the amount by which estimated ultimate losses payable are greater (or less) than the premiums received is established as a deferred charge (or gain) and amortized against (or into) underwriting income over the estimated future claim settlement periods.
 
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Competitive Environment
The Financial Services segment faces direct and indirect competition from equally rated financial institutions on all lines of business. The differentiating factors include pricing, customer service, market perception and historical performance.
Competition in the financial guaranty market consists principally of four major players as well as two recent entrants. The financial guaranty business also faces competition indirectly from other highly rated financial institutions that provide capital substitutes to the primary financial guaranty insurers. Banks, multiline insurers and reinsurers participate in this broader credit enhancement market. Competition is also a function of the ease with which primary insurers can raise capital in the private or public equity markets. Increased primary capital increases the ability of insurers to retain risk and diminishes the need for reinsurance. Our principal competitors in the financial guaranty reinsurance market consist of a few international reinsurers and, to a lesser extent, a few domestic reinsurers. Competition in this market is based upon many factors, including overall financial strength, pricing, service and evaluation of claims-paying ability by major rating agencies. In the mortgage reinsurance market, competition mainly consists of international mortgage reinsurers and, to a lesser extent, U.S. multi-line insurers.
For financial solutions, the primary competitive factors are rating agency standing, quality of service and the ability to post collateral. The SRT line competes with insurance companies and other financial institutions that assume and trade credit risk. This operation focuses on investment-grade portfolio credit exposures and competes in this market sector on terms of price, capacity and terms. The FSRP and retroactive contracts operations compete with several other P&C insurance companies, which have groups offering LPTs, traditional and non-traditional buy-outs and finite insurance and reinsurance. Competition is generally based on contract price, capacity and terms.

Unpaid Losses And Loss Expenses
We establish reserves for unpaid losses and loss expenses, which are estimates of future payments of reported and unreported claims for losses and related expenses, with respect to insured events that have occurred. The process of establishing reserves for P&C claims can be complex and is subject to considerable variability as it requires the use of informed estimates and judgments. These estimates and judgments are based on numerous factors, and may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed or as current laws change. We have actuarial staff in each of our operating segments who track insurance reserves and regularly evaluate the levels of loss reserves, taking into consideration factors that may impact the ultimate loss reserves. Any such revisions could result in future changes in estimates of losses or reinsurance recoverable and would be reflected in our results of operations in the period in which the estimates are changed. Losses and loss expenses are charged to income as incurred. The reserve for unpaid losses and loss expenses represents the estimated ultimate losses and loss expenses less paid losses and loss expenses, and comprises case reserves and incurred but not reported loss reserves (IBNR). During the loss settlement period, which can be many years in duration, additional facts regarding individual claims and trends often will become known. As these become apparent, case reserves may be adjusted by allocation from IBNR without any change in the overall reserve. In addition, application of statistical and actuarial methods may require the adjustment of the overall reserves upward or downward from time to time. Accordingly, the ultimate settlement of losses may be significantly greater than or less than reported loss and loss expense reserves.
We evaluate our estimates of reserves quarterly in light of developing information and discussions and negotiations with our insureds. While we are unable at this time to determine whether additional reserves, which could have a material adverse effect upon our financial condition, results of operations and cash flows, may be necessary in the future, we believe that our reserves for unpaid losses and loss expenses are adequate as of December 31, 2003.
We have considered A&E claims and claims expenses in establishing the liability for unpaid losses and loss expenses and have developed reserving methods which incorporate new sources of data with historical experience to estimate the ultimate losses arising from A&E exposures. The reserves for A&E claims and claims expenses represent management’s best estimate of future loss and loss expense payments and recoveries which are expected to develop over the next several decades. We continuously monitor evolving case law and its effect on environmental and latent injury claims and we review our total estimate of A&E claims quarterly.
For each line of business, management, in conjunction with internal actuaries, develop a “best estimate” of ultimate liabilities, which they believe provide a reasonable estimate of the required reserve. The internal actuaries utilize one set of assumptions in determining
 
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a single point estimate. The unpaid losses and loss expenses section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a discussion of our reserve-setting procedures by segment.
The “Analysis of Losses and Loss Expenses Development” shown below presents the subsequent development of the estimated year-end liability for net unpaid losses and loss expenses for the last eleven years. On July 2, 1999, we changed our fiscal year-end from September 30 to December 31. As a result, the information provided for the 1999 year is actually for the 15-month period from October 1, 1998, through December 31, 1999. Prior to December 31, 1999, the net unpaid losses and loss expenses are in respect of annual periods ending on September 30 of each year. The table also presents at December 31, 2003, the cumulative development of the estimated year-end liability for gross unpaid losses and loss expenses for the years 1994 through 2002. The top lines of the table show the estimated liability for gross and net unpaid losses and loss expenses recorded at the balance sheet date for each of the indicated periods. This liability represents the estimated amount of losses and loss expenses for claims arising from all prior years’ policies and agreements that were unpaid at the balance sheet date, including IBNR loss reserves. The upper (paid) portion of the table presents the net amounts paid as of subsequent periods on those claims for which reserves were carried as of each balance sheet date. The lower portion of the table shows the re-estimated amount of the previously recorded net liability as of the end of each succeeding period. The bottom lines of the table show the re-estimated amount of previously recorded gross liability at December 31, 2003, together with the change in reinsurance recoverable. We do not consider it appropriate to extrapolate future deficiencies or redundancies based upon the table below, as conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Several aspects of our operations, including the low frequency and high severity of losses in the high excess layers in which we provide insurance, complicate the actuarial reserving techniques we utilize. Accordingly, we expect that ultimate losses and loss expenses attributable to any single underwriting year will be either more or less than the incremental changes in the lower portion of the table. The “cumulative redundancy/deficiency” shown in the table below represents the aggregate change in the reserve estimates over all subsequent years. The amounts noted are cumulative in nature; that is, an increase in loss estimate for prior year losses generates a deficiency in each intermediate year. On November 1, 1993, we acquired CODA, on July 1, 1996, we acquired ACE Tempest Re, and on July 9, 1998, we acquired Tarquin. The table has been restated to include CODA, ACE Tempest Re and Tarquin’s loss experience as if each of these companies had been our wholly-owned subsidiaries from their inception. On January 2, 1998, we acquired ACE US Holdings; on April 1, 1998, we acquired CAT Limited; and on July 2, 1999, we acquired ACE INA. The unpaid loss information for ACE US Holdings, CAT Limited and ACE INA has been included in the table commencing in the year of acquisition. As a result, 1999 includes net reserves of $6.8 billion related to ACE INA at the date of acquisition and subsequent development thereon.
 
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Analysis of Losses and Loss Expenses Development

 	 	Years ended September 30
	 	 	Years ended December 31
	
(in millions of U.S. dollars)	 	1993	 	 	1994	 	 	1995	 	 	1996	 	 	1997	 	1998	 	 	1999(1)	 	 	2000	 	 	2001	 	 	2002	 	 	2003	
	
Gross unpaid	 	$	766	 	 	$	1,176	 	 	$	1,492	 	 	$	1,978	 	 	$	2,112	 	$	3,738	 	 	$	16,460	 	 	$	17,388	 	 	$	20,728	 	 	$	24,315	 	 	$	27,155	
Net unpaid	 	 	766	 	 	 	1,176	 	 	 	1,489	 	 	 	1,892	 	 	 	2,007	 	 	2,678	 	 	 	8,909	 	 	 	9,065	 	 	 	10,099	 	 	 	11,318	 	 	 	13,963	
Net paid (Cumulative) As Of:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    1 year later	 	 	127	 	 	 	67	 	 	 	80	 	 	 	359	 	 	 	337	 	 	1,018	 	 	 	2,711	 	 	 	2,404	 	 	 	2,685	 	 	 	2,640	 	 	 	 	
    2 years later	 	 	183	 	 	 	122	 	 	 	414	 	 	 	663	 	 	 	925	 	 	1,480	 	 	 	4,077	 	 	 	3,831	 	 	 	4,596	 	 	 	 	 	 	 	 	
    3 years later	 	 	229	 	 	 	452	 	 	 	696	 	 	 	1,248	 	 	 	1,066	 	 	1,656	 	 	 	5,133	 	 	 	5,095	 	 	 	 	 	 	 	 	 	 	 	 	
    4 years later	 	 	559	 	 	 	726	 	 	 	1,259	 	 	 	1,372	 	 	 	1,171	 	 	1,813	 	 	 	6,132	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    5 years later	 	 	838	 	 	 	1,286	 	 	 	1,380	 	 	 	1,465	 	 	 	1,197	 	 	1,979	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    6 years later	 	 	1,398	 	 	 	1,369	 	 	 	1,468	 	 	 	1,481	 	 	 	1,235	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    7 years later	 	 	1,481	 	 	 	1,450	 	 	 	1,481	 	 	 	1,517	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    8 years later	 	 	1,562	 	 	 	1,438	 	 	 	1,516	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    9 years later	 	 	1,550	 	 	 	1,458	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
  10 years later	 	 	1,564	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Liability Re-estimated As Of:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    End of year	 	$	766	 	 	$	1,176	 	 	$	1,489	 	 	$	1,892	 	 	$	2,007	 	$	2,678	 	 	$	8,909	 	 	$	9,065	 	 	$	10,099	 	 	$	11,318	 	 	$	13,963	
    1 year later	 	 	966	 	 	 	1,177	 	 	 	1,489	 	 	 	1,892	 	 	 	1,990	 	 	2,753	 	 	 	8,848	 	 	 	9,159	 	 	 	10,808	 	 	 	11,490	 	 	 	 	
    2 years later	 	 	1,068	 	 	 	1,228	 	 	 	1,489	 	 	 	1,881	 	 	 	1,915	 	 	2,747	 	 	 	8,851	 	 	 	9,727	 	 	 	11,006	 	 	 	 	 	 	 	 	
    3 years later	 	 	1,211	 	 	 	1,387	 	 	 	1,480	 	 	 	1,824	 	 	 	1,853	 	 	2,722	 	 	 	9,371	 	 	 	9,963	 	 	 	 	 	 	 	 	 	 	 	 	
    4 years later	 	 	1,430	 	 	 	1,401	 	 	 	1,495	 	 	 	1,852	 	 	 	1,833	 	 	2,730	 	 	 	9,512	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    5 years later	 	 	1,443	 	 	 	1,472	 	 	 	1,589	 	 	 	1,932	 	 	 	1,816	 	 	2,715	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    6 years later	 	 	1,580	 	 	 	1,530	 	 	 	1,679	 	 	 	1,931	 	 	 	1,829	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    7 years later	 	 	1,642	 	 	 	1,606	 	 	 	1,654	 	 	 	1,936	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    8 years later	 	 	1,713	 	 	 	1,566	 	 	 	1,672	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    9 years later	 	 	1,672	 	 	 	1,580	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
  10 years later	 	 	1,686	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cumulative redundancy/ (deficiency)	 	 	(920	)	 	 	(404	)	 	 	(183	)	 	 	(44	)	 	 	178	 	 	(37	)	 	 	(603	)	 	 	(898	)	 	 	(907	)	 	 	(172) (2)	 	 	 	 	
Gross unpaid losses and loss expenses end of year	 	 	766	 	 	 	1,176	 	 	 	1,492	 	 	 	1,978	 	 	 	2,112	 	 	3,738	 	 	 	16,460	 	 	 	17,388	 	 	 	20,728	 	 	 	24,315	 	 	 	27,155	
Reinsurance recoverable on unpaid losses	 	 	—	 	 	 	—	 	 	 	3	 	 	 	86	 	 	 	105	 	 	1,060	 	 	 	7,551	 	 	 	8,323	 	 	 	10,629	 	 	 	12,997	 	 	 	13,192	
	
Net unpaid losses and loss expenses	 	 	766	 	 	 	1,176	 	 	 	1,489	 	 	 	1,892	 	 	 	2,007	 	 	2,678	 	 	 	8,909	 	 	 	9,065	 	 	 	10,099	 	 	 	11,318	 	 	 	13,963	
	
Gross liability re-estimated	 	 	1,686	 	 	 	1,580	 	 	 	1,674	 	 	 	2,012	 	 	 	1,868	 	 	3,967	 	 	 	20,877	 	 	 	22,132	 	 	 	25,911	 	 	 	26,962	 	 	 	 	
Reinsurance recoverable on unpaid losses	 	 	—	 	 	 	—	 	 	 	2	 	 	 	76	 	 	 	39	 	 	1,252	 	 	 	11,365	 	 	 	12,169	 	 	 	14,905	 	 	 	15,472	 	 	 	 	
	
Net liability re-estimated	 	 	1,686	 	 	 	1,580	 	 	 	1,672	 	 	 	1,936	 	 	 	1,829	 	 	2,715	 	 	 	9,512	 	 	 	9,963	 	 	 	11,006	 	 	 	11,490	 	 	 	 	
	
Cumulative redundancy/(deficiency) on gross unpaid	 	 	(920	)	 	 	(404	)	 	 	(182	)	 	 	(34	)	 	 	244	 	 	(229	)	 	 	(4,417	)	 	 	(4,744	)	 	 	(5,183	)	 	 	(2,647	)	 	 	 	

(1)	 	The 1999 year is for the 15-month period ended December 31, 1999.	
(2)	 	The difference between the loss development included above and that reflected in the reconciliation of unpaid losses and loss expenses development of $8 million principally relates to certain changes in the deferred asset related to LPTs (value of reinsurance business assumed) that affects losses incurred but does not affect the table above.	
 
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The cumulative gross redundancy/deficiency is the difference between the gross loss reserves originally recorded and the re-estimated liability at December 31, 2003. We utilized little or no reinsurance for 1997 and prior years. In 1999, ACE INA acquired the CIGNA P&C insurance operations and the acquired loss reserves for 1999 and prior years are included in the table commencing in 1999. As of December 31, 2003, the cumulative deficiency for 1999 is $4.4 billion. This relates primarily to U.S. liabilities, including A&E liabilities for 1995 and prior. Reinsurance coverages have the effect of substantially reducing the net loss as follows: of the total $4.4 billion of cumulative deficiency for 1999 and prior years, approximately $2.2 billion was covered by reinsurance placed when the risks were originally written and $1.25 billion of the remaining liability has been ceded to the National Indemnity Company (“NICO”). Of the cumulative deficiency of $4.4 billion noted for 1999, approximately $500 million was identified and recorded in 2000, $600 million in 2001, $2.8 billion in 2002 and $500 million in 2003.

Reconciliation of Unpaid Losses and Loss Expenses

 	  	Years Ended December 31	 	
 	 		
(in thousands of U.S. dollars)	  	2003	 	 	2002	 	 	2001	 	
	 	
Gross unpaid losses and loss expenses at beginning of year	  	$	24,315,182	 	 	$	20,728,122	 	 	$	17,388,394	 	
Reinsurance recoverable on unpaid losses	  	 	(12,997,164	)	 	 	(10,628,608	)	 	 	(8,323,444	)	
	 	
Net unpaid losses and loss expenses at beginning of year	  	 	11,318,018	 	 	 	10,099,514	 	 	 	9,064,950	 	
Unpaid losses and loss expenses assumed in respect of reinsurance business acquired	  	 	89,779	 	 	 	202,920	 	 	 	300,204	 	
	 	
Total	  	 	11,407,797	 	 	 	10,302,434	 	 	 	9,365,154	 	
	 	
Net losses and loss expenses incurred in respect of losses occurring in:	  	 	 	 	 	 	 	 	 	 	 	 	
Current year	  	 	5,953,076	 	 	 	4,197,829	 	 	 	4,457,986	 	
Prior year	  	 	164,326	 	 	 	708,681	 	 	 	94,470	 	
	 	
Total	  	 	6,117,402	 	 	 	4,906,510	 	 	 	4,552,456	 	
	 	
Net losses and loss expenses paid in respect of losses occurring in:	  	 	 	 	 	 	 	 	 	 	 	 	
Current year	  	 	1,266,288	 	 	 	1,265,880	 	 	 	1,345,699	 	
Prior year	  	 	2,639,554	 	 	 	2,685,401	 	 	 	2,404,155	 	
	 	
Total	  	 	3,905,842	 	 	 	3,951,281	 	 	 	3,749,854	 	
	 	
Foreign currency revaluation	  	 	343,872	 	 	 	60,355	 	 	 	(68,242	)	
	 	
Net unpaid losses and loss expenses at end of year	  	 	13,963,229	 	 	 	11,318,018	 	 	 	10,099,514	 	
Reinsurance recoverable on unpaid losses	  	 	13,191,609	 	 	 	12,997,164	 	 	 	10,628,608	 	
	 	
Gross unpaid losses and loss expenses at end of year	  	$	27,154,838	 	 	$	24,315,182	 	 	$	20,728,122	 	

Our net incurred losses in 2003 were $6.1 billion, compared with $4.9 billion and $4.5 billion in 2002 and 2001, respectively. Net losses and loss expenses incurred for 2003, 2002 and 2001 include $164 million, $709 million and $94 million of prior period development, respectively. In 2002, we incurred $516 million of prior period development related to A&E. More information regarding prior period development is included in the Segment Operating Results section of the Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Investments
Our principal investment objective is to ensure that funds will be available to meet our primary insurance and reinsurance obligations. Within this broad liquidity constraint, the investment portfolio’s structure seeks to maximize return subject to specifically-approved guidelines of overall asset classes, credit quality, liquidity and volatility of expected returns. As such, our investment portfolio is invested primarily in investment-grade fixed-income securities as measured by the major rating agencies.
 
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The management of our investment portfolio is the responsibility of ACE Asset Management. ACE Asset Management operates principally to guide and direct our investment process. In this regard, ACE Asset Management:
• conducts formal asset allocation modeling for each of the ACE subsidiaries, providing formal recommendations for 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;
• monitors and aggregates the correlated risk of the overall investment portfolio; and
• provides governance over the investment process for each of our operating companies to ensure consistency of approach and adherence to investment guidelines.
For the portfolio, we determine allowable, targeted asset allocation and ranges for each of the operating segments. These asset allocation targets are derived from sophisticated asset and liability modeling that measures correlated histories of returns and volatility of returns. Allowable investment classes are further refined through analysis of our operating environment, including expected volatility of cash flows, overall capital position, regulatory and rating agency considerations.
The Finance and Investment Committee of the Board of Directors approves asset allocation targets and reviews our investment policy to ensure that it is consistent with our overall goals, strategies and objectives. Overall investment guidelines are approved by the Finance and Investment Committee to ensure appropriate levels of portfolio liquidity, credit quality, diversification and volatility are maintained. In addition, the Finance and Investment Committee systematically reviews the portfolio’s exposures to capture any potential violations of investment guidelines.
Within the guidelines and asset allocation parameters established by the Finance and Investment Committee, individual investment committees of the operating segments determine tactical asset allocation. Additionally, these committees review all investment-related activity that affects their operating company, including the selection of outside investment advisors, proposed asset allocations changes, and the systematic review of investment guidelines.
For additional information regarding the investment portfolio, including breakdowns of the sector and maturity distributions, see Note 3 of the Consolidated Financial Statements.

Regulation
 
Bermuda Operations
In Bermuda, our insurance subsidiaries are principally regulated by the Insurance Act 1978 (as amended) and related regulations (the Act). The Act imposes on Bermuda insurance companies, solvency and liquidity standards, and auditing and reporting requirements, and grants the Bermuda Monetary Authority (the Authority) powers to supervise, investigate and intervene in the affairs of insurance companies. Significant requirements include the appointment of an independent auditor, the appointment of a loss reserve specialist and the filing of the Annual Statutory Financial Return with the Supervisor of Insurance (the Supervisor). The Supervisor is the chief administrative officer under the Act. The Minister of Finance (the Minister) has appointed an Insurance Advisory Committee which provides advice to the Authority on matters connected with the discharge of its functions under the Act and also to advise the Minister on matters related to the development of the insurance industry in Bermuda.
We must comply with the provisions of the Act regulating the payment of dividends and distributions from contributed surplus. A Bermuda company may not declare or pay a dividend or make a distribution out of contributed surplus if there are reasonable grounds for believing that: (a) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (b) the realizable value of the company’s assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts.
The Supervisor may appoint an inspector with extensive powers to investigate the affairs of an insurer if he believes that an investigation is required in the interest of the insurer’s policyholders or persons who may become policyholders. In order to verify or supplement information otherwise provided to him, the Supervisor may direct an insurer to produce documents or information relating to matters connected with the insurer’s business. The power to obtain information is exercisable in relation to any company in Bermuda which is a parent company, subsidiary company or other associated companies of the insurer. If it appears to the Supervisor that there is a risk of the insurer becoming insolvent, or that the insurer is in breach of the Act or any conditions or its registration under the Act,
 
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the Supervisor may direct the insurer not to take on any new insurance business, not to vary any insurance contract if the effect would be to increase the insurer’s liabilities, not to make certain investments, to realize certain investments, to maintain in or transfer to the custody of a specified bank certain assets, not to declare or pay any dividends or other distributions, or to restrict the making of such payments and/or to limit its premium income.
The Act requires every insurer to appoint a principal representative resident in Bermuda and to maintain a principal office in Bermuda. The principal representative must be knowledgeable in insurance and is responsible for arranging the maintenance and custody of the statutory accounting records and for filing the annual Statutory Financial Return. There are various obligations placed on the principal representative. Among other items, the principal representative must report to the Authority if they consider that there is any likelihood of the insurer becoming insolvent or when the principal representative becomes aware or has reason to believe that the insurer has failed or defaulted in matters that may have been set out in the Act. The Act makes no attempt to restrict the nature of the risks underwritten by an insurer though conditions may be imposed relating to certain types of insurance business at the time of the application to register under the Act.
 
U.S. Operations
Although at the present time there is limited federal regulation of the insurance business in the U.S., our U.S. insurance subsidiaries are subject to extensive regulation in the states in which they do business. The laws of the various states establish supervisory agencies with broad authority to regulate, among other things: licenses to transact business, soliciting business, advertising, rates for certain business, policy language, underwriting and claims practices, transactions with affiliates, reserve adequacy, dividends, investments and insurer solvency. In addition, the U.S. insurance subsidiaries are subject to judicial decisions that define the scope of an insurer’s duty to defend a claim and the risks and benefits for which insurance is sought and provided. These include judicial interpretations of the nature of the insured risk in such areas as product liability and environmental coverages.
Regulations generally require insurance and reinsurance companies to furnish information to their domestic state insurance department concerning activities which may materially affect the operations, management or financial condition and solvency of the company. Regulations vary from state to state but generally require that each primary insurance company obtain a license from the department of insurance of a state to conduct business in that state. A reinsurance company is not generally required to have an insurance license to reinsure a U.S. ceding company. However, for a U.S. ceding company to obtain financial statement credit for reinsurance ceded, the reinsurer must obtain an insurance license or accredited status from the cedant’s state of domicile or must post collateral to support the liabilities ceded. In addition, regulations for reinsurers vary somewhat from primary insurers in that reinsurers are typically not subject to regulator approval of insurance policy forms or the rates agreed to between ceding insurers and their reinsurers.
Our U.S. insurance subsidiaries are required to file detailed annual and, in some states, quarterly reports with state insurance regulators in each of the states in which they do business. Such annual and quarterly reports are required to be prepared on a calendar year basis. In addition, the U.S. insurance subsidiaries’ operations and accounts are subject to examination at regular intervals by state regulators. The respective reports filed in accordance with applicable insurance regulations with respect to the most recent periodic examinations of the U.S. insurance subsidiaries contained no material adverse findings.
Statutory surplus is an important measure utilized by the regulators and rating agencies to assess our U.S. insurance subsidiaries’ ability to support business operations and provide dividend capacity. Our U.S. insurance subsidiaries are subject to various state statutory and regulatory restrictions that limit the amount of dividends that may be paid without prior approval from regulatory authorities. These restrictions differ by state, but are generally based on calculations incorporating statutory surplus, statutory net income, and/or investment income.
State insurance regulators have also adopted Risk Based Capital (RBC) requirements that are applicable to some of the U.S. insurance subsidiaries. These RBC requirements are designed to monitor capital adequacy and to raise the level of protection that statutory surplus provides for policyholders. The RBC formula provides a mechanism for the calculation of an insurance company’s Authorized Control Level (ACL) RBC amount. The initial RBC level which triggers regulatory action is known as the Company Action Level. Failure to achieve this level of RBC, which occurs if policyholders’ surplus falls below 200 percent of the ACL, requires the insurance company to submit a plan of corrective action to the relevant insurance commissioner. Based on the RBC formula, at December 31, 2003, the policyholders’ surplus of each of the ongoing U.S. insurance subsidiaries was higher than the Company Action Level.
 
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There are additional progressive RBC failure levels, which trigger more stringent regulatory action. If an insurer’s policyholders’ surplus falls below the Mandatory Control Level (70 percent of the ACL), the relevant insurance commissioner is required to place the insurer under regulatory control. However, an insurance commissioner may allow a P&C company operating below the Mandatory Control Level that is writing no business and is running off its existing business to continue its run-off. Brandywine is running-off its liabilities consistent with the terms of an order issued by the Insurance Commissioner of Pennsylvania. This includes periodic reporting obligations to the Pennsylvania Insurance Department. The Commissioner has determined that Brandywine has sufficient assets to meet its obligations.
In November 2002, the U.S. Congress passed the Terrorism Risk Insurance Act (TRIA), which requires commercial P&C insurers to offer coverage for losses due to certified acts of terrorism that does not differ materially from the terms, amounts and other coverage limitations offered by the insurer for other types of risks. Insured losses which are compensable under TRIA are those losses caused by an act certified by the Secretary of the Treasury, in concurrence with the Secretary of State and the Attorney General, to be an act of terrorism. The Secretary may only certify an act as terrorism if it involves a foreign person or group and has resulted in damage within the United States or to a U.S. air carrier or U.S. flag vessel. To be certified, the act must have caused aggregate damages exceeding $5 million. TRIA nullifies all terrorism exclusions in existing commercial P&C policies, but such exclusions may be reinstated if the insured either gives written authorization for such reinstatement or fails to pay any increased premium for the terrorism coverage after 30 days’ notice.
TRIA also provides for the federal government to reimburse insurers for 90 percent of their terrorism-related losses, subject to a premium-based deductible. The deductible for 2003 was seven percent of direct earned premiums for the year. For 2004, the deductible is ten percent of direct earned premium and for 2005 it will be 15 percent of direct earned premium.
In the event of a loss similar to the losses sustained in connection with the September 11 tragedy, our deductible and ten percent share of losses would have a material adverse effect on our results of operations in the period in which the loss is incurred and on our financial condition.
 
International Operations
The extent of insurance regulation varies significantly among the countries in which the non-U.S. ACE operations conduct business. While each country imposes licensing, solvency, auditing and financial reporting requirements, the type and extent of the requirements differ substantially. For example:
• in some countries, insurers are required to prepare and file quarterly financial reports, and in others, only annual reports;
• some regulators require intermediaries to be involved in the sale of insurance products, whereas other regulators permit direct sales contact between the insurer and the customer;
• the extent of restrictions imposed upon an insurer’s use of foreign reinsurance vary;
• policy form filing and rate regulation also vary by country;
• the frequency of contact and periodic on-site examinations by insurance authorities differ by country; and
• regulatory requirements relating to insurer’s dividend policies vary by country.
Significant variations can also be found in the size, structure and resources of the local regulatory departments that oversee insurance activities. Certain regulators prefer close relationships with all subject insurers and others operate a risk-based approach.
ACE operates in some countries through our subsidiaries and in some countries through branches of those subsidiaries. Local capital requirements applicable to a subsidiary generally include its branches. Certain ACE companies are jointly owned with local companies to comply with legal requirements for local ownership. Other legal requirements include discretionary licensing procedures, compulsory cessions of reinsurance, local retention of funds and records, and foreign exchange controls. ACE’s international companies are also subject to multinational application of certain U.S. laws. The complex regulatory environments in which ACE operates are subject to change and are regularly monitored.
 
United Kingdom
ACE INA UK Limited and ACE Underwriting Agencies Limited (responsible for managing Syndicate 2488 at Lloyd’s) and staff employed within the U.K. operations, are subject to primary regulation by the Financial Services Authority (FSA-U.K.). The FSA-U.K. is the single U.K. statutory regulator for the supervision of securities, banking and insurance business. The FSA-U.K. imposes capital adequacy, auditing,
 
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financial reporting and other requirements upon both insurers and the Society of Lloyd’s. In addition, Syndicate 2488 is subject to the requirements of the Council of Lloyd’s.
The FSA-U.K. regulates us and our subsidiaries in the ownership chain of our U.K. insurance companies, Lloyd’s managing agencies and Corporate Capital Vehicles (CCVs) pursuant to their authority with respect to a “controller”. Certain U.K.-based directors and employees are individually subject to regulation by the FSA-U.K. and Lloyd’s.
ACE INA UK Limited was re-authorized by the FSA-U.K. to write all classes of insurance business in December 2002. It has recently set up branch offices in all major European states and is an eligible excess and surplus lines reinsurer in most U.S. states.
The FSA-U.K. has taken over the regulation of managing agents that were previously subject to Lloyd’s supervision. Lloyd’s Regulatory Department is now responsible for managing risk on behalf of the Lloyd’s Franchise and a new department, the Franchise Directorate, has been set up to approve and monitor each syndicate’s business plan.
 
Europe
ACE Insurance S.A.-N.V. (ACE Europe) is registered as an insurer in Belgium and is regulated by the CBFA (the Commission bancaire, financière et des assurances/Commissie voor het Bank-, Financie- en Assurantiewezen and formerly known as the OCA). Like ACE INA UK Limited, ACE Europe is able to conduct its insurance business pursuant to the local laws passed by European Economic Area (EEA) member states, in particular the European Third Non-Life Directive of 1992 (Framework Directive). Under the Framework Directive, ACE Europe and ACE INA UK Limited have established operations in 14 EEA jurisdictions, and are able to conduct cross-border business on a freedom of service basis. Both companies are subject to the group solvency requirements set by the European directive on Supervision of Insurance Undertakings in Insurance Groups.
 
ACE Far East
ACE Japan is regulated by the Financial Services Authority in Japan (FSA-Japan). In accordance with the Insurance Business Law in Japan, the FSA-Japan focuses on protecting policyholders’ interests by ensuring the sound management of insurance companies and their operations, including licensing, product filings and approval, distribution of insurance products, investment of insurance premiums and other assets, etc. FSA-Japan staff conduct on-site inspections when deemed necessary. Insurance companies must submit an annual business report regarding its operations and assets. Deregulation and liberalization of the Japanese non-life insurance market has placed more emphasis on insurers’ independence of operation and compliance requirements.
 
United States Regulation and Tax of Non-U.S. Operations
Regulation of non-U.S insurers, often referred to as alien insurers, varies on a state by state basis. However, generally, alien insurers may write primary insurance in a state in one of three ways: (1) pursuant to a license issued by a state (admitted insurers), (2) by meeting a state’s excess and surplus lines eligibility standards (surplus lines-eligible insurers) or (3) pursuant to other state-specific exemptions. Alien insurers may write reinsurance on either an admitted or non-admitted basis. Admitted alien insurers are subject to regulation of solvency, premium rates and policy forms similar to regulation of domestic insurers. Surplus lines-eligible and other non-admitted alien insurers may be subject to minimum solvency and security requirements and other state specific criteria.
Lloyd’s is licensed for direct insurance in Illinois, Kentucky and the U.S. Virgin Islands and is an eligible excess and surplus lines insurer in all states and territories except Kentucky and the U.S. Virgin Islands. Lloyd’s is also an accredited reinsurer in all states and territories. In certain states, various categories of direct insurance are exempt under state laws. Lloyd’s maintains various trust funds in the state of New York in support of past, current and future underwriting of U.S. business, subject to regulation by the New York Insurance Department, which acts as the domiciliary commissioner for Lloyd’s U.S. trust funds. There are also deposit trust funds in other states to support both reinsurance and excess and surplus lines insurance business.
In addition ACE INA UK Limited, is now an eligible excess and surplus lines insurer in 33 U.S. states, with a number of additional state applications pending. ACE INA UK Limited is also able to write reinsurance business on a non-admitted basis in both the U.S. and a number of other jurisdictions.
Each state in the U.S. licenses insurers and prohibits, with some exceptions, the sale of insurance by non-admitted, non-U.S. insurers within its jurisdictions. ACE and its non-U.S. insurance subsidiaries, excluding its Lloyd’s operations, are not licensed to do business as admitted insurers in any jurisdiction in the U.S.
 
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Many states impose a premium tax (typically two percent to four percent of gross premiums written) on insureds who obtain insurance from non-admitted foreign insurers, such as ACE Bermuda. The premiums charged by the non-U.S. insurer do not include any U.S. state premium tax. Each insured is responsible for determining whether it is subject to any such tax and for paying such tax as may be due.
The U.S. Internal Revenue Code of 1986, as amended, (the Code) also imposes an excise tax on insurance and reinsurance premiums paid to foreign insurers or reinsurers with respect to U.S. risks. The rates of tax, unless reduced by an applicable U.S. tax treaty, are four percent for non-life insurance premiums and one percent for life insurance and all reinsurance premiums.
There can be no assurance that new or additional legislation in the U.S. will not be proposed and enacted that has the effect of subjecting our non-U.S. insurance subsidiaries, including our Lloyd’s operations, to regulation in the U.S.

Tax Matters
 
Corporate Income Tax
ACE Limited is a Cayman Islands corporation that operates as a holding company with offices only in Bermuda and does not pay U.S. corporate income taxes (except certain withholding taxes) on the basis that it is not engaged in a trade or business in the U.S. However, there can be no assurance that the Internal Revenue Service (IRS) will not contend to the contrary. If ACE Limited were subject to U.S. income tax, there could be a material adverse effect on our shareholders’ equity and earnings. ACE Limited and its Bermuda-based insurance and reinsurance subsidiaries do not file U.S. income tax returns reporting income subject to U.S. income tax since they do not conduct business within the U.S. However, ACE Limited and its Bermuda-based insurance and reinsurance subsidiaries have filed protective tax returns reporting no U.S. income to preserve their ability to deduct their ordinary and necessary business expenses should the IRS successfully challenge their contention that none of their income is subject to a net income tax in the U.S.
Under current Cayman Islands law, ACE Limited is not required to pay any taxes on its income or capital gains. ACE Limited has received an undertaking that, in the event of any taxes being imposed, ACE Limited will be exempted from taxation in the Cayman Islands until the year 2013.
Under current Bermuda law, ACE Limited and its Bermuda subsidiaries are not required to pay any taxes on its income or capital gains. ACE Limited and the Bermuda subsidiaries have received an undertaking from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, we will be exempt from taxation in Bermuda until March 2016.
Income from the operations at Lloyd’s is subject to U.K. corporation taxes. Lloyd’s is also required to pay U.S. income tax on U.S. effectively connected income written by Lloyd’s syndicates. Lloyd’s has a closing agreement with the IRS whereby the amount of tax due on this business is calculated by Lloyd’s and remitted directly to the IRS. These amounts are then charged to the accounts of the Names/Corporate Members in proportion to their participation in the relevant syndicates. Our Corporate Members are subject to this arrangement but, as U.K. domiciled companies, will receive U.K. corporation tax credits for any U.S. income tax incurred up to the amount of the equivalent U.K. corporation income tax charge on the U.S. income.
ACE Prime Holdings and ACE Capital Re USA Holdings and their respective subsidiaries are subject, directly or, as shareholders, indirectly to U.S. corporate income tax and file U.S. tax returns. Certain of our international operations are also subject to income taxes imposed by the jurisdictions in which they operate.
 
Related Person Insurance Income
Each U.S. person, who beneficially owns our Ordinary Shares (directly or through foreign entities) on the last day of a non-U.S. insurance subsidiary’s fiscal year, will have to include in such person’s gross income for U.S. income tax purposes a proportionate share (determined as described herein) of the related person insurance income (RPII) of such insurance subsidiary, unless the RPII of such insurance subsidiary, determined on a gross basis, is “de minimis” (i.e., less than 20 percent of that insurance subsidiary’s gross insurance income in such fiscal year). RPII is income attributable to insurance policies where the direct or indirect insureds are U.S. shareholders, or are related to U.S. shareholder, of ACE, and is includible in a U.S. shareholder’s gross income for U.S. tax purposes regardless of whether or not such shareholder is an insured.
 
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For the calendar year ended December 31, 2003, we believe the de minimis exception will apply. Although no assurances can be given, we anticipate that gross RPII of each of our non-U.S. insurance subsidiaries will fall within the de minimis exception and we will endeavor to take such steps as we determine to be reasonable to cause its gross RPII to remain below such level. 
The RPII provisions of the Code have never been interpreted by the courts. Regulations interpreting the RPII provisions of the Code exist only in proposed form, having been proposed on April 16, 1991. It is not certain whether these regulations will be adopted in their proposed form or what changes or clarifications might ultimately be made thereto or whether any such changes, as well as any interpretation or application of RPII by the IRS, the courts, or otherwise, might have retroactive effect.

 ITEM 2. Properties
We operate in almost 50 countries around the world including the U.S., Bermuda, the U.K., and Japan. Most of the office facilities that we occupy are leased. We are not dependent on our facilities to conduct business.

 ITEM 3. 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 which are discussed in the P&C loss reserves discussion. In addition to claims litigation, we and our subsidiaries 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, inter alia, allegations of underwriting errors or misconduct, employment claims, regulatory activity or disputes arising from our business ventures. While the outcomes of the business litigation involving us cannot be predicted with certainty at this point, we are disputing, and will continue to dispute, allegations against us that are without merit. We believe that the ultimate outcomes of matters in this category of business litigation will not have a material adverse effect on our financial condition, future operating results or liquidity, although an adverse resolution of a number of these items could have a material adverse effect on our results of operations in a particular quarter or fiscal year.

 ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders during the fourth  quarter of the fiscal year covered by this report.
 
EXECUTIVE OFFICERS OF THE COMPANY
The table below sets forth the names, ages, positions and business experience of the executive officers of ACE Limited.

Name	    	Age	 	Position	
	
Brian Duperreault	    	56	 	Chairman, Chief Executive Officer and Director; Chairman, effective May 27, 2004 *	
			
Donald Kramer	    	66	 	Vice Chairman and Director	
			
Evan G. Greenberg	    	49	 	President, Chief Operating Officer and Director; President and Chief Executive Officer and Director, effective May 27, 2004 *	
			
Dominic J. Frederico	    	51	 	Vice Chairman and Director	
			
Philip V. Bancroft	    	44	 	Chief Financial Officer	
			
Peter N. Mear	    	59	 	General Counsel and Secretary	
			
Paul Medini	    	46	 	Chief Accounting Officer	
 
*On March 11, 2004, the Company announced that the Board of Directors has elected Evan G. Greenberg, President of ACE Limited, to the additional position of Chief Executive Officer effective May 27, 2004. Brian Duperreault, who has been Chairman and Chief Executive Officer since 1994, will remain as Chairman of ACE Limited.
 
Brian Duperreault has been a director of ACE since October 1994. Mr. Duperreault has served as Chairman and Chief Executive Officer of ACE since November 1999 and as Chairman, President and Chief Executive Officer of ACE from October 1994 through November 1999. Prior to joining ACE, Mr. Duperreault had been employed with American International Group (AIG) since 1973 and served in various senior executive positions with AIG and its affiliates from 1978 until September 1994, including as Executive Vice President, Foreign General Insurance and, concurrently, as Chairman and Chief Executive Officer of American International Underwriters Inc., a subsidiary of
 
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AIG, from April 1994 to September 1994. Mr. Duperreault was President of American International Underwriters Inc. from 1991 to April 1994, and Chief Executive Officer of AIG affiliates in Japan and Korea from 1989 to 1991.
Donald Kramer has been a director and Vice Chairman of ACE since July 1996, following the acquisition of ACE Tempest Re. Since December 2003, Mr. Kramer has been a non-executive Chairman of the Board of Assured Guaranty, of which ACE is the current owner. ACE is in the process of offering common shares of Assured Guaranty for sale pursuant to a public offering. Upon completion of that public offering, Mr. Kramer will resign his position as Vice Chairman and director of ACE, although he will remain employed by ACE. Mr. Kramer served as Chairman or Co-Chairman of the Board of ACE Tempest Re from its formation in September 1993 until July 1996 and was President of ACE Tempest Re from July 1996 until 1999. Prior to the formation of ACE Tempest Re, he was President of Kramer Capital Corporation (venture capital investments) from March to September 1993, President of Carteret Federal Savings Bank (banking) from August 1991 to March 1993, Chairman of the Board of NAC Re Corporation (reinsurance) from June 1985 to June 1993, Chairman of the Board and Chief Executive Officer of KCP Holding Company (insurance) from July 1986 to August 1991 and of its affiliates, KCC Capital Managers (insurance investments) and Kramer Capital Consultants, Inc. (insurance investments), as well as Chairman of the Board of its subsidiary, National American Insurance Company of California (insurance) from September 1988 to August 1991.
Evan G. Greenberg was appointed to the position of President, Chief Operating Officer and Director of ACE in June 2003. Mr. Greenberg joined ACE as Vice Chairman, ACE Limited, and Chief Executive Officer of ACE Tempest Re in November 2001. In April 2002, Mr. Greenberg was appointed to the position of Chief Executive Officer of ACE Overseas General. Prior to joining ACE, Mr. Greenberg was most recently President and Chief Operating Officer of AIG, a position he held from 1997 until 2000. From 1975 to 1997, Mr. Greenberg held a variety of senior management positions at AIG including Chief Operating Officer of AIU, AIG’s Foreign General Insurance Organization, and President and Chief Executive Officer of AIU.
Dominic J. Frederico has been a director of ACE since 2001 and has served as Vice Chairman of ACE since June 2003. In addition, Mr. Frederico is President and Chief Executive Officer of Assured Guaranty, of which ACE is the current owner. ACE is in the process of offering common shares of Assured Guaranty for sale pursuant to a public offering. Upon completion of that public offering, Mr. Frederico will resign his position as Vice Chairman of ACE and be employed by Assured Guaranty, although he will remain a director of ACE. From 1999 to 2003, Mr. Frederico served as President and Chief Operating Officer of ACE Limited and Chairman of ACE INA Holdings. Mr. Frederico also served as Chairman, President and Chief Executive Officer of ACE INA from May 1999 through November 1999. Mr. Frederico previously served as President of ACE Bermuda from July 1997 to May 1999, Executive Vice President, Underwriting from December 1996 to July 1997, and as Executive Vice President, Professional Lines from January 1995 to December 1996. Mr. Frederico served in various capacities at AIG in Europe and the U.S. from 1982 to January 1995, including as Senior Vice President and Chief Financial Officer of an AIG subsidiary, with multi-regional general management responsibilities.
Philip V. Bancroft was appointed to the position of Chief Financial Officer of ACE in January 2002. For nearly 20 years, Mr. Bancroft worked for PricewaterhouseCoopers LLP. Most recently he served as partner-in-charge of the New York Regional Insurance Practice. Mr. Bancroft had been a partner with PricewaterhouseCoopers LLP for 10 years.
Peter N. Mear has served as General Counsel and Secretary of ACE since April 1996. Mr. Mear served as Vice President and Claims Counsel of Aetna Casualty and Surety Company from February 1991 to April 1996 and Counsel and Litigation Section Head of Aetna Life & Casualty from September 1977 to February 1991.
Paul Medini was appointed Chief Accounting Officer of ACE in October 2003. Mr. Medini joined ACE from PricewaterhouseCoopers LLP, where he was a partner with over 22 years of experience in their P&C practice.
 
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PART II

 ITEM 5. Market for the Registrant’s Ordinary Shares and Related Stockholder Matters
(a) Our Ordinary Shares, par value $0.041666667 per share, have been listed on the New York Stock Exchange since March 25, 1993. The ticker symbol was changed to ACE from ACL on March 30, 2001.
The following table sets forth the high and low closing sales prices of our Ordinary Shares per fiscal quarters, as reported on the New York Stock Exchange Composite Tape for the periods indicated:

 	 	2003	 	2002	
 	 		
 	 	High	 	Low	 	High	 	Low	
	
Quarter ending March 31	 	$	31.97	 	$	23.75	 	$	43.99	 	$	34.89	
Quarter ending June 30	 	$	36.50	 	$	29.35	 	$	44.59	 	$	30.00	
Quarter ending September 30	 	$	34.98	 	$	31.50	 	$	34.00	 	$	23.32	
Quarter ending December 31	 	$	41.42	 	$	33.57	 	$	36.19	 	$	27.27	
 
The last reported sale price of the Ordinary Shares on the New York Stock Exchange Composite Tape on March 8, 2004 was $45.01.
(b) The approximate number of record holders of Ordinary Shares as of March 8, 2004 was 1,777.
(c) The following table represents dividends paid per share to shareholders of record on each of the following dates:

Shareholders of Record as of:	 	 	  	Shareholders of Record as of:	 	 	
	
March 31, 2003	 	$	0.17	  	March 29, 2002	 	$	0.15	
June 30, 2003	 	$	0.19	  	June 28, 2002	 	$	0.17	
September 30, 2003	 	$	0.19	  	September 27, 2002	 	$	0.17	
December 31, 2003	 	$	0.19	  	December 27, 2002	 	$	0.17	
 
ACE Limited is a holding company whose principal source of income is investment income and dividends from its operating subsidiaries. The ability of the operating subsidiaries to pay dividends to us and our ability to pay dividends to our shareholders, are each subject to legal and regulatory restrictions. The declaration and payment of future dividends will be at the discretion of the Board of Directors and will be dependent upon the profits and financial requirements of ACE and other factors, including legal restrictions on the payment of dividends and such other factors as the Board of Directors deems relevant. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
 
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 ITEM 6. Selected Financial Data
The following table sets forth selected consolidated financial data of the Company as of and for the years ended December 31, 2003, 2002, 2001, 2000 and 1999. These selected financial and other data should be read in conjunction with the Consolidated Financial Statements and related notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. In 1999 the Company, through a U.S. holding company, ACE INA, acquired CIGNA Corporation’s domestic property and casualty insurance operations including its run-off business and also its international property and casualty insurance companies and branches, including most of the accident and health business written through those companies.

For the years ended December 31,
(in thousands of U.S. dollars, except share,
per share data and selected data)	 	2003	 	 	2002	 	 	2001	 	 	2000	 	 	1999	
	
Operations data:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	 	$	9,602,383	 	 	$	6,830,504	 	 	$	5,917,177	 	 	$	4,534,763	 	 	$	2,485,737	
Net investment income	 	 	862,341	 	 	 	802,141	 	 	 	785,869	 	 	 	770,855	 	 	 	493,337	
Other income (expense)	 	 	(27,262	)	 	 	(20,552	)	 	 	452	 	 	 	2,942	 	 	 	–	
Net realized gains (losses)	 	 	252,280	 	 	 	(489,089	)	 	 	(58,359	)	 	 	(38,961	)	 	 	37,916	
Losses and loss expenses	 	 	6,117,402	 	 	 	4,906,510	 	 	 	4,552,456	 	 	 	2,936,065	 	 	 	1,639,543	
Life and annuity benefits	 	 	181,077	 	 	 	158,118	 	 	 	401,229	 	 	 	–	 	 	 	–	
Policy acquisition costs and administrative expenses	 	 	2,518,009	 	 	 	1,904,021	 	 	 	1,615,119	 	 	 	1,396,374	 	 	 	833,312	
Interest expense	 	 	177,425	 	 	 	193,494	 	 	 	199,182	 	 	 	221,450	 	 	 	105,138	
Income tax expense (benefit)	 	 	278,347	 	 	 	(115,688	)	 	 	(78,674	)	 	 	93,908	 	 	 	28,684	
Amortization of goodwill	 	 	–	 	 	 	–	 	 	 	79,571	 	 	 	78,820	 	 	 	45,350	
	
Income (loss) before cumulative effect	 	 	1,417,482	 	 	 	76,549	 	 	 	(123,744	)	 	 	542,982	 	 	 	364,963	
Cumulative effect of adopting a new accounting standard
(net of income tax)	 	 	–	 	 	 	–	 	 	 	(22,670	)	 	 	–	 	 	 	–	
	
Net income (loss)	 	 	1,417,482	 	 	 	76,549	 	 	 	(146,414	)	 	 	542,982	 	 	 	364,963	
Dividends on Mezzanine equity	 	 	(9,773	)	 	 	(25,662	)	 	 	(25,594	)	 	 	(18,391	)	 	 	–	
Dividends on Preferred Shares	 	 	(26,236	)	 	 	–	 	 	 	–	 	 	 	–	 	 	 	–	
	
Net income (loss) available to holders of Ordinary Shares	 	$	1,381,473	 	 	$	50,887	 	 	$	(172,008	)	 	$	524,591	 	 	$	364,963	
	
Diluted earnings (loss) per share before cumulative effect
of adopting a new accounting standard (1)	 	$	5.01	 	 	$	0.19	 	 	$	(0.64	)	 	$	2.31	 	 	$	1.85	
	
Diluted earnings (loss) per share (1)	 	$	5.01	 	 	$	0.19	 	 	$	(0.74	)	 	$	2.31	 	 	$	1.85	
	
Balance sheet data (at end of period):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total investments and cash	 	$	24,007,849	 	 	$	18,709,058	 	 	$	15,935,913	 	 	$	13,762,324	 	 	$	12,875,535	
Total assets	 	 	49,552,793	 	 	 	43,953,956	 	 	 	37,186,764	 	 	 	31,689,526	 	 	 	30,122,888	
Net unpaid losses and loss expenses	 	 	13,963,229	 	 	 	11,318,018	 	 	 	10,099,514	 	 	 	9,064,950	 	 	 	8,908,817	
Net future policy benefits for life and annuity contracts	 	 	477,169	 	 	 	433,418	 	 	 	377,395	 	 	 	–	 	 	 	–	
Long-term debt	 	 	1,349,202	 	 	 	1,748,937	 	 	 	1,349,473	 	 	 	1,424,228	 	 	 	1,424,228	
Trust preferred securities	 	 	475,000	 	 	 	475,000	 	 	 	875,000	 	 	 	875,000	 	 	 	575,000	
Total liabilities	 	 	40,717,997	 	 	 	37,254,220	 	 	 	30,769,007	 	 	 	25,958,265	 	 	 	25,672,328	
Mezzanine equity	 	 	–	 	 	 	311,050	 	 	 	311,050	 	 	 	311,050	 	 	 	–	
Shareholders’ equity	 	 	8,834,796	 	 	 	6,388,686	 	 	 	6,106,707	 	 	 	5,420,211	 	 	 	4,450,560	
Diluted book value per share	 	$	29.46	 	 	$	24.16	 	 	$	23.59	 	 	$	23.25	 	 	$	20.28	
Selected data	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss and loss expense ratio (2)	 	 	65.0%	 	 	 	73.5%	 	 	 	82.6%	 	 	 	64.7%	 	 	 	66.0%	
Underwriting and administrative expense ratio (3)	 	 	26.5%	 	 	 	28.2%	 	 	 	29.0%	 	 	 	30.8%	 	 	 	33.5%	
	
Combined ratio (4)	 	 	91.5%	 	 	 	101.7%	 	 	 	111.6%	 	 	 	95.5%	 	 	 	99.5%	
	
Net loss reserves to capital and surplus ratio (5)	 	 	163.4%	 	 	 	183.9%	 	 	 	171.6%	 	 	 	167.2%	 	 	 	200.2%	
Weighted average shares outstanding – diluted	 	 	275,655,969	 	 	 	269,870,023	 	 	 	233,799,588	 	 	 	227,418,430	 	 	 	197,626,354	
Cash dividends per share	 	$	0.74	 	 	$	0.66	 	 	$	0.58	 	 	$	0.50	 	 	$	0.42	
(1) Diluted earnings (loss) per share is calculated by dividing net income (loss) available to holders of Ordinary Shares by weighted average shares outstanding – diluted.
 
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(2) The loss and loss expense ratio is calculated by dividing the losses and loss expenses by net premiums earned excluding life reinsurance premiums. Net premiums earned for life reinsurance were $183,953, $158,277 and $406,280 for the years ended December 31, 2003, 2002 and 2001, respectively.
(3) The underwriting and administrative expense ratio is calculated by dividing the policy acquisition costs and administrative expenses by net premiums earned excluding life reinsurance premiums.
(4) The combined ratio is the sum of the loss and loss expense ratio and the underwriting and administrative expense ratio.
(5) The net loss reserves to capital and surplus ratio is calculated by dividing the sum of the net unpaid losses and loss expenses and net future policy benefits for life and annuity contracts by shareholders’ equity.

 ITEM 7. 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 year ended December 31, 2003. This discussion should be read in conjunction with our Consolidated Financial Statements and related notes presented on pages F-1 to F-55 of this Form 10-K.
 
Overview
ACE Limited (ACE) is the Bermuda-based holding company of the ACE Group of Companies incorporated with limited liability under the Cayman Islands Companies Law. We created our business office in Bermuda in 1985 when we initially incorporated the Company and we continue to maintain our business office in Bermuda. Through our various operating subsidiaries, we provide a broad range of insurance and reinsurance products to insureds worldwide through operations in the U.S. and almost 50 other countries. Our long-term business strategy focuses on achieving underwriting income and providing value to our clients and shareholders through the utilization of our substantial capital base in the insurance and reinsurance markets.
As an insurance and reinsurance company, we generate gross revenues from two principal sources, premiums which are usually paid in advance of loss payments, and dividends and interest income earned on invested assets. Cash flow is generated from premiums collected and investment income received less paid losses and loss expenses. Generally when an insurance company writing long-tail business grows, as ACE has in 2003, its cash flows tend to be positive. ACE generated approximately $4.2 billion in positive operating cash flow in 2003 while cash and invested assets over this period increased by $5.3 billion.
Invested assets are generally held in liquid, investment grade fixed income securities of relatively short duration. We also invest a small portion of our assets in less liquid or higher risk assets in an attempt to achieve higher returns. Claims payments in any short-term period are highly unpredictable due to the random nature of loss events and the timing of claims awards or settlements. The value of investments held to pay future claims is subject to market forces such as the level of interest rates, stock market volatility and credit events such as corporate defaults. The actual cost of claims is also volatile based on loss trends, inflation rates, court awards and catastrophic events. We believe that our cash balances, our highly liquid investments, credit facilities and reinsurance protection provide sufficient liquidity to meet any unforeseen claim demands that might occur in the year ahead.
The insurance industry is highly competitive with many companies offering similar coverage. Following two years of sharply rising prices, property insurance rates have leveled off or have declined slightly. The global property catastrophe reinsurance market has also softened with adequate capacity available for good risks. In other lines with rising loss costs, such as casualty and liability lines, or directors and officers liability insurance, rates have continued to increase and terms and conditions have remained restrictive.
Overall we believe that current rate levels are adequate for most of the risks seeking coverage and that favorable industry conditions should persist through the balance of 2004.
Several industry trends are noteworthy, first, favorable capital markets have facilitated the formation of several important new companies anxious to deploy their capital resources. New companies have become a significant factor in providing adequate insurance and reinsurance capacity and a moderating factor with regard to rising premium rates. Second, older companies with legacy issues such as asbestos or excess liability reserves have experienced adverse development from prior years’ unpaid claims. This has kept rates as well as terms and conditions from weakening. Third, interest rates are at historically low levels requiring companies to look to underwriting profitability as their main source of income. Fourth, the rating agencies have generally operated with a negative bias toward the insurance industry, effectively downgrading nearly all reinsurance industry leaders and reducing ratings on numerous primary insurers. This has put pressure on certain major companies to reduce leverage and risk.
 
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In this competitive environment, ACE has maintained its strong financial rating and global infrastructure permitting it to write a considerable volume of new and renewable insurance business at favorable rates.
On March 8, 2004, Assured Guaranty, formerly AGC Holdings, filed an amendment to the registration statement filed on December 23, 2003 on Form S-1 for an initial public offering (IPO). Assured Guaranty is a wholly owned subsidiary of ACE Limited. Upon completion of the IPO, Assured Guaranty will be the holding company for the operating units now known as ACE Guaranty Corp. and ACE Capital Re International. These two units form part of the Financial Services segment. We expect to retain as much as 25-35 percent of our interest in Assured Guaranty depending on market conditions. We believe this transaction will allow us to allocate more capital to our P&C business and further strengthen our balance sheet. Our website, under the “Investor Information” tab, has a link to the Form S-1 as filed with the SEC.
We are closely following developments on possible legislation to move all U.S. asbestos bodily injury claims to a federal trust for compensation in accordance with an established set of medical criteria and claim values. The trust would be funded by asbestos defendants and their insurers. As currently proposed, ACE would be one of the insurer participants. We believe that if the proposed legislation is enacted, our ultimate funding obligation under the trust would be less than we would be required to pay under the current tort system because the trust would likely avoid payments to unimpaired victims and obviate the need for extensive legal costs. However, we cannot predict if any such proposed legislation will be modified or adopted.
 
Critical Accounting Estimates
Our Consolidated Financial Statements include amounts that, either by their nature or due to requirements of accounting principles generally accepted in the U.S. (GAAP), are determined using best estimates and assumptions. While we believe that the amounts included in our Consolidated Financial Statements reflect our best judgment, actual amounts could ultimately materially differ from those currently presented in our Consolidated Financial Statements. We believe the items that require the most subjective and complex estimates are:
• unpaid losses and loss expense reserves, including asbestos reserves;
• reinsurance recoverable, including our bad debt provision;
• impairments to the carrying value of our investment portfolio;
• the valuation of our deferred tax assets;
• the fair value of certain derivatives; and
• the valuation of goodwill.
We believe our accounting policies for these items are of critical importance to our Consolidated Financial Statements. The following discussion provides more information regarding the estimates and assumptions required to arrive at these amounts and should be read in conjunction with the sections entitled: Unpaid Losses and Loss Expenses, Asbestos and Environmental Claims, Reinsurance, Investments and Cash, Net Realized Gains (Losses) and Other Income and Expense Items.
 
Unpaid losses and loss expenses
As an insurance and reinsurance company, we are required, under GAAP, to establish loss 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. These reserves include estimates for both claims that have been reported and those that have been incurred but not reported (IBNR), and include estimates of expenses associated with processing and settling these claims. At December 31, 2003, the unpaid losses and loss expense reserve was $27.1 billion. Our P&C loss reserves are not discounted. The process of establishing reserves for property and casualty (P&C) claims can be complex and is subject to considerable variability as it requires the use of informed estimates and judgments. These estimates and judgments are based on numerous factors, and may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed or as current laws change. We have actuarial staff in each of our operating segments who track insurance reserves and regularly evaluate the levels of loss reserves, taking into consideration factors that may impact the ultimate loss reserves. The potential for variation in loss reserves is impacted by numerous factors, which we explain below.
We estimate loss reserves for all insurance and reinsurance business we write. In most cases, we do not have all the necessary information to determine the ultimate settlement value for a claim at the time we are required to accrue for the loss. As a result, historical experience and other statistical information are used to estimate the ultimate cost of the loss, depending on the type of business. To
 
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determine carried reserves for a particular line of business, we may perform one or more reserving methods to estimate ultimate losses and loss expenses and use the results to select a single point estimate. These methods may include, but are not necessarily limited to, extrapolations of our historical reported and paid loss data, application of industry loss development patterns to our reported or paid losses, expected loss ratios developed by management, or historical industry loss ratios. Underlying judgments and assumptions that may be incorporated into these actuarial methods include, but are not necessarily limited to, adjustments to historical data used in models to exclude aberrations in claims data such as catastrophes that are typically analyzed separately, application of tail factors used to project ultimate claims from historical loss experience when there are several data points to use, adjustments to actuarial models and related data for known business changes, such as changes in claims covered under insurance contracts, and the effect of recent or pending litigation on future claim settlements. For each of our lines of business, management, in conjunction with internal actuaries, develop their “best estimate” of ultimate liabilities, which they believe provide a reasonable estimate of the required reserve. We utilize one set of assumptions in determining a single point estimate. We do not calculate a range of loss reserve estimates. Actuarial ranges are not a true reflection of the potential volatility between loss reserves estimated at the balance sheet date and the ultimate settlement of losses. This is due to the fact that an actuarial range is developed based on known events as of the valuation date whereas actual volatility or prior period development has historically occurred in subsequent Consolidated Financial Statements in part from events and circumstances that were unknown as of the original valuation date. Since the ACE INA acquisition in 1999, our consolidated reserve for losses and loss expenses, net of reinsurance, reported at each year-end has developed by as much as ten percent (four percent excluding asbestos and environmental reserve strengthening), although ultimate loss reserve development could be higher. See the “Analysis of Losses and Loss Expense Development” for a summary of historical volatility between estimated loss reserves and ultimate loss settlements. The Unpaid Losses and Loss Expenses section below includes a discussion of our reserve-setting procedures by segment. The following is a discussion of specific reserving considerations by type of claim:
 
Short-Tail Business, such as Property Coverages
Short-tail business describes lines of business for which losses are usually known and paid shortly after the loss actually occurs. This would include, for example, most property, personal accident, aviation hull and automobile physical damage policies that are written. Typically, there is less variability in these lines of business.
 
Long-Tail Business, such as Casualty Coverages
Long-tail business describes lines of business for which specific losses may not be known for some period and losses take much longer to emerge. This includes most casualty lines such as general liability, directors and officers liability (D&O) and workers compensation. Within our general insurance business, long-tail casualty business has been increasing and for the year ended December 31, 2003 comprises approximately 43 percent of net premiums earned. There are many factors contributing to the uncertainty and volatility of long-tail business. Among these are:
• Given the recent expansion of this business, historical experience is often too immature to place reliance upon for reserving purposes. Instead, particularly for newer lines of business, reserve methods are based on industry loss ratios or development patterns that reflect the nature and coverage of the underwritten business and its future development. For new or growing lines of business, actual loss experience is apt to differ from industry loss statistics that are based on averages as well as loss experience of previous underwriting years;
• The inherent uncertainty of the length of paid and reporting development patterns;
• The possibility of future litigation, legislative or judicial change that might impact future loss experience relative to prior loss experience relied upon in loss reserve analyses; and
• Loss reserve analyses typically require loss or other data be grouped by common characteristics. If data from two combined lines of business exhibit different characteristics, such as loss payment patterns, the credibility of the reserve estimate could be affected. Because casualty lines of business can have various intricacies in their underlying coverage, there is an inherent risk as to the homogeneity of the underlying data used in performing reserve analyses.
At December 31, 2003, approximately 83 percent of our reserves (78 percent excluding asbestos and environmental reserves) relate to long-tail business. The estimation of unpaid losses and loss expense reserves can also be affected by the layer at which a particular contract or set of contracts is written. In the case of direct insurance, where the insurer is taking on risk in the lower value end of the particular contract, the experience will tend to be more frequency driven. These lines of business allow for more traditional actuarial
 
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methods to be used in determining loss reserve levels, as it is customary to have more historical experience to rely upon. In the case of excess contracts, the experience will tend to be more of a severity nature, as only a significant loss will enter the layer. For structured or unique contracts, most common to the financial solutions business and to a lesser extent our reinsurance business, traditional actuarial methods for setting loss reserves (such as loss development triangles), have to be tempered with an analysis of each contract’s terms, original pricing information, subsequent internal and external analyses of the ongoing contracts, market exposures and history and qualitative input from claims managers.
 
Asbestos and Environmental Reserves (A&E)
Included in our liabilities for losses and loss expenses are liabilities for asbestos, environmental and latent injury damage claims and expenses (A&E). These claims are principally related to claims arising from remediation costs associated with hazardous waste sites and bodily-injury claims related to exposure to asbestos products and environmental hazards. The estimation of these liabilities is particularly sensitive to the recent legal environment, including specific settlements that may be used as precedents to settle future claims.
In establishing A&E reserves for periods prior to the fourth quarter of 2002, we assumed that significant additional state judicial or legislative reform would substantially eliminate payments to future claimants who are not physically impaired. In January 2003, we announced additions to our fourth quarter 2002 A&E reserves based on the more conservative assumption that there will be no future state or federal asbestos reform. Therefore, our A&E reserves do not reflect any anticipated changes in the legal, social or economic environment, or any benefit from future legislative reforms. The vast majority of our reserve increase in the fourth quarter of 2002 is due to the strengthening of the IBNR provision for peripheral defendants and future increases in severity.
We believe the most significant variables relating to our A&E reserves include assumptions with respect to payments to unimpaired claimants and the liability of peripheral defendants. In establishing our A&E reserves, we consider multiple recoveries by claimants against various defendants; the ability of a claimant to bring a claim in a state in which they have no residency or exposure; the ability of a policyholder to claim the right to non-products coverage; and whether high-level excess policies have the potential to be accessed given the policyholders claim trends and liability situation. The results in asbestos cases announced by other carriers may well have little or no relevance to us because other coverage exposures are highly dependent upon the specific facts of individual coverage and resolution status of disputes among carrier, policyholder and claimants.
Based on the policies, the facts, the law and a careful analysis of the impact that these risk factors will likely have on any given account, we estimate the potential liability for indemnity, policyholder defense costs and coverage litigation expense. There are many complex variables that we consider when estimating the reserves for our inventory of asbestos accounts. The variables involved may directly impact the predicted outcome. Sometimes, the outcomes change significantly based on a small change in one risk factor related to just one account.
 
Reinsurance recoverable
The recognition of reinsurance recoverable requires two key judgments. The first judgment involves our estimation of the amount of gross IBNR to be ceded to reinsurers. Ceded IBNR is generally developed as part of our loss reserving process and consequently, its estimation is subject to similar risks and uncertainties as the estimation of gross IBNR (see Critical Accounting Estimates – Unpaid losses and loss expenses). The second judgment involves our estimate of the amount of the reinsurance recoverable balance that we will ultimately be unable to recover from related reinsurers due to insolvency, contractual dispute, or for other reasons. Amounts estimated to be uncollectible are reflected in a bad debt provision that reduces the reinsurance recoverable balance and shareholders’ equity. Changes in the bad debt provision are reflected in net income. At December 31, 2003, the reinsurance recoverable balance includes $13.7 billion of reinsurance recoverable on unpaid losses and loss expenses, less a provision for bad debts of $557 million. The unpaid recoverable consist of ceded IBNR of $7.3 billion and ceded case reserves of $5.9 billion. Also included are $1.3 billion of reinsurance recoverable on paid loss and loss adjustment expenses, less a provision for bad debts of $403 million.
Although the contractual obligation of individual reinsurers to pay their reinsurance obligations is based on specific contract provisions, the collectibility of such amounts requires significant estimation by management. The majority of the balance we have accrued as recoverable will not be due for collection until sometime in the future (in some cases several decades from now). Over this period of time, economic conditions and operational performance of a particular reinsurer may impact their ability to meet these obligations and
 
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while they may continue to acknowledge their contractual obligation to do so, they may not have the financial resources or willingness to fully meet their obligation to us.
To estimate the bad debt provision, the reinsurance recoverable must first be allocated to applicable reinsurers. This determination is based on a process rather than an estimate, although an element of judgment must be applied. As part of this process, ceded IBNR is allocated by reinsurer. The allocations are generally based on historical relationships between gross and ceded losses. If actual experience varies materially from historical experience, the allocation of reinsurance recoverable by reinsurer will change. While such change is unlikely to result in a large percentage change in the bad debt provision, it could, nevertheless, have a material effect on our net income in the period recorded.
We use a default analysis and, to a lesser extent, actual collection experience to estimate uncollectible reinsurance. The primary components of the default analysis are reinsurance recoverable balances by reinsurer, net of collateral, and default factors used to determine the portion of a reinsurer’s balance deemed uncollectible. The definition of collateral for this purpose requires some judgment and is generally limited to assets held in trust, letters of credit, and liabilities held by us with the same legal entity for which we believe there is a right of offset. Default factors require considerable judgment and are determined using the current rating, or rating equivalent, of each reinsurer as well as other key considerations and assumptions. The more significant considerations include, but are not necessarily limited to, the following:
• historical industry default statistics for the reinsurer’s current ratings class, the actual collection experience of the reinsurer, collateral triggers or other contractual provisions that may mitigate default exposure, and the dates the balances will likely become due (duration). For recoverable balances considered representative of the larger population (i.e., default probabilities are consistent with similarly rated reinsurers and payment durations conform to averages), management generally applies industry default factors consistent with the reinsurer’s particular rating class. Such factors have been developed by a major ratings agency;
• for recoverable balances that are both unrated by a major rating agency and for which management is unable to determine a credible rating equivalent based on a parent, affiliate, peer company, or internal analysis, additional judgment is required to determine a reasonable default factor. Based on certain industry benchmarks, management generally uses a default factor approximating 24 percent for such balances; and
• for insolvent insurers, management develops default factors based on an evaluation of each of the insolvent entities.
At December 31, 2003, the use of different assumptions within the model could have a material effect on the bad debt provision reflected in our Consolidated Financial Statements. To the extent the creditworthiness of our reinsurers was to deteriorate due to an adverse event affecting the reinsurance industry, such as a large number of major catastrophes, actual uncollectible amounts could be significantly greater than our bad debt provision. Such an event could have a material adverse effect on our financial condition, results of operations, and our liquidity. Given the various considerations used to develop default factors, we cannot precisely quantify the effect a specific industry event may have on the bad debt provision. However, based on the composition (particularly the average credit quality) of the reinsurance recoverable balance at December 31, 2003, we estimate that a ratings downgrade of one notch (for example from A to A-) for all rated reinsurers could increase our bad debt provision by as much as 15 percent, assuming no other changes relevant to the calculation. While a rating downgrade would result in an increase in our provision for bad debt and a charge to earnings in that period, a downgrade in and of itself does not imply that we will not ultimately collect all of the ceded reinsurance recoverable from the reinsurers in question.
Additional information on reinsurance recoverable can be found in the section entitled “Reinsurance”.
 
Investments
We record all investments in our portfolio at fair value, being the quoted market price of these securities provided by either independent pricing services, or when such prices are not available, by reference to broker or underwriter bid indications. We regularly review our investments for possible impairment. If there is a decline in a security’s net realizable value, we must determine whether that decline is temporary or “other than temporary”. If we believe a decline in the value of a particular investment is temporary, we record the decline as an unrealized loss in our shareholders’ equity. If we believe the decline is “other than temporary”, we write down the carrying value of the investment and record a realized loss in our consolidated statement of operations. The determination as to whether or not the decline is “other than temporary” principally requires the following critical judgments: i) the circumstances that require management to
 
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make a specific assessment as to whether or not the decline is “other than temporary”, such as the time period an investment has been in a loss position and the significance of the decline; and ii) for those securities to be assessed, whether we have the ability and intent to hold the security through an expected recovery period, absent a significant change in facts that is expected to have a material adverse effect on either the financial markets or the financial position of the issuer.
With respect to securities where the decline in value is determined to be temporary and the security’s value is not written down, a subsequent decision may be made to sell that security and realize a loss. Subsequent decisions on security sales could be made based on changes in liquidity needs (i.e., arising from a large insured loss such as a catastrophe), internal risk management considerations, the financial condition of the issuer or its industry, market conditions, and new investment opportunities. Day to day management of the majority of the Company’s investment portfolio is outsourced to third party investment managers. While these investment managers may, at a given point in time, believe that the preferred course of action is to hold securities with unrealized losses until such losses are recovered, the dynamic nature of portfolio management may result in a subsequent decision to sell the security and realize the loss based upon new circumstances such as those related to the changes described above. We believe that subsequent decisions to sell such securities are consistent with the classification of our portfolio as available for sale.
Because our investment portfolio is the largest component of consolidated assets and a multiple of shareholders’ equity, adverse changes in economic conditions subsequent to the balance sheet date could result in other than temporary impairments that are material to the financial condition and operating results of the Company. Such economic changes could arise from overall changes in the financial markets or specific changes to industries, companies, or foreign governments in which the Company maintains relatively large investment holdings. More information regarding our process for reviewing our portfolio for possible impairments can be found in the section entitled “Net Realized Gains (Losses)”.
Our exposure to interest rate risk is concentrated in our fixed income portfolio. An increase in interest rates of 50 basis points applied instantly across the yield curve would have resulted in a decrease in the market value of the fixed income portfolio of approximately $347 million at December 31, 2003. An immediate time horizon was used as this presents the worst case scenario.
 
Deferred Tax Assets
We provide for income taxes in accordance with the provisions of FAS No. 109, “Accounting for Income Taxes” (FAS 109). Deferred tax assets and liabilities are recognized consistent with the asset and liability method required by FAS 109. Our deferred tax assets and liabilities primarily result from temporary differences between the amounts recorded in our Consolidated Financial Statements and the tax basis of our assets and liabilities. We determine deferred tax assets and liabilities separately for each tax-paying component (an individual entity or group of entities that is consolidated for tax purposes) in each tax jurisdiction.
At December 31, 2003, our net deferred tax asset was $1.1 billion, including $412 million of net operating loss carryforwards, which will expire in the years 2018-2022. (See Note 14 of the Consolidated Financial Statements for more information). At each balance sheet date, management assesses the need to establish a valuation allowance that reduces deferred tax assets when it is more likely than not that all, or some portion, of the deferred tax assets will not be realized. The valuation allowance is based on all available information including projections of future taxable income from each tax-paying component in each tax jurisdiction principally derived from business plans, and available tax planning strategies. Projections of future taxable income incorporate several assumptions of future business and operations that are apt to differ from actual experience. If, in the future, our assumptions and estimates that resulted in our forecast of future taxable income for each tax-paying component proves to be incorrect, an additional valuation allowance could become necessary. This could have a material adverse effect on our financial condition, results of operations and liquidity. At December 31, 2003, the valuation allowance of $135.6 million reflects management’s assessment, that it is more likely than not that a portion of the deferred tax asset will not be realized due to the inability of certain foreign subsidiaries to generate sufficient taxable income.
 
Derivatives
We adopted Statement of Financial Accounting Standards (FAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (FAS 133), as of January 1, 2001. FAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. FAS 133 requires that all derivatives be recognized as either assets or liabilities on the balance sheet and be measured at fair value. We maintain investments in derivative instruments such as futures, options, interest rate swaps and foreign currency forward contracts primarily to manage duration and foreign currency ex -
 
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posure, enhance our portfolio yield or obtain an exposure to a particular financial market. Open derivatives as of the balance sheet date are reported at fair value based on market quotes or valuations provided to us by third party investment managers using market data. The net fair value related to these instruments at December 31, 2003, was $21 million and is included in accounts payable, accrued expenses and other liabilities. 
Certain products (principally credit protection oriented) issued by the Financial Services segment have been determined to meet the definition of a derivative under FAS 133. These products consist primarily of credit default swaps, index-based instruments and certain financial guaranty coverages. We view these products, for which we sell credit protection to others, as an extension of our financial guaranty business but which do not qualify for the financial guaranty insurance scope exception under FAS 133 and therefore are reported at fair value, with changes in fair value included in our earnings. We believe that the most meaningful presentation of these derivatives is to reflect revenue as net premiums earned, and to record estimates of losses and loss expenses on specific credit events as incurred losses. When we determine that a loss on a derivative contract is probable, we establish reserves for the loss. Other changes in fair value are included in realized gains and losses on derivative financial instruments. We generally hold derivative contracts to maturity. Where we hold a derivative to maturity, the cumulative unrealized gains and losses will net to zero if we incur no credit losses on that contract. (See Note 2(o) of the Consolidated Financial Statements for more information).
The fair value of these instruments depends on a number of factors including credit spreads, changes in interest rates, recovery rates and the credit ratings of referenced entities. Where available, we use quoted market prices to determine the fair value of these insured credit derivatives. If the quoted prices are not available, particularly for senior layer CDOs and equity layer credit protection, the fair value is estimated using valuation models for each type of credit protection. These models may be developed by third parties, such as rating agencies, or internally based on market conventions for similar transactions, depending on the circumstances. These models and the related assumptions are continuously reevaluated by management and enhanced, as appropriate, based upon improvements in modeling techniques and availability of more timely market information. The majority of our single name credit derivatives are valued using third-party market quotes. However, in the event that we terminate a derivative contract prior to maturity, as a result of a decision to exit a line of business or for risk management purposes, the unrealized gain or loss will be realized through premiums earned and losses incurred. Our exposures to CDOs are typically valued using a combination of rating agency models and internally developed models.
Valuation models include the use of management estimates and current market information. Management is also required to make assumptions on how the fair value of derivative instruments is affected by current market conditions. Management considers factors such as current prices charged for similar agreements, performance of underlying assets, and our ability to obtain reinsurance for our insured obligations. 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 the Consolidated Financial Statements, and the differences may be material.
Fair value adjustments attributed to derivative transactions, principally credit derivatives, are included in our net realized gains (losses). We recorded a gain of $163 million and losses of $77 million in 2003 and 2002, respectively. The change in fair value is due to many factors but primarily due to a change in credit spreads. For example, the 2003 gain corresponds to an approximately 60-65 percent tightening in investment grade corporate spreads and the 2002 loss corresponds to an approximate 20-25 percent widening. Depending on our ultimate percentage holding of Assured Guaranty after the planned IPO and changes in Assured Guaranty’s credit derivatives business after the IPO, the relationship between changes in corporate credit spreads and changes in the fair value of credit derivatives affecting our net income is apt to differ from historical results. Given these variables, the sensitivity of our future net income to changes in credit spreads is difficult to quantify at this time; however, we anticipate that after the completion of the planned IPO such sensitivity will be reduced relative to 2003.
In addition to credit derivatives, through the Financial Services segment, we have entered into a few other, relatively illiquid, index-based derivative instruments that are reported at fair value. These instruments are principally linked to equity and real estate market indices. The determination of fair value for these derivatives requires considerable judgment as there is limited ability to trade the contracts since they are uniquely structured and the exposure period covers up to 30 years.
 
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Valuation of Goodwill
Goodwill, which represents the excess of the cost of our acquisitions over the tangible net assets we acquired, was $2.7 billion at December 31, 2003. The ACE INA acquisition comprises approximately 79 percent of this balance. In June 2001, the Financial Accounting Standards Board (FASB) issued FAS 142, “Goodwill and Other Intangible Assets”, which primarily addresses accounting for goodwill and intangible assets subsequent to their acquisition. Under FAS 142, goodwill is no longer amortized to income but instead, is subject to annual impairment tests. At January 1, 2002, the initial adoption date of FAS 142, and January 1, 2003, goodwill was assigned to the applicable reporting units of the acquired entities giving rise to goodwill. Our reporting units for purposes of impairment testing are primarily based on legal entities within our operating segments. The allocation of goodwill to these reporting units is consistent with goodwill recognized at acquisition. In effect, impairment tests are performed for each acquired entity giving rise to goodwill. The most significant reporting units are the domestic and international divisions of ACE INA which were acquired in 1999, ACE Tempest Re acquired in 1996, Tarquin Limited acquired in 1998 and Capital Re Corporation acquired in 1999. There are other reporting units that resulted from smaller acquisitions that are also assessed annually. The transitional impairment test of goodwill determined that there was no impairment in goodwill in 2002. In our impairment tests, we principally use both an earnings model, that includes relevant financial data of comparable companies to the reporting unit being tested, such as the relationship of price to book value for recent transactions and market valuations of publicly traded companies, and an estimation of fair value based on present value of estimated net cash flows. We must assess whether the current fair value of our operating units is at least equal to the fair value used in the determination of goodwill. In doing this, we make assumptions and estimates about the profitability attributable to our operating segments, as this is important in assessing whether an impairment has occurred. As part of our ongoing management assessments, we regularly analyze our operating companies in an effort to maximize future cash flows and profitability. As a result of that review, updated forecasts supported indications that two relatively small majority-owned companies would not, under current market conditions, achieve sufficient contract sales volumes to generate and sustain future profitable results. As a consequence of these revised expectations, we recognized a goodwill impairment loss of $6 million during the first quarter of 2003. If, in the future, our assumptions and estimates made in assessing the fair value of acquired entities prove to be incorrect, goodwill carried on our balance sheet could be materially overstated. This would cause us to write-down the carrying value of goodwill, resulting in a charge to earnings in the period recorded. Accordingly, this could have a material adverse effect on our results of operations.

Results of Operations – Years Ended December 31, 2003, 2002 and 2001
The discussions that follow include tables, which show both our consolidated and segment operating results for the years ended December 31, 2003, 2002 and 2001. In presenting our operating results, we have discussed our performance with reference to underwriting results and with reference to income excluding net realized gains (losses) and the related income tax, which are both non-GAAP measures. Our consolidated and segment operating results below provide a reconciliation of underwriting results and income excluding net realized gains (losses) to net income, which we consider to be the most directly comparable GAAP financial measure. We consider these measures, which may be defined differently by other companies, to be important to an understanding of our overall results of operations. Underwriting results are calculated by subtracting losses and loss expenses, life and annuity benefits, policy acquisition costs and administrative expenses from net premiums earned. We use underwriting results and operating ratios to monitor the results of our operations without the impact of certain factors, including investment income, other income and expenses, interest and income tax expense and net realized gains (losses). We exclude net realized gains (losses), including the tax effect, when analyzing our operations because the amount of these gains (losses) is heavily influenced by, and fluctuates in part according to, the availability of market opportunities, and are generally driven by economic factors that are not necessarily consistent with key drivers of underwriting performance. We believe the use of these measures enhances the understanding of our results of operations by highlighting the underlying profitability of our insurance business. Underwriting results and income excluding net realized gains (losses) should not be viewed as a substitute for measures determined in accordance with GAAP.
 
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Consolidated Operating Results

(in millions of U.S. dollars)	  	2003	 	  	2002	 	  	2001	 	
	 	
Gross premiums written	  	$	14,637	 	  	$	12,819	 	  	$	10,165	 	
Net premiums written	  	 	10,215	 	  	 	8,068	 	  	 	6,363	 	
Net premiums earned	  	 	9,602	 	  	 	6,830	 	  	 	5,916	 	
Losses and loss expenses	  	 	6,118	 	  	 	4,906	 	  	 	4,552	 	
Life and annuity benefits	  	 	181	 	  	 	158	 	  	 	401	 	
Policy acquisition costs	  	 	1,357	 	  	 	960	 	  	 	785	 	
Administrative expenses	  	 	1,160	 	  	 	944	 	  	 	829	 	
	 	
Underwriting income (loss)	  	 	786	 	  	 	(138	)	  	 	(651	)	
	 	
Net investment income	  	 	861	 	  	 	802	 	  	 	785	 	
Net realized gains (losses)	  	 	252	 	  	 	(489	)	  	 	(58	)	
Other income (expense)	  	 	(27	)	  	 	(21	)	  	 	1	 	
Interest expense	  	 	177	 	  	 	193	 	  	 	199	 	
Income tax expense (benefit)	  	 	278	 	  	 	(116	)	  	 	(78	)	
Amortization of goodwill	  	 	–	 	  	 	–	 	  	 	79	 	
Cumulative effect of adopting a new accounting standard	  	 	–	 	  	 	–	 	  	 	(23	)	
	 	
Net income (loss)	  	$	1,417	 	  	$	77	 	  	$	(146	)	
	 	
Loss and loss expense ratio	  	 	65.0%	 	  	 	73.5%	 	  	 	82.6%	 	
Policy acquisition cost ratio	  	 	14.2%	 	  	 	14.2%	 	  	 	14.1%	 	
Administrative expense ratio	  	 	12.3%	 	  	 	14.0%	 	  	 	15.0%	 	
Combined ratio	  	 	91.5%	 	  	 	101.7%	 	  	 	111.7%	 	
 
Gross premiums written increased 14 percent in 2003 compared with 2002. Gross premiums written reflect the premiums paid by our customers to secure insurance or reinsurance protection from us. In 2003, gross premiums written in our P&C businesses increased 21 percent (approximately four percent of this increase is due to the appreciation of foreign currencies relative to the U.S. dollar) and gross premiums written in our Financial Services business decreased 32 percent, compared with 2002. Throughout 2003, we continued to experience rate increases and improved terms and conditions on P&C business, especially casualty policies. The decline in the Financial Services business was primarily due to the reduction of premiums for credit default swaps that cover the equity (first-loss portion) of a synthetic collateralized debt obligation (CDO). As discussed later in this report, production in the Financial Services segment can fluctuate dramatically from period to period. Gross premiums written increased 26 percent in 2002 compared with 2001 and net premiums written increased 27 percent.
Net premiums written, which reflect the premiums we retain after purchasing reinsurance protection, increased 27 percent in 2003 compared with 2002. Net premiums written increased 40 percent in our P&C businesses (four percent of this increase is due to appreciation of foreign currencies relative to the U.S. dollar) and decreased 31 percent in our Financial Services business. Our P&C net premiums written are growing more than our P&C gross premiums written because we are retaining more of the business we write. Our retention ratio (the ratio of net premiums written to gross premiums written) increased to 67 percent in 2003 compared with 58 percent in 2002. This reflects a conscious decision on our part to focus on direct lines of business and to shift away from heavily reinsured business. Net premiums earned, which reflect the portion of net premiums written that were recorded as revenues for the period, increased 41 percent in 2003 compared with 2002. Net premiums earned in our P&C businesses increased 50 percent (five percent of this increase is due to the appreciation of foreign currencies relative to the U.S. dollar) while our Financial Services business decreased two percent. The growth in P&C net premiums earned is a result of the growth in P&C net premiums written. Net premiums earned in 2002 increased 15 percent compared with 2001. These increases reflect the improved insurance market conditions that resulted in a combination of price increases on renewal business and growth in new business opportunities.
 
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The following table provides a consolidated breakdown of net premiums earned by line of business for the years ended December 31, 2003 and 2002.

(in millions of U.S. dollars)	 	2003	 	2002	
	
Casualty	 	$	4,118	 	$	2,589	
Property and all other	 	 	3,279	 	 	2,255	
Personal accident	 	 	920	 	 	701	
	
Total P&C	 	 	8,317	 	 	5,545	
	
Global Re – life	 	 	184	 	 	158	
Financial guaranty	 	 	328	 	 	282	
Financial solutions	 	 	773	 	 	845	
	
Net premiums earned	 	$	9,602	 	$	6,830	

Underwriting results for our P&C and Financial Services business are discussed by reference to 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 of our P&C and Financial Services business by net premiums earned from our P&C and Financial Services business. We do not calculate these ratios for the life reinsurance business, because they are not appropriate measures of the underwriting results for that business. 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 losses.
The loss and loss expense ratio declined in 2003, as the 2002 year was impacted by the increase to our A&E reserve. This reserve strengthening resulted in a net increase in our losses and loss expenses of $516 million ($354 million after tax) and added 7.7 percentage points to our loss and loss expense ratio. In 2003, our losses and loss expenses were higher by $164 million due to the depreciation of the U.S. dollar. Our loss and loss expense ratio is impacted by changes in the mix of business written and the level of catastrophe losses in a period. In 2003, we incurred $112 million of catastrophe losses, compared with $156 million in 2002. We have taken advantage of increasing rates and market opportunities, and most of these opportunities are in the casualty insurance and reinsurance areas, where rate increases are accelerating. Casualty business is typically written at higher loss ratios than property business because in some cases, the losses for casualty business can emerge long after the coverage period has expired, and claim settlement can be more complex than for property claims, which tends to lengthen the settlement period. However, because of the longer claim-payout duration, we benefit from investing the premiums for a longer period of time, therefore potentially increasing our net investment income. We have also increased our loss ratio assumptions over the past year in some of our casualty lines in connection with increases we have made in our retained risk levels. Our loss and loss expense ratio is also influenced by the size of LPTs written in a particular quarter. LPTs are typically recorded at higher loss ratios than our other lines of business. In 2002, we recorded gross premiums written attributed to LPT business of $311 million compared with $274 million in 2003. Also impacting our loss and loss expense ratio is adverse prior period development. We incurred $164 million of adverse prior period development in 2003, compared with $709 million ($193 million excluding A&E) in 2002. Our segment discussions below contain more information about prior period development. The 2001 loss and loss expense ratio was impacted by the September 11 tragedy and reserve strengthening for casualty lines, which added $650 million and $170 million, respectively to losses and loss expenses. Together, these two events added 14.7 percentage points to our 2001 loss and loss expense ratio.
Our policy acquisition costs include commissions, premium taxes, underwriting and other costs that vary with, and are primarily related to, the production of premium. The policy acquisition cost ratio was stable in 2003 compared with 2002 and 2001. The positive impact of the increase in net premiums earned was offset by changes in business mix. We have increased the volume of business generated from Global Reinsurance in ACE Tempest Re USA. ACE Tempest Re USA writes a higher proportion of business on a treaty-basis which incurs higher acquisition costs due to higher ceding commission expense. We have also purchased less reinsurance in the Insurance – North American segment, which has resulted in reduced ceding commission income. Administrative expenses include all other
 
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operating costs. Administrative expenses increased in 2003 and 2002 to support the growth in our business and partially due to the depreciation of the U.S. dollar, which had the effect of increasing administrative expenses for Insurance – Overseas General. The administrative expense ratio improved in 2003 and 2002 due to the significant increase in net premiums earned.
Net investment income increased $59 million in 2003 and $17 million in 2002, due to higher average invested assets, partially offset by a decline in the investment portfolio’s yield due to the impact of lower interest rates. See the section entitled “Net Investment Income” for more information.
Increases in net premiums earned and lower catastrophe losses in 2003 contributed to the higher underwriting income compared with 2002, which was impacted by the A&E reserve strengthening. Our net income increased $1.3 billion in 2003 due to higher underwriting income and the impact of net realized gains of $252 million in 2003 compared with net realized losses of $489 million in 2002. The appreciation of foreign currencies relative to the U.S. dollar added $24 million to our net income in 2003. In 2001, we reported underwriting losses due to the September 11 tragedy and the casualty reserve strengthening.
 
Segment Operating Results – Years Ended December 31, 2003, 2002 and 2001
The performance of our management for the P&C and Financial Services segments are measured based on the results achieved in underwriting income and income excluding net realized gains (losses).
 
Insurance – North American
The Insurance – North American segment comprises our P&C insurance operations in the U.S., Bermuda and Canada. This segment writes a variety of insurance products including property, liability (general liability and workers’ compensation), professional lines (directors and officers (D&O) and errors and omissions coverages (E&O)), marine, program business, accident and health (A&H) – principally being personal accident, aerospace, consumer-oriented products and other specialty lines.

(in millions of U.S. dollars)	 	2003	 	 	2002	 	 	2001	 	
	 	
Gross premiums written	 	$	6,895	 	 	$	6,116	 	 	$	4,521	 	
Net premiums written	 	 	4,015	 	 	 	2,919	 	 	 	1,986	 	
Net premiums earned	 	 	3,654	 	 	 	2,475	 	 	 	1,816	 	
Losses and loss expenses	 	 	2,521	 	 	 	2,200	 	 	 	1,373	 	
Policy acquisition costs	 	 	387	 	 	 	216	 	 	 	206	 	
Administrative expenses	 	 	402	 	 	 	341	 	 	 	315	 	
	 	
Underwriting income (loss)	 	 	344	 	 	 	(282	)	 	 	(78	)	
	 	
Net investment income	 	 	410	 	 	 	406	 	 	 	426	 	
Other income (expense)	 	 	(14	)	 	 	1	 	 	 	1	 	
Interest expense	 	 	29	 	 	 	32	 	 	 	37	 	
Income tax expense (benefit)	 	 	179	 	 	 	(4	)	 	 	94	 	
	 	
Income excluding net realized gains (losses)	 	 	532	 	 	 	97	 	 	 	218	 	
Net realized gains (losses)	 	 	39	 	 	 	(199	)	 	 	(19	)	
Tax effect of net realized gains (losses)	 	 	–	 	 	 	43	 	 	 	8	 	
	 	
Net income (loss)	 	$	571	 	 	$	(59	)	 	$	207	 	
	 	
Loss and loss expense ratio	 	 	69.0%	 	 	 	88.9%	 	 	 	75.6%	 	
Policy acquisition cost ratio	 	 	10.6%	 	 	 	8.7%	 	 	 	11.3%	 	
Administrative expense ratio	 	 	11.0%	 	 	 	13.8%	 	 	 	17.4%	 	
Combined ratio	 	 	90.6%	 	 	 	111.4%	 	 	 	104.3%	 	
 
Insurance – North American increased gross premiums written 13 percent in 2003 compared with 2002. This segment continues to benefit from a robust market for casualty lines of business, which represent a growing portion of its gross premiums written. Despite strong casualty premium production in 2003, the growth in gross premiums written has been moderate compared with the 35 percent growth reported in 2002 over 2001. This reflects the stabilization of property rates and our decision to exit certain heavily reinsured program business in late 2002 so that we could deploy our capital in areas with the greatest opportunity for underwriting income.
 
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Renewal rates for property business in the U.S. were down slightly in 2003 compared with the significant renewal rate increases experienced in 2002. Overall, property rates are generally at pricing levels that adequately compensate for the exposure being underwritten. For casualty lines, renewal rates on certain of the longer tail lines, such as workers’ compensation, continued to rise, but at a lower pace than in 2002. However, other casualty lines, such as D&O and umbrella excess business, continue to experience solid rate increases in 2003. Insurance – North American significantly increased gross premiums written in 2002 compared with 2001. This increase was due to higher renewal rates as a result of reduced industry capacity, and also due to new products introduced in this segment beginning in 2002, including A&H, excess casualty and medical risk.
Net premiums written increased 38 percent in 2003, compared with 2002. The primary factor contributing to the greater growth rate for net premiums written compared with gross premiums written is Insurance – North American’s decision to retain more of its gross premiums written. Insurance – North American increased its retention in order to take advantage of improved market conditions for rates and terms. A shift in business mix has also contributed to the growth in net premiums written in 2003. ACE Risk Management (ARM) has shifted its business mix away from the heavily reinsured program business and has increased retention of national account business. As a result, the retention ratio for Insurance – North American increased to 58 percent for 2003, compared with 48 percent for 2002.
Insurance – North American’s insurance operations are organized into distinct divisions, each offering specialized products and services targeted at specific markets. The following table provides an entity/divisional breakdown of Insurance – North American’s net premiums earned for the years ended December 31, 2003, 2002 and 2001.

(in millions of U.S. dollars)	 	2003	 	2002	 	2001	
	
ACE Westchester Specialty	 	$	991	 	$	787	 	$	506	
ACE Risk Management	 	 	822	 	 	488	 	 	388	
ACE Diversified Risk	 	 	538	 	 	259	 	 	186	
ACE U.S. International	 	 	387	 	 	313	 	 	234	
ACE Bermuda	 	 	420	 	 	259	 	 	168	
Other	 	 	496	 	 	369	 	 	334	
	
Net premiums earned	 	$	3,654	 	$	2,475	 	$	1,816	

ACE Westchester Specialty specializes in the wholesale distribution of excess and surplus lines property, inland marine and casualty coverages and products. ACE Westchester Specialty also provides coverage for agriculture business and specialty programs through its Program division. ACE Westchester Specialty’s net premiums earned for 2003 increased 26 percent, compared with 2002. This increase primarily reflects higher casualty writings due to the robust casualty market and growth in agriculture business.
ARM, which offers custom coverage solutions for large companies and national accounts, reported an increase of 68 percent in net premiums earned for 2003, compared with 2002. ARM’s increase in net premiums earned is being driven by growth in excess workers’ compensation (primarily high deductible policies in national accounts business) and, to a lesser extent custom casualty due to new business and increased retention ratios.
ACE Diversified Risk, which writes D&O, E&O and aerospace business, doubled its net premiums earned in 2003, compared to 2002. The increase primarily reflects higher D&O and E&O production, which have been experiencing a favorable rate environment and more restrictive policy terms and conditions. In addition, aerospace net premiums earned increased due to new business from an aviation syndicate that ACE USA participates in. Net premiums earned also benefited from increased retention.
ACE U.S. International (formerly referred to as Specialty P&C) provides worldwide risk protection by offering P&C coverages for U.S.-based multi-national companies. As a result of new business and higher renewal rates, ACE U.S. International’s net premiums earned for 2003 increased 24 percent compared with 2002, due to growth in the casualty and commercial marine lines.
ACE Bermuda, which specializes in providing professional lines and excess liability coverage, reported an increase in net premiums earned of 62 percent for 2003, compared with 2002. ACE Bermuda benefited from both higher renewal rates and increased volume of new business.
 
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Insurance – North American’s other divisions include ACE Select Markets (formerly referred to as Consumer Solutions group), ACE Casualty Risk, the A&H group, Global Energy, ACE USA Warranty, the run-off operations and our insurance-related service operations. Net premiums earned for these divisions increased $127 million for 2003, compared with 2002. Contributing to this increase was higher premium volume for ACE Casualty Risk and the A&H group. These units commenced operations in 2002 and 2001, respectively, and are experiencing strong demand for their primary product offerings, mainly umbrella excess for ACE Casualty Risk and personal accident coverage for the A&H group. In addition, ACE Select Markets also reported strong increases in net premiums earned primarily in 2003 for recreational marine business.
The loss and loss expense ratio decreased to 69.0 percent in 2003, compared with 88.9 percent in 2002. Losses and loss expenses for 2002 included $516 million related to the A&E reserve strengthening, which added 20.9 percentage points to the 2002 loss and loss expense ratio. The 2003 loss and loss expense ratio for Insurance – North American reflects the effect of a greater proportion of net premiums earned relating to casualty business, which has a longer claim-payout duration and typically produces higher loss and loss expense ratios than property business. The shift to more casualty business in 2003 more than offset the benefit of rate increases on both property and casualty lines of business in 2002. Additionally, Insurance – North American incurred adverse prior period development of $91 million in 2003, compared with adverse development of $79 million in 2002. The 2003 adverse development related primarily to casualty lines and principally emerged from medical inflation in workers’ compensation and large loss activity in commercial multi-peril. Additional minor development was experienced in professional liability, reinsurance of long-term disability and run-off business offset by positive development on property, excess liability and marine lines of business because case reserves developed better than expected. The 2002 development was primarily from run-off business with the remainder being attributed to several lines of business including workers’ compensation, commercial automobile, health care asset management run-off, warranty and financial institutions business. Losses and loss expenses for 2001 included $119 million related to the September 11 tragedy.
The policy acquisition cost ratio increased despite the growth in net premiums earned, compared with 2002. This reflects the decision to retain a greater percentage of the gross premiums written and to purchase less reinsurance, which has resulted in reduced ceding commissions for Insurance – North American. The administrative expense ratio declined due to the increase in net premiums earned. Administrative expenses increased mainly due to the increased costs associated with servicing the growth in Insurance – North American’s product lines. The policy acquisition cost and administrative expense ratios both declined in 2002 compared with 2001 due to increased net premiums earned with a higher proportion of lower commission professional lines business.
Income excluding net realized gains (losses) increased $435 million in 2003, compared with 2002, as a result of higher underwriting income. The decrease in 2002 compared with 2001, is primarily due to the asbestos reserve strengthening.
 
Insurance – Overseas General
The Insurance – Overseas General segment comprises ACE International, our network of indigenous insurance operations, and the insurance operations of ACE Global Markets. The Insurance – Overseas General segment writes a variety of insurance products including property, casualty, professional lines (D&O and E&O), marine, energy, aviation, political risk, consumer-oriented products and A&H – principally being supplemental accident.
 
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(in millions of U.S. dollars)	 	2003	 	 	2002	 	 	2001	 	
	 	
Gross premiums written	 	$	5,191	 	 	$	4,114	 	 	$	3,289	 	
Net premiums written	 	 	3,751	 	 	 	2,716	 	 	 	2,154	 	
Net premiums earned	 	 	3,563	 	 	 	2,393	 	 	 	1,941	 	
Losses and loss expenses	 	 	2,144	 	 	 	1,455	 	 	 	1,465	 	
Policy acquisition costs	 	 	682	 	 	 	533	 	 	 	445	 	
Administrative expenses	 	 	486	 	 	 	390	 	 	 	333	 	
	 	
Underwriting income (loss)	 	 	251	 	 	 	15	 	 	 	(302	)	
	 	
Net investment income	 	 	159	 	 	 	108	 	 	 	102	 	
Other income (expense)	 	 	(7	)	 	 	2	 	 	 	(1	)	
Interest expense	 	 	4	 	 	 	3	 	 	 	2	 	
Income tax expense (benefit)	 	 	84	 	 	 	6	 	 	 	(87	)	
Amortization of goodwill	 	 	–	 	 	 	–	 	 	 	3	 	
	 	
Income excluding net realized gains (losses)	 	 	315	 	 	 	116	 	 	 	(119	)	
Net realized gains (losses)	 	 	(6	)	 	 	(37	)	 	 	(5	)	
Tax effect of net realized gains (losses)	 	 	5	 	 	 	12	 	 	 	2	 	
	 	
Net income (loss)	 	$	314	 	 	$	91	 	 	$	(122	)	
	 	
Loss and loss expense ratio	 	 	60.2%	 	 	 	60.8%	 	 	 	75.5%	 	
Policy acquisition cost ratio	 	 	19.2%	 	 	 	22.3%	 	 	 	22.9%	 	
Administrative expense ratio	 	 	13.6%	 	 	 	16.3%	 	 	 	17.2%	 	
Combined ratio	 	 	93.0%	 	 	 	99.4%	 	 	 	115.6%	 	
 
Gross premiums written for the Insurance – Overseas General segment increased 26 percent in 2003 compared with 2002. The depreciation of the U.S. dollar against the major currencies accounted for approximately ten percent of the increase in gross premiums written in 2003. ACE International experienced growth across most of its regions, and ACE Global Markets experienced improved market conditions across most of its lines of business. This segment’s gross premiums written increased in 2002 compared with 2001, due to rate increases, new business writings and the weakening of the U.S. dollar.
ACE International’s P&C operations are organized geographically along product lines. Property insurance products include traditional commercial fire coverage as well as energy industry-related coverages. Principal casualty products are commercial general liability and liability coverage for multinational organizations. Through our professional lines, we provide D&O and professional indemnity coverages for medium to large clients. The A&H insurance operations provide coverage to individuals and groups outside of U.S. insurance markets. ACE International’s gross premiums written increased 36 percent to $3.6 billion in 2003 compared with $2.7 billion in 2002. The increases are due to higher rates and new business across most regions and also due to the weakening of the U.S. dollar against the pound sterling, euro and yen during the period. The depreciation of the U.S. dollar against the major currencies accounted for approximately 12 percent of the increase in gross premiums written in 2003. ACE Europe, which accounts for more than half of ACE International’s gross premiums written, continues to experience rising rates and growth in new policies for casualty business. Additionally, ACE Europe’s A&H lines have contributed positive growth due to strong volume increases. ACE Europe’s P&C growth was driven by rate increases and new business, specifically professional lines, while its A&H growth was driven by continued success in direct marketing campaigns. Asia Pacific reported production growth for P&C lines due to increases in new business and strong Australian growth while A&H lines increased due to favorable results from direct marketing channels. ACE Latin America reported strong demand for A&H products in Mexico and Brazil, and growth in new P&C policies. ACE Far East production declined due primarily to the adverse effect of the SARS epidemic on travel accident insurance and our decision to selectively renew the auto portfolio. ACE International’s gross premiums written increased 26 percent in 2002 compared with 2001, due to higher renewal rates and increased new business across most regions.
ACE Global Markets primarily underwrites P&C insurance through Lloyd’s Syndicate 2488 and ACE INA UK Limited. The main lines of business include aviation, property, energy, professional lines, marine, political risk and A&H. ACE Global Markets’ gross premiums written increased nine percent to $1.6 billion in 2003, compared with 2002. The increase is primarily due to the depreciation of the U.S.
 
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dollar against the major currencies which accounted for approximately three-quarters of the increase in gross premiums written. ACE Global Markets has been able to build upon favorable market conditions, reporting overall average rate increases of 10 percent in 2003. This is a significant achievement, given that this is in addition to average renewal rate increases that were in excess of 40 percent in 2002. Production in 2003 was subdued by lower rates on certain classes of aviation business and the impact of falling airline passenger movement due to the Iraq conflict and SARS. While rates for certain lines of business have stabilized, there are a number of business classes, most notably professional lines, where rates continue to rise. ACE Global Market’s gross premiums written increased by 23 percent to $1.5 billion in 2002 compared with $1.2 billion in 2001. This increase was due to rate increases across most lines and growth in new business. The retention ratio at ACE Global Markets has increased to 70 percent in 2003, compared with 54 percent in 2002 and 60 percent in 2001. The retention ratio was lower in 2002 due to the reinsurance premiums we incurred associated with reinsurance arrangements put into place following a revision of our underwriting strategy and the rebuilding of our reinsurance cover following the September 11 tragedy. Historically, the purchase of reinsurance protection by ACE Global Markets was principally on a whole account basis, and while this approach could have been continued, it was becoming increasingly difficult to acquire economically viable reinsurance protection on this basis. The current reinsurance program is of a more traditional, product line-specific nature. This has resulted in number of advantages, including greater access to participating reinsurance markets, achieving more competitive pricing, greater flexibility and the ability to build capacity and coverage of certain lines.
The table below shows net premiums earned by each of the Insurance – Overseas General segment’s key components for the years ended December 31, 2003, 2002 and 2001.

(in millions of U.S. dollars)	 	2003	 	2002	 	2001	
	
ACE Europe	 	$	1,466	 	$	925	 	$	659	
ACE Asia Pacific	 	 	390	 	 	246	 	 	159	
ACE Far East	 	 	367	 	 	335	 	 	349	
ACE Latin America	 	 	297	 	 	225	 	 	210	
	
ACE International	 	 	2,520	 	 	1,731	 	 	1,377	
ACE Global Markets	 	 	1,043	 	 	662	 	 	564	
	
Net premiums earned	 	$	3,563	 	$	2,393	 	$	1,941	

ACE International’s increase in net premiums earned in 2003 and 2002 is attributed to P&C and A&H lines across all geographical regions, with the exception of ACE Far East, where growth in net premiums written has been minimal. The increase in net premiums earned is principally driven by growth in net premiums written and the appreciation of foreign currencies against the U.S. dollar over the last two years. ACE Global Markets’ increase in net premiums earned in 2003 and 2002 is a result of higher net premiums written across most of its product lines, particularly the professional lines, aviation, and property portfolios. The devalued U.S. dollar increased this segment’s net premiums earned by approximately 11 percentage points.
The loss and loss expense ratio for Insurance – Overseas General improved slightly in 2003 compared with 2002. Losses for 2003 included $57 million of adverse prior period development, compared with $104 million of adverse development in 2002. Prior period development for 2003 primarily related to casualty lines for ACE International and was a result of lengthening of the loss development patterns for these lines of business. To a lesser extent, ACE Global Markets experienced 2003 adverse development primarily related to marine liability with lower amounts in professional lines, marine hull and bloodstock lines mitigated by positive development on property, energy, aviation and political risk lines of business. 2002 prior period development related primarily to casualty and D&O lines for ACE International and aerospace business for ACE Global Markets. Additionally, this segment incurred $10 million of catastrophe losses in 2003, principally related to hurricanes, while 2002 included $68 million of catastrophe losses related to the European floods. The reduction in the loss and loss expense ratio in 2003 compared with 2002 reflected lower adverse prior period development and lower catastrophe losses mitigated by higher loss ratios for current accident year losses due to changes in business mix. The loss and loss expense ratio for Insurance – Overseas General declined in 2002 compared with 2001. This improvement is attributed to the lack of catastrophe losses of the magnitude of the September 11 tragedy and the casualty reserve strengthening, which increased 2001 losses by $67 million and $170 million, respectively.
 
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The policy acquisition cost ratio for Insurance – Overseas General improved in 2003 compared with 2002, primarily due to a change in business mix. The administrative expense ratio for Insurance – Overseas General improved due to the increase in net premiums earned. ACE International’s administrative expenses increased 25 percent in 2003, due mainly to increased costs associated with supporting business growth across all regions of the world. Additionally, the depreciation of the U.S. dollar added $32 million to administrative expenses in 2003. The policy acquisition cost ratio was relatively unchanged in 2002 compared with 2001, while the administrative expense ratio declined due to the increase in net premiums earned outpacing the increase in expenses to support growth in operations.
Underwriting income increased in 2003 compared with 2002 primarily due to the increase in net premiums earned and a decrease in catastrophe losses of $58 million. Income excluding net realized gains (losses) increased in 2003 compared with 2002, driven by increased underwriting income and higher net investment income, partially offset by higher income tax expense. The underwriting loss and the loss excluding net realized gains (losses) in 2001 was primarily a result of the September 11 tragedy and the casualty reserve strengthening. Overall, the depreciation of the U.S. dollar accounted for eight percent of Insurance – Overseas General’s net income in 2003.
 
Global Reinsurance
The Global Reinsurance segment comprises ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re Europe, and ACE Tempest Life Re (ACE Life Re). ACE Life Re is our Bermuda-based life reinsurance operation and is addressed separately.
 
Property and Casualty Reinsurance

(in millions of U.S. dollars)	 	2003	 	2002	 	 	2001	 	
	 	
Gross premiums written	 	$	1,312	 	$	887	 	 	$	460	 	
Net premiums written	 	 	1,225	 	 	777	 	 	 	354	 	
Net premiums earned	 	 	1,100	 	 	677	 	 	 	324	 	
Losses and loss expenses	 	 	559	 	 	304	 	 	 	317	 	
Policy acquisition costs	 	 	211	 	 	123	 	 	 	68	 	
Administrative expenses	 	 	62	 	 	40	 	 	 	29	 	
	 	
Underwriting income (loss)	 	 	268	 	 	210	 	 	 	(90	)	
	 	
Net investment income	 	 	87	 	 	82	 	 	 	70	 	
Other income (expense)	 	 	3	 	 	1	 	 	 	–	 	
Interest expense	 	 	–	 	 	1	 	 	 	1	 	
Income tax expense (benefit)	 	 	14	 	 	1	 	 	 	(22	)	
Amortization of goodwill	 	 	–	 	 	–	 	 	 	14	 	
	 	
Income excluding net realized gains (losses)	 	 	344	 	 	291	 	 	 	(13	)	
Net realized gains (losses)	 	 	55	 	 	(43	)	 	 	(18	)	
	 	
Net income (loss)	 	$	399	 	$	248	 	 	$	(31	)	
	 	
Loss and loss expense ratio	 	 	50.9%	 	 	44.9%	 	 	 	97.7%	 	
Policy acquisition cost ratio	 	 	19.2%	 	 	18.1%	 	 	 	21.0%	 	
Administrative expense ratio	 	 	5.6%	 	 	5.9%	 	 	 	9.0%	 	
Combined ratio	 	 	75.7%	 	 	68.9%	 	 	 	127.7%	 	
 
Gross premiums written for Global Reinsurance increased 48 percent in 2003 compared with 2002. The Global Reinsurance segment has expanded into a multi-line global reinsurer that offers a diversified portfolio of products. This shift has enabled it to take advantage of the improved P&C market. In 2003, significant production gains were recorded at ACE Tempest Re USA and ACE Tempest Re Europe as these units benefited from higher rates and increased volume for P&C lines. Gross premiums written for this segment increased 93 percent in 2002 compared with 2001. This increase was a result of the improved market for P&C lines, some of which were first offered in 2002, and additionally due to higher property catastrophe premium rates.
 
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Global Reinsurance’s net premiums written increased 58 percent in 2003 compared with 2002. The retention ratio for this segment has increased to 93 percent in 2003, compared with 88 percent in 2002. The increase in the retention ratio reflects the decline in reinsurance purchased at ACE Tempest Re Europe and the increasing proportion of ACE Tempest Re USA business, which tends to be written at higher retention ratios than other business in this segment. ACE Tempest Re Europe increased its retention in order to take advantage of improved market conditions. Net premiums written more than doubled in 2002 compared with 2001, primarily as a result of increased production and less reinsurance purchased by ACE Tempest Re Europe.
The table below shows net premiums earned by each of the Global Reinsurance segment’s key components for the years ended December 31, 2003, 2002 and 2001.

(in millions of U.S. dollars)	 	2003	 	2002	 	2001	
	
ACE Tempest Re USA	 	$	463	 	$	182	 	$	42	
ACE Tempest Re Europe	 	 	259	 	 	142	 	 	60	
ACE Tempest Re Bermuda	 	 	378	 	 	353	 	 	222	
	
Net premiums earned	 	$	1,100	 	$	677	 	$	324	

Net premiums earned increased 62 percent in 2003 compared with 2002. The increase in net premiums earned in all components is primarily due to the increase in traditional non-catastrophe P&C business. In 2003, 65 percent of net premiums earned was from traditional non-catastrophe P&C business, compared with 46 percent in 2002. The increase in 2002 net premiums earned compared with 2001 follows the increase in net premiums written.
The loss and loss expense ratio increased in 2003 compared with 2002, due to the shift in mix of business which resulted in growth in non-catastrophe P&C business at ACE Tempest Re USA and ACE Tempest Re Europe. Non-catastrophe P&C business typically has higher loss ratios than property catastrophe business (except in periods with high catastrophe losses). Property catastrophe business is mainly written at ACE Tempest Re Bermuda. As Global Reinsurance increases non-catastrophe P&C writing, we expect its loss and loss expense ratio to continue to increase in line with what would be expected from a traditional multi-line reinsurer. Global Reinsurance incurred $82 million of catastrophe losses in 2003, compared with $88 million in 2002. Global Reinsurance had favorable prior period development of $27 million in 2003 compared with favorable development of $20 million in 2002, primarily due to the property catastrophe line of business and the losses in this line being lower than expected. The loss and loss expense ratio improved in 2002 as the Global Reinsurance segment was heavily impacted by the September 11 tragedy, which added 67.6 percentage points to the 2001 loss and loss expense ratio.
The policy acquisition cost ratio for Global Reinsurance increased due to the higher proportion of business generated from ACE Tempest Re USA, relative to ACE Tempest Re Europe and ACE Tempest Re Bermuda. More of ACE Tempest Re USA’s business is written on a treaty-basis which incurs higher acquisition costs due to higher ceding commissions paid. The administrative expense ratio decreased slightly due to increased net premiums earned partially offset by higher staffing costs to support the growth in business. The policy acquisition cost and administrative expense ratios decreased in 2002 due to the shift in business mix and the increase in net premiums earned, respectively.
Global Reinsurance’s underwriting income increased 28 percent in 2003 compared with 2002. The increase is primarily a result of higher net premiums earned in 2003. Underwriting income increased by $300 million in 2002 compared with 2001, due to the impact of the September 11 tragedy on the 2001 results and the improved market conditions in 2002. Income excluding net realized gains (losses) for Global Reinsurance increased 18 percent in 2003 compared with 2002. The increase in 2003 is a result of higher underwriting income and net investment income, partially offset by higher income tax expense. Foreign exchange did not have a material impact on Global Reinsurance’s income excluding gains in 2003. The large increase in income excluding net realized gains (losses) in 2002 compared with 2001 is due to the impact of the September 11 tragedy in 2001 and the improved market conditions in 2002.
 
Life Reinsurance
ACE Life Re principally provides reinsurance coverage to other life insurance companies, focusing on guarantees included in certain fixed and variable annuity products. We do not compete on a traditional basis for pure mortality business. The reinsurance transactions we
 
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undertake typically help clients – ceding companies – to manage mortality, morbidity, and/or lapse risks embedded in their book of business. We price life reinsurance using actuarial and investment models that incorporate a number of factors, including assumptions for mortality, morbidity, expenses, demographics, persistency, investment returns and inflation. We assess the performance of our life reinsurance business based on income excluding net realized gains (losses).

(in millions of U.S. dollars)	 	2003	 	 	2002	 	 	2001	
	
Gross premiums written	 	$	193	 	 	$	165	 	 	$	414	
Net premiums written	 	 	185	 	 	 	159	 	 	 	408	
Net premiums earned	 	 	184	 	 	 	158	 	 	 	406	
Life and annuity benefits	 	 	181	 	 	 	158	 	 	 	401	
Policy acquisition costs	 	 	16	 	 	 	16	 	 	 	8	
Administrative expenses	 	 	3	 	 	 	6	 	 	 	2	
Net investment income	 	 	33	 	 	 	27	 	 	 	9	
	
Income excluding net realized gains (losses)	 	 	17	 	 	 	5	 	 	 	4	
Net realized gains (losses)	 	 	(21	)	 	 	(14	)	 	 	2	
	
Net income (loss)	 	$	(4	)	 	$	(9	)	 	$	6	

ACE Life Re’s gross premiums written increased 17 percent in 2003 compared with 2002. This increase relates mainly to new variable annuity and mortality business. Gross premiums written in 2002 included $59 million of non-recurring business, $55 million of which was group long-term disability business. Gross premiums written decreased 60 percent in 2002 compared with 2001, which included $334 million from non-recurring deals. Income (loss) excluding net realized gains (losses) improved in 2003 due to lower policy acquisition costs and administrative expenses, and higher investment income compared with 2002. Policy acquisition costs decreased due to the growth in life, health and annuity lines, which have lower acquisition costs than the group long-term disability business. Administrative expenses were lower in 2003 due to reduced staff levels. Investment income is higher due to a higher invested asset base, as a result of increased production in 2003. Income (loss) excluding net realized gains (losses) increased in 2002 compared with 2001, primarily due to higher investment income.
 
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Financial Services
The Financial Services segment consists of two broad categories: financial guaranty and financial solutions. The financial guaranty operations provide insurance and reinsurance for financial guaranty exposures, including municipal and non-municipal obligations, credit default swaps (CDSs), mortgage guaranty reinsurance, title reinsurance, and trade credit reinsurance. The financial solutions operations provide one-off insurance and reinsurance solutions to clients with unique or complex risks, which are not adequately addressed in the traditional insurance market. Each financial solutions contract is structured to meet the needs of each client. Certain products (principally credit protection oriented) issued by the Financial Services segment have been determined to meet the definition of a derivative under FAS 133. The “Critical Accounting Estimates” section has more information relating to these products.

(in millions of U.S. dollars)	 	2003	 	 	2002	 	 	2001	 	
	 	
Gross premiums written	 	$	1,046	 	 	$	1,537	 	 	$	1,481	 	
Net premiums written	 	 	1,039	 	 	 	1,497	 	 	 	1,461	 	
Net premiums earned	 	 	1,101	 	 	 	1,127	 	 	 	1,429	 	
Losses and loss expenses	 	 	894	 	 	 	947	 	 	 	1,397	 	
Policy acquisition costs	 	 	61	 	 	 	72	 	 	 	58	 	
Administrative expenses	 	 	84	 	 	 	57	 	 	 	56	 	
	 	
Underwriting income (loss)	 	 	62	 	 	 	51	 	 	 	(82	)	
	 	
Net investment income	 	 	202	 	 	 	192	 	 	 	173	 	
Other income (expense)	 	 	–	 	 	 	1	 	 	 	1	 	
Interest expense	 	 	6	 	 	 	12	 	 	 	17	 	
Income tax expense	 	 	27	 	 	 	30	 	 	 	21	 	
Amortization of goodwill	 	 	–	 	 	 	–	 	 	 	4	 	
	 	
Income excluding net realized gains (losses)	 	 	231	 	 	 	202	 	 	 	50	 	
Net realized gains (losses)	 	 	190	 	 	 	(117	)	 	 	(4	)	
Tax effect of net realized gains (losses)	 	 	(37	)	 	 	17	 	 	 	(2	)	
Cumulative effect of adopting a new accounting standard	 	 	–	 	 	 	–	 	 	 	(23	)	
	 	
Net income	 	$	384	 	 	$	102	 	 	$	21	 	
	 	
Loss and loss expense ratio	 	 	81.2%	 	 	 	84.0%	 	 	 	97.8%	 	
Policy acquisition cost ratio	 	 	5.5%	 	 	 	6.4%	 	 	 	4.0%	 	
Administrative expense ratio	 	 	7.7%	 	 	 	5.0%	 	 	 	3.9%	 	
Combined ratio	 	 	94.4%	 	 	 	95.4%	 	 	 	105.7%	 	
 
Gross premiums written decreased 32 percent in 2003 compared with 2002. This decrease is primarily related to the termination of equity layer CDOs during 2003, which resulted in the recording of negative gross premiums written of $79 million. The financial solutions operations have reduced writing equity layer CDOs, and the financial guaranty operations have ceased writing this line completely due to presently unfavorable pricing terms. Gross premiums written in 2002 were slightly higher than in 2001, due to increased writings of equity layer CDOs, and CDSs, which were partially offset by lower LPT volume.
Gross premiums written for the financial guaranty operations increased 30 percent to $510 million in 2003, compared with $391 million in 2002. The municipal line reported strong production growth, benefiting from increased new issue activity, due to low interest rates and also a higher proportion of the new issues are insured. In addition, non-municipal and trade credit lines of business achieved strong production results offset by a decline in mortgage and equity CDO business. The decrease in mortgage gross written premium is partly due to the low interest rate environment that has fueled refinancing activity and resulted in a commensurate reduction in the existing in-force quota share book. Additionally, a non-recurring mortgage transaction was completed in 2002. During the fourth quarter of 2003, we terminated three equity layer CDOs, which resulted in the recording of negative gross premiums written. The policy acquisition cost ratio increased due to a change in business mix whereby a greater portion of the business, specifically municipal, non-municipal and trade credit lines, incurs commission costs. Administrative expenses increased as a result of an increase in staff needed to support the growing direct business and also due to a severance charge associated with the planned IPO. Underwriting income decreased $11
 
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million to $37 million in 2003, compared with $48 million in 2002, due to the higher policy acquisition cost and administrative expense ratios. In 2002, the financial guaranty operations increased underwriting income $16 million due to lower losses and loss expenses.
Gross premiums written for the financial solutions operations decreased to $536 million in 2003 compared with $1.1 billion in 2002. This reduction relates to the decline in LPTs written and the recording of negative premiums due to the termination of an equity CDO. Additionally, 2002 was bolstered by several large, multi-year prospective, structured programs sold. Net premiums earned for the financial solutions operations decreased to $773 million in 2003, compared with $845 million, in 2002. This decline in net premiums earned is the result of a reduction of retrospective premiums from LPTs, which are fully earned when written, offset, to a large degree, by an increase in net premiums earned from prospective contracts, typically finite and structured risk products for which premiums may be earned over a three to five year effective period. The financial solutions operations reported an increase in underwriting income of $22 million to $25 million in 2003, compared with $3 million in 2002. Underwriting income increased due to changes in mix of business as well as the discontinuation of life business, which typically incurs higher commissions than other business. The administrative expense ratio increased as a result of increased staffing costs. Underwriting income for the financial solutions operations increased $117 million in 2002 compared with 2001, which included an underwriting income impact of $147 million due to the September 11 tragedy.
Financial Services reported an increase in income excluding net realized gains (losses) in 2003 compared with 2002. The increase is a result of higher underwriting income and net investment income, and also a reduction in interest expense. Additionally, Financial Services incurred $43 million of adverse prior period development in 2003 principally on the structured finance line of business due to credit deterioration in collateralized debt obligations assumed through reinsurance treaties. In addition, prior year development includes an increase in the case reserve on an auto residual value transaction. Adverse development of $30 million in 2002 was principally from the ACE Financial Solutions International book, which comprises large, unique transactions, including LPTs. The increase in income excluding realized gains (losses) in 2002 compared with 2001, reflects the losses associated with the September 11 tragedy.
Following the closing of the planned IPO, we expect Financial Services’ income excluding net realized gains (losses) for 2004 to decrease 15-20 percent  compared with 2003.

Net Investment Income

Years Ended December 31
(in millions of U.S. dollars)	 	2003	 	 	2002	 	 	2001	
	
Insurance – North American	 	$	410	 	 	$	406	 	 	$	426	
Insurance – Overseas General	 	 	159	 	 	 	108	 	 	 	102	
Global Reinsurance – P&C	 	 	87	 	 	 	82	 	 	 	70	
Global Reinsurance – Life	 	 	33	 	 	 	27	 	 	 	9	
Financial Services	 	 	202	 	 	 	192	 	 	 	173	
Corporate and Other	 	 	(30	)	 	 	(13	)	 	 	5	
	
Net investment income	 	$	861	 	 	$	802	 	 	$	785	

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 seven percent in 2003 and two percent in 2002 compared with 2002 and 2001, respectively. The increased net investment income is due to the positive operating cash flows during 2003, 2002 and 2001 that resulted in a higher average invested asset base. This positive impact on investment income was partially offset by a decline in the investment portfolio’s yield, due to the impact of lower interest rates on investment of new cash and reinvestment of maturing securities. The average yield on fixed maturities declined to 4.0 percent at December 31, 2003, compared with 4.4 percent and 5.2 percent at December 31, 2002 and 2001, respectively.

Net Realized Gains (Losses)
Our investment strategy takes a long-term view, and our investment portfolio is actively managed to maximize total return within certain specific guidelines, designed to minimize risk. Our investment portfolio is reported at fair value. The effect of market movements on our investment portfolio impact income (through net realized gains (losses)) when securities are sold, when “other than temporary” impairments are recorded on invested assets or when derivatives, including financial futures and options, interest rate swaps and credit-default
 
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swaps, are marked to fair value or are settled. Changes in unrealized appreciation and depreciation, which result from the revaluation of securities held, are reported as a separate component of accumulated other comprehensive income in shareholders’ equity.
The following table presents our pre-tax net realized gains (losses) for the years ended December 31, 2003, 2002 and 2001.

Years Ended December 31
(in millions of U.S. dollars)	 	2003	 	 	2002	 	 	2001	 	
	 	
Fixed maturities and short-term investments	 	$	100	 	 	$	(58	)	 	$	(7	)	
Equity securities	 	 	(41	)	 	 	(157	)	 	 	27	 	
Other investments	 	 	(25	)	 	 	(12	)	 	 	(38	)	
Financial futures, options and interest rate swaps	 	 	34	 	 	 	(188	)	 	 	(11	)	
Fair value adjustment on credit derivatives	 	 	163	 	 	 	(77	)	 	 	(17	)	
Currency	 	 	21	 	 	 	3	 	 	 	(12	)	
	 	
Total net realized gains (losses)	 	$	252	 	 	$	(489	)	 	$	(58	)	

Given our total return objective for our investment portfolio, we may sell securities at a loss due to changes in the investment environment, our expectation that fair value may deteriorate further, our desire to reduce our exposure to an issuer or an industry, and changes in the credit quality of the security.
FAS 133 requires us to recognize all derivatives as either assets or liabilities on our consolidated balance sheet, and measure them at fair value. We record the gains and losses resulting from the fair value measurement of derivatives in net realized gains (losses). We participate in derivative instruments in two principal ways as follows: i) to offer protection to others as the seller or writer of the derivative, such as our credit derivatives business; or ii) to mitigate our own risk, principally arising from our investment holdings. We do not consider either type of transaction to be speculative. For the year ended December 31, 2003, we recorded net realized gains of $197 million on derivative transactions, compared with net realized losses of $265 million and $28 million for the years ended December 31, 2002 and 2001, respectively.
With respect to our credit derivatives’ business, as explained under “Critical Accounting Estimates,” we record a portion of the change in fair value in the losses and loss expense reserves, representing our best estimate of loss payouts, and a portion in net realized gains (losses), representing other changes in fair value. The fair value adjustment included in net realized gains (losses) in 2003 was a net realized gain of $163 million, compared with net realized losses of $77 million and $17 million in 2002 and 2001, respectively. The change in fair value is related to many factors but primarily due to changes in credit spreads. The gain or loss created by the estimated fair value adjustment will rise or fall each period based on estimated market pricing and may not be an indication of ultimate claims. Fair value is defined as the amount at which an asset or liability could be bought or sold in a current transaction between willing parties. We generally plan to hold derivative financial instruments to maturity. Where we hold derivative financial instruments to maturity, these fair value adjustments would generally be expected to reverse resulting in no gain or loss over the entire term of the contract. However, in the event that we terminate a derivative contract prior to maturity, as a result of a decision to exit a line of business or for risk management purposes, the unrealized gain or loss will be realized through premiums earned and losses incurred.
We recorded net realized gains on financial futures and option contracts and interest rate swaps of $34 million in 2003, compared with net realized losses of $188 million and $11 million in 2002 and 2001, respectively. We recorded net realized losses of $6 million on interest rate swaps in 2003, compared with net realized losses of $81 million in 2002. The interest rate swaps are designed to reduce the negative impact of increases in interest rates on our fixed maturity portfolio. We recorded gains of $40 million on our Standard and Poor’s (S&P) equity index futures contracts as the S&P 500 equity index increased 26 percent in 2003. We use foreign currency forward contracts to minimize the effect of fluctuating foreign currencies on certain non-U.S. dollar holdings in our portfolio that are not specifically matching foreign currency liabilities. These contracts are not designated as specific hedges and, in accordance with FAS 133, we record all realized and unrealized gains and losses on these contracts as net realized gains (losses) in the period in which the currency values change.
We regularly review our investment portfolio for possible impairment based on criteria including economic conditions, credit loss experience and issuer-specific developments. If there is a decline in a security’s net realizable value, we must determine whether that decline is temporary or “other than temporary”. If we believe a decline in the value of a particular investment is temporary, we record it as an unrealized loss in our shareholders’ equity. If we believe the decline is “other than temporary”, we write down the carrying value of
 
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the investment and record a net realized loss in our statement of operations. The decision to recognize a decline in the value of a security carried at fair value as “other than temporary” rather than temporary has no impact on our book value. Once a security is identified as having a potential “other than temporary” impairment, we determine whether or not cost will ultimately be recovered and whether we have the intent and ability to hold the security until an expected recovery period, absent a significant change in facts that is expected to have a material adverse financial effect on the issuer.
Our net realized gains (losses) in 2003 included write-downs of $29 million related to fixed maturity investments, $63 million related to equity securities and $29 million related to other investments, as a result of conditions which caused us to conclude the decline in fair value of the investment was “other than temporary”. This compares with write-downs of $101 million related to fixed maturity investments, $153 million related to equity securities and $14 million related to other investments in 2002. Excluding the impairment charges, we recorded $155 million of net gains primarily from the sale of fixed maturities.
The process of determining whether a decline in value is temporary or “other than temporary” requires considerable judgment and differs depending on whether or not the security is traded on a public market as well as by type of security. As a result of our periodic review process, we have determined that there currently is no need to sell any of these securities to fund anticipated payments. We have described below, by type of security, our process for reviewing our investments for possible impairment.
We review all of our fixed maturity securities, including securities on loan, and equity securities for potential impairment each quarter. Initially, we identify those securities to be evaluated for a potential impairment. In this process, the following is considered by type of security:
 
Fixed Maturities and Equity Securities, including Securities on Loan
A security that meets any of the following criteria is to be evaluated for a potential impairment:
• securities that have been in a loss position for the previous twelve months;
• those securities that have been in a loss position for the previous nine months and market value is less than 80 percent of amortized cost, or cost for equity securities; or
• those securities that are rated below investment grade by at least one major rating agency.
We evaluate all other fixed maturity and equity securities for a potential impairment when the unrealized loss at the balance sheet date exceeds a certain scope, based on both a percentage (i.e., market value is less than 80 percent of amortized cost, or cost for equity securities) and aggregate dollar decline, and certain indicators of an “other than temporary” impairment are present including:
• a significant economic event has occurred that is expected to adversely affect the industry the issuer participates in;
• recent issuer-specific news that is likely to have an adverse affect on operating results and cash flows; or
• a missed or late interest or principal payment related to any debt issuance.
For those securities identified as having a potential “other than temporary” impairment based on the above criteria, we estimate a reasonable period of time in which market value is expected to recover to a level in excess of cost, if at all. For fixed maturity securities, factors considered include:
• the degree to which any appearance of impairment is attributable to an overall change in market conditions such as interest rates rather than changes in the individual factual circumstances and risk profile of the issuer;
• the performance of the relevant industry sector;
• the nature of collateral or other credit support;
• whether an issuer is current in making principal and interest payments on the debt securities in question;
• the issuer’s financial condition and our assessment (using available market information) of its ability to make future scheduled principal and interest payments on a timely basis; and
• current financial strength or debt rating, analysis and guidance provided by rating agencies and analysts.
For equity securities, factors considered include:
• whether the decline appears to be related to general market or industry conditions or is issuer-specific; and
• the financial condition and near-term prospects of the issuer, including specific events that may influence the issuer’s operations.
Securities will be assessed to have an “other than temporary” impairment if cost is not expected to be recovered or we do not have the ability and specific intent to hold the security until its expected recovery. We typically make this latter assessment when such intent is considered inconsistent with our investment objectives, such as maximizing total return.
 
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Other Investments
With respect to other investments that are not traded in a public market, such as venture capital investments, the portfolio managers, as well as our internal valuation committee, consider a variety of factors in determining whether or not the investment should be evaluated for impairment. Indicators of impairment include:
• the issuer has reported losses for two consecutive fiscal years;
• a significant economic event has occurred that is expected to adversely affect the industry the issuer participates in;
• recent issuer-specific news that is expected to adversely affect operating results; and
• a missed interest or principal payment related to any debt issuance.
For those securities identified as having a possible impairment, we determine a reasonable period of time in which market value is expected to recover to a level in excess of cost, if at all. Factors considered include:
• the issuer’s most recent financing events;
• an analysis of whether fundamental deterioration has occurred; and
• the issuer’s progress, and whether it has been substantially less than expected. 
These securities will be assessed to have an “other than temporary” impairment if cost is not expected to be recovered or it is concluded that we do not have the ability and specific intent to hold the security until its expected recovery.
The following table summarizes for all securities in an unrealized loss position at December 31, 2003 (including securities on loan), the aggregate fair value and gross unrealized loss by length of time the amounts have continuously been in an unrealized loss position.

 	 	 
	0 – 12 Months
	 	 
	Over 12 Months
	 	 
	Total
	
(in millions of U.S. dollars)	 	Fair Value	 	Gross
Unrealized
Losses	 	Fair Value	 	Gross
Unrealized
Losses	 	Fair Value	 	Gross
Unrealized
Losses	
	
U.S. Treasury and agency	 	$	634	 	$	6	 	$	–	 	$	–	 	$	634	 	$	6	
Non-U.S. governments	 	 	283	 	 	5	 	 	–	 	 	–	 	 	283	 	 	5	
Corporate securities	 	 	994	 	 	17	 	 	5	 	 	–	 	 	999	 	 	17	
Mortgage-backed securities	 	 	1,299	 	 	15	 	 	–	 	 	–	 	 	1,299	 	 	15	
States, municipalities and political subdivisions	 	 	146	 	 	6	 	 	–	 	 	–	 	 	146	 	 	6	
	
Total fixed maturities	 	 	3,356	 	 	49	 	 	5	 	 	–	 	 	3,361	 	 	49	
Equities	 	 	38	 	 	3	 	 	–	 	 	–	 	 	38	 	 	3	
Other investments	 	 	–	 	 	–	 	 	–	 	 	–	 	 	–	 	 	–	
	
Total	 	$	3,394	 	$	52	 	$	5	 	$	–	 	$	3,399	 	$	52	

Other Income and Expense Items

Years Ended December 31
(in millions of U.S. dollars)	 	2003	 	 	2002	 	 	2001	 	
	 	
Other income (expense)	 	$	(27	)	 	$	(21	)	 	$	1	 	
	 	
Interest expense	 	$	177	 	 	$	193	 	 	$	199	 	
	 	
Income tax expense (benefit)	 	$	278	 	 	$	(116	)	 	$	(78	)	
	 	
Amortization of goodwill	 	$	–	 	 	$	–	 	 	$	79	 	

The other expense for 2003 includes $9 million of charges related to the commutation of a reinsurance contract and $12 million in goodwill and software impairments. Other expense for 2002 includes $25 million in debt prepayment expense on the ACE INA Subordinated Notes due in 2009. This cost was primarily attributable to a decline in interest rates since the note was originally issued.
 
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The decrease in interest expense is a result of a reduction in average outstanding trust preferred securities in 2003 compared with 2002. This decrease was partly offset due to the impact of the $500 million 6.0 percent notes issued late in the first quarter of 2002. During 2002, we repaid $400 million of trust preferred securities. Interest expense declined in 2002 compared with 2001 due to lower interest rates and a reduction in outstanding debt.
The increase in income tax expense is primarily due to the increase in net income in 2003 compared with 2002. Our net realized gains in 2003 compared with net realized losses in 2002 increased income tax expense by $104 million. In addition, the increased profitability for Insurance – Overseas General added $78 million to income tax expense in 2003. Last year’s A&E reserve strengthening resulted in an income tax benefit of $162 million in 2002. We reported an income tax benefit of $78 million in 2001 primarily due to the underwriting loss generated largely by the September 11 tragedy. Our effective tax rate on income excluding net realized gains (losses) for 2003, was 17 percent. Our effective tax rate is dependent upon the mix of earnings from different jurisdictions with various tax rates; a different geographic mix of actual earnings would change the effective tax rate. For further information on taxation, see Note 14 of the Consolidated Financial Statements.

Investments and Cash
Our principal investment objective is to ensure that funds are available to meet our insurance and reinsurance obligations. Within this broad liquidity constraint, the purpose of our investment portfolio’s structure is to maximize total return subject to specifically approved guidelines of overall asset classes, credit quality, and liquidity and volatility of expected returns. Our investment portfolio is invested primarily in fixed income securities with an average credit quality of AA, as rated by the independent investment rating service S&P. The portfolio is externally managed by independent, professional, investment managers. The average duration of our fixed income securities, including the effect of interest rate swaps, is 3.4 years at December 31, 2003, compared with 3.1 at December 31, 2002. Our other investments principally comprise direct investments, investments in investment funds and investments in limited partnerships.
The following table identifies our invested assets by type held at fair value and cost/amortized cost at December 31, 2003 and 2002.

 	 	December 31, 2003	 	December 31, 2002	
 	 		
(in millions of U.S. dollars)	 	Fair Value	 	Cost/ Amortized
Cost	 	Fair Value	 	Cost/ Amortized
Cost	
	
Fixed maturities	 	$	18,645	 	$	18,006	 	$	14,420	 	$	13,791	
Securities on loan	 	 	684	 	 	650	 	 	293	 	 	286	
Short-term investments	 	 	2,928	 	 	2,928	 	 	2,270	 	 	2,270	
Cash	 	 	562	 	 	562	 	 	663	 	 	663	
	
 	 	 	22,819	 	 	22,146	 	 	17,646	 	 	17,010	
Equity securities	 	 	544	 	 	401	 	 	411	 	 	442	
Other investments	 	 	645	 	 	602	 	 	652	 	 	622	
	
Total investments and cash	 	$	24,008	 	$	23,149	 	$	18,709	 	$	18,074	

We also gain exposure to equity markets through the use of derivative instruments. The combined equity exposure through both our equity portfolio and derivative instruments was valued at $662 million and $603 million at December 31, 2003 and December 31, 2002, respectively. The increase of $5.3 billion in total investments and cash is due to positive cash flows from operations as a result of strong premium volume, increased unrealized gains, increased securities lending collateral and the issuance of preferred shares. Offsetting these increases were dividends paid of $231 million in 2003.
 
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The following tables show the market value of our fixed maturities, short-term investments, securities on loan and cash at December 31, 2003. The first table lists elements according to type, and the second according to S&P credit rating.

(in millions of U.S. dollars)	 	Market Value	 	Percentage
of Total	
	
Treasury	 	$	1,715	 	7.5%	
Agency	 	 	1,512	 	6.6%	
Corporate	 	 	8,118	 	35.6%	
Mortgage-backed securities	 	 	3,894	 	17.1%	
Asset-backed securities	 	 	737	 	3.2%	
Municipal	 	 	1,445	 	6.3%	
Non-U.S.	 	 	1,908	 	8.4%	
Cash and short-term investments	 	 	3,490	 	15.3%	
	
Total	 	$	22,819	 	100%	

						
(in millions of U.S. dollars)	 	Market Value	 	Percentage
of Total	
	
AAA	 	$	12,315	 	54.0%	
AA	 	 	3,389	 	14.8%	
A	 	 	3,534	 	15.5%	
BBB	 	 	1,783	 	7.8%	
BB	 	 	709	 	3.1%	
B	 	 	1,029	 	4.5%	
Other	 	 	60	 	0.3%	
	
Total	 	$	22,819	 	100%	

In accordance with the ACE investment process, we invest in below-investment grade securities through dedicated investment portfolios managed by external investments managers that have investment professionals specifically dedicated to this asset class. At December 31, 2003, our fixed income investment portfolio included below-investment grade securities and non-rated securities which, in total, comprised approximately eight percent of our fixed income portfolio. We define a security as being below-investment grade if it has an S&P credit rating of BB or less. Our below investment-grade and non-rated portfolio includes approximately 500 names, with the top ten holdings making up approximately 11 percent of the $1.8 billion balance at December 31, 2003. The highest single exposure in this portfolio of securities is $26 million. 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. We reduce the overall risk in the below-investment grade portfolio, as in all investments, through careful credit analysis, strict investment policy guidelines, and diversification by issuer and/or guarantor as well as by industry.
 
Off-Balance Sheet Arrangements – Variable Interests Related to Equity Investments in CDOs
As a complement to our credit default swap business and with the objective of enhancing investment yield, we invested in the equity tranches of six CDOs from June 2001 through August 2002. Our aggregate maximum exposure under these CDOs is $43.8 million, which approximates the cost of these investments. At December 31, 2003, the underlying assets in these CDOs, which aggregate to $2.6 billion for all six CDOs, are principally invested in asset-backed securities, including investments in the debt tranches of other CDOs. While management considers the related entities to be variable interest entities, as defined by FIN 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” our equity investments represent a small portion of the variable interests in each CDO. Accordingly, under FIN 46, we are not required to consolidate any of these entities. At December 31, 2003, our aggregate carrying
 
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value for these investments is $29.1 million, which represents our remaining loss exposure related to these investments as of December 31, 2003. From January 1, 2004 through February 11, 2004, we sold four of these six positions, representing $16.1 million of our year end carrying value and $1.9 billion of the aforementioned $2.6 billion of aggregate assets in all six CDOs.
 
Restricted Assets
We are required to maintain assets on deposit with various regulatory authorities to support our 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. We also utilize trust funds in certain large 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 debt instruments. (See Notes 7 and 8 of the Consolidated Financial Statements)
The following table identifies the value of restricted assets at December 31, 2003 and 2002.

(in millions of U.S. dollars)	 	2003	 	2002	
	
Deposits with U.S. regulatory authorities	 	$	908	 	$	650	
Deposits with non-U.S. regulatory authorities	 	 	1,303	 	 	1,070	
Assets used for collateral or guarantees	 	 	1,141	 	 	1,230	
Trust funds	 	 	1,707	 	 	1,381	
	
 	 	$	5,059	 	$	4,331	

The value of restricted assets increased $728 million to $5.1 billion at December 31, 2003. The higher value of restricted assets is a result of increased use of our secured credit facility and the higher use of trust funds in place of LOCs.

Unpaid Losses and Loss Expenses
We establish reserves for the estimated unpaid ultimate liability for losses and loss expenses under the terms of our policies and agreements. These reserves take into account estimates both for claims that have been reported and for IBNR, and include estimates of expenses associated with processing and settling claims. The table below presents a rollforward of our unpaid losses and loss expenses for the year ended December 31, 2003.

(in millions of U.S. dollars)	 	Gross Losses	 	 	Reinsurance
Recoverable	 	 	Net Losses	 	
	 	
Balance at December 31, 2002	 	$	24,315	 	 	$	12,997	 	 	$	11,318	 	
Losses and loss expenses incurred	 	 	10,265	 	 	 	4,148	 	 	 	6,117	 	
Losses and loss expenses paid	 	 	(8,213	)	 	 	(4,308	)	 	 	(3,905	)	
Other (including foreign exchange revaluation)	 	 	788	 	 	 	355	 	 	 	433	 	
	 	
Balance at December 31, 2003	 	$	27,155	 	 	$	13,192	 	 	$	13,963	 	

Note 5 of our Consolidated Financial Statements includes a reconciliation of our beginning and ending net losses and loss adjustment expense reserves for each of the three years ended December 31, 2003, 2002, and 2001. The reserve for unpaid losses and loss expenses increased by $2.8 billion to $27.1 billion at December 31, 2003 compared with $24.3 billion at December 31, 2002. This increase is attributed to the significant growth in business in 2003. The balance at December 31, 2003, includes $13.9 billion of IBNR compared with $11.3 billion at December 31, 2002. Our net incurred losses in 2003 were $6.1 billion, compared with $4.9 billion in 2002. Net losses and loss expenses incurred for 2003 and 2002 include $164 million and $709 million of prior period development, respectively. In 2002, we incurred $516 million of prior period development related to A&E. More information regarding prior period development is included in the Segment Operating Results section.
 
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We have exposure to catastrophic event risk from global (re)insurance writings of property, workers’ compensation and other lines of business. This potential loss accumulation, caused by either man-made or natural events, is addressed within using several different approaches. First, we have established a series of Product Boards to ensure that geographic, product and client exposures are appropriate and meet limit guidelines adopted by the Boards. Second, we have adopted since 1999 a standardized catastrophe exposure modeling approach across each of its underwriting operations which allows the aggregation of risk within and across business units. This aggregation is performed and monitored on a quarterly basis to provide a level assessment of risk. Third, where the risk/return economics are effective, reinsurance is purchased at the business unit level to protect from accumulations arising either within product, business unit or across a combination thereof such that the overall risk from a catastrophic loss is appropriate to our capital structure.
In 2001, we incurred net losses of $650 million relating to the September 11 tragedy. At December 31, 2003, we had paid $1 billion of losses related to the September 11 tragedy and collected $684 million or 96 percent of the $708 million billed to reinsurers. Our net unpaid loss in connection with the September 11 tragedy was $323 million at December 31, 2003. We continue to evaluate our total potential liability based upon individual insurance and reinsurance policy language, legal and factual developments in underlying matters involving our insureds, relevant court decisions and legislative developments in the U.S. involving the terrorist attack. If our current assessments of future developments are proven wrong, the financial impact of any of them, singularly or in the aggregate, could be material .
For each of our lines of business, management, in conjunction with internal actuaries, develop a “best estimate” of ultimate liabilities, which they believe provide a reasonable estimate of the required reserve. The following is a discussion of our reserve- setting procedures by segment:
 
Insurance – North American and Insurance – Overseas General
Our internal actuaries perform standard actuarial methodologies including paid and incurred loss development and the Bornhuetter-Ferguson (BF) incurred and paid loss methods. The BF method is a blend of an expected loss ratio method and utilization of a pattern consistent with that of a loss development technique. For those lines of business where there is enough historical experience, in general, all four methods are utilized and an ultimate indication is estimated based on the outcomes of these techniques as well as any other methods used for the given line of business (e.g. counts and averages approaches). More reliance would be placed on loss development techniques for the older years as these are more mature and would have more consistent trends. For the more recent years, especially for long-tailed lines of business, a BF method would be given more weight as these immature years are highly leveraged and in many cases a development method could significantly understate or overstate liabilities. In all cases, additional diagnostics are performed to help in the determination of the most appropriate estimate. These diagnostics include a review of paid loss to incurred loss ratios, claims disposal rates and implied IBNR to case outstanding ratios. In situations where a new line of business is being written or a new product line being sold, an expected loss ratio method would be more appropriate as our own historical loss development information is limited. In these cases, industry benchmark loss ratios and development patterns are utilized to estimate ultimate indications. Given the high severity, low frequency nature of ACE Bermuda’s book of business, the actuarial techniques utilized in calculating IBNR is more heavily weighted to an expected loss ratio/BF methodology. There is intense monitoring by claim of potential case reserve development in this business and the interaction between the claims department and actuarial function is a crucial element in the success of this operating unit.
 
Global Reinsurance
ACE Global Re’s book of business consists of a significant amount of property catastrophe exposure. For this line of business, we develop initial loss estimates for large individual catastrophes based on market share information of potential exposures. Market share analysis uses cedant and industry information at geographic level (e.g. country) and line of business. A range of industry losses is then passed through the relevant market shares to provide a range of losses for the company’s exposures, allowing for program attachment points and the appropriate shares of the indemnity limits involved. When actual case reserves from the ceding companies are received, the initial loss estimates are progressively modified to reflect the actual emerging loss experience. Since the subject business is short tail, most of our historical losses are now reserved on this basis. For the casualty lines of business, similar actuarial techniques are utilized as described above for the Insurance – North American and Insurance – Overseas General segments. However, due to the
 
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immaturity of this book of business, more weight is given to the BF method of projections. There is considerable uncertainty around the expected projections for these lines and any favorable trends that may be seen in the development could easily be reversed.
 
Financial Services
Financial Guaranty
For the financial guaranty reinsurance and mortgage guaranty reinsurance businesses, unpaid losses and loss expenses principally consist of case reserves and portfolio reserves. Incurred but not reported reserves are generally limited to mortgage guaranty reinsurance assumed through quota share treaties, which represent a relatively small portion of these businesses. Case reserves are established when specific insured obligations are in or near default. Case reserves represent the present value of expected future loss payments and loss expenses, net of estimated recoveries but before considering ceded reinsurance. Financial guaranty insurance and reinsurance case reserves are discounted at 6.0 percent, which is the approximate taxable equivalent yield on the investment portfolio in all periods presented.
We also record portfolio reserves for our financial guaranty and mortgage guaranty businesses. Portfolio reserves are established with respect to the portion of our business for which case reserves have not been established. Portfolio reserves are established in an amount equal to the portion of actuarially estimated ultimate losses related to premiums earned to date as a percentage of total expected premiums for that in-force business. Portfolio reserves are developed considering the net par outstanding of each insured obligation, taking account of the probability of future default, the expected timing of the default and the expected recovery following default. These factors vary by type of issue (for example municiple, structured finance corporate), current credit rating and remaining term of the underlying obligation and are principally based on historical data obtained from rating agencies. Actuarially estimated ultimate losses on mortgage guaranty reinsurance are principally determined based on the historical industry loss experience, net of recoveries. During an accounting period, portfolio reserves principally increase or decrease based on changes in aggregate net amount at risk and the probability of default resulting from changes in credit quality of insured obligations, if any.
 
Financial Solutions
With respect to our financial solutions business, each contract we write is relatively large and unique, so each contract is reviewed and assessed individually. Most contracts are multi-year in nature. As with our financial guaranty business, traditional actuarial methods such as analyzing and extrapolating historical loss experience are not considered appropriate for financial solutions business because of the relatively small number of large contracts. Our loss estimates are based on contract terms (such as a requirement to pay profit commissions) original pricing information, analysis and comparison with external data and experience to date on the contract.

Reinsurance
One of the ways we manage our loss exposure is through the use of reinsurance. While reinsurance agreements are designed to limit our losses from large exposures and permit recovery of a portion of direct unpaid losses, reinsurance does not relieve us of liability to our insureds. Accordingly, the losses and loss expense reserves on our balance sheet represent our total unpaid gross losses. The reinsurance recoverable represents anticipated recoveries of a portion of those gross unpaid losses as well as amounts recoverable from reinsurers with respect to claims paid. The table below presents our net reinsurance recoverable at December 31, 2003 and 2002.

(in millions of U.S. dollars)	 	December 31
2003	 	 	December 31
2002	 	
	 	
Reinsurance recoverable on paid losses and loss expenses	 	$	1,277	 	 	$	1,363	 	
Bad debt reserve on paid losses and loss expenses	 	 	(403	)	 	 	(378	)	
Reinsurance recoverable on future policy benefits	 	 	15	 	 	 	9	 	
Reinsurance recoverable on unpaid losses and loss expenses	 	 	13,749	 	 	 	13,558	 	
Bad debt reserve on unpaid losses and loss expenses	 	 	(557	)	 	 	(561	)	
	 	
Net reinsurance recoverable	 	$	14,081	 	 	$	13,991	 	

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 failure of reinsurers to indemnify us,
 
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primarily because of disputes under reinsurance contracts and insolvencies. Provisions have been established for amounts estimated to be uncollectible.
Following is a breakdown of our reinsurance recoverable on paid losses at December 31, 2003 and 2002:

 	 	December 31, 2003
	 	December 31, 2002
	
(in millions of U.S. dollars)	 	Amount	 	Bad Debt
Reserve	 	% of Total
Reserve	 	Amount	 	Bad Debt
Reserve	 	% of Total
Reserve	
	
Category
General collections	 	$	730	 	$	45	 	6.2%	 	$	848	 	$	43	 	5.1%	
Other	 	 	547	 	 	358	 	65.4%	 	 	515	 	 	335	 	65.0%	
	
Total	 	$	1,277	 	$	403	 	31.6%	 	$	1,363	 	$	378	 	27.7%	

The general collections category represents amounts in the process of collection in the normal course of business. These are balances for which we have no indication of dispute or credit-related issues.
The o ther category includes amounts recoverable that are in dispute, or are from companies in supervision, rehabilitation or liquidation. Our estimation of this reserve considers the credit quality of the reinsurer and whether we have received collateral or other credit protections, such as parental guarantees.
The following tables provide a listing of our largest reinsurers with the first category representing the top ten reinsurers and the second category representing the remaining reinsurers with balances greater than $20 million. The third category includes amounts due from over 2,500 companies, each having balances of less than $20 million. Our bad debt reserve in the three categories is principally based on an analysis of the credit quality of the reinsurer and collateral balances. The next category, mandatory pools and government agencies, includes amounts backed by certain state and federal agencies. In certain states, insurance companies are required by law to participate in these pools. The fifth category, structured settlements, includes annuities purchased from life insurance companies to settle claims. Since we retain the ultimate liability in the event that the life company fails to pay the claimant, we reflect the amount as a liability and as a recoverable for GAAP purposes. These amounts are not subject to dispute and we establish our bad debt reserve based on the application of historical collection experience. The next category, captives, includes companies established and owned by our insurance clients to assume a significant portion of their direct insurance risk from us, i.e., they are structured to allow clients to self-insure a portion of their insurance risk. It is generally our policy to obtain collateral equal to expected losses; where appropriate, exceptions are granted, but only with review and sign-off at a senior officer level. Our final category, other, includes amounts recoverable that are in dispute or are from companies that are in supervision, rehabilitation or liquidation. We establish our bad debt reserve for these categories based on a case by case analysis of individual situations, including credit and collateral analysis and consideration of our collection experience in similar situations.
 
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Breakdown of Reinsurance Recoverable

(in millions of U.S. dollars)	 	December 31
2003	 	Bad Debt
Reserve	 	% of Gross	 	
	 	
Categories	 	 	 	 	 	 	 	 	 	
Top 10 reinsurers	 	$	7,798	 	$	84	 	1.1	%	
Other reinsurers balances greater than $20 million	 	 	3,373	 	 	147	 	4.4	%	
Other reinsurers balances less than $20 million	 	 	979	 	 	150	 	15.3	%	
Mandatory pools and government agencies	 	 	779	 	 	4	 	0.5	%	
Structured settlements	 	 	429	 	 	2	 	0.5	%	
Captives	 	 	801	 	 	1	 	0.1	%	
Other	 	 	882	 	 	572	 	64.9	%	
	 	
Total	 	$	15,041	 	$	960	 	6.4	%	

Top 10 Reinsurers (net of collateral)
AXA
Berkshire Hathaway Insurance Group
CIGNA
EQUITAS
GE Global Insurance Group
Hannover
Lloyd’s of London
Munich Re
St. Paul Companies
Swiss Re Group
 
Other Reinsurers Balances Greater Than $20 million (net of collateral)
					
ABB Group	  	Fairfax Financial	  	QBE Insurance	
AIOI Insurance	  	FM Global Group	  	RenaissanceRe Holdings Ltd.	
Allianz Group	  	Gerling Group	  	Royal & Sun Alliance Insurance Group Plc	
American International Group	  	Great American P&C Insurance Companies	  	Scor Group	
Arch Capital	  	Hartford Insurance Group	  	Sompo Japan	
AVIVA	  	Independence Blue Cross (Amerihealth)	  	Toa Reinsurance Company	
Chubb Insurance Group	  	ING – Internationale Nederlanden Group	  	Tokio Marine & Fire Insurance Company Ltd.	
CNA Insurance Companies	  	IRB – Brasil Resseguros S.A.	  	Travelers Property Casualty Group	
Constellation Reinsurance Company	  	Korean Reinsurance Company (KRIC)	  	Trenwick Group	
Converium Group	  	Liberty Mutual Insurance Companies	  	White Mountains Insurance Group	
DaimlerChrysler Group	  	Mitsui Sumitomo Insurance Company Ltd.	  	WR Berkley Corp.	
Dominion Ins. Co. Ltd	  	Overseas Partners Ltd.	  	XL Capital Group	
Electric Insurance Company	  	Partner Reinsurance Company of the U.S.	  	Zurich Financial Services Group	
Everest Re Group	  	PMA Capital Insurance Company	  	 	

Asbestos and Environmental Claims
Included in our liabilities for losses and loss expenses are amounts for A&E. These A&E liabilities principally relate to claims arising from remediation costs associated with hazardous waste sites and bodily-injury claims related to asbestos products and environmental hazards. These amounts include provision for both reported and IBNR claims.
Our exposure to asbestos principally arises out of liabilities acquired when we purchased Westchester Specialty in 1998 and the P&C business of CIGNA in 1999, with the larger exposure contained within the liabilities acquired in the CIGNA transaction. These CIGNA
 
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transaction liabilities reside in various subsidiaries of Brandywine, which was created in 1995 by the restructuring of CIGNA’s domestic operations into separate ongoing and run-off operations.
As part of the acquisition of Westchester Specialty, NICO provided $750 million of reinsurance protection for adverse development on loss and loss adjustment expense reserves. At December 31, 2003, the remaining unused limit in this NICO Westchester Specialty cover was approximately $600 million.
As part of the acquisition of the CIGNA P&C business, NICO provided $2.5 billion of reinsurance protection for adverse development on Brandywine loss and loss adjustment expense reserves and for uncollectible ceded reinsurance. This NICO Brandywine cover was exhausted on an incurred basis with the increase in our A&E reserves in the fourth quarter of 2002.
The active ACE INA companies retain two primary funding obligations associated with the run-off Brandywine operations: a dividend retention fund obligation and required reinsurance coverage provided under an aggregate excess of loss reinsurance agreement. In addition, certain active ACE INA companies remain residually liable for pre-1987 general liability business ceded by those companies to the primary Brandywine subsidiary, Century Indemnity Company (“Century”).
In accordance with the Brandywine restructuring order, INA Financial Corporation established and funded a dividend retention fund consisting of $50 million plus investment earnings. Pursuant to terms of the restructuring, the full balance of this dividend retention fund was contributed to Century as of December 31, 2002. To the extent in the future that dividends are paid by INA Holdings Corporation to its parent, INA Financial Corporation, and to the extent that INA Financial Corporation then pays such dividends to INA Corporation, a portion of those dividends must be withheld to replenish the principal of the dividend retention fund to $50 million within five years. In 2003, no such dividends were paid, and therefore no replenishment of the dividend retention fund occurred. This dividend fund obligation, to maintain and to replenish the fund as necessary and to the extent dividends are paid, is ongoing until ACE INA receives prior written approval from the Pennsylvania Commissioner of Insurance to terminate the fund.
In addition, the ACE INA insurance subsidiaries are obligated to provide insurance coverage to Century in the amount of $800 million under an aggregate excess of loss reinsurance agreement if the statutory capital and surplus of Century falls below $25 million or if Century lacks liquid assets with which to pay claims as they become due, after giving effect to contribution of any dividend retention fund balance. Coverage under the aggregate excess of loss reinsurance agreement was triggered as of December 31, 2002 following contribution of the dividend retention fund balance. Approximately $468 million in undiscounted losses were ceded to the aggregate excess of loss reinsurance agreement at December 31, 2003.
In a lawsuit filed in the state of California in December 1999, certain competitors of ACE USA have challenged the restructuring that resulted in the creation of Brandywine. The restructuring was previously upheld by the Pennsylvania Supreme Court in July 1999. The lawsuit alleges that the restructuring does not effectively relieve the insurance subsidiary that issued the policies prior to the restructuring (Insurance Company of North America) from liabilities for claims on those policies by California policyholders. The California trial court has held in response to a pre-trial motion that a California statute does prohibit the transfer of California policies to a subsequent legal entity without the consent of the policyholders and noted that consent was not received in the context of the Brandywine restructuring. ACE intends to appeal this decision. In addition, the liabilities that are the subject of this California lawsuit are included within our A&E reserves for Brandywine.
Congress has been working on possible legislation to move all U.S. asbestos bodily-injury claims to a federal trust for compensation in accordance with an established set of medical criteria and claim values. The trust would be funded by asbestos defendants and their insurers. As currently proposed, ACE would be one of the insurer participants. We believe that if the proposed legislation is enacted, our ultimate funding obligation under the trust would be less than we would be required to pay under the current tort system because the trust would avoid payments to unimpaired victims and obviate the need for extensive legal costs. However, we cannot predict if any such proposed legislation will be modified or adopted.
 
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The table below presents selected loss reserve data for A&E exposures at December 31, 2003 and 2002.

 	 	December 31, 2003
	 	December 31, 2002
	
(in millions of U.S. dollars)	 	Gross	 	Net	 	Gross	 	Net	
	
Asbestos	 	$	2,899	 	$	277	 	$	3,192	 	$	446	
Environmental and other latent exposures	 	 	1,148	 	 	250	 	 	1,352	 	 	403	
	
Total	 	$	4,047	 	$	527	 	$	4,544	 	$	849	

Paid losses for the year ended December 31, 2003 for asbestos claims were $293 million on gross reserves and $169 million on net reserves. Environmental and other latent exposure claim payments were $204 million on gross reserves and $153 million on net reserves in 2003.
Survival ratios attempt to measure the adequacy of A&E loss reserves by taking the current ending loss reserve and dividing by the average annual claim payments for the prior three years. We believe this to be a simplistic measure of a very complicated issue. However, we understand this ratio is used as a means to compare companies with A&E exposures. Thus, if we average our last three years of gross A&E claim payments and expect payments to continue at the same pace, our gross survival ratio is 10.3 years. Using the 2003 calendar year payments, our net survival ratio is 9.9 years. The current year survival ratios are adversely affected by the timing of certain previously agreed upon settlements. These settlements were anticipated in our 2002 asbestos study.

Liquidity and Capital Resources
 
Liquidity
Liquidity is a measure of a company’s ability to generate cash flows sufficient to meet short-term and long-term cash requirements of its business operations. As a holding company, ACE possesses assets that consist primarily of the stock of its subsidiaries, and of other investments. In addition to net investment income, our cash flows currently depend primarily on dividends or other statutorily permissible payments. Historically, these dividends and other payments have come from our Bermuda-based operating subsidiaries, which we refer to as our Bermuda subsidiaries. During the year ended December 31, 2003, we were able to meet all of our obligations, including the payment of dividends declared on our ordinary shares and preferred shares, with our net cash flow and dividends received. Should the need arise, we generally have access to the debt markets and other available credit facilities that are discussed below.
The payments 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, which are discussed later.
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. The legal restrictions on the payment of dividends from retained earnings by our Bermuda subsidiaries are currently satisfied by the share capital and additional paid-in capital of each of the Bermuda subsidiaries. During 2003, ACE Bermuda declared and paid dividends of $478 million, compared with $345 million and $234 million in 2002 and 2001, respectively. We received dividends of $25 million from ACE Cap Re International Ltd. during 2003. ACE Tempest Life Re declared and paid dividends of $140 million and $105 million in 2002 and 2001, respectively. We expect that a majority of our cash inflows for 2004 will be from our Bermuda subsidiaries.
The payment of any dividends from ACE Global Markets or its subsidiaries would be subject to applicable U.K. insurance laws and regulations including those promulgated by the Society of Lloyd’s. ACE INA’s and ACE Financial Services’ U.S. insurance subsidiaries may pay dividends, without prior regulatory approval, only from earned surplus and subject to certain annual limitations and the maintenance of a minimum capital requirement. 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 include restrictions that limit the amount of dividends payable without prior approval of regulatory insurance authorities.
We did not receive any dividends from ACE Global Markets or ACE INA in 2003. Under the Lloyd’s accounting model, syndicates in Lloyd’s operate each year as an annual venture. Each year of account is held open for three years. At the end of three years, the year of account purchases reinsurance from the next open year, which is known as reinsurance to close or RITC, and distributes the remaining funds to the investors in the syndicate. ACE Global Markets has historically retained these funds for operational purposes. ACE INA
 
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issued debt to provide partial financing for the ACE INA acquisition and for other operating needs. This debt is serviced by dividends paid by ACE INA’s insurance subsidiaries to ACE INA as well as other group resources. ACE Financial Services’ U.S. insurance subsidiaries are limited in their dividend paying abilities due to their need to maintain their AA and AAA financial strength ratings.
Our consolidated sources of funds consist primarily of net premiums written, net investment income and proceeds from sales and maturities of investments. Funds are used primarily to pay claims, operating expenses, dividends and for the purchase of investments. After satisfying our cash requirements, excess cash flows from these underwriting and investing activities are invested.
Our insurance and reinsurance operations provide liquidity in that premiums are received in advance, sometimes substantially in advance, of the time claims are paid. Our consolidated net cash flows from operating activities were $4.2 billion in 2003 compared with $2.4 billion and $1.4 billion in 2002 and 2001, respectively. The positive operating cash flows were generated from an increase in net premiums written of $2.2 billion for the year ended December 31, 2003, and relatively stable net losses and loss expenses paid compared with 2002. The increase in 2002 compared with 2001 was primarily due to the $1.7 billion increase in net premiums written. Generally cash flows are affected by claim payments that, due to the nature of our operations, may comprise large loss payments on a limited number of claims and therefore can fluctuate significantly from year to year. The irregular timing of these loss payments can create significant variations in cash flows from operations between periods. Sources of liquidity include cash from operations, financing arrangements or routine sales of investments. Our consolidated net cash flows used for investing activities increased to $4.7 billion in 2003, compared with $1.9 billion in 2002. This increase primarily reflects our strong consolidated net cash flows from operating activities in 2003. Net cash flows used for investing activities decreased to $1.9 billion in 2002 compared with $2.2 billion in 2001. This decrease is primarily due to our debt repayment activity in 2002, which reduced net cash available for investment. Our consolidated net cash flows from financing activities were $395 million in 2003, compared with usage of $491 million in 2002. The increase is primarily due to the net proceeds from the issuance of preferred shares in 2003, compared with the repayment of trust preferred securities and short-term debt in 2002. We reported consolidated net cash flows from financing activities of $896 million in 2001, primarily due to the net proceeds from the issuance of ordinary shares. Although our ongoing operations continue to generate positive cash flows, our cash flows are currently impacted by a large book of loss reserves from businesses in run-off. The run-off operations generated negative operating cash flows of $645 million in 2003, compared with $525 million and $614 million in 2002 and 2001, respectively, primarily due to claim payments. 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. We believe that our cash balances, cash flow from operations, routine sales of investments and the liquidity provided by our credit facilities, as discussed below are adequate to meet expected cash requirements.
ACE and its subsidiaries are assigned debt and financial strength (insurance) ratings from internationally recognized rating agencies, including S&P, A.M. Best, Moody’s Investors Service and Fitch IBCA. The ratings issued on our companies by these agencies are announced publicly and are available directly from the agencies. Our website, acelimited.com, also contains some information about our ratings, which you can find under the “Investor Information” tab.
Financial strength ratings represent the opinions of the rating agencies on the financial strength of a company and its capacity to meet the obligations of insurance policies. Independent ratings are one of the important factors that establish our competitive position in the insurance markets. The rating agencies consider many factors in determining the financial strength rating of an insurance company, including the relative level of statutory surplus necessary to support the business operations of the company. These ratings are based upon factors relevant to policyholders, agents and intermediaries and are not directed toward the protection of investors. Such ratings are not recommendations to buy, sell or hold securities.
Debt ratings apply to short- and long-term debt as well as preferred stock. These ratings are assessments of the likelihood that we will make timely payments of principal and interest and preferred stock dividends.
It is possible that, in the future, one or more of the rating agencies may reduce our existing ratings. If one or more of our ratings were downgraded, we could incur higher borrowing costs and our ability to access the capital markets could be impacted. In addition, our insurance and reinsurance operations could be adversely impacted by a downgrade in our financial strength ratings, including a possible reduction in demand for our products in certain markets.
 
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Capital Resources
Capital resources consist of funds deployed or available to be deployed to support our business operations. The following table summarizes the components of our capital resources at December 31, 2003 and 2002.

(in millions of U.S. dollars)	  	December 31
2003	  	December 31
2002	
	
Short-term debt	  	$	546	  	$	146	
Long-term debt	  	 	1,349	  	 	1,749	
	
Total debt	  	 	1,895	  	 	1,895	
	
Trust preferred securities	  	 	475	  	 	475	
Mezzanine equity	  	 	–	  	 	311	
Preferred shares	  	 	557	  	 	–	
Ordinary shareholders’ equity	  	 	8,278	  	 	6,389	
	
Total shareholders’ equity	  	 	8,835	  	 	6,389	
	
Total capitalization	  	$	11,205	  	$	9,070	
	
Ratio of debt to total capitalization	  	 	16.9%	  	 	20.9%	
Ratio of debt plus trust preferreds to total capitalization	  	 	21.2%	  	 	26.1%	
 
We believe our financial strength provides us with the flexibility and capacity to obtain funds externally through debt or equity financing on both a short-term and long-term basis. Our ability to access the capital markets is dependent on, among other things, market conditions and our perceived financial strength. We have accessed both the debt and equity markets from time to time.
 
Mezzanine Equity
In 2000, we publicly offered and issued 6,221,000 FELINE PRIDES for aggregate net proceeds of $311 million. Each FELINE PRIDE initially consisted of a unit referred to as an Income PRIDE. Each Income PRIDE consisted of (i) one 8.25 percent Cumulative Redeemable Preferred Share, Series A, liquidation preference $50 per share, and (ii) a purchase contract pursuant to which the holder of the Income PRIDE agreed to purchase from us, on May 16, 2003, $311 million of ordinary shares at the applicable settlement rate. On May 16, 2003, we issued approximately 11.8 million ordinary shares, in satisfaction of the purchase contracts underlying our FELINE PRIDES. In consideration, on June 16, 2003, we redeemed all of our 8.25 percent Cumulative Redeemable Preferred Shares, Series A, at a rate representing an issuance of 1.8991 ordinary shares per  preferred share.
 
Shareholders’ Equity
The following table analyzes the movements in our shareholders’ equity for the years ended December 31, 2003, 2002, and 2001.

(in millions of U.S. dollars)	 	2003	 	 	2002	 	 	2001	 	
	 	
Balance, beginning of year	 	$	6,389	 	 	$	6,107	 	 	$	5,420	 	
Net income (loss)	 	 	1,417	 	 	 	77	 	 	 	(147	)	
Change in net unrealized appreciation on investments	 	 	208	 	 	 	339	 	 	 	35	 	
Issuance of Preferred Shares	 	 	557	 	 	 	–	 	 	 	–	 	
Conversion of Mezzanine equity	 	 	311	 	 	 	–	 	 	 	–	 	
Dividends declared – Ordinary Shares	 	 	(204	)	 	 	(173	)	 	 	(138	)	
Dividends declared – Mezzanine equity	 	 	(10	)	 	 	(26	)	 	 	(26	)	
Dividends declared – Preferred Shares	 	 	(23	)	 	 	–	 	 	 	–	 	
Cumulative translation adjustments	 	 	108	 	 	 	(1	)	 	 	(2	)	
Other movements, net	 	 	82	 	 	 	66	 	 	 	17	 	
Ordinary Shares issued in share offering	 	 	–	 	 	 	–	 	 	 	1,127	 	
Repurchase of Ordinary Shares	 	 	–	 	 	 	–	 	 	 	(179	)	
	 	
Balance, end of year	 	$	8,835	 	 	$	6,389	 	 	$	6,107	 	

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In May 2003, we sold in a public offering 23 million depositary shares, each representing one-tenth of one of our 7.80 percent Cumulative Redeemable Preferred Shares for $25 per depositary share for net proceeds of $557 million. Gross proceeds from the sale of the preferred shares were $575 million and related expenses were $18 million. We used the net proceeds to make additional capital contributions to some of our subsidiaries and for general corporate purposes. This offering was made under our universal shelf registration statement with the SEC, which became effective in February 2003, allowing us to offer a number of different types of debt and equity securities up to a total offering price of $1.5 billion. Dividends on the preferred shares are payable quarterly, when and if declared by our Boards of Directors, in arrears on March 1, June 1, September 1 and December 1 of each year. On September 1, 2003 and December 1, 2003 we paid dividends of $4.9292 and $4.8750 per preferred share to shareholders of record on August 31, 2003 and November 30, 2003, respectively.
Our diluted book value per ordinary share increased to $29.46 at December 31, 2003, compared with $24.16 at December 31, 2002. In calculating our diluted book value per ordinary share, we include in the denominator in-the-money options together with the 11.8 million shares issued upon conversion of the FELINE PRIDES. The expected proceeds from the in-the-money options are included in the numerator. Shareholders’ equity increased by $2.4 billion in 2003, compared with 2002. This increase is due to the issuance of the preferred shares; our net income, conversion of the FELINE PRIDES which increased shareholder’s equity by $311 million, and unrealized gains on our investment portfolio of $208 million. Partially offsetting these increases, were $236 million of dividends declared on mezzanine equity, ordinary and preferred shares in 2003.
As part of our capital management program, in November 2001, our Board of Directors authorized the repurchase of any ACE issued debt or capital securities including ordinary shares, up to $250 million. At December 31, 2003, this authorization had not been utilized.
On January 10, 2003 and April 14, 2003, we paid dividends of 17 cents per ordinary share to shareholders of record on December 27, 2002 and March 31, 2003, respectively. On July 14, 2003 and October 14, 2003 and January 14, 2004 we paid dividends of 19 cents per ordinary share to shareholders of record on June 30, 2003, September 30, 2003 and December 31, 2003 respectively. We have paid dividends each quarter since we became a public company in 1993. However, the declaration, payment and value of future dividends on ordinary shares is at the discretion of our Board of Directors and will be dependent upon our profits, financial requirements and other factors, including legal restrictions on the payment of dividends and such other factors as our Board of Directors deems relevant.

Contractual Obligations and Commitments
The table below shows our contractual obligations and commitments including our payments due by  period:
 
Payments Due By Period

(in millions of U.S. dollars)	 	Total	 	Less than
1 Year	 	1-3 Years	 	4-5 Years	 	After 5
Years	
	
Contract holder deposit funds	 	$	94	 	$	35	 	$	27	 	$	20	 	$	12	
Operating leases	 	 	424	 	 	75	 	 	119	 	 	75	 	 	155	
Short-term debt	 	 	546	 	 	546	 	 	–	 	 	–	 	 	–	
Long-term debt	 	 	1,349	 	 	–	 	 	300	 	 	749	 	 	300	
Trust preferred securities	 	 	475	 	 	–	 	 	–	 	 	–	 	 	475	
	
Total contractual obligations and commitments	 	$	2,888	 	$	656	 	$	446	 	$	844	 	$	942	

The above table excludes estimated future cash flows for losses and loss expenses as there is typically no minimum contractual commitment associated with insurance and reinsurance contracts and also the amount and timing of the cash outflows are uncertain. Further, the above table excludes pension obligations. While we expect to contribute approximately $10 million to our defined benefit plans during 2004, minimum funding requirements are minimal over the next year. Subsequent funding commitments are apt to vary for many factors and are difficult to estimate at this time.
 
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Contract Holder Deposit Funds
Deposit liabilities of $212 million include contract holder deposit funds of $94 million and reinsurance deposit liabilities of $118 million. Contract holder deposit funds represent a liability for investment contracts sold that do not meet the definition of an insurance contract under FAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and Realized Gains and Losses from the Sale of Investments”. The investment contracts are sold with a guaranteed rate of return. The proceeds are then invested with the intent of realizing a greater return than is called for in the investment contracts. The above table does not include estimated cash flows for deposit liabilities as the amount and timing of cash flows is uncertain.
 
Operating Lease Commitments
We lease office space in most countries in which we operate under operating leases that expire at various dates through January 2018. We renew and enter into new leases in the ordinary course of business as required.
 
Short-term Debt
Included in short-term debt is ACE INA’s $400 million, 8.2 percent notes which become due on August 15, 2004. We plan to refinance these notes.
In June 1999, we arranged certain commercial paper programs. The programs use revolving credit facilities as back-up facilities and provide for up to $2.8 billion in commercial paper issuance (subject to the availability of back-up facilities, which currently total $750 million) for ACE and for ACE INA. During 2003 and 2002, we substantially reduced our use of commercial paper.
From time to time, we also use securities repurchase agreements as a source of short-term liquidity. Under these repurchase agreements, we agree to sell securities and repurchase them at a future date for a predetermined price, thereby creating liquidity. The covenants of our existing credit facilities limit our borrowing under repurchase agreements to $800 million.
 
Long-term Debt
Our total long-term debt of $1.3 billion is described in Note 8 of our Consolidated Financial Statements.
The following instruments have specific collateral triggers. In 1998, ACE US Holdings issued $250 million of unsecured senior notes that mature in October 2008. In December 1999, ACE INA issued $300 million of unsecured subordinated notes that mature in December 2009. We repaid $100 million of this outstanding amount during 2002. We have a $450 million credit default swap in place that has the economic effect of reducing our cost of borrowing associated with these two issuances. The minimum collateral in connection with the credit default swap is $158 million. The actual collateral can be higher depending on the credit quality of securities pledged.
Under these transactions, we would be required to provide collateral of $450 million if S&P downgraded our debt rating to BB+ or lower, or downgraded ACE Bermuda’s financial strength rating to BBB- or lower. Although there can be no assurance, we believe it is unlikely that either of these two events will occur. In the event that we terminate either of the swaps prematurely, we would be liable for certain transaction costs. The counter-party in each swap is a highly rated major financial institution and management does not anticipate non-performance.
 
Trust Preferred Securities
During 1999 and 2000, we issued $800 million of trust preferred securities of which $400 million matured and was repaid in 2002. The funds generated from these issues were used to partially finance the ACE INA acquisition. The securities outstanding consist of:
(i) $400 million company-obligated mandatorily redeemable preferred shares ($100 million and $300 million) issued by two business trusts wholly owned by us; and
(ii) $75 million of monthly income preferred securities issued by one of our subsidiary limited liability companies.
Each of the three remaining series of trust preferred securities was issued by a special purpose entity that is wholly owned by us; two trusts and a limited liability company. The sole assets of the special purpose entities are debt instruments issued by one or more of our subsidiaries. The special purpose entities look to payments on the debt instruments to make payments on the preferred securities. We have guaranteed the payments on these debt securities. The trustees of the trusts and the managers of the limited liability company include one or more of our officers and at least one independent trustee or manager, such as a bank or trust company. Our officers serving as trustees of the trusts or managers of the limited liability company do not receive any compensation or other remuneration
 
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for their services in such capacity. The full $475 million of outstanding trust preferred stock is shown on our consolidated balance sheet as a liability. Additional information with respect to the trust preferred securities is  contained in Note 8 of our Consolidated Financial Statements.
 
Credit Facilities
The following table shows our credit facilities by credit line, usage, expiry date and purpose at December 31, 2003.

 	  	Credit Line	  	Usage	  	Expiry Date	  	Purpose	
	
Liquidity Facilities	  	 	 	  	 	 	  	 	  	 	
ACE Limited 1	  	$	500	  	$	–	  	April 2004	  	General Corporate	
ACE Limited 1,2	  	 	250	  	 	64	  	May 2005	  	General Corporate	
ACE Guaranty Corp	  	 	140	  	 	–	  	May 2004	  	General Corporate	
Secured Operational LOC Facilities	  	 	 	  	 	 	  	 	  	 	
ACE Group	  	 	500	  	 	285	  	Sept. 2006	  	General Corporate	
Unsecured Operational LOC Facilities	  	 	 	  	 	 	  	 	  	 	
ACE Limited	  	 	500	  	 	278	  	Sept. 2004	  	General Corporate	
ACE Limited	  	 	100	  	 	84	  	Oct. 2004	  	General Corporate	
ACE Global Markets	  	 	200	  	 	200	  	Oct. 2004	  	General Corporate	
ACE Tempest Re	  	 	200	  	 	133	  	Dec. 2004	  	General Corporate	
ACE International	  	 	21	  	 	21	  	Various	  	General Corporate	
Unsecured Capital Facilities	  	 	 	  	 	 	  	 	  	 	
ACE Guaranty Corp	  	 	175	  	 	–	  	Dec. 2010	  	Rating Agency Capital	
ACE Global Markets 3	  	 	679	  	 	674	  	Nov. 2008	  	Underwriting capacity for Lloyd’s Syndicate 2488-2004 capacity of £550 million (approximately $1 billion)	
	
Total	  	$	3,265	  	$	1,739	  	 	  	 	
	
1 Commercial paper back-up facility
2 May also be used for LOCs
3 Unsecured letters of credit are placed with Lloyd’s as capital on behalf of ACE’s corporate capital vehicles
 
Some of the facilities noted above require that we maintain certain covenants, all of which have been met at December 31, 2003. These covenants include:
(i) maintenance of a minimum consolidated net worth covenant of not less than $4.4 billion plus 25 percent of Consolidated Net Income for each fiscal quarter ending on or after March 31, 2003 for which such Consolidated Net Income is positive, plus 50 percent of net proceeds of any issuance of equity interests (other than the net proceeds from any issuance of equity interests in substitution and replacement of other equity interests to the extent such net proceeds do not exceed the amount of a substantially contemporaneous redemption of equity interests) subsequent to March 31, 2003; and
(ii) maintenance of a maximum debt to total capitalization ratio of not greater than 0.35 to 1. Under this covenant, debt does not include trust preferred securities or mezzanine equity, except where the ratio of the sum of trust preferred securities and mezzanine equity to total capitalization is greater than 15 percent. In this circumstance, the amount greater than 15 percent would be included in the debt to total capitalization ratio.
At December 31, 2003, (a) the minimum consolidated net worth requirement under the covenant described in (i) above was $5.2 billion and our actual consolidated net worth as calculated under that covenant was $8.1 billion; and (b) our ratio of debt to total capitalization was 0.17 to 1.
Certain facilities are guaranteed by either operating subsidiaries or ACE Limited.
In addition to these covenants, the ACE Global Markets capital facility requires that collateral be posted if the financial strength rating of ACE Limited falls to S&P BBB+ or lower. Prior to November 2003 (the renewal date of the ACE Global Markets unsecured LOC), this requirement related to ACE Bermuda.
 
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Our failure to comply with the covenants under any credit facility would, subject to grace periods in the case of certain covenants, result in an event of default. This could require us to repay any outstanding borrowings or to cash collateralize letters of credit under such facility. An event of default under one or more credit facilities with outstanding credit extensions of $25 million or more would result in an event of default under all of the facilities described above.
As our Bermuda subsidiaries are not admitted insurers and reinsurers in the U.S., the terms of certain insurance and reinsurance contracts require them to provide LOCs to clients. In addition, ACE Global Markets is required to satisfy certain U.S. regulatory trust fund requirements which can be met by the issuance of LOCs.
 
Recent Accounting Pronouncements
See Note 2(p) to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.

 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
 
Market Sensitive Instruments and Risk Management
Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments. We are exposed to potential loss to various market risks, including changes in interest rates and foreign currency exchange rates. Our investment portfolio consists of both fixed income and equity securities, denominated in both U.S. and foreign currencies, which are sensitive to changes in interest rates, equity prices and foreign currency exchange rates. Therefore our net income is affected by changes in interest rates, equity prices and foreign currency exchange rates. We use investment derivative instruments such as futures, options, interest rate swaps, and foreign currency forward contracts to manage the duration of our investment portfolio and foreign currency exposures and also to obtain exposure to a particular financial market. These instruments are sensitive to changes in interest rates, foreign currency exchange rates and equity security prices. The portfolio includes other market sensitive instruments, which are subject to changes in market values with changes in interest rates.
 
Duration Management and Market Exposure Management
We use financial futures, options, interest rate swaps and foreign currency forward contracts for the purpose of managing certain investment portfolio exposures. These instruments are recognized as assets or liabilities in our Consolidated Financial Statements and changes in market value are included in net realized gains or losses in the consolidated statements of operations.
Our exposure to interest rate risk is concentrated in our fixed income portfolio, and to a lesser extent, our debt obligations. An increase in interest rates of 100 basis points applied instantly across the yield curve would have resulted in a decrease in the market value of our fixed income portfolio of 3.4 percent at December 31, 2003 compared with 3.1 percent at December 31, 2002. This equates to a decrease in market value of approximately $696 million on a fixed income portfolio valued at $20.6 billion at December 31, 2003. This compares with an approximately $488 million decrease in market value on a fixed income portfolio valued at $15.7 billion at December 31, 2002. An immediate time horizon was used as this presents the worst case scenario.
Our portfolio of equity securities, which we carry on our balance sheet at fair value, has exposure to price risk. This risk is defined as the potential loss in fair value resulting from adverse changes in stock prices. In addition, we attain exposure to the equity markets through the use of derivative instruments which also have exposure to price risk. Our U.S. equity portfolio is highly correlated with the S&P 500 index and changes in that index would approximate the impact on our portfolio. Our international equity portfolio has exposure to a broad range of non-U.S. equity markets, primarily in those countries where we have insurance operations. This portfolio is correlated to movement in each of these countries’ broad equity market. The combined equity exposure through both our portfolios of equity securities and derivative instruments was valued at $662 million at December 31, 2003 compared with $603 million at December 31, 2002. A hypothetical ten percent decline in the price of each stock in our portfolio of equity securities and the index correlated to the derivative instruments would have resulted in a $66 million decline in fair value at December 31, 2003. This compares to a decline of $60 million at December 31, 2002. Changes in fair value of these derivative instruments are recorded as net realized gains (losses) in the consolidated statements of operations. Changes in the fair value of our equity portfolio are recorded as unrealized appreciation (depreciation) and are included as other comprehensive income in shareholders’ equity.
Many of our non-U.S. companies maintain both assets and liabilities in local currencies. Therefore, exchange rate risk is generally limited to net assets denominated in those foreign currencies. Foreign exchange risk is reviewed as part of our risk management
 
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process. Locally required capital levels are invested in home currencies in order to satisfy regulatory requirements, and to support local insurance operations regardless of currency fluctuations.
 
Derivatives
FAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities, and requires that an entity recognize all derivatives as either assets or liabilities on the consolidated balance sheet and measure those instruments at fair value.
We maintain investments in derivative instruments such as futures, options, interest rate 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. If certain conditions are met, a derivative may be specifically designated as a fair value cash flow or foreign currency hedge. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Upon application of FAS 133, hedging relationships must be designated and documented pursuant to the provisions of this statement. We had no derivatives that were designated as hedges at December 31, 2003, 2002 or 2001.
Certain products (principally credit protection oriented) issued by the Financial Services segment have been determined to meet the definition of a derivative under FAS 133. The “Critical Accounting Estimates” section of the Management’s Discussion and Analysis of Results of Operations and Financial Condition has more information relating to these products.

 ITEM 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required by Regulation S-X are included in this report on Form 10-K commencing on page F-1.

 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no changes in, or any disagreements with, accountants on accounting and financial disclosure within the two years ended December 31, 2003.

 ITEM 9A. Controls and Procedures
As of the end of the period covered by this report, the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’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.
 
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PART  III

 ITEM 10. Directors and Executive Officers of the Registrant
Information pertaining to this item is incorporated by reference to the sections entitled “Election of Directors-Nominees for Election for Terms Expiring in 2007”, “Election of Directors-Directors Whose Terms of Office Will Continue After This Meeting”, “Election of Directors – Section 16(a) Beneficial Ownership Reporting compliance” and “Elections of Directors – Meetings and Committees of the Board – Audit Committee” of the definitive proxy statement for the Annual General Meeting of Shareholders to be held on May 27, 2004, which involves the election of directors and will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.
 
Code of Ethics
The Company has adopted a Code of Conduct, which sets forth standards by which all ACE employees, officers and directors must abide as they work for the Company. The Company has posted this Code of Conduct on its internet site (acelimited.com, under Investor Information / Corporate Governance / Code of Conduct). The Company intends to disclose on its internet site any amendments to, or waivers from, its Code of Conduct that are required to be publicly disclosed pursuant to the rules of the SEC. 

 ITEM 11. Executive Compensation
This item is incorporated by reference to the section entitled “Executive Compensation” of the definitive proxy statement for the Annual General Meeting of Shareholders to be held on May 27, 2004, which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.

 ITEM 12. Security Ownership of Certain Beneficial Owners and Management 
This item is incorporated by reference to the section entitled “Approval of ACE Limited 2004 Long-Term Incentive Plan – Security Ownership of Certain Beneficial Owners and Management” of the definitive proxy statement for the Annual General Meeting of Shareholders to be held on May 27, 2004, which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.

 ITEM 13. Certain Relationships and Related Transactions
This item is incorporated by reference to the section entitled “Election of Directors – Certain Business Relationships” of the definitive proxy statement for the Annual General Meeting of Shareholders to be held on May 27, 2004, which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.

 ITEM 14. Principal Accountant Fees and Services
This item is incorporated by reference to the information set forth in the definitive proxy statement for the Annual General Meeting of Shareholders to be held on May 27, 2004, which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.
 
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PART  IV

 ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements, Schedules and Exhibits

1. Consolidated Financial Statements	  	Page	
– Management’s Responsibility for Financial Statements	  	F-3	
– Report of Independent Auditors	  	F-4	
– Consolidated Balance Sheets at December 31, 2003 and 2002	  	F-5	
– Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001	  	F-6	
– Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2003, 2002 and 2001	  	F-7	
– Consolidated Statements of Comprehensive Income for the years ended December 31, 2003, 2002 and 2001	  	F-9	
– Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001	  	F-10	
– Notes to Consolidated Financial Statements	  	F-11	
2. Financial Statement Schedules	  	 	
– Schedule I – Summary of Investments – Other than Investments in Related Parties	  	F-56	
– Schedule II – Condensed Financial Information of the Registrant (Parent Company Only)	  	F-57	
– Schedule IV – Supplemental Information concerning Reinsurance	  	F-59	
– Schedule VI – Supplemental Information concerning Property and Casualty Operations	  	F-60	
 
Other schedules have been omitted as they are not applicable to ACE, or the required information has been included in the Consolidated Financial Statements and related notes.
 
3. Exhibits

Exhibit No.	  	Description	
	
2.1	  	Amended and Restated Agreement and Plan of Merger, dated as of October 26, 1999, among Capital Re Corporation, ACE Limited and CapRe Acquisition Corp. (Incorporated by reference to Exhibit 2.1 to Registration Statement on Form S-4 (No. 333-90927)	
2.2	  	First Amendment to Amended and Restated Agreement and Plan of Merger, dated as of November 29, 1999, among Capital Re Corporation, ACE Limited and CapRe Acquisition Corp. (Incorporated by reference to Exhibit 2.5 to Registration Statement on Form S-4 (No. 33-90927)	
2.3	  	Acquisition Agreement, dated as of January 11, 1999, among CIGNA Corporation, CIGNA Holdings, Inc. and ACE Limited (Incorporated by reference to Exhibit 2.1 of the Form 8-K current report (Date of earliest event reported: July 2, 1999))	
2.4	  	Amendment No. 1 to Acquisition Agreement, dated as of July 2, 1999, CIGNA Corporation, CIGNA Holdings, Inc. and ACE Limited (Incorporated by reference to Exhibit 2.2 of the Form 8-K current report (Date of earliest event reported: July 2, 1999))	
2.5	  	Amendment No. 2 to Acquisition Agreement, dated as of July 2, 1999, CIGNA Corporation, CIGNA Holdings, Inc. and ACE Limited (Incorporated by reference to Exhibit 2.3 of the Form 8-K current report (Date of earliest event reported: July 2, 1999))	
3.1	  	Memorandum of Association of the Company (Incorporated by reference to Exhibit 3.1 to Form 10-K for the year ended September 30, 1998)	
3.2	  	Articles of Association of the Company (Incorporated by reference to Exhibit 3.2 to Form 10-K for the year ended September 30, 1998)	
3.3	  	Special Resolutions adopted January 22, 2002 increasing the number of authorized Ordinary Shares and Other Shares (Incorporated by reference to Exhibit 3.3 to Form 10-K of the Company for the year ended December 31, 2001)	
4.1	  	Memorandum of Association of the Company (see Exhibit 3.1)	
4.2	  	Articles of Association of the Company (see Exhibit 3.2)	
4.3	  	Specimen certificate representing Ordinary Shares (Incorporated by reference to Exhibit 4.3 to Form 10-K of the Company for the year ended December 31, 2001)	
4.4	  	Form of the Declaration of Terms of Capital Re LLC 7.65% Cumulative Monthly Income Preferred Shares, Series A, January 24, 1994 (Incorporated by reference to Exhibit 4.2 to Capital Re’s Registration Statement on Form S-3 (Reg. No. 33-72090))	
4.5	  	Form of Liability Assumption Agreement dated as of January 24, 1994, between Capital Re Corporation and Capital Re LLC (Incorporated by reference to Exhibit 99.2 to Capital Re’s Registration Statement on Form S-3 (Reg. No. 33-72090))	
4.6	  	Form of Loan Agreement dated as of January 24, 1994, between Capital Re Corporation and Capital Re LLC (Incorporated by reference to Exhibit 99.1 to Capital Re’s Registration Statement on Form S-3 (Reg. No. 33-72090))	
 
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Exhibit No.	  	Description	
	
4.7	  	Form of Payment and Guarantee Agreement dated as of January 24, 1999, by Capital Re Corporation and Capital Re LLC (Incorporated by reference to Exhibit 4.1 to Capital Re’s Registration Statement on Form S-3 (Reg. No. 33-72090))	
4.8	  	Resolutions of a committee of the Board of Directors of ACE Limited establishing the terms of the 7.80 percent Cumulative Redeemable Preferred Shares, Series C, of ACE Limited (Incorporated by reference to Exhibit 4.1 of the Form 8-K current report (Date of earliest event reported: May 30, 2003))	
10.1*	  	ACE Limited Annual Performance Incentive Plan (Incorporated by reference to Exhibit 10.13 to the Registration Statement on Form S-1 of the Company (No. 33-57206))	
10.2*	  	ACE Limited Equity Linked Incentive Plan (Incorporated by reference to Exhibit 10.14 to the Registration Statement on Form S-1 of the Company (No. 33-57206))	
10.2.1*	  	Amendment to ACE Limited Equity Linked Incentive Plan (Incorporated by reference to Exhibit 10.15 to the Registration Statement on Form S-1 of the Company (No. 33-57206))	
10.2.2*	  	Second Amendment to ACE Limited Equity Linked Incentive Plan (Incorporated by reference to Exhibit 10.45 to Form 10-K of the Company for the year ended September 30, 1995).	
10.2.3*	  	Third Amendment to Equity Linked Incentive Plan-Stock Appreciation Right Plan (Incorporated by reference to Exhibit 10.28 to Form 10-Q of the Company for the quarter ended March 31, 1997)	
10.3*	  	Form of restricted stock award dated August 24, 1993, to ACE Limited Directors (Incorporated by reference to Exhibit 10.39 to Form 10-K of the Company for the year ended September 30, 1993)	
10.4*	  	Employment Agreement, dated October 1, 1994, between ACE Limited and Brian Duperreault (Incorporated by reference to Exhibit 10.42 to Form 10-K of the Company for the year ended September 30, 1994)	
10.5*	  	Employment Agreement, dated January 9, 1995, between ACE Limited and Dominic J. Frederico (Incorporated by reference to Exhibit 10.45 to Form 10-K of the Company for the year ended September 30, 1995)	
10.5.1*	  	Amendment dated as of February 25, 2003, amending the Employment Agreement dated January 9, 1995, between ACE Limited and Dominic J. Frederico (Incorporated by reference to Exhibit 10.66 to Form 10-K of the Company for the year ended December 31, 2002)	
10.6*	  	Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.36 to Form 10-Q of the Company for the quarter ended March 31, 1996)	
10.6.1*	  	First Amendment to ACE Limited Employee Stock Purchase Plan (Incorporated by reference to Exhibit 10.59 to Form 10-K of the Company for the year ended December 31, 2000)	
10.7*	  	ACE Limited 1996 Tempest Replacement Option Plan (Incorporated by reference to Exhibit 10.24 to Form 10-K of the Company for the year ended September 30, 1996)	
10.8*	  	ACE Limited Elective Deferred Compensation Plan (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company for the quarter ended December 31, 1997)	
10.9*	  	ACE Limited Rules of the Approved U.K. Stock Option Program (Incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company for the quarter ended December 31, 1997)	
10.10	  	ACE US Holdings, Inc. Credit Sensitive Senior Notes due 2008 Indenture dated as of October 27, 1998 (Incorporated by reference to Exhibit 10.37 of Form 10-K of the Company for the year ended September 30, 1998)	
10.11	  	Information Technology Services Agreement, dated as of June 29, 1999, among ACE INA Holdings Inc. and International Business Machines Corporation (Incorporated by reference to Exhibit 99.1 of the Form 8-K current report (Date of earliest event reported: July 2, 1999))	
10.12	  	Senior Indenture, dated as of August 1, 1999, among ACE INA Holdings, Inc., ACE Limited and Bank One, N.A. (formerly The First National Bank of Chicago), as trustee (Incorporated by reference to Exhibit 4.5 to registration statement on Form S-1 of the Company (No. 333-78841))	
10.12.1	  	Indenture, dated as of November 30, 1999, among ACE INA Holdings, Inc. and Bank One Trust Company, N.A., as trustee (Incorporated by reference to Exhibit 10.38 to Form 10-K of the Company for the year ended December 31, 1999)	
10.12.2	  	Supplemental Indenture No. 1, dated as of December 6, 1999, among ACE INA Holdings, Inc. and Bank One Trust Company, N.A., as trustee (Incorporated by reference to Exhibit 10.39 to Form 10-K of the Company for the year ended December 31, 1999)	
10.12.3	  	Indenture, dated as of December 1, 1999, among ACE INA Holdings, Inc., ACE Limited and Bank One Trust Company, National Association (Incorporated by reference to Exhibit 10.41 to Form 10-K of the Company for the year ended December 31, 1999)	
10.13*	  	ACE Limited 1999 Replacement Long Term Incentive Plan (Incorporated by reference to Exhibit 10.1 to the Form 10-Q of the Company for the quarter ended September 30, 1999)	
 
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Exhibit No.	  	Description	
	
10.14	  	Amended and Restated Trust Agreement, dated December 20, 1999, among ACE INA Holdings, Inc., Bank One Trust Company, National Association, as property trustee, Bank One Delaware Inc., as Delaware trustee and the administrative trustees named therein (Incorporated by reference to Exhibit 10.40 to Form 10-K of the Company for the year ended December 31, 1999)	
10.14.1	  	Common Securities Guarantee Agreement, dated as of December 20, 1999 (Incorporated by reference to Exhibit 10.42 to Form 10-K of the Company for the year ended December 31, 1999)	
10.14.2	  	Preferred Securities Guarantee Agreement, dated as of December 20, 1999 (Incorporated by reference to Exhibit 10.43 to Form 10-K of the Company for the year ended December 31, 1999)	
10.15*	  	Consulting Agreement dated as of January 1, 2000, between Kramer Capital Corp. and the Company (Incorporated by reference to Exhibit 10.46 to Form 10-K of the Company for the year ended December 31, 1999)	
10.16*	  	Promissory note from Dominic Frederico (Incorporated by reference to Exhibit 10.47 to Form 10-K of the Company for the year ended December 31, 1999)	
10.17	  	$75 million Credit Facility (subsequently amended to $100 million) between Capital Re Company, various banks and Deutsche Bank AG, as Agent (Incorporated by reference to Exhibit 4.09 to the Annual Report on Form 10-K for Capital Re Corporation for the fiscal year ended December 31, 1994 (Comm. File No. 1-10995))	
10.17.1	  	Amendment dated as of January 27, 1998, to $100 Million Credit Facility between Capital Reinsurance Company, various banks and Deutsche Bank AG, as Agent (Incorporated by reference to Exhibit 4.11 to Form 10-K for the year ended December 31, 1997 for Capital Re Corporation (Comm. File No. 1-10995))	
10.17.2	  	Amendment dated as of March 22, 1999, to $100 Million Credit Facility between Capital Reinsurance Company, various banks and Deutsche Bank AG, as Agent (Incorporated by reference to Exhibit 4.11 to Form 10-K for the year ended December 31, 1998 for Capital Re Corporation (Comm. File No. 1-10995))	
10.17.3	  	Amended and restated credit agreement dated as of November 15, 2001 increasing to $150 million, Credit Facility between ACE Guaranty Re. Inc., various banks and Deutsche Bang AG, as Agent.	
10.17.4	  	Amendment dated as of December 20, 2002, to $150 million Credit Facility (amended to $175 million) between ACE Guaranty Corp., various banks and Deutsche Bank AG, as Agent.	
10.17.5	  	Amendment dated as of December 16, 2003, to $175 million Credit Facility between ACE Guaranty Corp., various banks and Deutsche Bank AG, as Agent.	
10.18*	  	ACE Limited 1999 Replacement Stock Plan (Incorporated by reference to Exhibit 10.54 to Form 10-K of the Company for the year ended December 31, 1999)	
10.19*	  	ACE USA Officer Deferred Compensation Plan (as amended through January 1, 2000) (Incorporated by reference to Exhibit 10.5 to Form 10-Q of the Company for the quarter ended March 31, 2000)	
10.20*	  	ACE USA Supplemental Employee Retirement Savings Plan (Incorporated by reference to Exhibit 10.6 to Form 10-Q of the Company for the quarter ended March 31, 2000)	
10.21	  	Amended and Restated Five Year Credit Agreement among ACE Limited, ACE Bermuda Insurance Company Ltd., ACE INA Holdings, Inc. and ACE Financial Services, Inc., Mellon Bank, N.A., Bank of America, N.A. and The Chase Manhattan Bank, dated May 8, 2000 (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company for the quarter ended June 30, 2000)	
10.21.1	  	The First Amendment which amends the Amended and Restated Five Year Credit Agreement dated as of May 8, 2000, among ACE Limited, ACE Bermuda Insurance Ltd., ACE Tempest Reinsurance Ltd. (formerly known as Tempest Reinsurance Company Limited), ACE INA Holdings Inc. and ACE Financial Services Inc., various financial institutions and Morgan Guaranty Trust Company of New York, as administrative agent, dated as of October 23, 2000 (Incorporated by reference to Exhibit 10.4 to Form 10-Q of the Company for the quarter ended September 30, 2000)	
10.21.2	  	Second Amendment dated as of October 23, 2001, amending the Amended and Restated Five Year Credit Agreement dated as of May 8, 2000, and as amended as of October 23, 2000 among ACE Limited, certain subsidiaries, various lenders and Morgan Guaranty Trust Company of New York. (Incorporated by reference to Exhibit 10.4 to Form 10-Q of the Company for the quarter ended September 30, 2001)	
10.21.3	  	Third Amendment dated as of April 5, 2002, amending the Amended and Restated Five Year Credit Agreement dated as of May 8, 2000, and as amended October 23, 2000 among ACE Limited, certain subsidiaries, various lenders and JP Morgan Chase Bank (formerly known as Morgan Guaranty Trust Company of New York). (Incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company for the quarter ended June 30, 2002)	
10.21.4	  	Fourth Amendment dated as of April 4, 2003, amending the Amended and Restated Five Year Credit Agreement dated as of May 8, 2000, and as amended October 23, 2000, October 23, 2001 and April 5, 2002, among ACE Limited, certain subsidiaries, various lenders and JP Morgan Chase Bank (formerly known as Morgan Guaranty Trust Company of New York) (Incorporated by reference to Exhibit 10.3 to Form 10-Q of the Company for the quarter ended March 31, 2003)	
 
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Exhibit No.	  	Description	
	
10.22	  	Amended and Restated 364-Day Credit Agreement among ACE Limited, ACE Bermuda Insurance Ltd., ACE Tempest Reinsurance Ltd. (formerly known as Tempest Reinsurance Company Limited), ACE INA Holdings Inc., ACE Guaranty Re Inc., Bank of America, N.A., The Chase Manhattan Bank and Morgan Guaranty Trust Company of New York dated May 8, 2000 (Incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company for the quarter ended June 30, 2000)	
10.22.1	  	The First Amendment which amends the Amended and Restated 364-Day Credit Agreement dated as of May 8, 2000, among ACE Limited, ACE Bermuda Insurance Ltd., ACE Tempest Reinsurance Ltd. ( formerly known as Tempest Reinsurance Company Limited), ACE INA Holdings Inc., ACE Guaranty Re Inc., various financial institutions and Morgan Guaranty Trust Company of New York (“MGT”), as administrative agent, dated as of October 23, 2000 (Incorporated by reference to Exhibit 10.5 to Form 10-Q of the Company for the quarter ended September 30, 2000)	
10.22.2	  	Amended and Restated Credit Agreement dated as of April 6, 2001 among ACE Limited, ACE Bermuda Insurance Ltd., ACE Tempest Reinsurance Ltd., ACE INA Holdings Inc. and ACE Guaranty Re Inc., certain lenders, JP Morgan, a division of Chase Securities, Inc., as Lead Arranger and Bookrunner, Bank of America, N.A., Barclays Bank plc and Fleet National Bank, as Co-Syndication Agents and Morgan Guaranty Company of New York, as Administrative Agent. (Incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company for the quarter ended March 31, 2001)	
10.22.3	  	Second Amendment dated as of October 23, 2001, amending the Amended and Restated 364-day Credit Agreement dated as of May 8, 2000, as amended as of October 23, 2000 and amended and restated as of April 6, 2001, among ACE Limited, certain subsidiaries, various lenders and Morgan Guaranty Trust Company of New York. (Incorporated by reference to Exhibit 10.3 to Form 10-Q of the Company for the quarter ended September 30, 2001)	
10.22.4	  	Second Amendment and Restatement dated as of April 5, 2002, amending the credit agreement dated as of May 8, 2000, among ACE Limited, certain subsidiaries, various lenders and J.P. Morgan Securities Inc. (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company for the quarter ended June 30, 2002)	
10.22.5	  	Third Amendment and Restatement dated as of April 4, 2003, amending the credit agreement dated May 8, 2000, and as amended April 5, 2002, among ACE Limited, certain subsidiaries, various lenders and JP Morgan Securities Inc. (Incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company for the quarter ended March 31, 2003)	
10.23	  	Amendment and Restatement Agreement relating to a Letter of Credit Facility Agreement dated November 17, 2000 among ACE Limited, ACE Bermuda Insurance Ltd., Citibank, N.A., as arranger, Barclays Bank plc and ING Barings, as co-arrangers and Citibank International plc, as agent (Incorporated by reference to Exhibit 10.61 to Form 10-K of the Company for the year ended December 31, 2000)	
10.23.1	  	Second Amendment and Restatement dated as of November 21, 2001, amending and restating a letter of credit facility agreement dated as of November 19, 1999, and amended November 17, 2000, (and further amended as of October 23, 2001) among ACE Limited, ACE Bermuda Insurance Ltd., Citibank, N.A. as arranger, Barclays Bank plc and ING Barings, as co-arrangers, and Citibank International plc, as agent and trustee and certain financial institutions (Incorporated by reference to Exhibit 10.62 to Form 10-K of the Company for the year ended December 31, 2001)	
10.23.2	  	Third Amendment and Restatement dated as of November 19, 2002, amending and restating a letter of credit facility agreement dated as of November 19, 1999, and amended November 17, 2000, (and further amended as of October 23, 2001, and November 21, 2001) among ACE Limited, ACE Bermuda Insurance Ltd., Citibank, N.A. and Barclays Capital as lead arrangers and ING Bank, as co-arranger, and Citibank International plc, as agent and security trustee and certain financial institutions (Incorporated by reference to Exhibit 10.63 to Form 10-K of the Company for the year ended December 31, 2002)	
10.23.4	  	Fourth Amendment and Restatement dated as of November 14, 2003 amending the Third Amendment and Restatement dated as of November 19, 2002, amending and restating a letter of credit facility agreement dated as of November 19, 1999, and amended November 17, 2000, (and further amended as of October 23, 2001, and November 21, 2001) among ACE Limited, ACE Bermuda Insurance Ltd., Citibank, N.A. and Barclays Capital as lead arrangers and ING Bank, as co-arranger, and Citibank International plc, as agent and security trustee and certain financial institutions.	
10.24*	  	Promissory Note dated January 9, 2001 from Dominic J. Frederico (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company for the quarter ended March 31, 2001)	
10.25*	  	ACE Limited 1998 Long-Term Incentive Plan (as amended through the Second Amendment) (Incorporated by reference to Exhibit 10.3 to Form 10-Q of the Company for the quarter ended March 31, 2001)	
10.26*	  	The Compromise Agreement dated May 16, 2001 between ACE and John Charman (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company for the quarter ended June 30, 2001)	
10.27*	  	The ACE Limited 1995 Long Term Incentive Plan (as amended through the Second Amendment) (Incorporated by reference to Exhibit 10.3 to Form 10-Q of the Company for the quarter ended June 30, 2001)	
 
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Exhibit No.	  	Description	
	
10.28*	  	ACE Limited Supplemental Retirement Plan (as amended and restated effective July 1, 2001) (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company for the quarter ended September 30, 2001)	
10.29	  	Amended and Restated Rights Agreement between ACE Limited and Mellon Investor Services LLC, Rights Agent, dated as of December 20, 2001 (Incorporated by reference to Exhibit 10.59 to Form 10-K of the Company for the year ended December 31, 2001)	
10.30*	  	First Amendment to ACE Ltd. Elective Deferred Compensation Plan, effective as of January 1, 2001 (Incorporated by reference to Exhibit 10.60 to Form 10-K of the Company for the year ended December 31, 2001)	
10.31*	  	ACE Limited Employee Retirement Plan, as amended and restated effective July 1, 2001 and further amended through December 28, 2001 (Incorporated by reference to Exhibit 10.61 to Form 10-K of the Company for the year ended December 31, 2001)	
10.32	  	Reimbursement agreement for $500,000,000 Letter of Credit Facility dated as of September 30, 2002, among ACE Limited, certain subsidiaries, various lenders and Wachovia Securities, Inc. (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company for the quarter ended September 30, 2002)	
10.32.1	  	Reimbursement agreement for $500,000,000 Letter of Credit Facility dated as of September 25, 2003, among ACE Limited, certain subsidiaries, various lenders and Wachovia Securities, Inc. (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company for the quarter ended September 30, 2003)	
10.33	  	Reimbursement agreement for $350,000,000 Secured Letter of Credit Facility dated as of September 30, 2002, by ACE Limited, certain subsidiaries, various lenders and Wachovia Securities Inc. (Incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company for the quarter ended September 30, 2002)	
10.33.1	  	Reimbursement agreement for $500,000,000 Secured Letter of Credit Facility dated as of September 25, 2003, among ACE Limited, certain subsidiaries, various lenders and Wachovia Securities, Inc. (Incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company for the quarter ended September 30, 2003)	
10.34	  	Credit agreement dated May 30, 2002, by and among ACE Guaranty Re Inc., certain lenders, and ABN AMRO BANK N.V., in its capacity as administrative and sole bookrunner, and Commerzbank AG, New York and Grand Cayman Branches, Fleet National Bank and Westdeutsche Landesbank Girozentrale, New York Branch, as Co-Documentation Agents (Incorporated by reference to Exhibit 10.61 to Form 10-K of the Company for the year ended December 31, 2002)	
10.34.1	  	Continuing Agreement of Guaranty, dated as of May 30, 2002, given by ACE Limited, in favor of ABN AMRO Bank N.V., as agent for certain banks, in connection with that Credit Agreement, dated as of May 31, 2002, by and among ACE Guaranty Re Inc., certain banks, ABN AMRO Bank N.V., as agent, and Commerzbank AG, New York and Grand Cayman Branches, Fleet National Bank and Westdeutsche Landesbank Girozentrale, New York Branch, as Co-Documentation Agents (Incorporated by reference to Exhibit 10.62 to Form 10-K of the Company for the year ended December 31, 2002)	
10.34.2	  	Credit agreement dated May 22, 2003 by and among ACE Guaranty Corp., ACE Guaranty (UK) Ltd., certain lenders, ABN AMRO BANK N.V., in its capacity as administrative agent and ABN AMRO INCORPORATED as syndication agent, lead arranger and book runner. (Incorporated by reference to Exhibit 10.2 to Form 10-Q of the Company for the quarter ended June 30, 2003)	
10.35*	  	Employment Terms dated October 29, 2001, between ACE Limited and Evan Greenberg (Incorporated by reference to Exhibit 10.64 to Form 10-K of the Company for the year ended December 31, 2002)	
10.36*	  	Employment Terms dated November 2, 2001, between ACE Limited and Philip V. Bancroft (Incorporated by reference to Exhibit 10.65 to Form 10-K of the Company for the year ended December 31, 2002)	
10.37*	  	The ACE Limited 1995 Outside Directors Plan (As amended through the seventh amendment) (Incorporated by reference to Exhibit 10.1 to Form 10-Q of the Company for the quarter ended June 30, 2003)	
10.38	  	Ratio of earnings to fixed charges and preferred share dividends calculation	
14.1	  	Code of Conduct	
21.1	  	Subsidiaries of the Company	
23.1	  	Consent of PricewaterhouseCoopers LLP	
31.1	  	Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002	
31.2	  	Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002	
32.1	  	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002	
32.2	  	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002	
 
* Management Contract or Compensation Plan
 
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(b) Reports on Form 8-K
The Company filed a Form 8-K current report (date of earliest event reported: February 4, 2004) pertaining to ACE Limited’s press release reporting its fourth quarter 2003 results and the availability of its fourth quarter financial supplement.
The Company filed a Form 8-K current report (date of earliest event reported: March 5, 2004) pertaining to ACE Limited’s press release reporting a subsequent event resulting in a 2003 realized gain.
 
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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) 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
 	
By:	 	/ S /    P HILIP V. B ANCROFT
	
 	 	Philip V. Bancroft
Chief Financial Officer	
 
March 11, 2004
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature
	  	Title
	 	Date

/ S /    B RIAN D UPERREAULT        

Brian Duperreault	  	Chairman, Chief Executive Officer; Director	 	March 11, 2004	
			
/ S /    P HILIP V. B ANCROFT        

Philip V. Bancroft	  	Chief Financial Officer
(Principal Financial Officer)	 	March 11, 2004	
			
/ S /    P AUL B. M EDINI        

Paul B. Medini	  	Chief Accounting Officer
(Principal Accounting Officer)	 	March 11, 2004	
			
/ S /    D ONALD K RAMER        

Donald Kramer	  	Vice Chairman; Director	 	March 11, 2004	
			
/ S /    E VAN G. G REENBERG        

Evan G. Greenberg	  	President, Chief Operating Officer; Director	 	March 11, 2004	
			
/ S /    D OMINIC J. F REDERICO        

Dominic J. Frederico	  	Vice Chairman; Director	 	March 11, 2004	
			
/ S /    M ICHAEL G. A TIEH        

Michael G. Atieh	  	Director	 	March 11, 2004	
			
/ S /    B RUCE L. C ROCKETT        

Bruce L. Crockett	  	Director	 	March 11, 2004	
			
/ S /    R OBERT M. H ERNANDEZ        

Robert M. Hernandez	  	Director	 	March 11, 2004	
			
/ S /    J OHN A. K ROL        

John A. Krol	  	Director	 	March 11, 2004	
 
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Signature
	  	Title
	 	Date

/ S /    P ETER M ENIKOFF        

Peter Menikoff	  	Director	 	March 11, 2004	
			
/ S /    T HOMAS J. N EFF        

Thomas J. Neff	  	Director	 	March 11, 2004	
			
/ S /    R OBERT R IPP        

Robert Ripp	  	Director	 	March 11, 2004	
			
/ S /    W ALTER A. S COTT        

Walter A. Scott	  	Director	 	March 11, 2004	
			
/ S /    D ERMOT F. S MURFIT        

Dermot F. Smurfit	  	Director	 	March 11, 2004	
			
/ S /    R OBERT W. S TALEY        

Robert W. Staley	  	Director	 	March 11, 2004	
			
/ S /    G ARY M. S TUART        

Gary M. Stuart	  	Director	 	March 11, 2004	
 
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ACE LIMITED AND SUBSIDIARIES
 
CONSOLIDATED FINANCIAL STATEMENTS
 
DECEMBER 31, 2003

Table of Contents
 
ACE Limited
INDEX  TO  CONSOLIDATED  FINANCIAL  STATEMENTS

 
			
CONSOLIDATED FINANCIAL STATEMENTS	  	Page	
	
Management’s Responsibility for Financial Statements	  	F-3	
	
Report of Independent Auditors	  	F-4	
	
Consolidated Balance Sheets	  	F-5	
	
Consolidated Statements of Operations	  	F-6	
	
Consolidated Statements of Shareholders’ Equity	  	F-7	
	
Consolidated Statements of Comprehensive Income (Loss)	  	F-9	
	
Consolidated Statements of Cash Flows	  	F-10	
	
Notes to Consolidated Financial Statements	  	F-11	
		
FINANCIAL STATEMENT SCHEDULES	  	 	
	
Schedule I – Summary of Investments – Other Than Investments In Related Parties	  	F-56	
	
Schedule II – Condensed Financial Information of Registrant (Parent Company Only)	  	F-57	
	
Schedule IV – Supplemental Information Concerning Reinsurance	  	F-59	
	
Schedule VI – Supplementary Information Concerning Property and Casualty Operations	  	F-60	

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MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS
 
Management is responsible for the preparation, integrity and objectivity of the consolidated financial statements and other financial information presented in this annual report. The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States, applying certain estimates and judgments as required.
The Company’s internal controls are designed to provide reasonable assurance as to the integrity and reliability of the financial statements and to adequately safeguard, verify and maintain accountability of assets. Such controls are based on established policies and procedures and are implemented by trained, skilled personnel with an appropriate segregation of duties. The Company’s Internal Audit Department performs independent audits on the Company’s internal controls. The Company’s policies and procedures prescribe that the Company and all its employees are to maintain the highest ethical standards and that its business practices are to be conducted in a manner which is above reproach.
PricewaterhouseCoopers LLP, independent auditors, are retained to audit the Company’s financial statements. Their accompanying report is based on audits conducted in accordance with auditing standards generally accepted in the United States, which includes the consideration of the Company’s internal controls to establish a basis for reliance thereon in determining the nature, timing and extent of audit tests to be applied.
The Board of Directors exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of independent, non-management Board members. The Audit Committee meets periodically with the independent auditors, both privately and with management present, to review accounting, auditing, internal controls and financial reporting matters.

/ S /    B RIAN D UPERREAULT	 	 	 	/ S /    P HILIP V. B ANCROFT	
	 	 	 		
Brian Duperreault
Chairman and Chief Executive Officer	 	 	 	Philip V. Bancroft
Chief Financial Officer	
 
F-3

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REPORT  OF  INDEPENDENT  AUDITORS
 
To The Board of Directors and Shareholders of ACE Limited
 
In our opinion, the consolidated financial statements listed in the index appearing under item 15 (a) (1) present fairly, in all material respects, the financial position of ACE Limited and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the appendix appearing under item 15 (a) (2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the financial statements, the Company changed its method of accounting for goodwill and derivatives in 2002 and 2001, respectively.
 
/ S /    P RICEWATERHOUSE C OOPERS LLP
 
New York, New York
February 25, 2004
 
F-4

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CONSOLIDATED  BALANCE  SHEETS
ACE Limited and Subsidiaries

December 31, 2003 and 2002
(in thousands of U.S. dollars, except share and per share data)	 	2003	 	 	2002	 	
	 	
Assets	 	 	 	 	 	 	 	 	
Investments and cash	 	 	 	 	 	 	 	 	
Fixed maturities, at fair value	 	 	 	 	 	 	 	 	
(amortized cost – $18,006,405 and $13,790,742)	 	$	18,645,267	 	 	$	14,419,741	 	
Equity securities, at fair value (cost – $401,237 and $442,266)	 	 	543,811	 	 	 	411,031	 	
Securities on loan, at fair value (amortized cost/cost – $650,160 and $285,569)	 	 	684,629	 	 	 	292,973	 	
Short-term investments, at fair value	 	 	2,927,407	 	 	 	2,269,910	 	
Other investments (cost – $602,176 and $621,715)	 	 	645,085	 	 	 	652,048	 	
Cash	 	 	561,650	 	 	 	663,355	 	
	 	
Total investments and cash	 	 	24,007,849	 	 	 	18,709,058	 	
Accrued investment income	 	 	258,379	 	 	 	216,941	 	
Insurance and reinsurance balances receivable	 	 	2,836,616	 	 	 	2,653,990	 	
Accounts and notes receivable	 	 	191,519	 	 	 	250,956	 	
Reinsurance recoverable	 	 	14,080,716	 	 	 	13,991,453	 	
Deferred policy acquisition costs	 	 	1,004,753	 	 	 	831,580	 	
Prepaid reinsurance premiums	 	 	1,372,568	 	 	 	1,721,267	 	
Funds withheld	 	 	255,587	 	 	 	300,106	 	
Value of reinsurance business assumed	 	 	346,365	 	 	 	367,275	 	
Goodwill	 	 	2,710,830	 	 	 	2,716,860	 	
Deferred tax assets	 	 	1,089,805	 	 	 	1,287,983	 	
Other assets	 	 	1,397,806	 	 	 	906,487	 	
	 	
Total assets	 	$	49,552,793	 	 	$	43,953,956	 	
	 	
Liabilities	 	 	 	 	 	 	 	 	
Unpaid losses and loss expenses	 	$	27,154,838	 	 	$	24,315,182	 	
Unearned premiums	 	 	6,050,788	 	 	 	5,585,524	 	
Future policy benefits for life and annuity contracts	 	 	491,837	 	 	 	442,264	 	
Funds withheld	 	 	208,728	 	 	 	214,535	 	
Insurance and reinsurance balances payable	 	 	1,902,622	 	 	 	1,870,264	 	
Deposit liabilities	 	 	212,335	 	 	 	139,410	 	
Securities lending collateral	 	 	698,587	 	 	 	301,016	 	
Payable for securities purchased	 	 	369,105	 	 	 	503,019	 	
Accounts payable, accrued expenses and other liabilities	 	 	1,206,046	 	 	 	1,465,405	 	
Dividends payable	 	 	53,182	 	 	 	47,724	 	
Short-term debt	 	 	545,727	 	 	 	145,940	 	
Long-term debt	 	 	1,349,202	 	 	 	1,748,937	 	
Trust preferred securities	 	 	475,000	 	 	 	475,000	 	
	 	
Total liabilities	 	 	40,717,997	 	 	 	37,254,220	 	
	 	
Commitments and contingencies
    Mezzanine equity	 	 	–	 	 	 	311,050	 	
	 	
Shareholders’ equity	 	 	 	 	 	 	 	 	
Preferred Shares ($1.00 par value, 2,300,000 shares authorized, issued and outstanding)	 	 	2,300	 	 	 	–	 	
Ordinary Shares ($0.041666667 par value, 500,000,000 shares authorized;
279,897,193 and 262,679,356 shares issued and outstanding)	 	 	11,662	 	 	 	10,945	 	
Additional paid-in capital	 	 	4,765,355	 	 	 	3,781,112	 	
Unearned stock grant compensation	 	 	(44,912	)	 	 	(42,576	)	
Retained earnings	 	 	3,380,619	 	 	 	2,199,313	 	
Deferred compensation obligation	 	 	16,687	 	 	 	18,631	 	
Accumulated other comprehensive income	 	 	719,772	 	 	 	439,892	 	
Ordinary Shares issued to employee trust	 	 	(16,687	)	 	 	(18,631	)	
	 	
Total shareholders’ equity	 	 	8,834,796	 	 	 	6,388,686	 	
	 	
Total liabilities, mezzanine equity and shareholders’ equity	 	$	49,552,793	 	 	$	43,953,956	 	

See accompanying notes to consolidated financial statements
 
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Table of Contents
 
CONSOLIDATED  STATEMENTS  OF  OPERATIONS
ACE Limited and Subsidiaries

For the years ended December 31, 2003, 2002 and 2001
(in thousands of U.S. dollars, except per share data)	 	2003	 	 	2002	 	 	2001	 	
	 	
Revenues	 	 	 	 	 	 	 	 	 	 	 	 	
Gross premiums written	 	$	14,636,917	 	 	$	12,818,971	 	 	$	10,165,362	 	
Reinsurance premiums ceded	 	 	(4,421,909	)	 	 	(4,750,673	)	 	 	(3,801,748	)	
	 	
Net premiums written	 	 	10,215,008	 	 	 	8,068,298	 	 	 	6,363,614	 	
Change in unearned premiums	 	 	(612,625	)	 	 	(1,237,794	)	 	 	(446,437	)	
	 	
Net premiums earned	 	 	9,602,383	 	 	 	6,830,504	 	 	 	5,917,177	 	
Net investment income	 	 	862,341	 	 	 	802,141	 	 	 	785,869	 	
Other income (expense)	 	 	(27,262	)	 	 	(20,552	)	 	 	452	 	
Net realized gains (losses)	 	 	252,280	 	 	 	(489,089	)	 	 	(58,359	)	
	 	
Total revenues	 	 	10,689,742	 	 	 	7,123,004	 	 	 	6,645,139	 	
	 	
Expenses	 	 	 	 	 	 	 	 	 	 	 	 	
Losses and loss expenses	 	 	6,117,402	 	 	 	4,906,510	 	 	 	4,552,456	 	
Life and annuity benefits	 	 	181,077	 	 	 	158,118	 	 	 	401,229	 	
Policy acquisition costs	 	 	1,356,938	 	 	 	960,688	 	 	 	784,664	 	
Administrative expenses	 	 	1,161,071	 	 	 	943,333	 	 	 	830,455	 	
Interest expense	 	 	177,425	 	 	 	193,494	 	 	 	199,182	 	
Amortization of goodwill	 	 	–	 	 	 	–	 	 	 	79,571	 	
	 	
Total expenses	 	 	8,993,913	 	 	 	7,162,143	 	 	 	6,847,557	 	
	 	
Income (loss) before income tax and cumulative effect of adopting a new accounting standard	 	 	1,695,829	 	 	 	(39,139	)	 	 	(202,418	)	
Income tax expense (benefit)	 	 	278,347	 	 	 	(115,688	)	 	 	(78,674	)	
	 	
Net income (loss) before cumulative effect of adopting a new accounting standard	 	 	1,417,482	 	 	 	76,549	 	 	 	(123,744	)	
Cumulative effect of adopting a new accounting standard (net of income tax)	 	 	–	 	 	 	–	 	 	 	(22,670	)	
	 	
Net income (loss)	 	$	1,417,482	 	 	$	76,549	 	 	$	(146,414	)	
	 	
Basic earnings (loss) per share before cumulative effect of adopting a new accounting standard	 	$	5.10	 	 	$	0.19	 	 	$	(0.64	)	
	 	
Basic earnings (loss) per share	 	$	5.10	 	 	$	0.19	 	 	$	(0.74	)	
	 	
Diluted earnings (loss) per share before cumulative effect of adopting a new accounting standard	 	$	5.01	 	 	$	0.19	 	 	$	(0.64	)	
	 	
Diluted earnings (loss) per share	 	$	5.01	 	 	$	0.19	 	 	$	(0.74	)	

See accompanying notes to consolidated financial statements
 
F-6

Table of Contents
 
CONSOLIDATED  STATEMENTS  OF  SHAREHOLDERS’  EQUITY
ACE Limited and Subsidiaries

For the years ended December 31, 2003, 2002 and 2001
(in thousands of U.S. dollars)	 	2003	 	 	2002	 	 	2001	 	
	 	
Preferred Shares	 	 	 	 	 	 	 	 	 	 	 	 	
Balance – beginning of year	 	$	–	 	 	$	–	 	 	$	–	 	
Shares issued	 	 	2,300	 	 	 	–	 	 	 	–	 	
	 	
Balance – end of year	 	 	2,300	 	 	 	–	 	 	 	–	 	
	 	
Ordinary Shares	 	 	 	 	 	 	 	 	 	 	 	 	
Balance – beginning of year	 	 	10,945	 	 	 	10,828	 	 	 	9,681	 	
Shares issued	 	 	563	 	 	 	37	 	 	 	1,380	 	
Exercise of stock options	 	 	175	 	 	 	93	 	 	 	69	 	
Issued under Employee Stock Purchase Plan (ESPP)	 	 	12	 	 	 	10	 	 	 	9	 	
Cancellation of Shares	 	 	(33	)	 	 	(23	)	 	 	(29	)	
Repurchase of Shares	 	 	–	 	 	 	–	 	 	 	(282	)	
	 	
Balance – end of year	 	 	11,662	 	 	 	10,945	 	 	 	10,828	 	
	 	
Additional paid-in capital	 	 	 	 	 	 	 	 	 	 	 	 	
Balance – beginning of year	 	 	3,781,112	 	 	 	3,710,698	 	 	 	2,637,085	 	
Ordinary Shares issued	 	 	48,095	 	 	 	37,503	 	 	 	1,135,328	 	
Exercise of stock options	 	 	61,922	 	 	 	44,469	 	 	 	32,597	 	
Ordinary Shares issued under ESPP	 	 	7,341	 	 	 	7,462	 	 	 	6,065	 	
Cancellation of Ordinary Shares	 	 	(27,397	)	 	 	(19,020	)	 	 	(22,698	)	
Preferred shares issued, net	 	 	554,387	 	 	 	–	 	 	 	–	 	
Conversion of Mezzanine equity, net	 	 	310,465	 	 	 	–	 	 	 	–	 	
Tax benefit on employee stock options	 	 	29,430	 	 	 	–	 	 	 	–	 	
Equity offering expenses	 	 	–	 	 	 	–	 	 	 	(830	)	
Repurchase of Ordinary Shares	 	 	–	 	 	 	–	 	 	 	(76,849	)	
	 	
Balance – end of year	 	 	4,765,355	 	 	 	3,781,112	 	 	 	3,710,698	 	
	 	
Unearned stock grant compensation	 	 	 	 	 	 	 	 	 	 	 	 	
Balance – beginning of year	 	 	(42,576	)	 	 	(37,994	)	 	 	(29,642	)	
Stock grants awarded	 	 	(47,575	)	 	 	(40,699	)	 	 	(22,559	)	
Stock grants forfeited	 	 	4,710	 	 	 	7,370	 	 	 	4,533	 	
Amortization	 	 	40,529	 	 	 	28,747	 	 	 	9,674	 	
	 	
Balance – end of year	 	 	(44,912	)	 	 	(42,576	)	 	 	(37,994	)	
	 	
Retained earnings	 	 	 	 	 	 	 	 	 	 	 	 	
Balance – beginning of year	 	 	2,199,313	 	 	 	2,321,576	 	 	 	2,733,633	 	
Net income (loss)	 	 	1,417,482	 	 	 	76,549	 	 	 	(146,414	)	
Dividends declared on Ordinary Shares	 	 	(203,853	)	 	 	(173,150	)	 	 	(137,734	)	
Dividends declared on Mezzanine equity	 	 	(9,773	)	 	 	(25,662	)	 	 	(25,594	)	
Dividends declared on Preferred Shares	 	 	(22,550	)	 	 	–	 	 	 	–	 	
Repurchase of Ordinary Shares	 	 	–	 	 	 	–	 	 	 	(102,315	)	
	 	
Balance – end of year	 	 	3,380,619	 	 	 	2,199,313	 	 	 	2,321,576	 	
	 	
Deferred compensation obligation	 	 	 	 	 	 	 	 	 	 	 	 	
Balance – beginning of year	 	 	18,631	 	 	 	16,497	 	 	 	14,597	 	
(Decrease) increase to obligation	 	 	(1,944	)	 	 	2,134	 	 	 	1,900	 	
	 	
Balance – end of year	 	$	16,687	 	 	$	18,631	 	 	$	16,497	 	

See accompanying notes to consolidated financial statements
 
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Table of Contents
 
CONSOLIDATED  STATEMENTS  OF  SHAREHOLDERS’  EQUITY   (continued) 
ACE Limited and Subsidiaries

For the years ended December 31, 2003, 2002 and 2001
(in thousands of U.S. dollars)	 	2003	 	 	2002	 	 	2001	 	
	 	
Accumulated other comprehensive income	 	 	 	 	 	 	 	 	 	 	 	 	
Net unrealized appreciation (depreciation) on investments	 	 	 	 	 	 	 	 	 	 	 	 	
Balance – beginning of year	 	$	476,411	 	 	$	136,916	 	 	$	102,335	 	
Change in year, net of income tax	 	 	207,856	 	 	 	339,495	 	 	 	34,581	 	
	 	
Balance – end of year	 	 	684,267	 	 	 	476,411	 	 	 	136,916	 	
	 	
Minimum pension liability	 	 	 	 	 	 	 	 	 	 	 	 	
Balance – beginning of year	 	 	–	 	 	 	–	 	 	 	–	 	
Change in year, net of income tax	 	 	(35,684	)	 	 	–	 	 	 	–	 	
	 	
Balance – end of year	 	 	(35,684	)	 	 	–	 	 	 	–	 	
	 	
Cumulative translation adjustments	 	 	 	 	 	 	 	 	 	 	 	 	
Balance – beginning of year	 	 	(36,519	)	 	 	(35,317	)	 	 	(32,881	)	
Net adjustment for year, net of income tax	 	 	107,708	 	 	 	(1,202	)	 	 	(2,436	)	
	 	
Balance – end of year	 	 	71,189	 	 	 	(36,519	)	 	 	(35,317	)	
	 	
 	 	 	719,772	 	 	 	439,892	 	 	 	101,599	 	
	 	
Ordinary Shares issued to employee trust	 	 	 	 	 	 	 	 	 	 	 	 	
Balance – beginning of year	 	 	(18,631	)	 	 	(16,497	)	 	 	(14,597	)	
Decrease (increase) in Ordinary Shares	 	 	1,944	 	 	 	(2,134	)	 	 	(1,900	)	
	 	
Balance – end of year	 	 	(16,687	)	 	 	(18,631	)	 	 	(16,497	)	
	 	
Total shareholders’ equity	 	$	8,834,796	 	 	$	6,388,686	 	 	$	6,106,707	 	

See accompanying notes to consolidated financial statements
 
F-8

Table of Contents
 
CONSOLIDATED  STATEMENTS  OF  COMPREHENSIVE  INCOME  (LOSS)
ACE Limited and Subsidiaries

For the years ended December 31, 2003, 2002 and 2001
(in thousands of U.S. dollars)	 	2003	 	 	2002	 	 	2001	 	
	 	
Net income (loss)
Other comprehensive income (loss)	 	$	1,417,482	 	 	$	76,549	 	 	$	(146,414	)	
Net unrealized appreciation (depreciation) on investments
Unrealized appreciation on investments	 	 	304,267	 	 	 	357,963	 	 	 	65,168	 	
Reclassification adjustment for net realized (gains)
losses included in net income	 	 	(80,954	)	 	 	98,318	 	 	 	(16,303	)	
	 	
 	 	 	223,313	 	 	 	456,281	 	 	 	48,865	 	
Cumulative translation adjustments	 	 	144,160	 	 	 	(348	)	 	 	(6,646	)	
Minimum pension liability	 	 	(54,382	)	 	 	–	 	 	 	–	 	
	 	
Other comprehensive income, before income tax	 	 	313,091	 	 	 	455,933	 	 	 	42,219	 	
Income tax expense related to other comprehensive income items	 	 	(33,211	)	 	 	(117,640	)	 	 	(10,074	)	
	 	
Other comprehensive income	 	 	279,880	 	 	 	338,293	 	 	 	32,145	 	
	 	
Comprehensive income (loss)	 	$	1,697,362	 	 	$	414,842	 	 	$	(114,269	)	

See accompanying notes to consolidated financial statements
 
F-9

Table of Contents
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
ACE Limited and Subsidiaries

For the years ended December 31, 2003, 2002 and 2001
(in thousands of U.S. dollars)	  	2003	 	 	2002	 	 	2001	 	
	 	
Cash flows from operating activities	  	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	  	$	1,417,482	 	 	$	76,549	 	 	$	(146,414	)	
Adjustments to reconcile net income (loss) to net cash flow from (used for) operating activities:	  	 	 	 	 	 	 	 	 	 	 	 	
Net realized (gains) losses	  	 	(252,280	)	 	 	489,089	 	 	 	58,359	 	
Amortization of premium/discounts on fixed maturities	  	 	91,580	 	 	 	40,230	 	 	 	(2,019	)	
Deferred income taxes	  	 	206,050	 	 	 	(145,120	)	 	 	(118,058	)	
Unpaid losses and loss expenses	  	 	2,612,371	 	 	 	3,527,010	 	 	 	3,369,489	 	
Unearned premiums	  	 	316,064	 	 	 	1,700,493	 	 	 	771,039	 	
Future policy benefits for life and annuity contracts	  	 	49,573	 	 	 	59,534	 	 	 	382,730	 	
Insurance and reinsurance balances payable	  	 	(146,842	)	 	 	582,254	 	 	 	110,809	 	
Accounts payable, accrued expenses and other liabilities	  	 	(201,625	)	 	 	11,841	 	 	 	117,590	 	
Insurance and reinsurance balances receivable	  	 	(29,829	)	 	 	(242,249	)	 	 	(449,585	)	
Reinsurance recoverable	  	 	(89,263	)	 	 	(2,593,007	)	 	 	(2,403,506	)	
Deferred policy acquisition costs	  	 	(133,301	)	 	 	(142,888	)	 	 	(112,714	)	
Prepaid reinsurance premiums	  	 	351,107	 	 	 	(498,472	)	 	 	(365,050	)	
Funds withheld, net	  	 	45,308	 	 	 	(88,868	)	 	 	33,061	 	
Value of reinsurance business assumed	  	 	191,330	 	 	 	(273,965	)	 	 	(18,542	)	
Other	  	 	(203,159	)	 	 	(77,443	)	 	 	23,575	 	
Amortization of goodwill	  	 	–	 	 	 	–	 	 	 	79,571	 	
Cumulative effect of adopting a new accounting standard	  	 	–	 	 	 	–	 	 	 	22,670	 	
	 	
Net cash flows from operating activities	  	 	4,224,566	 	 	 	2,424,988	 	 	 	1,353,005	 	
	 	
Cash flows from investing activities	  	 	 	 	 	 	 	 	 	 	 	 	
Purchases of fixed maturities	  	 	(20,495,301	)	 	 	(17,949,823	)	 	 	(16,847,920	)	
Purchases of equity securities	  	 	(164,374	)	 	 	(218,852	)	 	 	(210,936	)	
Sales of fixed maturities	  	 	15,622,186	 	 	 	15,948,421	 	 	 	14,733,578	 	
Sales of equity securities	  	 	189,819	 	 	 	163,024	 	 	 	204,842	 	
Maturities of fixed maturities	  	 	127,532	 	 	 	284,899	 	 	 	44,929	 	
Net realized gains (losses) on investment derivatives	  	 	34,164	 	 	 	(105,429	)	 	 	(21,976	)	
Other	  	 	(35,503	)	 	 	(118,223	)	 	 	(89,115	)	
Settlement of an acquisition-related lawsuit	  	 	–	 	 	 	54,380	 	 	 	–	 	
	 	
Net cash flows used for investing activities	  	 	(4,721,477	)	 	 	(1,941,603	)	 	 	(2,186,598	)	
	 	
Cash flows from financing activities	  	 	 	 	 	 	 	 	 	 	 	 	
Dividends paid on Ordinary Shares	  	 	(198,395	)	 	 	(167,470	)	 	 	(128,745	)	
Dividends paid on Mezzanine equity	  	 	(9,773	)	 	 	(25,662	)	 	 	(25,666	)	
Dividends paid on Preferred Shares	  	 	(22,550	)	 	 	–	 	 	 	–	 	
Net proceeds from issuance of Preferred Shares	  	 	556,687	 	 	 	–	 	 	 	–	 	
Net proceeds from (repayment of) short-term debt	  	 	(213	)	 	 	(349,468	)	 	 	56,144	 	
Proceeds from exercise of options for Ordinary Shares	  	 	62,097	 	 	 	44,562	 	 	 	32,666	 	
Proceeds from Ordinary Shares issued under ESPP	  	 	7,353	 	 	 	7,472	 	 	 	6,074	 	
Net proceeds from long-term debt	  	 	–	 	 	 	399,155	 	 	 	–	 	
Net proceeds from (repayment of) trust preferred securities	  	 	–	 	 	 	(400,000	)	 	 	–	 	
Repurchase of Ordinary Shares	  	 	–	 	 	 	–	 	 	 	(179,446	)	
Net proceeds from issuance of Ordinary Shares	  	 	–	 	 	 	–	 	 	 	1,135,878	 	
	 	
Net cash flows from (used for) financing activities	  	 	395,206	 	 	 	(491,411	)	 	 	896,905	 	
	 	
Net increase (decrease) in cash	  	 	(101,705	)	 	 	(8,026	)	 	 	63,312	 	
Cash – beginning of year	  	 	663,355	 	 	 	671,381	 	 	 	608,069	 	
	 	
Cash – end of year	  	$	561,650	 	 	$	663,355	 	 	$	671,381	 	
	 	
Supplemental cash flow information	  	 	 	 	 	 	 	 	 	 	 	 	
Taxes paid	  	$	42,030	 	 	$	2,123	 	 	$	28,513	 	
Interest paid	  	$	175,943	 	 	$	196,032	 	 	$	199,445	 	
 
See accompanying notes to consolidated financial statements
 
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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS
ACE Limited and Subsidiaries
 
1. General
ACE Limited (ACE or the Company) is a holding company incorporated with limited liability under the Cayman Islands Companies Law and maintains its business office in Bermuda. The Company, through its various subsidiaries, provides a broad range of insurance and reinsurance products to insureds worldwide. ACE operates through four reporting segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance and Financial Services. These segments are described in Note 17.
On March 8, 2004, Assured Guaranty Ltd. (Assured Guaranty), formerly AGC Holdings, filed an amendment to the registration statement filed with the SEC on December 23, 2003 on Form S-1 for an initial public offering (IPO). Assured Guaranty is a wholly owned subsidiary of ACE Limited. Upon completion of the IPO, Assured Guaranty will be the holding company for the operating units, now known as ACE Guaranty Corp. and ACE Capital Re International. These two units form part of the Financial Services segment. The Company expects to retain as much as 25-35 percent of its interest in Assured Guaranty depending on market conditions.
 
2. Significant accounting policies
 
a) Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain items in the prior year financial statements have been reclassified to conform with the current year presentation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company’s principal estimates include;
• unpaid losses and loss expense reserves, including asbestos reserves;
• reinsurance recoverable, including the bad debt provision;
• impairments to the carrying value of the investment portfolio;
• the valuation of our deferred tax assets;
• the fair value of certain derivatives; and
• the valuation of goodwill.
While the amounts included in the consolidated financial statements reflect our best estimates and assumptions, these amounts could ultimately be materially different from the amounts currently provided for in the consolidated financial statements.
 
b) Premiums
Premiums are generally recognized as written upon inception of the policy. For multi-year policies written which are payable in annual installments, due to the ability of the insured/reinsured to commute or cancel coverage within the term of the policy, only the annual premium is included as written at policy inception. The remaining annual premiums are included as written at each successive anniversary date within the multi-year term.
Reinsurance premiums from traditional life and annuity policies with life contingencies are generally recognized as revenue when due from policyholders. Traditional life policies include those contracts with fixed and guaranteed premiums and benefits. Benefits and expenses are matched with such income to result in the recognition of profit over the life of the contracts.
Premiums written are primarily earned on a pro rata basis over the terms of the policies to which they relate. Accordingly, unearned premiums represent the portion of premiums written which is applicable to the unexpired portion of the policies in force. Premium estimates for retrospectively rated policies are recognized within the periods in which the related losses are incurred.
Financial guaranty premiums are received either upfront or in installments. Upfront premiums are earned in proportion to the expiration of the amount at risk. Installment premiums are earned over each installment period, generally one year or less. For insured bonds for which the par value outstanding is declining during the insurance period, upfront premium earnings are greater in the earlier periods thus matching revenue recognition with the underlying risk. The premiums are allocated in accordance with the principal amortization schedule of the related bond issue and are earned ratably over the amortization period. When an insured issue is retired early, is called by the issuer or is in substance paid in advance through a refunding accomplished by placing U.S. Government securities in escrow, the
 
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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
remaining unearned premium reserve is earned at that time. Unearned premium reserve represents the portion of premiums written that is applicable to the unexpired amount at risk of insured bonds.
The Company underwrites retroactive loss portfolio transfer (LPT) contracts. These contracts are evaluated to determine whether they meet the established criteria for reinsurance accounting, and, if so, are recorded in the statement of operations when written and generally result in large one-time written and earned premiums with comparable incurred losses. The contracts can cause significant variances in gross premiums written, net premiums written, net premiums earned, and net incurred losses in the years in which they are written. Contracts not meeting the established criteria for reinsurance accounting are recorded using the deposit method. There were no LPT contracts recorded using the deposit method in 2002 and one contract in 2003.
Reinsurance premiums assumed are based on information provided by ceding companies supplemented by the Company’s own estimates of premium for which ceding company reports have not yet been received. The information used in establishing these estimates is reviewed and subsequent adjustments are recorded in the period in which they are determined. These premiums are earned over the terms of the related reinsurance contracts.
 
c) Policy acquisition costs
Policy acquisition costs consist of commissions, premium taxes, underwriting and other costs that vary with, and are primarily related to, the production of premium. Acquisition costs are deferred and amortized over the period in which the related premiums are earned, or for annuities over the pattern of estimated gross profit. Deferred policy acquisition costs are reviewed to determine if they are recoverable from future income, including investment income. If such costs are estimated to be unrecoverable, they are expensed.
 
d) Reinsurance
In the ordinary course of business, the Company’s insurance subsidiaries assume and cede reinsurance with other insurance companies. These agreements provide greater diversification of business and minimize the net loss potential arising from large risks. Ceded reinsurance contracts do not relieve the Company of its obligation to its insureds.
Reinsurance recoverable includes the balances due from reinsurance companies for paid and unpaid losses and loss expenses that will be recovered from reinsurers, based on contracts in force, and are presented net of a reserve for uncollectible reinsurance that has been determined based upon a review of the financial condition of the reinsurers and other factors. The method for determining the reinsurance recoverable on unpaid losses and loss expenses involves actuarial estimates of unpaid losses and loss expenses as well as a determination of the Company’s ability to cede unpaid losses and loss expenses under its existing reinsurance contracts. The reserve for uncollectible reinsurance is based on an estimate of the amount of the reinsurance recoverable balance that the Company will ultimately be unable to recover due to reinsurer insolvency, a contractual dispute or some other reason. The valuation of this reserve includes several judgments including certain aspects of the allocation of reinsurance recoverable on incurred but not reported claims by reinsurer, default probabilities of reinsurers, expected due dates of cash recoveries, and anticipated recoveries from insolvent reinsurers. The methods used to determine the reinsurance recoverable balance, and related bad debt provision, are continually reviewed and updated and any resulting adjustments are reflected in earnings in the period identified.
Prepaid reinsurance premiums represent the portion of premiums ceded to reinsurers applicable to the unexpired terms of the reinsurance contracts in force.
 
e) Investments
The Company’s investments are considered to be “available for sale” under the definition included in the Financial Accounting Standard Board’s (FASB) Statement of Financial Accounting Standards (FAS) No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. The Company’s investment portfolio is reported at fair value, being the quoted market price of these securities provided by either independent pricing services, or when such prices are not available, by reference to broker or underwriter bid indications. Short-term investments comprise securities due to mature within one year of date of issue. Short-term investments include certain cash and cash equivalents, which are part of investment portfolios under the management of external investment managers.
Other investments principally comprise direct investments, investments in investment funds and investments in limited partnerships. For direct investments that meet the requirements for equity accounting, the Company accrues its portion of the net income or loss of the investment. Other direct investments are carried at fair value. Investments in investment funds are carried at the net asset value as
 
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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
advised by the fund. Investments in limited partnerships for which the Company has significant influence over operations are accounted for using the equity method. Limited partnerships for which the Company does not have significant influence over operations are carried at cost, which approximates fair value.
Realized gains or losses on sales of investments are determined on a first-in, first-out basis. Unrealized appreciation (depreciation) on investments is included as other comprehensive income in shareholders’ equity. The Company regularly reviews its investments for possible impairment based on: i) certain indicators of an impairment, including the amount of time a security has been in an loss position, the magnitude of the loss position, and whether the security is rated below an investment grade level; ii) the period in which cost is expected to be recovered, if at all, based on various criteria including economic conditions, credit loss experience and other issuer-specific developments; and iii) the Company’s ability and intent to hold the security to the expected recovery period. If there is a decline in a security’s net realizable value, a determination is made as to whether that decline is temporary or “other than temporary”. If it is believed that a decline in the value of a particular investment is temporary, the decline is recorded as an unrealized loss in shareholders’ equity. If it is believed that the decline is “other than temporary,” the Company writes down the carrying value of the investment and records a realized loss in the statement of operations.
The Company utilizes financial futures, options, interest rate swaps and foreign currency forward contracts for the purpose of managing certain investment portfolio exposures (see Note 7 for additional discussion of the objectives and strategies employed). These instruments are derivatives and therefore reported at fair value, generally using publicly quoted market prices, and recognized as assets or liabilities in the accompanying consolidated balance sheet with changes in market value included in net realized gains or losses in the consolidated statements of operations. Collateral held by brokers equal to a percentage of the total value of open futures contracts is included in short-term investments.
Net investment income includes interest and dividend income together with amortization of market premiums and discounts and is net of investment management and custody fees. For mortgage-backed securities, and any other holdings for which there is a prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any adjustments required due to the resultant change in effective yields and maturities are recognized prospectively.
The Company engages in a securities lending program whereby certain securities from our portfolio are loaned to other institutions for short periods of time. The market value of the loaned securities is monitored on a daily basis, with additional collateral obtained or refunded as the market value of the loaned securities changes. The Company’s policy is to require fixed maturities and initial cash collateral equal to 102 percent of the fair value of the loaned securities. The Company maintains full ownership rights to the securities loaned, and continues to earn interest on them. In addition, the Company shares a portion of the interest earned on the collateral with the lending agent. The Company has an indemnification agreement with the lending agents in the event a borrower becomes insolvent or fails to return securities. The fair value of the securities on loan is reported as a separate line in total investments and cash. The securities lending collateral is included in short term investments with a corresponding liability related to the Company’s obligation to return the collateral plus interest.
Similar to securities lending arrangements, securities sold under agreements to repurchase are accounted for as collateralized investments and borrowings and are recorded at the contractual repurchase amounts plus accrued interest. Assets to be repurchased are the same, or substantially the same, as the assets transferred and the transferor, through right of substitution, maintains the right and ability to redeem the collateral on short notice.
 
f) Cash
Cash includes cash on hand and deposits with a maturity of three months or less at time of purchase. Cash held by external money managers is included in short-term investments.
 
g) Goodwill
In June 2001, FASB issued FAS No. 142, “Goodwill and Other Intangible Assets” (FAS 142). FAS 142 primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. FAS 142 requires goodwill in each reporting unit be tested for impairment annually. For purposes of impairment testing, goodwill recognized in the Company’s consolidated balance sheet is assigned to the applicable reporting unit of the acquired entities giving rise to the goodwill.
 
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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
h) Value of reinsurance business assumed
The value of reinsurance business assumed represents the difference between the estimated ultimate value of the liabilities assumed under retroactive reinsurance contracts, including LPTs and the consideration received under the contract. The value of reinsurance business assumed is amortized to loss and loss expenses based on the payment pattern of the losses assumed. The unamortized value is reviewed regularly to determine if it is recoverable based upon the terms of the contract, estimated losses and loss expenses and anticipated investment income. If such amounts are estimated to be unrecoverable, they are expensed in the period identified.
 
i) Unpaid losses and loss expenses
Property and Casualty
A liability is established for the estimated unpaid losses and loss expenses of the Company under the terms of, and with respect to, its policies and agreements. These amounts include provision for both reported claims and incurred but not reported (IBNR) claims. The methods of determining such estimates and establishing the resulting reserve are reviewed continuously and any adjustments are reflected in operations in the period in which they become known. Future developments may result in losses and loss expenses materially greater or less than the reserve provided. The Company does not discount its property and casualty loss reserves.
Included in unpaid losses and loss expenses are liabilities for asbestos, environmental and latent injury damage claims and expenses (A&E). These unpaid losses and loss adjustment expenses are principally related to claims arising from remediation costs associated with hazardous waste sites and bodily-injury claims related to asbestos products and environmental hazards. The estimation of these liabilities is particularly sensitive to the recent legal environment, including specific settlements that may be used as precedents to settle future claims.
 
Financial Guaranty
For the financial guaranty reinsurance and mortgage guaranty reinsurance businesses, unpaid losses and loss expenses principally consist of case reserves and portfolio reserves. Incurred but not reported reserves are generally limited to mortgage guaranty reinsurance assumed through quota share treaties, which represent a relatively small portion of these businesses. Case reserves are established when specific insured obligations are in or near default. Case reserves represent the present value of the expected future loss payments and loss expenses, net of estimated recoveries under salvage and subrogation rights, but before considering ceded reinsurance. Financial guaranty insurance and reinsurance case reserves are discounted at six percent, which is the approximate taxable equivalent yield on the related investment portfolio in all periods presented, resulting in a discount of $19.8 million and $14.9 million, respectively.
Portfolio reserves are established with respect to the portion of the Company’s business for which case reserves have not been established. Portfolio reserves are established in an amount equal to the portion of actuarially estimated ultimate losses related to premiums earned to date as a percentage of total expected premiums for that in force business. Portfolio reserves are developed considering the net par outstanding of each insured obligation, taking account of the probability of future default, the expected timing of the default and the expected recovery following default. These factors vary by type of issue (for example municiple, structured finance corporate), current credit rating and remaining term of the underlying obligation and are principally based on historical data obtained from rating agencies. Actuarially estimated ultimate losses on mortgage guaranty reinsurance are principally determined based on the historical industry loss experience, net of recoveries. During an accounting period, portfolio reserves principally increase or decrease based on changes in aggregate net amount at risk and the probability of default resulting from changes in credit quality of insured obligations, if any.
 
Life Reinsurance
The development of life and annuity policy reserves requires management to make estimates and assumptions regarding mortality, morbidity, lapse, expense and investment experience. Such estimates are primarily based on historical experience and information provided by ceding companies. Actual results could differ materially from these estimates.
Management monitors actual experience, and where circumstances warrant, will revise its assumptions and the related reserve estimates. These revisions are recorded in the period they are determined.
 
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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
j) Deposit liabilities
Deposit liabilities include contract holder deposit funds and reinsurance deposit liabilities. The contract holder deposit funds represent a liability for investment contracts sold that do not meet the definition of an insurance contract under FAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments”. The investment contracts are sold with a guaranteed rate of return. The proceeds are then invested with the intent of realizing a greater return than is called for in the investment contracts. The reinsurance deposit liabilities represent contracts entered into by the Company with cedants which are not deemed to transfer significant underwriting and/or timing risk. They are accounted for as deposits, whereby liabilities are initially recorded at the same amount as assets received as defined under FAS No. 113 “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts”. The Company uses a portfolio rate of return of equivalent duration to the liabilities in determining risk transfer. An initial accretion rate is established based on actuarial estimates whereby the deposit liability is increased to the estimated amount payable over the term of the contract. The deposit accretion rate is the rate of return required to fund expected future payment obligations (this is equivalent to the ‘best estimates’ of future flows), which are determined actuarially based upon the nature of the underlying indemnifiable losses. Accretion of the liability is recorded as interest expense. The Company periodically reassesses the estimated ultimate liability. Any changes to this liability are reflected as an adjustment to interest expense to reflect the cumulative effect of the period the contract has been in force, and by an adjustment to the future accretion rate of the liability over the remaining estimated contract term.
 
k) Translation of foreign currencies
Financial statements of subsidiaries expressed in foreign currencies are translated into U.S. dollars in accordance with FAS No. 52, “Foreign Currency Translation” (FAS 52). Under FAS 52, functional currency assets and liabilities are translated into U.S. dollars generally using period end rates of exchange and the related translation adjustments are recorded as a separate component of accumulated other comprehensive income. Functional currencies are generally the currencies of the local operating environment. Statement of operations amounts expressed in functional currencies are translated using average exchange rates. Gains and losses resulting from foreign currency transactions are recorded in net realized gains (losses) in current income.
 
l) Income taxes
Income taxes have been provided in accordance with the provisions of FAS No. 109, “Accounting for Income Taxes”, on those operations which are subject to income taxes (see Note 14). Deferred tax assets and liabilities result from temporary differences between the amounts recorded in the consolidated financial statements and the tax basis of the Company’s assets and liabilities. Such temporary differences are primarily due to the tax basis discount on unpaid losses and loss expenses, foreign tax credits, non-deductibility of deferred policy acquisition costs and tax benefits of net operating loss carryforwards. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance against deferred tax assets is recorded if it is more likely than not that all, or some portion, of the benefits related to deferred tax assets will not be realized.
 
m) Earnings per share
Basic earnings per share is calculated using the weighted average shares outstanding. All potentially dilutive securities including Mezzanine equity, unvested restricted stock, stock options, warrants and convertible securities are excluded from the basic earnings per share calculation. In calculating diluted earnings per share, the weighted average shares outstanding is increased to include all potentially dilutive securities. The incremental shares from assumed conversions are not included in computing diluted loss per share amounts as these shares are considered anti-dilutive. Basic and diluted earnings per share are calculated by dividing net income available to ordinary shareholders by the applicable weighted average number of shares outstanding during the year.
 
n) Cash flow information
Purchases and sales or maturities of short-term investments are recorded net for purposes of the statements of cash flows and are included with fixed maturities.
 
o) Derivatives
The Company adopted FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (FAS 133) as of January 1, 2001. FAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in
 
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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
other contracts (collectively referred to as derivatives), and for hedging activities. FAS 133 requires that an entity recognize all derivatives as either assets or liabilities on the consolidated balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a fair value, cash flow or foreign currency hedge. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Upon application of FAS 133, hedging relationships must be designated and documented pursuant to the provisions of this statement. The Company had no derivatives that were designated as hedges during 2003, 2002 and 2001.
The Company recorded an expense related to the cumulative effect of adopting this standard of $23 million, net of income tax of $12 million in 2001. The Company has recorded in net realized gains (losses), a pretax gain of $163 million, at December 31, 2003 and a pretax loss of $77 million at December 31, 2002, to reflect the change in the fair value of derivatives during the year. The level of gains and losses resulting from changes in the fair value of derivatives on a prospective basis is dependent upon a number of factors including changes in interest rates, credit spreads and other market factors. The Company’s involvement with derivative instruments and transactions is primarily to offer protection to others or to mitigate its own risk and is not considered speculative in nature.
The Company maintains investments in derivative instruments such as futures, options, interest rate 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. The Company has historically recorded the changes in market value of these instruments as realized gains (losses) in the consolidated statements of operations and, accordingly, FAS 133, as amended, did not have a significant impact on the results of operations, financial condition or liquidity as it relates to these instruments. At December 31, 2003, a liability of $21 million representing the fair value of these instruments is included in accounts payable, accrued expenses and other liabilities.
For certain products, the Company sells protection to customers as the writer of a derivative financial instrument or an insurance or reinsurance contract that meets the definition of a derivative under FAS 133. These products consist primarily of credit derivatives, indexed-based instruments and certain financial guaranty coverages. Where available, the Company uses quoted market prices to determine the fair value of these insured credit derivatives. If the quoted prices are not available, particularly for senior layer CDO’s and equity layer credit protection, the fair value is estimated using valuation models for each type of credit protection. These models may be developed by third parties, such as rating agencies, or may be developed internally based on market conventions for similar transactions, depending on the circumstances. These models and the related assumptions are continuously reevaluated by management and enhanced, as appropriate, based upon improvements in modeling techniques and availability of more timely market information. The fair value of credit derivatives reflects the estimated cost to the Company to purchase protection on its outstanding exposures and is not an estimate of expected losses incurred. 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 the consolidated financial statements, and the differences may be material. In addition to credit derivatives, the Company has entered into a few other, relatively illiquid, index-based derivative instruments that are reported at fair value. These instruments are principally linked to equity and real estate market indices. The determination of fair value for these derivatives requires considerable judgment as there is limited ability to trade the contracts since they are uniquely structured and the exposure period covers up to 30 years.
The Company records fees received from the issuance of these derivative products in gross premiums written and establishes unearned premium reserves and loss reserves for its derivative business. These loss reserves represent the Company’s best estimate of the probable losses expected under these contracts. Unrealized gains and losses on derivative financial instruments are computed as the difference between fair value and the total of the unearned premium reserve, losses and loss expense reserves, premiums receivable, prepaid reinsurance premiums and reinsurance recoverable or ceded losses. Cumulative unrealized gains and losses are reflected as assets and liabilities, respectively, in the consolidated balance sheets. Changes in unrealized gains and losses on derivative financial instruments are reflected in net realized gains (losses) in the consolidated statement of operations. Unrealized gains and losses resulting from changes in the fair value of derivatives occur because of changes in interest rates, credit spreads recovery rates, the credit ratings of the referenced entities and other market factors. In the event that the Company terminates a derivative contract prior to maturity as a result of a decision to exit a line of business or for risk management purposes, the unrealized gain or loss will be realized through premiums earned and losses incurred. The following table summarizes activities related to derivatives used to sell protection to others.
 
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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries

(in thousands of U.S. dollars)	 	2003	 	2002	 	
	 	
Balance sheets as of December 31,	 	 	 	 	 	 	 	
Assets	 	 	 	 	 	 	 	
Insurance balances receivable	 	$	92,836	 	$	193,896	 	
Prepaid reinsurance premiums	 	 	2,399	 	 	2,952	 	
Reinsurance recoverable	 	 	16,937	 	 	10,000	 	
Unrealized gain on derivative financial instruments	 	 	27,179	 	 	—	 	
Liabilities	 	 	 	 	 	 	 	
Unearned premiums	 	 	204,725	 	 	335,173	 	
Unpaid losses and loss expenses	 	 	148,629	 	 	141,140	 	
Future policy benefits for life and annuity contracts	 	 	22,780	 	 	9,854	 	
Unrealized losses on derivative financial instruments	 	 	—	 	 	136,095	 	
	 	
Net liability – fair value of derivative financial instruments	 	$	236,783	 	$	415,414	 	
	 	
Statements of operations for the years ended December 31,	 	 	 	 	 	 	 	
Net premiums written	 	$	65,795	 	$	424,227	 	
Net premiums earned	 	 	195,690	 	 	153,450	 	
Losses and loss expenses	 	 	82,319	 	 	125,515	 	
Life and annuity benefits	 	 	12,926	 	 	(895	)	
Net realized gains (losses) on derivative financial instruments	 	 	163,274	 	 	(77,279	)	
	 	
Total impact of derivative financial instruments	 	$	263,719	 	$	(48,449	)	

p) New accounting pronouncements

Not Yet Adopted
In July 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (SOP 03-1). This Statement of Position provides guidance on accounting and reporting by insurance enterprises for certain nontraditional long-duration contracts and for separate accounts and is effective for financial statements for fiscal years beginning after December 15, 2003. At the date of initial application of this SOP, the Company is required to make certain determinations, such as significance of mortality and morbidity risk and adjustments to contract holder liabilities. SOP 03-1 may not be applied retroactively to prior years’ financial statements, and the initial application should be as of the beginning of the entity’s fiscal year. The Company will adopt SOP 03-1 on January 1, 2004 and is currently evaluating the impact of adoption of SOP 03-1 on its consolidated financial statements.
In December 2003, FASB revised FAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (FAS 132), to require additional disclosures related to pensions and postretirement benefits. While retaining the existing disclosure requirements for pensions and postretirement benefits, additional disclosures are required related to pension plan assets, obligations, contributions and net benefit costs, beginning with fiscal years ending after December 15, 2003. For foreign plans, these additional disclosures are required beginning with fiscal years ending after June 15, 2004. Additional disclosures pertaining to benefit payments are also required for fiscal years ending after June 15, 2004. FAS 132 revisions also include additional disclosure requirements for interim financial reports beginning after December 15, 2003. Given that all of the Company’s defined benefit plans cover foreign employees, the Company is not required to implement the additional disclosures in its 2003 consolidated financial statements but will begin providing such disclosures in its 2004 consolidated financial statements. Interim disclosure requirements will be implemented beginning in the first quarter of 2004.

Adopted in 2003
In May 2003, FASB issued FAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (FAS 150), which establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. FAS 150 requires the classification of a financial instrument that is within its scope as a liability (or an asset in some circumstances). The adoption of FAS 150 did not impact the Company’s consolidated financial statements.
 
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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
In April 2003, FASB issued FAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (FAS 149), which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities under FAS 133. FAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of FAS 149 did not have a material impact on the Company’s consolidated financial statements. 
In January 2003, FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46), which requires consolidation of all variable interest entities (VIE) by the primary beneficiary, as these terms are defined in FIN 46. In addition, it requires expanded disclosure for all VIEs. In December 2003, FASB revised FIN 46 and deferred its effective date to be no later than the end of the first reporting period that ends after March 15, 2004, except for those entities considered to be special-purpose entities for which FIN 46 is effective in the first reporting period that ends after December 15, 2003. The Company adopted FIN 46 at December 31, 2003. The adoption of FIN 46 did not have a material impact on the Company’s consolidated financial statements (see Note 3g).
In November 2002, FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45). FIN 45 requires that, for guarantees, within its scope that are issued or amended after December 31, 2002, a liability for the fair value of the obligation undertaken in issuing the guarantee be established and recognized through earnings, even when the likelihood of making payments under the guarantee is remote. Guarantees provided under contracts subject to insurance accounting, such as financial guaranty and mortgage guaranty reinsurance contracts, are excluded from this pronouncement. To date, the impact on earnings has not been material.
In November 2003, the Emerging Issues Task Force (EITF) reached consensus on EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments” (EITF 03-1) that certain quantitative and qualitative disclosures are required for equity and fixed maturity securities that are impaired at the balance sheet date but for which an other-than-temporary impairment has not been recognized. The guidance requires companies to disclose the aggregate amount of unrealized losses and the related fair value of investments with unrealized losses for securities that have been in an unrealized loss position for less than 12 months and separately for those that have been in an unrealized loss position for over 12 months, by investment category. The Company has adopted the disclosure requirements (see Note 3d).
In April 2003, FASB cleared Derivative Implementation Guidance Issue No. B36, “Embedded Derivatives: Modified Coinsurance Arrangements and Debt Instruments That Incorporate Credit Risk Exposures That are Unrelated or Only Partially Related to the Creditworthiness of the Obligor under Those Instruments” (Issue B36). The accounting guidance states that modified coinsurance arrangements, in which funds are withheld by the ceding insurer and a return on those withheld funds is paid based on the ceding company’s return on certain of its investments, contain an embedded derivative feature that will require bifurcation. Companies that have ceded insurance under existing modified coinsurance arrangements may reclassify the related securities from the held-to-maturity and available-for-sale categories into the trading category on the date the guidance is initially applied. The guidance on embedded derivatives in Issue B36 can be applied to other funds held arrangements or experience account balances that accrue interest based on the investment performance of a specified portfolio. The adoption of Issue B36 did not have a material impact on the Company’s consolidated financial statements.
In October 1995, FASB issued FAS No. 123, “Accounting for Stock-Based Compensation” (FAS 123). FAS 123 established accounting and reporting standards for stock-based employee compensation plans, which include stock option and stock purchase plans. FAS 123 provides employers a choice: adopt FAS 123 accounting standards for all stock compensation arrangements which requires the recognition of compensation expense for the fair value of virtually all stock compensation awards; or continue to account for stock options and other forms of stock compensation under Accounting Principles Board Opinion No. 25 (APB 25), while also providing the disclosure required under FAS 123. In December 2002, FASB issued FAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (FAS 148). FAS 148 amends the disclosure requirements of FAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The Company continues to account for stock-based compensation plans in accordance with APB 25. No compensation expense for options is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of the grant.
 
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Table of Contents
 
NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
The following table outlines the Company’s net income available to holders of Ordinary Shares and diluted earnings per share for the years ended December 31, 2003, 2002, and 2001, had the compensation cost been determined in accordance with the fair value method recommended in FAS 123.

(in thousands of U.S. dollars, except per share data)	 	2003	 	2002	 	2001	 	
	 	
Net income (loss) available to holders of Ordinary Shares:	 	 	 	 	 	 	 	 	 	 	
As reported	 	$	1,381,473	 	$	50,887	 	$	(172,008	)	
Add: Stock-based compensation expense included in reported net income, net of income tax	 	$	31,533	 	$	22,572	 	$	9,151	 	
Deduct: Compensation expense, net of income tax	 	$	64,060	 	$	56,174	 	$	24,927	 	
Pro Forma	 	$	1,348,946	 	$	17,285	 	$	(187,784	)	
	 	
Basic earnings (loss) per share:	 	 	 	 	 	 	 	 	 	 	
As reported	 	$	5.10	 	$	0.19	 	$	(0.74	)	
Pro Forma	 	$	4.98	 	$	0.06	 	$	(0.80	)	
	 	
Diluted earnings (loss) per share:	 	 	 	 	 	 	 	 	 	 	
As reported	 	$	5.01	 	$	0.19	 	$	(0.74	)	
Pro Forma	 	$	4.90	 	$	0.06	 	$	(0.80	)	

The fair value of the options issued is estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions used for grants in 2003, 2002 and 2001, respectively: dividend yield of 2.44 percent, 1.43 percent and 1.65 percent; expected volatility of 32.4 percent, 35.2 percent and 42.8 percent; risk free interest rate of 2.43 percent, 4.01 percent and 4.84 percent, annual forfeiture rate of five percent, seven percent and seven percent and an expected life of 4.25 years, four years and four years.
 
3. Investments
 
a) Fixed maturities
The fair values and amortized costs of fixed maturities at December 31, 2003 and 2002 are as follows:

 	 	2003	 	2002	
 	 		
(in thousands of U.S. dollars)	 	Fair Value	 	Amortized Cost	 	Fair Value	 	Amortized Cost	
	
U.S. Treasury and agency	 	$	2,707,850	 	$	2,638,594	 	$	1,320,965	 	$	1,244,484	
Non-U.S. governments	 	 	1,909,473	 	 	1,879,130	 	 	1,597,860	 	 	1,545,171	
Corporate securities	 	 	8,688,884	 	 	8,286,468	 	 	7,039,636	 	 	6,730,915	
Mortgage-backed securities	 	 	3,894,026	 	 	3,854,526	 	 	3,260,520	 	 	3,167,580	
States, municipalities and political subdivisions	 	 	1,445,034	 	 	1,347,687	 	 	1,200,760	 	 	1,102,592	
	
 	 	$	18,645,267	 	$	18,006,405	 	$	14,419,741	 	$	13,790,742	

The gross unrealized appreciation (depreciation) related to fixed maturities at December 31, 2003 and 2002 is as follows:

 	 	2003	 	 	2002	 	
 	 		
(in thousands of U.S. dollars)	 	Gross
Unrealized
Appreciation	 	Gross
Unrealized
Depreciation	 	 	Gross Unrealized
Appreciation	 	Gross Unrealized
Depreciation	 	
	 	
U.S. Treasury and agency	 	$	75,158	 	$	(5,902	)	 	$	76,868	 	$	(387	)	
Non-U.S. governments	 	 	35,264	 	 	(4,922	)	 	 	54,066	 	 	(1,377	)	
Corporate securities	 	 	419,200	 	 	(16,784	)	 	 	358,658	 	 	(49,937	)	
Mortgage-backed securities	 	 	54,810	 	 	(15,309	)	 	 	94,623	 	 	(1,683	)	
States, municipalities and political subdivisions	 	 	103,426	 	 	(6,079	)	 	 	98,247	 	 	(79	)	
	 	
 	 	$	687,858	 	$	(48,996	)	 	$	682,462	 	$	(53,463	)	

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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
Mortgage-backed securities issued by U.S. government agencies are combined with all other mortgage derivatives held and are included in the category, “mortgage-backed securities”. Approximately 75 percent of the total mortgage holdings at December 31, 2003, and 73 percent at December 31, 2002, 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. Fixed maturities at December 31, 2003, by contractual maturity, are shown below. 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. The Company also invests in interest rate swaps to manage the duration of the fixed maturity portfolio. The average duration, including the effect of the interest rate swaps, is 3.4 years at December 31, 2003 and 3.1 years at December 31, 2002.

(in thousands of U.S. dollars)	 	Fair Value	 	Amortized Cost	
	
Maturity period	 	 	 	 	 	 	
Less than 1 year	 	$	792,470	 	$	778,771	
1 – 5 years	 	 	6,412,214	 	 	6,170,742	
5 – 10 years	 	 	5,297,799	 	 	5,062,193	
Greater than 10 years	 	 	2,248,758	 	 	2,140,173	
	
 	 	$	14,751,241	 	$	14,151,879	
Mortgage-backed securities	 	 	3,894,026	 	 	3,854,526	
	
Total fixed maturities	 	$	18,645,267	 	$	18,006,405	

b) Equity securities
The gross unrealized appreciation (depreciation) on equity securities at December 31, 2003 and 2002 is as follows:

(in thousands of U.S. dollars)	 	2003	 	 	2002	 	
	 	
Equity securities–cost	 	$	401,237	 	 	$	442,266	 	
Gross unrealized appreciation	 	 	145,270	 	 	 	24,018	 	
Gross unrealized depreciation	 	 	(2,696	)	 	 	(55,253	)	
	 	
Equity securities–fair value	 	$	543,811	 	 	$	411,031	 	

c) Securities on loan
The fair values and amortized cost/cost of securities on loan and the gross unrealized appreciation (depreciation) related to these securities at December 31, 2003 and 2002 are detailed below.

 	 	2003	 	2002	
 	 		
(in thousands of U.S. dollars)	 	Fair Value	 	Amortized
Cost/Cost	 	Fair Value	 	Amortized
Cost/Cost	
	
Fixed maturities	 	$	666,363	 	$	640,246	 	$	272,084	 	$	258,124	
Equity securities	 	 	18,266	 	 	9,914	 	 	20,889	 	 	27,445	
	
Total	 	$	684,629	 	$	650,160	 	$	292,973	 	$	285,569	

															
 	 	2003	 	 	2002	 	
 	 		
(in thousands of U.S. dollars)	 	Gross
Unrealized
Appreciation	 	Gross
Unrealized
Depreciation	 	 	Gross
Unrealized
Appreciation	 	Gross
Unrealized
Depreciation	 	
	 	
Fixed maturities	 	$	26,437	 	$	(320	)	 	$	19,728	 	$	(5,768	)	
Equity securities	 	 	8,352	 	 	–	 	 	 	2,866	 	 	(9,422	)	
	 	
Total	 	$	34,789	 	$	(320	)	 	$	22,594	 	$	(15,190	)	

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Table of Contents
 
NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
d) Gross unrealized loss
The following table summarizes, for all securities in an unrealized loss position at December 31, 2003 (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
	
(in thousands of U.S. dollars)	 	Fair
Value	 	Gross
Unrealized Loss	 	Fair
Value	 	Gross
Unrealized Loss	 	Fair
Value	 	Gross
Unrealized Loss	
	
U.S. Treasury and agency	 	$	634,241	 	$	5,917	 	$	–	 	 	$–	 	$	634,241	 	$	5,917	
Non-U.S. governments	 	 	282,459	 	 	4,922	 	 	–	 	 	–	 	 	282,459	 	 	4,922	
Corporate securities	 	 	993,456	 	 	16,726	 	 	5,015	 	 	363	 	 	998,471	 	 	17,089	
Mortgage-backed securities	 	 	1,299,364	 	 	15,309	 	 	–	 	 	–	 	 	1,299,364	 	 	15,309	
States, municipalities and political subdivisions	 	 	146,282	 	 	6,079	 	 	–	 	 	–	 	 	146,282	 	 	6,079	
	
Total fixed maturities	 	 	3,355,802	 	 	48,953	 	 	5,015	 	 	363	 	 	3,360,817	 	 	49,316	
Equities	 	 	38,094	 	 	2,696	 	 	–	 	 	–	 	 	38,094	 	 	2,696	
Other investments	 	 	–	 	 	–	 	 	–	 	 	–	 	 	–	 	 	–	
	
Total	 	$	3,393,896	 	$	51,649	 	$	5,015	 	 	363	 	$	3,398,911	 	$	52,012	

The Company reviews all of its fixed maturity securities, including securities on loan, and equity securities for potential impairment each quarter. Initially, the Company identifies those securities to be evaluated for a potential impairment. In this process, the following is considered by type of security:

Fixed Maturities and Equity Securities, including Securities on Loan
A security that meets any of the following criteria is to be evaluated for a potential impairment:
• securities that have been in a loss position for the previous twelve months;
• those securities that have been in a loss position for the previous nine months and market value is less than 80 percent of amortized cost, or cost for equity securities; or
• those securities that are rated below investment grade by at least one major rating agency.
We evaluate all other fixed maturity and equity securities for a potential impairment when the unrealized loss at the balance sheet date exceeds a certain scope, based on both a percentage (i.e., market value is less than 80 percent of amortized cost, or cost for equity securities) and aggregate dollar decline, and certain indicators of an “other than temporary” impairment are present including:
• a significant economic event has occurred that is expected to adversely affect the industry the issuer participates in;
• recent issuer-specific news that is likely to have an adverse affect on operating results and cash flows; or
• a missed or late interest or principal payment related to any debt issuance.
For those securities identified as having a potential “other than temporary” impairment based on the above criteria, we estimate a reasonable period of time in which market value is expected to recover to a level in excess of cost, if at all. For fixed maturity securities factors considered include:
• the degree to which any appearance of impairment is attributable to an overall change in market conditions such as interest rates rather than changes in the individual factual circumstances and risk profile of the issuer;
• the performance of the relevant industry sector;
• the nature of collateral or other credit support;
• whether an issuer is current in making principal and interest payments on the debt securities in question;
• the issuer’s financial condition and our assessment (using available market information) of its ability to make future scheduled principal and interest payments on a timely basis; and
• current financial strength or debt rating, analysis and guidance provided by rating agencies and analysts.
For equity securities, factors considered include:
• whether the decline appears to be related to general market or industry conditions or is issuer-specific; and
• the financial condition and near-term prospects of the issuer, including specific events that may influence the issuer’s operations.
Securities will be assessed to have an “other than temporary” impairment if cost is not expected to be recovered or the Company does not have the ability and specific intent to hold the security until its expected recovery. The Company typically makes this latter assessment when such intent is considered inconsistent with management’s investment objectives, such as maximizing total return.
 
F-21

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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries

Other Investments
With respect to other investments that are not traded in a public market, such as venture capital investments, the portfolio managers, as well as the Company’s internal valuation committee, consider a variety of factors in determining whether or not the investment should be evaluated for impairment. Indicators of impairment include:
• the issuer has reported losses for two consecutive fiscal years;
• a significant economic event has occurred that is expected to adversely affect the industry the issuer participates in;
• recent issuer-specific news that is expected to adversely affect operating results; and
• a missed interest or principal payment related to any debt issuance.
For those securities identified as having a possible impairment, we determine a reasonable period of time in which market value is expected to recover to a level in excess of cost, if at all. Factors considered include:
• the issuer’s most recent financing events;
• an analysis of whether fundamental deterioration has occurred; and
• the issuer’s progress, and whether it has been substantially less than expected. 
These securities will be assessed to have an “other than temporary” impairment if cost is not expected to be recovered or it is concluded that we do not have the ability and specific intent to hold the security until its expected recovery.
 
e) Net realized gains (losses) and change in net unrealized appreciation (depreciation) on investments
The analysis of net realized gains (losses) and the change in net unrealized appreciation (depreciation) on investments for the years ended December 31, 2003, 2002 and 2001 is as follows:

(in thousands of U.S. dollars)	 	2003	 	 	2002	 	 	2001	 	
	 	
Fixed maturities	 	 	 	 	 	 	 	 	 	 	 	 	
Gross realized gains	 	$	199,669	 	 	$	179,911	 	 	$	189,751	 	
Gross realized losses	 	 	(70,912	)	 	 	(136,600	)	 	 	(144,220	)	
Other than temporary impairments	 	 	(28,787	)	 	 	(101,075	)	 	 	(52,512	)	
	 	
 	 	 	99,970	 	 	 	(57,764	)	 	 	(6,981	)	
Equity securities	 	 	 	 	 	 	 	 	 	 	 	 	
Gross realized gains	 	 	42,441	 	 	 	22,832	 	 	 	58,779	 	
Gross realized losses	 	 	(20,593	)	 	 	(27,340	)	 	 	(32,213	)	
Other than temporary impairments	 	 	(63,302	)	 	 	(152,728	)	 	 	–	 	
	 	
 	 	 	(41,454	)	 	 	(157,236	)	 	 	26,566	 	
Other investments	 	 	4,807	 	 	 	1,964	 	 	 	(9,747	)	
Write-down of other investments	 	 	(29,373	)	 	 	(14,067	)	 	 	(28,453	)	
Currency gains (losses)	 	 	20,892	 	 	 	3,324	 	 	 	(12,061	)	
Financial futures and option contracts and interest rate swaps	 	 	34,164	 	 	 	(188,031	)	 	 	(10,843	)	
Fair value adjustment on derivatives	 	 	163,274	 	 	 	(77,279	)	 	 	(16,840	)	
	 	
Net realized gains (losses)	 	 	252,280	 	 	 	(489,089	)	 	 	(58,359	)	
	 	
Change in net unrealized appreciation (depreciation) on investments	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed maturities	 	 	9,863	 	 	 	423,278	 	 	 	125,349	 	
Equity securities	 	 	173,809	 	 	 	17,227	 	 	 	(85,459	)	
Securities on loan	 	 	27,065	 	 	 	7,404	 	 	 	–	 	
Other investments	 	 	12,576	 	 	 	8,372	 	 	 	8,975	 	
Change in deferred income taxes	 	 	(15,457	)	 	 	(116,786	)	 	 	(14,284	)	
	 	
Change in net unrealized appreciation on investments	 	 	207,856	 	 	 	339,495	 	 	 	34,581	 	
	 	
Total net realized gains (losses) and change in net unrealized appreciation (depreciation) on investments	 	$	460,136	 	 	$	(149,594	)	 	$	(23,778	)	

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Table of Contents
 
NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
f) Net investment income
Net investment income for the years ended December 31, 2003, 2002 and 2001 was derived from the following sources:

(in thousands of U.S. dollars)	 	2003	 	 	2002	 	 	2001	 	
	 	
Fixed maturities and short-term investments	 	$	891,842	 	 	$	833,436	 	 	$	811,912	 	
Equity securities	 	 	13,929	 	 	 	6,778	 	 	 	9,837	 	
Other investments	 	 	7,453	 	 	 	5,308	 	 	 	5,861	 	
	 	
Gross investment income	 	 	913,224	 	 	 	845,522	 	 	 	827,610	 	
Investment expenses	 	 	(50,883	)	 	 	(43,381	)	 	 	(41,741	)	
	 	
Net investment income	 	$	862,341	 	 	$	802,141	 	 	$	785,869	 	

g) Variable interests related to equity investments in CDOs
As a complement to the Company’s credit default swap business and with the objective of enhancing investment yield, the Company invested in the equity tranches of six collateralized debt obligations (CDOs) from June 2001 through August 2002. The Company’s aggregate maximum exposure under these CDOs is $43.8 million, which approximates the cost of these investments. At December 31, 2003, the underlying assets in these CDOs, which aggregate to $2.6 billion for all six CDOs, are principally invested in asset-backed securities, including investments in the debt tranches of other CDOs. While management considers the related entities to be variable interest entities, as defined by FIN 46, the Company’s equity investments represent a small portion of the variable interests in each CDO. Accordingly, under FIN 46, the Company is not required to consolidate any of these entities. At December 31, 2003, the Company’s aggregate carrying value for these investments is $29.1 million, which represents the Company’s remaining loss exposure related to these investments as of December 31, 2003.
 
h) Restricted assets
The Company 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. The Company also utilizes trust funds in certain large 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. The Company also has investments in segregated portfolios primarily to provide collateral or guarantees for LOCs and debt instruments described in Notes 7 and 8. At December 31, 2003, restricted assets of $4.7 billion are included in fixed maturities. The remaining balance is included in short-term investments, equity securities and cash. The components of the fair value of the restricted assets at December 31, 2003 and 2002 are as follows:

(in thousands of U.S. dollars)	 	2003	 	2002	
	
Deposits with U.S. regulatory authorities	 	$	907,715	 	$	649,962	
Deposits with non-U.S. regulatory authorities	 	 	1,303,060	 	 	1,069,657	
Assets used for collateral or guarantees	 	 	1,141,334	 	 	1,230,174	
Trust funds	 	 	1,706,444	 	 	1,380,886	
	
 	 	$	5,058,553	 	$	4,330,679	

4. Goodwill
FAS 142, “Goodwill and Other Intangible Assets” primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. All goodwill recognized in the Company’s consolidated balance sheet at January 1, 2002 was assigned to one or more reporting units. FAS 142 requires that goodwill in each reporting unit be tested for impairment annually. Based on a profitability review performed in 2003, it was determined that two relatively small majority owned warranty program administration companies were not currently profitable. As a result of that review, updated forecasts supported indications that these companies would not, under current
 
F-23

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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
market conditions, achieve sufficient contract sales volumes to generate and sustain future profitable results. As a consequence of these revised expectations, the Company recognized a goodwill impairment loss of $6 million during the first quarter of 2003.
The following table details the movement in goodwill by segment during the year ended December 31, 2003.

(in thousands of U.S. dollars)	 	Insurance –
North American	 	 	Insurance –
Overseas General	 	Global
Reinsurance	 	Financial
Services	 	ACE
Consolidated	 	
	 	
Goodwill at beginning of year	 	$	1,133,543	 	 	$	1,121,636	 	$	364,958	 	$	96,723	 	$	2,716,860	 	
Goodwill impairment loss	 	 	(6,030	)	 	 	–	 	 	–	 	 	–	 	 	(6,030	)	
	 	
Goodwill at end of year	 	$	1,127,513	 	 	$	1,121,636	 	$	364,958	 	$	96,723	 	$	2,710,830	 	

5. Unpaid losses and loss expenses
 
Property and casualty
The Company establishes reserves for the estimated unpaid ultimate liability for losses and loss expenses under the terms of its policies and agreements. These reserves include estimates for both claims that have been reported and for IBNR, and include estimates of expenses associated with processing and settling these claims. The process of establishing reserves for property and casualty (P&C) claims can be complex and is subject to considerable variability as it requires the use of informed estimates and judgments. The Company’s estimates and judgments may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed, or as current laws change. The Company does not discount its P&C loss reserves. The Company continually evaluates its estimates of reserves in light of developing information and in light of discussions and negotiations with its insureds. While the Company believes that its reserve for unpaid losses and loss expenses at December 31, 2003 is adequate, new information or trends may lead to future developments in ultimate losses and loss expenses significantly greater or less than the reserves provided. Any such revisions could result in future changes in estimates of losses or reinsurance recoverable, and would be reflected in the Company’s results of operations in the period in which the estimates are changed.
The reconciliation of unpaid losses and loss expenses for the years ended December 31, 2003, 2002 and 2001 is as follows:

(in thousands of U.S. dollars)	  	2003	 	 	2002	 	 	2001	 	
	 	
Gross unpaid losses and loss expenses at beginning of year	  	$	24,315,182	 	 	$	20,728,122	 	 	$	17,388,394	 	
Reinsurance recoverable on unpaid losses	  	 	(12,997,164	)	 	 	(10,628,608	)	 	 	(8,323,444	)	
	 	
Net unpaid losses and loss expenses at beginning of year	  	 	11,318,018	 	 	 	10,099,514	 	 	 	9,064,950	 	
Unpaid losses and loss expenses assumed in respect of reinsurance business acquired	  	 	89,779	 	 	 	202,920	 	 	 	300,204	 	
	 	
Total	  	 	11,407,797	 	 	 	10,302,434	 	 	 	9,365,154	 	
	 	
Net losses and loss expenses incurred in respect of losses occurring in:	  	 	 	 	 	 	 	 	 	 	 	 	
Current year	  	 	5,953,076	 	 	 	4,197,829	 	 	 	4,457,986	 	
Prior year	  	 	164,326	 	 	 	708,681	 	 	 	94,470	 	
	 	
Total	  	 	6,117,402	 	 	 	4,906,510	 	 	 	4,552,456	 	
	 	
Net losses and loss expenses paid in respect of losses occurring in:	  	 	 	 	 	 	 	 	 	 	 	 	
Current year	  	 	1,266,288	 	 	 	1,265,880	 	 	 	1,345,699	 	
Prior year	  	 	2,639,554	 	 	 	2,685,401	 	 	 	2,404,155	 	
	 	
Total	  	 	3,905,842	 	 	 	3,951,281	 	 	 	3,749,854	 	
	 	
Foreign currency revaluation	  	 	343,872	 	 	 	60,355	 	 	 	(68,242	)	
	 	
Net unpaid losses and loss expenses at end of year	  	 	13,963,229	 	 	 	11,318,018	 	 	 	10,099,514	 	
Reinsurance recoverable on unpaid losses	  	 	13,191,609	 	 	 	12,997,164	 	 	 	10,628,608	 	
	 	
Gross unpaid losses and loss expenses at end of year	  	$	27,154,838	 	 	$	24,315,182	 	 	$	20,728,122	 	

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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
Net losses and loss expenses incurred for the year ended December 31, 2003 were $6.1 billion, compared with $4.9 billion and $4.5 billion in 2002 and 2001, respectively. Net losses and loss expenses incurred for 2003, 2002 and 2001 include $164 million, $709 million and $94 million of prior period development, respectively. In 2002, the prior period development included $516 million related to A&E.
Insurance – North American incurred adverse prior period development of $91 million in 2003, compared with adverse development of $79 million in 2002. The 2003 adverse development related primarily to casualty lines and principally emerged from medical inflation in workers’ compensation and large loss activity in commercial multi-peril. Additional minor development was experienced in professional liability, reinsurance of long-term disability and run-off business offset by positive development on property, excess liability and marine lines of business. The 2002 development was primarily from run-off business with the remainder being attributed to several lines of business including workers’ compensation, commercial automobile, health care asset management run-off, warranty and financial institutions business.
Insurance – Overseas General incurred $57 million of adverse prior period development, compared with $104 million of adverse development in 2002. Prior period development for 2003 primarily related to casualty lines for ACE International and was a result of lengthening of the loss development patterns for these lines of business. To a lesser extent, ACE Global Markets experienced 2003 adverse development primarily related to marine liability with lower amounts in professional lines, marine hull and bloodstock lines mitigated by positive development on property, energy, aviation and political risk lines of business. 2002 prior period development related primarily to casualty and D&O lines for ACE International and aerospace business for ACE Global Markets.
Global Reinsurance had positive prior period development of $27 million in 2003 compared with positive development of $20 million in 2002, primarily due to the property catastrophe line of business and the losses in this line being lower than expected. 
Financial Services incurred $43 million of adverse prior period development in 2003 principally on the structured finance line of business due to credit deterioration in collateralized debt obligations assumed through reinsurance treaties. In addition, prior year development includes an increase in the case reserve on an auto residual value transaction. In 2002, Financial Services incurred $30 million of net prior period development; the variance from 2003 principally relating to adverse development in the ACE Financial Solutions International book, which comprises large, unique transactions, including LPTs.
Net losses and loss expenses incurred for the year ended December 31, 2001 include $94 million of prior year development principally in the Insurance – Overseas General segment. This development was reflected during the fourth quarter of 2001 when the Company recorded additional reserves to strengthen its casualty loss reserves.
 
Asbestos and environmental
Included in the Company’s liabilities for losses and loss expenses are liabilities for asbestos, environmental and latent injury damage claims and expenses. These claims are principally related to claims arising from remediation costs associated with hazardous waste sites and bodily-injury claims related to asbestos products and environmental hazards. These amounts include provisions for both reported and IBNR claims.
The Company’s exposure to asbestos principally arises out of liabilities acquired when the Company purchased Westchester Specialty in 1998 and the P&C business of CIGNA in 1999, with the larger exposure contained within the liabilities acquired in the CIGNA transaction. These CIGNA transaction liabilities reside in various subsidiaries of Brandywine, which was created in 1995 by the restructuring of CIGNA’s domestic operations into separate ongoing and run-off operations.
In January 2003, the Company completed an internal review of its A&E reserves. As a result of this review, the Company increased its gross A&E reserve, for the year ended December 31, 2002, by $2.2 billion, offset by $1.9 billion of reinsurance recoverable, including $533 million of reinsurance purchased from the National Indemnity Company (“NICO”) as part of the acquisition of CIGNA’s P&C business. The Company also increased its bad debt provision for reinsurance recoverable by $145 million. As a result of these two items, together with ACE Bermuda’s ten percent participation in the NICO cover, the net increase in exposure was determined to be $516 million ($354 million after income tax) and was recorded in the fourth quarter of 2002.
As part of the acquisition of Westchester Specialty, NICO provided $750 million of reinsurance protection for adverse development on loss and loss adjustment expense reserves. At December 31, 2003, the remaining unused limit in this NICO Westchester Specialty cover was approximately $600 million.
 
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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
As part of the acquisition of the CIGNA P&C business, NICO provided $2.5 billion of reinsurance protection for adverse development on Brandywine loss and loss adjustment expense reserves and for uncollectible ceded reinsurance. This NICO Brandywine cover was exhausted on an incurred basis with the increase in our A&E reserves in the fourth quarter of 2002.
The active ACE INA companies retain two primary funding obligations associated with the run-off Brandywine operations: a dividend retention fund obligation and required reinsurance coverage provided under an aggregate excess of loss reinsurance agreement. In addition, certain active ACE INA companies remain residually liable for business ceded by those companies to the primary Brandywine subsidiary, Century Indemnity Company (“Century”).
In accordance with the Brandywine restructuring order, INA Financial Corporation established and funded a dividend retention fund consisting of $50 million plus investment earnings. Pursuant to terms of the restructuring, the full balance of this dividend retention fund was contributed to Century as of December 31, 2002. To the extent in the future that dividends are paid by INA Holdings Corporation to its parent, INA Financial Corporation, and to the extent that INA Financial Corporation then pays such dividends to INA Corporation, a portion of those dividends must be withheld to replenish the principal of the dividend retention fund to $50 million within five years. In 2003, no such dividends were paid, and therefore no replenishment of the dividend retention fund occurred. This dividend fund obligation, to maintain and to replenish the fund as necessary and to the extent dividends are paid, is ongoing until ACE INA receives prior written approval from the Pennsylvania Commissioner of Insurance to terminate the fund.
In addition, the ACE INA insurance subsidiaries are obligated to provide insurance coverage to Century in the amount of $800 million under an aggregate excess of loss reinsurance agreement if the statutory capital and surplus of Century falls below $25 million or if Century lacks liquid assets with which to pay claims as they become due, after giving effect to contribution of any dividend retention fund balance. Coverage under the aggregate excess of loss reinsurance agreement was triggered as of December 31, 2002 following contribution of the dividend retention fund balance. Approximately $468 million in undiscounted losses were ceded to the aggregate excess of loss reinsurance agreement at December 31, 2003. The following table presents selected loss reserve data for A&E exposures at December 31, 2003 and 2002.

 	 	2003
	 	2002
	
(in millions of U.S. dollars)	 	Gross	 	Net	 	Gross	 	Net	
	
Asbestos	 	$	2,899	 	$	277	 	$	3,192	 	$	446	
Environmental and other latent exposures	 	 	1,148	 	 	250	 	 	1,352	 	 	403	
	
Total	 	$	4,047	 	$	527	 	$	4,544	 	$	849	

During the years ended December 31, 2003 and 2002, the Company made net payments of $322 million and $308 million, respectively, with respect to latent claims.
In a lawsuit filed in the state of California in December 1999, certain competitors of ACE USA have challenged the restructuring that resulted in the creation of Brandywine. The restructuring was previously upheld by the Pennsylvania Supreme Court in July 1999. The lawsuit alleges that the restructuring does not effectively relieve the insurance subsidiary that issued the policies prior to the restructuring (Insurance Company of North America) from liabilities for claims on those policies by California policyholders. The California trial court has held in response to a pre-trial motion that a California statute does prohibit the transfer of California policies to a subsequent legal entity without the consent of the policyholders and noted that consent was not received in the context of the Brandywine restructuring. ACE intends to appeal this decision. In addition, the liabilities that are the subject of this California lawsuit are included within our A&E reserves for Brandywine.
 
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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
6. Reinsurance
The Company purchases reinsurance to manage various exposures including catastrophe risks. Although reinsurance agreements contractually obligate the Company’s reinsurers to reimburse it for the agreed-upon portion of its gross paid losses, they do not discharge the primary liability of the Company. The amounts for net premiums written and net premiums earned in the consolidated statements of operations are net of reinsurance. Direct, assumed and ceded amounts for these items for the years ended December 31, 2003, 2002 and 2001 are as follows:

(in thousands of U.S. dollars)	  	2003	 	 	2002	 	 	2001	 	
	 	
Premiums written	  	 	 	 	 	 	 	 	 	 	 	 	
Direct	  	$	11,425,435	 	 	$	9,939,024	 	 	$	7,629,233	 	
Assumed	  	 	3,211,482	 	 	 	2,879,947	 	 	 	2,536,129	 	
Ceded	  	 	(4,421,909	)	 	 	(4,750,673	)	 	 	(3,801,748	)	
	 	
Net	  	$	10,215,008	 	 	$	8,068,298	 	 	$	6,363,614	 	
	 	
Premiums earned	  	 	 	 	 	 	 	 	 	 	 	 	
Direct	  	$	11,240,783	 	 	$	8,537,225	 	 	$	6,980,359	 	
Assumed	  	 	3,021,134	 	 	 	2,525,388	 	 	 	2,359,241	 	
Ceded	  	 	(4,659,534	)	 	 	(4,232,109	)	 	 	(3,422,423	)	
	 	
Net	  	$	9,602,383	 	 	$	6,830,504	 	 	$	5,917,177	 	

The composition of the Company’s reinsurance recoverable at December 31, 2003 and 2002, is as follows:

(in thousands of U.S. dollars)	  	2003	 	 	2002	 	
	 	
Reinsurance recoverable on paid losses and loss expenses	  	$	1,277,119	 	 	$	1,363,247	 	
Bad debt reserve on paid losses and loss expenses	  	 	(402,680	)	 	 	(377,804	)	
Reinsurance recoverable on future policy benefits	  	 	14,668	 	 	 	8,846	 	
Reinsurance recoverable on unpaid losses and loss expenses	  	 	13,749,189	 	 	 	13,558,623	 	
Bad debt reserve on unpaid losses and loss expenses	  	 	(557,580	)	 	 	(561,459	)	
	 	
Net reinsurance recoverable	  	$	14,080,716	 	 	$	13,991,453	 	

The Company evaluates the financial condition of its reinsurers and potential reinsurers on a regular basis and also monitors concentrations of credit risk with reinsurers. The provision for uncollectible reinsurance is required principally due to the failure of reinsurers to indemnify ACE, primarily because of disputes under reinsurance contracts and insolvencies. Provisions have been established for amounts estimated to be uncollectible.
Following is a breakdown of the Company’s reinsurance recoverable on paid losses at December 31, 2003 and 2002:

 	 	December 31, 2003
	 	December 31, 2002
	
(in millions of U.S. dollars)	 	Amount	 	Bad Debt
Reserve	 	% of Total
Reserve	 	Amount	 	Bad Debt
Reserve	 	% of Total
Reserve	
	
Category	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
General collections	 	$	730	 	$	45	 	6.2%	 	$	848	 	$	43	 	5.1%	
Other	 	 	547	 	 	358	 	65.4%	 	 	515	 	 	335	 	65.0%	
	
Total	 	$	1,277	 	$	403	 	31.6%	 	$	1,363	 	$	378	 	27.7%	

General collections balances represent amounts in the process of collection in the normal course of business, for which the Company has no indication of dispute or credit-related issues.
 
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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
The other category includes amounts recoverable that are in dispute, or are from companies who are in supervision, rehabilitation or liquidation. The Company’s estimation of this reserve considers the credit quality of the reinsurer and whether the Company has received collateral or other credit protections such as parental guarantees.
The following tables provide a listing of the Company’s largest reinsurers with the first category representing the top 10 reinsurers and the second category representing the remaining reinsurers with balances greater than $20 million. The third category includes amounts due from over 2,500 companies, each having balances of less than $20 million. The bad debt reserve for these three categories is principally based on an analysis of the credit quality of the reinsurer and collateral balances. The next category, mandatory pools and government agencies, includes amounts backed by certain state and federal agencies. In certain states, insurance companies are required by law to participate in these pools. The fifth category, structured settlements, includes annuities purchased from life insurance companies to settle claims. Since the Company retains the ultimate liability in the event that the life company fails to pay, it reflects the amount as a liability and a recoverable for GAAP purposes. These amounts are not subject to dispute and the bad debt reserve is established based on the application of historical collection experience. The next category, captives, includes companies established and owned by the Company’s insurance clients to assume a significant portion of their direct insurance risk from the Company, i.e., they are structured to allow clients to self-insure a portion of their insurance risk. It is generally the Company’s policy to obtain collateral equal to expected losses; where appropriate, exceptions are granted but only with review and sign-off at a senior officer level. The final category, other, includes amounts recoverable that are in dispute or are from companies that are in supervision, rehabilitation, or liquidation. The Company establishes its bad debt reserve in this category based on a case by case analysis of individual situations, including credit and collateral analysis and consideration of the Company’s collection experience in similar situations.

Breakdown of Reinsurance Recoverable

(in millions of U.S. dollars)	 	December 31
2003	 	Bad Debt
Reserve	 	% of Gross	
	
Categories	 	 	 	 	 	 	 	 	
Top 10 reinsurers	 	$	7,798	 	$	84	 	1.1%	
Other reinsurers balances greater than $20 million	 	 	3,373	 	 	147	 	4.4   	
Other reinsurers balances less than $20 million	 	 	979	 	 	150	 	15.3   	
Mandatory pools and government agencies	 	 	779	 	 	4	 	0.5   	
Structured settlements	 	 	429	 	 	2	 	0.5   	
Captives	 	 	801	 	 	1	 	0.1   	
Other	 	 	882	 	 	572	 	64.9   	
	
Total	 	$	15,041	 	$	960	 	6.4%	

Top 10 Reinsurers (net of collateral)
AXA
Berkshire Hathaway Insurance Group
CIGNA
EQUITAS
GE Global Insurance Group
Hannover
Lloyd’s of London
Munich Re
St. Paul Companies
Swiss Re Group
 
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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries

Other Reinsurers Balances Greater Than $20 million (net of collateral)
					
ABB Group	  	Fairfax Financial	  	QBE Insurance	
AIOI Insurance	  	FM Global Group	  	RenaissanceRe Holdings Ltd.	
Allianz Group	  	Gerling Group	  	Royal & Sun Alliance Insurance Group Plc	
American International Group	  	Great American P&C Insurance Companies	  	Scor Group	
Arch Capital	  	Hartford Insurance Group	  	Sompo Japan	
AVIVA	  	Independence Blue Cross (Amerihealth)	  	Toa Reinsurance Company	
Chubb Insurance Group	  	ING – Internationale Nederlanden Group	  	Tokio Marine & Fire Insurance Company Ltd.	
CNA Insurance Companies	  	IRB – Brasil Resseguros S.A.	  	Travelers Property Casualty Group	
Constellation Reinsurance Company	  	Korean Reinsurance Company (KRIC)	  	Trenwick Group	
Converium Group	  	Liberty Mutual Insurance Companies	  	White Mountains Insurance Group	
DaimlerChrysler Group	  	Mitsui Sumitomo Insurance Company Ltd.	  	WR Berkley Corp.	
Dominion Ins. Co. Ltd	  	Overseas Partners Ltd.	  	XL Capital Group	
Electric Insurance Company	  	Partner Reinsurance Company of the U.S.	  	Zurich Financial Services Group	
Everest Re Group	  	PMA Capital Insurance Company	  	 	
 
7. Commitments, contingencies and guarantees
 
a) Derivative Instruments
The Company maintains investments in derivative instruments such as futures, options, interest rate 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. The Company currently records changes in market value of these instruments as realized gains (losses) in the consolidated statements of operations.
 
(i) Foreign currency exposure management
The Company uses foreign currency forward contracts to minimize the effect of fluctuating foreign currencies. The forward currency contracts purchased are not specifically identifiable against cash, any single security or groups of securities denominated in those currencies, and therefore, do not qualify as hedges for financial reporting purposes. All realized and unrealized contract gains and losses are reflected currently in the consolidated statements of operations. The contractual amount of the foreign currency forward contracts at December 31, 2003, was $169 million, the current fair value was $168 million and the unrealized loss was $1 million.
 
(ii) Duration management and market exposure
 
Futures
A portion of the Company’s equity exposure is attained using a synthetic equity strategy, whereby equity index futures contracts are held in an amount equal to the market value of an underlying portfolio comprised of short-term investments and fixed maturities. This creates an equity market exposure equal in value to the total amount of funds invested in this strategy. In addition, exchange traded bond and note futures contracts may be used in fixed maturity portfolios as substitutes for ownership of the physical bonds and notes without significantly increasing the risk in the portfolio. Investments in financial futures contracts may be made only to the extent that there are assets under management, not otherwise committed.
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. At December 31, 2003, the contract amount of $523 million reflects the net extent of involvement the Company had in these financial instruments.
 
Options
Option contracts may be used in the portfolio as protection against unexpected shifts in interest rates, which would thereby 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 Company’s synthetic equity strategy as described
 
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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
above. 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. The price of an option is influenced by the underlying security, expected volatility, time to expiration and supply and demand.
For long option positions, the maximum loss is the premium paid for the option. The maximum credit exposure is represented by the fair value of the options held. For short option positions, the potential loss is the same as having taken a position in the underlying security. Short call options are backed in the portfolio with the underlying, or highly correlated, securities and short put options are backed by uncommitted cash for the in-the-money portion.
 
Interest rate swaps
An interest rate swap is a contract between two counterparties in which interest payments are made based on a notional principal amount, which itself is never paid or received. At December 31, 2003, the notional principal amount was $751 million. Under the terms of an interest rate swap, one counterparty makes interest payments based on a fixed interest rate and the other counterparty’s payments are based on a floating rate. Interest rate swap contracts are used in the portfolio as protection against unexpected shifts in interest rates, which would affect the fair value of the fixed maturity portfolio. By using swaps in the portfolio, the overall duration or interest rate sensitivity of the portfolio can be reduced.
The credit risk associated with the above derivative financial instruments relates to the potential for non-performance by counterparties. Non-performance is not anticipated; however, in order to minimize the risk of loss, management monitors the creditworthiness of its counterparties. 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 the Company’s investment guidelines. These counterparties are required to have a minimum credit rating of AA- by Standard and Poors or Aa3 by Moody’s. In addition, certain contracts require that collateral be posted once pre-determined thresholds are breached as a result of market movements.
 
b) Concentrations of credit risk
The investment portfolio is managed following prudent standards of diversification. Specific provisions limit the allowable holdings of a single issue and issuers. The Company believes that there are no significant concentrations of credit risk associated with its investments.
 
c) Financial guaranty
At December 31, 2003 and 2002, the Company’s reinsured financial guaranty portfolio was broadly diversified by bond type, geographic location and maturity schedule, with no single risk representing more than 1.2 percent of the Company’s net exposure. The Company limits its exposure to losses from reinsured financial guarantees by underwriting primarily investment grade obligations and retroceding a portion of its risks to other insurance companies.
The net financial guaranty exposure outstanding was approximately $88.9 billion and $81.8 billion at December 31, 2003 and 2002, respectively. At December 31, 2003, the weighted average credit quality of this portfolio, including credit default swaps was A based on ratings assigned by Standard & Poor’s. The range of final maturities for the portfolio was one to thirty years. The composition at December 31, 2003 and 2002, by type of issue, is as follows:

Type of Issue
 
(in billions of U .S. dollars)	 	2003	 	2002	
	
Non-municipal	 	$	36.0	 	$	31.7	
Tax-backed	 	 	21.1	 	 	19.6	
Municipal utilities	 	 	11.1	 	 	10.4	
Special revenue	 	 	9.1	 	 	8.6	
Health care	 	 	5.8	 	 	5.8	
Structured municipal	 	 	3.4	 	 	3.5	
Other municipal	 	 	2.4	 	 	2.2	
	
Total	 	$	88.9	 	$	81.8	

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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
As part of its financial guaranty business, the Company participates in credit default swap transactions whereby one counterparty pays a periodic fee in fixed basis points on a notional amount in return for a contingent payment by the other counterparty in the event one or more defined credit events occurs with respect to one or more third party reference securities or loans. A credit event is defined as a failure to pay, bankruptcy, cross acceleration (generally accompanied by a failure to pay), repudiation, restructuring or similar nonpayment event. The total notional amount of credit default swaps outstanding at December 31, 2003 and 2002, included in the Company’s financial guaranty exposure above, was $23.9 billion and $20.7 billion, respectively.
At December 31, 2003 and 2002, the Company’s net mortgage guaranty insurance exposure in force (representing the current principal balance of all mortgage loans that are currently reinsured) was approximately $4.8 billion and $5.2 billion, respectively, and direct primary net risk in force was approximately $3.5 billion and $3.0 billion, respectively.
 
d) Credit facilities
In April 2003, the Company renewed, at substantially the same terms, its $500 million, 364-day revolving credit facility. This facility, together with the Company’s $250 million, five-year revolving credit facility, which was last renewed in May 2000, is available for general corporate purposes and each of the facilities may also be used as commercial paper back-up. The five-year facility also permits the issuance of letters of credit (LOCs). At December 31, 2003, the outstanding LOCs issued under these facilities was $64 million. There were no other drawings or LOCs issued under these facilities.
ACE Guaranty Corp. is party to a non-recourse credit facility which provides up to $175 million specifically supporting the company’s municipal portfolio and is designed to provide rating agency qualified capital to support ACE Guaranty Corp.’s claims paying resources. The facility’s expiry date is December 2010. ACE Guaranty Corp. has not borrowed under this credit facility. In May 2003, ACE Guaranty Corp. entered into a $140 million, 364-day revolving credit facility that is available for general corporate purposes. ACE Guaranty Corp. has not borrowed under this credit facility.
 
e) Letters of Credit
In November 2003, to fulfill the requirements of Lloyd’s for open years of account, the Company renewed and decreased a syndicated uncollateralized, five-year LOC facility in the amount of £380 million (approximately $679 million). This facility was originally arranged in 1998. This LOC facility requires that the Company and/or certain of its subsidiaries continue to maintain certain covenants, including a minimum consolidated net worth covenant and a maximum leverage covenant, which have been met at December 31, 2003.
In September 2003, the Company arranged a $500 million unsecured, one-year LOC facility for general business purposes, including the issuance of insurance and reinsurance letters of credit. This facility replaced an existing $500 million LOC facility, which was last renewed in September 2002. Usage under this facility was $278 million at December 31, 2003.
In September 2003, the Company also arranged a $500 million secured, three-year LOC facility for general business purposes, including the issuance of insurance and reinsurance letters of credit. This facility replaced an existing $350 million LOC facility, which was last renewed in September 2002. Usage under this facility was $285 million at December 31, 2003. The Company also maintains various other LOC facilities; both collateralized and uncollateralized, for general purposes. At December 31, 2003, the aggregate availability under these facilities was $521 million and usage was $438 million.
 
f) Legal proceedings
The Company’s 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 the Company’s loss and loss expense reserves. In addition to claims litigation, the Company and its subsidiaries 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, inter alia, allegations of underwriting errors or misconduct, employment claims, regulatory activity or disputes arising from business ventures. While the outcomes of the business litigation involving the Company cannot be predicted with certainty at this point, the Company is disputing, and will continue to dispute, allegations against it that are without merit. The Company believes that the ultimate outcomes of matters in this category of business litigation will not have a material adverse effect on the financial condition, future operating results or liquidity of the Company, although an adverse resolution of a number of these items could have a material adverse effect on the Company’s results of operations in a particular quarter or fiscal year.
 
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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
g) Lease commitments
The Company and its subsidiaries lease office space in the countries in which they operate under operating leases which expire at various dates through January 2018. The Company renews and enters into new leases in the ordinary course of business as required. Total rent expense with respect to these operating leases for the years ended December 31, 2003, 2002 and 2001, was approximately $85 million, $65 million and $62 million, respectively.
Future minimum lease payments under the leases are expected to be as follows:

Year ending December 31,
    (in millions of U.S. dollars)	 	 	
	
2004	 	$	75	
2005	 	 	70	
2006	 	 	49	
2007	 	 	39	
2008	 	 	36	
Later years	 	 	155	
	
Total minimum future lease commitments	 	$	424	

h) Acquisition of business entities
Pursuant to the restructuring order that created Brandywine, the active ACE INA insurance subsidiaries are obligated to provide reinsurance coverage to Century Indemnity in the amount of $800 million under an aggregate excess of loss reinsurance agreement if the capital and surplus of Century Indemnity falls below $25 million or if Century Indemnity lacks liquid assets with which to pay claims as they become due. (See Note 5 for additional disclosure.)
 
i) Tax matters
ACE Limited and certain of its non-U.S.-based insurance and reinsurance subsidiaries (non-U.S. subsidiaries) have not paid or provided for U.S. corporate income taxes (except certain withholding taxes) on the basis that they are not engaged in a trade or business in the U.S. or otherwise subject to taxation in the United States. However, because definitive identification of activities which constitute being engaged in a trade or business in the U.S. is not provided by the Internal Revenue Code of 1986, regulations or court decisions, there can be no assurance that the Internal Revenue Service (IRS) will not contend that ACE Limited or its non-U.S. subsidiaries are engaged in a U.S. trade or business or otherwise subject to taxation. If ACE Limited and its non-U.S. subsidiaries were considered to be engaged in a trade or business in the U.S., the Company or such subsidiaries could be subject to U.S. tax at regular corporate tax rates on its taxable income, if any, that is effectively connected with such U.S. trade or business plus an additional 30 percent “branch profits” tax on such income remaining, if any, after the regular corporate taxes, in which case there could be a significant adverse effect on the Company’s results of operations and its financial condition. ACE Limited and its non-U.S. subsidiaries do not file U.S. income tax returns reporting income subject to U.S. income tax since they do not conduct business within the U.S. ACE Limited and some of its non-U.S. subsidiaries have filed protective tax returns, however, reporting no U.S. income to preserve their ability to deduct their ordinary and necessary business expenses should the IRS successfully contend that a portion of their income is subject to a net income tax in the U.S.
 
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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
8. Debt
The following table outlines the Company’s debt as of December 31, 2003 and 2002:

(in millions of U.S. dollars)	 	2003	 	2002	
	
Short-term debt	 	 	 	 	 	 	
ACE INA commercial paper	 	$	146	 	$	146	
ACE INA Notes due 2004	 	 	400	 	 	–  	
	
 	 	$	546	 	$	146	
	
Long-term debt	 	 	 	 	 	 	
ACE INA Notes due 2004	 	$	–  	 	$	400	
ACE INA Notes due 2006	 	 	300	 	 	300	
ACE Limited Senior Notes due 2007	 	 	499	 	 	499	
ACE US Holdings Senior Notes due 2008	 	 	250	 	 	250	
ACE INA Subordinated Notes due 2009	 	 	200	 	 	200	
ACE INA Debentures due 2029	 	 	100	 	 	100	
	
 	 	$	1,349	 	$	1,749	
	
Trust Preferred Securities	 	 	 	 	 	 	
Capital Re LLC Monthly Income Preferred Securities due 2044	 	$	75	 	$	75	
ACE INA Trust Preferred Securities due 2029	 	 	100	 	 	100	
ACE INA Capital Securities due 2030	 	 	300	 	 	300	
	
 	 	$	475	 	$	475	

a) Short-term debt
The Company has commercial paper programs that use revolving credit facilities as back-up facilities and provide for up to $2.8 billion in commercial paper issuance (subject to the availability of back-up facilities, which currently total $750 million as outlined in Note 7) for ACE and for ACE INA. For the years ended December 31, 2003, and 2002, commercial paper rates averaged 1.4 percent and 1.9 percent, respectively.
 
b) ACE Limited senior notes
In March 2002, ACE Limited issued $500 million of 6.0 percent notes due April 1, 2007. The notes are not redeemable before maturity and do not have the benefit of any sinking fund. These senior unsecured notes rank equally with all of the Company’s other senior obligations and contain a customary limitation on lien provisions as well as customary events of default provisions which, if breached, could result in the accelerated maturity of such senior debt.
 
c) ACE INA notes and debentures
In 1999, ACE INA issued $400 million of 8.2 percent notes due August 15, 2004, $300 million of 8.3 percent notes due August 15, 2006, and $100 million of 8.875 percent debentures due August 15, 2029. The notes and debentures are not redeemable before maturity and do not have the benefit of any sinking fund. These unsecured notes and debentures are guaranteed on a senior basis by the Company and they rank equally with all of ACE INA’s other senior indebtedness.
 
d) ACE US Holdings senior notes
In 1998, ACE US Holdings issued $250 million in aggregate principal amount of unsecured senior notes maturing in October 2008. Interest payments, based on a floating rate, averaged 8.6 percent during fiscal 2003 and fiscal 2002. The senior notes are callable subject to certain call premiums. Simultaneously, the Company entered into a notional $250 million swap transaction that has the economic effect of reducing the cost of debt to the consolidated group, excluding fees and expenses, to 6.47 percent for ten years. The minimum collateral in connection with the swap transaction is $88 million. The actual collateral can be higher depending on the credit quality of securities pledged. In the event that the Company terminates the swap prematurely, the Company would be liable for certain transaction costs. The swap counterparty is a highly-rated major financial institution and the Company does not anticipate non-performance.

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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
e) ACE INA subordinated notes
In 1999, ACE INA issued $300 million, 11.2 percent unsecured subordinated notes maturing in December 2009. The subordinated notes are callable subject to certain call premiums. Simultaneously, the Company entered into a notional $300 million swap transaction that has the economic effect of reducing the cost of debt to the consolidated group, excluding fees and expenses, to 8.41 percent for ten years. The minimum collateral in connection with the swap transaction is $70 million. The actual collateral can be higher depending on the credit quality of securities pledged. In the event that the Company terminates the swap prematurely, the Company would be liable for certain transaction costs. The swap counterparty is a highly-rated major financial institution and the Company does not anticipate non-performance. During 2002, the Company repaid $100 million of these notes and swaps, and incurred debt prepayment expenses of $25 million ($17 million, net of income tax) which is reported as other expense in the statement of operations.
 
f) Capital Re LLC monthly income preferred securities
In 1994, ACE Financial Services, through Capital Re LLC, issued $75 million of company obligated, mandatorily redeemable preferred securities. Capital Re LLC exists solely for the purpose of issuing preferred and common shares. These securities pay monthly dividends at a rate of 7.65 percent per annum, are callable as of January 1999 at par and are mandatorily redeemable in January 2044. The Company has guaranteed all obligations of Capital Re LLC.
 
g) ACE INA trust preferred securities
In 1999, ACE Capital Trust I, a Delaware statutory business trust (ACE Capital Trust I) issued $100 million, 8.875 percent Trust Originated Preferred Securities (the “Trust Preferred Securities”). All of the common securities of ACE Capital Trust I (the “ACE Capital Trust I Common Securities”) are owned by ACE INA.
The Trust Preferred Securities mature on December 31, 2029. The maturity date may be extended for one or more periods but not later than December 31, 2048. Distributions on the Trust Preferred Securities are payable quarterly at a rate of 8.875 percent. ACE Capital Trust I may defer these payments for up to 20 consecutive quarters (but no later than December 31, 2029, unless the maturity date is extended). Any deferred payments would accrue interest quarterly on a compounded basis if ACE INA defers interest on the subordinated debentures (as defined below).
The sole assets of ACE Capital Trust I consist of $103,092,800 principal amount of 8.875 percent Junior Subordinated Deferrable Interest Debentures (the “Subordinated Debentures”) issued by ACE INA. The Subordinated Debentures mature on December 31, 2029. Interest on the Subordinated Debentures is payable quarterly at a rate of 8.875 percent. ACE INA may defer such interest payments (but no later than December 31, 2029, unless the maturity date is extended), with such deferred payments accruing interest compounded quarterly. ACE INA may redeem the Subordinated Debentures at 100 percent of the principal amount thereof, plus accrued and unpaid interest to the redemption date, in whole or in part, at any time on or after December 31, 2004, and in whole but not in part prior to December 31, 2004, in the event certain changes in tax or investment company law occur. The Trust Preferred Securities and the ACE Capital Trust I Common Securities will be redeemed upon repayment of the Subordinated Debentures.
The Company has guaranteed, on a subordinated basis, ACE INA’s obligations under the Subordinated Debentures and distributions and other payments due on the Trust Preferred Securities. These guarantees, when taken together with the Company’s obligations under an expense agreement entered into with ACE Capital Trust I, provide a full and unconditional guarantee of amounts due on the Trust Preferred Securities.
 
h) ACE INA capital securities
In 2000, ACE Capital Trust II, a Delaware statutory business trust (ACE Capital Trust II), issued and sold in a public offering $300 million, 9.7 percent Capital Securities (the “Capital Securities”). All of the common securities of ACE Capital Trust II (the “ACE Capital Trust II Common Securities”) are owned by ACE INA.
The Capital Securities mature on April 1, 2030, which may not be extended. Distributions on the Capital Securities are payable semi-annually. ACE Capital Trust II may defer these payments for up to ten consecutive semi-annual periods (but no later than April 1, 2030). Any deferred payments would accrue interest semi-annually on a compounded basis if ACE INA defers interest on the Subordinated Debentures due 2030 (as defined below).
 
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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
The sole assets of ACE Capital Trust II consist of $309,280,000 principal amount of 9.7 percent Junior Subordinated Deferrable Interest Debentures (the “Subordinated Debentures due 2030”) issued by ACE INA. The Subordinated Debentures due 2030 mature on April 1, 2030. Interest on the Subordinated Debentures due 2030 is payable semi-annually. ACE INA may defer such interest payments (but no later than April 1, 2030), with such deferred payments accruing interest compounded semi-annually. ACE INA may redeem the Subordinated Debentures due 2030 in the event certain changes in tax or investment company law occur at a redemption price equal to accrued and unpaid interest to the redemption date plus the greater of (i) 100 percent of the principal amount thereof, or (ii) the sum of the present value of scheduled payments of principal and interest on the debentures from the redemption date to April 1, 2030. The Capital Securities and the ACE Capital Trust II Common Securities will be redeemed upon repayment of the Subordinated Debentures due 2030.
The Company has guaranteed, on a subordinated basis, ACE INA’s obligations under the Subordinated Debentures due 2030, and distributions and other payments due on the Capital Securities. These guarantees, when taken together with the Company’s obligations under expense agreements entered into with ACE Capital Trust II, provide a full and unconditional guarantee of amounts due on the Capital Securities.
 
9. Mezzanine equity
In 2000, the Company publicly offered and issued 6,221,000 FELINE PRIDES for aggregate net proceeds of $311 million. Each FELINE PRIDE initially consisted of a unit referred to as an Income PRIDE. Each Income PRIDE consisted of (i) one 8.25 percent Cumulative Redeemable Preferred Share, Series A, liquidation preference $50 per share, and (ii) a purchase contract pursuant to which the holder of the Income PRIDE agreed to purchase from the Company, on May 16, 2003, $311 million of Ordinary Shares at the applicable settlement rate. On May 16, 2003, the Company issued approximately 11.8 million Ordinary Shares, in satisfaction of the purchase contracts underlying its FELINE PRIDES. In consideration, on June 16, 2003, all of its 8.25 percent Cumulative Redeemable Preferred Shares, Series A, were redeemed at a rate representing an issuance of 1.8991 Ordinary Shares per preferred share.
 
10. Preferred shares
On May 30, 2003, the Company sold in a public offering 20 million depositary shares, each representing one-tenth of one of its 7.80 percent Cumulative Redeemable Preferred Shares, for $25 per depositary share. Underwriters exercised their over-allotment option, which resulted in the issuance of an additional three million depositary shares. Gross proceeds from the sale of the preferred shares were $575 million and related expenses were $18 million.
The shares have an annual dividend rate of 7.80 percent with the first quarterly dividend paid on September 1, 2003. The shares will not be convertible into or exchangeable for the Company’s Ordinary Shares. The Company may redeem these shares at any time after May 30, 2008 at a redemption value of $25 per depositary share or at any time under certain limited circumstances.
 
11. Shareholders’ equity
 
a) Shares issued and outstanding
Following is a table of changes in Ordinary Shares issued and outstanding for the years ended December 31, 2003, 2002 and 2001:

 	  	2003	 	 	2002	 	 	2001	 	
	 	
Opening balance	  	262,679,356	 	 	259,861,205	 	 	232,346,579	 	
Shares issued, net	  	12,713,143	 	 	332,547	 	 	32,415,912	 	
Exercise of stock options	  	4,215,968	 	 	2,232,985	 	 	1,648,326	 	
Shares issued under Employee Stock Purchase Plan	  	288,726	 	 	252,619	 	 	211,288	 	
Repurchase of shares	  	–	 	 	–	 	 	(6,760,900	)	
	 	
 	  	279,897,193	 	 	262,679,356	 	 	259,861,205	 	
	 	
Ordinary Shares issued to employee trust	  	 	 	 	 	 	 	 	 	
Opening balance	  	(756,475	)	 	(713,475	)	 	(661,125	)	
Shares redeemed (issued)	  	67,800	 	 	(43,000	)	 	(52,350	)	
	 	
 	  	(688,675	)	 	(756,475	)	 	(713,475	)	

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Table of Contents
 
NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
In May 2003, the Company issued 11,814,274 Ordinary Shares, in satisfaction of the purchase contracts underlying its FELINE PRIDES. In 2003, under the terms of the Company’s long-term incentive plans, 1,726,407 restricted Ordinary Shares were issued to officers and directors of the Company and 827,538 Ordinary Shares were cancelled. In 2002, 887,000 restricted Ordinary Shares of the Company were issued and 554,453 were cancelled in connection with the Company’s long-term incentive plans. In October 2001, the Company completed a public offering of 32.89 million Ordinary Shares (which included the over-allotment option of 4.29 million shares) in which it raised aggregate net proceeds of approximately $1.1 billion. The Company used the net proceeds of the Ordinary Share offering to expand its net underwriting capacity and for general corporate purposes. In addition, 474,088 Ordinary Shares of the Company were cancelled in connection with the Company’s long-term incentive plans during 2001.
Ordinary Shares issued to employee trust are the shares issued by the Company to a rabbi trust for deferred compensation obligations (see Note 12e).
 
b) ACE Limited securities repurchase authorization
In November 2001, the Board of Directors authorized the repurchase of any ACE issued debt or capital securities, including ACE’s Ordinary Shares, up to an aggregate total of $250 million. These purchases may take place from time to time in the open market or in private purchase transactions. At December 31, 2003, this authorization had not been utilized. During 2001, the Company repurchased and cancelled 6,760,900 Ordinary Shares under a previous repurchase authorization for an aggregate cost of $179.4 million.
 
c) General restrictions
The holders of the Ordinary Shares are entitled to receive dividends and are allowed one vote per share provided that, if the controlled shares of any shareholder constitute 10 percent or more of the outstanding Ordinary Shares of the Company, only a fraction of the vote will be allowed so as not to exceed 10 percent. Generally, the Company’s directors have absolute discretion to decline to register any transfer of shares. All transfers are subject to the restriction that they may not increase to 10 percent or higher the proportion of issued Ordinary Shares owned by any shareholder.
 
d) Dividends declared
Dividends declared on Ordinary Shares amounted to $0.74, $0.66 and $0.58 per Ordinary Share for the years ended December 31, 2003, 2002 and 2001, respectively. Dividends declared on Mezzanine equity amounted to $9.8 million for the year ended December 31, 2003, and $26 million for the years ended December 31, 2002 and 2001. Dividends declared on preferred shares amounted to $23 million for the year ended December 31, 2003.
 
12. Employee benefit plans
 
a) Pension plans
The Company provides pension benefits to eligible employees and their dependents through various defined contribution plans and defined benefit plans sponsored by the Company. The defined contribution plans include a capital accumulation plan (401(K)) in the United States. The defined benefit plans consist of various plans offered in certain jurisdictions outside of the United States and Bermuda.
 
Defined contribution plans (including (401(k))
Under these plans, employees’ contributions may be supplemented by ACE matching contributions based on the level of employee contribution. These contributions are invested at the election of each employee in one or more of several investment portfolios offered by a third party investment advisor. In addition, the Company may provide additional matching contributions, depending on its annual financial performance. Expenses for these plans totaled $54 million, $43 million and $39 million for the years ended December 31, 2003, 2002 and 2001, respectively.
 
Defined benefit plans
The Company maintains non-contributory defined benefit plans that cover certain foreign employees, principally located in Europe and Asia. The Company does not provide any such plans to U.S. employees. Benefits under these plans are based on employees’ years of service and compensation during final years of service. All underlying defined benefit plans are subject to periodic actuarial valuation by qualified local actuarial firms. The Company funds the plans at the amount required by FAS No. 87, “Employers’ Accounting for Pensions” (FAS 87). The accumulated benefit obligation is compared to plan assets, both as defined in FAS 87, and any resulting deficiency is recorded as a liability.
 
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Table of Contents
 
NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
During 2003, the Company obtained detailed actuarial valuations for certain foreign plans that had not been included in the 2002 disclosure. To be consistent with the 2003 disclosure, previously reported disclosures for 2002 have been updated to include these plans. The status of the defined benefit pension plans at December 31, 2003 and 2002 is as follows:

(in thousands of U.S. dollars)	 	2003	 	 	2002	 	
	 	
Change in projected benefit obligation	 	 	 	 	 	 	 	 	
Projected benefit obligation, at beginning of year	 	$	290,364	 	 	$	247,338	 	
Service cost	 	 	5,418	 	 	 	6,766	 	
Interest cost	 	 	15,231	 	 	 	15,039	 	
Actuarial (gain) loss	 	 	(703	)	 	 	4,517	 	
Benefits paid	 	 	(12,184	)	 	 	(8,512	)	
Foreign currency losses	 	 	28,888	 	 	 	24,339	 	
Plan amendments	 	 	358	 	 	 	783	 	
Plan participants’ contributions	 	 	106	 	 	 	94	 	
	 	
Projected benefit obligation, at end of year	 	$	327,478	 	 	$	290,364	 	
	 	
Change in plan assets	 	 	 	 	 	 	 	 	
Fair value of plan assets, at beginning of year	 	$	160,839	 	 	$	173,607	 	
Actual return on plan assets	 	 	22,502	 	 	 	(27,274	)	
Employer contribution	 	 	10,719	 	 	 	7,612	 	
Benefits paid	 	 	(12,184	)	 	 	(8,512	)	
Foreign currency gains	 	 	17,132	 	 	 	15,312	 	
Plan participants’ contributions	 	 	106	 	 	 	94	 	
	 	
Fair value of plan assets, at end of year	 	$	199,114	 	 	$	160,839	 	
	 	
Reconciliation of funded status	 	 	 	 	 	 	 	 	
Funded status	 	$	(128,364	)	 	$	(129,525	)	
Unrecognized net actuarial loss	 	 	79,760	 	 	 	85,753	 	
Unrecognized past service	 	 	1,070	 	 	 	719	 	
Unrecognized transition asset	 	 	122	 	 	 	122	 	
	 	
Prepaid (accrued) benefit cost	 	$	(47,412	)	 	$	(42,931	)	
	 	
Amounts recognized in the consolidated balance sheets	 	 	 	 	 	 	 	 	
Prepaid benefit cost	 	$	21,369	 	 	$	20,681	 	
Accrued benefit liability	 	 	(68,781	)	 	 	(63,612	)	
Intangible asset	 	 	1,142	 	 	 	–	 	
Additional minimum liability	 	 	(55,524	)	 	 	–	 	
Accumulated other comprehensive income	 	 	54,382	 	 	 	–	 	
	 	
Prepaid (accrued) benefit cost	 	$	(47,412	)	 	$	(42,931	)	
	 	
Components of net benefit cost	 	 	 	 	 	 	 	 	
Service cost	 	$	5,418	 	 	$	6,766	 	
Interest cost	 	 	15,231	 	 	 	15,039	 	
Expected return on plan assets	 	 	(11,898	)	 	 	(15,339	)	
Amortization of net transition asset	 	 	6	 	 	 	6	 	
Amortization of prior service cost	 	 	97	 	 	 	13	 	
Amortization of net actuarial loss	 	 	6,013	 	 	 	153	 	
	 	
Net benefit cost	 	$	14,867	 	 	$	6,638	 	

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Table of Contents
 
NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
The following are the key assumptions used in the actuarial determination of the projected benefit obligation and net benefit cost:

 	  	2003	  	2002	
	
Weighted-average assumptions as of December 31	  	 	  	 	
Discount rate	  	4.84%	  	5.22%	
Expected rate of return on plan assets	  	6.69%	  	6.86%	
Rate of future compensation increase	  	4.40%	  	3.36%	
 
b) Options and stock appreciation rights
In February 1996 and November 1998, shareholders of the Company approved the ACE Limited 1995 Long-Term Incentive Plan and the ACE Limited 1998 Long-Term Incentive Plan, respectively (the “Incentive Plans”), which incorporate stock options, stock appreciation rights, restricted stock awards and stock purchase programs. At December 31, 2003, there were 6.9 million Ordinary Shares of the Company available for award under these Incentive Plans. Prior to the adoption of the Incentive Plans, the Company adopted the Equity Linked Incentive Plan, which incorporated both a Stock Appreciation Rights Plan and a Stock Option Plan (Option Plan) which will continue to run off. Under the Option Plan, generally, options expire ten years after the award date and are subject to a vesting period of four years. Stock options granted under the Incentive Plan may be exercised for Ordinary Shares of the Company upon vesting. Under the Incentive Plans, generally, options expire ten years after the award date and vest in equal portions over three years.
During 1999, the Company established the ACE Limited 1999 Replacement Stock Plan. This plan was established to replace existing Capital Re employee benefits in connection with the Capital Re acquisition, as well as to permit additional grants to employees of the Company. The Company may grant options, stock appreciation rights, stock units, performance shares, performance units, restricted stock and restricted stock units. Any such award shall be subject to such conditions, restrictions and contingencies as the Company determines. At December 31, 2003, two million Ordinary Shares were available for grant under this plan.
Following is a summary of options issued and outstanding for the years ended December 31, 2003, 2002 and 2001.

 	 	Year of Expiration	 	Average
Exercise Price	 	Options for
Ordinary Shares	 	
	 	
Balance at December 31, 2000	 	 	 	 	 	 	15,896,800	 	
Options granted	 	2011	 	$	35.63	 	3,821,615	 	
Options exercised	 	2002-2010	 	$	37.87	 	(1,648,326	)	
Options forfeited	 	2004-2011	 	$	26.28	 	(999,459	)	
	 	
Balance at December 31, 2001	 	 	 	 	 	 	17,070,630	 	
Options granted	 	2012	 	$	42.57	 	5,220,693	 	
Options exercised	 	2003-2012	 	$	40.01	 	(2,232,985	)	
Options forfeited	 	2006-2012	 	$	33.22	 	(746,051	)	
	 	
Balance at December 31, 2002	 	 	 	 	 	 	19,312,287	 	
Options granted	 	2013	 	$	28.13	 	4,021,112	 	
Options exercised	 	2003-2012	 	$	34.85	 	(4,215,968	)	
Options forfeited	 	2003-2013	 	$	37.98	 	(726,295	)	
	 	
Balance at December 31, 2003	 	 	 	 	 	 	18,391,136	 	

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Table of Contents
 
NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
The following table summarizes the range of exercise prices for outstanding options at December 31, 2003.

Range of Exercise
Prices	 	Options
Outstanding	 	Weighted
Average
Remaining
Contractual
Life	 	Weighted
Average
Exercise Price	 	Options
Exercisable	 	Weighted
Average
Exercise Price	
	
$ 7.63 – $15.00	 	743,003	 	1.61 years	 	$	10.84	 	743,003	 	$	10.84	
$15.00 – $30.00	 	9,317,007	 	6.49 years	 	$	24.78	 	5,813,799	 	$	23.09	
$30.00 – $43.90	 	8,331,126	 	7.77 years	 	$	39.69	 	3,675,406	 	$	38.68	
 	 	18,391,136	 	 	 	 	 	 	10,232,208	 	 	 	

c) Employee stock purchase plan
The Company maintains an employee stock purchase plan (ESPP). Participation in the plan is available to all eligible employees. Maximum annual purchases by participants are limited to the number of whole shares that can be purchased by an amount equal to 10 percent of the participant’s compensation or $25,000, whichever is less. Participants may purchase shares at a purchase price equal to 85 percent of the lesser of (i) the fair market value of the stock on first day of the subscription period; or (ii) the fair market value of the stock on the last day of the subscription period. Pursuant to the provisions of the ESPP, during 2003, 2002 and 2001, employees paid $7.3 million, $7.5 million and $6.1 million, respectively to purchase 288,726 shares, 252,619 shares and 211,288 shares respectively.
 
d) Restricted stock awards
Under the Company’s long-term incentive plans 1,720,589 restricted Ordinary Shares were awarded during the year ended December 31, 2003, to officers of the Company and its subsidiaries. These shares vest at various dates through December 2007. In addition, during the year, 11,165 restricted Ordinary Shares were awarded to outside directors under the terms of the 1995 Outside Director Plan. These shares vest in May 2004.
Under the Company’s long-term incentive plans 881,142 restricted Ordinary Shares were awarded during the year ended December 31, 2002, to officers of the Company and its subsidiaries. These shares vest at various dates through December 2006. In addition, during 2002, 12,588 restricted Ordinary Shares were awarded to outside directors under the terms of the 1995 Outside Director Plan. These shares vested in May 2003.
At the time of grant the market value of the shares awarded under these grants is recorded as unearned stock grant compensation and is presented as a separate component of shareholders’ equity. The unearned compensation is charged to income over the vesting period using the accelerated method.
 
e) Deferred compensation obligation
The Company maintains a rabbi trust for deferred compensation plans for key employees and executive officers. In accordance with EITF 97-14, “Accounting for Deferred Compensation Agreements Where Amounts Earned are Held in a Rabbi Trust and Invested”, assets of the rabbi trust are to be consolidated with those of the employer, and the value of the employer’s stock held in the rabbi trust should be classified in shareholders’ equity and accounted for at historical cost in a manner similar to treasury stock. The shares issued by the Company to the rabbi trust are recorded in Ordinary Shares issued to employee trust and the obligation has been recorded in deferred compensation obligation. Both are components of shareholders’ equity.
 
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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
13. Earnings per share
The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2003, 2002 and 2001:

(in thousands of U.S. dollars, except share and per share data)	 	2003	 	 	2002	 	 	2001	 	
	 	
Numerator:	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss) before cumulative effect of adopting a new accounting standard	 	$	1,417,482	 	 	$	76,549	 	 	$	(123,744	)	
Dividends on Mezzanine equity	 	 	(9,773	)	 	 	(25,662	)	 	 	(25,594	)	
Dividends on Preferred Shares	 	 	(26,236	)	 	 	–	 	 	 	–	 	
	 	
Net income (loss) available to holders of Ordinary Shares before cumulative effect	 	 	1,381,473	 	 	 	50,887	 	 	 	(149,338	)	
Cumulative effect of adopting a new accounting standard	 	 	–	 	 	 	–	 	 	 	(22,670	)	
	 	
Net income (loss) available to holders of Ordinary Shares	 	$	1,381,473	 	 	$	50,887	 	 	$	(172,008	)	
	 	
Denominator:	 	 	 	 	 	 	 	 	 	 	 	 	
Denominator for basic earnings (loss) per share:	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average shares outstanding	 	 	270,620,114	 	 	 	260,535,836	 	 	 	233,799,588	 	
Dilutive effect of Mezzanine equity	 	 	–	 	 	 	2,874,870	 	 	 	–	 	
Effect of other dilutive securities	 	 	5,035,855	 	 	 	6,459,317	 	 	 	–	 	
	 	
Denominator for diluted earnings (loss) per share: Adjusted weighted average shares outstanding and assumed conversions	 	 	275,655,969	 	 	 	269,870,023	 	 	 	233,799,588	 	
	 	
Basic earnings (loss) per share:	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings (loss) per share before cumulative effect of adopting a new accounting standard	 	$	5.10	 	 	$	0.19	 	 	$	(0.64	)	
	 	
Earnings (loss) per share	 	$	5.10	 	 	$	0.19	 	 	$	(0.74	)	
	 	
Diluted earnings (loss) per share:	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings (loss) per share before cumulative effect of adopting a new accounting standard	 	$	5.01	 	 	$	0.19	 	 	$	(0.64	)	
	 	
Earnings (loss) per share	 	$	5.01	 	 	$	0.19	 	 	$	(0.74	)	

The denominator for diluted loss per share for the year ended December 31, 2001 does not include the dilutive effect of FELINE PRIDES and other dilutive securities. The incremental shares from assumed conversions are not included in computing diluted loss per share amounts as these shares are considered anti-dilutive. The dilutive effect of FELINE PRIDES for the year ended December 31, 2001 is 3,180,571 shares. Other dilutive securities totaled 8,085,418 shares for the year ended December 31, 2001.
 
14. Taxation
Under current Cayman Islands law, the Company is not required to pay any taxes in the Cayman Islands on its income or capital gains. The Company has received an undertaking that, in the event of any taxes being imposed, the Company will be exempted from taxation in the Cayman Islands until the year 2013. Under current Bermuda law, the Company and its Bermuda subsidiaries are not required to pay any taxes in Bermuda on its income or capital gains. The Company has received an undertaking from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, the Company will be exempt from taxation in Bermuda until March 2016.
Income from the Company’s operations at Lloyd’s is subject to United Kingdom corporation taxes. Lloyd’s is required to pay U.S. income tax on U.S. connected income (U.S. income) written by Lloyd’s syndicates. Lloyd’s has a closing agreement with the IRS whereby the amount of tax due on this business is calculated by Lloyd’s and remitted directly to the IRS. These amounts are then charged to the personal accounts of the Names/Corporate Members in proportion to their participation in the relevant syndicates. The Company’s Corporate Members are subject to this arrangement but, as U.K. domiciled companies, will receive U.K. corporation tax credits for any U.S. income tax incurred up to the value of the equivalent U.K. corporation income tax charge on the U.S. income.
ACE Prime Holdings and ACE Cap Re USA Holdings, and their respective subsidiaries are subject to income taxes imposed by U.S. authorities and file U.S. tax returns. Should the U.S. subsidiaries pay a dividend to the Company, withholding taxes will apply. Certain international operations of the Company are also subject to income taxes imposed by the jurisdictions in which they operate.
 
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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
The Company is not subject to taxation other than as stated above. There can be no assurance that there will not be changes in applicable laws, regulations or treaties, which might require the Company to change the way it operates or become subject to taxation.
The income tax provision for the years ended December 31, 2003, 2002 and 2001 is as follows:

(in thousands of U.S. dollars)	 	2003	 	2002	 	 	2001	 	
	 	
Current tax expense	 	$	72,297	 	$	29,432	 	 	$	39,384	 	
Deferred tax expense (benefit)	 	 	206,050	 	 	(145,120	)	 	 	(118,058	)	
	 	
Provision for income taxes	 	$	278,347	 	$	(115,688	)	 	$	(78,674	)	

The weighted average expected tax provision has been calculated using pre-tax accounting income (loss) in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate. A reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average tax rate for the years ended December 31, 2003, 2002 and 2001, is provided below.

(in thousands of U.S. dollars)	 	2003	 	 	2002	 	 	2001	 	
	 	
Expected tax provision at weighted average rate	 	$	274,624	 	 	$	(121,639	)	 	$	(92,276	)	
Permanent differences	 	 	 	 	 	 	 	 	 	 	 	 	
Tax-exempt interest	 	 	(16,018	)	 	 	(16,917	)	 	 	(15,234	)	
Other	 	 	3,334	 	 	 	9,166	 	 	 	(8,570	)	
Goodwill	 	 	2,110	 	 	 	–	 	 	 	23,113	 	
Net withholding taxes	 	 	14,297	 	 	 	13,702	 	 	 	14,293	 	
	 	
Total provision for income taxes	 	$	278,347	 	 	$	(115,688	)	 	$	(78,674	)	

The components of the net deferred tax asset as of December 31, 2003 and 2002 are as follows:

(in thousands of U.S. dollars)	 	2003	 	2002	
	
Deferred tax assets	 	 	 	 	 	 	
Loss reserve discount	 	$	518,443	 	$	500,061	
Unearned premium reserve	 	 	114,521	 	 	94,566	
Foreign tax credits	 	 	204,052	 	 	133,811	
Investments	 	 	92,898	 	 	123,410	
Bad debts	 	 	152,619	 	 	177,197	
Net operating loss carryforward	 	 	412,469	 	 	518,879	
Other	 	 	107,593	 	 	222,924	
	
Total deferred tax assets	 	 	1,602,595	 	 	1,770,848	
	
Deferred tax liabilities	 	 	 	 	 	 	
Deferred policy acquisition costs	 	 	163,199	 	 	148,811	
Unrealized appreciation on investments	 	 	174,547	 	 	159,090	
Other	 	 	39,452	 	 	39,372	
	
Total deferred tax liabilities	 	 	377,198	 	 	347,273	
	
Valuation allowance	 	 	135,592	 	 	135,592	
	
Net deferred tax asset	 	$	1,089,805	 	$	1,287,983	

The valuation allowance of $135.6 million at December 31, 2003 and 2002, reflects management’s assessment, based on available information, that it is more likely than not that a portion of the deferred tax asset will not be realized due to the inability of certain foreign subsidiaries to generate sufficient taxable income. Adjustments to the valuation allowances are made when there is a change in management’s assessment of the amount of deferred tax asset that is realizable.
 
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NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
At December 31, 2003, the Company has net operating loss carryforwards for U.S. federal income tax purposes of approximately $1.2 billion. The net operating loss carryforwards are available to offset future U.S. federal taxable income and, if unutilized, will expire in the years 2018-2022.
 
15. Statutory financial information
The Company’s insurance and reinsurance subsidiaries are subject to insurance laws and regulations in the jurisdictions in which they operate. These regulations include restrictions that limit the amount of dividends or other distributions, such as loans or cash advances, available to shareholders without prior approval of the insurance regulatory authorities. Statutory capital and surplus of the Bermuda subsidiaries was $3.6 billion at December 31, 2003 and $3.1 billion at December 31, 2002 and 2001. Statutory net income (loss) was $722 million, $486 million and $(24) million for the years ended December 31, 2003, 2002 and 2001, respectively.
There are no statutory restrictions on the payment of dividends from retained earnings by any of the Bermuda subsidiaries as the minimum statutory capital and surplus requirements are satisfied by the share capital and additional paid-in capital of each of the Bermuda subsidiaries.
The Company’s U.S. subsidiaries file financial statements prepared in accordance with statutory accounting practices prescribed or permitted by insurance regulators. In 1998, the National Association of Insurance Commissioners (NAIC) adopted the Codification of Statutory Accounting Principles guidance (the Codification), which replaces the current Accounting Practices and Procedures manual as the NAIC’s primary guidance on statutory accounting as of January 1, 2001. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas. All states and Puerto Rico have adopted the Codification guidance, effective January 1, 2001.
Statutory accounting differs from generally accepted accounting policies in the reporting of certain reinsurance contracts, investments, subsidiaries, acquisition expenses, fixed assets, deferred income taxes and certain other items. As permitted by a state insurance department, certain of the Company’s U.S. subsidiaries discount certain asbestos-related and environmental pollution liabilities, which increase statutory surplus by approximately $183 million and $230 million as December 31, 2003 and 2002, respectively. In addition, one U.S. subsidiary is permitted to include in admitted assets an intercompany loan guaranteed by the parent company which serves to increase statutory surplus by approximately $129 million in 2003. Combined statutory surplus of the Company’s U.S. subsidiaries was $2.7 billion, $2.1 billion and $2.1 billion at December 31, 2003, 2002 and 2001, respectively. The combined statutory net income (loss) of these operations was $434 million, $(86) million and $150 million for the years ended December 31, 2003, 2002 and 2001, respectively. The statutory surplus of the U.S. subsidiaries met regulatory requirements.
The Company’s international subsidiaries prepare statutory financial statements based on local laws and regulations. Some jurisdictions impose complex regulatory requirements on insurance companies while other jurisdictions impose fewer requirements. In some countries, the Company must obtain licenses issued by governmental authorities to conduct local insurance business. These licenses may be subject to reserves and minimum capital and solvency tests. Jurisdictions may impose fines, censure, and/or impose criminal sanctions for violation of regulatory requirements.
 
16. Information provided in connection with outstanding debt of subsidiaries
The following tables present the condensed consolidating financial information for ACE Limited (the “Parent Guarantor”), ACE INA Holdings, Inc. and ACE Financial Services, Inc. (formerly Capital Re Corporation), (the “Subsidiary Issuers”) at December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001. The Subsidiary Issuers are direct or indirect wholly-owned subsidiaries of the Parent Guarantor. Investments in subsidiaries are accounted for by the Parent Guarantor and the Subsidiary Issuers under the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are reflected in the Parent Guarantor’s investment accounts and earnings. The Parent Guarantor fully and unconditionally guarantees certain of the debt of the Subsidiary Issuers (see Note 8).
 
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Table of Contents
 
NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
Condensed Consolidating Balance Sheet at December 31, 2003

(in thousands of U.S. dollars)	 	ACE Limited
(Parent Co.
Guarantor)	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)	 	 	ACE Financial
Services, Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	Consolidating
Adjustments (2)	 	 	ACE Limited
Consolidated	
	
Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total investments and cash	 	$	44,163	 	$	10,518,902	 	 	$	1,208,081	 	 	$	12,236,703	 	 	$	–	 	 	$	24,007,849	
Insurance and reinsurance balances receivable	 	 	–	 	 	2,015,186	 	 	 	28,433	 	 	 	792,997	 	 	 	–	 	 	 	2,836,616	
Reinsurance recoverable	 	 	–	 	 	12,055,309	 	 	 	–	 	 	 	2,025,407	 	 	 	–	 	 	 	14,080,716	
Goodwill	 	 	–	 	 	2,130,908	 	 	 	96,723	 	 	 	483,199	 	 	 	–	 	 	 	2,710,830	
Investments in subsidiaries	 	 	9,056,845	 	 	–	 	 	 	152,000	 	 	 	(152,000	)	 	 	(9,056,845	)	 	 	–	
Due from subsidiaries and affiliates, net	 	 	349,617	 	 	(17,929	)	 	 	(46,819	)	 	 	64,748	 	 	 	(349,617	)	 	 	–	
Other assets	 	 	53,430	 	 	4,526,075	 	 	 	181,774	 	 	 	1,155,503	 	 	 	–	 	 	 	5,916,782	
	
Total assets	 	$	9,504,055	 	$	31,228,451	 	 	$	1,620,192	 	 	$	16,606,557	 	 	$	(9,406,462	)	 	$	49,552,793	
	
Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Unpaid losses and loss expenses	 	$	–	 	$	18,996,890	 	 	$	110,259	 	 	$	8,047,689	 	 	$	–	 	 	$	27,154,838	
Unearned premiums	 	 	–	 	 	3,757,093	 	 	 	389,027	 	 	 	1,904,668	 	 	 	–	 	 	 	6,050,788	
Future policy benefits for life and annuity contracts	 	 	–	 	 	–	 	 	 	–	 	 	 	491,837	 	 	 	–	 	 	 	491,837	
Short-term debt	 	 	–	 	 	545,727	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	545,727	
Long-term debt	 	 	499,451	 	 	599,751	 	 	 	–	 	 	 	250,000	 	 	 	–	 	 	 	1,349,202	
Trust preferred securities	 	 	–	 	 	400,000	 	 	 	75,000	 	 	 	–	 	 	 	–	 	 	 	475,000	
Other liabilities	 	 	169,808	 	 	3,192,513	 	 	 	128,109	 	 	 	1,160,175	 	 	 	–	 	 	 	4,650,605	
	
Total liabilities	 	 	669,259	 	 	27,491,974	 	 	 	702,395	 	 	 	11,854,369	 	 	 	–	 	 	 	40,717,997	
	
Total shareholders’ equity	 	 	8,834,796	 	 	3,736,477	 	 	 	917,797	 	 	 	4,752,188	 	 	 	(9,406,462	)	 	 	8,834,796	
	
Total liabilities, mezzanine equity and shareholders’ equity	 	$	9,504,055	 	$	31,228,451	 	 	$	1,620,192	 	 	$	16,606,557	 	 	$	(9,406,462	)	 	$	49,552,793	

(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
 
F-43

Table of Contents
 
NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
Condensed Consolidating Balance Sheet at December 31, 2002

(in thousands of U.S. dollars)	 	ACE Limited
(Parent Co.
Guarantor)	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)	 	ACE Financial
Services, Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries and
Eliminations (1)	 	 	Consolidating
Adjustments (2)	 	 	ACE Limited
Consolidated	
	
Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total investments and cash	 	$	77,506	 	$	7,413,714	 	$	1,023,777	 	 	$	10,194,061	 	 	$	–	 	 	$	18,709,058	
Insurance and reinsurance balances receivable	 	 	–	 	 	1,729,439	 	 	28,252	 	 	 	896,299	 	 	 	–	 	 	 	2,653,990	
Reinsurance recoverable	 	 	–	 	 	11,616,228	 	 	11,420	 	 	 	2,363,805	 	 	 	–	 	 	 	13,991,453	
Goodwill	 	 	–	 	 	2,130,908	 	 	96,723	 	 	 	489,229	 	 	 	–	 	 	 	2,716,860	
Investments in subsidiaries	 	 	7,095,429	 	 	–	 	 	152,000	 	 	 	(152,000	)	 	 	(7,095,429	)	 	 	–	
Due from subsidiaries and affiliates, net	 	 	162,314	 	 	50,967	 	 	(49,681	)	 	 	(1,286	)	 	 	(162,314	)	 	 	–	
Other assets	 	 	42,703	 	 	4,235,625	 	 	210,477	 	 	 	1,393,790	 	 	 	–	 	 	 	5,882,595	
	
Total assets	 	$	7,377,952	 	$	27,176,881	 	$	1,472,968	 	 	$	15,183,898	 	 	$	(7,257,743	)	 	$	43,953,956	
	
Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Unpaid losses and loss expenses	 	$	–	 	$	17,057,979	 	$	75,960	 	 	$	7,181,243	 	 	$	–	 	 	$	24,315,182	
Unearned premiums	 	 	–	 	 	3,233,614	 	 	352,551	 	 	 	1,999,359	 	 	 	–	 	 	 	5,585,524	
Future policy benefits for life and annuity contracts	 	 	–	 	 	–	 	 	–	 	 	 	442,264	 	 	 	–	 	 	 	442,264	
Short-term debt	 	 	–	 	 	145,940	 	 	–	 	 	 	–	 	 	 	–	 	 	 	145,940	
Long-term debt	 	 	499,282	 	 	999,655	 	 	–	 	 	 	250,000	 	 	 	–	 	 	 	1,748,937	
Trust preferred securities	 	 	–	 	 	400,000	 	 	75,000	 	 	 	–	 	 	 	–	 	 	 	475,000	
Other liabilities	 	 	178,934	 	 	2,574,801	 	 	160,238	 	 	 	1,627,400	 	 	 	–	 	 	 	4,541,373	
	
Total liabilities	 	 	678,216	 	 	24,411,989	 	 	663,749	 	 	 	11,500,266	 	 	 	–	 	 	 	37,254,220	
Mezzanine equity	 	 	311,050	 	 	–	 	 	–	 	 	 	–	 	 	 	–	 	 	 	311,050	
Total shareholders’ equity	 	 	6,388,686	 	 	2,764,892	 	 	809,219	 	 	 	3,683,632	 	 	 	(7,257,743	)	 	 	6,388,686	
Total liabilities, mezzanine equity and shareholders’ equity	 	$	7,377,952	 	$	27,176,881	 	$	1,472,968	 	 	$	15,183,898	 	 	$	(7,257,743	)	 	$	43,953,956	

(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
 
F-44

Table of Contents
 
NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
Condensed Consolidating Statement of Operations

For the year ended December 31, 2003
(in thousands of U.S. dollars)	 	ACE Limited
(Parent Co.
Guarantor)	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)	 	 	ACE Financial
Services, Inc.
(Subsidiary
Issuer)	 	Other ACE
Limited
Subsidiaries and
Eliminations (1)	 	 	Consolidating
Adjustments (2)	 	 	ACE Limited
Consolidated	 	
	 	
Net premiums written	 	$	–	 	 	$	5,174,709	 	 	$	258,547	 	$	4,781,752	 	 	$	–	 	 	 	$10,215,008	 	
Net premiums earned	 	 	–	 	 	 	4,736,025	 	 	 	177,400	 	 	4,688,958	 	 	 	–	 	 	 	9,602,383	 	
Net investment income	 	 	18,441	 	 	 	364,902	 	 	 	47,179	 	 	449,583	 	 	 	(17,764	)	 	 	862,341	 	
Other income (expense)	 	 	–	 	 	 	(3,101	)	 	 	–	 	 	(24,161	)	 	 	–	 	 	 	(27,262	)	
Equity in earnings of subsidiaries	 	 	1,553,458	 	 	 	–	 	 	 	–	 	 	–	 	 	 	(1,553,458	)	 	 	–	 	
Net realized gains (losses)	 	 	(5,946	)	 	 	47,111	 	 	 	52,328	 	 	158,787	 	 	 	–	 	 	 	252,280	 	
Losses and loss expenses	 	 	–	 	 	 	3,309,348	 	 	 	56,706	 	 	2,751,348	 	 	 	–	 	 	 	6,117,402	 	
Life and annuity benefits	 	 	–	 	 	 	–	 	 	 	–	 	 	181,077	 	 	 	–	 	 	 	181,077	 	
Policy acquisition costs and administrative expenses	 	 	109,837	 	 	 	1,207,820	 	 	 	72,331	 	 	1,137,859	 	 	 	(9,838	)	 	 	2,518,009	 	
Interest expense	 	 	33,304	 	 	 	129,977	 	 	 	6,681	 	 	21,668	 	 	 	(14,205	)	 	 	177,425	 	
Income tax expense	 	 	5,330	 	 	 	169,817	 	 	 	40,374	 	 	62,826	 	 	 	–	 	 	 	278,347	 	
	 	
Net income (loss)	 	$	1,417,482	 	 	$	327,975	 	 	$	100,815	 	$	1,118,389	 	 	$	(1,547,179	)	 	$	1,417,482	 	

Condensed Consolidating Statement of Operations

For the year ended December 31, 2002
(in thousands of U.S. dollars)	 	ACE Limited
(Parent Co.
Guarantor)	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)	 	 	ACE Financial
Services, Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries and
Eliminations (1)	 	 	Consolidating
Adjustments (2)	 	 	ACE Limited
Consolidated	 	
	 	
Net premiums written	 	$	–	 	 	$	3,919,544	 	 	$	124,618	 	 	$	4,024,136	 	 	$	–	 	 	$	8,068,298	 	
Net premiums earned	 	 	–	 	 	 	3,216,854	 	 	 	112,421	 	 	 	3,501,229	 	 	 	–	 	 	 	6,830,504	 	
Net investment income	 	 	46,848	 	 	 	319,638	 	 	 	46,778	 	 	 	419,501	 	 	 	(30,624	)	 	 	802,141	 	
Other income (expense)	 	 	–	 	 	 	(28,362	)	 	 	–	 	 	 	7,810	 	 	 	–	 	 	 	(20,552	)	
Equity in earnings of subsidiaries	 	 	215,437	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	(215,437	)	 	 	–	 	
Net realized losses	 	 	(79,480	)	 	 	(161,691	)	 	 	(29,681	)	 	 	(218,237	)	 	 	–	 	 	 	(489,089	)	
Losses and loss expenses	 	 	–	 	 	 	2,775,631	 	 	 	24,512	 	 	 	2,106,367	 	 	 	–	 	 	 	4,906,510	 	
Life and annuity benefits	 	 	–	 	 	 	–	 	 	 	–	 	 	 	158,118	 	 	 	–	 	 	 	158,118	 	
Policy acquisition costs and administrative expenses	 	 	71,018	 	 	 	847,766	 	 	 	49,699	 	 	 	939,302	 	 	 	(3,764	)	 	 	1,904,021	 	
Interest expense	 	 	27,431	 	 	 	149,065	 	 	 	11,892	 	 	 	20,658	 	 	 	(15,552	)	 	 	193,494	 	
Income tax expense (benefit)	 	 	7,807	 	 	 	(155,871	)	 	 	5,908	 	 	 	26,468	 	 	 	–	 	 	 	(115,688	)	
	 	
Net income (loss)	 	$	76,549	 	 	$	(270,152	)	 	$	37,507	 	 	$	459,390	 	 	$	(226,745	)	 	$	76,549	 	

(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
 
F-45

Table of Contents
 
NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
Condensed Consolidating Statement of Operations
																									
For the year ended December 31, 2001
(in thousands of U.S. dollars)	  	ACE
Limited
(Parent Co.
Guarantor)	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)	 	 	ACE Financial
Services, Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries and
Eliminations (1)	 	 	Consolidating
Adjustments  (2)	 	 	ACE Limited
Consolidated	 	
	 	
Net premiums written	  	$	–	 	 	$	2,616,489	 	 	$	88,997	 	 	$	3,658,128	 	 	$	–	 	 	$	6,363,614	 	
Net premiums earned	  	 	–	 	 	 	2,498,169	 	 	 	77,662	 	 	 	3,341,346	 	 	 	–	 	 	 	5,917,177	 	
Net investment income	  	 	62,322	 	 	 	351,282	 	 	 	46,602	 	 	 	362,438	 	 	 	(36,775	)	 	 	785,869	 	
Other income (expense)	  	 	–	 	 	 	(1,078	)	 	 	–	 	 	 	1,530	 	 	 	–	 	 	 	452	 	
Equity in earnings of subsidiaries	  	 	(136,456	)	 	 	–	 	 	 	–	 	 	 	–	 	 	 	136,456	 	 	 	–	 	
Net realized gains (losses)	  	 	(13,524	)	 	 	(52,441	)	 	 	19,968	 	 	 	(12,362	)	 	 	–	 	 	 	(58,359	)	
Losses and loss expenses	  	 	–	 	 	 	1,970,727	 	 	 	22,854	 	 	 	2,558,875	 	 	 	–	 	 	 	4,552,456	 	
Life and annuity benefits	  	 	–	 	 	 	–	 	 	 	–	 	 	 	401,229	 	 	 	–	 	 	 	401,229	 	
Policy acquisition costs and administrative expenses	  	 	58,164	 	 	 	765,725	 	 	 	38,270	 	 	 	753,754	 	 	 	(794	)	 	 	1,615,119	 	
Interest expense	  	 	(7,753	)	 	 	179,505	 	 	 	14,013	 	 	 	20,492	 	 	 	(7,075	)	 	 	199,182	 	
Income tax expense (benefit)	  	 	8,345	 	 	 	(45,420	)	 	 	8,229	 	 	 	(49,828	)	 	 	–	 	 	 	(78,674	)	
Amortization of goodwill	  	 	–	 	 	 	57,960	 	 	 	4,205	 	 	 	17,406	 	 	 	–	 	 	 	79,571	 	
	 	
Income (loss) before cumulative effect of adopting a new accounting standard	  	 	(146,414	)	 	 	(132,565	)	 	 	56,661	 	 	 	(8,976	)	 	 	107,550	 	 	 	(123,744	)	
Cumulative effect of adopting a new accounting standard (net of income tax)	  	 	–	 	 	 	–	 	 	 	(22,800	)	 	 	130	 	 	 	–	 	 	 	(22,670	)	
	 	
Net income (loss)	  	$	(146,414	)	 	$	(132,565	)	 	$	33,861	 	 	$	(8,846	)	 	$	107,550	 	 	$	(146,414	)	

(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
 
F-46

Table of Contents
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 
ACE Limited and Subsidiaries
 
Condensed Consolidating Statement of Cash Flows

For the year ended December 31, 2003
(in thousands of U.S. dollars)	 	ACE Limited
(Parent Co.
Guarantor)	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)	 	 	ACE Financial
Services, Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	ACE Limited
Consolidated	 	
	 	
Net cash flows from (used for) operating activities	 	$	(160,168	)	 	$	2,174,533	 	 	$	196,156	 	 	$	2,014,045	 	 	$	4,224,566	 	
	 	
Cash flows from investing activities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Purchases of fixed maturities	 	 	(2,003	)	 	 	(7,351,386	)	 	 	(416,883	)	 	 	(12,725,029	)	 	 	(20,495,301	)	
Purchases of equity securities	 	 	–	 	 	 	(107,213	)	 	 	–	 	 	 	(57,161	)	 	 	(164,374	)	
Sales of fixed maturities	 	 	59,845	 	 	 	4,072,454	 	 	 	240,401	 	 	 	11,249,486	 	 	 	15,622,186	 	
Sales of equity securities	 	 	–	 	 	 	113,609	 	 	 	–	 	 	 	76,210	 	 	 	189,819	 	
Maturities of fixed maturities	 	 	–	 	 	 	–	 	 	 	3,000	 	 	 	124,532	 	 	 	127,532	 	
Net realized gains (losses) on investment derivatives	 	 	(6,265	)	 	 	–	 	 	 	–	 	 	 	40,429	 	 	 	34,164	 	
Capitalization of subsidiaries	 	 	(741,018	)	 	 	705,217	 	 	 	–	 	 	 	35,801	 	 	 	–	 	
Dividends received from subsidiaries	 	 	503,044	 	 	 	–	 	 	 	–	 	 	 	(503,044	)	 	 	–	 	
Other	 	 	–	 	 	 	82,505	 	 	 	–	 	 	 	(118,008	)	 	 	(35,503	)	
	 	
Net cash flows from (used for) investing activities	 	 	(186,397	)	 	 	(2,484,814	)	 	 	(173,482	)	 	 	(1,876,784	)	 	 	(4,721,477	)	
	 	
Cash flows from financing activities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends paid on Ordinary Shares	 	 	(198,395	)	 	 	 	 	 	 	 	 	 	 	–	 	 	 	(198,395	)	
Dividends paid on Mezzanine equity	 	 	(9,773	)	 	 	 	 	 	 	 	 	 	 	–	 	 	 	(9,773	)	
Dividends paid on Preferred Shares	 	 	(22,550	)	 	 	 	 	 	 	 	 	 	 	–	 	 	 	(22,550	)	
Net proceeds from issuance of Preferred Shares	 	 	556,687	 	 	 	 	 	 	 	–	 	 	 	 	 	 	 	556,687	 	
Repayment of short-term debt, net	 	 	–	 	 	 	(213	)	 	 	–	 	 	 	–	 	 	 	(213	)	
Advances to (from) affiliates	 	 	(23,744	)	 	 	 	 	 	 	(4,000	)	 	 	27,744	 	 	 	–	 	
Proceeds from exercise of options for Ordinary Shares	 	 	62,097	 	 	 	 	 	 	 	–	 	 	 	–	 	 	 	62,097	 	
Proceeds from Ordinary Shares issued under ESPP	 	 	7,353	 	 	 	 	 	 	 	–	 	 	 	–	 	 	 	7,353	 	
	 	
Net cash flows from (used for) financing activities	 	 	371,675	 	 	 	(213	)	 	 	(4,000	)	 	 	27,744	 	 	 	395,206	 	
	 	
Net increase (decrease) in cash	 	 	25,110	 	 	 	(310,494	)	 	 	18,674	 	 	 	165,005	 	 	 	(101,705	)	
Cash – beginning of year	 	 	2,150	 	 	 	478,161	 	 	 	4,438	 	 	 	178,606	 	 	 	663,355	 	
	 	
Cash – end of year	 	$	27,260	 	 	$	167,667	 	 	$	23,112	 	 	$	343,611	 	 	$	561,650	 	

(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
 
F-47

Table of Contents
 
NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
Condensed Consolidating Statement of Cash Flows

 
For the year ended December 31, 2002
(in thousands of U.S. dollars)	 	ACE Limited
(Parent Co.
Guarantor)	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)	 	 	ACE Financial
Services, Inc.
(Subsidiary
Issuer)	 	 	Other ACE
Limited
Subsidiaries and
Eliminations (1)	 	 	ACE Limited
Consolidated	 	
	 	
Net cash flows from (used for) operating activities	 	$	(175,655	)	 	$	(146,920	)	 	$	67,146	 	 	$	2,680,417	 	 	$	2,424,988	 	
	 	
Cash flows from investing activities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Purchases of fixed maturities	 	 	(53,613	)	 	 	(3,719,650	)	 	 	(651,029	)	 	 	(13,525,531	)	 	 	(17,949,823	)	
Purchases of equity securities	 	 	–	 	 	 	(85,164	)	 	 	–	 	 	 	(133,688	)	 	 	(218,852	)	
Sales of fixed maturities	 	 	399,456	 	 	 	3,106,157	 	 	 	577,428	 	 	 	11,865,380	 	 	 	15,948,421	 	
Sales of equity securities	 	 	–	 	 	 	67,884	 	 	 	–	 	 	 	95,140	 	 	 	163,024	 	
Maturities of fixed maturities	 	 	–	 	 	 	–	 	 	 	–	 	 	 	284,899	 	 	 	284,899	 	
Net realized gains (losses) on investment derivatives	 	 	–	 	 	 	–	 	 	 	–	 	 	 	(105,429	)	 	 	(105,429	)	
Settlement of an acquisition-related lawsuit	 	 	54,380	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	54,380	 	
Capitalization of subsidiaries	 	 	(1,314,676	)	 	 	1,280,691	 	 	 	100,000	 	 	 	(66,015	)	 	 	–	 	
Dividends received from subsidiaries	 	 	485,000	 	 	 	–	 	 	 	–	 	 	 	(485,000	)	 	 	–	 	
Other	 	 	–	 	 	 	(16,238	)	 	 	–	 	 	 	(101,985	)	 	 	(118,223	)	
	 	
Net cash flows from (used for) investing activities	 	 	(429,453	)	 	 	633,680	 	 	 	26,399	 	 	 	(2,172,229	)	 	 	(1,941,603	)	
	 	
Cash flows from financing activities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends paid on Ordinary Shares	 	 	(167,470	)	 	 	–	 	 	 	–	 	 	 	–	 	 	 	(167,470	)	
Dividends paid on Mezzanine equity	 	 	(25,662	)	 	 	–	 	 	 	–	 	 	 	–	 	 	 	(25,662	)	
Repayment of short-term debt, net	 	 	–	 	 	 	145,940	 	 	 	(100,000	)	 	 	(395,408	)	 	 	(349,468	)	
Proceeds from long-term debt, net	 	 	499,155	 	 	 	(100,000	)	 	 	–	 	 	 	–	 	 	 	399,155	 	
Repayment of trust preferred securities	 	 	–	 	 	 	(400,000	)	 	 	–	 	 	 	–	 	 	 	(400,000	)	
Advances to (from) affiliates	 	 	216,676	 	 	 	(9,866	)	 	 	9,866	 	 	 	(216,676	)	 	 	–	 	
Proceeds from exercise of options for Ordinary Shares	 	 	44,562	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	44,562	 	
Proceeds from Ordinary Shares issued under ESPP	 	 	7,472	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	7,472	 	
	 	
Net cash flows from (used for) financing activities	 	 	574,733	 	 	 	(363,926	)	 	 	(90,134	)	 	 	(612,084	)	 	 	(491,411	)	
	 	
Net increase (decrease) in cash	 	 	(30,375	)	 	 	122,834	 	 	 	3,411	 	 	 	(103,896	)	 	 	(8,026	)	
Cash – beginning of year	 	 	32,525	 	 	 	355,327	 	 	 	1,027	 	 	 	282,502	 	 	 	671,381	 	
	 	
Cash – end of year	 	$	2,150	 	 	$	478,161	 	 	$	4,438	 	 	$	178,606	 	 	$	663,355	 	

(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
 
F-48

Table of Contents
 
NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
Condensed Consolidating Statement of Cash Flows

For the year ended December 31, 2001
(in thousands of U.S. dollars)	 	ACE Limited
(Parent Co.
Guarantor)	 	 	ACE INA
Holdings, Inc.
(Subsidiary Issuer)	 	 	ACE Financial
Services, Inc.
(Subsidiary Issuer)	 	 	Other ACE
Limited
Subsidiaries and
Eliminations  (1)	 	 	ACE Limited
Consolidated	 	
	 	
Net cash flows from (used for) operating activities	 	$	113,428	 	 	$	(328,591	)	 	$	(51,649	)	 	$	1,619,817	 	 	$	1,353,005	 	
	 	
Cash flows from investing activities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Purchases of fixed maturities	 	 	(125,733	)	 	 	(2,153,163	)	 	 	(848,263	)	 	 	(13,720,761	)	 	 	(16,847,920	)	
Purchases of equity securities	 	 	–	 	 	 	(122,778	)	 	 	–	 	 	 	(88,158	)	 	 	(210,936	)	
Sales of fixed maturities	 	 	94,689	 	 	 	2,386,217	 	 	 	835,459	 	 	 	11,417,213	 	 	 	14,733,578	 	
Sales of equity securities	 	 	–	 	 	 	122,437	 	 	 	–	 	 	 	82,405	 	 	 	204,842	 	
Maturities of fixed maturities	 	 	–	 	 	 	–	 	 	 	4,500	 	 	 	40,429	 	 	 	44,929	 	
Net realized losses on investment derivatives	 	 	–	 	 	 	–	 	 	 	–	 	 	 	(21,976	)	 	 	(21,976	)	
Capitalization of subsidiaries	 	 	(1,101,000	)	 	 	111,000	 	 	 	–	 	 	 	990,000	 	 	 	–	 	
Dividends received from subsidiaries	 	 	338,873	 	 	 	–	 	 	 	–	 	 	 	(338,873	)	 	 	–	 	
Other	 	 	(1,009	)	 	 	(60,594	)	 	 	(7,337	)	 	 	(20,175	)	 	 	(89,115	)	
	 	
Net cash flows from (used for) investing activities	 	 	(794,180	)	 	 	283,119	 	 	 	(15,641	)	 	 	(1,659,896	)	 	 	(2,186,598	)	
	 	
Cash flows from financing activities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends paid on Ordinary Shares	 	 	(128,745	)	 	 	–	 	 	 	–	 	 	 	–	 	 	 	(128,745	)	
Dividends paid on Mezzanine equity	 	 	(25,666	)	 	 	–	 	 	 	–	 	 	 	–	 	 	 	(25,666	)	
Repurchase of Ordinary Shares	 	 	(179,446	)	 	 	–	 	 	 	–	 	 	 	–	 	 	 	(179,446	)	
Proceeds from short-term debt, net	 	 	–	 	 	 	(335,708	)	 	 	–	 	 	 	391,852	 	 	 	56,144	 	
Proceeds from issuance of Ordinary Shares, net	 	 	1,135,878	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	1,135,878	 	
Advances to (from) affiliates	 	 	(174,000	)	 	 	483,060	 	 	 	41,741	 	 	 	(350,801	)	 	 	–	 	
Proceeds from exercise of options for Ordinary Shares	 	 	32,666	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	32,666	 	
Proceeds from Ordinary Shares issued under ESPP	 	 	6,074	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	6,074	 	
	 	
Net cash flows from (used for) financing activities	 	 	666,761	 	 	 	147,352	 	 	 	41,741	 	 	 	41,051	 	 	 	896,905	 	
	 	
Net increase (decrease) in cash	 	 	(13,991	)	 	 	101,880	 	 	 	(25,549	)	 	 	972	 	 	 	63,312	 	
Cash – beginning of year	 	 	46,516	 	 	 	253,447	 	 	 	26,576	 	 	 	281,530	 	 	 	608,069	 	
	 	
Cash – end of year	 	$	32,525	 	 	$	355,327	 	 	$	1,027	 	 	$	282,502	 	 	$	671,381	 	

(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
 
F-49

Table of Contents
 
NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
17. Segment information
 
In 2002, following changes in executive management responsibilities, the Company reassessed and changed its reporting segments from individual operating units to lines of business. The Company now operates through four business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance and Financial Services. These segments distribute their products through various forms of brokers and agencies. Insurance – North American, Insurance – Overseas General and Global Reinsurance utilize direct marketing programs to reach clients, while Financial Services operates with major U.S. financial guaranty insurers, mortgage guaranty insurers in the U.S., U.K. and Australia, title insurers and European trade credit insurers. Additionally, Insurance – North American has formed Internet distribution channels for some of its products and Global Reinsurance and Financial Services have established relationships with reinsurance intermediaries.
The Insurance – North American segment includes the operations of ACE USA, ACE Canada and ACE Bermuda, excluding the financial solutions business in both the U.S. and Bermuda, which are included in the Financial Services segment. These operations provide a broad range of property and casualty insurance and reinsurance products, including excess liability, excess property, professional lines, aerospace, accident and health coverages and claim and risk management products and services, to a diverse group of commercial and non-commercial enterprises and consumers. The operations of ACE USA also include the run-off operations, which include Brandywine, Commercial Insurance Services, residual market workers’ compensation business, pools and syndicates not attributable to a single business group, the run-off of open market facilities and the run-off results of various other smaller exited lines of business. Run-off operations do not actively sell insurance products, but are responsible for the management of existing policies and related claims.
The Insurance – Overseas General segment consists of ACE International and the insurance operations of ACE Global Markets. ACE International includes ACE INA’s network of indigenous insurance operations, which were acquired in 1999. The segment has four regions of operations: ACE Asia Pacific, ACE Far East, ACE Latin America and the ACE European Group, (which comprises ACE Europe, ACE INA UK Limited and the insurance operations of ACE Global Markets). ACE Global Markets provides funds at Lloyd’s to support underwriting by the Lloyd’s syndicates managed by Lloyd’s managing agencies which are owned by the Company (including for segment purposes Lloyd’s operations owned by ACE Financial Services). The reinsurance operation of ACE Global Markets is included in the Global Reinsurance segment. Companies within the Insurance – Overseas General segment write a variety of insurance products including property, casualty, professional lines (D&O and E&O), marine, energy, aviation, political risk, consumer-oriented products and A&H – principally being supplemental accident.
The Global Reinsurance segment comprises ACE Tempest Re Bermuda, ACE Tempest Re USA and ACE Tempest Re Europe. These subsidiaries provide property catastrophe, casualty and property reinsurance. Global Reinsurance also includes the operations of ACE Tempest Life Re. The principal business of ACE Tempest Life Re is to provide reinsurance coverage to other life insurance companies.
The Financial Services segment includes the financial guaranty business of ACE Guaranty Corp. and ACE Capital Re International and the financial solutions business in the U.S. and Bermuda. The financial guaranty businesses serve the U.S. domestic and international financial guaranty insurance and reinsurance markets. Their principal business is the insurance and reinsurance of investment grade public finance and asset-backed debt issues (insured and ceded by the primary bond insurance companies), and insurance and reinsurance of credit-default swaps. In addition to financial guaranty business, the companies provide trade credit reinsurance and structured solutions to problems of financial and risk management through reinsurance and other forms of credit enhancement products, as well as mortgage guaranty reinsurance and title reinsurance. The financial solutions business includes insurance and reinsurance solutions to complex risks that generally cannot be adequately addressed by the traditional insurance marketplace. It consists of securitization and risk trading, finite and structured risk products, and retroactive contracts in the form of loss portfolio transfers.
 
a)    The following tables summarize the operations by segment for the years ended December 31, 2003, 2002 and 2001.
b)     For segment reporting purposes, certain items have been presented in a different manner than in the consolidated financial
statements.
 
F-50

Table of Contents
 
NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
Statement of Operations by Segment

For the year ended December 31, 2003
(in thousands of U.S. dollars) 	  	Insurance–
North
American	 	 	Insurance–
Overseas
General	 	 	Global
Reinsurance	  	Corporate and
Other (1)	 	 	Consolidated
Property &
Casualty (2)	 	 	Financial
Services	 	 	ACE
Consolidated	 	
	 	
Operations Data	  	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross premiums written	  	$	6,895,185	 	 	$	5,190,704	 	 	$	1,311,885	  	$	–	 	 	$	13,397,774	 	 	$	1,046,319	 	 	$	14,444,093	 	
Net premiums written	  	 	4,015,100	 	 	 	3,751,181	 	 	 	1,224,450	  	 	–	 	 	 	8,990,731	 	 	 	1,039,381	 	 	 	10,030,112	 	
Net premiums earned	  	 	3,653,394	 	 	 	3,563,397	 	 	 	1,100,268	  	 	–	 	 	 	8,317,059	 	 	 	1,101,371	 	 	 	9,418,430	 	
Losses and loss expenses	  	 	2,520,551	 	 	 	2,143,573	 	 	 	559,498	  	 	–	 	 	 	5,223,622	 	 	 	893,780	 	 	 	6,117,402	 	
Policy acquisition costs	  	 	386,759	 	 	 	682,455	 	 	 	211,174	  	 	–	 	 	 	1,280,388	 	 	 	60,676	 	 	 	1,341,064	 	
Administrative expenses	  	 	402,188	 	 	 	486,388	 	 	 	61,790	  	 	123,117	 	 	 	1,073,483	 	 	 	84,361	 	 	 	1,157,844	 	
	 	
Underwriting income (loss)	  	 	343,896	 	 	 	250,981	 	 	 	267,806	  	 	(123,117	)	 	 	739,566	 	 	 	62,554	 	 	 	802,120	 	
	 	
Life	  	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross premiums written	  	 	–	 	 	 	–	 	 	 	192,824	  	 	–	 	 	 	–	 	 	 	–	 	 	 	192,824	 	
Net premiums written	  	 	–	 	 	 	–	 	 	 	184,896	  	 	–	 	 	 	–	 	 	 	–	 	 	 	184,896	 	
Net premiums earned	  	 	–	 	 	 	–	 	 	 	183,953	  	 	–	 	 	 	–	 	 	 	–	 	 	 	183,953	 	
Life and annuity benefits	  	 	–	 	 	 	–	 	 	 	181,077	  	 	–	 	 	 	–	 	 	 	–	 	 	 	181,077	 	
Policy acquisition costs	  	 	–	 	 	 	–	 	 	 	15,874	  	 	–	 	 	 	–	 	 	 	–	 	 	 	15,874	 	
Administrative expenses	  	 	–	 	 	 	–	 	 	 	3,227	  	 	–	 	 	 	–	 	 	 	–	 	 	 	3,227	 	
Net investment income	  	 	–	 	 	 	–	 	 	 	33,540	  	 	–	 	 	 	–	 	 	 	–	 	 	 	33,540	 	
	 	
Underwriting income	  	 	–	 	 	 	–	 	 	 	17,315	  	 	–	 	 	 	–	 	 	 	–	 	 	 	17,315	 	
	 	
Net investment income	  	 	410,362	 	 	 	158,831	 	 	 	87,443	  	 	(29,596	)	 	 	627,040	 	 	 	201,761	 	 	 	828,801	 	
Other income (expense)	  	 	(13,979	)	 	 	(7,132	)	 	 	3,198	  	 	(9,613	)	 	 	(27,526	)	 	 	264	 	 	 	(27,262	)	
Interest expense	  	 	28,755	 	 	 	3,565	 	 	 	72	  	 	138,181	 	 	 	170,573	 	 	 	6,852	 	 	 	177,425	 	
Income tax expense (benefit)	  	 	179,748	 	 	 	84,191	 	 	 	14,115	  	 	(58,724	)	 	 	219,330	 	 	 	26,766	 	 	 	246,096	 	
	 	
Income (loss) excluding net realized gains (losses)	  	 	531,776	 	 	 	314,924	 	 	 	361,575	  	 	(241,783	)	 	 	949,177	 	 	 	230,961	 	 	 	1,197,453	 	
Net realized gains (losses)	  	 	39,570	 	 	 	(5,716	)	 	 	33,320	  	 	(5,946	)	 	 	61,228	 	 	 	191,052	 	 	 	252,280	 	
Tax effect of net realized gains (losses)	  	 	(218	)	 	 	4,959	 	 	 	345	  	 	–	 	 	 	5,086	 	 	 	(37,337	)	 	 	(32,251	)	
	 	
Net income (loss)	  	$	571,128	 	 	$	314,167	 	 	$	395,240	  	$	(247,729	)	 	$	1,015,491	 	 	$	384,676	 	 	$	1,417,482	 	

(1) Includes ACE Limited, ACE INA Holdings and intercompany eliminations.
(2) Excludes life reinsurance business.
 
F-51

Table of Contents
 
NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
Statement of Operations by Segment

For the year ended December 31, 2002
(in thousands of U.S. dollars)	  	Insurance–
North
American	 	 	Insurance–
Overseas
General	 	 	Global
Reinsurance	 	 	Corporate
and Other (1)	 	 	Consolidated
Property &
Casualty (2)	 	 	Financial
Services	 	 	ACE
Consolidated	 	
	 	
Operations Data	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross premiums written	  	$	6,116,356	 	 	$	4,113,944	 	 	$	887,069	 	 	$	–	 	 	$	11,117,369	 	 	$	1,536,503	 	 	$	12,653,872	 	
Net premiums written	  	 	2,918,540	 	 	 	2,716,372	 	 	 	777,524	 	 	 	–	 	 	 	6,412,436	 	 	 	1,496,848	 	 	 	7,909,284	 	
Net premiums earned	  	 	2,475,390	 	 	 	2,392,721	 	 	 	676,690	 	 	 	–	 	 	 	5,544,801	 	 	 	1,127,426	 	 	 	6,672,227	 	
Losses and loss expenses	  	 	2,200,091	 	 	 	1,455,038	 	 	 	303,952	 	 	 	–	 	 	 	3,959,081	 	 	 	947,429	 	 	 	4,906,510	 	
Policy acquisition costs	  	 	216,442	 	 	 	533,003	 	 	 	122,610	 	 	 	–	 	 	 	872,055	 	 	 	72,080	 	 	 	944,135	 	
Administrative expenses	  	 	340,392	 	 	 	390,309	 	 	 	40,256	 	 	 	110,522	 	 	 	881,479	 	 	 	56,452	 	 	 	937,931	 	
	 	
Underwriting income (loss)	  	 	(281,535	)	 	 	14,371	 	 	 	209,872	 	 	 	(110,522	)	 	 	(167,814	)	 	 	51,465	 	 	 	(116,349	)	
	 	
Life	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross premiums written	  	 	–	 	 	 	–	 	 	 	165,099	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	165,099	 	
Net premiums written	  	 	–	 	 	 	–	 	 	 	159,014	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	159,014	 	
Net premiums earned	  	 	–	 	 	 	–	 	 	 	158,277	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	158,277	 	
Life and annuity benefits	  	 	–	 	 	 	–	 	 	 	158,118	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	158,118	 	
Policy acquisition costs	  	 	–	 	 	 	–	 	 	 	16,553	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	16,553	 	
Administrative expenses	  	 	–	 	 	 	–	 	 	 	5,402	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	5,402	 	
Net investment income	  	 	–	 	 	 	–	 	 	 	27,005	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	27,005	 	
	 	
Underwriting income	  	 	–	 	 	 	–	 	 	 	5,209	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	5,209	 	
	 	
Net investment income	  	 	405,937	 	 	 	108,049	 	 	 	81,437	 	 	 	(12,267	)	 	 	583,156	 	 	 	191,980	 	 	 	775,136	 	
Other income (expense)	  	 	1,034	 	 	 	2,055	 	 	 	589	 	 	 	(25,587	)	 	 	(21,909	)	 	 	1,357	 	 	 	(20,552	)	
Interest expense	  	 	32,307	 	 	 	2,621	 	 	 	319	 	 	 	145,410	 	 	 	180,657	 	 	 	12,837	 	 	 	193,494	 	
Income tax expense (benefit)	  	 	(4,339	)	 	 	5,834	 	 	 	892	 	 	 	(77,029	)	 	 	(74,642	)	 	 	30,413	 	 	 	(44,229	)	
	 	
Income (loss) excluding net realized gains (losses)	  	 	97,468	 	 	 	116,020	 	 	 	295,896	 	 	 	(216,757	)	 	 	287,418	 	 	 	201,552	 	 	 	494,179	 	
Net realized gains (losses)	  	 	(198,861	)	 	 	(37,013	)	 	 	(57,232	)	 	 	(79,481	)	 	 	(372,587	)	 	 	(116,502	)	 	 	(489,089	)	
Tax effect of net realized gains (losses)	  	 	42,381	 	 	 	11,968	 	 	 	109	 	 	 	–	 	 	 	54,458	 	 	 	17,001	 	 	 	71,459	 	
	 	
Net income (loss)	  	$	(59,012	)	 	$	90,975	 	 	$	238,773	 	 	$	(296,238	)	 	$	(30,711	)	 	$	102,051	 	 	$	76,549	 	

(1) Includes ACE Limited, ACE INA Holdings and intercompany eliminations.
(2) Excludes life reinsurance business.
 
F-52

Table of Contents
 
NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
Statement of Operations by Segment

For the year ended December 31, 2001
(in thousands of U.S. dollars) 	  	Insurance–
North
American	 	 	Insurance–
Overseas
General	 	 	Global
Reinsurance	 	 	Corporate
and Other (1)	 	 	Consolidated
Property &
Casualty (2)	 	 	Financial
Services	 	 	ACE
Consolidated	 	
	 	
Operations Data	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross premiums written	  	$	4,521,276	 	 	$	3,289,200	 	 	$	460,049	 	 	$	–	 	 	$	8,270,525	 	 	$	1,480,785	 	 	$	9,751,310	 	
Net premiums written	  	 	1,986,001	 	 	 	2,154,222	 	 	 	354,323	 	 	 	–	 	 	 	4,494,546	 	 	 	1,461,378	 	 	 	5,955,924	 	
Net premiums earned	  	 	1,816,731	 	 	 	1,940,814	 	 	 	324,567	 	 	 	–	 	 	 	4,082,112	 	 	 	1,428,785	 	 	 	5,510,897	 	
Losses and loss expenses	  	 	1,373,255	 	 	 	1,464,964	 	 	 	317,019	 	 	 	–	 	 	 	3,155,238	 	 	 	1,397,218	 	 	 	4,552,456	 	
Policy acquisition costs	  	 	206,064	 	 	 	444,809	 	 	 	68,259	 	 	 	–	 	 	 	719,132	 	 	 	57,680	 	 	 	776,812	 	
Administrative expenses	  	 	315,473	 	 	 	332,500	 	 	 	29,755	 	 	 	94,583	 	 	 	772,311	 	 	 	55,357	 	 	 	827,668	 	
	 	
Underwriting income (loss)	  	 	(78,061	)	 	 	(301,459	)	 	 	(90,466	)	 	 	(94,583	)	 	 	(564,569	)	 	 	(81,470	)	 	 	(646,039	)	
	 	
Life	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross premiums written	  	 	–	 	 	 	–	 	 	 	414,052	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	414,052	 	
Net premiums written	  	 	–	 	 	 	–	 	 	 	407,690	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	407,690	 	
Net premiums earned	  	 	–	 	 	 	–	 	 	 	406,280	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	406,280	 	
Life and annuity benefits	  	 	–	 	 	 	–	 	 	 	401,229	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	401,229	 	
Policy acquisition costs	  	 	–	 	 	 	–	 	 	 	7,852	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	7,852	 	
Administrative expenses	  	 	–	 	 	 	–	 	 	 	2,787	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	2,787	 	
Net investment income	  	 	–	 	 	 	–	 	 	 	9,408	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	9,408	 	
	 	
Underwriting income	  	 	–	 	 	 	–	 	 	 	3,820	 	 	 	–	 	 	 	–	 	 	 	–	 	 	 	3,820	 	
	 	
Net investment income	  	 	425,762	 	 	 	102,193	 	 	 	69,775	 	 	 	5,146	 	 	 	602,876	 	 	 	173,585	 	 	 	776,461	 	
Other income (expense)	  	 	1,030	 	 	 	(1,078	)	 	 	–	 	 	 	–	 	 	 	(48	)	 	 	500	 	 	 	452	 	
Interest expense	  	 	37,163	 	 	 	2,591	 	 	 	733	 	 	 	141,919	 	 	 	182,406	 	 	 	16,776	 	 	 	199,182	 	
Income tax expense (benefit)	  	 	93,841	 	 	 	(86,851	)	 	 	(22,260	)	 	 	(76,699	)	 	 	(91,969	)	 	 	21,309	 	 	 	(70,660	)	
Amortization of goodwill	  	 	(360	)	 	 	3,755	 	 	 	14,011	 	 	 	57,960	 	 	 	75,366	 	 	 	4,205	 	 	 	79,571	 	
	 	
Income (loss) excluding net realized gains (losses)	  	 	218,087	 	 	 	(119,839	)	 	 	(9,355	)	 	 	(212,617	)	 	 	(127,544	)	 	 	50,325	 	 	 	(73,399	)	
Net realized gains (losses)	  	 	(19,268	)	 	 	(5,465	)	 	 	(16,047	)	 	 	(13,524	)	 	 	(54,304	)	 	 	(4,055	)	 	 	(58,359	)	
Tax effect of net realized gains (losses)	  	 	8,167	 	 	 	2,244	 	 	 	(383	)	 	 	–	 	 	 	10,028	 	 	 	(2,014	)	 	 	8,014	 	
Cumulative effect of new standard	  	 	(50	)	 	 	441	 	 	 	539	 	 	 	–	 	 	 	930	 	 	 	(23,600	)	 	 	(22,670	)	
	 	
Net income (loss)	  	$	206,936	 	 	$	(122,619	)	 	$	(25,246	)	 	$	(226,141	)	 	$	(170,890	)	 	$	20,656	 	 	$	(146,414	)	

(1) Includes ACE Limited, ACE INA Holdings and intercompany eliminations.
(2) Excludes life reinsurance business
 
Underwriting assets for property and casualty and financial services are reviewed in total by management for purposes of decision-making. We do not allocate assets to our segments. Assets are specifically identified for our life reinsurance operations and corporate holding companies, including ACE Limited and ACE INA Holdings.
The following table summarizes the identifiable assets at December 31, 2003 and 2002.

(in millions of U.S. dollars)	 	2003	 	2002	
	
Life reinsurance	 	$	698	 	$	623	
Corporate	 	 	2,483	 	 	2,190	
All other	 	 	46,372	 	 	41,141	
	
Total assets	 	$	49,553	 	$	43,954	

F-53

Table of Contents
 
NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries
 
The following tables summarize the revenues of each segment by product offering for the years ended December 31, 2003, 2002 and 2001.

Net premiums earned by type of premium

Year ended December 31, 2003
(in millions of U.S. dollars)	 	Property &
Casualty	 	Life, Accident &
Health	 	Financial
Guaranty	 	Financial
Solutions	 	ACE
Consolidated	
	
Insurance – North American	 	$	3,308	 	$	346	 	$	–	 	$	–	 	$	3,654	
Insurance – Overseas General	 	 	2,989	 	 	574	 	 	–	 	 	–	 	 	3,563	
Global Reinsurance	 	 	1,100	 	 	184	 	 	–	 	 	–	 	 	1,284	
Financial Services	 	 	–	 	 	–	 	 	328	 	 	773	 	 	1,101	
	
 	 	$	7,397	 	$	1,104	 	$	328	 	$	773	 	$	9,602	
	
Year ended December 31, 2002
(in millions of U.S. dollars)	 	Property &
Casualty	 	Life, Accident &
Health	 	Financial
Guaranty	 	Financial
Solutions	 	ACE
Consolidated	
	
Insurance – North American	 	$	2,350	 	$	125	 	$	–	 	$	–	 	$	2,475	
Insurance – Overseas General	 	 	1,817	 	 	576	 	 	–	 	 	–	 	 	2,393	
Global Reinsurance	 	 	677	 	 	158	 	 	–	 	 	–	 	 	835	
Financial Services	 	 	–	 	 	–	 	 	282	 	 	845	 	 	1,127	
	
 	 	$	4,844	 	$	859	 	$	282	 	$	845	 	$	6,830	
	
Year ended December 31, 2001
(in millions of U.S. dollars)	 	Property &
Casualty	 	Life, Accident &
Health	 	Financial
Guaranty	 	Financial
Solutions	 	ACE
Consolidated	
	
Insurance – North American	 	$	1,812	 	$	4	 	$	–	 	$	–	 	$	1,816	
Insurance – Overseas General	 	 	1,427	 	 	511	 	 	–	 	 	3	 	 	1,941	
Global Reinsurance	 	 	324	 	 	406	 	 	–	 	 	–	 	 	730	
Financial Services	 	 	–	 	 	–	 	 	352	 	 	1,077	 	 	1,429	
	
 	 	$	3,563	 	$	921	 	$	352	 	$	1,080	 	$	5,916	

c) The following table summarizes the Company’s gross premiums written by geographic region. Allocations have been made on the basis of location of risk.

Year
Ended	 	North
America	 	 	Europe	 	 	Australia &
New Zealand	 	 	Asia
Pacific	 	 	Latin
America	 	
	 	
2003	 	64	%	 	22	%	 	3	%	 	7	%	 	4	%	
	 	
2002	 	64	%	 	21	%	 	2	%	 	8	%	 	5	%	
	 	
2001	 	63	%	 	21	%	 	2	%	 	9	%	 	5	%	

F-54

Table of Contents
 
NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS   (continued) 
ACE Limited and Subsidiaries

18. Condensed unaudited quarterly financial data

2003

(in thousands of U.S. dollars, except per share data)	 	Quarter Ended
March 31,
2003	 	 	Quarter Ended
June 30,
2003	 	Quarter Ended
September 30,
2003	 	 	Quarter Ended
December 31,
2003	 	
	 	
Net premiums earned	 	$	2,071,532	 	 	$	2,306,592	 	$	2,397,525	 	 	$	2,826,734	 	
Net investment income	 	 	206,412	 	 	 	211,947	 	 	214,689	 	 	 	229,293	 	
Other income (expense)	 	 	(6,154	)	 	 	726	 	 	(3,088	)	 	 	(18,746	)	
Net realized gains (losses)	 	 	(40,089	)	 	 	106,561	 	 	57,556	 	 	 	128,252	 	
	 	
Total revenues	 	$	2,231,701	 	 	$	2,625,826	 	$	2,666,682	 	 	$	3,165,533	 	
	 	
Losses and loss expenses	 	$	1,282,833	 	 	$	1,459,379	 	$	1,518,478	 	 	$	1,856,712	 	
	 	
Life and annuity benefits	 	$	48,499	 	 	$	43,559	 	$	44,524	 	 	$	44,495	 	
	 	
Net income	 	$	247,444	 	 	$	370,468	 	$	354,965	 	 	$	444,605	 	
	 	
Basic earnings per share	 	$	0.92	 	 	$	1.35	 	$	1.25	 	 	$	1.56	 	
	 	
Diluted earnings per share	 	$	0.90	 	 	$	1.32	 	$	1.22	 	 	$	1.53	 	

2002

(in thousands of U.S. dollars, except per share data)	 	Quarter Ended
March 31, 2002	 	 	Quarter Ended
June 30, 2002	 	 	Quarter Ended
September 30,
2002	 	 	Quarter Ended
December 31,
2002	 	
	 	
Net premiums earned	 	$	1,359,809	 	 	$	1,575,707	 	 	$	1,925,579	 	 	$	1,969,409	 	
Net investment income	 	 	200,135	 	 	 	200,804	 	 	 	199,740	 	 	 	201,462	 	
Other income (expense)	 	 	4,799	 	 	 	(12,068	)	 	 	(14,032	)	 	 	749	 	
Net realized losses	 	 	(25,881	)	 	 	(139,721	)	 	 	(235,282	)	 	 	(88,205	)	
	 	
Total revenues	 	$	1,538,862	 	 	$	1,624,722	 	 	$	1,876,005	 	 	$	2,083,415	 	
	 	
Losses and loss expenses	 	$	853,145	 	 	$	960,949	 	 	$	1,327,792	 	 	$	1,764,624	 	
	 	
Life and annuity benefits	 	$	22,996	 	 	$	23,311	 	 	$	59,697	 	 	$	52,114	 	
	 	
Net income (loss)	 	$	197,805	 	 	$	103,900	 	 	$	(56,510	)	 	$	(168,646	)	
	 	
Basic earnings (loss) per share	 	$	0.74	 	 	$	0.37	 	 	$	(0.24	)	 	$	(0.67	)	
	 	
Diluted earnings (loss) per share	 	$	0.70	 	 	$	0.36	 	 	$	(0.24	)	 	$	(0.67	)	

 
F-55

Table of Contents
 
SCHEDULE  I
ACE Limited and Subsidiaries

SUMMARY OF INVESTMENTS — OTHER THAN INVESTMENTS IN RELATED PARTIES
										
December 31, 2003
(in thousands of U.S. dollars)	 	Cost or
Amortized Cost	 	Fair Value	 	Amount at
which shown
in the
balance sheet	
	
Fixed maturities:	 	 	 	 	 	 	 	 	 	
Bonds:	 	 	 	 	 	 	 	 	 	
U.S. Treasury and agency	 	$	2,638,594	 	$	2,707,850	 	$	2,707,850	
Non-U.S. governments	 	 	1,879,130	 	 	1,909,473	 	 	1,909,473	
Corporate securities	 	 	8,286,468	 	 	8,688,884	 	 	8,688,884	
Mortgage-backed securities	 	 	3,854,526	 	 	3,894,026	 	 	3,894,026	
States, municipalities and political subdivision	 	 	1,347,687	 	 	1,445,034	 	 	1,445,034	
	
Total fixed maturities	 	 	18,006,405	 	 	18,645,267	 	 	18,645,267	
	
Equity securities:	 	 	 	 	 	 	 	 	 	
Common stock:	 	 	 	 	 	 	 	 	 	
Public utilities	 	 	1,190	 	 	1,517	 	 	1,517	
Banks, trust and insurance companies	 	 	22,685	 	 	32,845	 	 	32,845	
Industrial, miscellaneous and all other	 	 	377,362	 	 	509,449	 	 	509,449	
	
Total equity securities	 	 	401,237	 	 	543,811	 	 	543,811	
Securities on loan	 	 	650,160	 	 	684,629	 	 	684,629	
Other investments	 	 	602,176	 	 	645,085	 	 	645,085	
Short-term investments and cash	 	 	3,489,057	 	 	3,489,057	 	 	3,489,057	
	
Total investments and cash	 	$	23,149,035	 	$	24,007,849	 	$	24,007,849	

F-56

Table of Contents
 
SCHEDULE  II
ACE Limited and Subsidiaries

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
BALANCE SHEETS (Parent Company Only)
									
December 31, 2003 and 2002
(in thousands of U.S. dollars)	 	2003	 	 	2002	 	
	 	
Assets	 	 	 	 	 	 	 	 	
Investments in subsidiaries and affiliates on equity basis	 	$	9,056,845	 	 	$	7,095,429	 	
Fixed maturities	 	 	9,451	 	 	 	60,408	 	
Short-term investments	 	 	7,182	 	 	 	14,678	 	
Other investments, at cost	 	 	270	 	 	 	270	 	
Cash	 	 	27,260	 	 	 	2,150	 	
	 	
Total investments and cash	 	 	9,101,008	 	 	 	7,172,935	 	
Due from subsidiaries and affiliates, net	 	 	349,617	 	 	 	162,314	 	
Other assets	 	 	53,430	 	 	 	42,703	 	
	 	
Total assets	 	$	9,504,055	 	 	$	7,377,952	 	
	 	
Liabilities	 	 	 	 	 	 	 	 	
Accounts payable, accrued expenses and other liabilities	 	$	116,626	 	 	$	131,210	 	
Dividends payable	 	 	53,182	 	 	 	47,724	 	
Long-term debt	 	 	499,451	 	 	 	499,282	 	
	 	
Total liabilities	 	 	669,259	 	 	 	678,216	 	
	 	
Mezzanine equity	 	 	–	 	 	 	311,050	 	
	 	
Shareholders’ equity	 	 	 	 	 	 	 	 	
Preferred Shares	 	 	2,300	 	 	 	–	 	
Ordinary Shares	 	 	11,662	 	 	 	10,945	 	
Additional paid-in capital	 	 	4,765,355	 	 	 	3,781,112	 	
Unearned stock grant compensation	 	 	(44,912	)	 	 	(42,576	)	
Retained earnings	 	 	3,380,619	 	 	 	2,199,313	 	
Deferred compensation obligation	 	 	16,687	 	 	 	18,631	 	
Accumulated other comprehensive income	 	 	719,772	 	 	 	439,892	 	
Ordinary Shares issued to employee trust	 	 	(16,687	)	 	 	(18,631	)	
	 	
Total shareholders’ equity	 	 	8,834,796	 	 	 	6,388,686	 	
	 	
Total liabilities, mezzanine equity and shareholders’ equity	 	$	9,504,055	 	 	$	7,377,952	 	

STATEMENTS OF OPERATIONS (Parent Company Only)

For the years ended December 31, 2003, 2002 and 2001
(in thousands of U.S. dollars)	 	2003	 	 	2002	 	 	2001	 	
	 	
Revenues	 	 	 	 	 	 	 	 	 	 	 	 	
Investment income, including intercompany interest income	 	$	(14,863	)	 	$	19,417	 	 	$	70,075	 	
Equity in net income of subsidiaries and affiliates	 	 	1,553,458	 	 	 	215,437	 	 	 	(136,456	)	
Net realized losses	 	 	(5,946	)	 	 	(79,480	)	 	 	(13,524	)	
	 	
 	 	 	1,532,649	 	 	 	155,374	 	 	 	(79,905	)	
Expenses	 	 	 	 	 	 	 	 	 	 	 	 	
Administrative and other expenses	 	 	(115,167	)	 	 	(78,825	)	 	 	(66,509	)	
	 	
Net income (loss)	 	$	1,417,482	 	 	$	76,549	 	 	$	(146,414	)	

F-57

Table of Contents
 
SCHEDULE  II   (continued) 
ACE Limited and Subsidiaries

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
STATEMENTS OF CASH FLOWS (Parent Company Only)

For the years ended December 31, 2003, 2002 and 2001
(in thousands of U.S. Dollars)	 	2003	 	 	2002	 	 	2001	 	
	 	
Cash flows from operating activities	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	$	1,417,482	 	 	$	76,549	 	 	$	(146,414	)	
Adjustments to reconcile net income (loss) to net cash flow
from (used for) operating activities:	 	 	 	 	 	 	 	 	 	 	 	 	
Equity in net income of subsidiaries and affiliates	 	 	(1,553,458	)	 	 	(215,437	)	 	 	136,456	 	
Net realized losses	 	 	5,946	 	 	 	79,480	 	 	 	13,524	 	
Amounts due to subsidiaries and affiliates, net	 	 	16,060	 	 	 	(138,038	)	 	 	153,553	 	
Accounts payable, accrued expenses and other liabilities	 	 	(14,584	)	 	 	15,069	 	 	 	26,887	 	
Accrued interest on advances from affiliate	 	 	(17,880	)	 	 	(13,083	)	 	 	(31,846	)	
Other	 	 	(13,734	)	 	 	19,140	 	 	 	(38,300	)	
Amortization of premiums/discounts on fixed maturities	 	 	–	 	 	 	664	 	 	 	(432	)	
	 	
Net cash flows from (used for) operating activities	 	 	(160,168	)	 	 	(175,656	)	 	 	113,428	 	
	 	
Cash flows from investing activities	 	 	 	 	 	 	 	 	 	 	 	 	
Purchases of fixed maturities	 	 	(2,003	)	 	 	(53,612	)	 	 	(125,733	)	
Sales of fixed maturities	 	 	59,845	 	 	 	399,456	 	 	 	94,689	 	
Net realized (gains) loss on investment derivatives	 	 	(6,265	)	 	 	–	 	 	 	–	 	
Dividends received from subsidiaries	 	 	503,044	 	 	 	485,000	 	 	 	338,873	 	
Capitalization of subsidiaries	 	 	(741,018	)	 	 	(1,314,676	)	 	 	(1,101,000	)	
Advances from (to) affiliates	 	 	42,304	 	 	 	652,797	 	 	 	(695,100	)	
Other investments	 	 	–	 	 	 	–	 	 	 	(1,009	)	
Settlement of an acquisition-related lawsuit	 	 	–	 	 	 	54,380	 	 	 	–	 	
	 	
Net cash flows from (used for) investing activities	 	 	(144,093	)	 	 	223,345	 	 	 	(1,489,280	)	
	 	
Cash flows from financing activities	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends paid on Ordinary Shares	 	 	(198,395	)	 	 	(167,470	)	 	 	(128,745	)	
Dividends paid on Mezzanine equity	 	 	(9,773	)	 	 	(25,662	)	 	 	(25,666	)	
Dividends paid on Preferred Shares	 	 	(22,550	)	 	 	–	 	 	 	–	 	
Net proceeds from issuance of Preferred Shares	 	 	556,687	 	 	 	–	 	 	 	–	 	
Proceeds from exercise of options for Ordinary Shares	 	 	62,097	 	 	 	44,562	 	 	 	32,666	 	
Proceeds from Ordinary Shares issued under ESPP	 	 	7,353	 	 	 	7,472	 	 	 	6,074	 	
Advances from (to) affiliates	 	 	(66,048	)	 	 	(436,121	)	 	 	521,100	 	
Proceeds from long-term debt	 	 	–	 	 	 	499,155	 	 	 	–	 	
Repurchase of Ordinary Shares	 	 	–	 	 	 	–	 	 	 	(179,446	)	
Net proceeds from issuance of Ordinary Shares	 	 	–	 	 	 	–	 	 	 	1,135,878	 	
	 	
Net cash flows from (used for) financing activities	 	 	329,371	 	 	 	(78,064	)	 	 	1,361,861	 	
	 	
Net increase (decrease) in cash	 	 	25,110	 	 	 	(30,375	)	 	 	(13,991	)	
Cash – beginning of year	 	 	2,150	 	 	 	32,525	 	 	 	46,516	 	
	 	
Cash – end of year	 	$	27,260	 	 	$	2,150	 	 	$	32,525	 	

F-58

Table of Contents
 
SCHEDULE  IV 
Ace Limited and Subsidiaries

SUPPLEMENTAL INFORMATION CONCERNING REINSURANCE
 
Premiums Written

For the years ended December 31, 2003, 2002 and 2001
(in thousands of U.S. dollars)	 	Direct Amount	 	Ceded
To Other
Companies	 	Assumed
From Other
Companies	 	Net Amount	
	
2003	 	$	11,425,435	 	$	4,421,909	 	$	3,211,482	 	$	10,215,008	
2002	 	$	9,939,024	 	$	4,750,673	 	$	2,879,947	 	$	8,068,298	
2001	 	$	7,629,233	 	$	3,801,748	 	$	2,536,129	 	$	6,363,614	
 
F-59

Table of Contents
 
SCHEDULE  VI
ACE Limited and Subsidiaries

SUPPLEMENTARY INFORMATION CONCERNING PROPERTY AND CASUALTY OPERATIONS

As of and for the years ended December 31, 2003, 2002 and 2001
(in thousands of U.S. dollars)	 	 	 	 	 	 	 	 	 	 	 	 	
	
 	 	Deferred
Policy
Acquisition
Costs
 	 	Net Reserves
for Unpaid
Losses and
Loss Expenses
 	 	Unearned
Premium
 	 	Net Premiums
Earned
 	 	Net Investment
Income
 	 	Net Losses and Loss
Expenses Incurred
	 	Amortization
of Deferred
Policy
Acquisition
Costs
 	 	Net Paid
Losses and
Loss Expenses
 	 	Net Premiums
Written
 	
	 		 		 		 		 		 	Related to
Current Year	 	Prior
Year	 		 		 		
	
2003	 	$	999,442	 	$	13,963,229	 	$	6,047,697	 	$	9,418,430	 	$	828,801	 	$	5,953,076	 	$	164,326	 	$	1,341,064	 	$	3,905,842	 	$	10,030,112	
2002	 	$	829,860	 	$	11,318,018	 	$	5,583,376	 	$	6,672,227	 	$	775,136	 	$	4,197,829	 	$	708,681	 	$	944,135	 	$	3,951,281	 	$	7,909,284	
2001	 	$	677,776	 	$	10,099,514	 	$	3,852,019	 	$	5,510,897	 	$	776,461	 	$	4,457,986	 	$	94,470	 	$	776,812	 	$	3,749,854	 	$	5,995,924	
 
F-60
 
EXHIBIT 10.17.3

AMENDED AND RESTATED CREDIT AGREEMENT
 
among
 
ACE GUARANTY RE INC.,
 
VARIOUS BANKS
 
and
 
DEUTSCHE BANK AG,
NEW YORK BRANCH,
as Agent

 
Dated as of November 15, 2001

 
DEUTSCHE BANC ALEX. BROWN INC.,
as Arranger

AMENDED AND RESTATED CREDIT AGREEMENT, dated as of November 15, 2001, among ACE GUARANTY RE INC., a Maryland corporation (the “Borrower”), the Banks party hereto from time to time, and DEUTSCHE BANK AG, NEW YORK BRANCH, acting in its capacity as Agent pursuant to Section 11 (in such capacity, the “Agent”).
 
W I T N E S S E T H :
 
WHEREAS, the Borrower, certain of the Banks and the Agent are parties to a Credit Agreement, dated as of January 27, 1994 (as amended to date, the “Original Credit Agreement”); and
 
WHEREAS, the Borrower, the Banks and the Agent desire to amend and restate in its entirety the Original Credit Agreement; and
 
WHEREAS, in connection with the amendment and restatement of the Original Credit Facility, Haverford (Bermuda) (SAC) Reinsurance Ltd (in respect of Segregated Account No. 12) (“Haverford”), has agreed to issue its Stand-By Reinsurance Treaty substantially in the form of Exhibit G (the “Treaty”) in support of certain of the Loan obligations of the Banks; and
 
WHEREAS, subject to and upon the terms and conditions herein set forth, the Banks are willing to make available to the Borrower the credit facility provided for herein;
 
NOW, THEREFORE, IT IS AGREED that the Original Credit Agreement is hereby amended and restated in its entirety as follows:
 
SECTION 1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION.
 
Section 1.01 Defined Terms . As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):
 
“Affiliate” shall mean, with respect to any Person, any other Person (other than an individual) directly or indirectly controlling, controlled by, or under direct or indirect common control with, such Person; provided, however, that an Affiliate of the Borrower shall include any Person that directly or indirectly owns more than 10% of the Borrower and any officer or director of the Borrower or any such Person. A Person shall be deemed to control another Person if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such other Person, whether through the ownership of voting securities, by contract or otherwise.
 
“Agent” shall mean Deutsche Bank AG, New York Branch, in its capacity as Agent for the Banks hereunder, and shall include any successor to the Agent appointed pursuant to Section 11.08.
 
“Agreement” shall mean this Amended and Restated Credit Agreement, as modified, supplemented or amended from time to time.

“Applicable Margin” shall mean a percentage per annum equal to (i) if the Borrower’s Rating assigned by Moody’s and S&P is equal to Aaa and AAA, respectively, 1.50%, (ii) if the Borrower’s Rating assigned by Moody’s and S&P is less than Aaa and AAA, respectively, but greater than A1 and A+, respectively, 1.75%, or (iii) if the Borrower’s Rating assigned by either Moody’s or S&P is equal to or less than A1 or A+, respectively, 2.00%.
 
“Assignment and Assumption Agreement” shall mean any Assignment and Assumption Agreement substantially in the form of Exhibit F entered into pursuant to the terms hereof.
 
“Authorized Officer” shall mean the president, any vice president, the chief financial officer or the treasurer of the Borrower.
 
“Average Annual Debt Service” as of a specified date with respect to an Insured Obligation shall mean the applicable Retained Percentage times the sum of (i) the aggregate outstanding principal amount of such Insured Obligation and (ii) the aggregate amount of interest thereafter required to be paid on such Insured Obligation (giving effect to all mandatory sinking fund payments or other regularly scheduled required redemptions, prepayments or other retirement of principal), divided by the number of whole and fractional years from the date of determination to the latest maturity date of such Insured Obligation, and as of a specified date with respect to the Covered Portfolio shall mean the sum of the Annual Average Debt Service as of such date of all Insured Obligations contained in the Covered Portfolio. In the event that an Insured Obligation bears interest at a variable rate, the interest thereon for purposes of the determination of Average Annual Debt Service shall be calculated at the rate employed by the Borrower to compute average annual debt service with respect to such Insured Obligation in accordance with its customary business practices.
 
“Bank” shall mean the banks listed on the signature pages hereof on the Effective Date, any institution which becomes a Bank hereunder pursuant to Section 12.04(b) and, upon the terms and conditions set forth in Section 2.08, Haverford.
 
“Bankruptcy Code” shall have the meaning provided in Section 10.05.
 
“Base Rate” shall mean the higher of (i) 1/4 of 1% in excess of the Federal Funds Rate and (ii) the Prime Lending Rate.
 
“Borrower” shall have the meaning provided in the first paragraph of this Agreement.
 
“Borrower’s Rating” shall mean the Borrower’s claims-paying ability rating.
 
“Borrowing” shall mean the borrowing of Loans on a given date.
 
“Business Day” shall mean any day except Saturday, Sunday and any day which shall be in New York City a legal holiday or a day on which banking institutions are authorized or required by law or other government action to close.
 
-2-

“Change of Control” shall mean and include the occurrence of any of the following events: (i) any Person, entity or “group” (within the meaning of Sections 13(d) or 14(d) of the Securities Exchange Act of 1934) other than the Parent and/or one or more Wholly-Owned Subsidiaries of the Parent (a) shall have acquired, directly or indirectly, beneficial ownership of 20% or more of any outstanding class of capital stock of the Parent or the Borrower having ordinary voting power in the election of directors, provided that any Person, entity or group shall be permitted to acquire up to 25% of the outstanding capital stock of any such class in a transaction approved before the consummation of same by a majority of the directors of the Parent or the Borrower, as the case may be, or (b) shall have obtained the power (whether or not exercised) to elect the majority of the Board of Directors of the Parent or the Borrower; or (ii) the majority of the Board of Directors of the Parent or the Borrower shall not be Continuing Directors.
 
“Code” shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to the Code are to the Code, as in effect at the date of this Agreement and any subsequent provisions of the Code, amendatory thereof, supplemental thereto or substituted therefor.
 
“Collateral” shall mean all “Collateral” as defined in the Security Agreement.
 
“Collateral Account” shall have the meaning provided in the Security Agreement.
 
“Collateral Agent” shall have the meaning provided in the Security Agreement.
 
“Commitment” shall mean, for each Bank, the amount set forth opposite such Bank’s name in Schedule I hereto directly below the column entitled “Commitment”, as the same may be (i) reduced from time to time pursuant to Section 2.08, 3.02 and/or 3.03 and (ii) adjusted from time to time as a result of assignments to or from such Bank pursuant to Section 3.04 or 12.04.
 
“Commitment Fees” shall have the meaning provided in Section 3.01(a).
 
“Commitment Period” initially shall mean the period commencing on the Effective Date and ending on the Expiry Date and, from and after the date of any extension of the Expiry Date, shall mean the period commencing on the date which is seven years prior to the Expiry Date and ending on the Expiry Date.
 
“Consolidated Subsidiary” shall mean, as to any Person, all Subsidiaries of such Person which are consolidated with such Person for financial reporting purposes in accordance with generally accepted accounting principles in the United States.
 
“Contingent Obligation” shall mean, as to any Person, any obligation of such Person guaranteeing or intended to guarantee any Indebtedness, leases, dividends or other obligations (“primary obligations”) of any other Person (the “primary obligor”) in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (a) for the purchase or payment of any such primary obligation or (b) to maintain working capital or equity capital of the
 
-3-

primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the holder of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof; provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business or obligations under insurance or reinsurance contracts entered into in the ordinary course of business to secure reinsurance obligations. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith.
 
“Continuing Directors” shall mean the directors of a Person on the date hereof and each other director, if such other director’s nomination for election to the Board of Directors of such Person is supported by a majority of the then Continuing Directors.
 
“Covered Portfolio” shall mean and include each Insured Obligation as of the Effective Date and each Insured Obligation issued thereafter and prior to the Loss Threshold Incurrence Date other than any Insured Obligation which is excluded from the Covered Portfolio pursuant to Section 12.13.
 
“Credit Documents” shall mean this Agreement, each Note, the Treaty and the Security Agreement.
 
“Credit Event” shall mean the making of any Loan.
 
“Cumulative Losses” for a specified period shall mean the aggregate Losses of the Borrower determined cumulatively during such period without regard to Pledged Recoveries.
 
“Declining Bank” shall have the meaning provided in Section 3.04(b).
 
“Default” shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default.
 
“Defaulted Loan” shall mean, with respect to any Bank at any time, the Loan or portion of any Loan required to be made by such Bank to the Borrower pursuant to Section 2.01 at or prior to such time that has not been made by such Bank as of such time.
 
“Defaulting Bank” shall mean, at any time, any Bank that, at such time, owes a Defaulted Loan.
 
“Department” shall mean the Maryland Insurance Administration of the State of Maryland.
 
“Dollars” and the sign “$” shall each mean freely transferable lawful money of the United States.
 
-4-

“Effective Date” shall have the meaning provided in Section 12.09.
 
“Eligible Transferee” shall mean and include a commercial bank, financial institution or other “accredited investor” (as defined in Regulation D of the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder) assigned, or the parent of which is assigned, an unsecured senior debt rating (or shadow rating as reflected in a letter) by each of Moody’s and S&P equal to or greater than the rating then assigned by such rating agency to the relevant assignor.
 
“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to ERISA are to ERISA, as in effect at the date of this Agreement, and to any subsequent provisions of ERISA, amendatory thereof, supplemental thereto or substituted therefor.
 
“ERISA Affiliate” shall mean any person (as defined in Section 3(9) of ERISA) which together with the Borrower or any of its Subsidiaries would be deemed to be a “single employer” within the meaning of Section 414(b), (c), (m) or (o) of the Code.
 
“Event of Default” shall have the meaning provided in Section 10.
 
“Expiry Date” shall have the meaning provided in Section 3.04(a).
 
“Extending Bank” shall have the meaning provided in Section 3.04(b).
 
“Extension Request” shall have the meaning provided in Section 3.04(a).
 
“Federal Funds Rate” shall mean for any period, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve System arranged by Federal Funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal Funds brokers of recognized standing selected by the Agent.
 
“Fees” shall mean all amounts payable pursuant to or referred to in Section 3.01.
 
“General Account” shall have the meaning provided in Section 12.16(ii).
 
“Haverford” shall have the meaning provided in the third WHEREAS clause of this Agreement.
 
“Haverford Reinsurance” shall have the meaning provided in Section 12.16(i).
 
“holder of any Note” shall mean any Federal Reserve Bank to which a Bank has pledged its Note to the extent such Federal Reserve Bank has foreclosed upon such Note.
 
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“Increasing Extending Bank” shall have the meaning provided in Section 3.04(b).
 
“Indebtedness” shall mean, as to any Person, without duplication, (i) all indebtedness (including principal, interest, fees and charges) of such Person for borrowed money or for the deferred purchase price of property or services, (ii) the face amount of all letters of credit issued for the account of such Person and all drafts drawn thereunder, (iii) all liabilities secured by any Lien on any property owned by such Person, whether or not such liabilities have been assumed by such Person, (iv) the aggregate amount required to be capitalized under leases under which such Person is the lessee and (v) all Contingent Obligations of such Person; provided, however, that the term “Indebtedness” shall not include (a) any indebtedness arising from investment activities in the ordinary course of business that are not required to be classified as indebtedness on such Person’s balance sheet in accordance with generally accepted principles, (b) intercompany indebtedness, (c) indebtedness constituting the purchase price of goods or equipment used in the ordinary course of business and (d) indebtedness represented by letters of credit issued as part of a reinsurance arrangement consistent with industry practices and in the ordinary course of business.
 
“Installment Premiums” shall mean any and all premiums which are required to be paid or claimed to be required to be paid to or for the account of the Borrower in respect of Insured Obligations in the Covered Portfolio on a periodic basis rather than by payment in full on the date of the effectiveness of the relevant Insurance Contract.
 
“Insurance Contracts” shall have the meaning provided in Section 7.16.
 
“Insured Obligation” shall mean “municipal obligation bonds”, “special revenue bonds”, “industrial development bonds” and “utility first mortgage obligations” which the Borrower is permitted to insure under the provisions of Section 6904 (b) (1) (A), (B) or (C) of the New York Insurance Law (without regard to clause (J) thereof) as in effect on the Effective Date and issued by the United States of America, a state thereof or the District of Columbia, a municipality or governmental unit or other political subdivision of the foregoing or any public agency or instrumentality, in any event to the extent that the payment of principal thereof and/or interest thereon, is insured, reinsured or otherwise guaranteed by the Borrower.
 
“Lending Office” shall mean the office of the Agent located at 31 West 52nd Street, New York, New York 10019 or such other office, Subsidiary or Affiliate of the Agent as the Agent may from time to time specify as such to the Borrower.
 
“Lien” shall mean any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), preference, priority or other security agreement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement, any financing or similar statement or notice filed under the UCC or any other similar recording or notice statute, and any lease having substantially the same effect as any of the foregoing).
 
“Loan” shall have the meaning provided in Section 2.01, and shall expressly include each Treaty Payment.
 
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“Loss” shall mean at any time the aggregate sum of (i) the amount paid by the Borrower at such time or required at such time to be paid by the Borrower on claims under an Insurance Contract with respect to an Insured Obligation in the Covered Portfolio by reason of the failure by the issuer thereof or other obligor with respect thereto to pay insured amounts on such Insured Obligations when due (including adjustment expenses with respect to such claims), plus (ii) Permitted Reserves at such time, minus (iii) amounts paid at such time or reasonably expected by the Borrower at such time to be paid to the Borrower under reinsurance agreements (whether facultative or treaty) and similar arrangements with respect to the claims referred to in clause (i), minus (iv) any amount received prior to the Loss Threshold Incurrence Date which if received after the Loss Threshold Incurrence Date would constitute a Pledged Recovery, provided that, without limiting the generality of the foregoing, the term “Loss” shall not include any damages or penalties required to be paid by the Borrower in respect of an Insurance Contract by reason of the breach by the Borrower of its obligations thereunder or the cancellation or termination thereof other than in accordance with its terms.
 
“Loss Threshold Incurrence Date” shall mean the date on which the Borrower has Cumulative Losses (net of recoveries) during the relevant Commitment Period equal to the greater of $210,000,000 and 4.75% of Average Annual Debt Service as of any date of determination thereof.
 
“Majority Banks” shall mean at any time Banks owed at least 51% of the aggregate principal amount of the Loans outstanding at such time or, if no Loans are outstanding at such time, Banks holding at least 51% of the aggregate Commitments at such time; provided, however, that if any Bank shall be a Defaulting Bank at such time, there shall be excluded from the determination of Majority Banks at such time (i) the aggregate principal amount of the Loans owing to such Bank and outstanding at such time and (ii) the Commitment of such Bank at such time.
 
“Majority Participants” shall have the meaning provided in Section 12.04(a).
 
“Margin Stock” shall have the meaning provided in Regulation U of the Board of Governors of the Federal Reserve System.
 
“Moody’s” shall mean Moody’s Investors Service, Inc.
 
“Multiemployer Plan” shall mean any multiemployer plan as defined in Section 4001(1)(3) of ERISA, which is contributed to by (or to which there is an obligation to contribute of) the Borrower, a Subsidiary of the Borrower or an ERISA Affiliate, and each such plan for the five-year period immediately following the latest date on which the Borrower, a Subsidiary of the Borrower or an ERISA Affiliate contributed to or had an obligation to contribute to such plan.
 
“Note” shall have the meaning provided in Section 2.05.
 
“Notice of Borrowing” shall have the meaning provided in Section 2.03.
 
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“Notice Office” shall mean the office of the Agent located at 31 West 52nd Street, New York, New York 10019, or such other office as the Agent may hereafter designate in writing as such to the Borrower.
 
“Obligations” shall mean all amounts owing to the Agent, Collateral Agent or any Bank pursuant to the terms of this Agreement or any other Credit Document.
 
“Original Credit Agreement” shall have the meaning provided in the first WHEREAS clause of this Agreement.
 
“Parent” shall mean ACE Limited, a Cayman Islands corporation.
 
“Payment Office” shall mean the office of the Agent located at 31 West 52nd Street, New York, New York 10019, or such other office as the Agent may hereafter designate in writing as such to the Borrower.
 
“PBGC” shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA or any successor thereto.
 
“Permitted Liens” shall have the meaning provided in Section 9.01.
 
“Permitted Reserves” shall mean, with respect to any Insured Obligation, an amount equal to the reserves established in accordance with the Borrower’s statutory accounting practices which are deemed necessary or prudent in the reasonable judgment of the Borrower by reason of the failure or anticipated failure by the issuer of such Insured Obligation or other obligor with respect thereto to pay such Insured Obligation when due, all as reflected on the Borrower’s books and which are or will be reported by the Borrower in its statutory financial statements.
 
“Person” shall mean any individual, partnership, limited liability company, joint venture, firm, corporation, association, trust or other enterprise or any government or political subdivision or any agency, department or instrumentality thereof.
 
“Plan” shall mean an employee pension benefit plan which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Code, which is maintained or contributed to by (or to which there is an obligation to contribute of), or at any time during the five calendar years preceding the date of this Agreement was maintained or contributed to by (or to which there was an obligation to contribute of), the Borrower or an ERISA Affiliate.
 
“Pledged Premiums” shall mean at any time on and after the Trigger Date (i) any and all Installment Premiums which are paid or payable to the Borrower at such time with respect to an Insurance Contract covering any defaulted Insured Obligations in the Covered Portfolio minus (ii) the aggregate amount of such Installment Premiums referred to in clause (i) paid or payable to any Person other than the Borrower at such time under reinsurance agreements (whether facultative or treaty) and similar arrangements.
 
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“Pledged Recoveries” shall mean at any time on and after the Trigger Date any and all moneys and other payments, property and other consideration and compensation received or receivable by or for the account of the Borrower at such time (excluding the aggregate amount of any and all monies, payments, property, consideration and compensation paid or payable to any Person other than the Borrower under reinsurance agreements (whether facultative or treaty) and similar arrangements) as repayment or reimbursement of, or otherwise in respect of or arising out of, the payment of a claim by the Borrower under an Insurance Contract covering any Insured Obligation in the Covered Portfolio (without regard to whether such claim was paid from the proceeds of a Loan), whether from the issuer thereof or any other Person including without limitation under or pursuant to (i) such Insurance Contract, any reimbursement agreement, guaranty, letter of credit, mortgage, security agreement, pledge agreement or other contract, agreement or arrangement with respect to such Insurance Contract, other than such items described in (ii) through (ix) below, (ii) any account or account receivable, (iii) any compromise, settlement or similar arrangement with respect to such payment, (iv) any voluntary payment or gift, (v) any reinsurance of such Insured Obligation to the extent that payment or expected payment under such reinsurance was not deducted in determining the Loss attributed to the Borrower’s payment or required payment of such claim, (vi) any contractual, statutory, common law or other right of subrogation, (vii) any realization upon any mortgage, security interest or other Lien, (viii) any cause of action, whether sounding in tort, contract or otherwise, and any judicial, arbitration or other proceeding by or before any court, agency, tribunal, association or other governmental or private body, or (ix) any other legal or equitable right or claim, whether or not similar to the foregoing), less the out-of-pocket costs and expenses, including without limitation attorneys fees and court costs, actually incurred by the Borrower in connection with the collection or other realization of such moneys and other payments, property and other consideration and compensation.
 
“Pledged Reserves Account” shall have the meaning provided in the Security Agreement.
 
“Pledged Reserves Account Funds” shall mean at any time the aggregate amount of proceeds of Loans borrowed hereunder for the purpose of establishing or maintaining Permitted Reserves, such proceeds to be deposited in the Pledged Reserves Account in accordance with Section 2.1(b) of the Security Agreement.
 
“Pledged Reserve Release Notice” shall have the meaning provided in Section 8.11.
 
“Pledged Reserve Repayment Date” shall mean the date on which the Borrower delivers the Pledged Reserve Release Notice required by Section 8.11.
 
“Prime Lending Rate” shall mean the rate as announced by Deutsche Bank AG, New York Branch, from time to time as its prime lending rate, the Prime Lending Rate to change when and as such prime lending rate changes. The Prime Lending Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. Deutsche Bank AG, New York Branch, may make commercial loans or other loans at rates of interest at, above or below the Prime Lending Rate.
 
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“Replacement Bank” shall have the meaning provided in Section 3.04(b).
 
“Reportable Event” shall mean an event described in Section 4043(c) of ERISA with respect to a Plan as to which the 30-day notice requirement has not been waived by the PBGC.
 
“Retained Percentage” of an Insured Obligation shall mean the percentage of risk assumed by the Borrower under Insurance Contracts with respect thereto.
 
“SEC” shall have the meaning provided in Section 8.01(e).
 
“Security Agreement” shall have the meaning provided in Section 5.05.
 
“Segregated Accounts Act” shall mean the meaning provided in Section 12.16(i).
 
“S&P” shall mean Standard & Poor’s Corporation.
 
“Subsidiary” shall mean, as to any Person, (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person and/or one or more Subsidiaries of such Person and (ii) any partnership, limited liability company, association, joint venture or other entity in which such Person and/or one or more Subsidiaries of such Person has more than a 50% equity interest at the time.
 
“Taxes” shall have the meaning provided in Section 4.04.
 
“Treaty” shall have the meaning provided in the third WHEREAS clause of this Agreement.
 
“Treaty Payment” shall have the meaning provided in Section 2.08(a).
 
“Trigger Date” shall have the meaning provided in the Security Agreement.
 
“UCC” shall mean the Uniform Commercial Code as from time to time in effect in the relevant jurisdiction.
 
“Unfunded Current Liability” of any Plan means the amount, if any, by which the present value of the accrued benefits under the Plan as of the close of its most recent plan year, determined in accordance with Statement of Financial Accounting Standards No. 35, based upon the actuarial assumptions used by the Plan’s actuary in the most recent annual valuation of the Plan, exceeds the fair market value of the assets allocable thereto, determined in accordance with Section 412 of the Code.
 
“United States” and “U.S.” shall each mean the United States of America.
 
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“Unutilized Commitment” shall mean, for any Bank, at any time, the Commitment of such Bank at such time less the aggregate principal amount of all Loans made by such Bank pursuant to Section 2.01 prior to such time.
 
“Wholly-Owned Subsidiary” shall mean, as to any Person, (i) any corporation 100% of whose capital stock is at the time owned by such Person and/or one or more Wholly-Owned Subsidiaries of such Person and (ii) any partnership, limited liability company, association, joint venture or other entity in which such Person and/or one or more Wholly-Owned Subsidiaries of such Person has a 100% equity interest at such time.
 
Section 1.02 Principles of Construction . (a) All references to sections, schedules and exhibits are to sections, schedules and exhibits in or to this Agreement unless otherwise specified. The words “hereof”, “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement.
 
(b) The term generally accepted accounting principles means generally accepted accounting principles in the United States, and all accounting terms not specifically defined herein shall be construed in accordance therewith.
 
SECTION 2. AMOUNT AND TERMS OF CREDIT .
 
Section 2.01 The Loans . Subject to and upon the terms and conditions set forth herein, each Bank severally agrees, at any time and from time to time prior to the Expiry Date, to make loans (each a “Loan” and, collectively, the “Loans”) to the Borrower, provided, however, that the principal amount of any Loan made by a Bank at any time pursuant to this Section 2.01 shall not exceed the Unutilized Commitment of such Bank at such time. Once repaid, Loans incurred hereunder may not be reborrowed.
 
Section 2.02 Amount of Each Borrowing . The aggregate principal amount of each Borrowing hereunder shall not (i) be less than $2,000,000, and if greater, shall be in an integral multiple of $1,000,000 and (ii) exceed the lesser of (a) Cumulative Losses incurred after the occurrence of the Loss Threshold Incurrence Date less the aggregate principal amount of all Loans previously made and (b) the aggregate Unutilized Commitments of all Banks as in effect on the date such Borrowing is made.
 
Section 2.03 Notice of Borrowing . Whenever the Borrower desires to make a Borrowing hereunder, it shall give the Agent at its Notice Office at least two Business Days’ prior notice made hereunder, provided that any such notice shall be deemed to have been given on a certain day only if given before 12:00 Noon (New York time) on such day. Each such notice (each a “Notice of Borrowing”) shall be in the form of Exhibit A, appropriately completed to specify the aggregate principal amount of the Loans to be made pursuant to such Borrowing, and the date of such Borrowing (which shall be a Business Day).
 
Section 2.04 Disbursement of Funds . No later than 12:00 Noon (New York time) on the date specified in each Notice of Borrowing, (i) each Bank will make available at the
 
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Payment Office its pro rata portion (in accordance with the Commitment of such Bank and the aggregate Commitments of all of the Banks as in effect on such date) of the amount of the Borrowing requested to be made on such date, in Dollars and in immediately available funds, and (ii) the Agent will make available to the Borrower the aggregate of the amounts so made available by the Banks on such day at the Payment Office.
 
Section 2.05 Notes . The Borrower’s obligation to pay the principal of, and interest on, the Loans made by each Bank shall be evidenced by a promissory note duly executed and delivered by the Borrower substantially in the form of Exhibit B with blanks appropriately completed in conformity herewith (each a “Note” and, collectively, the “Notes”). Each Note shall (i) be payable to the order of such Bank and be dated the Effective Date if such Bank shall be a party hereto on the Effective Date or the effective date of the Assignment and Assumption Agreement pursuant to which it becomes a party hereto if such Bank shall become a party hereto after the Effective Date, (ii) be in a stated principal amount equal to such Bank’s Commitment and be payable in the principal amount of the Loans evidenced thereby, (iii) mature, with respect to each Loan evidenced thereby, on the Expiry Date, (iv) bear interest as provided in the appropriate clause of Section 2.06 in respect of the Loans evidenced thereby and (v) be entitled to the benefits of this Agreement and be secured by the Security Agreement. Each Bank will note on its internal records the amount of each Loan made by it and each payment in respect thereof and will prior to any transfer of its Note endorse on the reverse side thereof the outstanding principal amount of Loans evidenced thereby. Failure to make any such notation shall not affect the Borrower’s obligations in respect of such Loans.
 
Section 2.06 Interest . (a) The Borrower agrees to pay interest in respect of the unpaid principal amount of each Loan from the date the proceeds thereof are made available to the Borrower until the maturity thereof (whether by acceleration or otherwise) at a rate per annum which shall be equal to the Base Rate in effect from time to time plus the Applicable Margin.
 
(b) Overdue principal and, to the extent permitted by law, overdue interest in respect of each Loan and any other overdue amount payable by the Borrower hereunder shall bear interest from the date payment thereof was due until (but not including) the date of actual payment at a rate per annum equal to 3.5% per annum in excess of the Base Rate in effect from time to time.
 
(c) Accrued (and theretofore unpaid) interest shall be payable (i) in respect of each Loan, quarterly in arrears on the last Business Day of each March, June, September and December, and (ii) in respect of each Loan, on any prepayment (on the amount prepaid), at maturity (whether by acceleration or otherwise) and, after such maturity, on demand.
 
Section 2.07 Capital Adequacy . If any Bank determines at any time that any applicable law or governmental rule, regulation, order or request (whether or not having the force of law) concerning capital adequacy, or any change in interpretation or administration thereof by any governmental authority, central bank or comparable agency, will have the effect of increasing the amount of capital required or expected to be maintained by such Bank based on the existence of its Commitment hereunder or its obligations hereunder, then the Borrower shall pay to such
 
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Bank, upon its written demand therefor, such additional amounts as shall be required to compensate such Bank for the increased cost to such Bank as a result of such increase of capital. In determining such additional amounts, such Bank will act reasonably and in good faith and will use averaging and attribution methods which are reasonable, provided that such Bank’s determination of compensation owing under this Section 2.07 shall, absent manifest error, be final and conclusive and binding on all the parties hereto. Each Bank, upon determining that any additional amounts will be payable pursuant to this Section 2.07, will give prompt written notice thereof to the Borrower, which notice shall show the basis for the calculation of such additional amounts. The failure to give any such notice shall not be deemed to be a waiver of any of the Borrower’s obligations to pay additional amounts pursuant to this Section 2.07, provided that the Borrower shall not be required to pay any such amounts until it receives written notice from a Bank in accordance with this Section 2.07.
 
Section 2.08 Payments Pursuant to Treaty; Obligations of Defaulting Banks . (a) Anything contained in this Agreement to the contrary notwithstanding, in the event that a Bank fails to make a Loan or any portion of a Loan required to be made pursuant to Section 2.01 and, as a result thereof, Haverford makes a corresponding payment to the Borrower pursuant to the Treaty (each such payment, a “Treaty Payment”), then (i) each Treaty Payment shall be deemed to be a Loan made by Haverford to the Borrower for purposes of this Agreement and the other Credit Documents, which Loan (A) shall be deemed to be made on the date of such Treaty Payment in an aggregate principal amount equal to such Treaty Payment, (B) with respect to the repayment thereof, shall be governed by, and entitled to the benefits of, this Agreement, and (c) be secured by the Security Agreement, (ii) so long as any principal of, interest on or other amount due and owing with respect to such Loan remains unpaid, Haverford shall be deemed to be a Bank for purposes of this Agreement and the other Credit Documents with respect thereto (but expressly not with respect to Commitment Fees) and (iii) the Commitment of such Defaulting Bank shall be permanently reduced on the date any such Loan is made by Haverford in an amount equal to the principal amount of such Loan. Anything contained in this Agreement to the contrary notwithstanding, the Borrower’s obligation to pay the principal of, and interest on, any Loan made by Haverford may not be evidenced by a Note. The Borrower’s failure to execute and deliver a Note to Haverford in respect of any Loan, however, shall not affect the Borrower’s obligations in respect thereof.
 
(b) If Haverford makes a payment to the Borrower pursuant to the Treaty as contemplated by Section 2.08(a), Haverford, in addition to any other right or remedy it may have pursuant to this Agreement or any other Credit Document, shall be entitled to receive, from such Defaulting Bank, upon demand, the amount of such payment, plus interest thereon, from the date made until paid, at the Base Rate plus the Applicable Margin. Upon any such payment by the relevant Defaulting Bank Haverford shall apply all such amounts received against amounts owing with respect to the relevant Loan, and such Defaulting Bank shall be subrogated to the rights of Haverford with respect thereto.
 
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SECTION 3.	COMMITMENT FEES, FEES; AND TERMINATIONS, EXTENSIONS AND INCREASES OF COMMITMENTS AND CONTINGENT COMMITMENTS .	
 
Section 3.01 Fees . (a) The Borrower agrees to pay to the Agent for distribution to the Banks pro rata in accordance with their respective Unutilized Commitments a commitment fee (such commitment fee, together with the commitment fee payable pursuant to Section 3.01(b), being the “Commitment Fees”) for the period from the Effective Date until the Expiry Date (or such earlier date as the Commitments shall have been terminated) computed at a rate equal to 0.55% per annum on the daily average Unutilized Commitments of the Banks; provided, however, that any Commitment Fee accrued with respect to the Unutilized Commitment of a Defaulting Bank during the period prior to the time such Bank became a Defaulting Bank and unpaid at such time shall not be payable by the Borrower so long as such Bank shall be a Defaulting Bank except to the extent that such Commitment Fee shall otherwise have been due and payable by the Borrower prior to such time; and provided further that no Commitment Fee shall accrue on the Unutilized Commitment of a Defaulting Bank so long as such Bank shall be a Defaulting Bank.
 
(b) Accrued Commitment Fees shall be due and payable quarterly in arrears on the last Business Day of each March, June, September and December of each year and on the Expiry Date or upon such earlier date as the Commitments shall be terminated.
 
(c) The Borrower shall pay to the Agent such fees in connection with the Credit Documents as may be agreed to from time to time between the Borrower and the Agent.
 
Section 3.02 Voluntary Termination of Unutilized Commitments . Upon at least five Business Days’ prior notice to the Agent at its Notice Office, the Borrower shall have the right to terminate the Unutilized Commitments, in whole or in part, in minimum aggregate amounts of $5,000,000 (or, if greater, in integral multiples of $1,000,000), provided that the Borrower shall concurrently satisfy its obligations, if any, at such time under Section 3.01.
 
Section 3.03 Mandatory Termination of Commitments . (a) The Commitment of each Bank shall be permanently reduced on each date a Loan is made by such Bank pursuant to Section 2.01 by the amount of such Loan.
 
(b) Notwithstanding anything herein to the contrary, the Borrower shall have the right to unilaterally terminate the Commitment of any Bank if, at any time after the Effective Date (with respect to any Bank that is a party hereto on the Effective Date) or at any time after the effective date of the relevant Assignment and Assumption Agreement (with respect to any Bank that becomes a party hereto after the Effective Date pursuant to Section 3.04 or 12.04), the unsecured senior debt rating (or shadow rating as reflected in a letter) of such Bank or its parent shall be downgraded by Moody’s or S&P, such termination to be effective on the Business Day the Borrower delivers to such Bank a notice of termination. The Borrower shall, concurrent with such termination, pay to such Bank the aggregate amount, if any, owing at such time by the Borrower to such Bank under this Agreement.
 
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(c) In addition to any other mandatory Commitment reductions pursuant to this Section 3.03, the Commitment of each Bank shall each terminate in its entirety on the Expiry Date.
 
Section 3.04 Expiry Date . (a) The expiration of the Commitments shall occur on October 15, 2008 (the “Expiry Date”); provided, however, that before (but not earlier than 120 days nor later than 90 days before) each anniversary of the Effective Date, the Borrower may make a written request (an “Extension Request”) to the Agent at the Notice Office that the Expiry Date be extended by one calendar year. Such Extension Request (a copy of which shall be forwarded by the Agent to each of the Banks and Haverford) shall include a certification by a senior officer of the Borrower that no Default or Event of Default has occurred and is continuing and all representations and warranties contained herein and the other Credit Documents are true and correct in all material aspects on and as of the date of the Extension Request (it being understood and agreed that any representation or warranty which expressly refers by its terms to a specified date shall be required to be true only as of such date). If by the date occurring 30 days next succeeding the Agent’s receipt of such Extension Request, any Bank agrees thereto in writing by so indicating on counterparts of the Extension Request and delivering such counterpart to the Borrower, “Expiry Date” as to such Bank shall mean the October 15 occurring in the calendar year next succeeding the Expiry Date then in effect, provided that any failure to so notify the Borrower shall be deemed to be a disapproval by such Bank of the Borrower’s Extension Request. The Commitment of any Bank which does not so agree, shall terminate upon the Expiry Date then in effect. No Bank shall be obligated to grant any extension pursuant to this Section 3.04(a), and any such extension shall be in the sole discretion of each Bank. The Borrower shall pay to each Bank which does not so agree all amounts owing under its Note and this Agreement on the effective date of the termination of such Bank’s Commitment.
 
(b) If fewer than all of the Banks consent to an Extension Request (each Bank that has not so consented being a “Declining Bank”, and each other Bank being an “Extending Bank”), the Borrower shall have the right to require any Declining Bank to assign in full its rights and obligations under this Agreement (i) to any one or more Extending Banks designated by the Borrower that have offered in their returned counterpart of the Extension Request to increase their respective Commitments in an aggregate amount at least equal to the amount of such Declining Bank’s Commitment (each such Extending Bank being an “Increasing Extending Bank”) and (ii) to the extent of any shortfall in the aggregate amount of extended Commitments to any one or more Eligible Transferees designated by the Borrower that agree to assume all of such rights and obligations (each such Eligible Transferee being a “Replacement Bank”), provided that (1) such Declining Bank shall have received payment of all amounts owing under its Note and this Agreement on the effective date of such assignment, (2) such assignment shall otherwise have occurred in compliance with Section 12.04 including, without limitation, clauses (iii) and (iv) of subsection (b) thereof and (3) the effective date of such assignment shall be the date specified by the Borrower and agreed to by the Replacement Bank or Increasing Extending Bank, as the case may be, which date shall be on or prior to the applicable Expiry Date.
 
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SECTION 4. PREPAYMENTS; PAYMENTS .
 
Section 4.01 Voluntary Prepayments . The Borrower shall have the right to prepay the Loans, without premium or penalty, in whole or in part from time to time.
 
Section 4.02 Mandatory Prepayments . On each Pledged Reserve Repayment Date, an amount equal to 100% of the Pledged Reserves Account Funds with respect to which the Borrower has delivered a Pledged Reserve Release Notice as required by Section 8.11 shall be applied as a mandatory prepayment of principal of outstanding Loans.
 
Section 4.03 Method and Place of Payment . Except as otherwise specifically provided herein, all payments under this Agreement or any Note shall be made to the Agent not later than 12:00 Noon (New York time) on the date when due and shall be made in Dollars in immediately available funds at the Agent’s Payment Office. Whenever any payment to be made hereunder or under the Note shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest shall be payable at the applicable rate during such extension.
 
Section 4.04 Net Payments . All payments made by the Borrower hereunder or under any Note will be made without setoff, counterclaim or other defense. All such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein with respect to such payment (but excluding any tax imposed on or measured by the net income or gross income or gross receipts of any Bank (other than withholding taxes or taxes in lieu of withholding taxes) pursuant to the laws of the jurisdiction (or any political subdivision or taxing authority thereof or therein) in which the principal office or lending office of such Bank is located or in which such Bank is organized or in which such Bank is doing business through a branch or office from which such jurisdiction treats a Loan as having been made) and all interest, penalties or similar liabilities with respect thereto (collectively, “Taxes”). If any Taxes are so levied or imposed, the Borrower agrees to pay the full amount of such Taxes and such additional amounts as may be necessary so that every payment of all amounts due hereunder or under any Note, after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein or in such Note. The Borrower shall also reimburse each Bank, upon its written request, which request shall show the basis for calculation of such reimbursement, for taxes imposed on or measured by the net income of such Bank pursuant to the laws of the jurisdiction (or any political subdivision or taxing authority thereof or therein) in which its principal office or lending office is located or in which such Bank is organized or in which such Bank is doing business through a branch or office from which such jurisdiction treats a Loan as having been made as it shall determine are payable by it in respect of amounts paid to or on behalf of such Bank pursuant to the preceding sentence. The Borrower will furnish to the applicable Bank within 45 days after the date the payment of any Taxes is due pursuant to applicable law certified copies of any tax receipts available to the Borrower evidencing such payment by the Borrower. The Borrower will indemnify and hold harmless each Bank, and reimburse each Bank upon its written request, for the amount of any Taxes so levied or imposed and paid by such Bank.
 
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Section 4.05 Limitations on Sources of Payment . Notwithstanding any other provision of this Agreement or of any other Credit Document, the obligations of the Borrower to make payments of principal and interest on the Loans and the Notes are limited recourse obligations of the Borrower payable solely from the Pledged Recoveries, the Pledged Premiums, the Pledged Reserves Account Funds and the other Collateral, and none of the Agent, the Collateral Agent, any Bank or any other Person shall be entitled to procure any money judgment against or to levy or foreclose upon or attach any other assets or properties of the Borrower for payment of such obligations; provided, however, that nothing herein contained shall limit, restrict or impair the lien created by the Security Agreement or the right of any Bank to exercise any of its rights herein or in any of the other Credit Documents upon the occurrence of an Event of Default or otherwise, or to bring suit and obtain a judgment against the Borrower (recourse thereon being limited as to payment of principal and interest on the Loans and the Notes as provided in this Section 4.05).
 
SECTION 5. CONDITIONS PRECEDENT TO EFFECTIVENESS .
 
This Agreement shall become effective subject to the satisfaction (or waiver by the Banks) of the following conditions:
 
Section 5.01 Execution of Agreement; Notes . The Borrower and each Bank shall have signed a copy hereof (whether the same or different copies) and shall have delivered the same to the Agent at its Notice Office and there shall have been delivered to each Bank a Note executed by the Borrower in the amount, maturity and as otherwise provided herein.
 
Section 5.02 No Default; Representations and Warranties . There shall exist no Default or Event of Default and all representations and warranties contained herein and in the other Credit Documents shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on and as of the Effective Date.
 
Section 5.03 Opinion of Counsel . The Agent shall have received an opinion addressed to it and the Banks and dated the Effective Date from the General Counsel of the Borrower covering the matters set forth in Exhibit C.
 
Section 5.04 Corporate Documents; Proceedings . (a) The Agent shall have received a certificate, dated the Effective Date, signed by the president or any vice president of the Borrower, and attested to by the secretary or any assistant secretary of the Borrower, in the form of Exhibit D with appropriate insertions, together with copies of the charter documents and resolutions of the Borrower referred to in such certificate.
 
(b) All corporate and legal proceedings and all instruments and agreements in connection with the transactions contemplated in this Agreement and the other Credit Documents shall be satisfactory in form and substance to the Agent, and it shall have received all information and copies of all documents and papers, including records of corporate proceedings and governmental approvals, if any, which the Agent reasonably may have requested in connection therewith, such documents and papers where appropriate to be certified by proper corporate or governmental authorities.
 
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Section 5.05 Security Agreement . The Borrower shall have duly authorized, executed and delivered an Amended and Restated Pledge and Security Agreement in the form of Exhibit E (as modified, supplemented or amended from time to time, the “Security Agreement”) covering all the Borrower’s present and future Collateral, together with:
 
(a) evidence of all filings as may be necessary or, in the opinion of the Collateral Agent, desirable to perfect the security interests purported to be created by the Security Agreement; and
 
(b) evidence that all other actions necessary or, in the opinion of the Collateral Agent, desirable to perfect and protect the security interests purported to be created by the Security Agreement have been taken.
 
Section 5.06 Covered Portfolio, etc. The Agent shall have received a certificate, dated the Effective Date, signed by the president, the chief financial officer or other senior financial officer of the Borrower, setting forth in reasonable detail as of June 30, 2001 (i) each Insured Obligation in the Covered Portfolio and each reinsurance agreement or similar arrangement which covers any material amount of such Insured Obligations, (ii) each default by the issuer of any such Insured Obligation or other obligor with respect thereto which has formed or the Borrower reasonably expects to form the basis of a claim under an Insurance Contract, (iii) each default by any party to any such reinsurance agreement or similar arrangement, (iv) each claim paid by the Borrower under any Insurance Contract with respect to such Insured Obligations equal to or greater than $100,000, individually or in the aggregate, and (v) the Borrower’s reasonable estimate as of June 30, 2001 of Installment Premiums payable with respect to the Covered Portfolio.
 
Section 5.07 Requisite Approvals . All necessary governmental (domestic and foreign) and third party approvals in connection with the transactions contemplated by the Credit Documents and otherwise referred to herein or therein shall have been obtained and remain in effect, and all applicable waiting periods shall have expired without any action being taken by any competent authority which restrains, prevents or imposes materially adverse conditions upon the consummation of the transactions contemplated by the Credit Documents and otherwise referred to herein or therein. Additionally, there shall not exist any judgment, order, injunction or other restraint issued or filed or a hearing seeking injunctive relief or other restraint pending or notified prohibiting or imposing materially adverse conditions upon the making of the Loans.
 
Section 5.08 Litigation . No litigation by any entity (private or governmental) shall be pending or threatened with respect to this Agreement or any documentation executed in connection herewith or the transactions contemplated hereby, or with respect to any material Indebtedness of the Borrower or which any Bank shall determine would reasonably be expected to have a materially adverse effect on the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower or of the Borrower and its Subsidiaries taken as a whole.
 
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Section 5.09 Fees, etc . The Borrower shall have paid to the Agent and to the Banks all costs, fees and expenses (including, without limitation, legal fees and expenses) payable to the Agent and/or the Banks to the extent then due.
 
Section 5.10 Rating . On the Effective Date, the Borrower’s Rating assigned by Moody’s and S&P shall be not lower than Aa2 and AAA, respectively.
 
All of the certificates, legal opinions and other documents and papers referred to in this Section 5, unless otherwise specified, shall have been delivered to the Agent at its Notice Office.
 
SECTION 6. CONDITIONS PRECEDENT TO ALL CREDIT EVENTS .
 
The obligation of the Banks to make Loans is subject, at the time of each such Credit Event, to the satisfaction of the following conditions:
 
Section 6.01 Loss Threshold Incurrence Date . At or prior to the time of each such Credit Event, the Loss Threshold Incurrence Date shall have occurred.
 
Section 6.02 Notice of Borrowing . Prior to the making of each Loan, the Agent shall have received a Notice of Borrowing meeting the requirements of Section 2.03.
 
The acceptance of the proceeds of each Credit Event shall constitute a representation and warranty by the Borrower to each Bank that the Loss Threshold Incurrence Date has occurred.
 
SECTION 7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS .
 
In order to induce the Banks to enter into this Agreement, the Borrower makes the following representations, warranties and agreements as of the Effective Date, which shall survive the execution and delivery of this Agreement and the Notes (it being understood and agreed that any representation or warranty which expressly refers by its terms to a specified date shall be required to be true and correct in all material respects only as of such date):
 
Section 7.01 Corporate Status . The Borrower (i) is a duly organized and validly existing corporation in good standing under the laws of the State of Maryland, (ii) has the power and authority to own its property and assets and to transact the business in which it is engaged and (iii) is duly qualified as a foreign corporation and in good standing in each jurisdiction where the ownership, leasing or operation of property or the conduct of its business requires such qualification, except where the failure to qualify would not have a material adverse effect on the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower or of the Borrower and its Subsidiaries taken as a whole.
 
Section 7.02 Corporate Power and Authority . The Borrower has the corporate power to execute, deliver and perform the terms and provisions of each of the Credit Documents to which it is party and has taken all necessary corporate action to authorize the execution, delivery and performance by it of each of such Credit Documents. The Borrower has, or in the case of the Credit Documents other than this Agreement, by the Effective Date will have, duly executed and delivered each of the Credit Documents to which it is party, and each of such
 
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Credit Documents constitutes or, in the case of each such other Credit Document when executed and delivered, will constitute, its legal, valid and binding obligation enforceable in accordance with its terms, subject to the qualifications that enforcement of the rights and remedies created hereby or thereby is subject to (i) bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting the rights and remedies of creditors and (ii) general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law).
 
Section 7.03 No Violation . Neither the execution, delivery or performance by the Borrower of the Credit Documents to which it is a party, nor compliance by it with the terms and provisions thereof, nor the use of the proceeds of the Loans (i) will contravene any provision of any law, statute, rule or regulation or any order, writ, injunction or decree of any court or governmental instrumentality, (ii) will conflict or be inconsistent with or result in any breach of any of the terms, covenants, conditions or provisions of, or constitute a default under, or result in the creation or imposition of (or the obligation to create or impose) any Lien (other than Permitted Liens) upon any of the property or assets of the Borrower pursuant to the terms of any indenture, mortgage, deed of trust, credit agreement, loan agreement or any other agreement, contract or instrument to which the Borrower is a party or by which it or any of its property or assets is bound or to which it may be subject or (iii) will violate any provision of the certificate of incorporation or by-laws of the Borrower.
 
Section 7.04 Governmental Approvals . No order, consent, approval, license, authorization or validation of, or filing, recording or registration with (except as have been obtained or made prior to the Effective Date), or exemption by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with, (i) the execution, delivery and performance of any Credit Document to which the Borrower is a party or (ii) the legality, validity, binding effect or enforceability of any such Credit Document.
 
Section 7.05 Financial Statements; Financial Condition; Undisclosed Liabilities; etc . (a) The Borrower’s statutory financial statements contained in its annual convention statement as filed with the Department for the year ended December 31, 2000 and heretofore furnished to the Agent present fairly the financial condition of the Borrower as of the date of such statements. Such statutory financial statements were prepared in accordance with applicable statutory accounting principles. Since December 31, 2000, there has been no material adverse change in the business, operations, property, assets or condition (financial or otherwise) of the Borrower or of the Borrower and its Subsidiaries taken as a whole.
 
(b) Except as fully reflected in the financial statements delivered pursuant to Section 7.05(a), there are no liabilities or obligations with respect to the Borrower or any of its Subsidiaries of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether or not due) which, either individually or in aggregate, would be material to the Borrower or to the Borrower and its Subsidiaries taken as a whole. The Borrower does not know of any basis for the assertion against the Borrower of any liability or obligation of any nature whatsoever that is not fully reflected in the financial statements delivered pursuant to Section 7.05(a) which, either individually or in the aggregate, would be material to the Borrower or to the Borrower and its Subsidiaries taken as a whole. At March 31, 2001 Average Annual Debt Service was $3,113,274,050.
 
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Section 7.06 Litigation . There are no actions, suits or proceedings pending or, to the best knowledge of the Borrower, threatened (i) with respect to any Credit Document or (ii) that are reasonably likely to materially and adversely affect the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower or of the Borrower and its Subsidiaries taken as a whole.
 
Section 7.07 True and Complete Disclosure . All factual information (taken as a whole) heretofore or contemporaneously furnished by or on behalf of the Borrower in writing to the Banks (including without limitation all information contained in the Credit Documents) for purposes of or in connection with this Agreement or any transaction contemplated herein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of the Borrower in writing to the Banks will be, true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any fact necessary to make such information (taken as a whole) not misleading at such time in light of the circumstances under which such information was provided.
 
Section 7.08 Use of Proceeds; Margin Regulations . All proceeds of each Loan shall be used by the Borrower only to pay or reimburse itself for the payment of Losses in respect of the Covered Portfolio, and no part of the proceeds of any Loan will be used by the Borrower to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock. Neither the making of any Loan nor the use of the proceeds thereof will violate or be inconsistent with the provisions of Regulations T, U or X of the Board of Governors of the Federal Reserve System.
 
Section 7.09 Tax Returns and Payments . The Borrower has filed all tax returns required to be filed by it and has paid all income taxes payable by it which have become due pursuant to such tax returns and all other taxes and assessments payable by it which have become due, other than those not yet delinquent and except for those contested in good faith and for which adequate reserves have been established. The Borrower has paid, or has provided adequate reserves (in the good faith judgment of the management of the Borrower) for the payment of, all federal and state income taxes applicable for all prior fiscal years and for the current fiscal year to the date hereof.
 
Section 7.10 Compliance with ERISA . Each Plan is in substantial compliance with all applicable provisions of ERISA and the Code; no Reportable Event has occurred with respect to any Plan; no Plan has an accumulated or waived funding deficiency or has applied for an extension of any amortization period within the meaning of Section 412 of the Code or Section 302 of ERISA; neither the Borrower nor any ERISA Affiliate has incurred any material liability to or on account of a Plan or a Multiemployer Plan pursuant to Section 409, 502(i), 515, 4201, 4204, 4212, 4062, 4063, 4064 or 4069 of ERISA or Section 401(a)(29), 4971 or 4975 of the Code which has not been satisfied in full or expects to incur any material liability under any of the foregoing sections with respect to any such Plan or Multiemployer Plan; no condition exists which presents a material risk to the Borrower or any ERISA Affiliate of incurring a
 
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material liability to or on account of a Plan pursuant to the foregoing provisions of ERISA and the Code; neither the Borrower nor any of its ERISA Affiliates is or has ever been a party to, or is or has ever been required to make contributions to, or has terminated any Multiemployer Plan; no Lien imposed under the Code or ERISA on the assets of the Borrower or any ERISA Affiliate exists or is likely to arise on account of any Plan or Multiemployer Plan; and the Borrower does not maintain or contribute to any employee welfare benefit plan (as defined in Section 3(1) of ERISA) which provides benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or any employee pension benefit plan (as defined in Section 3(2) of ERISA) the obligations with respect to which would reasonably be expected to have a material adverse effect on the ability of the Borrower to perform its obligations under this Agreement.
 
Section 7.11 Capitalization . As of the date hereof, the authorized capital stock of the Borrower consists of 200,000 shares of common stock, $120.00 par value per share, of which 20,834 shares are issued and outstanding. All such outstanding shares have been duly and validly issued, and are fully paid and non-assessable. The Borrower does not have outstanding any securities convertible into or exchangeable for its capital stock or outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock.
 
Section 7.12 Subsidiaries . Set forth on Schedule II hereto is a complete and correct list, as of the date hereof, of all of the Subsidiaries of the Borrower, together with, for each subsidiary, (i) the jurisdiction of organization of such Subsidiary, the Persons having an ownership interest therein and (ii) the nature of the ownership represented by such ownership interests. As of the Effective Date, (a) the Borrower and, to the extent applicable, the appropriate Subsidiary owns free and clear of Liens, and has the unencumbered right to vote all outstanding ownership interest in each Person shown to be held by it in Schedule II, (b) all of the issued and outstanding capital stock of each such Person organized as a corporation has been duly and validly issued, and are fully paid and nonassessable, and (c) no Subsidiary of the Borrower has any outstanding securities convertible into or exchangeable for capital stock or outstanding any rights to subscribe for or to purchase, or any option for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock except as otherwise disclosed on Schedule II.
 
Section 7.13 Compliance with Statutes, etc. The Borrower is in compliance with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls), except such noncompliances as could not reasonably be expected to have, in the aggregate, a material adverse effect on the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower or of the Borrower and its Subsidiaries taken as a whole.
 
Section 7.14 Investment Company Act . The Borrower is not an “investment company” within the meaning of the Investment Company Act of 1940, as amended.
 
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Section 7.15 Public Utility Holding Company Act . The Borrower is not a “holding company”, or a “subsidiary company” of a “holding company”, or an “affiliate” of a “holding company” or of a “subsidiary company” of a “holding company” within the meaning of the Public Utility Holding Company Act of 1935, as amended.
 
Section 7.16 Compliance with Insurance Law . The Borrower is duly licensed to transact business as a financial guaranty insurance corporation by the New York Insurance Department and (a) has all other requisite federal, state and other governmental licenses, authorizations, permits, consents and approvals to conduct its insurance and other business as currently conducted and proposed to be conducted in New York, Maryland and each other jurisdiction in which it writes or issues policies of insurance (including without limitation any form of financial guaranty insurance, certain lines of surety insurance or credit insurance), surety bonds, guaranties, contracts of reinsurance or other undertakings similar to the foregoing (collectively, “Insurance Contracts”) or in which it conducts business, except for failures, if any, to have such licenses, authorizations, permits, consents and approvals which singly or in the aggregate could not reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower or the ability of the Borrower to perform its obligations under this Agreement or any of the other Credit Documents, (b) has made all filings of each of its forms of Insurance Contracts and of its rates and charges with the Department, the New York Insurance Department and all other federal, state and other administrative or governmental bodies required for the use thereof and has obtained all requisite approvals thereof, except for failures, if any, to file or to obtain such approvals which singly or in the aggregate could not reasonably be expected to have a material adverse effect on the business, assets, operations or financial condition of the Borrower or the ability of the Borrower to perform its obligations under this Agreement or any of the other Credit Documents, (c) has duly established and maintains all reserves required under the New York Insurance Law, Maryland Insurance Law and other applicable federal, state and other laws, rules and regulations, except for failures, if any, to maintain reserves which could not reasonably be expected to have a material adverse effect on the business, assets, operations, property or condition (financial or otherwise) of the Borrower or the ability of the Borrower to perform its obligations under this Agreement or any of the Credit Documents and (e) is in compliance (and has not received any notice from the Department, the New York Insurance Department or similar administrative or governmental body or an authorized representative thereof claiming that it is not in compliance) with the New York Insurance Law, Maryland Insurance Law and all other applicable federal, state and other laws relating to its insurance and other businesses, except with respect to failures, if any, to comply which singly or in the aggregate could not reasonably be expected to have a material adverse effect on the business, assets, operations, property or condition (financial or otherwise) of the Borrower or of the Borrower and its Subsidiaries taken as a whole or the ability of the Borrower to perform its obligations under this Agreement or any of the other Credit Documents.
 
Section 7.17 Covered Portfolio . Substantially all of the Insured Obligations in the Covered Portfolio are insured or reinsured by the Borrower under Insurance Contracts in the form or forms heretofore supplied to the Agent in accordance with the Borrower’s underwriting criteria. The Borrower has no reason to believe that its rights included among the Collateral are not valid and binding against the obligors thereunder in accordance with their respective terms,
 
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except insofar as enforceability may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting the enforcement of creditors’ rights generally and the availability of equitable remedies, except for such Collateral which, in the aggregate, could not reasonably be expected to have a material adverse effect on the right and ability of the Collateral Agent, in accordance with the Security Agreement, to realize upon the Collateral as a whole. The Borrower has delivered to each Bank a listing, as of June 30, 2001, of the reinsurer and the related amounts (both ceded par inforce and ceded principal and interest inforce) of reinsured Insured Obligations in excess of $1,000,000 as of such date.
 
SECTION 8. AFFIRMATIVE COVENANTS .
 
The Borrower covenants and agrees that on and after the Effective Date and until the Commitments have terminated and the Loans and the Notes, together with interest, Fees and all other obligations incurred hereunder and thereunder, are paid in full:
 
Section 8.01 Information Covenants . The Borrower will furnish to the Agent and, upon the request of any Bank, to such Bank:
 
(a) Quarterly and Annual Borrower Financial Statements . Promptly, and in any event within five Business Days after the filing thereof, a copy of the annual statement for each calendar year and quarterly statements for each calendar quarter as filed with the Department or New York Insurance Department and the financial statements of the Borrower for such calendar year or quarter prepared in accordance with the statutory accounting principles, accompanied by any and all letters, reports and/or certifications prepared by public accountants required to be filed with the Department or New York Insurance Department, certified by the Chief Financial Officer of the Borrower as presenting fairly in accordance with statutory accounting principles applied (except as specifically set forth therein) on a basis consistent with prior periods, the information contained therein.
 
(b) Officer’s Certificates . At the time of the delivery of the financial statements provided for in Section 8.01(a) (or in case of clause (i)(A) of this Section 8.01(b), at the time of the delivery of the annual Borrower financial statements provided for in Section 8.01(a)), a certificate of the Chief Financial Officer or Treasurer of the Borrower (i) listing the Insured Obligations in the Covered Portfolio (and, if the Trigger Date has occurred, identifying the Insurance Contracts with respect thereto) and calculating in reasonable detail as of the date of such financial statements (A) if such date is prior to the Trigger Date, the Borrower’s Cumulative Losses (stating separately any Permitted Reserves included therein) for the current Commitment Period and (B) if such date is on or after the occurrence of the Trigger Date or the Loss Threshold Incurrence Date, (1) the date of the occurrence thereof, (2) evidence of the occurrence thereof, (3) the amount of Permitted Reserves as of the date of such financial statements and (4) the aggregate amount of Pledged Recoveries received by or for the account of the Borrower during the current Commitment Period on or prior to the date of such financial statements and (ii) to the effect that, to the best of such officer’s knowledge, no Default or Event of Default has occurred and is continuing or, if any Default or Event of Default has occurred and is continuing, specifying the nature and extent thereof.
 
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(c) Management Letters . Promptly after the receipt thereof by the Borrower or any of its Subsidiaries, a copy of any “management letter” received by the Borrower or such Subsidiary from its certified public accountants and the management’s responses thereto.
 
(d) Notice of Default or Litigation . Promptly, and in any event within two Business Days, after an Authorized Officer obtains knowledge thereof, written notice of (i) the occurrence of any event which constitutes a Default or Event of Default, (ii) any litigation or governmental proceeding (including, without limitation, any investigation by or before the Department) pending (A) against the Borrower or any of its Subsidiaries which could reasonably be expected to have a materially adverse effect upon the business, operations, property, assets, liabilities, or condition (financial or otherwise) of the Borrower or of the Borrower and its Subsidiaries taken as a whole or (B) with respect to any Credit Document, (iii) any other event which could reasonably be expected to have a materially adverse effect upon the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower or of the Borrower and its Subsidiaries taken as a whole, (iv) any rating report received by the Borrower published by Moody’s, S&P or, if either Moody’s or S&P no longer rates the claims-paying ability of the Borrower, any other nationally recognized rating agency which, with the consent of the Borrower, rates the creditworthiness of obligations insured by the Borrower, (v) if prior to the Trigger Date, each Loss in excess of $5,000,000 in any fiscal year and, if after the Trigger Date, each Loss, in any event, including without limitation, identification of the Insured Obligation with respect to which such Loss occurred, (vi) each default by the issuer of any Insured Obligation in the Covered Portfolio or other obligor with respect thereto which could form the basis of a claim under an Insurance Contract and (vii) each default by any party to a reinsurance agreement or similar arrangement with the Borrower of Insured Obligations in the Covered Portfolio.
 
(e) Other Reports and Filings . Within 10 Business Days following the filing thereof with the Securities and Exchange Commission or any successor thereto (the “SEC”), copies of all financial information, proxy materials and other information and reports, if any, which the Borrower or any Affiliate of the Borrower shall file with the SEC.
 
(f) Specific Information . No less frequently then quarterly, (i) information with respect to the Covered Portfolio received by the Borrower from the relevant primary insurer, (ii) service mix (i.e., healthcare, education, small issue industrial development bonds, utilities and pollution control, etc.) detail, on a par insured and debt service basis, with respect to the Covered Portfolio and (iii) a watch list/weakening credit update with respect to the Covered Portfolio.
 
(g) Other Information . From time to time, such other information or documents (financial or otherwise) as any Bank may reasonably request, including, without limitation, information with respect to, and copies of, any relevant reinsurance agreement.
 
Section 8.02 Books, Records and Inspections . The Borrower will, and will cause each of its Subsidiaries to, keep proper books of record and account in which full, true and correct entries in conformity with generally accepted accounting principles in the United States and all requirements of law shall be made of all dealings and transactions in relation to its
 
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business and activities. The Borrower will, and will cause each of its Subsidiaries to, permit officers and designated representatives of the Agent or any Bank to visit and inspect, during regular business hours and under guidance of officers of the Borrower or such Subsidiary, any of the properties of the Borrower or such Subsidiary, and to examine the books of account of the Borrower or such Subsidiary and discuss the affairs, finances and accounts of the Borrower or such Subsidiary with, and be advised as to the same by, its and their officers and independent accountants, all at such reasonable times and intervals and to such reasonable extent as the Agent or such Bank may request.
 
Section 8.03 Corporate Franchises . The Borrower will do or cause to be done all things necessary to preserve and keep in full force and effect its existence and its material rights, franchises, licenses and patents; provided, however, that nothing in this Section 8.03 shall prevent (i) transactions by the Borrower or any of its Subsidiaries which are permitted as exceptions to the restrictions of Section 9.02 or (ii) the withdrawal by the Borrower of its qualification as a foreign corporation in any jurisdiction where such withdrawal could not reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower or of the Borrower and its Subsidiaries taken as a whole.
 
Section 8.04 Compliance with Statutes, etc . The Borrower will, and will cause each of its Subsidiaries to, comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls), except such noncompliances as could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower or of the Borrower and its Subsidiaries taken as a whole.
 
Section 8.05 ERISA . Promptly after an Authorized Officer of the Borrower has received notice or otherwise has knowledge thereof, the Borrower shall deliver to the Agent a written notice describing in reasonable detail the occurrence of any of the following: that a Reportable Event has occurred; that an accumulated funding deficiency, within the meaning of Section 412 of the Code or Section 302 of ERISA, has been incurred or an application may be or has been made to the Secretary of the Treasury for a waiver or modification of the minimum funding standard (including any required installment payments) or an extension of any amortization period under Section 412 of the Code or Section 303 or 304 of ERISA with respect to a Plan; that a Plan has an Unfunded Current Liability giving rise to a Lien under ERISA; or that the Borrower or any ERISA Affiliate will or may incur any material liability (including any contingent or secondary liability) to or on account of the termination of or withdrawal from a Plan or Multiemployer Plan under Section 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA. Upon written request of the Agent, the Borrower will deliver to each Bank a complete copy of the annual report (Form 5500) of each Plan required to be filed with the Internal Revenue Service.
 
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Section 8.06 Performance of Obligations . The Borrower will, and will cause each of its Subsidiaries to, perform all of its obligations under the terms of each mortgage, indenture, security agreement and other debt instrument by which it is bound, except such non-performances as could not, individually or in the aggregate, reasonably be expected to have a material adverse effect on the business, operations, property, assets, liabilities, prospects or condition (financial or otherwise) of the Borrower or of the Borrower and its Subsidiaries taken as a whole.
 
Section 8.07 Use of Proceeds . The Borrower will use the proceeds of the Loans only to pay or reimburse itself for the payment of Losses in respect of the Covered Portfolio.
 
Section 8.08 Conduct of Business . The Borrower will continue to engage in business of the same general type as conducted by it on the Effective Date.
 
Section 8.09 Underwriting Criteria . The Borrower shall maintain (i) its criteria for underwriting (including reinsuring) Insurance Contracts and (ii) its basic service/industry mix substantially as heretofore in effect.
 
Section 8.10 Collection of Pledged Recoveries and Pledged Premiums . The Borrower shall at all times use its commercially reasonable efforts to collect and otherwise realize upon all Pledged Recoveries and Pledged Premiums in compliance with applicable law and in a commercially reasonable manner.
 
Section 8.11 Pledged Reserve Release Notice . The Borrower hereby acknowledges and agrees that if, at any time, it shall cease to maintain all or any portion of Permitted Reserves in respect of which Pledged Reserves Account Funds have been deposited in the Pledged Reserves Account, the Borrower as promptly as possible (and in any event within three Business Days) after it shall cease to maintain such Permitted Reserves shall give written notice thereof (each such notice, a “Pledged Reserve Release Notice”) to the Agent and the Collateral Agent which notice shall provide the amount of such Pledged Reserves Account Funds that have been released.
 
Section 8.12 Registry . The Borrower hereby covenants that it shall maintain a register on which it will record the Commitment from time to time of each of the Banks, the Loans made by each of the Banks and each repayment in respect of the principal amount of the Loans of each Bank. Failure to make any such recordation, or any error in such recordation, shall not affect the Borrower’s obligations in respect of such Loans. Upon the request of the Borrower, the Agent hereby agrees to use its reasonable efforts to provide to the Borrower such information not otherwise available to the Borrower, as the Borrower shall reasonably request from time to time in order to enable it to fulfill its obligations pursuant to this Section 8.12.
 
Section 8.13 Maintenance of Insurance . The Borrower will, and will cause each of its Subsidiaries to, (i) maintain with financially sound and reputable insurance companies insurance on all its property in at least such amounts and against at least such risks as is consistent and in accordance with industry practice and (ii) furnish to the Agent, upon its reasonable request, full information as to such insurance carried.
 
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Section 8.14 Payment of Taxes . The Borrower will pay and discharge or cause to be paid and discharged, and will cause each of its Subsidiaries to pay and discharge, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, in each case on a timely basis, and all lawful claims which, if unpaid, might become a lien or charge upon any properties of the Borrower or any of its Subsidiaries; provided that neither the Borrower nor any of its Subsidiaries shall be required to pay any such tax, assessment, charge, levy or claim which is being contested in good faith and by proper proceedings if it has maintained adequate reserves with respect thereto in accordance with generally accepted accounting principles.
 
SECTION 9. NEGATIVE COVENANTS .
 
The Borrower covenants and agrees that on and after the Effective Date and until the Commitments have terminated and the Loans and the Notes, together with interest, Fees and all other obligations incurred hereunder and thereunder, are paid in full:
 
Section 9.01 Liens . The Borrower will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon or with respect to any Pledged Recoveries, Pledged Premiums, Pledged Reserves Account Funds or other Collateral, provided that the provisions of this Section 9.01 shall not prevent the creation, incurrence, assumption or existence of the following (Liens described below are herein referred to as “Permitted Liens”):
 
(i) the Lien in favor of the Banks and Haverford under the Security Agreement or otherwise permitted thereunder;
 
(ii) inchoate Liens for taxes, assessments or governmental charges or levies not yet due or Liens for taxes, assessments or governmental charges or levies being contested in good faith and by appropriate proceedings for which adequate reserves have been established in accordance with generally accepted accounting principles;
 
(iii) Liens in respect of property or assets of the Borrower or any of its Subsidiaries imposed by law, which were incurred in the ordinary course of business and do not secure Indebtedness for borrowed money, such as carriers’, warehousemen’s, materialmen’s and mechanics’ liens and other similar Liens arising in the ordinary course of business, which relate to Indebtedness which has not been paid when due and payable in accordance with its terms and which are being contested in good faith by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property or assets subject to any such Lien; and
 
(iv) Liens in respect of statutory preference or priorities granted to certain claims under Article 48A, Sections 132-150 (inclusive) of the Maryland Annotated Code;
 
(v) Liens established in favor of the beneficiaries of reinsurance agreements to the extent such Liens are established in the ordinary course of business or are otherwise within the parameters of industry practice; and
 
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(vi) Liens represented by a financing statement to the extent such financing statement does not represent notice of a valid security interest and the Borrower uses its best efforts to file or cause to be filed a termination statement in respect thereof.
 
Section 9.02 Consolidation, Merger, Sale of Assets, etc . The Borrower will not, and will not permit any of its Subsidiaries to, wind up, liquidate or dissolve its affairs or enter into any transaction of merger or consolidation, or convey, sell, lease or otherwise dispose of (or agree to do any of the foregoing at any future time) all or any substantial part of its property or assets, or purchase or otherwise acquire (in one or a series of related transactions) all or substantially all of the property or assets (other than purchases or other acquisitions of inventory, materials and equipment in the ordinary course of business) of any Person, or permit any of its Subsidiaries so to do any of the foregoing, except that:
 
(i) each of the Borrower and its Subsidiaries may in the ordinary course of business buy, sell or lease assets;
 
(ii) any Subsidiary may wind up its affairs or liquidate or dissolve into, and may consolidate or merge with or into, the Borrower or any other Subsidiary of the Borrower;
 
(iii) the assets or stock of any Subsidiary of the Borrower may be purchased or otherwise acquired by the Borrower or any other Subsidiary of the Borrower;
 
(iv) the Borrower or any of its Subsidiaries may purchase or otherwise acquire all or substantially all of the properties or assets of any Person (other than the Borrower) or acquire such Person by merger so long as (a) no Default or Event of Default has occurred and is continuing or would occur after giving effect thereto, (b) the consolidated net worth (determined in accordance with U.S. generally accepted accounting principles) of the Borrower and its Subsidiaries taken as a whole immediately after giving effect to such purchase, acquisition or merger is at least equal to or not less than 5% lower than such consolidated net worth immediately prior to such purchase, acquisition or merger, (c) such purchase, acquisition or merger shall not result in any downgrading of the Borrower’s Rating assigned by Moody’s or S&P from that in effect immediately prior to such purchase, acquisition or merger and (d) the Borrower shall deliver to the Agent a certificate of the president, chief financial officer or the treasurer of the Borrower stating that such purchase, merger or acquisition complied with the conditions contained in this clause (iv);
 
(v) the Borrower or any Subsidiary may merge into another Person so long as (a) such merger is solely for the purpose of changing domicile, (b) the surviving corporation assumes all obligations of the Borrower or any Subsidiary under each of the Credit Documents and (c) no Default or Event of Default has occurred and is continuing or would occur after giving effect thereto;
 
(vi) any Subsidiary may take any action not otherwise permitted by this Section 9.02 so long as no Default or Event of Default has occurred and is continuing to the extent such action is not in any manner adverse to the security interest created pursuant to the Security Agreement or otherwise materially adverse to the Borrower or the Bank; and
 
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(vii) intercompany transfers shall be permitted in accordance with Section 9.04.
 
Section 9.03 Limitation on Modification of Indebtedness; Modifications of Charter, By-Laws and Certain Other Agreements; etc. The Borrower will not, and will not permit any of its Subsidiaries to, (i) amend or modify, or permit the amendment or modification of, any provision of any Indebtedness or of any agreement (including, without limitation, any purchase agreement, indenture, loan agreement or security agreement) in any manner adverse to the security interest created pursuant to the Security Agreement or otherwise materially adverse to the Banks or (ii) amend, modify or change its certificate of incorporation (including, without limitation, by the filing or modification of any certificate or designation) or by-laws, or any agreement entered into by it, with respect to its capital stock, or enter into any new agreement with respect to its capital stock in any manner adverse to the security interest crated pursuant to the Security Agreement or otherwise materially adverse to the Banks.
 
Section 9.04 Transactions with Affiliates . The Borrower will not, and will not permit any of its Subsidiaries to, enter into any transaction or series of related transactions, whether or not in the ordinary course of business, with any Affiliate of the Borrower or any of its Subsidiaries, other than in compliance with applicable law (including, without limitation, any applicable insurance law).
 
SECTION 10. EVENTS OF DEFAUL T.
 
Upon the occurrence of any of the following specified events (each an “Event of Default”):
 
Section 10.01 Payments . The Borrower shall (i) default in the payment when due of any principal of any Loan or any Note or (ii) default, and such default shall continue unremedied for two or more Business Days, in the payment when due of any interest on any Loan or any Note or any Fees or any other amounts owing hereunder or under any Note; or
 
Section 10.02 Representations, etc . Any representation, warranty or statement made by or on behalf of the Borrower herein or in any other Credit Document or in any certificate delivered pursuant hereto or thereto shall prove to be untrue in any material respect on the date as of which made or deemed made; or
 
Section 10.03 Covenants . The Borrower shall (i) default in the due performance or observance by it of any term, covenant or agreement contained in Section 8.01(d)(i), 8.03, 8.08, 8.09, 8.10, 8.11, 8.14 or 9 or (ii) default in the due performance or observance by it of any term, covenant or agreement (other than those referred to in Sections 10.01 and 10.02 and clause (i) of this Section 10.03) contained in this Agreement and such default shall continue unremedied for a period of 30 days after written notice to the Borrower by the Agent or, in the event there is no Agent, any Bank; or
 
Section 10.04 Bankruptcy, etc . The Borrower or any of its Subsidiaries shall commence a voluntary case concerning itself under Title 11 of the United States Code entitled “Bankruptcy,” as now or hereafter in effect, or any successor thereto (the “Bankruptcy Code”); or
 
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an involuntary case is commenced against the Borrower or any of its Subsidiaries, and the petition is not controverted within 10 days, or is not stayed or dismissed and remains in effect after 60 days, after commencement of the case; or a custodian (as defined in the Bankruptcy Code) is appointed for, or takes charge of, all or substantially all of the property of the Borrower or any of its Subsidiaries, or the Borrower or any of its Subsidiaries commences any other proceeding under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction whether now or hereafter in effect relating to the Borrower or any of its Subsidiaries, or there is commenced against the Borrower or any of its Subsidiaries any such proceeding which remains undismissed or unstayed for a period of 60 days, or the Borrower or any of its Subsidiaries is adjudicated insolvent or bankrupt; or any order of relief or other order approving any such case or proceeding is entered; or the Borrower or any of its Subsidiaries suffers any appointment of any custodian or the like for it or any substantial part of its property to continue undischarged or unstayed for a period of 60 days; or the Borrower or any of its Subsidiaries makes a general assignment for the benefit of creditors; or any corporate action is taken by the Borrower or any of its Subsidiaries for the purpose of effecting any of the foregoing; or
 
Section 10.05 ERISA . Any Plan shall fail to maintain the minimum funding standard required for any plan year or part thereof or a waiver of such standard or extension of any amortization period is sought or granted under Section 412 of the Code; any Plan is, shall have been or is likely to be terminated or the subject of termination proceeding under ERISA; any Plan shall have an Unfunded Current Liability; or the Borrower or any of its Subsidiaries or ERISA Affiliates has incurred or is likely to incur a liability to or on account of a Plan under Section 409, 502(i), 502(1), 515, 4062, 4063, 4064, 4069, 4201 or 4204 of ERISA or Section 4971 or 4975 of the Code, or the Borrower or any Subsidiary has incurred or is likely to incur liabilities pursuant to one or more employee welfare benefit plans (as defined in Section 3(1) of ERISA) which provide benefits to retired employees (other than as required by Section 601 of ERISA); there shall result from any such event or events the imposition of a Lien upon the assets of the Borrower or any of its Subsidiaries, the granting of a security interest, or a liability or a material risk of incurring a liability, which Lien, security interest or liability, in the opinion of the Agent or Majority Banks, will have a material adverse effect upon the business, operations, property, assets, condition (financial or otherwise) or prospects of the Borrower or of the Borrower and its Subsidiaries taken as a whole; or
 
Section 10.06 Security Agreement . (i) The Security Agreement or any provision thereof shall cease to be in full force and effect, or shall cease in any material respect to give the Collateral Agent for the benefit of any Bank or Haverford, the Liens, rights, powers and privileges purported to be created thereby, or (ii) the Borrower shall otherwise default in any material respect in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to the Security Agreement and such default shall continue unremedied for a period of 30 days after written notice to the Borrower by the Agent or, in the event there is no Agent, any Bank; or
 
Section 10.07 Judgments . One or more judgments or decrees shall be entered against the Borrower or any of its Subsidiaries involving in the aggregate for the Borrower and its Subsidiaries a liability (not paid or fully covered by insurance) of $10,000,000 or more at any one time, and all such judgments or decrees shall not have been vacated, discharged or stayed or bonded pending appeal within 60 days after the entry thereof; or
 
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Section 10.08 Change of Control . A Change of Control shall occur;
 
then, and in any such event, and at any time thereafter, if any Event of Default shall then be continuing, the Agent may or shall upon direction from the Majority Banks, by written notice to the Borrower, take the following actions to the extent permitted below (provided, that, if an Event of Default specified in Section 10.04 shall occur with respect to the Borrower, the result which would occur upon the giving of written notice to the Borrower as specified below shall occur automatically without the giving of any such notice): if any Event of Default has occurred and is continuing, the Agent may declare the principal of and any accrued interest in respect of all Loans and the Notes and all obligations owing hereunder and thereunder to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower.
 
SECTION 11. THE AGENT .
 
Section 11.01 Appointment . The Banks hereby designate Deutsche Bank AG, New York Branch as Agent (for purposes of this Section 11, the term “Agent” shall also include Deutsche Bank AG, New York Branch in its capacity as Collateral Agent pursuant to the Security Documents) to act as specified herein and in the other Credit Documents. Each Bank hereby irrevocably authorizes, and each holder of any Note by the acceptance of such Note shall be deemed irrevocably to authorize, the Agent to take such action on its behalf under the provisions of this Agreement, the other Credit Documents and any other instruments and agreements referred to herein or therein and to exercise such powers and to perform such duties hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof and such other powers as are reasonably incidental thereto. The Agent may perform any of its duties hereunder by or through its officers, directors, agents or employees.
 
Section 11.02 Nature of Duties . The Agent shall not have any duties or responsibilities except those expressly set forth in this Agreement and the Security Agreement. Neither the Agent nor any of its officers, directors, agents or employees shall be liable for any action taken or omitted by it or them hereunder or under any other Credit Document or in connection herewith or therewith, unless caused by its or their gross negligence or willful misconduct. The duties of the Agent shall be mechanical and administrative in nature; the Agent shall not have by reason of this Agreement or any other Credit Document a fiduciary relationship in respect of any Bank or the holder of any Note; and nothing in this Agreement or any other Credit Document, expressed or implied, is intended to or shall be so construed as to impose upon the Agent any obligations in respect of this Agreement or any other Credit Document except as expressly set forth herein or therein.
 
Section 11.03 Lack of Reliance on the Agent . Independently and without reliance upon the Agent, each Bank and the holder of each Note, to the extent it deems appropriate, has made and shall continue to make (i) its own independent investigation of the financial condition and affairs of the Borrower in connection with the making and the continuance of the Loans and
 
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the taking or not taking of any action in connection herewith and (ii) its own appraisal of the creditworthiness of the Borrower and, except as expressly provided in this Agreement, the Agent shall not have any duty or responsibility, either initially or on a continuing basis, to provide any Bank with any credit or other information with respect thereto, whether coming into its possession before the making of the Loans or at any time or times thereafter. The Agent shall not be responsible to any Bank or the holder of any Note for any recitals, statements, information, representations or warranties herein or in any document, certificate or other writing delivered in connection herewith or for the execution, effectiveness, genuineness, validity, enforceability, perfection, collectability, priority or sufficiency of this Agreement or any other Credit Document or the financial condition of the Borrower or be required to make any inquiry concerning either the performance or observance of any of the terms, provisions or conditions of this Agreement or any other Credit Document, or the financial condition of the Borrower or the existence or possible existence of any Default or Event of Default.
 
Section 11.04 Certain Rights of the Agent . If the Agent shall request instructions from the Banks with respect to any act or action (including failure to act) in connection with this Agreement or any other Credit Document, the Agent shall be entitled to refrain from such act or taking such action unless and until the Agent shall have received instructions from the Majority Banks or all the Banks to the extent required by Section 12.11; and the Agent shall not incur liability to any Person by reason of so refraining. Without limiting the foregoing, no Bank or the holder of any Note shall have any right of action whatsoever against the Agent as a result of the Agent acting or refraining from acting hereunder or under any other Credit Document in accordance with the instructions of the Majority Banks or the Banks, as the case may be.
 
Section 11.05 Reliance . The Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, statement, certificate, telex, teletype or telecopier message, cablegram, radiogram, order or other document or telephone message signed, sent or made by any Person that the Agent believed to be the proper Person, and, with respect to all legal matters pertaining to this Agreement and any other Credit Document and its duties hereunder and thereunder, upon advice of counsel selected by the Agent.
 
Section 11.06 Indemnification . To the extent the Agent is not reimbursed and indemnified by the Borrower, each Bank will reimburse and indemnify the Agent for and against any and all liabilities, obligations, losses, damages, penalties, claims, actions, judgments, suits and reasonable costs, expenses and disbursements of whatsoever kind or nature which may be imposed on, asserted against or incurred by the Agent in performing its duties hereunder or under any other Credit Document, in any way relating to or arising out of this Agreement or any other Credit Document; provided that no Bank shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Agent’s gross negligence or willful misconduct.
 
Section 11.07 The Agent in Its Individual Capacity . With respect to its obligation to make Loans under this Agreement, the Agent shall have the rights and powers specified herein for a “Bank” and may exercise the same rights and powers as though it was not performing the duties specified herein; and the term “Banks,” “holders of Notes” or any similar terms shall, unless the context clearly otherwise indicates, include the Agent in its individual capacity. The
 
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Agent may accept deposits from, lend money to, and generally engage in any kind of banking, trust or other business with the Borrower or any Affiliate of the Borrower as if they were not performing the duties specified herein, and may accept fees and other consideration from the Borrower for services in connection with this Agreement and otherwise without having to account for the same to the Banks.
 
Section 11.08 Resignation by the Agent . (a) The Agent may resign from the performance of all its functions and duties hereunder and/or under the other Credit Documents at any time by giving 15 Business Days’ prior written notice to the Borrower and the Banks. In the case of the resignation by the Agent, such resignation shall take effect upon the appointment of a successor Agent pursuant to Section 11.08(b) or 11.08(c) or as otherwise provided in Section 11.08(d).
 
(b) Upon any such notice of resignation by the Agent, the Banks shall appoint a successor Agent hereunder or thereunder who shall be a commercial bank or trust company reasonably acceptable to the Borrower (it being understood and agreed that any Bank is deemed to be acceptable to the Borrower).
 
(c) If a successor Agent shall not have been so appointed within such 15 Business Day period, the Agent, with the consent of the Borrower, shall then appoint a successor Agent who shall serve as Agent hereunder or thereunder until such time, if any, as the Banks appoint a successor Agent as provided above.
 
(d) If no successor Agent has been appointed pursuant to Section 11.08(b) or 11.08(c) by the 20th Business Day after the date such notice of resignation was given by the Agent, the Agent may appoint any other Bank which agrees to such appointment to act as successor Agent.
 
SECTION 12. MISCELLANEOUS .
 
Section 12.01 Payment of Expenses, etc . The Borrower shall: (i) whether or not the transactions herein contemplated are consummated, pay all reasonable out-of-pocket costs and expenses (a) of the Agent (including, without limitation, the reasonable fees and disbursements of White & Case, LLP, counsel for the Agent) in connection with the preparation, execution and delivery of this Agreement and the other Credit Documents and the documents and instruments referred to herein and therein and any amendment, waiver or consent relating hereto or thereto and (b) of the Agent and the Banks in connection with the enforcement of this Agreement and the other Credit Documents and the documents and instruments referred to herein and therein (including, without limitation, the reasonable fees and disbursements of counsel for the Agent and the Banks); (ii) pay and hold each Bank harmless from and against any and all present and future stamp and other similar taxes with respect to the foregoing matters and save such Bank harmless from and against any and all liabilities with respect to or resulting from any delay or omission (other than to the extent attributable to such Bank) to pay such taxes; and (iii) except as otherwise provided in Section 4.05, indemnify each Bank, its officers, directors, employees, representatives and agents from and hold each of them harmless against any and all liabilities, obligations, losses, damages, penalties, claims, actions, judgments, suits, and
 
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reasonable costs, expenses and disbursements incurred by any of them as a result of, or arising out of, or in any way related to, or by reason of, any investigation, litigation or other proceeding (whether or not such Bank is a party thereto) related to the entering into and/or performance of this Agreement or any other Credit Document or the use of the proceeds of any Loans hereunder or the consummation of any transactions contemplated herein or in any other Credit Document, including, without limitation, the reasonable fees and disbursements of counsel incurred in connection with any such investigation, litigation or other proceeding (but excluding any such liabilities, obligations, losses, etc., to the extent incurred by reason of the gross negligence or willful misconduct of the Person to be indemnified).
 
Section 12.02 Right of Setoff . Except as otherwise provided in Section 4.05, in addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights and to the extent permitted by applicable law, during the continuance of an Event of Default, each Bank is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to the Borrower or to any other Person, any such notice being hereby expressly waived, to set off and to appropriate and apply any and all deposits (general or special), and any other Indebtedness at any time held or owing by such Bank (including without limitation by branches and agencies of such Bank wherever located) to or for the credit or the account of the Borrower against and on account of the Obligations and liabilities of the Borrower to such Bank under this Agreement or under any of the other Credit Documents, and all other claims of any nature or description arising out of or connected with this Agreement or any other Credit Document, irrespective of whether or not the Bank shall have made any demand hereunder and although said Obligations, liabilities or claims, or any of them, shall be contingent or unmatured, provided however that (i) except to the extent provided in the next succeeding clause (ii), no Bank is authorized hereunder to take any of the foregoing actions, nor shall any Bank exercise any other right of setoff or bankers’ lien or any other right now or hereafter granted under applicable law with respect to the Pledged Reserves Account or any portion of the Pledged Reserves Account Funds or any Collateral contained in the Pledged Reserves Account (each of the Agent, the Collateral Agent and each Bank hereby waiving, to the extent permitted by applicable law, any such right) and (ii) from and after receipt by the Agent or the Collateral Agent of any Pledged Reserve Release Notice, the Agent, the Collateral Agent or any Bank is authorized to and may exercise, to the extent permitted by applicable law, any of such foregoing actions or such rights only with respect to the amount of Pledged Reserves Account Funds described in such Pledged Reserve Release Notice and the other Collateral contained in the Pledged Reserves Account in an amount equal to the interest and other earnings on such Pledged Reserves Account Funds.
 
Section 12.03 Notices . Except as otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, facsimile or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered: if to the Borrower or any Bank, at its address listed opposite its name on the signature page hereto; and if to the Agent at its Notice Office; or, as to any Bank or the Agent, at such other address as shall be designated by such party in a written notice to the other parties hereto and, as to each other party, at such other address as shall be designated by such party in a written notice to the Borrower and the Agent. All such notices and communications shall not be effective until received by the Agent or the Borrower.
 
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Section 12.04 Benefit of Agreement . (a) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto; provided, however, that the Borrower may not assign or transfer any of its rights or obligations hereunder without the prior written consent of the Banks and, provided further, that, no Bank may transfer or assign its rights or obligations hereunder or under any of the other Credit Documents, except as provided in this Section 12.04 or in Section 12.15, provided further, that no Bank shall transfer, grant or assign any participation under which the participant shall have rights to approve any amendment to or waiver of this Agreement or any of the other Credit Documents (i) except to the extent such amendment or waiver (A) extends the final maturity of any Loan or Note other than in accordance with Section 3.04, or reduces the rate or extends the time of payment of interest or Fees thereon, or reduces the principal amount thereof, or increases the Commitment of any Bank over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default shall not constitute a change in the terms of any Commitment of any Bank), (B) releases any material portion of the Collateral under the Security Agreement except as shall be otherwise provided in any Credit Document, (C) consents to the assignment or transfer by the Borrower of any of its rights and obligations under any Credit Document, (D) amends the definition of Loss Threshold Incurrence Date other than to increase the dollar amount or the percentage specified therein, (E) amends the definition of Trigger Date other than to decrease the dollar amount specified therein, (F) reduces the percentage specified in the definition of Majority Participants or (G) amends, modifies or waives any provision of this Section 12.04 or (ii) except to the extent that a Bank may permit its Majority Participants to approve any material written amendment, modification, waiver or release of any other provision of this Agreement or any other Credit Document which would, if effected, materially adversely affect the interests of its participants. “Majority Participants” for purposes of this Section 12.04 shall mean, with respect to each Bank, at any time participants of such Bank participating in at least 51% of the aggregate principal amount of Loans made by such Bank and outstanding at such time, or if no such Loans are outstanding at such time, participants of such Bank participating in at least 51% of the Commitment of such Bank at such time. In the case of any such participation, the participant shall not constitute a “Bank” hereunder and shall not have any rights under this Agreement or any of the other Credit Documents (the participant’s rights against any Bank in respect of such participation to be those set forth in the agreement executed by such Bank in favor of the participant relating thereto) and all amounts payable by the Borrower hereunder shall be determined as if such Bank had not sold such participation, except that the participant shall be entitled to the benefits of Section 2.07 or 4.04 of this Agreement to the extent that such Bank would be entitled to such benefits if the participation had not been transferred, granted or assigned.
 
(b) Notwithstanding the foregoing, any Bank (or any Bank together with one or more other Banks) may (and, at the direction of the Borrower following a rating downgrade of such Bank, shall) assign all or a portion of its Commitment and related outstanding rights and obligations hereunder to one or more Eligible Transferees, each of which assignees shall become a party to this Agreement as a Bank by execution of an Assignment and Assumption Agreement and delivery of such Assignment and Assumption Agreement to the Borrower and the Agent, provided that (i) new Notes will be issued to such new Bank in the stated amount of its assumed Commitment, and to the assigning Bank in the stated amount of the Commitment if any, retained
 
-36-

by it, upon the request of such new Bank or assigning Bank and the surrender of the Note previously issued to the assigning Bank (or the execution and delivery to the Borrower of an indemnity satisfactory to the Borrower), such new Notes to be in conformity with the requirements of Section 2.05 to the extent needed to reflect the revised Commitments, (ii) unless such assignment is to an Affiliate of such assigning Bank with the same or higher unsecured senior debt rating, and so long as no Default or Event of Default exists at the time of such assignment, the Borrower shall have consented to such assignment, (iii) at the time of such assignment, the new Bank or (except to the extent the new Bank is an affiliate of the assigning Bank) its parent shall have an unsecured senior debt rating (or shadow rating as reflected in a letter) by each of Moody’s and S&P (A) acceptable to the Borrower (if such assignment is at the direction of the Borrower) or (B) no lower than the unsecured senior debt rating (or shadow rating as reflected in a letter) by each of Moody’s and S&P of the assigning Bank or its parent (if such assignment is not at the direction of the Borrower), (iv) such assignment shall not result in a downgrading of the Borrower’s Rating by Moody’s or S&P from that in effect immediately prior to such assignment, (v) the assigning Bank shall provide notice of any such assignment to the Agent and the Borrower and the Borrower shall provide notice of same to Moody’s and S&P and (vi) the new Bank shall deliver a legal opinion addressed to each of the Borrower, Moody’s and S&P dated the effective date of the applicable assignment to the effect that this Agreement constitutes its legal, valid and binding obligation enforceable in accordance with its terms, except to the extent that the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws generally affecting creditor’s rights and by equitable principles (regardless of whether enforcement is sought in equity or at law) as the same may be applied in the event of bankruptcy or similar proceedings with respect to such new Bank. To the extent of any assignment pursuant to this Section 12.04(b), the assigning Bank shall be relieved of its obligations hereunder with respect to its assigned Commitment. To the extent that an assignment of all or any portion of a Bank’s Commitment and related outstanding Obligations pursuant to this Section 12.04(b) would at the time of such assignment, result in increased costs under Section 2.07 or 4.04 from those being charged by the respective assigning Bank prior to such assignment, then the Borrower shall not be obligated to pay such increased costs (although the Borrower shall be obligated to pay any other increased costs of the type described above resulting from changes in applicable law, or government rules, regulations, orders or requests after the date of the respective assignment).
 
(c) Upon the execution and delivery of an Assignment and Assumption Agreement in accordance with, and subject to the restrictions of, Section 12.04(b), the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder and under the other Credit Documents have been assigned to it pursuant to such Assignment and Assumption Agreement, have the rights and obligations of a “Bank” hereunder and thereunder.
 
(d) Any Bank claiming any amounts payable pursuant to Section 4.04 shall use reasonable efforts (consistent with legal and regulatory restrictions and subject to overall policy considerations of such Bank) to designate another lending office for its Commitment or Loans or take such other action to minimize such amounts, as may be reasonably requested by the Borrower, provided that such designation is made or such other action is taken on such terms that such Bank and its lending office suffer no economic, legal or regulatory disadvantage.
 
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(e) Nothing in this Agreement shall prevent or prohibit any Bank from pledging its Loans and Notes hereunder to a Federal Reserve Bank in support of borrowings made by such Bank from such Federal Reserve Bank.
 
(f) Each Bank shall promptly notify the Borrower of any change in the location of its applicable lending office.
 
Section 12.05 No Waiver; Remedies Cumulative . No failure or delay on the part of any Bank or the holder of any Note in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between the Borrower and any Bank or the holder of any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. Except as otherwise expressly provided herein or in any other Credit Document, the rights, powers and remedies herein or in any other Credit Document expressly provided are cumulative and not exclusive of any rights, powers or remedies which any Bank would otherwise have. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of any Bank or the holder of any Note to any other or further action in any circumstances without notice or demand.
 
Section 12.06 Calculations; Computations . (a) The financial statements to be furnished to the Banks pursuant to Section 8.01(a) shall be made and prepared in accordance with generally accepted accounting principles in the United States consistently applied throughout the periods involved (except as set forth in the notes thereto or as otherwise disclosed in writing by the Borrower to the Banks).
 
(b) All computations of interest and Fees hereunder shall be made on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or Fee is payable.
 
Section 12.07 Governing Law; Submission to Jurisdiction; Venue; Waiver of Jury Trial . (a) This Agreement and the other Credit Documents and the rights and obligations of the parties hereunder and thereunder shall be construed in accordance with and be governed by the law of the State of New York, without regard to the conflict of law provisions thereof. Any legal action or proceeding against the Borrower with respect to this Agreement or any other Credit Document may be brought in the courts of the State of New York or of the United States for the Southern District of New York, and, by execution and delivery of this Agreement, the Borrower hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. The Borrower irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the Borrower at its address set forth opposite its signature below (or to such other address as the Borrower may from time to time notify the Agent in writing), such service to become effective 30 days after such mailing. Except as otherwise provided in Section 4.05, nothing herein shall affect the right of the Agent or any Bank under this Agreement to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against the Borrower in any other jurisdiction.
 
-38-

(b) The Borrower hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement or any other Credit Document brought in the courts referred to in Section 12.07(a) and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum.
 
(c) Each of the Borrower, the Agent and each of the Banks hereby irrevocably waives its right to a jury trial in connection with any action, proceeding or counterclaim arising out of or relating to this Agreement or any other Credit Document or any transaction contemplated hereby or thereby.
 
Section 12.08 Counterparts . This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A set of counterparts executed by all the parties hereto shall be lodged with the Borrower and the Agent.
 
Section 12.09 Effectiveness . This Agreement shall become effective on the date (the “Effective Date”) on which the Borrower and the Banks shall have signed a copy hereof (whether the same or different copies) and shall have delivered the same to the Agent at its Notice Office and the conditions set forth in Section 5 shall have been satisfied or waived by the Banks, as evidenced by a written notice by the Agent to the Borrower confirming that the Agreement has become effective and setting forth the Effective Date.
 
Section 12.10 Headings Descriptive . The headings of the several sections and subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement.
 
Section 12.11 Amendment or Waiver . Neither this Agreement nor any other Credit Document nor any terms hereof or thereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by the Borrower and the Majority Banks and the Agent; provided, however, that no such change, waiver, discharge or termination shall, without the consent of each Bank (other than any Bank that is, at the time of the proposed extension, release, amendment, reduction or consent, a Defaulting Bank; provided, however, that, with respect to any matter described in clause (i) or (ii) of this Section 12.11, the consent of each Defaulting Bank which at such time has a Loan outstanding shall also be required) (i) extend the final maturity of any Loan or Note other than in accordance with Section 3.04 or reduce the rate or extend the time of payment of interest or Fees thereon, or reduce the principal amount thereof, or increase the Commitment of any Bank over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default shall not constitute a change in the terms of any Commitment of any Bank), (ii) release any material portion of the Collateral under any Security Document except as shall be otherwise
 
-39-

provided in any Credit Document, (iii) amend, modify or waive any provision of this Section 12.11, (iv) reduce the percentage specified in the definition of Majority Banks, (v) consent to the assignment or transfer by the Borrower of any of its rights and obligations under any Credit Document, (vi) amend the definition of Loss Threshold Incurrence Date other than to increase the dollar amount or the percentage specified therein or (vii) amend the definition of Trigger Date other than to decrease the dollar amount specified therein.
 
Section 12.12 Survival . All indemnities set forth herein including, without limitation, in Sections 2.07, 4.04 and 12.01 shall survive the execution and delivery of this Agreement and the Notes and the making and repayment of the Loans.
 
Section 12.13 Exclusions from Covered Portfolio . In the event that (i) any Bank (or any participant to whom such Bank has transferred, granted or assigned any participation in its rights and obligations hereunder and under the other Credit Documents) is, or upon the occurrence of any contingency would be, obligated under the terms of a line of credit, standby bond purchase agreement, letter of credit, liquidity agreement or similar agreement or arrangement to purchase any Insured Obligation listed in a certificate delivered by the Borrower to the Agent pursuant to Section 5.06 or 8.01(b) and (ii) such Insured Obligation had not previously been listed on such a certificate or such obligation arose or was in existence prior to the date of such certificate, such Bank (or such participant) shall promptly (and, in any event, within 30 days of delivery of such certificate) notify the Agent, and the Agent shall promptly notify the Borrower, that such Bank (or such participant) is or would be so obligated to purchase such Insured Obligation. Upon delivery by the Agent to the Borrower of any such notice with respect to an Insured Obligation, such Insured Obligation shall, effective upon delivery of such notice by the Agent to the Borrower, be excluded from the Covered Portfolio.
 
Section 12.14 Confidentiality . Each of the Agent and each Bank agrees to take and cause its respective Affiliates to take normal and reasonable precautions and exercise due care to maintain the confidentially of all financial information and all other information reasonably identified as “confidential” or “secret” by the Borrower and provided to it by the Borrower or by the Agent on the Borrower’s behalf, and neither it nor any of its Affiliates shall use such information other than is connection with or in enforcement of this Agreement and the other Credit Documents or in connection with other business now or hereafter existing or contemplated with the Borrower, except to the extent such information (i) was or becomes generally available to the public other than as a result of a disclosure by the Agent or any Bank or (ii) was or becomes available on a non-confidential basis from a source other than the Borrower, provided that such source is not bound by a confidentiality agreement with the Borrower known to the Agent or such Bank; provided, however, that the Agent or any Bank may disclose such information (a) at the request or pursuant to any requirement of any authority to which the Agent or such Bank is subject or in connection with an examination of the Agent or such Bank by any such authority; (b) pursuant to subpoena or other court process, provided that if not prohibited by law, the Agent or such Bank will make reasonable efforts to provide notice to the Borrower of the receipt of such subpoena prior to delivering confidential material in response thereto, and the Agent and the Banks will cooperate with the Borrower in any attempt to obtain a protective order, at the Borrower’s expense, as may be reasonably requested by the Borrower; (c) when required to do so in accordance with the provisions of any applicable law or regulation; (d) to the
 
-40-

extent reasonably required in connection with any litigation or proceeding with respect to the transactions contemplated hereby to which the Agent or any Bank or their respective Affiliates may be party; (e) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Credit Document; (f) to the Agent’s or such Bank’s independent auditors and other professional advisors with a need to know and who agrees to keep such information confidential to the extent required of the Agent or such Bank hereunder; and (g) to any assignee or participant, actual or potential, provided that such Person agrees to keep such information confidential to the same extent required of the Agent or the Bank hereunder.
 
Section 12.15 Third Party Beneficiary . To the extent expressly granted any rights, benefits or privileges hereunder or under the Security Agreement, Haverford shall be an intended (and not an incidental) third party beneficiary of this Agreement and the Security Agreement with respect to any such right, benefit or privilege, and may assign all such rights, benefits and privileges without consent to General Re Corporation or any of its affiliates.
 
Section 12.16 Special Acknowledgments re Haverford . The Borrower, the Agent and each of the Banks expressly acknowledge the following with respect to Haverford:
 
(i) Haverford is a registered segregated account of Haverford (Bermuda) (SAC) Reinsurance Ltd (“Haverford Reinsurance”), and exists pursuant to and in compliance with the Segregated Accounts Companies Act 2000 (the “Segregated Accounts Act”). Separate entries, recording data, assets, liabilities, rights and obligations exist with respect to Haverford, separate and distinct from Haverford Reinsurance or any other segregated account.
 
(ii) The account maintained by Haverford Reinsurance under Section 16(1)(c) of the Segregated Accounts Act (the “General Account”) is not linked in any way or available to Haverford for any purpose.
 
(iii) In the event of exhaustion of or inaccessibility to the segregated account assets of Haverford, there will be no recourse whatsoever by the Borrower, the Agent, any Bank or any other Person to the assets of the General Account or any assets of any other segregated account established by Haverford Reinsurance vis a vis the Treaty or otherwise.
 
Section 12.17 Payments Pro Rata . (a) The Agent agrees that promptly after its receipt of each payment from or on behalf of the Borrower in respect of any Obligation (including, without limitation, any payment received pursuant to Section 2.4 or 6.4 of the Security Agreement) it shall distribute such payment to the Banks pro rata based upon their respective shares, if any, of the Obligations with respect to which such payment was received.
 
(b) Each of the Banks agrees that, if it should receive any amount hereunder (whether by voluntary payment, by realization upon security, by the exercise of the right of setoff or banker’s lien, by counterclaim or cross action, by the enforcement of any right under any Credit Document or otherwise), which is applicable to the payment of any Obligation, the sum of which when compared to the related sum or sums received by other Banks is in a greater proportion then the total amount of such Obligation then owed and due to the such Bank vis a vis that owed and due to all Banks immediately prior to such receipt, then such Bank receiving such
 
-41-

excess payment shall purchase for cash without recourse or warranty from the other Banks an interest in the relevant Obligation in such amount as shall result in a proportional participation by all Banks in such amount; provided, however, that if all or any portion of such excess amount is thereafter recovered from such Bank, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest.
 
(c) Anything contained herein to the contrary notwithstanding, the provisions of Sections 12.17(a) and 12.17(b) shall be subject to the express provisions of this Agreement which require or permit differing payments to be made to Defaulting Banks as opposed to non-Defaulting Banks.
 
IN WITNESS WHEREOF, the parties hereto have caused their respective duly authorized officers to execute and deliver this Agreement as of the date first above written.
 
Address :

 	 	 	
1325 Avenue of the Americas
New York, New York 10019
Attention: Chief Financial Officer	 	ACE GUARANTY RE INC.	
 	 	By	 	 
	
 	 	 	 	Name:	
 	 	 	 	Title:	
		
 	 	ING BANK N.V., LONDON BRANCH	
60 London Wall	 	 	 	 	
London EC2M 5TQ England	 	 	 	 	
Attention: Mr. Robert Miners	 	By	 	 
	
 	 	 	 	Name:	
 	 	 	 	Title:	
			
 	 	By	 	 
	
 	 	 	 	Name:	
 	 	 	 	Title:	
 
-42-

					
 
1211 Avenue of the Americas
New York, New York 10036
Attention: Ms. Lillian Tung Lum	 	WESTDEUTSCHE LANDESBANK
GIROZENTRALE, NEW YORK BRANCH	
			
 	 	By	 	 
	
 	 	 	 	Name:	
 	 	 	 	Title:	
			
 	 	By	 	 
	
 	 	 	 	Name:	
 	 	 	 	Title:	

270 Park Avenue
New York, New York 10022
Attention: Ms. Helen Newcomb	 	JPMORGAN CHASE BANK	
 	 	By	 	 
	
 	 	 	 	Name:	
 	 	 	 	Title:	

Corporate Center at Rye
555 Theodore Fremd Avenue
Suite B-200
Rye, New York 10580
Attention: Mr. Werner Samuel	 	COMMERZBANK AG, NEW YORK BRANCH	
 	 	By	 	 
	
 	 	 	 	Name:	
 	 	 	 	Title:	
			
 	 	By	 	 
	
 	 	 	 	Name:	
 	 	 	 	Title:	
 
-43-

					
 
31 West 52nd Street
New York, New York 10019
Attention: Mr. Clinton M. Johnson	 	 	 	DEUTSCHE BANK AG, NEW YORK BRANCH,
Individually and as Agent	
			
 	 	By	 	 
	
 	 	 	 	Name:	
 	 	 	 	Title:	
			
 	 	By	 	 
	
 	 	 	 	Name:	
 	 	 	 	Title:	
 
-44-

SCHEDULE I
 
COMMITMENTS

Name
	  	Commitment
	
Deutsche Bank AG, New York Branch	  	$	49,000,000	
		
ING Bank N.V., London Branch	  	 	47,500,000	
		
Westdeutsche Landesbank Girozentrale, New York Branch	  	 	20,000,000	
		
JPMorgan Chase Bank	  	 	18,500,000	
		
Commerzbank AG, New York Branch	  	 	15,000,000	
 	  			
Total	  	$	150,000,000	

SCHEDULE II
 
SUBSIDIARIES OF THE BORROWER
 
ACE Risk Assurance Company, a Maryland corporation (100% owned)

TABLE OF CONTENTS

 	  	Page
	
SECTION 1. DEFINITIONS AND PRINCIPLES OF CONSTRUCTION	  	1	
		
Section 1.01 Defined Terms	  	1	
Section 1.02 Principles of Construction	  	11	
		
SECTION 2. AMOUNT AND TERMS OF CREDIT	  	11	
		
Section 2.01 The Loans	  	11	
Section 2.02 Amount of Each Borrowing	  	11	
Section 2.03 Notice of Borrowing	  	11	
Section 2.04 Disbursement of Funds	  	11	
Section 2.05 Notes	  	12	
Section 2.06 Interest	  	12	
Section 2.07 Capital Adequacy	  	12	
		
SECTION 3. COMMITMENT FEES, FEES; AND TERMINATIONS, EXTENSIONS AND INCREASES OF COMMITMENTS AND CONTINGENT COMMITMENTS	  	14	
		
Section 3.01 Fees	  	14	
Section 3.02 Voluntary Termination of Unutilized Commitments	  	14	
Section 3.03 Mandatory Termination of Commitments	  	14	
Section 3.04 Expiry Date	  	15	
		
SECTION 4. PREPAYMENTS; PAYMENTS	  	16	
		
Section 4.01 Voluntary Prepayments	  	16	
Section 4.02 Mandatory Prepayments	  	16	
Section 4.03 Method and Place of Payment	  	16	
Section 4.04 Net Payments	  	16	
Section 4.05 Limitations on Sources of Payment	  	17	
		
SECTION 5. CONDITIONS PRECEDENT TO EFFECTIVENESS	  	17	
		
Section 5.01 Execution of Agreement; Notes	  	17	
Section 5.02 No Default; Representations and Warranties	  	17	
Section 5.03 Opinion of Counsel	  	17	
Section 5.04 Corporate Documents; Proceedings	  	17	
Section 5.05 Security Agreement	  	18	
Section 5.06 Covered Portfolio, etc	  	18	
Section 5.07 Requisite Approvals	  	18	
Section 5.08 Litigation	  	18	
Section 5.09 Fees, etc	  	19	
 
(i)

			
 	  	Page
	
Section 5.10 Rating	  	19	
		
SECTION 6. CONDITIONS PRECEDENT TO ALL CREDIT EVENTS	  	19	
		
Section 6.01 Loss Threshold Incurrence Date	  	19	
Section 6.02 Notice of Borrowing	  	19	
		
SECTION 7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS	  	19	
		
Section 7.01 Corporate Status	  	19	
Section 7.02 Corporate Power and Authority	  	19	
Section 7.03 No Violation	  	20	
Section 7.04 Governmental Approvals	  	20	
Section 7.05 Financial Statements; Financial Condition; Undisclosed Liabilities; etc	  	20	
Section 7.06 Litigation	  	21	
Section 7.07 True and Complete Disclosure	  	21	
Section 7.08 Use of Proceeds; Margin Regulations	  	21	
Section 7.09 Tax Returns and Payments	  	21	
Section 7.10 Compliance with ERISA	  	21	
Section 7.11 Capitalization	  	22	
Section 7.12 Subsidiaries	  	22	
Section 7.13 Compliance with Statutes, etc.	  	22	
Section 7.14 Investment Company Act	  	22	
Section 7.15 Public Utility Holding Company Act	  	22	
Section 7.16 Compliance with Insurance Law	  	23	
Section 7.17 Covered Portfolio	  	23	
		
SECTION 8. AFFIRMATIVE COVENANTS	  	24	
		
Section 8.01 Information Covenants	  	24	
Section 8.02 Books, Records and Inspections	  	25	
Section 8.03 Corporate Franchises	  	26	
Section 8.04 Compliance with Statutes, etc	  	26	
Section 8.05 ERISA	  	26	
Section 8.06 Performance of Obligations	  	26	
Section 8.07 Use of Proceeds	  	27	
Section 8.08 Conduct of Business	  	27	
Section 8.09 Underwriting Criteria	  	27	
Section 8.10 Collection of Pledged Recoveries and Pledged Premiums	  	27	
Section 8.11 Pledged Reserve Release Notice	  	27	
Section 8.12 Registry	  	27	
Section 8.13 Maintenance of Insurance	  	27	
Section 8.14 Payment of Taxes	  	27	
		
SECTION 9. NEGATIVE COVENANTS	  	28	
		
Section 9.01 Liens	  	28	
 
(ii)

			
 	  	Page
	
Section 9.02 Consolidation, Merger, Sale of Assets, etc	  	29	
Section 9.03 Limitation on Modification of Indebtedness; Modifications of Charter, By-Laws and Certain Other Agreements; etc.	  	30	
Section 9.04 Transactions with Affiliates	  	30	
		
SECTION 10. EVENTS OF DEFAULT	  	30	
		
Section 10.01 Payments	  	30	
Section 10.02 Representations, etc	  	30	
Section 10.03 Covenants	  	30	
Section 10.04 Bankruptcy, etc	  	30	
Section 10.05 ERISA	  	31	
Section 10.06 Security Agreement	  	31	
Section 10.07 Judgments	  	31	
Section 10.08 Change of Control	  	32	
		
SECTION 11. THE AGENT	  	32	
		
Section 11.01 Appointment	  	32	
Section 11.02 Nature of Duties	  	32	
Section 11.03 Lack of Reliance on the Agent	  	32	
Section 11.04 Certain Rights of the Agent	  	33	
Section 11.05 Reliance	  	33	
Section 11.06 Indemnification	  	33	
Section 11.07 The Agent in Its Individual Capacity	  	33	
Section 11.08 Resignation by the Agent	  	34	
		
SECTION 12. MISCELLANEOUS	  	34	
		
Section 12.01 Payment of Expenses, etc.	  	34	
Section 12.02 Right of Setoff	  	35	
Section 12.03 Notices	  	35	
Section 12.04 Benefit of Agreement	  	35	
Section 12.05 No Waiver; Remedies Cumulative	  	38	
Section 12.06 Calculations; Computations	  	38	
Section 12.07 Governing Law; Submission to Jurisdiction; Venue; Waiver of Jury Trial	  	38	
Section 12.08 Counterparts	  	39	
Section 12.09 Effectiveness	  	39	
Section 12.10 Headings Descriptive	  	39	
Section 12.11 Amendment or Waiver	  	39	
Section 12.12 Survival	  	40	
Section 12.13 Exclusions from Covered Portfolio	  	40	
Section 12.14 Confidentiality	  	40	
Section 12.15 Third Party Beneficiary	  	41	
Section 12.16 Special Acknowledgments re Haverford	  	41	
Section 12.17 Payments Pro Rata	  	41	
 
(iii)

			
SCHEDULES	  	 	
		
Schedule I	  	Commitments	
Schedule II	  	Subsidiaries of the Borrower	
		
EXHIBITS	  	 	
		
Exhibit A	  	Notice of Borrowing	
Exhibit B	  	Note	
Exhibit C	  	Opinion of General Counsel of the Borrower	
Exhibit D	  	Officers’ Certificate of the Borrower	
Exhibit E	  	Pledge and Security Agreement	
Exhibit F	  	Assignment and Assumption Agreement	
Exhibit G	  	Stand-By Reinsurance Treaty	
 
(iv)
 
EXHIBIT 10.17.4
 
DECEMBER 2002 AMENDMENT TO CREDIT AGREEMENT
 
DECEMBER 2002 AMENDMENT TO CREDIT AGREEMENT (this “Amendment”), dated as of December 20, 2002, among ACE Guaranty Corp. (f/k/a ACE Guaranty Re Inc.) (the “Borrower”), various banks (the “Banks”), Norddeutsche Landesbank Girozentrale, New York Branch (the “New Bank”), and Deutsche Bank AG, New York Branch, as agent (the “Agent”). All capitalized terms defined in the hereinafter defined Credit Agreement shall have the same meaning when used herein unless otherwise defined herein.
 
W I T N E S S E T H :
 
WHEREAS, the Borrower, the Banks and the Agent entered into an Amended and Restated Credit Agreement, dated as of November 15, 2001 (the “Credit Agreement”); and
 
WHEREAS, the New Bank desires to become a Bank under the Credit Agreement; and
 
WHEREAS, pursuant to a Termination Agreement, dated as of October 22, 2002, among Haverford, the Borrower and General Re Financial Products Corporation, the Treaty was terminated, effective November 15, 2002; and
 
WHEREAS, the parties hereto wish to amend the Credit Agreement as herein provided;
 
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto hereby agree as follows:
 
1. New Bank . Upon execution and delivery of this Amendment by the parties hereto, the New Bank shall be a Bank for all purposes of the Credit Agreement.
 
2. Exiting Banks . As of the close of business on December 20, 2002, neither JPMorgan Chase Bank nor Commerzbank AG, New York Branch (each an “Exiting Bank”), shall have any further obligations under, or be a Bank for purposes of, the Credit Agreement. Each Exiting Bank shall, however, be entitled to receive its Commitment Fee through and including December 20, 2002 and all other amounts, if any, owing to it under the Credit Agreement, including, without limitation, any indemnities to which it may become entitled pursuant to Section 12.01 of the Credit Agreement at any time in the future.
 
3. Amendments to the Credit Agreement . (a) Section 3.04 of the Credit Agreement is hereby amended (i) by deleting the date “October 15, 2008” in the first sentence of such Section and replacing it with the date “November 15, 2009” and (ii) by deleting the date “October 15” in the third sentence of such Section and replacing it with the date “November 15”.

(b) The Credit Agreement is hereby amended by deleting all references to “Haverford”, “Haverford Reinsurance”, “Treaty”, “Treaty Payment” and “General Account” and, in particular, by deleting Sections 2.08, 12.15 and 12.16 and Exhibit G.
 
(c) Schedule I of the Credit Agreement is hereby amended in its entirety to the form attached hereto as Annex A.
 
4. Representations and Warranties . In order to induce the Banks, the New Bank and the Agent to enter into this Amendment, the Borrower hereby represents and warrants that:
 
(a) no Loss occurred on or prior to November 15, 2002 that could require any payment be made by Haverford pursuant to the Treaty;
 
(b) no Default or Event of Default exists or will exist as of the date hereof or after giving effect to this Amendment; and
 
(c) as of the date hereof, and after giving effect to this Amendment, all representations and warranties of the Borrower contained in the Credit Agreement will be true and correct in all material respects (it being understood and agreed that any representation or warranty which expressly refers by its terms to a specified date is true in all material respects only as of such date).
 
5. Confirmation of Effective Date . The Borrower, the Banks and the Agent hereby acknowledge that the Effective Date referred to in Section 12.09 of the Agreement is November 15, 2001.
 
6. GOVERNING LAW . THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAW PROVISIONS THEREOF.
 
7. Agreement Not Otherwise Amended . This Amendment is limited precisely as written and shall not be deemed to be an amendment, consent, waiver or modification of any other term or condition of the Credit Agreement or any of the instruments or agreements referred to therein, or prejudice any right or rights which the Banks (including any Exiting Bank), the New Bank, the Agent or any of them may now have or may have in the future under or in connection with the Credit Agreement or any of the instruments or agreements referred to therein. Except as expressly modified hereby, the terms and provisions of the Credit Agreement shall continue in full force and effect. Whenever the Credit Agreement is referred to in the Credit Agreement or any of the instruments, agreements or other documents or papers executed and delivered in connection therewith, it shall be deemed to be a reference to the Credit Agreement as modified hereby.
 
8. Counterparts . This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
 
-2-

9. Address for Notices . The initial address for notices for the New Bank shall be 1114 Avenue of the Americas, 37 th Floor, New York, New York 10036, Attention: Mr. Georg L. Peters.
 
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective duly authorized officers as of the date first above written.

ACE GUARANTY CORP.	
		
By	 	 
	
 	 	Name:	
 	 	Title:	
	
ING BANK N.V., LONDON BRANCH	
		
By	 	 
	
 	 	Name:	
 	 	Title:	
		
By	 	 
	
 	 	Name:	
 	 	Title:	
	
WESTLB AG, NEW YORK BRANCH	
		
By	 	 
	
 	 	Name:	
 	 	Title:	
		
By	 	 
	
 	 	Name:	
 	 	Title:	
 
-3-

			
NORDDEUTSCHE LANDESBANK
GIROZENTRALE, NEW YORK BRANCH	
		
By	 	 
	
 	 	Name:	
 	 	Title:	
		
By	 	 
	
 	 	Name:	
 	 	Title:	
	
JPMORGAN CHASE BANK	
		
By	 	 
	
 	 	Name:	
 	 	Title:	
	
COMMERZBANK AG, NEW YORK BRANCH	
		
By	 	 
	
 	 	Name:	
 	 	Title:	
		
By	 	 
	
 	 	Name:	
 	 	Title:	
	
DEUTSCHE BANK AG, NEW YORK BRANCH, Individually and as Agent	
		
By	 	 
	
 	 	Name:	
 	 	Title:	
		
By	 	 
	
 	 	Name:	
 	 	Title:	
 
-4-

ANNEX A
 
SCHEDULE I
 
COMMITMENTS

Name
	  	Commitment
	
Deutsche Bank AG, New York Branch	  	$	50,000,000	
		
ING Bank N.V., London Branch	  	 	50,000,000	
		
Norddeutsche Landesbank Girozentrale, New York Branch	  	 	50,000,000	
		
WestLB AG, New York Branch	  	 	25,000,000	
 	  			
Total	  	$	175,000,000	

 
EXHIBIT 10.17.5
 
DECEMBER 2003 AMENDMENT TO CREDIT AGREEMENT
 
DECEMBER 2003 AMENDMENT TO CREDIT AGREEMENT (this “Amendment”), dated as of December 16, 2003, among ACE Guaranty Corp. (the “Borrower”), various banks (the “Banks”) and Deutsche Bank AG, New York Branch, as agent (the “Agent”). All capitalized terms defined in the hereinafter defined Credit Agreement shall have the same meaning when used herein unless otherwise defined herein.
 
WITNESSETH :
 
WHEREAS, the Borrower, the Banks and the Agent entered into an Amended and Restated Credit Agreement, dated as of November 15, 2001 (as amended to date, the “Credit Agreement”); and
 
WHEREAS, the parties hereto wish to amend the Credit Agreement as herein provided;
 
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto hereby agree as follows:
 
1. Amendment to the Credit Agreement . Section 3.04 of the Credit Agreement is hereby amended (a) by deleting the date “November 15, 2009” in the first sentence of such Section and replacing it with the date “December 15, 2010” and (b) by deleting the date “November 15” in the third sentence of such Section and replacing it with the date “December 15”.
 
2. Representations and Warranties . In order to induce the Banks and the Agent to enter into this Amendment, the Borrower hereby represents and warrants that:
 
(a) no Default or Event of Default exists or will exist as of the date hereof or after giving effect to this Amendment; and
 
(b) as of the date hereof, and after giving effect to this Amendment, all representations and warranties of the Borrower contained in the Credit Agreement will be true and correct in all material respects (it being understood and agreed that any representation or warranty which expressly refers by its terms to a specified date is true in all material respects only as of such date).
 
3. GOVERNING LAW . THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAW PROVISIONS THEREOF.
 
4. Agreement Not Otherwise Amended . This Amendment is limited precisely as written and shall not be deemed to be an amendment, consent, waiver or modification of any other term or condition of the Credit Agreement or any of the instruments or agreements referred to therein, or prejudice any right or rights which the Banks, the Agent or any of them may now have or may have in the future under or in connection with the Credit

Agreement or any of the instruments or agreements referred to therein. Except as expressly modified hereby, the terms and provisions of the Credit Agreement shall continue in full force and effect. Whenever the Credit Agreement is referred to in the Credit Agreement or any of the instruments, agreements or other documents or papers executed and delivered in connection therewith, it shall be deemed to be a reference to the Credit Agreement as modified hereby.
 
5. Counterparts . This Amendment may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
 
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective duly authorized officers as of the date first above written.

ACE GUARANTY CORP.	
		
By	 	 	
 	 		
 	 	Name:
Title:	
	
ING BANK N.V., LONDON BRANCH	
		
By	 	 	
 	 		
 	 	Name:
Title:	

By	 	 	
 	 		
 	 	Name:
Title:	
	
WESTLB AG, NEW YORK BRANCH	
		
By	 	 	
 	 		
 	 	Name:
Title:	

By	 	 	
 	 		
 	 	Name:
Title:	
 
-2-

			
NORDDEUTSCHE LANDESBANK
    GIROZENTRALE, NEW YORK BRANCH	
		
By	 	 	
 	 		
 	 	Name:
Title:	

By	 	 	
 	 		
 	 	Name:
Title:	
	
DEUTSCHE BANK AG, NEW YORK BRANCH, Individually and as Agent	
		
By	 	 	
 	 		
 	 	Name:
Title:	

By	 	 	
 	 		
 	 	Name:
Title:	
 
-3-
 
EXHIBIT 10.23.4

CLIFFORD
CHANCE	 	LIMITED LIABILITY PARTNERSHIP	
 
CONFORMED COPY
 
EXHIBIT
 
DATED 19 NOVEMBER 1999
(as (a) amended and restated pursuant to the First Restatement Agreement
dated 17 November 2000, (b) amended pursuant to the Amendment Agreement dated
23 October 2001, (c) amended and restated pursuant to the Second Restatement Agreement
dated 21 November 2001, (d) amended and restated pursuant to the Third Restatement
Agreement dated 19 November 2002), and (e) amended and restated pursuant to the Fourth
Amendment and Restatement Agreement dated 14 November 2003)
 
ACE LIMITED
as Account Party
 
ACE BERMUDA INSURANCE LTD.
and
ACE TEMPEST REINSURANCE LTD.
as Guarantors
 
CITIGROUP GLOBAL MARKETS LIMITED
and
BARCLAYS CAPITAL
as Lead Arrangers
 
ING BANK, N.V., LONDON BRANCH
as Co-Arranger
 
CITIBANK INTERNATIONAL plc
as Agent and Security Trustee
 
and
 
OTHERS

 
£380,000,000
LETTER OF CREDIT FACILITY AGREEMENT

 

CONTENTS

Clause
	  	 	  	Page
	
1.	  	Definitions And Interpretation	  	1	
			
2.	  	The Facility	  	18	
			
3.	  	Utilisation Of The Facility	  	19	
			
4.	  	Termination Of Letters Of Credit	  	20	
			
5.	  	Substitution Of Letters Of Credit	  	24	
			
6.	  	Increase Of The Facility	  	25	
			
7.	  	Notification	  	26	
			
8.	  	The Account Party’s Liabilities In Relation To Letters Of Credit	  	26	
			
9.	  	Cancellation And Collateralisation	  	28	
			
10.	  	Taxes	  	29	
			
11.	  	Tax Receipts	  	30	
			
12.	  	Increased Costs	  	31	
			
13.	  	Illegality	  	32	
			
14.	  	Mitigation	  	32	
			
15.	  	Representations	  	33	
			
16.	  	Covenants	  	37	
			
17.	  	Events Of Default	  	43	
			
18.	  	Commission And Fees	  	48	
			
19.	  	Costs And Expenses	  	49	
			
20.	  	Default Interest And Break Costs	  	50	
			
21.	  	Indemnities	  	51	
			
22.	  	Currency Of Account And Payment	  	51	
			
23.	  	Payments	  	52	
			
24.	  	Set-Off	  	54	
			
25.	  	Sharing	  	54	
			
26.	  	The Agent, The Arrangers And The Banks	  	55	
			
27.	  	Assignments And Transfers	  	63	
			
28.	  	Economic And Monetary Union	  	66	
			
29.	  	Calculations And Evidence Of Debt	  	66	
			
30.	  	Guarantee And Indemnity	  	68	
			
31.	  	Remedies And Waivers, Partial Invalidity	  	70	
			
32.	  	Notices	  	70	

					
			
33.	  	Counterparts	  	72	
			
34.	  	Amendments	  	72	
			
35.	  	Governing Law	  	73	
			
36.	  	Jurisdiction	  	73	
		
Schedule 1 T HE B ANKS	  	75	
		
Schedule 2 F ORM O F T RANSFER C ERTIFICATE	  	76	
		
Schedule 3 C ONDITIONS P RECEDENT	  	79	
		
Schedule 4 U TILISATION R EQUEST	  	80	
		
Schedule 5 F ORM O F L ETTER O F C REDIT	  	82	
		
Schedule 6 M ANDATORY L IQUID A SSET C OSTS R ATE	  	89	
		
Schedule 7 F ORM O F C ONFIDENTIALITY U NDERTAKING	  	91	
		
Schedule 8 P RICING S CHEDULE	  	94	
		
Schedule 9 E XISTING L IENS	  	95	
		
Schedule 10 F ORM O F C HARGE A GREEMENT	  	96	
		
Schedule 11 F ORM O F S UBSTITUTION N OTICE	  	118	

THIS AGREEMENT originally dated 19 November 1999, as (a) amended and restated pursuant to the First Restatement Agreement dated 17 November 2000, (b) amended by an Amendment Agreement dated 23 October 2001, (c) further amended and restated pursuant to the Second Restatement Agreement dated 21 November 2001, (d) further amended and restated pursuant to the Third Restatement Agreement dated 19 November 2002, and (e) further amended and restated pursuant to the Fourth Amendment and Restatement Agreement dated 14 November 2003, is made between:
 
(1)	ACE LIMITED as account party (the “ Account Party ”);	
 
(2)	ACE BERMUDA INSURANCE LTD . and ACE TEMPEST REINSURANCE LTD. as guarantors (the “ Guarantors ”);	
 
(3)	CITIGROUP GLOBAL MARKETS LIMITED and BARCLAYS CAPITAL (the investment banking division of Barclays Bank PLC) as lead arrangers of the Facility (the “ Lead Arrangers ”);	
 
(4)	ING BANK, N.V., LONDON BRANCH as co-arranger of the Facility (the “ Co-Arranger ”);	
 
(5)	CITIBANK INTERNATIONAL plc as agent and trustee for the banks (when acting in such capacities the “ Agent ” and the “ Security Trustee ” respectively); and	
 
(6)	THE BANKS as defined below.	
 
IT IS AGREED as follows.
 
1.	DEFINITIONS AND INTERPRETATION	
 
1.1	Definitions	
 
In this Agreement:
 
“ ACE INA ” means ACE INA Holdings Inc., a Delaware company and its successors.
 
“ ACE US ” means ACE US Holdings, Inc., a Delaware company and its successors.
 
“ Adjusted Consolidated Debt ” means, at any time, an amount equal to (a) the then outstanding Consolidated Debt of the Account Party and its Subsidiaries plus (b) to the extent exceeding an amount equal to 15 per cent. of Total Capitalisation, the then issued and outstanding amount of Preferred Securities (other than any Mandatorily Convertible Preferred Securities).
 
“ Affiliate ” means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person. For the purposes of this definition, the term “control” (including the terms “controlling”, “controlled by” and “under common control with”) of a Person means the possession, direct or indirect, of the power to vote 5 per cent. or more of the Voting Interests of such Person or to direct or cause the direction of the management and policies of such Person, whether through the ownership of Voting Interests, by contract or otherwise.
 
- 1 -

“ Amendment Agreement ” means the amendment agreement dated 23 October 2001 which amends the First Restatement Agreement.
 
“ Applicant ” means each of ACE Capital Limited, ACE Capital IV Limited, ACE Capital V Limited, ACE Capital VI Limited and ACE Capital VII Limited and their successors and substitutes within the Group from time to time.
 
“ Approved Credit Institution ” means a credit institution within the meaning of the First Council Directive relating to the taking up and pursuit of the business of credit institutions (No. 2000/12 EC) which has been approved by the Council of Lloyd’s for the purpose of providing guarantees and issuing or confirming letters of credit comprising a member’s Funds at Lloyd’s.
 
“ Approved Investment ” means any Investment that was made by the Account Party or any of its Subsidiaries pursuant to investment guidelines set forth by the board of directors of the Account Party which guidelines are consistent with past practices.
 
“ Arrangers ” means the Lead Arrangers and the Co-Arranger.
 
“ Authorised Signatory ” means, in relation to an Obligor, any person who is duly authorised (in such manner as may be reasonably acceptable to the Agent) and in respect of whom the Agent has received a certificate signed by a director or another Authorised Signatory of such Obligor setting out the name and signature of such person and confirming such person’s authority to act.
 
“ Availability Period ” means the period from the Commencement Date to the Commitment Termination Date (or such other date which Lloyd’s may specify as the Funds Date for 2003) inclusive.
 
“ Available Commitment ” means, in relation to a Bank at any time and save as otherwise provided herein its Commitment less its share of the Sterling Amount of Outstandings at such time provided that such amount shall not be less than zero.
 
“ Available Facility ” means, at any time, the aggregate of the Available Commitments adjusted, in the case of a proposed utilisation pursuant to a Utilisation Request, so as to take into account:-
 
 	(a)	any reduction in the Commitment of a Bank pursuant to the terms hereof; and	
 
 	(b)	any Letter of Credit which pursuant to any other Utilisation Request, is to be issued; and	
 
 	(c)	any Letter of Credit which is due to expire,	
 
on or before the proposed Utilisation Date relating to such utilisation.
 
“ Bank ” means any financial institution:
 
 	(a)	named in Schedule 1 ( The Banks ); or	
 
 	(b)	which has become a party hereto in accordance with Clause 27.4 ( Assignments by Banks ) or Clause 27.5 ( Transfers by Banks ),	
 
- 2 -

and which has not ceased to be a party hereto in accordance with the terms hereof.
 
“ Bermuda Companies Law ” means The Companies Act 1981 of Bermuda, as amended, and the regulations promulgated thereunder.
 
“ Bermuda Insurance Law ” means The Insurance Act 1978 of Bermuda, as amended, and the regulations promulgated thereunder.
 
“ Business Day ” means a day (other than a Saturday or Sunday) on which banks generally are open for business in London and Bermuda and, in the case of payments to be made in dollars, New York.
 
“ Capitalised Leases ” means all leases that have been or should be, in accordance with GAAP, recorded as capitalised leases.
 
“ Cash Collateral ” means, in relation to any Bank’s L/C Proportion of any Letter of Credit, a deposit in such interest-bearing account or accounts as such Bank or, as the case may be, the Agent may specify, such deposit and account to be secured in favour of, and on terms and conditions acceptable to, such Bank.
 
“ Charge Agreement ” means the charge agreement dated on or about the date of the Second Restatement Agreement, in substantially the form set out in Schedule 10 ( Form of Charge Agreement ).
 
“ Charged Portfolio ” has the meaning ascribed to it in the Charge Agreement.
 
“ Commencement Date ” has the meaning given to it in the Fourth Amendment and Restatement Agreement.
 
“ Commitment ” means, in relation to a Bank at any time and save as otherwise provided herein, the amount set opposite its name under the heading “ Commitment ” in Schedule 1 (The Banks) .
 
“ Commitment Termination Date ” means 16 December 2003.
 
“ Consolidated ” refers to the consolidation of accounts in accordance with GAAP.
 
“ Consolidated Debt ” means at any date the Debt of the Account Party and its Consolidated Subsidiaries, determined on a Consolidated basis as of such date.
 
“ Consolidated Net Income ” means, for any period, the net income of the Account Party and its Consolidated Subsidiaries, determined on a Consolidated basis for such period.
 
“ Consolidated Net Worth ” means at any date the Consolidated stockholder’s equity of the Account Party and its Consolidated Subsidiaries determined as of such date, provided that such determination for the purposes of Clause 16.7 ( Adjusted Consolidated Debt to Total Capitalisation Ratio ), Clause 16.8 ( Consolidated Net Worth ) and Clause 16.9 ( Liens ) shall be made without giving effect to adjustments pursuant to Statement No. 115 of the Financial Accounting Standards Board of the United States of America.
 
- 3 -

“ Consolidated Subsidiary ” means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of the Account Party in its consolidated financial statements if such statements were prepared as of such date.
 
“ Contingent Obligation ” means, with respect to any Person, any obligation or arrangement of such Person to guarantee or indemnify or intended to guarantee or indemnify any Debt, leases, dividends or other payment obligations (“ primary obligations ”) of any other Person (the “ primary obligor ”) in any manner, whether directly or indirectly, including, without limitation:
 
 	(a)	the direct or indirect guarantee, endorsement (other than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the obligation of a primary obligor;	
 
 	(b)	the obligation to make take-or-pay or similar payments, if required, regardless of non-performance by any other party or parties to an agreement; or	
 
 	(c)	any obligation of such Person, whether or not contingent:	
 
 	(i)	to purchase any such primary obligation or any property constituting direct or indirect security therefor;	
 
 	(ii)	to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor;	
 
 	(iii)	to purchase property, assets, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation; or	
 
 	(iv)	otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof,	
 
provided, however, that Contingent Obligations shall not include any obligations of any such Person arising under insurance contracts entered into in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made (or, if less, the maximum amount of such primary obligation for which such Person may be liable pursuant to the terms of the instrument evidencing such Contingent Obligation) or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such person is required to perform thereunder), as determined by such Person in good faith.
 
“ Custodian ” means (at the date of the Charge Agreement) State Street Bank and Trust Company, or such other entity or entities as may be agreed from time to time between the Account Party and the Security Trustee (each acting reasonably), provided that such
 
- 4 -

other Custodian has entered into Security Documents in a form reasonably acceptable to the Security Trustee.
 
“ Custodian’s Undertaking ” means the undertaking delivered to the Security Trustee by the Custodian in respect of the Charged Portfolio as contemplated by the Charge Agreement.
 
“ Debenture ” means debt securities issued by the Account Party or ACE INA to a Special Purpose Trust in exchange for proceeds of Preferred Securities and common securities of such Special Purpose Trust.
 
“ Debt ” of any Person means, without duplication for purposes of calculating financial ratios:
 
 	(a)	all indebtedness of such Person for borrowed money:	
 
 	(b)	all obligations of such Person for the deferred purchase price of property or services (other than trade payables incurred in the ordinary course of such Person’s business);	
 
 	(c)	all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments;	
 
 	(d)	all obligations of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property);	
 
 	(e)	all obligations of such Person as lessee under Capitalised Leases (excluding imputed interest);	
 
 	(f)	all obligations of such Person under acceptance, letter of credit or similar facilities;	
 
 	(g)	all obligations of such Person (except for Approved Investments) to purchase, redeem, retire, defease or otherwise make any payment in respect of any Equity Interests (except for obligations to pay for Equity Interests within customary settlement periods) in such Person or any other Person or any warrants, rights or options to acquire such capital stock (excluding payments under a contract for the forward sale of ordinary shares of such Person issued in a public offering), valued, in the case of Redeemable Preferred Interests, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends;	
 
 	(h)	all obligations of such Person under Guaranteed Investment Contracts issued by such Person;	
 
 	(i)	all Contingent Obligations of such Person in respect of Debt (of the types described above) of any other Person;	
 
- 5 -

 	(j)	all indebtedness and other payment obligations referred to in paragraphs (a) through (i) above of another Person secured by (or for which the holder of such Debt has an existing right, contingent or otherwise, to be secured by) any Lien on property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such indebtedness or other payment obligations;	
 
provided, however, that the amount of Debt of such Person under paragraph (j) above shall, if such Person has not assumed or otherwise become liable for any such Debt, be limited to the lesser of the principal amount of such Debt or the fair market value of all property of such Person securing such Debt; provided further that “ Debt ” shall not include obligations in respect of insurance or reinsurance contracts entered into in the ordinary course of business; provided further that, solely for the purposes of Clause 16.7 ( Adjusted Consolidated Debt to Total Capitalisation Ratio ) and Clause 16.8 ( Consolidated Net Worth ) and the definitions of “ Adjusted Consolidated Debt ” and “ Total Capitalisation ”, “ Debt ” shall not include (x) any contingent obligations of any Person under or in connection with acceptance, letter of credit or similar facilities, or (y) obligations of the Account Party or ACE INA under any Debentures or under any subordinated guarantee or any Preferred Securities or obligations of a Special Purpose Trust under any Preferred Securities or (z) obligations of such Person under Guaranteed Investment Contracts in an aggregate amount not to exceed $2,000,000,000 outstanding at any time.
 
“ Default ” means an Event of Default or a Potential Event of Default.
 
“ Derivatives Obligations ” of any Person means all obligations of such Person in respect of any rate swap transaction, basis swap, forward rate transaction, commodity swap, commodity option, equity or equity index swap, equity or equity index option, bond option, interest rate option, foreign exchange transaction, cap transaction, floor transaction, collar transaction, currency swap transaction, cross-currency rate swap transaction, currency option or other similar transaction (including any option with respect to any of the foregoing transactions) or any combination of the foregoing transactions.
 
“ Effective Date ” means, in respect of each Letter of Credit, 21 November 2003.
 
“ Equity Interests ” means, with respect to any Person, shares of capital stock of (or other ownership or profit interests in) such Person, warrants, options or other rights for the purchase or other acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or other acquisition from such Person of such shares (or such other interests), and other ownership or profit interests in such Person (including, without limitation, partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are authorised or otherwise existing on any date of determination.
 
“ Event of Default ” means any circumstance described as such in Clause 17 ( Events of Default ).
 
- 6 -

“ Facility ” means the sterling and dollar letter of credit facility granted to the Account Party in this Agreement.
 
“ Facility Office ” means, in relation to the Agent, the office identified with its signature below or such other office as it may select by notice and, in relation to any Bank, the office notified by it to the Agent in writing prior to the date hereof (or, in the case of a Transferee, at the end of the Transfer Certificate to which it is a party as Transferee) or such other office as it may from time to time select by notice to the Agent.
 
“ Final Expiration Date ” means the date on which a Letter of Credit terminates in accordance with its terms.
 
“ Finance Documents ” means this Agreement and each Security Document and any other document or documents as may be agreed by the Agent and the Account Party.
 
“ Finance Parties ” means the Agent, the Security Trustee, the Arrangers and the Banks.
 
“ First Restatement Agreement ” means the amendment and restatement agreement dated 17 November 2000 made between (amongst others) the Account Party, the Guarantor named therein, the Agent and the Banks named therein.
 
“ Fourth Amendment and Restatement Agreement ” means the amendment and restatement agreement dated 14 November 2003 made between (amongst others) the Account Party, the Guarantors, the Agent and the Banks named therein.
 
“ Funds at Lloyd’s ” has the meaning given to it in paragraph 4 of the Membership Bylaw (No. 17 of 1993).
 
“ Funds at Lloyd’s Requirements ” means, in respect of any member, the amount required to be maintained by that member as Funds at Lloyd’s.
 
“ Funds Date ” means, in relation to any year, the date notified by Lloyd’s as being the latest date in that year by which Funds at Lloyd’s can be placed with Lloyd’s in order to satisfy Funds at Lloyd’s Requirements in respect of the year of account next following that date, such date notified by Lloyd’s in respect of the 2004 year of account being 21 November 2003.
 
“ GAAP ” has the meaning specified in Clause 1.7 ( Accounting Terms and Determinations ).
 
“ Group ” means the Account Party and its Subsidiaries for the time being.
 
“ Guaranteed Investment Contract ” means, with respect to any Person, a guaranteed investment contract or funding agreement or other similar agreement issued by such Person that guarantees to a counterparty a rate of return on the invested capital over the life of such contract or agreement.
 
“ Hedge Agreements ” means interest rate swap, cap or collar agreements, interest rate future or option contracts, currency swap agreements, currency future or option contracts and other hedging agreements.
 
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“ Internal Revenue Code ” means the Internal Revenue Code of 1986 of the United States of America, as amended, or any successor statute, and includes regulation promulgated and rulings issued thereunder.
 
“ Investment ” in any Person means any loan or advance to such Person, any purchase or other acquisition of any Equity Interests or Debt or the assets comprising a division or business unit or a substantial part or all of the business of such Person, any capital contribution to such Person or any other direct or indirect investment in such Person, including, without limitation, any acquisition by way of a merger or consolidation and any arrangement pursuant to which the investor incurs Debt of the types referred to in paragraph (i) or (j) of the definition of “ Debt ” in respect of such Person; provided, however, that any purchase by any US Facility Agreement Loan Party or any Subsidiary of any catastrophe-linked instruments which are (x) issued for the purpose of transferring traditional reinsurance risk to the capital markets and (y) purchased by such US Facility Agreement Loan Party or any Subsidiary in accordance with its customary reinsurance underwriting procedures, or the entry by any US Facility Agreement Loan Party or any Subsidiary into swap transactions relating to such instruments in accordance with such procedures, shall be deemed to be the entry by such Person into a reinsurance contract and shall not be deemed to be an Investment by such Person.
 
“ L/C Commission Rate ” means the rate per annum determined in accordance with Clause 18.1 (Letter of Credit Commission) or Schedule 8 ( Pricing Schedule ), as the case may be.
 
“ L/C Proportion ” means, in relation to a Bank in respect of any Letter of Credit and save as otherwise provided herein, the proportion (expressed as a percentage) borne by such Bank’s Available Commitment to the Available Facility immediately prior to the issue of such Letter of Credit.
 
“ L/C Valuation Date ” means the first Business Day which falls six months after the Commencement Date and each day falling at six monthly intervals thereafter.
 
“ Letter of Credit ” means a letter of credit issued or to be issued pursuant to Clause 3 ( Utilisation of the Facility ) substantially in the form set out in Schedule 5 ( Form of Letter of Credit ) or in such other form requested by the Account Party which is approved by the Banks (such approval not to be unreasonably withheld or delayed).
 
“ Letter of Credit Commission ” means the letter of credit commission described in Clause 18.1 ( Letter of Credit Commission ).
 
“ LIBOR ” means, in relation to any Unpaid Sum on which interest for a given period is to accrue, the percentage rate per annum equal to the offered quotation which appears on the page of the Telerate Screen which displays an average British Bankers Association Interest Settlement Rate for the currency of the relevant amount (being currently “3740” or, as the case may be, “3750”) for such period as of 11.00 a.m. London time on the Quotation Date for such period or, if such page or such service shall cease to be available, such other page or such other service for the purpose of displaying an average British Bankers Association Interest Settlement Rate for such currency as the Agent, after consultation with the Banks and the Account Party, shall select, acting reasonably.
 
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“ Lien ” means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or other charge or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest, in respect of such asset. For the purposes of this Agreement, the Account Party shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, capital lease or other title retention agreement relating to such asset.
 
“ Lloyd’s ” means the Society incorporated by Lloyd’s Act 1871 by the name of Lloyd’s.
 
“ Majority Banks ” means, save as otherwise provided herein:
 
 	(a)	whilst there are no Outstandings, a Bank or Banks whose Commitments amount (or, if each Bank’s Commitment has been reduced to zero, did immediately before such reduction to zero, amount) in aggregate to sixty-six and two thirds per cent. or more (or for the purposes of Clause 17.18 ( Acceleration and Cancellation ) to more than fifty per cent.) of the Total Commitments; and	
 
 	(b)	whilst there are Outstandings a Bank or Banks to whom in aggregate more than sixty-six and two thirds per cent. (or for the purposes of Clause 17.18 ( Acceleration and Cancellation ) more than fifty per cent.) of the Outstandings is owed,	
 
provided that , in respect of a Letter of Credit issued by a Declining Bank pursuant to sub-clause 4.5.2 of Clause 4.5 ( Replacement Letters of Credit ), an amount equal to the amount of its Outstandings in respect thereof multiplied by the Reduction Percentage applicable at that time shall be excluded in determining the amount of Outstandings owed to such Bank for the purposes of this definition only.
 
“ Mandatorily Convertible Preferred Securities ” means units comprised of (i) Preferred Securities or preferred shares of the Account Party and (ii) a contract for the sale of ordinary shares of the Account Party (including “Feline Prides TM ”, “Rhinos TM” or any substantially similar securities).
 
“ Mandatory Liquid Asset Costs Rate ” in relation to any Unpaid Sum shall bear the meaning given to it in Schedule 6 ( Mandatory Liquid Asset Costs Rate ).
 
“ Material Debt ” means Debt of the Account Party and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, in an aggregate principal or face amount exceeding US$25,000,000.
 
“ Material Financial Obligations ” means a principal amount of Debt and/or current payment obligations in respect of Derivatives Obligations of the Account Party and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, exceeding in the aggregate US$25,000,000.
 
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“ Material Subsidiary ” means any Subsidiary having:
 
 	(a)	assets (after inter company eliminations) in excess of 10 per cent. of the total assets of the Account Party and its Subsidiaries determined on a Consolidated basis; or	
 
 	(b)	annual net income constituting 10 per cent. or more of the total annual net income of the Account Party and its Subsidiaries on a Consolidated basis,	
 
in each case determined as of the end of the most recently ended fiscal year, and in any event ACE UK Limited shall be construed as a Material Subsidiary.
 
“ Net Proceeds ” means, with respect to any issuance of Equity Interests by any Person, the amount of cash received by such Person in connection with such transaction after deducting therefrom the aggregate, without duplication, of the following amounts to the extent properly attributable to such transactions:
 
 	(a)	reasonable brokerage commissions, attorney’s fees, finders’ fees, financial advisory fees, financial advisory fees, accounting fees, underwriting fees, investment banking fees, and other similar commissions, and reasonable fees and expenses and disbursements of any of the foregoing, in each case to the extent paid or payable by such Person;	
 
 	(b)	reasonable printing and related expenses of filing and recording or registration fees or charges or similar fees or charges paid by such Person; and	
 
 	(c)	taxes paid or payable by such Person to any governmental authority or regulatory body as a result of such transaction.	
 
“ Notice of Charge ” means the notice of charge of the Charged Portfolio to be delivered by the Obligors to the Custodian pursuant to the terms of the Charge Agreement.
 
“ Obligors ” means the Account Party and the Guarantors.
 
“ Original Agreement ” means this Agreement as:
 
 	(a)	amended and restated pursuant to the First Restatement Agreement,	
 
 	(b)	amended by the Amendment Agreement;	
 
 	(c)	amended and restated pursuant to the Second Restatement Agreement; and	
 
 	(d)	amended and restated pursuant to the Third Restatement Agreement,	
 
but prior to its amendment and restatement on the Commencement Date.
 
“ Original Letters of Credit ” means the letters of credit issued under the Original Agreement.
 
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“ Original Sterling Amount ” means:
 
 	(a)	in relation to a Letter of Credit denominated in sterling, the amount specified as the amount of the Letter of Credit in the Utilisation Request relating thereto; and	
 
 	(b)	in relation to a Letter of Credit denominated in dollars, the amount of sterling which could be purchased with the dollar amount of such Letter of Credit at the spot rate of exchange quoted by the Agent at or about 11.00 a.m. London time on the day falling three Business Days before the Utilisation Date for the purchase of sterling with dollars for delivery two Business Days thereafter.	
 
“ Outstandings ” means, at any time, the aggregate of the Sterling Amounts of the maximum actual and contingent liabilities of the Banks in respect of each outstanding Letter of Credit.
 
“ Permitted Liens ” means such of the following as to which no enforcement, collection, execution, levy or foreclosure proceeding shall have been commenced or which are being contested in good faith by appropriate proceedings:
 
 	(a)	Liens for taxes, assessments and governmental charges or levies not yet due and payable;	
 
 	(b)	Liens imposed by law, such as materialsmen’s, mechanics’, carriers’, workmen’s and repairmen’s Liens and other similar Liens arising in the ordinary course of business securing obligations that are not overdue for a period of more than 90 days;	
 
 	(c)	pledges or deposits to secure obligations under workers’ compensation laws or similar legislation or to secure public or statutory obligations; and	
 
 	(d)	easements, rights of way and other encumbrances on title to real property that do not render title to the property encumbered thereby unmarketable or materially adversely affect the use of such property for its present purposes.	
 
“ Person ” means an individual, a company, a corporation, a partnership, an association, a trust or any other entity or organisation, including a government or political subdivision or an agency or instrumentality thereof.
 
“ Potential Event of Default ” means any event which would reasonably be expected to become (with the passage of time, the giving of notice, the making of any determination hereunder or any combination thereof) an Event of Default.
 
“ Preferred Interests ” means, with respect to any Person, Equity Interests issued by such Person that are entitled to a preference or priority over any other Equity Interests issued by such Person upon any distribution of such Person’s property and assets, whether by dividend or upon liquidation.
 
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“ Preferred Securities ” means:
 
 	(a)	preferred securities issued by the Special Purpose Trust which shall provide, among other things, that dividends shall be payable only out of proceeds of interest payments on the Debentures; or	
 
 	(b)	other instruments that may be treated in whole or in part as equity for rating agency purposes while being treated as debt for tax purposes.	
 
“ Proportion ” means, in relation to a Bank the proportion borne by its Commitment to the Total Commitments (or, if the Total Commitments are then zero, by its Commitment to the Total Commitments immediately prior to their reduction to zero).
 
“ Quotation Date ” means, in relation to any period for which an interest rate is to be determined hereunder, the day on which quotations would ordinarily be given by prime banks in the London interbank market for deposits in the currency in relation to which such rate is to be determined for delivery on the first day of that period, provided that , if, for any such period, quotations would ordinarily be given on more than one date, the Quotation Date for that period shall be the last of those dates.
 
“ Redeemable ” means, with respect to any Equity Interest, any Debt or any other right or obligation, any such Equity Interest, Debt, right or obligation that:
 
 	(a)	the issuer has undertaken to redeem at a fixed or determinable date or dates, whether by operation of a sinking fund or otherwise, or upon the occurrence of a condition not solely within the control of the issuer; or	
 
 	(b)	is redeemable at the option of the holder.	
 
“ Reduction Percentage ” means 20 per cent. x (5 - a); where “a” equals the remaining number of years (and for such purposes any incomplete year shall be treated as one year) for which the relevant Letter of Credit is currently valid.
 
“ Representations ” means each of the representations set out in Clause 15 ( Representations ).
 
“ Required Value ” has the meaning ascribed to it in the Charge Agreement.
 
“ Second Restatement Agreement ” means the agreement dated 21 November 2001 which amends and restates the Original Agreement.
 
“ Securitisation Transaction ” means any sale, assignment or other transfer by the Account Party or any Subsidiary of any accounts receivable, premium finance loan receivables, lease receivables or other payment obligations owing to the Account Party or such Subsidiary or any interest in any of the foregoing, together in each case with any collections and other proceeds thereof, any collection or deposit accounts related thereto, and any collateral, guarantees or other property or claims in favour of the Account Party or such Subsidiary supporting or securing payment by the obligor thereon of, or otherwise related to, any such receivables.
 
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“ Security ” means any security granted over the Charged Portfolio by the Obligors in favour of the Security Trustee pursuant to the Charge Agreement.
 
“ Security Documents ” means the Charge Agreement, the Custodian’s Undertaking and the Notice of Charge.
 
“ Special Purpose Trust ” means a special purpose business trust established by the Account Party or ACE INA of which the Account Party or ACE INA will hold all the common securities, which will be the issuer of Preferred Securities, and which will loan to the Account Party or ACE INA (such loan being evidenced by the Debentures) the net proceeds of the issuance and sale of the Preferred Securities and common securities of such Special Purpose Trust.
 
“ Spot Rate ” means the spot rate of exchange quoted by the Agent at or about 11.00 a.m. London time on the day on which the relevant calculation is to be made for the purchase of sterling with dollars or any other relevant currency for delivery two business days thereafter.
 
“ Sterling Amount ” means:
 
 	(a)	in relation to a Letter of Credit at any time:	
 
 	(i)	if such Letter of Credit is denominated in sterling, the maximum actual and contingent liability of the Banks thereunder or in respect thereof at such time; and	
 
 	(ii)	if such Letter of Credit is denominated in dollars, the equivalent in sterling of the maximum actual and contingent liability of the Banks thereunder at such time, calculated as at the later of the date which falls (1) two Business Days before its Utilisation Date or (2) the most recent L/C Valuation Date; and	
 
 	(b)	in relation to the Outstandings, the aggregate of the Sterling Amounts of each outstanding Letter of Credit.	
 
“ Subsidiary ” means, as to any Person, any corporation or other entity of which securities or other ownership interests having ordinary voting power to elect a majority of the board of directors or other persons performing similar functions are at the time directly or indirectly owned by such Person and, unless otherwise specified, “ Subsidiary ” means a Subsidiary of the Account Party.
 
“ Substitution Date ” means the date on which a new Letter of Credit will be substituted for an existing Letter of Credit under Clause 5 ( Substitution of Letters of Credit ), as specified in the relevant Substitution Request.
 
“ Substitution Period ” means the period from the Commencement Date to the date falling 48 months prior to the then-applicable Final Expiration Date.
 
“ Substitution Request ” means a request substantially in the form set out in Schedule 11 ( Form of Substitution Notice ).
 
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“ Term ” means, save as otherwise provided herein:
 
 	(a)	in relation to any Letter of Credit, the period from its Effective Date until its Final Expiration Date; and	
 
 	(b)	in relation to an Unpaid Sum, any of those periods mentioned in Clause 20 ( Default Interest and Break Costs ).	
 
“ Termination Notice ” has the meaning specified in Clause 4.1 ( Continuation until Termination ).
 
“ Third Restatement Agreement ” means the amendment and restatement agreement dated 19 November 2002 made between (amongst others) the Account Party, the Guarantor named therein, the Agent and the Banks named therein.
 
“ Total Capitalisation ” means, at any time, an amount (without duplication) equal to:
 
 	(a)	the then outstanding Consolidated Debt of the Account Party and its Subsidiaries	
 
plus
 
 	(b)	Consolidated stockholders’ equity of the Account Party and its Subsidiaries plus (without duplication)	
 
 	(c)	the then issued and outstanding amount of Preferred Securities (including Mandatorily Convertible Preferred Securities) and (without duplication) Debentures.	
 
“ Total Commitments ” means, at any time, the aggregate of the Banks’ Commitments.
 
“ Transfer Certificate ” means a certificate substantially in the form set out in Schedule 2 ( Form of Transfer Certificate ) signed by a Bank and a Transferee under which:
 
 	(a)	such Bank seeks to procure the transfer to such Transferee of all or a part of such Bank’s rights, benefits and obligations under the Finance Documents upon and subject to the terms and conditions set out in Clause 27.3 ( Assignments and Transfers by Banks ); and	
 
 	(b)	such Transferee undertakes to perform the obligations it will assume as a result of delivery of such certificate to the Agent as contemplated in Clause 27.5 ( Transfers by Banks ).	
 
“ Transfer Date ” means, in relation to any Transfer Certificate, the date for the making of the transfer as specified in such Transfer Certificate.
 
“ Transferee ” means a person to which a Bank seeks to transfer by novation all or part of such Bank’s rights, benefits and obligations under the Finance Documents.
 
“ Unpaid Sum ” means the unpaid balance of any of the sums referred to in Clause 20.1 ( Default Interest ).
 
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“ US Facility Agreements ” means each of:
 
 	(a)	the US$500,000,000 364 day revolving credit facility agreement originally entered into on 11 June 1999 (as amended and restated on (i) 8 May 2000, (ii) 6 April 2001, (iii) 5 April 2002 and (iv) 4 April 2003) and made between, inter alia , ACE Limited and ACE INA as borrowers, the financial institutions named therein and others; and	
 
 	(b)	the US$250,000,000 revolving credit facility agreement originally entered into on 11 June 1999 (as amended and restated on 8 May 2000) and made between, inter alia , ACE Limited and ACE INA as borrowers, the financial institutions named therein and others (the “ Five Year US Facility ”),	
 
in each case as the same may be further amended or restated from time to time.
 
“ US Facility Agreement Loan Parties ” means, at any time, any or all of the Account Party, ACE INA, ACE Financial Services Inc., ACE Guaranty Re Inc., ACE Bermuda Insurance Ltd. and ACE Tempest Reinsurance Ltd.
 
“ US Fee Letter ” means the fee letter dated 5 March 2001 and made between, inter alia , the Account Party, the arrangers of the US Facility Agreements, JP Morgan Securities Inc. and others.
 
“ US Letter of Credit Agreements ” means any and all letter of credit agreements entered into by any borrower pursuant to the Five Year US Facility.
 
“ US Loan Documents ” means:
 
 	(a)	each US Facility Agreement;	
 
 	(b)	the US Notes;	
 
 	(c)	the US Fee Letter; and	
 
 	(d)	each US Letter of Credit Agreement.	
 
“ US Notes ” means each promissory note issued or to be issued pursuant to the terms of the US Facility Agreements.
 
“ Utilisation Date ” means the date on which a Letter of Credit is to be issued.
 
“ Utilisation Request ” means a notice substantially in the form set out in Schedule 4 ( Utilisation Request ).
 
“ Voting Interests ” means shares of capital stock issued by a corporation, or equivalent Equity Interest in any other Person, the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even if the right so to vote has been suspended by the happening of such a contingency.
 
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“ Wholly-Owned Consolidated Subsidiary ” means any Consolidated Subsidiary all of the shares of capital stock or other ownership interests of which (except directors’ qualifying shares) are at the time directly or indirectly owned by the Account Party.
 
1.2	Interpretation	
 
Any reference in this Agreement to:
 
the “ Agent ”, “ Security Trustee ”, any “ Obligor ” or any “ Bank ” shall be construed so as to include its and any subsequent successors and permitted transferees in accordance with their respective interests;
 
“ continuing ”, in the context of an Event of Default shall be construed as a reference to an Event of Default which has not been remedied or waived in accordance with the terms hereof and in relation to a Potential Event of Default, one which has not been remedied within the relevant grace period or waived in accordance with the terms hereof.
 
the “ euro ” means the single currency of participating member states of the European Union;
 
a “ holding company ” of a company or corporation shall be construed as a reference to any company or corporation of which the first-mentioned company or corporation is a Subsidiary;
 
a “ law ” shall be construed as any law (including common or customary law), statute, constitution, decree, judgment, treaty, regulation, directive, bye-law, order or any other legislative measure of any government, supranational, local government, statutory or regulatory body or court;
 
a “ member ” shall be construed (as the context may require) as a reference to an underwriting member of Lloyd’s;
 
a “ month ” is a reference to a period starting on one day in a calendar month and ending on the numerically corresponding day in the next succeeding calendar month save that, where any such period would otherwise end on a day which is not a Business Day, it shall end on the next succeeding Business Day, unless that day falls in the calendar month succeeding that in which it would otherwise have ended, in which case it shall end on the immediately preceding Business Day, provided that , if a period starts on the last Business Day in a calendar month or if there is no numerically corresponding day in the month in which that period ends, that period shall end on the last Business Day in that later month (and references to “ months ” shall be construed accordingly);
 
a “ participating member state ” is a reference to a member of the European Communities that adopts or has adopted the euro as its lawful currency in accordance with legislation of the European Union relating to European Monetary Union;
 
a Bank’s “ participation ”, in relation to a Letter of Credit, shall be construed as a reference to the rights and obligations of such Bank in relation to such Letter of Credit as are expressly set out in this Agreement;
 
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a “ successor ” shall be construed so as to include an assignee or successor in title of such party and any person who under the laws of its jurisdiction of incorporation or domicile has assumed the rights and obligations of such party under this Agreement or to which, under such laws, such rights and obligations have been transferred;
 
“ tax ” shall be construed so as to include any tax, levy, impost, duty or other charge of a similar nature (including any penalty or interest payable in connection with any failure to pay or any delay in paying any of the same);
 
“ VAT ” shall be construed as a reference to value added tax including any similar tax which may be imposed in place thereof from time to time; and
 
the “ winding-up ”, “ dissolution ” or “ administration ” of a company or corporation shall be construed so as to include any equivalent or analogous proceedings under the law of the jurisdiction in which such company or corporation is incorporated or any jurisdiction in which such company or corporation carries on business including the seeking of liquidation, winding-up, reorganisation, dissolution, administration, arrangement, adjustment, protection or relief of debtors.
 
1.3	Currency Symbols	
 
 	1.3.1 	“ £ ” and “ sterling ” denote lawful currency of the United Kingdom for the time being.	
 
 	1.3.2 	“ US$ ” and “ dollars ” denote lawful currency of the United States of America for the time being.	
 
1.4	Agreements and Statutes	
 
 	Any	reference in this Agreement to:	
 
 	1.4.1 	this Agreement or any other agreement or document shall be construed as a reference to this Agreement or, as the case may be, such other agreement or document as the same may have been, or may from time to time be, amended, varied, novated or supplemented;	
 
 	1.4.2 	a statute or treaty shall be construed as a reference to such statute or treaty as the same may have been, or may from time to time be, amended or, in the case of a statute, re-enacted; and	
 
 	1.4.3 	a bylaw shall be construed as a reference to a bylaw made under Lloyd’s Acts 1871 to 1982 as the same may have been, or may from time to time be, amended or replaced.	
 
1.5 	Headings	
 
Clause and Schedule headings are for ease of reference only.
 
1.6	Time	
 
Any reference in this Agreement to a time of day shall, unless a contrary indication appears, be a reference to London time.
 
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1.7	Accounting Terms and Determinations	
 
Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time (“ GAAP ”), applied on a basis consistent (except for changes concurred in by the Account Party’s independent public accountants) with the most recent audited consolidated financial statements of the Account Party and its Consolidated Subsidiaries delivered to the Banks; provided that , if the Account Party notifies the Agent that the Account Party wishes to amend any covenant in Clause 16 ( Covenants ) to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Agent notifies the Account Party that the Majority Banks wish to amend Clause 16 ( Covenants ) for such purpose), then the Account Party’s compliance with such covenant shall be determined on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted account principals became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Account Party and the Majority Banks.
 
1.8	Third party rights	
 
A person who is not a party to this Agreement has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Agreement.
 
2.	THE FACILITY	
 
2.1	Grant of the Facility	
 
The Banks, upon the terms and subject to the conditions hereof, grant to the Account Party a dual currency letter of credit facility in an aggregate amount of £380,000,000.
 
2.2 	Purpose and Application	
 
The Facility is intended to support Funds at Lloyd’s, and, accordingly, the Account Party shall apply all Letters of Credit issued hereunder in or towards satisfaction of such purpose and none of the Finance Parties shall be obliged to concern themselves with such application.
 
2.3	Conditions Precedent	
 
Save as the Banks may otherwise agree, the Account Party may not deliver any Utilisation Request unless the Agent has confirmed to the Account Party and the Banks (which confirmation the Agent gave on 27 November 2001) that it has received all of the documents and other evidence listed in Schedule 3 ( Conditions Precedent ) and that each is, in form and substance, satisfactory to the Agent.
 
2.4	Several Obligations	
 
The obligations of each Bank are several and the failure by a Bank to perform its obligations hereunder and/or under any Letter of Credit issued hereunder shall not affect the obligations of either Obligor towards any other party hereto nor shall any other party be liable for the failure by such Bank to perform its obligations hereunder and/or under such Letter of Credit.
 
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2.5	Several Rights	
 
The rights of each Finance Party are several and any debt arising hereunder at any time from an Obligor to any Finance Party shall be a separate and independent debt. Each such party shall be entitled to protect and enforce its individual rights arising out of this Agreement independently of any other party (so that it shall not be necessary for any party hereto to be joined as an additional party in any proceedings for this purpose).
 
2.6	Cancellation of Original Letters of Credit	
 
On and with effect from the Effective Date, all outstanding Original Letters of Credit shall be cancelled and replaced by the Letters of Credit issued after the Commencement Date.
 
3.	UTILISATION OF THE FACILITY	
 
3.1	Utilisation Conditions for the Facility	
 
Save as otherwise provided herein, a Letter of Credit will be issued at the request of the Account Party on behalf of an Applicant if:
 
 	3.1.1 	no later than 10.00 a.m. two Business Days before the proposed Utilisation Date, the Agent has received a duly completed Utilisation Request from the Account Party;	
 
 	3.1.2 	the proposed Utilisation Date is a Business Day falling within the Availability Period;	
 
 	3.1.3 	the proposed Original Sterling Amount of such Letter of Credit is less than or equal to the Available Facility;	
 
 	 3.1.4 	the Letter of Credit is substantially in the form set out in Schedule 5 (Form of Letter of Credit) or in such other form requested by the Account Party which is approved by the Banks (such approval not to be unreasonably withheld or delayed);	
 
 	3.1.5	 the beneficiary of such Letter of Credit is Lloyd’s;	
 
 	3.1.6 	on and as of the proposed Utilisation Date:	
 
 	(a)	no Event of Default or Potential Event of Default has occurred and is continuing; and	
 
 	(b)	the Representations are true in all material respects; and	
 
 	3.1.7	the Agent has received evidence acceptable to it that the Charged Portfolio has been delivered to the Custodian and the amount of the Charged Portfolio is at least equal to the Required Value.	
 
3.2	Request for Letters of Credit	
 
A single Utilisation Request may be issued in respect of more than one Letter of Credit.
 
3.3	Completion of Letters of Credit	
 
The Agent is authorised to arrange for the issue of any Letter of Credit pursuant to Clause 3.1 ( Utilisation Conditions for the Facility ) by:
 
 	3.3.1 	completing the Effective Date of such Letter of Credit;	
 
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 	3.3.2	completing the schedule to such Letter of Credit with the percentage participation of each Bank as allocated pursuant to the terms hereof; and	
 
 	3.3.3	executing such Letter of Credit on behalf of each Bank and following such execution delivering such Letter of Credit to Lloyd’s on the Utilisation Date,	
 
provided that the Agent shall not deliver any such Letter of Credit to Lloyd’s unless the Agent is satisfied that:
 
 	(a)	Lloyd’s has cancelled (or will upon such delivery cancel) the Original Letters of Credit; and	
 
 	(b)	all amounts outstanding in respect of the Original Letters of Credit have been paid in full.	
 
3.4	Dollar Option	
 
The Account Party may, in a Utilisation Request, request that such Letter of Credit be denominated in dollars in which event such Letter of Credit shall be denominated in dollars.
 
3.5	Amounts of Letters of Credit	
 
The amount of a Letter of Credit shall be:
 
 	3.5.1	the Original Sterling Amount of such Letter of Credit, if such Letter of Credit is to be denominated in sterling; and	
 
 	3.5.2	if such Letter of Credit is to be denominated in dollars, the amount specified in the Utilisation Request relating thereto.	
 
3.6	Each Bank’s Participation in Letters of Credit	
 
Save as otherwise provided herein, each Bank will participate in each Letter of Credit issued pursuant to this Clause 3 in the proportion borne by its Available Commitment to the Available Facility immediately prior to the issue of such Letter of Credit.
 
3.7	Cancellation of Commitments	
 
On the expiry of the Availability Period the Available Facility and each Bank’s Available Commitment shall be reduced to zero.
 
3.8	Final Expiration Date	
 
Each Letter of Credit shall expire on its Final Expiration Date.
 
4.	TERMINATION OF LETTERS OF CREDIT	
 
4.1	Continuation until Termination	
 
Each Bank acknowledges that, subject to the terms of this Agreement, each issued Letter of Credit shall continue in force unless Lloyd’s receives a notice pursuant to clause 3 of the Letter of Credit, giving Lloyd’s not less than four years’ notice in writing terminating such Letter of Credit on the fourth anniversary of its Commencement Date or any subsequent date as specified in such notice (a “ Termination Notice ”). The Agent is not
 
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entitled to give a Termination Notice to Lloyd’s pursuant to clause 3 of the Letter of Credit except as permitted by this Clause 4.
 
4.2	Account Party’s Rights to Terminate a Letter of Credit	
 
 	4.2.1	 	The Account Party may, by notice to the Agent given no later than 1 August 2004, terminate a Letter of Credit, such termination becoming effective on 30 September 2008. The Agent shall promptly give notice to the Banks and (by way of a Termination Notice) to Lloyd’s of that termination. Following the giving of such Termination Notice by the Agent to Lloyd’s, that Letter of Credit will expire on 30 September 2008.	
 
 	4.2.2	 	Subject to sub-clause 4.2.3 below, from 1 October 2004, the Account Party may, by notice to the Agent, terminate a Letter of Credit. The Agent shall promptly give notice to the Banks and (by way of a Termination Notice) to Lloyd’s of that termination. Following the giving of such Termination Notice by the Agent to Lloyd’s, that Letter of Credit will expire on the fourth anniversary of the date on which that Termination Notice is given.	
 
 	4.2.3	 	The Account Party may not, in any year, give notice to the Agent terminating a Letter of Credit between 16 August and 30 September (inclusive) of that year.	
 
4.3	Banks’ Rights to Terminate a Letter of Credit	
 
 	4.3.1	 	Each Bank may in its absolute discretion, by notice to the Agent given no later than 15 August 2004, elect to terminate its participation in a Letter of Credit, such termination becoming effective on 30 September 2008. The Agent shall give notice thereof to the Account Party within two Business Days of notification from such Bank. Provided that the Account Party has not designated a Substitute Bank in accordance with Clause 4.4 ( Substitute Bank ) below and the relevant Bank has not revoked its notification of termination (which it shall be able to revoke up to and including 15 August 2004 and not thereafter), the Agent shall deliver a Termination Notice to Lloyd’s of that termination no earlier than the date which falls three weeks after 15 August 2004. Following the giving of such Termination Notice by the Agent to Lloyd’s, that Letter of Credit will expire on 30 September 2008. Unless notice is given to the Agent as aforesaid each Bank will be deemed automatically to have agreed to continue its participation in each Letter of Credit.	
 
 	4.3.2	 	Subject to sub-clause 4.3.3 below, from 1 October 2004, each Bank may, in its absolute discretion, by notice to the Agent, terminate its participation in a Letter of Credit. The Agent shall give notice to the Account Party of that termination within two Business Days thereafter. Provided that the Account Party has not designated a Substitute Bank in accordance with Clause 4.4 ( Substitute Bank ) below, the Agent shall deliver a Termination Notice to Lloyd’s of that termination no earlier than the date which falls three weeks after the date on which notice of that termination was received from such Bank by the Agent. Following the giving of such Termination Notice by the Agent to Lloyd’s, that Letter of Credit will expire on the fourth anniversary of the date on which that Termination Notice is given.	
 
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 	4.3.3	 	A Bank may not, in any year, give notice to the Agent terminating its participation in a Letter of Credit between 16 August and 30 September (inclusive) of that year.	
 
4.4	Substitute Bank	
 
 	 4.4.1	 	If any Bank (a “ Declining Bank ”) gives notice in accordance with the provisions of Clause 4.3 ( Banks’ Rights to Terminate a Letter of Credit ) that it intends to terminate its participation in a Letter of Credit in accordance with that Clause, then the Account Party may designate:	
 
 	(a)	in respect of notice given in accordance with sub-clause 4.3.1, by the date which falls three weeks prior to 30 September 2004; and	
 
 	(b)	in respect of notice given in accordance with sub-clause 4.3.2, by the date which falls three weeks after the date on which such notice was given, (each date referred to in (a) and (b) above being a “ Substitute Date ”),	
 
an Approved Credit Institution (the “ Substitute Bank ”) which is willing to assume all of the rights and obligations of the Declining Bank in respect of its participation in the relevant Letter of Credit (the “ Old Letter of Credit ”).
 
 	4.4.2	 	If the Account Party has designated a Substitute Bank, it shall promptly notify the Agent and the Declining Bank thereof and shall procure the release by Lloyd’s of the Old Letter of Credit from the Funds at Lloyd’s of the relevant Applicant.	
 
 	4.4.3	 	The Declining Bank shall, with effect from the relevant Substitute Date, transfer its rights and obligations hereunder to the Substitute Bank in accordance with the provisions of Clause 27.5 ( Transfers by Banks ).	
 
 	4.4.4	 	The Substitute Bank shall pay to the Declining Bank all amounts then due and owing (and all fees accrued to but excluding the date of such transfer) to the Declining Bank in respect of its participation in the Old Letter of Credit.	
 
4.5	Replacement Letters of Credit	
 
 	 4.5.1	 	If a Substitute Bank has become party hereto pursuant to Clause 4.4 ( Substitute Bank) , then, subject to the provisions of Clause 4.6 ( Continuation Conditions Precedent ), the Banks who are deemed to have agreed to the continuation of the Old Letter of Credit in any year (the “ Extending Banks ”) shall, together with the Substitute Bank, issue, with effect from the relevant Substitute Date, and participate in, a new Letter of Credit (the “ New Letter of Credit ”) which shall:	
 
 	(a)	replace the Old Letter of Credit, and	
 
 	(b)	be in an amount equal to the Old Letter of Credit.	
 
 	4.5.2	 	If a Substitute Bank has not been designated, then:	
 
 	(a)	the Account Party shall procure the release by Lloyd’s of the Old Letter of Credit from the Funds at Lloyd’s of the relevant Applicant;	
 
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 	(b)	subject to the provisions of Clause 4.6 ( Continuation Conditions Precedent ), the Extending Banks shall issue, with effect from the relevant Substitute Date, and participate in, a new Letter of Credit (the “ Reduced Letter of Credit ”) which shall:	
 
 	(i)	replace their participation in the Old Letter of Credit; and	
 
 	(ii)	be in an amount equal to the Old Letter of Credit less the amount of the Declining Bank’s participation therein; and	
 
 	(c)	the Declining Bank shall issue, with effect from the relevant Substitute Date, and participate in, a separate Letter of Credit (a “ Bilateral Letter of Credit ”) which shall:	
 
 	(i)	replace its participation in the Old Letter of Credit;	
 
 	(ii)	be in an amount equal to the Declining Bank’s participation in the Old Letter of Credit; and	
 
 	(iii)	have a Final Expiration Date which is the fourth anniversary of the date on which the relevant Termination Notice was given by the Agent to Lloyd’s after that Declining Bank first gave its notice of termination pursuant to Clause 4.3 ( Banks’ Rights to Terminate a Letter of Credit ).	
 
4.6	Continuation Conditions Precedent	
 
 	 4.6.1	 	On or prior to the date of the delivery of each set of financial statements referred to in sub-clause 16.1.1 of Clause 16.1 ( Information ) the Account Party shall promptly notify the Agent if (as of the date of such delivery):	
 
 	(a)	an Event of Default or Potential Event of Default occurs which is continuing;	
 
 	(b)	any of the representations and warranties of the Obligors contained in this Agreement or in the Charge Agreement cease to be correct in all material respects, or become misleading in any material respect; or	
 
 	(c)	any Letter of Credit ceases solely to be used to support the relevant Applicant’s underwriting business at Lloyd’s which has been provided in accordance with the requirements of Lloyd’s applicable to it.	
 
 	 4.6.2	 	Subject to due notification to Lloyd’s in accordance with the provisions of the relevant Letter of Credit, the Banks shall be entitled to terminate their participations in all or any Letters of Credit at any time if any of the events specified in sub-clause 4.6.1 above occurs. Such Bank shall promptly give notice thereof to the Agent and the Agent shall provide a copy thereof to the Account Party within two Business Days of such notification from that Bank.	
 
4.7	Cancellation of Bilateral Letters of Credit	
 
At any time after the issue of a Bilateral Letter of Credit by a Declining Bank the Account Party may give the Agent and the Declining Bank not less than fourteen days’
 
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prior written notice of its intention to procure that the liability of the Declining Bank under such Letter of Credit is reduced to zero (whereupon it shall do so).
 
4.8	Mandatory Collateralisation	
 
If any of the events specified in sub-clause 4.6.1 of Clause 4.6 ( Continuation Conditions Precedent ) has occurred, the Agent may (and, if so instructed by the Majority Banks participating in such Letter of Credit, shall) require the Account Party to procure that the liabilities of each of the Banks under such Letter of Credit are reduced to zero and/or provide Cash Collateral for each Bank’s L/C Proportion under such Letter of Credit.
 
4.9	Revised Letters of Credit	
 
In the event that the Funds at Lloyd’s Requirements of an Applicant change at or around the time of any given Funds Date in terms of amount and/or the identity of the Applicant, then, subject to the approval of Lloyd’s and subject to each Bank’s Outstandings under the Letters of Credit issued hereunder not being increased other than in accordance with Clause 6 ( Increase of the Facility ), the Banks shall co-operate with the Account Party to ensure to the extent reasonably possible that the Letters of Credit provide for the revised Funds at Lloyd’s Requirements of the Applicants.
 
5.	SUBSTITUTION OF LETTERS OF CREDIT	
 
5.1	Request For Substitution	
 
At any time prior to the end of the Substitution Period, the Account Party may request the cancellation of any existing Letter(s) of Credit and the substitution therefor of one or more new Letters of Credit in accordance with this Clause 5.
 
5.2	Substitution Request	
 
If the Account Party wishes to substitute one or more new Letters of Credit under Clause 5.1 ( Request For Substitution ), the Account Party shall give the Agent notice, by way of a duly signed and completed Substitution Request, no later than the date falling 30 Business Days prior to the proposed Substitution Date.
 
5.3	Substitution of a Letter of Credit	
 
 	5.3.1	 	Upon receipt of a Substitution Request, the Agent shall promptly notify each Bank of the contents thereof and of the amount of such Bank’s participation in the proposed substitute Letter(s) of Credit and, subject to the provisions of Clause 5.4 ( Substitution Conditions Precedent) and to the acceptance of the proposed substitution by Lloyd’s, there shall be substituted for the existing Letter(s) of Credit the subject of the relevant Substitution Request new Letter(s) of Credit in accordance with the terms of this Clause 5.	
 
 	5.3.2	 	If a new Letter of Credit (the “ Substitute Letter of Credit ”) is to be substituted for one or more existing Letters of Credit (the “ Existing Letters of Credit ”) pursuant to sub-clause 5.3.1 above, the Banks shall issue, with effect from the Substitution Date, and participate in, a Substitute Letter of Credit which shall:	
 
 	(a)	replace the Existing Letter(s) of Credit; and	
 
 	(b)	be in an amount equal to or less than the aggregate of all the Existing Letters of Credit.	
 
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5.4	Substitution Conditions Precedent	
 
 	5.4.1	 	On or prior to close of business on the Substitution Date immediately following the delivery of any Substitution Request, the Account Party shall promptly notify the Agent if:	
 
 	(a)	an Event of Default or Potential Event of Default occurs which is continuing;	
 
 	(b)	any of the representations and warranties of the Obligors contained in this Agreement or in the Charge Agreement cease to be correct in all material respects, or become misleading in any material respect; or	
 
 	(c)	any Letter of Credit which is the subject of such Substitution Request ceases solely to be used to support the relevant Applicant’s underwriting business at Lloyd’s which has been provided in accordance with the requirements of Lloyd’s applicable to it.	
 
 	 5.4.2	 	The Banks shall not be obliged to agree to any substitution requested if the Account Party fails to comply with its obligations under this Clause 5 ( Substitution of Letters of Credit ) or if any of the events specified in sub-clause 5.4.1 above occurs.	
 
6.	INCREASE OF THE FACILITY	
 
6.1	Request for Increase	
 
In the event that the Funds at Lloyd’s Requirements of an Applicant increases at or around the time of any given Funds Date and, as a result of such increase, the aggregate amount of the Funds at Lloyd’s Requirements of the Applicants on such Funds Date would exceed the aggregate amount of the Banks’ Outstandings under the Letters of Credit, the Account Party shall be entitled to request an increase of the amount of the Letter of Credit of such Applicant by giving notice to the Agent no later than eight weeks prior to the Funds Date for such year (the “ Increase Request ”). The Increase Request shall be made in writing and shall be unconditional and irrevocable and shall specify:
 
 	6.1.1	 	which Letters of Credit and Applicants the Increase Request relates to;	
 
 	6.1.2	 	the additional amount of commitments required by the Account Party from the Banks; and	
 
 	6.1.3	 	any other information relevant to the Increase Request.	
 
6.2	Notification of Increase Request	
 
The Agent shall forward a copy of the Increase Request to the Banks as soon as practicable, and in any event no later than two Business Days after receipt thereof, together with notification of the amount of such Banks’ pro rata participation in any such increased Letter of Credit.
 
6.3	Response to Increase Request	
 
If a Bank, in its sole discretion, agrees to the increase requested by the Account Party pursuant to the Increase Request, it shall give notice to the Agent (a “ Notice of
 
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Increase ”) accordingly not less than three weeks prior to the Increase Date. If a Bank does not give such Notice of Increase by such date, then such Bank shall be deemed to have refused such increase. Nothing shall oblige a Bank to agree to the Increase Request.
 
6.4 	Notification of Response to Increase Request	
 
The Agent shall notify the Account Party in writing of each Bank’s decision in relation to the Increase Request (specifying which Banks have given a Notice of Increase, which Banks have actually refused the Increase Request and which Banks are deemed to have refused the Increase Request) no less than two weeks prior to the Increase Date.
 
6.5	Increase	
 
 	6.5.1	 	If one or more of the Banks does not give a Notice of Increase (hereinafter referred to as “ Refusing Banks ”), then the Refusing Banks shall not participate in any increase pursuant to the Increase Request but shall continue to participate in the Letters of Credit to the extent of their existing participation.	
 
 	6.5.2	 	If one or more Banks agree to the Increase Request, such Banks’ participation in the relevant Letter(s) of Credit shall, subject to satisfaction of any conditions precedent which may be specified in connection therewith, be increased in accordance with the terms of the Increase Request.	
 
 	6.5.3	 	The Account Party shall co-operate with the Agent, the Banks and Lloyd’s with respect to the replacement of any Letters of Credit required as a result of an Increase Request, and all parties hereto shall agree on any necessary replacement Letters of Credit in the context of any replacement Letters of Credit required in accordance with Clause 4.5 ( Replacement Letters of Credit ).	
 
 	6.5.4	 	The Facility, save as amended pursuant to the Increase Request, shall continue to operate in accordance with its terms.	
 
7.	NOTIFICATION	
 
7.1	Letters of Credit	
 
On or before each Utilisation Date, the Agent shall notify each Bank of the Letter of Credit that is to be issued by the Agent on behalf of the Banks, the name of the Applicant in respect of whom the Letter of Credit is being issued, the proposed length of the relevant Term and the aggregate principal amount of the relevant Letter of Credit allocated to such Bank pursuant to this Agreement.
 
7.2	Demands under Letters of Credit	
 
If a demand is made by Lloyd’s under a Letter of Credit, the Agent shall promptly make demand upon the Account Party in accordance with this Agreement and notify the Banks accordingly.
 
8.	THE ACCOUNT PARTY’S LIABILITIES IN RELATION TO LETTERS OF CREDIT	
 
8.1	The Account Party’s Indemnity to Banks	
 
The Account Party shall irrevocably and unconditionally, as a primary obligation, indemnify (on demand by the Agent) each Bank against:
 
 	8.1.1	 	any sum paid or due and payable by such Bank in accordance with the terms of any Letter of Credit requested by the Account Party; and	
 
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 	8.1.2	 	all liabilities, costs (including, without limitation, any costs incurred in funding any amount which falls due from such Bank in connection with such Letter of Credit), claims, losses and expenses which such Bank may at any time properly incur or sustain (and not as a result of such Bank’s gross negligence or wilful misconduct) in connection with any Letter of Credit.	
 
8.2	Preservation of Rights	
 
Neither the obligations of the Account Party set out in this Clause 8 nor the rights, powers and remedies conferred on any Bank by this Agreement or by law shall be discharged, impaired or otherwise affected by:
 
 	8.2.1	 	the winding-up, dissolution, administration or re-organisation of any Bank or any other person or any change in its status, function, control or ownership;	
 
 	8.2.2	 	any of the obligations of any Bank or any other person hereunder or under any Letter of Credit or under any other security taken in respect of the Account Party’s obligations hereunder or otherwise in connection with any Letter of Credit being or becoming illegal, invalid, unenforceable or ineffective in any respect;	
 
 	8.2.3	 	time or other indulgence being granted or agreed to be granted to any Bank or any other person in respect of its obligations hereunder or under or in connection with any Letter of Credit or under any such other security;	
 
 	8.2.4	 	any amendment to, or any variation, waiver or release of, any obligation of any Bank or any other person under any Letter of Credit or this Agreement; or	
 
 	8.2.5	 	any other act, event or omission which, but for this Clause 8, might operate to discharge, impair or otherwise affect any of the obligations of the Account Party set out in this Clause 8 or any of the rights, powers or remedies conferred upon any Bank by this Agreement or by law.	
 
The obligations of the Account Party set out in this Clause 8 shall be in addition to and independent of every other security which any Bank may at any time hold in respect of the Account Party’s obligations hereunder.
 
8.3	Settlement Conditional	
 
Any settlement or discharge between the Account Party and a Bank shall be conditional upon no security or payment to such Bank by the Account Party or any other person on behalf of the Account Party, being avoided or reduced by virtue of any laws relating to bankruptcy, insolvency, liquidation or similar laws of general application and, if any such security or payment is so avoided or reduced, such Bank shall be entitled to recover the value or amount of such security or payment from the Account Party subsequently as if such settlement or discharge had not occurred.
 
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8.4	Right to make Payments under Letters of Credit	
 
Each Bank shall be entitled to make any payment in accordance with the terms of the relevant Letter of Credit without any reference to or further authority from the Account Party or any other investigation or enquiry. The Account Party irrevocably authorises each Bank to comply with any demand under a Letter of Credit which is valid on its face.
 
8.5	Revaluation of Outstandings	
 
On each L/C Valuation Date, the Agent shall calculate the amount of the Outstandings (having regard to changes in the Sterling Amounts of the Letters of Credit which may arise as a result of currency fluctuations), and the Agent shall notify the Account Party of the amount, if any (the “ Excess Amount ”), by which the Outstandings exceed 105 per cent. of the aggregate Commitments of the Banks on such date, and the Account Party shall secure such Excess Amount by providing Cash Collateral in an amount not less than the Excess Amount, provided that if the Account Party provides Cash Collateral as aforesaid and, on any succeeding L/C Valuation Date, the Excess Amount as determined on such date (the “ New Excess Amount ”) is:
 
 	8.5.1	 	less than the amount of the Cash Collateral provided at such time, the Agent shall deliver to the Account Party an amount equal to the difference between the amount of such Cash Collateral and the New Excess Amount; or	
 
 	8.5.2	 	greater than the amount of Cash Collateral provided at such time, the Account Party shall deliver to the Agent an amount equal to the amount by which the New Excess Amount exceeds the amount of such Cash Collateral.	
 
9.	CANCELLATION AND COLLATERALISATION	
 
9.1	Cancellation/Cash Collateralisation of Letters of Credit	
 
The Account Party may give the Agent not less than fourteen days’ prior notice of its intention to procure that the liability of each Bank under a Letter of Credit requested by it is reduced to zero (whereupon it shall do so) or provide Cash Collateral for each Bank’s L/C Proportion under such Letter of Credit (whereupon it shall do so).
 
9.2	Notice of Cancellation or Collateralisation	
 
Any notice of cancellation or collateralisation given by the Account Party pursuant to this Clause 9 shall be irrevocable, shall specify the date upon which such cancellation or collateralisation is to be made and the amount of such cancellation or collateralisation and shall oblige the Account Party to procure such cancellation or collateralisation on such date.
 
9.3	Notice of Removal of a Bank	
 
If:
 
 	9.3.1	 	any sum payable to any Bank by the Account Party is required to be increased pursuant to Clause 10.1 ( Tax Gross-up ); or	
 
 	9.3.2	 	any Bank claims indemnification from the Account Party under Clause 10.2 ( Tax Indemnity ) or Clause 12.1 ( Increased Costs ),	
 
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the Account Party may, whilst such circumstance continues, give the Agent at least ten Business Days’ notice (which notice shall be irrevocable) of its intention to cancel, and/or provide Cash Collateral in respect of the Commitment of such Bank.
 
9.4	Removal of a Bank	
 
On the day the notice referred to in Clause 9.3 ( Notice of Removal of a Bank) expires, the Account Party shall procure either that such Bank’s L/C Proportion of each relevant Letter of Credit be reduced to zero (by reduction of the amount of such Letter of Credit in an amount equal to such Bank’s L/C Proportion) or that Cash Collateral be provided in an amount equal to such Bank’s L/C Proportion of such Letter of Credit.
 
9.5	No Further Availability	
 
A Bank for whose account a repayment is to be made under Clause 9.3 ( Notice of Removal of a Bank) shall not be obliged to participate in the making of any Letter of Credit on or after the date upon which the Agent receives the Account Party’s notice of its intention to procure the repayment of such Bank’s share of the Outstandings, and such Bank’s Available Commitment shall be reduced to zero.
 
9.6	No Other Repayments or Cancellation	
 
The Account Party shall not repay or cancel all or any part of the Outstandings except at the times and in the manner expressly provided for in this Agreement.
 
10.	TAXES	
 
10.1	Tax Gross-up	
 
All payments to be made by an Obligor to any Finance Party hereunder shall be made free and clear of and without deduction for or on account of tax unless such Obligor is required to make such a payment subject to the deduction or withholding of tax, in which case the sum payable by such Obligor (in respect of which such deduction or withholding is required to be made) shall be increased to the extent necessary to ensure that such Finance Party receives a sum net of any deduction or withholding equal to the sum which it would have received had no such deduction or withholding been made or required to be made.
 
10.2	Tax Indemnity	
 
Without prejudice to Clause 10.1 ( Tax Gross-up ), if any Finance Party is required to make any payment of or on account of tax on or in relation to any sum received or receivable hereunder (including any sum deemed for purposes of tax to be received or receivable by such Finance Party whether or not actually received or receivable) or if any liability in respect of any such payment is asserted, imposed, levied or assessed against any Finance Party, the Account Party shall, upon demand of the Agent, promptly indemnify the Finance Party which suffers a loss or liability as a result against such payment or liability, together with any interest, penalties, costs and expenses payable or incurred in connection therewith, provided that this Clause 10.2 shall not apply to:
 
 	 10.2.1	 	any tax imposed on and calculated by reference to the net income actually received or receivable by such Finance Party by the jurisdiction in which such Finance Party is incorporated; or	
 
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 	 10.2.2	 	any tax imposed on and calculated by reference to the net income of the Facility Office of such Finance Party actually received or receivable by such Finance Party by the jurisdiction in which its Facility Office is located.	
 
10.3	Claims by Banks	
 
A Bank intending to make a claim pursuant to Clause 10.2 ( Tax Indemnity ) shall notify the Agent of the event giving rise to the claim, whereupon the Agent shall notify the Account Party thereof.
 
11.	TAX RECEIPTS	
 
11.1	Notification of Requirement to Deduct Tax	
 
If, at any time, an Obligor is required by law to make any deduction or withholding from any sum payable by it hereunder (or if thereafter there is any change in the rates at which or the manner in which such deductions or withholdings are calculated), such Obligor shall promptly, upon becoming aware of the same, notify the Agent.
 
11.2	Evidence of Payment of Tax	
 
If an Obligor makes any payment hereunder in respect of which it is required to make any deduction or withholding, it shall pay the full amount required to be deducted or withheld to the relevant taxation or other authority within the time allowed for such payment under applicable law and shall deliver to the Agent for each Bank, within thirty days after it has made such payment to the applicable authority, an original receipt (or a certified copy thereof) issued by such authority evidencing the payment to such authority of all amounts so required to be deducted or withheld in respect of that Bank’s share of such payment.
 
11.3	Tax Credit Payment	
 
If an additional payment is made under Clause 10 ( Taxes ) by an Obligor for the benefit of any Finance Party and such Finance Party, in its sole discretion, determines that it has obtained (and has derived full use and benefit from) a credit against, a relief or remission for, or repayment of, any tax, then, if and to the extent that such Finance Party, in its sole opinion, determines that:
 
 	11.3.1	 	such credit, relief, remission or repayment is in respect of or calculated with reference to the additional payment made pursuant to Clause 10 ( Taxes) ; and	
 
 	11.3.2	 	its tax affairs for its tax year in respect of which such credit, relief, remission or repayment was obtained have been finally settled,	
 
such Finance Party shall, to the extent that it can do so without prejudice to the retention of the amount of such credit, relief, remission or repayment, pay to such Obligor such amount as such Finance Party shall, in its sole opinion, determine to be the amount which will leave such Finance Party (after such payment) in no worse after-tax position than it would have been in had the additional payment in question not been required to be made by such Obligor.
 
11.4	Tax Credit Clawback	
 
If any Finance Party makes any payment to an Obligor pursuant to Clause 11.3 ( Tax Credit Payment ) and such Finance Party subsequently determines, in its sole opinion,
 
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that the credit, relief, remission or repayment in respect of which such payment was made was not available or has been withdrawn or that it was unable to use such credit, relief, remission or repayment in full, the Obligor shall reimburse such Finance Party such amount as such Finance Party determines, in its sole opinion, is necessary to place it in the same after-tax position as it would have been in if such credit, relief, remission or repayment had been obtained and fully used and retained by such Finance Party.
 
11.5	Tax and Other Affairs	
 
No provision of this Agreement shall interfere with the right of any Finance Party to arrange its tax or any other affairs in whatever manner it thinks fit, oblige any Finance Party to claim any credit, relief, remission or repayment in respect of any payment under Clause 10.1 ( Tax Gross-up ) in priority to any other credit, relief, remission or repayment available to it nor oblige any Finance Party to disclose any information relating to its tax or other affairs or any computations in respect thereof.
 
12.	INCREASED COSTS	
 
12.1	Increased Costs	
 
If, by reason of (a) any change in law or in its interpretation or administration and/or (b) compliance with any request or requirement relating to the maintenance of capital or any other request from or requirement of any central bank or other fiscal, monetary or other authority (being a request or requirement with which banks are accustomed to comply) and/or (c) the introduction of, changeover to or operation of the euro in any participating member state:
 
 	12.1.1 	a Bank or any holding company of such Bank is unable to obtain the rate of return on its capital which it would have been able to obtain but for such Bank’s entering into or assuming or maintaining a commitment, issuing or performing its obligations under this Agreement or any Letter of Credit;	
 
 	12.1.2 	a Bank or any holding company of such Bank incurs a cost as a result of such Bank’s entering into or assuming or maintaining a commitment, issuing or performing its obligations under this Agreement or any Letter of Credit; or	
 
 	12.1.3 	there is any increase in the cost to a Bank or any holding company of such Bank of funding or maintaining such Bank’s share of any Unpaid Sum or any Letter of Credit,	
 
then the Account Party shall, from time to time on demand of the Agent, promptly pay to the Agent for the account of that Bank amounts sufficient to indemnify that Bank or to enable that Bank to indemnify its holding company from and against, as the case may be, (a) such reduction in the rate of return of capital, (b) such cost or (c) such increased cost.
 
12.2	Increased Costs Claims	
 
A Bank intending to make a claim pursuant to Clause 12.1 ( Increased Costs ) shall notify the Agent as soon as reasonably practicable of the event giving rise to such claim and the amount of such claim and the basis for calculation of such amount in reasonable detail whereupon the Agent shall notify the Account Party thereof.
 
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12.3	Exclusions	
 
Notwithstanding the foregoing provisions of this Clause 12, no Bank shall be entitled to make any claim under this Clause 12 in respect of:
 
 	12.3.1 	any cost, increased cost or liability as referred to in Clause 12.1 ( Increased Costs ) to the extent the same is compensated by the Mandatory Liquid Asset Costs Rate; or	
 
 	12.3.2 	any cost, increased cost or liability compensated by (or the recovery of which is precluded under) Clause 10 ( Taxes ).	
 
13.	ILLEGALITY	
 
If, at any time, it is or will become unlawful or prohibited pursuant to any request from or requirement of any central bank or other fiscal, monetary or other authority (being a request or requirement with which banks are accustomed to comply) for a Bank to fund, issue, participate in or allow to remain outstanding all or part of its share of the Letters of Credit, then that Bank shall, promptly after becoming aware of the same, deliver to the Account Party through the Agent a notice to that effect and:
 
 	13.1.1 	such Bank shall not thereafter be obliged to participate in any Letter of Credit or issue any Letter of Credit (whichever shall be so affected) and the amount of its Available Commitment shall be immediately reduced to zero; and	
 
 	13.1.2 	if the Agent on behalf of such Bank so requires, the Account Party shall on such date as the Agent shall have specified ensure that the liabilities of such Bank under or in respect of each affected Letter of Credit are reduced to zero or otherwise secured by providing Cash Collateral in an amount equal to such Bank’s L/C Proportion of such Letters of Credit or such Bank’s maximum actual or contingent liabilities under such Letter of Credit.	
 
14.	MITIGATION	
 
If, in respect of any Bank, circumstances arise which would or would upon the giving of notice result in:
 
 	14.1.1 	an increase in any sum payable to it or for its account pursuant to Clause 10.1 ( Tax Gross-up );	
 
 	14.1.2 	a claim for indemnification pursuant to Clause 10.2 ( Tax Indemnity ) or Clause 12.1 ( Increased Costs ); or	
 
 	14.1.3 	the reduction of its Available Commitment to zero or any repayment to be made pursuant to Clause 13 ( Illegality ),	
 
then, without in any way limiting, reducing or otherwise qualifying the rights of such Bank or the obligations of the Obligors under any of the Clauses referred to in sub-clauses 14.1.1, 14.1.2 and 14.1.3 such Bank shall promptly upon becoming aware of such circumstances notify the Agent thereof and, in consultation with the Agent and the Account Party and to the extent that it can do so lawfully and without prejudice to its own position, take reasonable steps (including a change of location of its Facility Office
 
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or the transfer of its rights, benefits and obligations hereunder to another financial institution which is an Approved Credit Institution and which is acceptable to the Account Party and willing to participate in the Facility) to mitigate the effects of such circumstances, provided that such Bank shall be under no obligation to take any such action if, in the opinion of such Bank, to do so might have any adverse effect upon its business, operations or financial condition (other than any minor costs and expenses of an administrative nature).
 
15.	REPRESENTATIONS	
 
The Obligors jointly and severally represent and warrant on the Commencement Date that:
 
15.1	Corporate Existence and Power	
 
The Account Party is a company limited by shares, and each Guarantor is a limited liability company, and in each case, is duly incorporated and validly existing under the laws of its jurisdiction of incorporation and the Account Party is in good standing under the laws of the Cayman Islands. Each of the Obligors has all corporate powers and all material governmental licenses, authorisations, consents and approvals required to carry on its respective business as now conducted. Each Guarantor is a Wholly-Owned Consolidated Subsidiary of the Account Party.
 
15.2	Corporate and Governmental Authorisation; No Contravention	
 
The execution, delivery and performance by each Obligor of this Agreement and the other Finance Documents to which it is a party are within its corporate powers, have been duly authorised by all necessary corporate action, require no action by or in respect of, or filing with, any governmental body, agency or official and do not contravene, or constitute a default under, any provision of applicable law or regulation or of the memorandum of association, articles of association or bye-laws (or any comparable document) of any Obligor or of any agreement, judgment, injunction, order, decree or other instrument binding upon any Obligor or any of their respective Subsidiaries or result in the creation or imposition of any Lien (excluding the provision of Security pursuant to this Agreement) on any asset of any Obligor or any of their respective Subsidiaries.
 
15.3	Binding Effect	
 
Each of this Agreement and the other Finance Documents to which any Obligor is a party constitutes a valid and binding agreement of each Obligor enforceable in accordance with its terms, subject to bankruptcy, insolvency or other laws of general application affecting the enforcement of creditors rights, the application of equitable principles and the non-availability of the equitable remedies of specific performance or injunctive relief.
 
15.4	Financial Information	
 
 	15.4.1 	The consolidated balance sheet of the Account Party and its Consolidated Subsidiaries as of 31 December 2002, and the related consolidated statements of operations and of cash flows for the fiscal year then ended, reported on by PricewaterhouseCoopers LLP, copies of which have been delivered to each of the Banks prior to the Commencement Date, fairly present, in all material	
 
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 	respects, in conformity with GAAP, the consolidated financial position of the Account Party and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such fiscal year.	
 
 	15.4.2 	The unaudited consolidated balance sheet of the Account Party and its Consolidated Subsidiaries as of 30 June 2003, and the related unaudited consolidated statements of operations and of cash flows for the six months then ended, copies of which have been delivered to each of the Banks prior to the Commencement Date, fairly present, in all material respects, in conformity with GAAP (except for the absence of footnotes) applied on a basis consistent with the financial statements referred to in sub-clause 15.4.1, the consolidated financial position of the Account Party and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such six month period (subject to normal year-end adjustments).	
 
 	15.4.3 	Since 30 June 2003, there has been no material adverse change in the business, financial position or results of operations of the Account Party and its Consolidated Subsidiaries, considered as a whole.	
 
 	15.4.4 	The consolidated balance sheet of each Guarantor and its Consolidated Subsidiaries as of 31 December 2002, and the related consolidated statements of operations and retained earnings and of cash flows for the fiscal year then ended, all reported on by PricewaterhouseCoopers LLP, copies of which have been delivered to each of the Banks prior to the Commencement Date, fairly present, in all material respects in conformity with GAAP, the consolidated financial position of each Guarantor and its Consolidated Subsidiaries as of such date and their consolidated results of operations and retained earnings and cash flows for such fiscal year.	
 
 	15.4.5 	Since 31 December 2002, there has been no material adverse change in the business, financial position or results of operations of each Guarantor and its Consolidated Subsidiaries, considered as a whole.	
 
15.5	Litigation	
 
Except as disclosed in the notes to the financial statements referred to in sub-clause 15.4.1 of Clause 15.4 ( Financial Information ), and except for insurance claims made in the context of the ordinary course of business of the Group, there is no action, suit or proceeding pending against, or to the knowledge of the Account Party threatened against or affecting, the Account Party or any of its Subsidiaries before any court or arbitrator or any governmental body, agency or official in which there is a reasonable likelihood of an adverse decision which could materially adversely affect the business, consolidated financial position or consolidated results of operations of the Account Party and its Consolidated Subsidiaries, considered as a whole, or which in any manner draws into question the validity or enforceability of this Agreement or any other Finance Document.
 
15.6	Taxes	
 
The Account Party and its Subsidiaries have filed all material income tax returns and all other material tax returns which are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Account
 
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Party or any Subsidiary. The charges, accruals and reserves on the books of the Account Party and its Subsidiaries in respect of taxes or other governmental charges are, in the opinion of the Account Party, adequate.
 
15.7	Written Information	
 
All written information supplied by any member of the Group under the Finance Documents which is factual, is true, complete and accurate in all material respects as at the date it was given and is not misleading in any material respect and all financial projections so supplied have been prepared on the basis of recent historical information and on the basis of reasonable assumptions.
 
15.8	Compliance with Laws	
 
The Account Party and each Subsidiary are in compliance, in all material respects, with all applicable laws, ordinances, rules, regulations, guidelines and other requirements of governmental authorities except where the necessity of compliance therewith is contested in good faith by appropriate proceedings and any reserves required under generally accepted accounting principles with respect thereto have been established and except where any such failure could not reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Account Party and its Consolidated Subsidiaries, considered as a whole.
 
15.9	Lien	
 
 	15.9.1 	Each Obligor has good and marketable title in and to its portion of the Security free and clear of all Liens (except the Lien created under the Finance Documents and subject to the interest of the Custodian under the Finance Documents and to “Permitted Liens” as defined in the Charge Agreement).	
 
 	15.9.2 	The Charge Agreement creates in favour of the Security Trustee, for the benefit of the Banks, a valid and enforceable first priority Lien on all of the Security, subject to the interest of the Custodian under the Finance Documents.	
 
 	15.9.3 	Neither Obligor has outstanding, nor is any Obligor contractually bound to create, any Lien on or with respect to any of the Security, subject to the interest of the Custodian under the Finance Documents and to “Permitted Liens” as defined in the Charge Agreement.	
 
 	15.9.4 	Neither Obligor is subject to any agreement, judgment, injunction, order, decree or other instrument or any law or regulation which would prevent or otherwise interfere with such Obligor’s obligations to deliver Security in the amounts, at the times and as otherwise provided in the Charge Agreement, subject to the interest of the Custodian under the Finance Documents.	
 
The representations contained in this Clause 15.9 shall only be made on the date hereof and shall only be repeated on each day commencing on the date on which the Pricing Level is Level V.
 
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15.10 	 	Validity and Admissibility in Evidence	
 
All acts, conditions and things required to be done, fulfilled and performed in order:
 
 	15.10.1 	to enable each Obligor lawfully to enter into, exercise its rights under and perform and comply with the obligations expressed to be assumed by it in the Finance Documents to which it is a party,	
 
 	15.10.2 	to ensure that the obligations expressed to be assumed by it in the Finance Documents to which it is a party are legal, valid, binding and enforceable; and	
 
 	15.10.3 	to make the Finance Documents to which it is a party admissible in evidence in its jurisdiction of incorporation,	
 
have been done, fulfilled and performed (subject to any exception contained in the legal opinions provided as conditions precedent).
 
15.11	 	Claims Pari Passu	
 
Under the laws of its jurisdiction of incorporation in force at the date of this Agreement, the claims of the Finance Parties against each Obligor under this Agreement will rank at least pari passu with the claims of all its other unsecured and unsubordinated creditors save those claims which are preferred solely by any bankruptcy, insolvency, liquidation or other similar laws of general application or are mandatorily preferred by law applying to insurance companies generally.
 
15.12	 	No Filing or Stamp Taxes	
 
Under the laws of the jurisdiction of incorporation of each Obligor in force at the date of this Agreement, it is not necessary that the Finance Documents to which it is party be filed, recorded or enrolled with any court or other authority in such jurisdiction or that any stamp, registration or similar tax be paid on or in relation to the Finance Documents to which it is party.
 
15.13	 	No Winding-up	
 
No Obligor or Material Subsidiary has taken any corporate action nor have any other steps been taken or legal proceedings been started or (to the best of its knowledge and belief) threatened against any Obligor or Material Subsidiary for its winding-up, dissolution, administration or re-organisation (whether by voluntary arrangement, scheme of arrangement or otherwise) or for the appointment of a receiver, administrator, administrative receiver, conservator, custodian, trustee or similar officer of it or of any or all of its assets or revenues.
 
15.14	 	No Default	
 
No Default has occurred and is continuing.
 
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16.	COVENANTS	
 
The Account Party agrees that, so long as any Original Letter of Credit or any Letter of Credit is in effect or any Outstandings remain unpaid:
 
16.1	Information	
 
The Account Party will deliver to the Agent in sufficient copies for the Banks:
 
 	16.1.1 	as soon as available and in any event within 90 days after the end of each fiscal year of the Account Party, a consolidated balance sheet of the Account Party and its Consolidated Subsidiaries as of the end of such fiscal year and the related consolidated statements of operations and of cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on in a manner acceptable to the Securities and Exchange Commission of the United States of America or otherwise reasonably acceptable to the Majority Banks by PricewaterhouseCoopers LLP or other independent public accountants of internationally recognised standing;	
 
 	16.1.2 	as soon as available and in any event within 45 days after the end of each of the first three quarters of each fiscal year of the Account Party, a consolidated balance sheet of the Account Party and its Consolidated Subsidiaries as of the end of such quarter and the related consolidated statements of operations and of cash flows for such quarter and for the portion of the Account Party’s fiscal year ended at the end of such quarter, setting forth in the case of such statements of operations and cash flows in comparative form the figures for the corresponding quarter and the corresponding portion of the Account Party’s previous fiscal year, all certified (subject to normal year-end adjustments) as to fairness of presentation, generally accepted accounting principles and consistency by the chief financial officer or the chief accounting officer of the Account Party;	
 
 	16.1.3 	simultaneously with the delivery of each set of financial statements referred to in sub-clauses 16.1.1 and 16.1.2, a certificate of the chief financial officer or the chief accounting officer of the Account Party (a) setting forth in reasonable detail the calculations required to establish whether the Account Party was in compliance with the requirements of Clauses 16.7 ( Adjusted Consolidated Debt to Total Capitalisation Ratio ) to 16.9 ( Liens ), inclusive, on the date of such financial statements and (b) stating whether any Default exists on the date of such certificate and, if any Default then exists, setting forth the details thereof and the action which the Account Party is taking or proposes to take with respect thereto;	
 
 	16.1.4 	within five days after any executive officer of the Account Party obtains knowledge of any Default, if such Default is then continuing, a certificate of the chief financial officer or the chief accounting officer of the Account Party setting forth the details thereof and the action which the Account Party is taking or proposes to take with respect thereto;	
 
 	16.1.5 	promptly upon the mailing thereof to the shareholders of the Account Party generally, copies of all financial statements, reports and proxy statements so mailed;	
 
 	16.1.6 	promptly upon the filing thereof, copies of all registration statements (other than the exhibits thereto and any registration statements on Form S-8 or its equivalent) and reports on Forms 10-K, 10-Q and 8-K (or their equivalents) which the Account Party shall have filed with the Securities and Exchange Commission of the United States of America;	
 
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 	16.1.7 	as soon as available and in any event within 20 days after submission, each statutory statement of each Guarantor in the form submitted to The Insurance Division of the Bermuda Monetary Authority;	
 
 	16.1.8 	as soon as available and in any event within 120 days after the end of each fiscal year of each Guarantor, a consolidated balance sheet of such Guarantor and its Consolidated Subsidiaries as of the end of such fiscal year and the related statements of income and changes in financial position for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by the independent public accountants which reported on the financial statements referred to in sub-clause 16.1.1;	
 
 	16.1.9 	promptly after any executive officer of the Account Party obtains knowledge thereof:	
 
 	(a)	a copy of any notice from the Supervisor of Insurance or the Registrar of Companies or any other Person of the revocation, the suspension or the placing of any restriction or condition on the registration as an insurer of each Guarantor under the Bermuda Insurance Law or of the institution of any proceeding or investigation which could result in any such revocation, suspension or placing of such a restriction or condition;	
 
 	(b)	copies of any correspondence by, to or concerning a Guarantor relating to an investigation conducted by the Minister of Finance, whether pursuant to Section 132 of the Bermuda Companies Law or otherwise; and	
 
 	(c)	a copy of any notice of or requesting or otherwise relating to the winding up or any similar proceeding of or with respect to a Guarantor; and	
 
 	16.1.10 	from time to time such additional information regarding the financial position, results of operations or business of the Account Party or any of its Subsidiaries as the Agent, at the request of any Bank, may reasonably request from time to time except where the furnishing of such information is restricted or prohibited by applicable law or regulation.	
 
16.2	Payment of Obligations	
 
The Account Party will pay and discharge, and will cause each Subsidiary to pay and discharge, at or before maturity, all their respective material obligations and liabilities, including, without limitation, tax liabilities, except where the same may be contested in good faith by appropriate proceedings, and will maintain, and will cause each Subsidiary to maintain, in accordance with generally accepted accounting principles, appropriate reserves for the accrual of any of the same.
 
16.3	Maintenance of Property; Insurance.	
 
 	16.3.1 	The Account Party will keep, and will cause each Subsidiary to keep, all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted.	
 
 	16.3.2 	The Account Party will maintain, and will cause each Subsidiary to maintain, insurance with responsible and reputable insurance companies or associations in	
 
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 	such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Account Party or such Subsidiary operates (it being understood that the foregoing shall not apply to maintenance of reinsurance or similar matters which shall be solely within the reasonable business judgement of the Account Party and its Subsidiaries). The Account Party will deliver to the Banks upon request of any Bank through the Agent from time to time, full information as to the insurance carried.	
 
16.4	Conduct of Business and Maintenance of Existence	
 
The Account Party will continue, and will cause each Subsidiary to continue, to engage in business of the same general type as now conducted by the Account Party and its Subsidiaries, and will preserve, renew and keep in full force and effect, and will cause each Subsidiary to preserve, renew and keep in full force and effect, their respective existence and their respective rights, privileges and franchises necessary or desirable in the normal conduct of business; provided that nothing in this Clause 16.4 shall prohibit:
 
 	16.4.1 	the merger or amalgamation of a Subsidiary (other than a Guarantor) into the Account Party or the merger or consolidation of a Subsidiary (other than a Guarantor) with or into another Person if the corporation surviving such consolidation or merger is a Subsidiary and if, in each case, after giving effect thereto, no Default shall have occurred and be continuing;	
 
 	16.4.2 	any merger or amalgamation of any Obligor permitted by Clause 16.10 ( Consolidations, Mergers and Sale of Assets ); or	
 
 	16.4.3 	the termination of:	
 
 	(a)	the corporate existence; or	
 
 	(b)	any rights, privileges and franchises of any Subsidiary (other than a Guarantor),	
 
if, in each case, the Account Party in good faith determines that such termination is in the best interest of the Account Party and is not materially disadvantageous to the Banks.
 
16.5	Compliance with Laws	
 
The Account Party will comply, and cause each Subsidiary to comply, in all material respects with all applicable laws, ordinances, rules, regulations, guidelines and other requirements of governmental authorities except where the necessity of compliance therewith is contested in good faith by appropriate proceedings and any reserves required under generally accepted accounting principles with respect thereto have been established and except where any such failure to comply could not reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Account Party and its Consolidated Subsidiaries, considered as a whole.
 
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16.6	Inspection of Property, Books and Records	
 
The Account Party will keep, and will cause each Subsidiary to keep, proper books of records and account in accordance with generally accepted accounting principles in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities; and will permit, and will cause each Subsidiary to permit, representatives of any Bank at such Bank’s expense to visit and inspect any of their respective properties, to examine and make abstracts from any of their respective books and records and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants, all at such reasonable times on reasonable notice and as often as may reasonably be desired.
 
16.7	Adjusted Consolidated Debt to Total Capitalisation Ratio	
 
The Account Party shall maintain at all times a ratio of Adjusted Consolidated Debt to Total Capitalisation of not more than 0.35 to 1.
 
16.8	Consolidated Net Worth	
 
The Account Party shall maintain at all times Consolidated Net Worth in an amount at least equal to the sum of:
 
 	16.8.1 	 	US$4,400,000,000;	
 
plus
 
 	16.8.2 	 	25 per cent. of Consolidated Net Income for each fiscal quarter of the Account Party ending on and after 31 March 2003 for which such Consolidated Net Income is positive;	
 
plus
 
 	16.8.3 	 	50 per cent. of Net Proceeds of any issuance of Equity Interests (other than the Net Proceeds from any issuance of Equity Interests in substitution and replacement of other Equity Interests to the extent such Net Proceeds do not exceed the amount of a substantially contemporaneous redemption of Equity Interests permitted hereunder) subsequent to 31 March 2003.	
 
16.9	Liens	
 
Neither the Account Party nor any Subsidiary will create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist, any Lien on or with respect to any of its properties of any character (including, without limitation, accounts) whether now owned or hereafter acquired, or assign, or permit any of its Subsidiaries to assign, any accounts or other right to receive income, except:
 
 	16.9.1 	 	Liens created under the US Loan Documents;	
 
 	16.9.2 	 	Permitted Liens;	
 
 	16.9.3 	 	Liens described in Schedule 9 ( Existing Liens );	
 
 	16.9.4 	 	purchase money Liens upon or in real property or equipment acquired or held by the Account Party or any of its Subsidiaries in the ordinary course of business to secure the purchase price of such property or equipment or to secure	
 
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 	Debt incurred solely for the purpose of financing the acquisition, construction or improvement of any such property or equipment to be subject to such Liens, or Liens existing on any such property or equipment at the time of acquisition or within 180 days following such acquisition (other than any such Liens created in contemplation of such acquisition that do not secure the purchase price), or extensions, renewals or replacements or any of the foregoing for the same or a lesser amount, provided, however, that no such Lien shall extend to or cover any property other than the property or equipment being acquired, constructed or improved, and no such extension, renewal or replacement shall extend to or cover any property not theretofore subject to the Lien being extended, renewed or replaced;	
 
 	16.9.5 	Liens arising in connection with Capitalised Leases, provided that no such Lien shall extend to or cover any assets other than the assets subject to such Capitalised Leases;	
 
 	16.9.6 	(a) any Lien existing on any asset of any Person at the time such Person becomes a Subsidiary and not created in contemplation of such event, (b) any Lien on any asset of any Person existing at the time such Person is merged or consolidated with or into the Account Party or any of its Subsidiaries in accordance with Clause 16.10 ( Consolidations, Mergers and Sales of Assets ) and not created in contemplation of such event and (c) any Lien existing on any asset prior to the acquisition thereof by the Account Party or any of its Subsidiaries and not created in contemplation of such acquisition;	
 
 	16.9.7 	Liens securing obligations under credit default swap transactions determined by reference to, or Contingent Obligations in respect of, Debt issued by the Account Party or one of its Subsidiaries; such Debt not to exceed an aggregate principal amount of US$550,000,000;	
 
 	16.9.8 	Liens arising in the ordinary course of its business which:	
 
 	(a)	do not secure Debt; and	
 
 	(b)	do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business;	
 
 	16.9.9 	Liens on cash and Approved Investments securing Hedge Agreements arising in the ordinary course of business;	
 
 	16.9.10 	other Liens securing Debt or other obligations outstanding in an aggregate principal or face amount not to exceed at any time 5 per cent. of Consolidated Net Worth;	
 
 	16.9.11 	Liens consisting of deposits made by the Account Party or any insurance Subsidiary with any insurance regulatory authority or other statutory Liens or Liens or claims imposed or required by applicable insurance law or regulation against the assets of the Account Party or any insurance Subsidiary, in each case in favour of policyholders of the Account Party or such insurance Subsidiary or	
 
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 	an insurance regulatory authority and in the ordinary course of the Account Party’s or such insurance Subsidiary’s business;	
 
 	 16.9.12 	 	Liens on Investments and cash balances of the Account Party or any insurance Subsidiary (other than capital stock of any Subsidiary) securing obligations of the Account Party or any insurance Subsidiary in respect of:	
 
 	(a)	letters of credit obtained in the ordinary course of business; and/or	
 
 	(b)	trust arrangements formed in the ordinary course of business for the benefit of cedents to secure reinsurance or insurance obligations owed to them by the Account Party or any insurance Subsidiary;	
 
 	16.9.13 	the replacement, extension or renewal of any Lien permitted by sub-clause 16.9.3 or 16.9.5 of this Clause 16.9 upon or in the same property theretofore subject thereto or the replacement, extension or renewal (without increase in the amount (other than in respect of fees, expenses and premiums, if any) or change in any direct or contingent obligor) of the Debt secured thereby;	
 
 	16.9.14 	Liens securing obligations owed by the Account Party to any Subsidiary or by any Subsidiary to the Account Party or any other Subsidiary;	
 
 	16.9.15 	Liens incurred in the ordinary course of business in favour of financial intermediaries and clearing agents pending clearance of payments for investment or in the nature of set-off, banker’s lien or similar rights as to deposit accounts or other funds;	
 
 	16.9.16 	judgement or judicial attachment Liens, provided that the enforcement of such Liens is effectively stayed;	
 
 	16.9.17 	Liens on any assets of the Obligors created pursuant to the Finance Documents;	
 
 	16.9.18 	Liens arising in connection with Securitisation Transactions, provided that the aggregate principal amount of the investment or claim held at any time by all purchasers, assignees or other transferees of (or of interests in) receivables and other rights to payment in all Securitisation Transactions shall not exceed US$250,000,000;	
 
 	16.9.19 	Liens on securities arising out of repurchase agreements with a term of not more than three months entered into with “ Lenders ” (as such term is defined in the Five Year US Facility) or their Affiliates or with securities dealers of recognised standing; provided that (but without prejudice to sub-clause 16.9.10) the aggregate amount of all assets of the Account Party and its Subsidiaries subject to such agreements shall not at any time exceed US$800,000,000;	
 
 	16.9.20 	Liens securing up to an aggregate amount of US$200,000,000 of obligations of ACE Tempest Reinsurance Ltd, the Account Party or any wholly owned subsidiary, arising out of catastrophe bond financing; and	
 
 	16.9.21 	Liens on proceeds delivered to the Account Party or any Subsidiary thereof under any Guaranteed Investment Contract.	
 
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16.10 	Consolidations, Mergers and Sales of Assets	
 
 	16.10.1 	No Obligor will consolidate with or merge or amalgamate into any other Person, provided that if both immediately before and after giving effect thereto no Default shall have occurred and be continuing, then:	
 
 	(a)	a Guarantor may merge or amalgamate or consolidate with any other person so long as the surviving entity is such Guarantor or a Wholly-Owned Consolidated Subsidiary of the Account Party and, if such Guarantor is not the surviving entity, such surviving entity shall have assumed the obligations of such Guarantor hereunder pursuant to an instrument in form and substance reasonably satisfactory to the Majority Banks and shall have delivered such opinions of counsel with respect thereto as the Agent may reasonably request; and	
 
 	(b)	the Account Party may merge or amalgamate with another Person so long as the Account Party is the surviving entity.	
 
 	 16.10.2 	No Obligor will sell, lease or otherwise transfer, directly or indirectly, all or any substantial part of its assets to any other Person (excluding sales of investment securities in the ordinary course of business).	
 
16.11 	No Amendments	
 
The Account Party shall not amend or waive, or utilise or rely on any waiver of, any provision of any Security Document that may be entered into without the written consent of the Agent, the Security Trustee and the Majority Banks.
 
16.12 	Maintenance of Legal Validity	
 
Each Obligor shall obtain, comply with the terms of and do all that is necessary to maintain in full force and effect all authorisations, approvals, licences and consents required in or by the laws of its jurisdiction of incorporation to enable it lawfully to enter into and perform its obligations under the Finance Documents to which it is a party and to ensure the legality, validity, enforceability or admissibility in evidence in its jurisdiction of incorporation of the Finance Documents to which it is a party.
 
16.13 	Claims Pari Passu	
 
Each Obligor shall ensure that at all times the claims of the Finance Parties against it under this Agreement ranks at least pari passu with the claims of all its other unsecured and unsubordinated creditors save those claims which are preferred by any bankruptcy, insolvency, liquidation or other similar laws of general application or are mandatorily preferred by law applying to insurance companies generally.
 
17.	EVENTS OF DEFAULT	
 
Each of Clause 17.1 ( Failure to Pay ) to Clause 17.17 ( Custodian’s Undertaking) describes circumstances which constitute an Event of Default for the purposes of this Agreement.
 
17.1 	Failure to Pay	
 
The Account Party shall fail to reimburse any drawing under any Letter of Credit when required hereunder or shall fail to pay within five Business Days of the due date thereof
 
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any interest or fees or other amounts payable hereunder or under any other Finance Document or a Guarantor shall fail to pay when due any such reimbursement obligations, interest, fees or other amounts payable hereunder provided that , for the purposes of this Clause 17.1, no such payment default by the Account Party shall be continuing if a Guarantor pays the amount thereof at the time and otherwise in the manner provided in Clause 30 ( Guarantee and Indemnity ).
 
17.2	Specific Covenants	
 
The Account Party shall fail to observe or perform any covenant (a) contained in Clauses 16.7 ( Adjusted Consolidated Debt to Total Capitalisation Ratio ) to Clause 16.10 ( Consolidations, Mergers and Sale of Assets ) inclusive or (b) contained in Clause 18.1 ( Letter of Credit Commission ).
 
17.3	Other Obligations	
 
Any Obligor shall fail to observe or perform any covenant or agreement contained in this Agreement or in any other Finance Document (other than those covered by Clause 17.1 ( Failure to Pay ) or Clause 17.2 ( Specific Covenants )) and such failure, if it is capable of remedy, is not remedied within 30 days after notice thereof has been given to the Account Party by the Agent at the request of any Bank.
 
17.4	Misrepresentation	
 
Any representation, warranty, certification or statement made by any Obligor in this Agreement or in any other Finance Document or in any certificate, financial statement or other document delivered pursuant to this Agreement or any other Finance Document shall prove to have been incorrect in any material respect when made (or deemed made).
 
17.5	Cross-default	
 
The Account Party or any Subsidiary shall fail to make any payment in respect of any Material Financial Obligations when due or within any applicable grace period.
 
17.6	Cross-Acceleration	
 
Any event or condition shall occur which results in the acceleration of the maturity of any Material Debt or enables (or, with the giving of notice or lapse of time or both, would enable) the holder of such Material Debt or any Person acting on such holder’s behalf to accelerate the maturity thereof.
 
17.7	Winding-up of the Account Party or a Guarantor	
 
 	17.7.1 	A resolution or other similar action is passed authorising the voluntary winding up of the Account Party or any other similar action with respect to the Account Party or a petition is filed for the winding up of the Account Party or the taking of any other similar action with respect to the Account Party in the Grand Court of the Cayman Islands (except in the case of any frivolous or vexatious steps or proceedings started by any Person who is not a member of the Group where such steps or proceedings are dismissed within 30 days); or	
 
 	17.7.2 	any corporate action is taken authorising the winding up, the liquidation, any arrangement or the taking of any other similar action of or with respect to a Guarantor or authorising any corporate action to be taken to facilitate any such winding up, liquidation, arrangement or other similar action or any petition shall	
 
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 	be filed seeking the winding up, the liquidation, any arrangement or the taking of any other similar action of or with respect to a Guarantor by the Registrar of Companies in Bermuda, one or more holders of insurance policies or reinsurance certificates issued by a Guarantor or by any other Person or Persons or any petition shall be presented for the winding up of any Guarantor to a court of Bermuda as provided under the Bermuda Companies Law and in either such case such petition shall remain undismissed and unstayed for a period of 60 days or any creditors’ or members’ voluntary winding up of a Guarantor as provided under the Bermuda Companies Law shall be commenced or any receiver shall be appointed by a creditor of a Guarantor or by a court of Bermuda on the application of a creditor of a Guarantor as provided under any instrument giving rights for the appointment of a receiver.	
 
17.8	Execution or Distress	
 
A proceeding shall be commenced by any Person seeking execution or distress over or possession of the assets of either Obligor or any substantial part thereof or any similar remedy and such proceedings shall remain undismissed and unstayed for a period of 60 days.
 
17.9	Insolvency and Rescheduling	
 
An Obligor or Material Subsidiary shall commence a voluntary case or other proceeding seeking liquidation, reorganisation or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due, or shall take any corporate action to authorise any of the foregoing; or an involuntary case or other proceeding shall be commenced against an Obligor or Material Subsidiary seeking liquidation, reorganisation or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; or an order for relief shall be entered against an Obligor or Material Subsidiary under the United States federal bankruptcy laws as now or hereafter in effect.
 
17.10 	Analogous Proceedings	
 
There occurs, in relation to an Obligor or Material Subsidiary in any country or territory in which any of them carries on business or in any jurisdiction where any part of their assets is subject, any event which corresponds in that country or territory with any of those mentioned in Clause 17.7 ( Winding-up of the Account Party or a Guarantor ) to Clause 17.9 ( Insolvency and Rescheduling ) above.
 
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17.11 	Failure to comply with Judgment	
 
A final judgment or order for the payment of money in excess of US$100,000,000 shall be rendered against an Obligor or Material Subsidiary and such judgment or order shall continue unsatisfied and unstayed for a period of 30 days.
 
17.12 	Ownership of the Account Party and the Guarantors	
 
 	17.12.1 	Any Person or two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934 of the United States of America, as amended), directly or indirectly, of Voting Interests of the Account Party (or other securities convertible into such Voting Interests) representing 30 per cent. or more of the combined voting power of all Voting Interests of the Account Party; or	
 
 	17.12.2 	during any period of 12 consecutive calendar months, individuals who were directors of the Account Party on the first day of such period shall cease to constitute a majority of the board of directors of the Account Party; or	
 
 	17.12.3 	any Person or two or more Persons acting in concert shall have acquired, by contract or otherwise, or shall have entered into a contract or arrangement that results in its or their acquisition of the power to exercise, directly or indirectly, a controlling influence over the management or policies of the Account Party; or	
 
 	17.12.4 	a Guarantor ceases to be a Wholly-Owned Consolidated Subsidiary of the Account Party.	
 
17.13 	Illegality	
 
At any time it is or becomes unlawful for either Obligor to perform or comply with any or all of its obligations hereunder or under any of the Finance Documents or any court or arbitrator or any governmental body, agency or official which has jurisdiction in the matter shall decide, rule or order that any provision of any of the Finance Documents is invalid or unenforceable in any material respect, or either Obligor shall so assert in writing.
 
17.14 	Revocation of Registration	
 
The registration of a Guarantor as an insurer shall be revoked, suspended or otherwise have restrictions or conditions placed upon it unless, in the case of the placing of any such restrictions or conditions, such restrictions or conditions could not have a material adverse effect on the interests of the Finance Parties under the Finance Documents.
 
17.15	 Security	
 
If the Obligors are required to grant security pursuant to sub-clause 18.1.2 of Clause 18.1 ( Letter of Credit Commission ) and they fail to deliver Security at the times, in the amounts or as otherwise specified in the Finance Documents or the Lien created pursuant thereto on the Security shall at any time or for any reason cease to be a valid, enforceable and first priority Lien on any of the Security or either Obligor shall fail to observe or perform any covenant relating to the delivery of the Security and the perfection of the first priority charge and security interest created therein contained in any other Finance Document, provided that if the market value of the Charged Portfolio falls below the
 
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Required Value or the Charged Portfolio fails to satisfy the Security Trustee’s Requirements (as defined in the Charge Agreement), such circumstances shall not constitute an Event of Default if the market value of the Charged Portfolio is restored to the Required Value and/or, as the case may be, the Security Trustee’s Requirements are satisfied in each case within five Business Days of notification by the Security Trustee on behalf of the Banks of the breach of clause 4 of the Charge Agreement or, if earlier, within five Business Days of either Obligor becoming aware of such breach.
 
17.16 	Finance Documents	
 
Any provision of any Finance Document is repudiated, terminated, amended or waived by any party thereto without the written consent of the Agent, the Security Trustee and the Majority Banks.
 
17.17 	Custodian’s Undertaking	
 
In the event that the Obligors are required to grant Security pursuant to sub-clause 18.1.2 of Clause 18.1 ( Letter of Credit Commission ), the Custodian fails to observe or perform any material provision of the Custodian’s Undertaking and such failure, if in the reasonable opinion of the Majority Banks it is capable of remedy, is not remedied within 30 days after notice thereof has been given to the Custodian by the Account Party or by the Agent at the request of any Bank.
 
17.18 	Acceleration and Cancellation	
 
Upon the occurrence of an Event of Default at any time thereafter while that Event of Default is continuing, the Agent may (and, if so instructed by the Majority Banks, shall) by notice to the Account Party:
 
 	17.18.1 	require the Account Party to procure that the liabilities of each of the Banks under each Letter of Credit are promptly reduced to zero and/or provide Cash Collateral for each Letter of Credit in an amount specified by the Agent (whereupon the Account Party shall do so); and/or	
 
 	17.18.2 	declare that any unutilised portion of the Facility shall be cancelled, whereupon the same shall be cancelled and the Available Commitment of each Bank shall be reduced to zero; and	
 
 	17.18.3 	(in the event that the Obligors have granted Security pursuant to sub-clause 18.1.2 of Clause 18.1 ( Letter of Credit Commission ), direct the Security Trustee to exercise all rights and remedies of a mortgagee or a secured party at such time including, without limitation, the right to take possession of any or all of the assets subject to the Security Documents and the books and records relating thereto, with or without judicial process. For the purposes of the preceding sentence, the Security Trustee may enter upon any or all of the premises where any of the assets subject to the Security Documents, such other security or books or records may be situated and take possession and remove the same therefrom.	
 
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18.	COMMISSION AND FEES	
 
18.1	Letter of Credit Commission	
 
 	18.1.1 	The Account Party shall, in respect of each Letter of Credit requested by it, pay to the Agent for the account of each Bank (for distribution in proportion to each Bank’s L/C Proportion of such Letter of Credit) a letter of credit commission in sterling at the L/C Commission Rate on the maximum actual and contingent liabilities of the Banks under the relevant Letter of Credit. Such Letter of Credit Commission shall be paid quarterly in arrear in respect of each successive period of three months (or such shorter period as shall end on the Final Expiration Date of the relevant Letter of Credit) which begins during the Term of the relevant Letter of Credit, commencing from the Effective Date of such Letter of Credit, and payable on the first day of each such period thereafter.	
 
 	18.1.2 	If the Pricing Level reaches Level V (each as defined in Schedule 8 ( Pricing Schedule )), the Required Value (for the avoidance of doubt, the Obligors will not each be required to grant Security to the Required Value) shall (subject to Clause 26.21.3) be increased to an amount equal to the aggregate amount of the Letters of Credit issued hereunder, and each Obligor shall promptly (and in any event within five Business Days) perform its obligations under clause 4 of the Charge Agreement. Upon the Security Trustee being satisfied that each Obligor has performed its obligations under clause 4 of the Charge Agreement, and having received legal opinions in form and substance satisfactory to the Security Trustee (acting reasonably) opining that the Charge Agreement creates in favour of the Security Trustee on behalf of the Banks a valid and enforceable first priority Lien on all of the Security (subject to such qualifications and assumptions as are customarily made by leading firms of solicitors in giving legal opinions of that nature), the L/C Commission Rate shall become 0.15 per cent. and the Security Trustee shall notify all parties hereto accordingly.	
 
 	18.1.3 	Any change to the L/C Commission Rate shall take effect on the day on which the event giving rise to such change occurs (whether pursuant to Schedule 8 ( Pricing Schedule ) or pursuant to sub-clause 18.1.2).	
 
 	18.1.4 	Any unpaid Letter of Credit Commission payable in respect of each Original Letter of Credit shall be paid in full by the Account Party by no later than the Effective Date.	
 
18.2	Arrangement Fees	
 
The Account Party shall pay to the Lead Arrangers the fees specified in the letter dated 29 September 2003 from the Lead Arrangers to the Account Party at the times, and in the amounts, specified in such letter.
 
18.3	Agency Fee	
 
The Account Party shall pay to the Agent for its own account the agency fees specified in the letter dated 29 September 2003 from the Agent to the Account Party at the times, and in the amounts, specified in such letter.
 
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18.4	Participation Fees	
 
The Account Party shall pay to the Lead Arrangers the participation fees specified in the letter dated 29 September 2003 from the Lead Arrangers to the Account Party at the times, and in the amounts, specified in such letter. These fees shall be distributed by the Lead Arrangers among certain of the Banks in accordance with the arrangements agreed by the Lead Arrangers with such Banks prior to the Commencement Date.
 
19.	COSTS AND EXPENSES	
 
19.1	Transaction Expenses	
 
The Account Party shall, from time to time within thirty days of demand of the Agent, reimburse the Agent and the Arrangers for all reasonable costs and expenses (including legal fees) together with any VAT thereon incurred by them in connection with the negotiation, preparation and execution of the Finance Documents, any other document referred to in the Finance Documents and the completion of the transactions therein contemplated.
 
19.2	Preservation and Enforcement of Rights	
 
 	19.2.1 	The Account Party shall, from time to time on demand of the Agent, reimburse the Finance Parties for all costs and expenses (including legal fees) properly incurred on a full indemnity basis together with any VAT thereon incurred in or in connection with the preservation and/or enforcement of any of the rights of the Finance Parties under the Finance Documents and any document referred to in the Finance Documents (including, without limitation, any costs and expenses relating to any investigation as to whether or not an Event of Default might have occurred or is likely to occur or any steps necessary or desirable in connection with any proposal for remedying or otherwise resolving a Default).	
 
 	19.2.2	 In the event that the Obligors have granted Security pursuant to sub-clause 18.1.2 of Clause 18.1 ( Letter of Credit Commission ) and if, by reason of a subsequent breach of clause 4 of the Charge Agreement by either Obligor, any Bank incurs a capital cost or is unable to continue to obtain the rate of return obtained by it hereunder at the date the Security is granted or at the date it becomes party hereto as a Bank, the Obligors shall on demand of the Agent, promptly pay to the Agent for the account of the Bank amounts sufficient to indemnify that Bank from and against such cost or loss in return.	
 
19.3	Stamp Taxes	
 
The Account Party shall pay all stamp, registration and other taxes to which the Finance Documents, any other document referred to in the Finance Documents or any judgment given in connection therewith is or at any time may be subject and to which it is a party and shall, from time to time on demand of the Agent, indemnify the Finance Parties against any liabilities, costs, claims and expenses resulting from any failure to pay or any delay in paying any such tax.
 
19.4	Amendment Costs	
 
If an Obligor requests any amendment, waiver or consent to any Finance Document then the Account Party shall, within thirty days of demand by the Agent, reimburse the Finance Parties for all reasonable costs and expenses (including legal fees) together with
 
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any VAT thereon incurred by such persons in responding to or complying with such request.
 
19.5	Banks’ Liabilities for Costs	
 
If the Account Party fails to perform any of its obligations under this Clause 19 each Bank shall, in its Proportion, indemnify each of the Agent and the Arrangers against any loss incurred by any of them as a result of such failure.
 
20.	DEFAULT INTEREST AND BREAK COSTS	
 
20.1	Default Interest	
 
If any sum due and payable by an Obligor hereunder is not paid on the due date therefor in accordance with Clause 23 ( Payments ) or if any sum due and payable by an Obligor under any judgment of any court in connection herewith is not paid on the date of such judgment, the period beginning on such due date or, as the case may be, the date of such judgment and ending on the date upon which the obligation of such Obligor to pay such sum is discharged shall be divided into successive periods, each of which (other than the first) shall start on the last day of the preceding such period and the duration of each of which shall (except as otherwise provided in this Clause 20) be selected by the Agent.
 
20.2	Default Interest Rate	
 
An Unpaid Sum shall bear interest during each Term in respect thereof at the rate per annum which is the sum from time to time of two per cent. and LIBOR on the Quotation Date therefor.
 
20.3	Payment of Default Interest	
 
Any interest which shall have accrued under Clause 20.1 ( Default Interest ) in respect of an Unpaid Sum shall be due and payable and shall be paid by the relevant Obligor, together with any Mandatory Liquid Asset Costs Rate in respect thereof on the last day of each Term in respect thereof or on such other dates as the Agent may specify by notice to the relevant Obligor.
 
20.4	Break Costs	
 
If any Bank or the Agent on its behalf receives or recovers all or any part of an Unpaid Sum otherwise than on the last day of a Term relating thereto, the Account Party shall pay to the Agent on demand for the account of such Bank an amount equal to the amount (if any) by which:
 
 	20.4.1 	the additional interest which would have been payable on the amount so received or recovered had it been received or recovered on the last day of that Term	
 
exceeds
 
 	 20.4.2	 the amount of interest which in the opinion of the Agent (acting reasonably) would have been payable to the Agent on the last day of that Term in respect of a deposit in the currency of the amount so received or recovered equal to the amount so received or recovered placed by it with a prime bank in London for a period starting on the first Business Day following the date of such receipt or recovery and ending on the last day of that Term.	
 
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21.	INDEMNITIES	
 
21.1	Company’s Indemnity	
 
The Account Party undertakes to indemnify:
 
 	21.1.1 	each Finance Party against any reasonable cost, claim, loss, expense (including legal fees) or liability together with any VAT thereon, whether or not reasonably foreseeable, which it may sustain or incur as a consequence of the occurrence of any Event of Default or any default by an Obligor in the performance of any of the obligations expressed to be assumed by it in the Finance Documents;	
 
 	21.1.2 	the Agent against any reasonable cost or loss it may suffer or incur as a result of its entering into, or performing, any foreign exchange contract for the purposes of Clause 23 ( Payments );	
 
 	21.1.3 	each Bank against any reasonable cost or loss it may suffer under Clause 19.5 ( Banks’ Liabilities for Costs ) or Clause 26.5 ( Indemnification ); and	
 
 	21.1.4 	each Bank against any reasonable cost or loss it may suffer or incur as a result of its issuing or making arrangements to issue a Letter of Credit requested by the Account Party hereunder but not issued by reason of the operation of any one or more of the provisions hereof.	
 
21.2	Currency Indemnity	
 
If any sum (a “ Sum ”) due from an Obligor under the Finance Documents or any order or judgment given or made in relation thereto has to be converted from the currency (the “ First Currency ”) in which such Sum is payable into another currency (the “ Second Currency ”) for the purpose of:
 
 	21.2.1 	making or filing a claim or proof against such Obligor;	
 
 	21.2.2 	obtaining an order or judgment in any court or other tribunal; or	
 
 	21.2.3 	enforcing any order or judgment given or made in relation thereto,	
 
the Account Party shall indemnify each person to whom such Sum is due from and against any loss suffered or incurred as a result of any discrepancy between (a) the rate of exchange used for such purpose to convert such Sum from the First Currency into the Second Currency and (b) the rate or rates of exchange available to such person at its prevailing spot rate at the time of receipt of such Sum.
 
22.	CURRENCY OF ACCOUNT AND PAYMENT	
 
22.1	Currency of Account	
 
Sterling is the currency of account and payment for each and every sum at any time due from an Obligor hereunder, provided that :
 
 	 22.1.1 	each sum falling due by an Obligor hereunder in relation to any demand made under a Letter of Credit or in relation to any reimbursement of the Banks pursuant to a demand made under a Letter of Credit shall be made in the currency of the demand;	
 
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 	22.1.2 	each payment of interest shall be made in the currency in which the sum in respect of which such interest is payable is denominated;	
 
 	22.1.3 	each payment in respect of costs and expenses shall be made in the currency in which the same were incurred;	
 
 	22.1.4 	each payment pursuant to Clause 10.2 ( Tax Indemnity ) or Clause 12.1 ( Increased Costs ) shall be made in the currency specified by the party claiming thereunder; and	
 
 	22.1.5 	any amount expressed to be payable in a currency other than sterling shall be paid in that other currency.	
 
23.	PAYMENTS	
 
23.1	Payments to the Agent	
 
On each date on which this Agreement requires an amount to be paid by an Obligor, such Obligor shall make the same available to the Agent for value on the due date at such time and in such funds and to such account with such bank as the Agent shall specify from time to time upon reasonable advance notice to such Obligor.
 
23.2	Payments by the Agent	
 
Save as otherwise provided herein, each payment received by the Agent pursuant to Clause 23.1 ( Payments to the Agent ) shall be made available by the Agent to the person entitled to receive such payment in accordance with this Agreement (in the case of a Bank, for the account of its Facility Office) for value the same day by transfer to such account of such person with such bank in the principal financial centre of the country of the currency of such payment as such person shall have previously notified to the Agent.
 
23.3	No Set-off	
 
All payments required to be made by an Obligor hereunder shall be calculated without reference to any set-off or counterclaim and shall be made free and clear of and without any deduction for or on account of any set-off or counterclaim.
 
23.4	Clawback	
 
Where a sum is to be paid hereunder to the Agent for the account of another person, the Agent shall not be obliged to make the same available to that other person or to enter into or perform any exchange contract in connection therewith until it has been able to establish to its satisfaction that it has actually received such sum, but if it does so and it proves to be the case that it had not actually received such sum, then the person to whom such sum or the proceeds of such exchange contract was so made available shall on request refund the same to the Agent together with an amount sufficient to indemnify the Agent against any cost or loss it may have suffered or incurred by reason of its having paid out such sum or the proceeds of such exchange contract prior to its having received such sum.
 
23.5	Partial Payments	
 
If and whenever a payment is made by an Obligor hereunder and the Agent receives an amount less than the due amount of such payment the Agent may apply the amount
 
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received towards the obligations of the Obligors under this Agreement in the following order:
 
 	23.5.1 	first, in or towards payment of any unpaid costs and expenses of each of the Agent and the Arrangers;	
 
 	23.5.2 	second , in or towards payment pro rata of any accrued interest, Letter of Credit Commission or fees payable to any Bank hereunder due but unpaid;	
 
 	23.5.3 	third , in or towards payment pro rata of any Outstandings due but unpaid; and	
 
 	23.5.4 	fourth , in or towards payment pro rata of any other sum due but unpaid.	
 
23.6	Variation of Partial Payments	
 
The order of partial payments set out in Clause 23.5 ( Partial Payments ) shall override any appropriation made by the Obligors to which the partial payment relates but the order set out in sub-clauses 23.5.2, 23.5.3 and 23.5.4 of Clause 23.5 ( Partial Payments ) may be varied if agreed by all the Banks.
 
23.7	Appropriations of proceeds of enforcement of Security	
 
If the Agent recovers any moneys from the enforcement of any Finance Document in its capacity as Agent or Security Trustee thereunder, it shall apply the money recovered in the following order:
 
 	23.7.1 	first , in payment of all costs, charges, expenses and liabilities (and all interest thereon as provided in the Finance Documents) incurred by or on behalf of the Agent and the Security Trustee and any receiver, attorney or agent in connection with the due performance of its duties and exercise of its powers and discretions under the Finance Documents and the remuneration of the Agent, the Security Trustee and every receiver under the Finance Documents;	
 
 	23.7.2 	secondly , in or towards payment pro rata of any due but unpaid costs and expenses of the Agent, the Arrangers and the Banks under the Finance Documents;	
 
 	23.7.3 	thirdly, in or towards payment pro rata of any accrued interest, Letter of Credit Commission or fees due but unpaid under this Agreement;	
 
 	23.7.4 	fourthly, in or towards payment pro rata of any Outstandings due but unpaid under this Agreement;	
 
 	23.7.5 	fifthly, in or towards payment pro rata of any other sum due but unpaid under the Finance Documents; and	
 
 	23.7.6 	sixthly, in payment of the surplus (if any) to the Account Party or any other person entitled thereto.	
 
The order of application of money recovered in this Clause may only be varied with the consent of all the Banks.
 
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24.	SET-OFF	
 
24.1	Contractual Set-off	
 
Each Obligor authorises each Bank at any time after an Event of Default has occurred which is continuing to apply any credit balance to which such Obligor is entitled on any account of such Obligor with such Bank in satisfaction of any sum due and payable from such Obligor to such Bank hereunder (whether by way of collateralisation or otherwise) but unpaid. For this purpose, each Bank is authorised to purchase with the moneys standing to the credit of any such account such other currencies as may be necessary to effect such application.
 
24.2	Set-off not Mandatory	
 
No Bank shall be obliged to exercise any right given to it by Clause 24.1 ( Contractual Set-off ).
 
25.	SHARING	
 
25.1	Payments to Banks	
 
If a Bank (a “ Recovering Bank ”) applies any receipt or recovery from an Obligor to a payment due under this Agreement and such amount is received or recovered other than in accordance with Clause 23 ( Payments ), then such Recovering Bank shall:
 
 	25.1.1	 notify the Agent of such receipt or recovery;	
 
 	25.1.2	 at the request of the Agent, promptly pay to the Agent an amount (the “ Sharing Payment ”) equal to such receipt or recovery less any amount which the Agent determines may be retained by such Recovering Bank as its share of any payment to be made in accordance with Clause 23.5 ( Partial Payments ).	
 
25.2	Redistribution of Payments	
 
The Agent shall treat the Sharing Payment as if it had been paid by the relevant Obligor and distribute it between the Finance Parties (other than the Recovering Bank) in accordance with Clause 23.5 ( Partial Payments ).
 
25.3	Recovering Bank’s Rights	
 
The Recovering Bank will be subrogated to the rights of the parties which have shared in a redistribution pursuant to Clause 25.2 (Redistribution of Payments) in respect of the Sharing Payment (and the relevant Obligor shall be liable to the Recovering Bank in an amount equal to the Sharing Payment) in place of any corresponding liability to the parties which have shared in the redistribution.
 
25.4	Repayable Recoveries	
 
If any part of the Sharing Payment received or recovered by a Recovering Bank becomes repayable and is repaid by such Recovering Bank, then:
 
 	 25.4.1	 each party which has received a share of such Sharing Payment pursuant to Clause 25.2 ( Redistribution of Payments ) shall, upon request of the Agent, pay to the Agent for account of such Recovering Bank an amount equal to its share of such Sharing Payment; and	
 
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 	 25.4.2	 such Recovering Bank’s rights of subrogation in respect of any reimbursement shall be cancelled and the relevant Obligor will be liable to the reimbursing party for the amount so reimbursed.	
 
25.5	Exception	
 
This Clause 25 shall not apply if the Recovering Bank would not, after making any payment pursuant hereto, have a valid and enforceable claim against the relevant Obligor.
 
25.6	Recoveries Through Legal Proceedings	
 
If any Bank intends to commence any action in any court it shall give prior notice to the Agent and the other Banks. If any Bank shall commence any action in any court to enforce its rights hereunder and, as a result thereof or in connection therewith, receives any amount, then such Bank shall not be required to share any portion of such amount with any Bank which has the legal right to, but does not, join in such action or commence and diligently prosecute a separate action to enforce its rights in another court.
 
26.	THE AGENT, THE ARRANGERS AND THE BANKS	
 
26.1	Appointment of the Agent	
 
The Arrangers and each of the Banks hereby appoints the Agent to act as its agent in connection herewith and authorises the Agent to exercise such rights, powers, authorities and discretions as are specifically delegated to the Agent by the terms hereof together with all such rights, powers, authorities and discretions as are reasonably incidental thereto.
 
26.2	Agent’s Discretions	
 
The Agent may:
 
 	26.2.1	 assume, unless it has, in its capacity as agent for the Banks, received notice to the contrary from any other party hereto, that (a) any representation made or deemed to be made by an Obligor in connection with the Finance Documents is true, (b) no Event of Default or Potential Event of Default has occurred, (c) no Obligor is in breach of or default under its obligations under the Finance Documents and (d) any right, power, authority or discretion vested therein upon the Majority Banks, the Banks or any other person or group of persons has not been exercised;	
 
 	26.2.2	 assume that the Facility Office of each Bank is that notified to it by such Bank in writing prior to the date hereof (or, in the case of a Transferee, at the end of the Transfer Certificate to which it is a party as Transferee) until it has received from such Bank a notice designating some other office of such Bank to replace its Facility Office and act upon any such notice until the same is superseded by a further such notice;	
 
 	26.2.3	 engage and pay for the advice or services of any lawyers, accountants, surveyors or other experts whose advice or services may to it seem necessary, expedient or desirable and rely upon any advice so obtained;	
 
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 	26.2.4 	rely as to any matters of fact which might reasonably be expected to be within the knowledge of an Obligor upon a certificate signed by or on behalf of such Obligor;	
 
 	26.2.5 	rely upon any communication or document believed by it to be genuine;	
 
 	26.2.6 	refrain from exercising any right, power or discretion vested in it as agent hereunder unless and until instructed by the Majority Banks as to whether or not such right, power or discretion is to be exercised and, if it is to be exercised, as to the manner in which it should be exercised;	
 
 	26.2.7 	refrain from acting in accordance with any instructions of the Majority Banks to begin any legal action or proceeding arising out of or in connection with the Finance Documents until it shall have received such security as it may require (whether by way of payment in advance or otherwise) for all costs, claims, losses, expenses (including legal fees) and liabilities together with any VAT thereon which it will or may expend or incur in complying with such instructions; and	
 
 	26.2.8 	assume (unless it has specific notice to the contrary) that any notice or request made by the Account Party is made on behalf of both Obligors.	
 
26.3	Agent’s Obligations	
 
The Agent shall:
 
 	26.3.1 	promptly inform each Bank of the contents of any notice or document received by it in its capacity as Agent from an Obligor under the Finance Documents and shall promptly deliver to each Bank a copy of each Letter of Credit delivered to Lloyd’s pursuant to Clause 3.3 ( Completion of Letters of Credit );	
 
 	26.3.2 	promptly notify each Bank of the occurrence of any Event of Default or any default by an Obligor in the due performance of or compliance with its obligations under the Finance Documents of which the Agent has notice from any other party hereto;	
 
 	26.3.3 	save as otherwise provided herein, act as agent under the Finance Documents in accordance with any instructions given to it by an Majority Banks, which instructions shall be binding on the Arrangers and the Banks; and	
 
 	26.3.4 	if so instructed by the Majority Banks, refrain from exercising any right, power or discretion vested in it as agent under the Finance Documents.	
 
The Agent’s duties under the Finance Documents are solely mechanical and administrative in nature.
 
26.4	Excluded Obligations	
 
Notwithstanding anything to the contrary expressed or implied herein, neither the Agent nor the Arrangers shall:
 
 	26.4.1 	be bound to enquire as to (a) whether or not any representation made or deemed to be made by an Obligor in connection with the Finance Documents is true, (b)	
 
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 	the occurrence or otherwise of any Default, (c) the performance by an Obligor of its obligations under the Finance Documents or (d) any breach of or default by an Obligor of or under its obligations under the Finance Documents;	
 
 	26.4.2 	be bound to account to any Bank for any sum or the profit element of any sum received by it for its own account;	
 
 	26.4.3 	be bound to disclose to any other person any information relating to any member of the Group if (a) such person, on providing such information, expressly stated to the Agent or, as the case may be, the Arrangers, that such information was confidential or (b) such disclosure would or might in its opinion constitute a breach of any law or be otherwise actionable at the suit of any person;	
 
 	26.4.4 	be under any obligations other than those for which express provision is made herein; or	
 
 	26.4.5 	be or be deemed to be a fiduciary for any other party hereto.	
 
26.5	Indemnification	
 
Each Bank shall, in its Proportion, from time to time on demand by the Agent, indemnify the Agent against any and all costs, claims, losses, expenses (including legal fees) and liabilities together with any VAT thereon which the Agent may incur, otherwise than by reason of its own gross negligence or wilful misconduct, in acting in its capacity as agent hereunder (other than any which have been reimbursed by the Account Party pursuant to Clause 21.1 Company’s Indemnity ).
 
26.6	Exclusion of Liabilities	
 
Except in the case of gross negligence or wilful default, neither the Agent nor the Arrangers accepts any responsibility:
 
 	26.6.1 	for the adequacy, accuracy and/or completeness of any information supplied by the Agent or the Arrangers, by an Obligor or by any other person in connection with the Finance Documents or any other agreement, arrangement or document entered into, made or executed in anticipation of, pursuant to or in connection with the Finance Documents;	
 
 	26.6.2 	for the legality, validity, effectiveness, adequacy or enforceability of the Finance Documents or any other agreement, arrangement or document entered into, made or executed in anticipation of, pursuant to or in connection with the Finance Documents; or	
 
 	26.6.3 	for the exercise of, or the failure to exercise, any judgement, discretion or power given to any of them by or in connection with the Finance Documents or any other agreement, arrangement or document entered into, made or executed in anticipation of, pursuant to or in connection with the Finance Documents.	
 
Accordingly, neither the Agent nor the Arrangers shall be under any liability (whether in negligence or otherwise) in respect of such matters, save in the case of gross negligence or wilful misconduct.
 
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26.7	No Actions	
 
Each of the Banks agree that it will not assert or seek to assert against any director, officer or employee of the Agent or the Arrangers any claim it might have against any of them in respect of the matters referred to in Clause 26.6 ( Exclusion of Liabilities ).
 
26.8	Business with the Group	
 
The Agent and the Arrangers may accept deposits from, lend money to and generally engage in any kind of banking or other business with any member of the Group.
 
26.9	Resignation	
 
The Agent may resign its appointment hereunder at any time without assigning any reason therefor by giving not less than thirty days’ prior notice to that effect to each of the other parties hereto, provided that no such resignation shall be effective until a successor for the Agent is appointed in accordance with the succeeding provisions of this Clause 26.
 
26.10  	Removal of Agent	
 
The Majority Banks may remove the Agent from its role as agent hereunder after consultation with the Account Party by giving notice to that effect to each of the other parties hereto. Such removal shall take effect only when a successor to the Agent is appointed in accordance with the terms hereof.
 
26.11 	Successor Agent	
 
If the Agent gives notice of its resignation pursuant to Clause 26.9 ( Resignation ) or it is removed pursuant to Clause 26.10 ( Removal of Agent ) then any reputable and experienced bank or other financial institution may be appointed as a successor to the Agent by the Majority Banks (after consultation with the Account Party if the successor is a Bank or otherwise with the Account Party’s prior written consent) during the period of such notice (with the co-operation of the Agent), subject to such entity executing and delivering a confidentiality undertaking substantially in the form set out in Schedule 7 ( Form of Confidentiality Undertaking ) but, if no such successor is so appointed, the Agent may appoint such a successor itself.
 
26.12 	Rights and Obligations	
 
If a successor to the Agent is appointed under the provisions of Clause 26.11 ( Successor Agent ), then (a) the retiring Agent shall be discharged from any further obligation hereunder but shall remain entitled to the benefit of the provisions of this Clause 26 and (b) its successor and each of the other parties hereto shall have the same rights and obligations amongst themselves as they would have had if such successor had been a party hereto.
 
26.13 	Own Responsibility	
 
It is understood and agreed by each Bank that at all times it has itself been, and will continue to be, solely responsible for making its own independent appraisal of and investigation into all risks arising under or in connection with this Agreement including, but not limited to:
 
 	26.13.1 	the financial condition, creditworthiness, condition, affairs, status and nature of each member of the Group;	
 
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 	26.13.2 	the legality, validity, effectiveness, adequacy and enforceability of the Finance Documents and any other agreement, arrangement or document entered into, made or executed in anticipation of, pursuant to or in connection with the Finance Documents;	
 
 	26.13.3 	whether such Bank has recourse, and the nature and extent of that recourse, against an Obligor or any other person or any of its assets under or in connection with the Finance Documents, the transactions therein contemplated or any other agreement, arrangement or document entered into, made or executed in anticipation of, pursuant to or in connection with the Finance Documents; and	
 
 	26.13.4 	the adequacy, accuracy and/or completeness of any information provided by the Agent or the Arrangers, an Obligor or by any other person in connection with the Finance Documents, the transactions contemplated therein or any other agreement, arrangement or document entered into, made or executed in anticipation of, pursuant to or in connection with the Finance Documents.	
 
Accordingly, each Bank acknowledges to the Agent and the Arrangers that it has not relied on and will not hereafter rely on the Agent and the Arrangers or either of them in respect of any of these matters.
 
26.14 	Agency Division Separate	
 
In acting as agent hereunder for the Banks, the Agent shall be regarded as acting through its agency division which shall be treated as a separate entity from any other of its divisions or departments and, notwithstanding the foregoing provisions of this Clause 26, any information received by some other division or department of the Agent may be treated as confidential and shall not be regarded as having been given to the Agent’s agency division.
 
26.15 	Declaration of Agent as Security Trustee	
 
The Agent hereby declares that it shall hold:
 
 	26.15.1 	all rights, titles and interests that may hereafter be mortgaged, charged, assigned or otherwise secured in favour of the Agent by or pursuant to the Finance Documents;	
 
 	26.15.2 	the benefit of all representations, covenants, guarantees, indemnities and other contractual provisions given in favour of the Agent (other than any such benefits given to the Agent solely for its own benefit) by or pursuant to the Finance Documents (other than this Agreement); and	
 
 	26.15.3 	all proceeds of the security referred to in sub-clause 26.15.1 above and of the enforcement of the benefits referred to in 26.15.2 above,	
 
on trust for itself and the other Finance Parties from time to time.
 
Such declaration shall remain valid notwithstanding that the Agent may on the date hereof or at any other time be the sole Finance Party; for the avoidance of doubt,
 
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however, such declaration shall, in such case, be deemed repeated on each date on which the Agent ceases to be the sole Finance Party.
 
Each of the parties hereto agrees that the obligations, rights and benefits vested or to be vested in the Agent as trustee as aforesaid by the Finance Documents or any document entered into pursuant thereto shall (as well before as after enforcement) be performed and (as the case may be) exercised by the Agent in accordance with the provisions of this Clause 26.
 
26.16 	Powers and Discretions	
 
The Agent shall have all the powers and discretions conferred upon trustees by the Trustee Act 1925 (to the extent not inconsistent herewith) and by way of supplement it is expressly declared as follows:
 
 	26.16.1 	the Agent shall be at liberty to place any of the Finance Documents and any other instruments, documents or deeds delivered to it pursuant thereto or in connection therewith for the time being in its possession in any safe deposit, safe or receptacle selected by the Agent or with any bank, any company whose business includes undertaking the safe custody of documents or any firm of lawyers of good repute;	
 
 	26.16.2 	the Agent may, whenever it thinks fit, delegate by power of attorney or otherwise to any person or persons or fluctuating body of persons all or any of the rights, trusts, powers, authorities and discretions vested in it by any of the Finance Documents and such delegation may be made upon such terms and subject to such conditions (including the power to sub-delegate) and subject to such regulations as the Agent may think fit and the Agent shall not be bound to supervise, or be in any way responsible for any loss incurred by reason of any misconduct or default on the part of, any such delegate (or sub-delegate);	
 
 	26.16.3 	notwithstanding anything else herein contained, the Agent may refrain from doing anything which would or might in its opinion be contrary to any law of any jurisdiction or any directive or regulation of any agency of any state or which would or might otherwise render it liable to any person and may do anything which is, in its opinion, necessary to comply with any such law, directive or regulation;	
 
 	26.16.4 	save in the case of gross negligence or wilful misconduct, the Agent and every attorney, agent, delegate, sub-delegate and any other person appointed by any of them under any of the Finance Documents may indemnify itself or himself out of the security held by the Agent against all liabilities, costs, fees, charges, losses and expenses incurred by any of them in relation to or arising out of the taking or holding of any of the security constituted by, or any of the benefits provided by, any of the Finance Documents, in the exercise or purported exercise of the rights, trusts, powers and discretions vested in any of them or in respect of any other matter or thing done or omitted to be done in any way relating to any of the Finance Documents or pursuant to any law or regulation; and	
 
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 	26.16.5 	without prejudice to the provisions of any of the Finance Documents, the Agent shall not be under any obligation to insure any property or to require any other person to maintain any such insurance and shall not be responsible for any loss which may be suffered by any person as a result of the lack of or inadequacy or insufficiency of any such insurance.	
 
26.17 	Liability	
 
The Agent shall not be liable for any failure:
 
 	26.17.1 	to require the deposit with it of any deed or document certifying, representing or constituting the title of the Account Party to any of the property mortgaged, charged, assigned or otherwise encumbered by or pursuant to any of the Finance Documents;	
 
 	26.17.2 	to obtain any licence, consent or other authority for the execution, delivery, validity, legality, adequacy, performance, enforceability or admissibility in evidence of any of the Finance Documents;	
 
 	26.17.3 	to register or notify any deed or document mentioned at sub-clause 26.17.1 in accordance with the provisions of any of the documents of title of the Account Party;	
 
 	26.17.4 	to effect or procure registration of or otherwise protect any of the security created by any of the Finance Documents by registering the same under any applicable registration laws in any territory or otherwise by registering any notice, caution or other entry prescribed by or pursuant to the provisions of the said Act or laws;	
 
 	26.17.5 	to take or to require the Account Party to take any steps to render the security without limitation, any floating charge) created or purported to be created by or pursuant to any of the Finance Documents effective or to secure the creation of any ancillary charge under the laws of any jurisdiction; or	
 
 	26.17.6 	to require any further assurances in relation to any of the Finance Documents.	
 
26.18 	Title to Security etc.	
 
The Agent may accept without enquiry, requisition or objection such right and title as the Account Party may have to the property belonging (or purportedly belonging) to it (or any part thereof) which is the subject matter of any of the Finance Documents and shall not be bound or concerned to investigate or make any enquiry into the right or title of the Account Party to such property (or any part thereof) or, without prejudice to the foregoing, to require the Account Party to remedy any defect in the Account Party’s right or title as aforesaid.
 
26.19 	New Security Trustee	
 
The Agent may at any time appoint any person (whether or not a trust corporation) to act either as a separate trustee or as a co-trustee jointly with the Agent:
 
 	26.19.1 	if the Agent considers such appointment to be in the interests of the Banks; or	
 
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 	 26.19.2 	for the purposes of conforming to any legal requirements, restrictions or conditions which the Agent deems relevant for the purposes of the Finance Documents and the Agent shall give prior notice to the Account Party and the Banks of any such appointment.	
 
Any person so appointed shall (subject to the provisions of the Finance Documents) have such powers, authorities and discretions and such duties and obligations as shall be conferred or imposed or such person by the instrument of appointment and shall have the same benefits under this Clause 26 as the Agent.
 
The Agent shall have power in like manner to remove any person so appointed.
 
Such reasonable remuneration as the Agent may pay to any person so appointed, and any costs, charges and expenses incurred by such person in performing its functions pursuant to such appointment, shall for the purposes hereof be treated as costs, charges and expenses incurred by the Agent under the Finance Documents.
 
26.20 	Perpetuity Period	
 
The perpetuity period under the rule against perpetuities if applicable to the trusts constituted in this Clause 26 and the other Finance Documents shall be the period of eighty years from the date of this Agreement and, subject thereto, if the Agent determines that all of the obligations of the Account Party under any of the Finance Documents have been fully and unconditionally discharged, such trusts shall be wound up.
 
26.21 	Security	
 
 	26.21.1 	In the event that the Required Value is greater than US$100 pursuant to sub-clause 18.1.2 of Clause 18.1 ( Letter of Credit Commission ), as soon as reasonably practicable after each delivery to the Security Trustee of the statement(s) of the Charged Portfolio by the Custodian pursuant to paragraph 3 of the Custodian’s Undertaking and in any event within seven Business Days of such delivery, the Security Trustee and the Obligors shall adjust the Required Value to the extent necessary to ensure that the Required Value of the Charged Portfolio is an amount equal to the aggregate of:	
 
A + (A x Y per cent.) + B + (B x Y per cent.) +C + (C x Y per cent.)
 
where:
 
 	A	represents the amount of the Charged Portfolio denominated in sterling	
 
 	B	represents the amount of the Charged Portfolio denominated in dollars (converted into sterling at the Spot Rate)	
 
 	C	represents the amount of the Charged Portfolio denominated in any currency other than sterling or dollars (converted into sterling at the Spot Rate)	
 
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Y per cent. means:
 
 	(a)	10 per cent. in respect of any portion of the Charged Portfolio denominated in sterling;	
 
 	(b)	10 per cent. in respect of any portion of the Charged Portfolio denominated in dollars; and	
 
 	(c)	15 per cent. in respect of any portion of the Charged Portfolio denominated in any currency other than dollars or sterling	
 
and shall notify the Custodian of any such adjustments.
 
 	26.21.2 	The Security Trustee shall not amend the Security Trustee’s Requirements without the consent of the Banks.	
 
 	 26.21.3 	In the event that the Pricing Level reverts from Level V to level IV or above (each as defined in Schedule 8 ( Pricing Schedule ), the Required Value will revert to US$100. For the avoidance of doubt, if, following any such reduction in the Required Value, the Pricing Level again reaches Level V, the Required Value shall be increased to the extent required pursuant to sub-clause 18.1.2 of Clause 18.1 ( Letter of Credit Commission ).	
 
26.22 	Bank Representations	
 
Each Bank represents to the Agent on the date of issue of each Letter of Credit that:
 
 	26.22.1 	the execution and delivery of each Letter of Credit by the Agent on the Bank’s behalf has been duly authorised by all necessary action on the part of the Bank; and	
 
 	26.22.2 	the obligations of the Bank under each Letter of Credit constitute its legal, valid and binding obligations.	
 
26.23 	Letters of Credit	
 
Each Bank shall in its Proportion, indemnify the Agent against any and all liabilities, costs and expenses which the Agent may incur (in its capacity as Agent) as a result of the execution and delivery of any Letter of Credit and any documents executed and delivered by the Agent in connection therewith.
 
27.	ASSIGNMENTS AND TRANSFERS	
 
27.1	Binding Agreement	
 
The Finance Documents shall be binding upon and enure to the benefit of each party hereto and its or any subsequent successors and Transferees.
 
27.2	No Assignments and Transfers by the Obligors	
 
No Obligor shall be entitled to assign or transfer all or any of its rights, benefits and obligations under the Finance Documents without the prior written consent of all the Banks.
 
27.3	Assignments and Transfers by Banks	
 
Subject to obtaining the prior written consent of the Account Party (such consent not to be unreasonably withheld or delayed), any Bank may, at any time, assign all or any of its
 
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rights and benefits under the Finance Documents or transfer in accordance with Clause 27.5 ( Transfers by Banks ) all or any of its rights, benefits and obligations under the Finance Documents to a bank or financial institution, provided that :
 
 	27.3.1 	no such assignment or transfer of the whole or any part of the Commitment may be made unless it is to an Approved Credit Institution; and	
 
 	27.3.2 	the Account Party’s consent is not required if such assignment or transfer is:	
 
 	(a)	to any subsidiary or holding company, or to any subsidiary of any holding company, of such Bank; or	
 
 	(b)	to any other Bank.	
 
27.4	Assignments by Banks	
 
If any Bank assigns all or any of its rights and benefits under the Finance Documents in accordance with Clause 27.3 ( Assignments and Transfers by Banks ), then, unless and until the assignee has delivered a notice to the Agent confirming in favour of the Agent, the Arrangers and the Banks that it shall be under the same obligations towards each of them as it would have been under if it had been an original party hereto as a Bank (whereupon such assignee shall become a party hereto as a “ Bank ”), the Agent, the Arrangers, and the Banks shall not be obliged to recognise such assignee as having the rights against each of them which it would have had if it had been such a party hereto.
 
27.5	Transfers by Banks	
 
If any Bank wishes to transfer all or any of its rights, benefits and/or obligations under the Finance Documents as contemplated in Clause 27.3 ( Assignments and Transfers by Banks ), then such transfer may be effected by the delivery to the Agent of a duly completed Transfer Certificate executed by such Bank and the relevant Transferee in which event, on the later of the Transfer Date specified in such Transfer Certificate and the fifth Business Day after (or such earlier Business Day endorsed by the Agent on such Transfer Certificate falling on or after) the date of delivery of such Transfer Certificate to the Agent:
 
 	27.5.1 	to the extent that in such Transfer Certificate the Bank party thereto seeks to transfer by novation its rights, benefits and obligations under the Finance Documents, each of the Obligors and such Bank shall be released from further obligations towards one another under the Finance Documents and their respective rights against one another shall be cancelled (such rights and obligations being referred to in this Clause 27.5 as “ discharged rights and obligations ”);	
 
 	27.5.2 	each of the Obligors and the Transferee party thereto shall assume obligations towards one another and/or acquire rights against one another which differ from such discharged rights and obligations only insofar as such Obligor and such Transferee have assumed and/or acquired the same in place of such Obligor and such Bank;	
 
 	27.5.3 	the Agent, the Arrangers, the Security Trustee, such Transferee and the other Banks shall acquire the same rights and benefits and assume the same	
 
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 	obligations between themselves as they would have acquired and assumed had such Transferee been an original party hereto as a Bank with the rights, benefits and/or obligations acquired or assumed by it as a result of such transfer and to that extent the Agent, the Arrangers and the relevant Bank shall each be released from further obligations to each other under the Finance Documents; and	
 
 	27.5.4 	such Transferee shall become a party hereto as a “Bank”.	
 
27.6	Replacement of Letter of Credit	
 
On any transfer pursuant to Clause 27.5 ( Transfers by Banks ) other than such a transfer upon the designation of a Substitute Bank in accordance with the provisions of sub-clause 4.4.1 of Clause 4.4 ( Substitute Bank ) the Bank transferring all or any of its rights, benefits and/or obligations under the Finance Documents shall ensure that the Account Party will procure the release by Lloyd’s of each Letter of Credit (an “ Old Letter of Credit ”) with respect to which the transfer is to have effect and its replacement by a new Letter of Credit to be issued by the Transferee and all the other Banks in an amount equal to that of the Old Letter of Credit.
 
27.7	Transfer Fees	
 
On the date upon which a transfer takes effect pursuant to Clause 27.5 ( Transfers by Banks ) the relevant Transferee shall pay to the Agent for its own account a fee of £1,000.
 
27.8	Disclosure of Information	
 
Any Bank may disclose to any person:
 
 	27.8.1 	to (or through) whom such Bank assigns or transfers (or may potentially assign or transfer) all or any of its rights, benefits and obligations under the Finance Documents;	
 
 	27.8.2 	with (or through) whom such Bank enters into (or may potentially enter into) any sub-participation in relation to, or any other transaction under which payments are to be made by reference to, this Agreement or any Obligor; or	
 
 	27.8.3 	to whom information may be required to be disclosed by any applicable law,	
 
such information about any Obligor or the Group and the Finance Documents as such Bank shall consider appropriate and in the case of sub-clause 27.8.1 and 27.8.2, subject to requiring and receiving a confidentiality undertaking substantially in the form set out in Schedule 7 ( Form of Confidentiality Undertaking ).
 
27.9	Partial Transfers/Assignments	
 
Any assignment or transfer by a Bank of part of its Commitment or Outstandings shall be in a minimum amount of £10,000,000.
 
27.10 	U.S Tax Shelter Disclosure	
 
Notwithstanding any other provision in this Agreement, all parties hereto agree that each party (and each of their employees, representatives, or other agents) may disclose to any and all persons, without limitation of any kind, the U.S. tax treatment and U.S. tax structure of this Agreement and all materials of any kind (including opinions or other tax
 
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analyses) that are provided to any party relating to such U.S. tax treatment and U.S. tax structure.
 
28.	ECONOMIC AND MONETARY UNION	
 
28.1	Alternative Currencies during Transition Period	
 
On and from the date on which the United Kingdom becomes a Participating Member State, if and to the extent that any EMU Legislation provides that an amount denominated either in the euro or in sterling and payable within that Participating Member State by crediting an account of the creditor can be paid by the debtor either in the euro unit or in sterling, the Borrower shall be entitled to pay or repay any such amount payable hereunder either in the euro unit or in sterling.
 
28.2	Business Days	
 
With effect on and from the date on which the United Kingdom becomes a Participating Member State, the definition of Business Day in Clause 1.1 ( Definitions ) shall be amended by the addition thereto (at the end) of the following:
 
“and if such reference relates to a date for the payment or purchase of a sum denominated in the euro or in sterling, a day (other than a Saturday or Sunday) on which (a) such clearing or settlement system as is determined by the Agent to be suitable for clearing or settlement of the euro is open for business and (b) banks are generally open for business in London.”.
 
28.3	Rounding and Other Consequential Changes	
 
With effect on and from the date on which the United Kingdom becomes a Participating Member State:
 
 	28.3.1 	without prejudice and in addition to any method of conversion or rounding prescribed by any EMU Legislation, each reference in this Agreement to a fixed amount or fixed amounts in a national currency unit to be paid to or by the Agent shall be replaced by a reference to such comparable and convenient fixed amount or fixed amounts in the euro unit as the Agent may from time to time specify; and	
 
 	28.3.2 	save as expressly provided in this Clause 28, the Finance Documents shall be subject to such changes of construction or interpretation as the Agent and the Security Trustee may from time to time specify to be necessary to reflect the changeover to the euro in the United Kingdom and to put the parties in the same position, so far as possible, that they would have been in if no change in currency had occurred.	
 
29.	CALCULATIONS AND EVIDENCE OF DEBT	
 
29.1	Basis of Accrual	
 
Interest and Letter of Credit Commission shall accrue from day to day and shall be calculated on the basis of a year of 365 days (or in the case of any such amounts denominated in dollars, 360 days) and the actual number of days elapsed.
 
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29.2	Proportionate Reductions	
 
Any collateralisation of Outstandings denominated in dollars shall reduce the amount of such Outstandings by the amount of dollars collateralised and shall reduce the Sterling Amount of such Outstandings proportionately.
 
29.3	Evidence of Debt	
 
Each Bank shall maintain in accordance with its usual practice accounts evidencing the face amount of its participations in Letters of Credit and the amounts from time to time owing to it hereunder.
 
29.4	Control Accounts	
 
The Agent shall maintain on its books a control account or accounts in which shall be recorded (a) the amount of any Unpaid Sum and the face amount of any Letter of Credit issued and each Bank’s share therein, (b) the amount of all fees, interest and other sums due or to become due from an Obligor and each Bank’s share therein and (c) the amount of any sum received or recovered by the Agent hereunder and each Bank’s share therein.
 
29.5	Prima Facie Evidence	
 
In any legal action or proceeding arising out of or in connection with this Agreement, the entries made in the accounts maintained pursuant to Clause 29.3 ( Evidence of Debt ) and Clause 29.4 ( Control Accounts ) shall be prima facie evidence of the existence and amounts of the specified obligations of the Obligors.
 
29.6	Certificates of Banks	
 
A certificate of a Bank as to:
 
 	29.6.1 	the amount by which a sum payable to it hereunder is to be increased under Clause 10.1 ( Tax Gross-up );	
 
 	29.6.2 	the amount for the time being required to indemnify it against any such cost, payment or liability as is mentioned in Clause 10.2 ( Tax Indemnity ) or Clause 12.1 ( Increased Costs ); or	
 
 	29.6.3 	the amount of any credit, relief, remission or repayment as is mentioned in Clause 11.3 ( Tax Credit Payment ) or Clause 11.4 ( Tax Credit Clawback ),	
 
shall, in the absence of manifest error, be prima facie evidence of the existence and amounts of the specified obligations of the Obligors.
 
29.7	Agent’s Certificates	
 
A certificate of the Agent as to the amount at any time due from the Account Party hereunder or the amount which, but for any of the obligations of the Account Party hereunder being or becoming void, voidable, unenforceable or ineffective, at any time would have been due from the Account Party hereunder shall, in the absence of manifest error, be conclusive for the purposes of Clause 30 ( Guarantee and Indemnity ).
 
29.8	Letters of Credit	
 
A certificate of a Bank as to the amount paid out by such Bank in respect of any Letter of Credit shall, save for manifest error, be prima facie evidence of the payment of such amounts in any legal action or proceedings arising in connection therewith.
 
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30.	GUARANTEE AND INDEMNITY	
 
30.1	Guarantee and Indemnity	
 
Each Guarantor irrevocably and unconditionally:
 
 	30.1.1 	guarantees to each Finance Party the due and punctual observance and performance of all the terms, conditions and covenants on the part of the Account Party contained in the Finance Documents and agrees to pay from time to time on demand any and every sum or sums of money which the Account Party is at any time liable to pay to any Finance Party under or pursuant to the Finance Documents and which has become due and payable but has not been paid at the time such demand is made; and	
 
 	30.1.2 	agrees as a primary obligation to indemnify each Finance Party from time to time on demand from and against any loss incurred by any Finance Party as a result of any of the obligations of the Account Party under or pursuant to the Finance Documents being or becoming void, voidable, unenforceable or ineffective as against the Account Party for any reason whatsoever, whether or not known to any Finance Party or any other person, the amount of such loss being the amount which the person or persons suffering it would otherwise have been entitled to recover from the Account Party.	
 
30.2	Additional Security	
 
The obligations of each Guarantor herein contained shall be in addition to and independent of every other security which any Finance Party may at any time hold in respect of any of the Account Party’s obligations under the Finance Documents.
 
30.3	Continuing Obligations	
 
The obligations of each Guarantor herein contained shall constitute and be continuing obligations notwithstanding any settlement of account or other matter or thing whatsoever and shall not be considered satisfied by any intermediate payment or satisfaction of all or any of the obligations of the Account Party under the Finance Documents and shall continue in full force and effect until final payment in full of all amounts owing by the Account Party under the Finance Documents and total satisfaction of all the Account Party’s actual and contingent obligations under the Finance Documents.
 
30.4	Obligations not Discharged	
 
Neither the obligations of each Guarantor herein contained nor the rights, powers and remedies conferred in respect of each Guarantor upon any Finance Party by the Finance Documents or by law shall be discharged, impaired or otherwise affected by:
 
 	30.4.1 	the winding-up, dissolution, administration or re-organisation of the Account Party or any other person or any change in its status, function, control or ownership;	
 
 	30.4.2 	any of the obligations of the Account Party or any other person under the Finance Documents or under any other security taken in respect of any of its obligations under the Finance Documents being or becoming illegal, invalid, unenforceable or ineffective in any respect;	
 
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 	30.4.3 	time or other indulgence being granted or agreed to be granted to the Account Party in respect of its obligations under the Finance Documents or under any such other security;	
 
 	30.4.4 	any amendment to, or any variation, waiver or release of, any obligation of the Account Party under the Finance Documents or under any such other security;	
 
 	30.4.5 	any failure to take, or fully to take, any security contemplated hereby or otherwise agreed to be taken in respect of the Account Party’s obligations under the Finance Documents;	
 
 	30.4.6 	any failure to realise or fully to realise the value of, or any release, discharge, exchange or substitution of, any security taken in respect of the Account Party’s obligations under the Finance Documents; or	
 
 	30.4.7	any other act, event or omission which, but for this Clause 30.4, might operate to discharge, impair or otherwise affect any of the obligations of a Guarantor herein contained or any of the rights, powers or remedies conferred upon any of the Finance Parties by the Finance Documents or by law.	
 
30.5	Settlement Conditional	
 
Any settlement or discharge between the Account Party and any of the Finance Parties shall be conditional upon no security or payment to any Finance Party by the Account Party or any other person on behalf of the Account Party being avoided or reduced by virtue of any laws relating to bankruptcy, insolvency, liquidation or similar laws of general application and, if any such security or payment is so avoided or reduced, each Finance Party shall be entitled to recover the value or amount of such security or payment from the Account Party subsequently as if such settlement or discharge had not occurred.
 
30.6	Exercise of Rights	
 
No Finance Party shall be obliged before exercising any of the rights, powers or remedies conferred upon them in respect of each Guarantor by the Finance Documents or by law to:
 
 	30.6.1 	make any demand of the Account Party;	
 
 	30.6.2 	take any action or obtain judgment in any court against the Account Party;	
 
 	30.6.3 	make or file any claim or proof in a winding-up or dissolution of the Account Party; or	
 
 	30.6.4 	enforce or seek to enforce any other security taken in respect of any of the obligations of the Account Party under the Finance Documents.	
 
30.7	Deferral of Guarantors’ Rights	
 
Each Guarantor agrees that, so long as any amounts are or may be owed by the Account Party under the Finance Documents or the Account Party is under any actual or contingent obligations under the Finance Documents, it shall not exercise any rights which it may at any time have by reason of performance by it of its obligations under the Finance Documents:
 
 	30.7.1 	to be indemnified by the Account Party; and/or	
 
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 	30.7.2 	to claim any contribution from any other guarantor of the Account Party’s obligations under the Finance Documents; and/or	
 
 	 30.7.3 	to take the benefit (in whole or in part and whether by way of subrogation or otherwise) of any rights of the Finance Parties under the Finance Documents or of any other security taken pursuant to, or in connection with, the Finance Documents by all or any of the Finance Parties.	
 
30.8	Suspense Accounts	
 
All moneys received, recovered or realised by a Bank by virtue of Clause 30.1 ( Guarantee and Indemnity ) may, in that Bank’s discretion, be credited to an interest bearing suspense or impersonal account and may be held in such account for so long as such Bank thinks fit pending the application from time to time (as such Bank may think fit) of such moneys in or towards the payment and discharge of any amounts owing by the Account Party to such Bank under the Finance Documents.
 
31.	REMEDIES AND WAIVERS, PARTIAL INVALIDITY	
 
31.1	Remedies and Waivers	
 
No failure to exercise, nor any delay in exercising, on the part of any Finance Party, any right or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy prevent any further or other exercise thereof or the exercise of any other right or remedy. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law.
 
31.2	Partial Invalidity	
 
If, at any time, any provision of the Finance Documents is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction, neither the legality, validity or enforceability of the remaining provisions thereof nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby.
 
32.	NOTICES	
 
32.1	Communications in writing	
 
 	32.1.1 	Any communication to be made under or in connection with the Finance Documents shall be made in writing and, unless otherwise stated, may be made by fax, letter or telex or (to the extent that the relevant party hereto has specified such address pursuant to Clause 32.2 ( Addresses )) by e-mail.	
 
 	32.1.2 	The Agent may additionally (if the parties hereto agree and the Account Party has specifically approved in writing), in the case of any document to be forwarded by the Agent pursuant to this Agreement where such document has been supplied to such Agent pursuant to Clause 16.1 ( Information ), refer the relevant party or parties hereto (by fax, letter, telex or (if so specified) e-mail) to a web site considered by the Account Party as secure and confidential and to the location of the relevant information on such web site in discharge of such notification or delivery obligation.	
 
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32.2	Addresses	
 
The address, fax number, e-mail address, telex number and, where appropriate, web site (and the department or officer, if any, for whose attention the communication is to be made) of each party hereto for any communication or document to be made or delivered under or in connection with the Finance Documents is:
 
 	32.2.1 	in the case of an Obligor, that identified with its name below;	
 
 	32.2.2 	in the case of each Bank, that notified in writing to the Agent on or prior to the date on which it becomes a party hereto; and	
 
 	32.2.3 	in the case of the Agent, that identified with its name below,	
 
or any substitute address, fax number, e-mail address, telex number, web site, department or officer as the party hereto may notify to the Agent (or the Agent may notify to the other parties hereto, if a change is made by the Agent or a web site carrying relevant information has been set up by the Agent) by not less than five Business Days’ notice.
 
32.3	Delivery	
 
 	32.3.1 	Any communication or document made or delivered by one person to another under or in connection with the Finance Documents will only be effective:	
 
 	(a)	if by way of fax, when received in legible form; or	
 
 	(b)	if by way of letter, when it has been left at the relevant address or five Business Days after being deposited in the post postage prepaid in an envelope addressed to it at that address; or	
 
 	(c)	if by way of telex, when dispatched, but only if, at the time of transmission, the correct answerback appears at the start and at the end of the sender’s copy of the notice; or	
 
 	(d)	if by way of e-mail, when sent in legible form, but only if, following transmission, the sender does not receive a non-delivery message; or	
 
 	(e)	where reference in such communication is to a web site, when the delivery of the letter, fax, telex or, as the case may be, e-mail referring the addressee to such web site is effective,	
 
and, if a particular department or officer is specified as part of its address details provided under Clause 32.2 ( Addresses ), if addressed to that department or officer.
 
 	32.3.2 	Any communication or document to be made or delivered to the Agent will be effective only when actually received by the Agent and then only if it is expressly marked for the attention of the department or officer identified with the Agent’s signature below (or any substitute department or officer as the agent shall specify for this purpose).	
 
 	32.3.3 	All notices from or to any Obligor shall be sent through the Agent.	
 
- 71 -

32.4	Notification of address, fax number and telex number	
 
Promptly upon receipt of notification of an address, fax number, telex number or e-mail address or change of such pursuant to Clause 32.2 ( Addresses ) or changing its own address, fax number, telex number or e-mail address, the Agent shall notify the other parties hereto.
 
32.5	English language	
 
 	32.5.1 	Any notice given under or in connection with any Finance Document must be in English.	
 
 	32.5.2 	All other documents provided under or in connection with any Finance Document must be:	
 
 	(a)	in English; or	
 
 	(b)	if not in English, accompanied (if so required by the Agent) by an English translation thereof certified (by an officer of the person making or delivering the same) as being a true and accurate translation thereof.	
 
32.6	Deemed receipt by the Obligors	
 
Any communication or document made or delivered to the Account Party in accordance with Clause 32.3 ( Delivery ) shall be deemed to have been made or delivered to both Obligors.
 
33.	COUNTERPARTS	
 
This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument.
 
34.	AMENDMENTS	
 
34.1	Amendments	
 
The Agent, if it has the prior consent of the Majority Banks, and the Obligors may from time to time agree in writing to amend this Agreement or to waive, prospectively or retrospectively, any of the requirements of this Agreement and any amendments or waivers so agreed shall be binding on all the Finance Parties, provided that no such waiver or amendment shall subject any Finance Party hereto to any new or additional obligations without the consent of such Finance Party.
 
34.2	Amendments Requiring the Consent of all the Banks	
 
An amendment or waiver which relates to:
 
 	34.2.1 	Clause 4 ( Termination of Letters of Credit ), Clause 5 ( Substitution of Letters of Credit ), Clause 6 ( Increase of the Facility ), Clause 25 ( Sharing ) or this Clause 34;	
 
 	34.2.2 	a change in the currency or amount of any Letter of Credit;	
 
 	34.2.3 	a reduction in the Letter of Credit Commission, or the amount or currency of any payment of interest, fees or any other amount payable hereunder to any Finance Party or deferral of the date for payment thereof;	
 
- 72 -

 	34.2.4 	a release of a Guarantor from any of its obligations set out in Clause 30 ( Guarantee and Indemnity );	
 
 	34.2.5 	Clause 16.7 ( Adjusted Consolidated Debt to Total Capitalisation Ratio ) and Clause 16.8 ( Consolidated Net Worth );	
 
 	34.2.6 	the definition of Majority Banks;	
 
 	34.2.7 	any provision which contemplates the need for the consent or approval of all the Banks; or	
 
 	34.2.8 	the Security Documents (if any),	
 
shall not be made without the prior consent of all the Banks.
 
34.3	Exceptions	
 
Notwithstanding any other provisions hereof, the Agent shall not be obliged to agree to any such amendment or waiver if the same would:
 
 	34.3.1 	amend or waive this Clause 34, Clause 19 ( Costs and Expenses ) or Clause 26 ( The Agent, the Arrangers and the Banks ); or	
 
 	34.3.2 	otherwise amend or waive any of the Agent’s rights hereunder or subject the Agent or the Arrangers to any additional obligations hereunder.	
 
35.	GOVERNING LAW	
 
This Agreement is governed by English law.
 
36.	JURISDICTION	
 
36.1	English Courts	
 
Each of the parties hereto irrevocably agrees for the benefit of each of the Agent, the Arrangers and the Banks that the courts of England shall have jurisdiction to hear and determine any suit, action or proceeding, and to settle any disputes, which may arise out of or in connection with this Agreement and the other Finance Documents and, for such purposes, irrevocably submits to the jurisdiction of such courts.
 
36.2	Convenient Forum	
 
The Obligors irrevocably waive any objection which either of them might now or hereafter have to the courts referred to in Clause 36.1 being nominated as the forum to hear and determine any suit, action or proceeding, and to settle any disputes, which may arise out of or in connection with this Agreement and agree not to claim that any such court is not a convenient or appropriate forum.
 
36.3	Service of Process	
 
Each Obligor agrees that the process by which any suit, action or proceeding is begun may be served on it by being delivered in connection with any suit, action or proceeding in England, to ACE London Services Limited at ACE Building, 100 Leadenhall Street, London EC3A 3BP or its other principal place of business for the time being.
 
- 73 -

36.4	Non-Exclusive Jurisdiction	
 
The submission to the jurisdiction of the courts referred to in Clause 36.1 shall not (and shall not be construed so as to) limit the right of the Agent, the Arrangers and the Banks or any of them to take proceedings against the Account Party in any other court of competent jurisdiction nor shall the taking of proceedings in any one or more jurisdictions preclude the taking of proceedings in any other jurisdiction, whether concurrently or not.
 
AS WITNESS the hands of the duly authorised representatives of the parties hereto the day and year first before written.
 
- 74 -

SCHEDULE 1
 
T HE B ANKS
 
- 75 -

SCHEDULE 2
 
F ORM OF T RANSFER C ERTIFICATE
 
To: Citibank International plc
 
TRANSFER CERTIFICATE
 
relating to the agreement (as from time to time amended, varied, novated or supplemented, the “ Credit Agreement ”) originally dated 19 November 1999 whereby following the First Restatement Agreement, the Amendment Agreement, the Second Restatement Agreement, the Third Restatement Agreement and the Fourth Amendment and Restatement Agreement a £380,000,000 letter of credit facility was made available to ACE Limited by a group of banks on whose behalf Citibank International plc acted as agent in connection therewith.
 
1.	Terms defined in the Credit Agreement shall, subject to any contrary indication, have the same meanings herein. The terms Bank, Transferee and Portion Transferred are defined in the schedule hereto.	
 
2.	The Bank (a) confirms that the details in the schedule hereto under the heading “ Letters of Credit ” accurately summarises its participation in the Credit Agreement and the Term of any existing Letters of Credit and (b) requests the Transferee to accept and procure the transfer by novation to the Transferee of the Portion Transferred (specified in the schedule hereto) of its Commitment and/or its participation in such Letters of Credit by counter-signing and delivering this Transfer Certificate to the Agent at its address for the service of notices specified in the Credit Agreement.	
 
3.	The Transferee hereby requests the Agent to accept this Transfer Certificate as being delivered to the Agent pursuant to and for the purposes of Clause 27.5 ( Transfers by Banks ) of the Credit Agreement so as to take effect in accordance with the terms thereof on the Transfer Date or on such later date as may be determined in accordance with the terms thereof.	
 
4.	The Transferee confirms that it has received a copy of the Credit Agreement together with such other information as it has required in connection with this transaction and that it has not relied and will not hereafter rely on the Bank to check or enquire on its behalf into the legality, validity, effectiveness, adequacy, accuracy or completeness of any such information and further agrees that it has not relied and will not rely on the Bank to assess or keep under review on its behalf the financial condition, creditworthiness, condition, affairs, status or nature of the Obligors.	
 
5.	The Transferee hereby undertakes with the Bank and each of the other parties to the Credit Agreement that it will perform in accordance with their terms all those obligations which by the terms of the Finance Documents will be assumed by it after delivery of this Transfer Certificate to the Agent and satisfaction of the conditions (if any) subject to which this Transfer Certificate is expressed to take effect.	
 
6.	The Bank makes no representation or warranty and assumes no responsibility with respect to the legality, validity, effectiveness, adequacy or enforceability of the Finance Documents or any document relating thereto and assumes no responsibility for the	
 
- 76 -

 	financial condition of the Obligors or for the performance and observance by the Obligors of any of their respective obligations under the Finance Documents or any document relating thereto and any and all such conditions and warranties, whether express or implied by law or otherwise, are hereby excluded.	
 
7.	The Bank hereby gives notice that nothing herein or in the Finance Documents (or any document relating thereto) shall oblige the Bank to (a) accept a re-transfer from the Transferee of the whole or any part of its rights, benefits and/or obligations under the Finance Documents transferred pursuant hereto or (b) support any losses directly or indirectly sustained or incurred by the Transferee for any reason whatsoever including the non-performance by an Obligor or any other party to the Finance Documents (or any document relating thereto) of its obligations under any such document. The Transferee hereby acknowledges the absence of any such obligation as is referred to in (a) or (b) above.	
 
8.	This Transfer Certificate and the rights, benefits and obligations of the parties hereunder shall be governed by and construed in accordance with English law.	
 
THE SCHEDULE

9.      Bank:	  	 	  	 	
			
10.    Transferee:	  	 	  	 	
			
11.    Transfer Date:	  	 	  	 	
			
12.    Bank’s Commitment	  	 	  	Portion Transferred	
			
13.    Letter(s) of Credit Bank’s L/C Participation	  	Term and
Final Expiration
Date (if applicable)	  	Portion Transferred	
			
[Transferor Bank]	  	[Transferee Bank]	  	 	

By:	 	 	 	By:	 	 	

Date:	 	 	 	Date:	 	 	

- 77 -

ADMINISTRATIVE DETAILS OF TRANSFEREE
 
Address
Contact Name:
 
Account for Payments
in sterling:
 
Fax:
Telephone:
 
- 78 -

SCHEDULE 3
 
C ONDITIONS P RECEDENT
 
1.	In relation to each Obligor:	
 
 	(i)	confirmation by an Authorised Signatory of such Obligor that there have been no changes to the constitutional documents of such Obligor since 19 November 1999;	
 
 	(ii)	a copy, certified as at the date of the Second Restatement Agreement a true and up-to-date copy by an Authorised Signatory of such Obligor, of a board resolution of such Obligor approving the execution, delivery and performance of the Second Restatement Agreement, the Charge Agreement and the Notice of Charge and the terms and conditions thereof and authorising a named person or persons to sign the Second Restatement Agreement, the Charge Agreement and Notice of Charge and any documents to be delivered by such Obligor pursuant thereto;	
 
 	(iii)	a certificate of an Authorised Signatory of such Obligor setting out the names and signatures of the persons authorised to sign, on behalf of such Obligor, Second Restatement Agreement, the Charge Agreement and the Notice of Charge and any documents to be delivered by such Obligor pursuant thereto.	
 
2.	Opinion of Clifford Chance, solicitors to the Agent.	
 
3.	An opinion of Maples and Calder, Cayman Islands counsel to the Account Party addressed to the Finance Parties.	
 
4.	An opinion of Conyers, Dill and Pearman, Bermudian counsel to the Account Party addressed to the Finance Parties.	
 
5.	A copy, certified a true copy by an Authorised Signatory of the Account Party, of the financial statements of the Account Party referred to in sub-clauses 15.4.1 and 15.4.2 of Clause 15.4 ( Financial Information ).	
 
6.	Evidence satisfactory to the Agent that Lloyd’s agrees to accept deeds of substitution in respect of transfers by Banks.	
 
7.	Evidence satisfactory to the Agent that all Original Letters of Credit will be cancelled by Lloyd’s upon the issue of the Letters of Credit issued hereunder on and after the Commencement Date.	
 
8.	Evidence that ACE UK Limited of Crosby Court, 38 Bishopsgate, London EC2N 4AJ has agreed to act as the agent of each Obligor for the service of process in England in respect of the Amended Agreement.	
 
- 79 -

SCHEDULE 4
 
U TILISATION R EQUEST
 
From: ACE Limited
 
To:	   Citibank International plc	
 
Dated:
 
Dear Sirs,
 
1.	We refer to the £380,000,000 letter of credit agreement originally dated 19 November 1999 (as (a) amended and restated pursuant to the First Restatement Agreement, (b) amended pursuant to the Amendment Agreement, (c) amended and restated pursuant to the Second Restatement Agreement, (d) amended and restated pursuant to the Third Restatement Agreement and (e) amended and restated pursuant to the Fourth Amendment and Restatement Agreement (the “ Credit Agreement ”)) and made between inter alia , ACE Limited as account party, Citibank International plc as agent and the financial institutions named therein as Banks. Terms defined in the Credit Agreement shall have the same meaning in this notice. This notice is irrevocable.	
 
2.	We hereby give you notice that, pursuant to the Credit Agreement we wish the Banks to issue the following Letters of Credit:	

Amount
	 	Effective Date
	 	Beneficiary
	  	Applicant

£/US$ 1	 	[•] November 2003	 	Society of Lloyd’s	  	 	
				
£/US$ 1	 	[•] November 2003	 	Society of Lloyd’s	  	 	
				
£/US$ 1	 	[•] November 2003	 	Society of Lloyd’s	  	 	
				
£/US$ 1	 	[•] November 2003	 	Society of Lloyd’s	  	 	
				
£/US$ 1	 	[•] November 2003	 	Society of Lloyd’s	  	 	
				
£/US$ 1	 	[•] November 2003	 	Society of Lloyd’s	  	 	
				
£/US$ 1	 	[•] November 2003	 	Society of Lloyd’s	  	 	
 
3.	Utilisation Date: [            ].	
 
4.	We confirm that, at the date hereof, the Representations are true in all material respects and no Default is continuing, or would result from the issue of such Letters of Credit.	
 
The Letters of Credit should be issued in the form attached and delivered to the recipient at [ address of recipient ]. The purpose of their issue is to support Funds at Lloyd’s in respect of the Applicants.
 
1	Delete where appropriate.	
 
- 80 -

	
Yours faithfully	

	
	
Authorised Signatory	
 
for and on behalf of
 
ACE LIMITED
 
- 81 -

SCHEDULE 5
 
F ORM OF L ETTER OF C REDIT
 
Letter of Credit to be issued by the Agent on behalf of the Banks
 
To:	The Society and Council of Lloyd’s	
c/o General Manager, Members’ Financial Services
Gun Wharf
Dock Road
Chatham
Kent ME4 4TU
 
Dear Sirs
 
Irrevocable Standby Letter of Credit No. [                ]
 
Re: [ name of Corporate Member of Lloyd’s ] (the “Applicant”)
 
This Clean Irrevocable Standby Letter of Credit (the “ Credit ”) is issued by the banks whose names are set out in Appendix 1 hereto (the “ Issuing Banks ”, and each an “ Issuing Bank ”) in favour of the Society of Lloyd’s (“ Lloyd’s ”) on the following terms:
 
1.	Subject to the terms hereof, the Issuing Banks shall make payments within two business days of demand on Citibank International plc (the “ Agent ”) in accordance with paragraph 4 below. 	
 
2.	Upon a demand being made by Lloyd’s pursuant to paragraph 4 below each Issuing Bank shall pay that proportion of the amount demanded which is equal to the proportion which its Commitment set out in Appendix 1 hereto bears to the aggregate Commitments of all the Issuing Banks set out in Appendix 1 hereto, provided that the obligations of the Issuing Banks under this Credit shall be several and no Issuing Bank shall be required to pay an amount exceeding its Commitment set out in Appendix 1 hereto and the Issuing Banks shall not be obliged to make payments hereunder in aggregate exceeding a maximum amount of [ amount in approved currency ]. Any payment by an Issuing Bank hereunder shall be made in [ approved currency ] to Lloyd’s account specified in the demand made by Lloyd’s pursuant to paragraph 4 below.	
 
3.	This Credit is effective from 21 November 2003 (the “ Commencement Date ”) and will expire on the Final Expiration Date. This Credit shall remain in force until we give you not less than four years’ notice in writing terminating the same on the fourth anniversary of the Commencement Date or on any date subsequent thereto as specified in such notice (the “ Final Expiration Date ”), our notice to be sent by registered mail for the attention of the General Manager, Members’ Financial Services, at the above address.	
 
4.	Subject to paragraph 3 above, the Issuing Banks shall pay to Lloyd’s under this Credit upon presentation of a demand by Lloyd’s on Citibank International plc at Citibank Centre, Canada Square, Canary Wharf, London E14 5LB marked for the attention of Cliff Posner, Loans Agency (and, in copy, at Citibank Centre, Canada Square, Canary Wharf, London E14 5LB marked for the attention of Jon Pasquill, Global Cash and	
 
- 82 -

 	Trade) in the form set out in Appendix 2 or Appendix 3 (as appropriate) hereto the amount specified therein (which amount shall not, when aggregated with all other amounts paid by the Issuing Banks to Lloyd’s under this Credit, exceed the maximum amount referred to in paragraph 2 above).	
 
5.	The Agent has signed this Credit as agent for disclosed principals and accordingly shall be under no obligation to Lloyd’s hereunder.	
 
6.	All charges are for the Applicant’s account.	
 
7.	Subject to any contrary indication herein, this Credit is subject to the International Standby Practices - ISP98 (1998 publication) - International Chamber of Commerce Publication No. 590.	
 
8.	This Credit shall be governed by and interpreted in accordance with English law and the Issuing Banks hereby irrevocably submit to the jurisdiction of the High Court of Justice in England.	
 
9.	Each of the Issuing Banks engages with Lloyd’s that demands made under and in compliance with the terms and conditions of this Credit shall be duly honoured on presentation.	
 
Yours faithfully
 
CITIBANK INTERNATIONAL plc
 
for and on behalf of
 
[ Names of all Issuing Banks ]
 
- 83 -

APPENDIX 1
 
Issuing Banks’ Commitments

Name and Address of Issuing Bank
	  	Commitment

 	  	 	

		

 	  	 	

		

 	  	 	

		

 	  	 	

		

 	  	 	

		

Total value:	  	 	
 
- 84 -

APPENDIX 2
 
Form of Demand (Sterling)
 
[on Lloyd’s letterhead]
 
D EAR S IR /M ADAM
 
THE SOCIETY OF LLOYD’S
TRUSTEE OF
LETTER OF CREDIT NO.
 
With reference to the above, we enclose for your attention a Bill of Exchange, together with the respective Credit. Payment should be made by way of CHAPS. The account details are as follows:-

N ATIONAL W ESTMINSTER B ANK P LC	  	S ORT C ODE 60-00-01	  	 	
			
City of London Office
P.O. Box 12258
1 Princes Street
London EC2R 8AP	  	Account 13637444	  	 	
 
Please quote Member Code:
 
Yours faithfully
 
for Manager
Members’ Funds Department
Members’ Services Unit
 
- 85 -

Your ref:
Our ref: MEM/    /    /    /C911f
Extn:
 
BILL OF EXCHANGE
The Society of Lloyd’s
 
Trustee of
Letter of Credit No.
 
Please pay in accordance with the terms of the Credit to our order the amount of £             .

For and on behalf of	

	
Authorised Signatory	
Membership Department	
 
TO:	C ITIBANK I NTERNATIONAL PLC	
as Agent
 
- 86 -

APPENDIX 3
 
Form of Demand (Approved Currency)
 
[on Lloyd’s letterhead]
 
D EAR S IR /M ADAM
 
THE SOCIETY OF LLOYD’S
TRUSTEE OF
LETTER OF CREDIT NO.
 
With reference to the above, we enclose for your attention a Bill of Exchange, together with the respective Credit. Payment should be made by way of SWIFT. The account details are as follows:-

N ATIONAL W ESTMINSTER B ANK P LC	  	S ORT C ODE 60-00-01	
		
City of London Office	  	Account 13637444	
P.O. Box 12258	  	 	
1 Princes Street	  	SWIFT Code NWBK GB21	
London EC2R 8AP	  	SWIFT Code Intermediary CHA SUS33	
 
Please quote Member Code:
 
Yours faithfully
 
for Manager
Members’ Funds Department
Members’ Services Unit
 
- 87 -

Your ref:
Our ref: MEM/    /    /    /C911f
Extn:
 
BILL OF EXCHANGE
The Society of Lloyd’s
 
Trustee of
Letter of Credit No.
 
Please pay in accordance with the terms of the Credit to our order the amount of $            .

For and on behalf of	

	
Authorised Signatory	
Membership Department	
 
TO:	C ITIBANK I NTERNATIONAL PLC	
as Agent
 
- 88 -

SCHEDULE 6
 
M ANDATORY L IQUID A SSET C OSTS R ATE
 
1.	For the purposes of this Agreement, the cost of compliance with existing requirements of the Bank of England and/or the Financial Services Authority will be calculated by the Agent in relation to each Unpaid Sum on the basis of rates supplied by the Agent (or such Bank(s) as it may from time to time determine) by reference to the circumstances existing on the first day of each Term in respect of such Unpaid Sum and, if any such Term of such Unpaid Sum exceeds three months, at three calendar monthly intervals from the first day of such Term during its duration in accordance with the following formula:	
 
 	(a)	in relation to Unpaid Sums denominated in Sterling:	

AB + C(B - D) + E x 0.01
	  	per cent. per annum	
100 - (A + C)	  	 	
 
 	(b)	in relation to Unpaid Sums denominated in dollars:	

E x 0.01
	  	per cent. per annum	
300	  	 	
 
Where:
 
 	A	is the percentage of eligible liabilities (assuming these to be in excess of any stated minimum) which the Agent (or such Bank as it may determine) is from time to time required to maintain as an interest free cash ratio deposit with the Bank of England to comply with cash ratio requirements.	
 
 	B	is the percentage rate per annum at which sterling deposits are offered by the Agent (or such Bank as it may determine) in accordance with its normal practice, for a period equal to (a) the relevant Term (or, as the case may be, remainder of such Term) in respect of the relevant Unpaid Sum or (b) three months, whichever is the shorter, to a leading bank in the London Interbank Market as of 11.00 a.m. in a sum approximately equal to the amount of such Unpaid Sum.	
 
 	C	is the percentage of eligible liabilities which the Agent (or such Bank as it may determine) is required from time to time to maintain as interest bearing special deposits with the Bank of England.	
 
 	D	is the percentage rate per annum payable by the Bank of England to the Agent (or such Bank as it may determine) on interest bearing special deposits.	
 
 	E	is the rate payable by the Agent (or such Bank as it may determine) to the Financial Services Authority pursuant to the Fees Regulations (but, for this purpose, ignoring any minimum fee required pursuant to the	
 
- 89 -

 	Fees Regulations) and expressed in pounds per £1,000,000 of the Fee Base of the Agent (or such Bank as it may determine).	
 
2.	For the purposes of this Schedule:	
 
 	(i)	“ eligible liabilities ” and “ special deposits ” shall bear the meanings ascribed to them from time to time under or pursuant to the Bank of England Act 1998 or (as may be appropriate) by the Bank of England;	
 
 	(ii)	“ Fee Regulations ” means the Banking Supervision (Fees) Regulations 2002 or such other regulation as may be in force from time to time in respect of the payment of fees for banking supervision; and	
 
 	(iii)	“ Fee Base ” shall bear the meaning ascribed to it, and shall be calculated in accordance with, the Fees Regulations.	
 
3.	The percentages used in A and C above shall be those required to be maintained on the first day of the relevant period as determined in accordance with B above.	
 
4.	In application of the above formula, A, B, C and D will be included in the formula as figures and not as percentages e.g. if A is 0.5 per cent. and B is 12 per cent., AB will be calculated as 0.5 x 12 and not as 0.5 per cent. x 12 per cent.	
 
5.	Calculations will be made on the basis of a 365 day year (or, if market practice differs, in accordance with market practice).	
 
6.	A negative result obtained by subtracting D from B shall be taken as zero.	
 
7.	The resulting figures shall be rounded to four decimal places.	
 
8.	Additional amounts calculated in accordance with this Schedule are payable on the last day of the Term to which they relate.	
 
9.	The determination of the Mandatory Liquid Asset Costs Rate by the Agent in relation to any period shall, in the absence of manifest error, be conclusive and binding on all of the parties hereto.	
 
10.	The Agent may from time to time, after consultation with the Account Party and the Banks, determine and notify to all parties any amendments or variations which are required to be made to the formula set out above in order to comply with any requirements from time to time imposed by the Bank of England or the Financial Services Authority in relation to any Unpaid Sum and any such determination shall, in the absence of manifest error, be conclusive and binding on all the parties hereto.	
 
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SCHEDULE 7
 
F ORM OF C ONFIDENTIALITY U NDERTAKING
 
[Letterhead of Transferor]
 
[ Date ]
 
To:	[Transferee]	
 
Dear Sirs,
 
ACE Limited - £380,000,000 Letter of Credit Facility Agreement originally dated 19 November 1999 (as (a) amended and restated pursuant to a First Amendment Agreement dated 17 November 2000, (b) an Amendment Agreement dated 23 October 2001, (c) a Second Restatement Agreement dated 21 November 2001, (d) a Third Restatement Agreement dated 19 November 2002, and (e) a Fourth Amendment and Restatement Agreement dated 14 November 2003)
 
Confidentiality Agreement
 
In connection with your possible interest in becoming a bank in the above-captioned facility (the “ Transaction ”) for ACE Limited (the “ Company ”), we will be providing you with information that is not in the public domain but that is confidential or proprietary in nature. Such information and any other information concerning the Company or the Transaction furnished to you by [Transferor], or by or on behalf of the Company (whether before, on or after the date of this Agreement), together with analyses, compilations or other materials prepared by you or your directors, officers, employees or advisors (collectively, “ Representatives ”) which contain or otherwise reflect such information, are hereinafter collectively referred to as the “ Information ”. In consideration of your receipt of the Information, you agree that:
 
1.	Except as otherwise expressly provided herein, you will not (a) use the Information except in connection with the Transaction or (b) disclose to any person any terms or conditions of the Transaction or any portion of the Information.	
 
2.	Notwithstanding the foregoing, you may disclose the Information: (a) to your Representatives who need to know the Information for purposes of evaluating the Transaction and who are informed by you of the confidential nature of the Information and who agree to be bound by the terms of this Agreement; (b) as may be required by applicable law or at the request of any regulatory or supervisory authority having jurisdiction over you or at the request of any rating agency for purposes of establishing or maintaining your debt ratings, provided that you request confidential treatment thereof to the extent permitted by law; or (c) with the prior written consent of the Company and [Transferor].	
 
3.	The reference to the term “Information” contained in paragraphs 1 and 2 shall not include such portions thereof which (a) are or become available to the public through no fault or action by you or your Representatives or (b) are or hereafter become available to you on a non-confidential basis from a source other than the Company, [Transferor] or their respective Representatives, which source, to the best of your knowledge, is not	
 
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 	prohibited from disclosing such Information to you by a contractual, legal or fiduciary obligation to the Company or [Transferor].	
 
4.	In the event that you or any of your Representatives becomes legally compelled to disclose any of the Information or the existence of the Transaction, you will, to the extent permitted by law provide the Company and [Transferor] with prompt notice so that they may seek a protective order or other appropriate remedy. In the event that such protective order or remedy is not obtained, you shall furnish only that portion of the Information that is legally required and shall disclose such Information in a manner reasonably designed to preserve its confidential nature.	
 
5.	In the event that discussions with you concerning the Transaction are discontinued or your participation in the Transaction is otherwise terminated, you shall redeliver to [Transferor] any Information that was furnished to you by or on behalf of the Company or the Transferor or shall certify to the Company and [Transferor] that you have destroyed all such Information.	
 
6.	You agree to be responsible for any breach of this Agreement by you or your Representatives.	
 
7.	You acknowledge that money damages and other remedies at law may be inadequate to protect against breach of this Agreement and you hereby agree to the granting of injunctive or other equitable relief without proof of actual damages.	
 
8.	It is further understood and agreed that no failure or delay by the Company or [Transferor] in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof.	
 
9.	This Agreement shall be governed by and construed in accordance with the laws of England and Wales.	
 
If you are prepared to accept the Information on the foregoing terms, please countersign this Agreement in the space provided below and deliver it via telecopier (with the executed original to follow by next-day courier) to:
 
[Transferor]
 
[address]
 
Attention:
 
Telecopier:
 
Your acceptance of this Agreement shall be effective upon our receipt of such fax from you.
 
Yours faithfully,
 
[TRANSFEROR]
 
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B Y :   [            ]	 	[ACCEPTED AND AGREED]	  	 	
Title: [                    ]	 	As at the date hereof	  	 	
			
 	 	[Name of Transferee]	  	 	
			
 	 	By: [            ]	  	 	
			
 	 	Title: [            ]	  	 	
 
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SCHEDULE 8
 
P RICING S CHEDULE
 
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SCHEDULE 9
 
E XISTING L IENS
 
1.	Lien arising under a Subordination Agreement dated as of 27 October 1998 among ACE US Holdings, Inc., ACE Limited and The Chase Manhattan Bank encumbering ACE US Holdings, Inc.’s rights under the Subordinated Loan Agreement dated as of 27 October 1998 among ACE US Holdings, Inc., ACE Bermuda Insurance Ltd. and United States Trust Company of New York, as trustee under the Indenture dated 17 October 1998 of ACE US Holdings, Inc.	
 
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SCHEDULE 10
 
F ORM OF C HARGE A GREEMENT
 
Name of each Chargor and the address of its registered or principal office:
 
(1)	ACE Limited	
ACE Global Headquarters
17 Woodbourne Avenue
Hamilton HM08
Bermuda
 
Facsimile no: +441 296 0087
 
(2)	ACE Bermuda Insurance Ltd.	
ACE Global Headquarters
17 Woodbourne Avenue
Hamilton HM08
Bermuda
 
Facsimile no: +441 296 0087
 
((1) and (2) together the “ Chargors ” and each a “ Chargor ”)
 
Name of Custodian and address of its registered or principal office:
 
[            ]
 
Facsimile no: [            ] (the “ Custodian ”)
 
Date: [ Date ]
 
To:	CITIBANK INTERNATIONAL plc (the “ Security Trustee ”)	
336 Strand
London WC2R 1HB
 
The terms used in this Charge Agreement are defined in Clause 23 ( Payments ).
 
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It is a condition precedent to the obligations of the Banks under the Agreement that the Chargors shall have granted the security interests and undertaken the obligations contemplated by this Charge Agreement.
 
NOW, THEREFORE , in consideration of the premises and in order to induce the Banks to issue Letters of Credit under the Agreement and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, each Chargor hereby agrees with the Security Trustee as follows:
 
1.	PAYMENT AND DISCHARGE	
 
We shall pay and discharge in full all of the Obligations at the times and in the manner provided for in the Agreements.
 
2.	CHARGE	
 
2.1	Each Chargor hereby pledges and assigns to the Security Trustee, and hereby grants to the Security Trustee a security interest in, its portion of the Charged Portfolio as collateral security for the prompt payment or performance in full when due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including the payment of amounts that would become due but for the operation of the automatic stay under Section 362(a) of the United States Bankruptcy Code, 11 U.S.C. 362(a)), of all Obligations.	
 
2.2	Notwithstanding any provision of the Agreement to the contrary, the Security Trustee’s entitlement and recourse against the Charged Portfolio under this Charge Agreement shall not in any circumstances exceed an amount equal to the Required Value.	
 
2.3	Each Chargor shall deposit all of its portion of the Charged Portfolio in the accounts comprising the Charged Portfolio and held with the Custodian.	
 
3.	CUSTODIAN’S UNDERTAKING	
 
We undertake to deliver (or procure the delivery of) the Custodian’s Undertaking to you forthwith upon the execution of this Charge Agreement.
 
4.	REQUIRED VALUE	
 
We undertake to ensure that with effect from the date of this Charge Agreement and at all times thereafter until the Obligations are discharged in full:
 
4.1	the market value of the Charged Portfolio (including the accounts and securities of both Chargors) shall not be less than the Required Value and without limitation from time to time to pay or transfer to the Custodian (by way of increment to the Charged Portfolio) money and/or securities so that the market value of each Chargor’s portion of the Charged Portfolio (including the accounts and securities of both Chargors) shall not be less than the Required Value; and	
 
4.2	each component part of the Charged Portfolio shall satisfy the Security Trustee’s Requirements applicable thereto.	
 
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5.	FURTHER ASSURANCE	
 
Each Chargor agrees that from time to time, at the expense of such Chargor, such Chargor shall promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Security Trustee may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Security Trustee or the Custodian to exercise and enforce its rights and remedies hereunder or under the Custodian’s Undertaking with respect to any part of such Chargor’s portion of the Charged Portfolio. Without limiting the generality of the foregoing, each Chargor shall: (a) execute and file such assignments, financing or continuation statements, or amendments thereto, and such other instruments or notices, as may reasonably be necessary or desirable, or as the Security Trustee may request, in order to perfect and preserve the security interests granted or purported to be granted hereby, and (b) at the Security Trustee’s request, appear in and defend any action or proceeding that may affect such Chargor’s title to or the Security Trustee’s security interest in all or any part of such Chargor’s portion of the Charged Portfolio.
 
6.	REPRESENTATIONS AND WARRANTIES	
 
Each Chargor hereby represents and warrants to you and undertakes that:
 
6.1	it is (or at the time of transfer thereof to the Custodian will be) the beneficial owner of its portion of the Charged Portfolio from time to time transferred by it to the Custodian, as agent for the Security Trustee, free and clear of any lien other than Permitted Liens in accordance with the undertaking contained in Clause 7 ( Negative Pledge ) hereof, except for the security interest created by this Charge Agreement. The pledge and assignment of the Charged Portfolio pursuant to this Charge Agreement and the Custodian’s Undertaking creates a valid security interest in its portion of the Charged Portfolio securing the payment of the Obligations. Assuming execution and due performance of the Custodian’s Undertaking by the Custodian, the security interest in the Charged Portfolio is or will be perfected and senior in priority to any other lien therein;	
 
6.2	subject to paragraph 11 of the Custodian’s Undertaking, it has not sold or agreed to sell or otherwise disposed of or agreed to dispose of the benefit of its portion of the Charged Portfolio or any part thereof;	
 
6.3	it has and will at all times have the necessary power to enable it to enter into and perform the obligations expressed to be assumed by it under this Charge Agreement;	
 
6.4	this Charge Agreement constitutes its legal, valid, binding and enforceable obligation (subject to bankruptcy, insolvency or other laws of general application affecting the enforcement of creditors’ rights, the application of equitable principles and the non-availability of the equitable remedies of specific performance or injunctive relief) and is a security over its portion of the Charged Portfolio and every part thereof effective in accordance with its terms; and	
 
6.5	all necessary authorisations to enable or entitle it to enter into this Charge Agreement have been obtained and are in full force and effect and will remain in full force and effect	
 
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 	at all times during the subsistence of the security hereby constituted and no authorisation, approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for either (a) the grant by it of the security interest granted hereby, (b) the execution, delivery or performance of this Charge Agreement or the Custodian’s Undertaking by it, or (c) the perfection of or the exercise by Security Trustee or the Custodian of its rights and remedies hereunder or under the Custodian’s Undertaking.	
 
6.6	All information heretofore, herein or hereafter supplied to the Security Trustee or the Custodian by or on behalf of it with respect to its portion of the Charged Portfolio is accurate and complete in all material respects.	
 
7.	NEGATIVE PLEDGE	
 
Each Chargor undertakes with you that at no time during the subsistence of the security interest granted hereby will it, otherwise than:
 
7.1	in your favour, or	
 
7.2	with your prior written consent and in accordance with and subject to any conditions which you may attach to such consent,	
 
create, grant, extend or permit to subsist any lien, security interest or other encumbrance on or over its portion of the Charged Portfolio or any part thereof, other than Permitted Liens. The foregoing prohibition shall apply not only to any lien, security interest or other encumbrance which rank or purport to rank in point of security in priority to the security hereby constituted but also to any lien, security interest or other encumbrance which rank or purport to rank pari passu therewith or thereafter.
 
8.	POWER OF SALE	
 
8.1	Upon the occurrence of an Event of Default which is continuing and has not been remedied or waived under the Agreement, the Security Trustee may instruct the Custodian to (a) sell or redeem any of the Charged Portfolio, (b) transfer any or all of the Charged Portfolio constituting cash to any account designated by the Security Trustee, including an account or accounts established in the Security Trustee’s name (whether with the Security Trustee or the Custodian or otherwise), (c) register title to all or any portion of the Charged Portfolio in any name specified by the Security Trustee, including the name of the Security Trustee or any of its nominees or agents, without reference to any interest of the Chargors, or (d) otherwise deal with the Charged Portfolio as directed by the Security Trustee.	
 
8.2	Upon the occurrence of an Event of Default which is continuing and has not been remedied or waived under the Agreement, the Security Trustee may exercise in respect of the Charged Portfolio, in addition to all other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the Uniform Commercial Code as in effect in any relevant jurisdiction (the “ UCC ”) (whether or not the UCC applies to the affected Charged Portfolio), and the Security Trustee may also in its sole discretion sell the Charged Portfolio or any part thereof in one or more parcels at public or private sale, at any exchange or broker’s board	
 
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 	or at any of the Security Trustee’s offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as the Security Trustee may deem commercially reasonable, irrespective of the impact of any such sales on the market price of the Charged Portfolio. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of the Chargors, and each Chargor hereby waives (to the extent permitted by applicable law) all rights of redemption, stay or appraisal which it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. The Security Trustee shall not be obligated to make any sale of Charged Portfolio regardless of notice of sale having been given. The Security Trustee may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned.	
 
8.3	Each Chargor hereby agrees that the property included in the Charged Portfolio is of a type customarily sold on recognized markets and, accordingly, that no notice to any person is required before any sale of any of the Charged Portfolio pursuant to the terms of this Charge Agreement; provided that , without prejudice to the foregoing, each Chargor agrees that, to the extent notice of any such sale shall be required by law, at least ten days’ notice to it of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification.	
 
8.4	If the proceeds of any sale or other disposition of the Charged Portfolio are insufficient to pay all the Obligations, the Chargors shall be liable for the deficiency and the fees of any attorneys employed by the Security Trustee to collect such deficiency.	
 
8.5	Anything contained herein to the contrary notwithstanding, any of the Charged Portfolio consisting of a deposit or an other obligation of the Security Trustee, whether credited to the Charged Portfolio or otherwise, shall be subject to the Security Trustee’s rights of set-off.	
 
9.	POWER OF ATTORNEY	
 
9.1	Each Chargor hereby irrevocably appoints the Security Trustee as its attorney-in-fact, with full authority in the place and stead of such Chargor and in the name of such Chargor, the Security Trustee or otherwise, from time to time in the Security Trustee’s discretion upon the occurrence of an Event of Default which is continuing and has not been remedied or waived under the Agreement, to take any action and execute and deliver, any instrument that the Security Trustee may reasonably deem necessary or advisable to accomplish the purposes of this Charge Agreement or the Custodian’s Undertaking, including, without limitation, executing instruments of transfer (or completing partially completed instruments executed by us), assignments or notices, or exercising any of the rights and powers from time to time attaching to any part of such Chargor’s portion of the Charged Portfolio. Each Chargor hereby undertakes to ratify and confirm all things done and documents executed by the Security Trustee in the exercise of the power of attorney conferred by this Clause.	
 
9.2	If the Chargor fails to perform any agreement contained herein, the Security Trustee may itself perform, or cause performance of, such agreement, and the expenses of the Security	
 
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 	Trustee incurred in connection therewith shall be payable by the Chargor under Clause 14 ( Exculpation, Costs, Charges and Expenses ).	
 
10.	EFFECTIVENESS OF SECURITY	
 
10.1	This Charge Agreement shall be in addition to and shall be independent of every other security which you may at any time hold for any of the Obligations. No prior security held by you over the whole or any part of the Charged Portfolio shall merge in the security hereby constituted.	
 
10.2	Nothing contained in this Charge Agreement is intended to, or shall operate so as to, prejudice or affect any bill, note, guarantee, mortgage, pledge, charge or other security of any kind whatsoever which you may have for the Obligations or any of them or any right, remedy or privilege of yours thereunder.	
 
11.	REMEDIES, TIME OR INDULGENCE	
 
11.1	The rights, powers and remedies provided by this Charge Agreement are cumulative and are not, nor are they to be construed as, exclusive of any right of set-off or other rights, powers and remedies provided by law.	
 
11.2	No failure on your part to exercise, or delay on your part in exercising, any of the rights, powers and remedies provided by this Charge Agreement or by law (each a “ Security Trustee Right ”) shall operate as a waiver thereof, nor shall any single or partial waiver of a Security Trustee Right preclude any further or other exercise of that Security Trustee Right or the exercise of any other Security Trustee Right.	
 
11.3	You may in your discretion grant time or other indulgence or make any other arrangement, variation or release with any person(s) not party hereto (irrespective of whether such person(s) is/are jointly liable with us) in respect of the Obligations or in any way affecting or concerning them or any of them or in respect of any security for the Obligations or any of them, without in any such case prejudicing, affecting or impairing the security hereby constituted, or any Security Trustee Right or the exercise of the same, or any indebtedness or other liability owed by either of us to you.	
 
12.	ACCOUNTS	
 
All monies received, recovered or realised by you under this Charge Agreement (including the proceeds of any conversion of currency) may in your discretion be credited to any suspense or impersonal account and may be held in such account for so long as you shall think fit (with interest accruing thereon at such rate, if any, as you may deem fit) pending their application from time to time (as you shall be entitled to do in your discretion) in or towards the discharge of any of the Obligations.
 
13.	CURRENCY	
 
13.1	For the purpose of or pending the discharge of any of the Obligations you may convert any monies received, recovered or realised or subject to application by you under this Charge Agreement (including the proceeds of any previous conversion under this Clause) from their existing currency of denomination into the currency of denomination	
 
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 	of such Obligations as you may think fit, and any such conversion shall be effected at your then prevailing spot rate of exchange for obtaining such other currency with the existing currency.	
 
13.2	References herein to any currency extend to any funds of that currency and for the avoidance of doubt funds of one currency may be converted into different funds of the same currency.	
 
14.	EXCULPATION, COSTS, CHARGES AND EXPENSES	
 
14.1	The powers conferred on the Security Trustee hereunder are solely to protect its interest in the Charged Portfolio and shall not impose any duty upon it to exercise any such powers. Except for the exercise of reasonable care in the custody of any portion of the Charged Portfolio in its possession and the accounting for moneys actually received by it hereunder, the Security Trustee shall have no duty as to any Charged Portfolio, it being understood that the Security Trustee shall have no responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relating to any Charged Portfolio, whether or not the Security Trustee has or is deemed to have knowledge of such matters, (b) taking any necessary steps (other than steps taken in accordance with the standard of care set forth above to maintain possession of the Charged Portfolio) to preserve rights against any parties with respect to any Charged Portfolio, (c) taking any necessary steps to collect or realise upon the Obligations or any guarantee therefor, or any part thereof, or any of the Charged Portfolio, (d) initiating any action to protect the Charged Portfolio against the possibility of a decline in market value, (e) any loss resulting from investments made, held or sold, or (f) determining (i) the correctness of any statement or calculation made by a Chargor in any written instructions or (ii) whether any transfer to or from the Charged Portfolio is proper. The Security Trustee shall be deemed to have exercised reasonable care in the custody and preservation of Charged Portfolio in its possession if such Charged Portfolio is accorded treatment substantially equal to that which the Security Trustee accords its own property of like kind. In addition to the foregoing and without limiting the generality thereof, the Security Trustee shall not be responsible for any actions or omissions of Custodian.	
 
14.2	Each Chargor agrees to indemnify the Security Trustee from and against any and all claims, losses and liabilities in any way relating to, growing out of or resulting from this Charge Agreement and the transactions contemplated hereby (including enforcement of this Charge Agreement), except to the extent such claims, losses or liabilities result from the Security Trustee’s gross negligence or wilful misconduct as finally determined by a court of competent jurisdiction.	
 
14.3	Each Chargor shall pay to the Security Trustee upon demand the amount of any and all costs and expenses, including the reasonable fees and expenses of its counsel and of any experts and agents, that the Securities Trustee may incur in connection with (a) the administration of this Charge Agreement, (b) the custody, preservation, use or operation of, or the sale of, collection from, or other realisation upon, any of the Charged Portfolio, (c) the exercise or enforcement of any of the rights of the Security Trustee hereunder, or (d) the failure by a Chargor to perform or observe any of the provisions hereof on a full	
 
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 	indemnity basis together with interest from the date of the same having been incurred (or from the date of demand if such demand is made after unreasonable delay) to the date of payment at such rate or rates as you may determine in relation to the currency involved.	
 
15.	CONTINUING SECURITY INTEREST	
 
This Charge Agreement shall create a continuing security interest in the Charged Portfolio and shall (a) remain in full force and effect until the indefeasible payment in full of the Obligations and the cancellation or expiration of all outstanding Letters of Credit, (b) be binding upon each Chargor, its successors and assigns, and (c) inure, together with the rights and remedies of the Security Trustee hereunder, to the benefit of Security Trustee and the Banks and their respective successors, transferees and assigns. Upon the indefeasible payment in full of all Obligations and the cancellation or expiration of all outstanding Letters of Credit, the security interest granted hereby shall terminate and all rights to the Charged Portfolio shall revert to the respective Chargor so long as the Custodian’s fees, expenses, and advancements have first been paid or reimbursed in full. Upon any such termination the Security Trustee shall, at the Chargors’ expense, execute and deliver to the Chargors such documents as the Chargors shall reasonably request to evidence such termination and each Chargor shall be entitled to the return, upon its request and at its expense, against receipt and without recourse to the Security Trustee, of such of its Charged Portfolio as shall not have been sold or otherwise applied pursuant to the terms hereof.
 
16.	AMENDMENTS	
 
No amendment or waiver of any provision of this Charge Agreement, or consent to any departure by a Chargor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Security Trustee, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it was given. 
 
17.	LAW AND JURISDICTION	
 
17.1	THIS AGREEMENT SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE EXTENT THAT THE UCC PROVIDES THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK.	
 
17.2	ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST THE CHARGORS ARISING OUT OF OR RELATING TO THIS CHARGE AGREEMENT MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK, AND BY EXECUTION AND DELIVERY OF THIS CHARGE AGREEMENT EACH CHARGOR ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND WAIVES ANY DEFENSE	
 
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 	OF FORUM NON CONVENIENS AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS CHARGE AGREEMENT. Each Chargor hereby agrees that service of all process in any such proceeding in any such court may be made by registered or certified mail, return receipt requested, to such Chargor at its address as provided pursuant to Clause 19 ( Notices ), such service being hereby acknowledged by each Chargor to be sufficient for personal jurisdiction in any action against such Chargor in any such court and to be otherwise effective and binding service in every respect. Nothing herein shall affect the right to serve process in any other manner permitted by law or shall limit the right of the Security Trustee to bring proceedings against a Chargor in the courts of any other jurisdiction.	
 
17.3	EACH CHARGOR AND THE SECURITY TRUSTEE HEREBY AGREE TO WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS CHARGE AGREEMENT OR THE CUSTODIAN’S UNDERTAKING. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of this transaction, including contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. Each Chargor and the Security Trustee acknowledge that this waiver is a material inducement for such Chargor and the Security Trustee to enter into a business relationship, that each Chargor and the Security Trustee have already relied on this waiver in entering into this Charge Agreement and that each will continue to rely on this waiver in their related future dealings. Each Chargor and the Security Trustee further warrant and represents that it has reviewed this waiver with its legal counsel, and that it knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS CHARGE AGREEMENT OR THE CUSTODIAN’S UNDERTAKING. In the event of litigation, this Charge Agreement may be filed as a written consent to a trial by the court.	
 
18.	PROVISIONS SEVERABLE	
 
Each of the provisions contained in this Charge Agreement shall be severable and distinct from one another and if at any time any one or more of such provisions is or becomes invalid, illegal or unenforceable, the validity, legality and enforceability of each of the remaining provisions of this Charge Agreement shall not in any way be affected, prejudiced or impaired thereby.
 
19.	NOTICES	
 
All notices, requests and demands to or upon the Security Trustee or either Chargor hereunder shall be effected in the manner provided for in Clause 31 ( Remedies and Waivers, Partial Invalidity ) of the Agreement.
 
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20.	THE SECURITY TRUSTEE’S DISCRETIONS	
 
Any liberty or power which may be exercised or any determination which may be made hereunder by you may be exercised or made in your absolute and unfettered discretion and you shall not be under any obligation to give reasons therefor, provided that the Security Trustee will so act in good faith and in accordance with Clause 26 ( The Agent, The Arrangers and The Banks ) of the Agreement).
 
21.	ASSIGNMENT	
 
You shall have a full and unfettered right to assign the whole or any part of the benefit of this Charge Agreement to any Person who is appointed as your successor pursuant to Clause 26 ( The Agent, The Arrangers and The Banks ) of the Agreement and the words “you” and “your” and the expression “the Security Trustee” wherever used herein shall be deemed to include your assignees and other successors, whether immediate or derivative, who shall be entitled to enforce and proceed upon this Charge Agreement in the same manner as if named herein. You shall be entitled to impart any information concerning us to any such assignee or other successor or any participant or proposed assignee, successor or participant subject to such person executing and delivering a confidentiality undertaking substantially in the form set out in Schedule 7 ( Form of Confidentiality Undertaking ) of the Agreement.
 
22.	COUNTERPARTS	
 
This Charge Agreement may be executed in one or more counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument; signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document.
 
23.	INTERPRETATION	
 
23.1	Terms not otherwise defined herein shall bear the meaning ascribed to them in the Agreement.	
 
In this Charge Agreement:
 
“ Agreement ” means the £380,000,000 letter of credit facility agreement originally dated 19 November 1999 (as (a) amended and restated pursuant to the First Restatement Agreement, (b) amended pursuant to the Amendment Agreement, (c) amended and restated pursuant to the Second Restatement Agreement and (d) amended and restated pursuant to the Fourth Amendment and Restatement Agreement)and made between ACE Limited as account party, ACE Bermuda Insurance Ltd. as guarantor, Citigroup Global Markets Limited as lead arranger, Barclays Bank PLC as arranger, ING Bank, N.V., London Branch as co-arranger, Citibank International plc as agent and security trustee and the financial institutions defined therein as banks;
 
- 105 -

“ Charged Portfolio ” means at any time all of each Chargor’s right, title and interest in any and all assets (to include without limitation any and all securities) now or hereafter carried in or credited to or held for the benefit of:
 
 	(a)	the account (designated, at the date hereof, with account number [    ]) maintained by the Custodian in the name of ACE Limited; and	
 
 	(b)	the account (designated, at the date hereof, with account number [    ]) maintained by the Custodian in the name of ACE Bermuda Insurance Ltd.	
 
“ Custodian ” means the above-mentioned Custodian or such other person as the Chargors and the Security Trustee may agree to in writing from time to time;
 
“ Custodian’s Undertaking ” means an undertaking in the form set out in the Second Schedule duly executed by the Custodian as the same may be amended or substituted with the prior written consent of the Security Trustee from time to time;
 
“ Obligations ” means any and all of the present or future, actual or contingent, obligations of the Chargors to the Finance Parties hereunder or under the Agreement;
 
“ Permitted Lien ” means any Lien described in paragraph (a) of the definition of “ Permitted Lien ” in the Agreement or in sub-clause 15.9.1 of Clause 15.9 ( Lien ) of the Agreement;
 
“ Required Value ” means US$100 or, if Pricing Level V applies, such other amount as is determined in accordance with the Agreement and notified from time to time by the Security Trustee to the Custodian; and
 
“ Security Trustee’s Requirements ” means the Security Trustee’s requirements in respect of the component parts of the Charged Portfolio all as set forth in Part B of the Schedule to the Custodian’s Undertaking or as may be agreed from time to time by the Security Trustee and ACE Limited on behalf of the Chargors and notified to the Custodian ( provided that the Security Trustee’s Requirements may be adjusted by the Security Trustee without the agreement of the Chargors (but after consultation in good faith with ACE Limited on behalf of the Chargors) where an adjustment is necessary to ensure that the Banks continue to receive the same regulatory treatment in respect of their Outstandings as they receive at the date hereof and Provided further that, in the event that the “financial strength rating” of either or both of the Chargors as determined by Standard and Poor’s Rating Services reaches BBB+ or less, the Security Trustee’s Requirements shall be amended without the prior agreement of the Chargors by the additional requirement that any fixed income securities comprising the Charged Portfolio issued by or fully and explicitly guaranteed by the central government of an OECD (Organisation for Economic Co-operation and Development) country shall only satisfy the Security Trustee’s Requirements if such country is rated AA or better by Standard and Poor’s Rating Services or AA equivalent or better by any other recognised rating service).
 
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23.2	Any reference in this Charge Agreement to:-	
 
a “ business day ” shall be construed as a reference to a day (other than a Saturday or Sunday) on which banks are generally open for business in London, Bermuda, and the jurisdiction in which the Custodian’s principal or head office is located;
 
a “ clearance system ” means Clearstream, the Euro-Clear System, the First Chicago Clearing Centre, The Depository Trust Company and such other clearance system as may from time to time be used in connection with transactions relating to any securities, and any depository for any of the foregoing;
 
a “ Clause ” is, unless otherwise stated, a reference to a Clause hereof;
 
a “ person ” shall be construed as a reference to any person, firm, company, corporation, government, state or agency of a state or any association or partnership (whether or not having separate legal personality) of two or more of the foregoing;
 
a “ Schedule ” is, unless otherwise stated, a reference to a schedule hereto; and
 
“ securities ” shall be construed as a reference to bonds, debentures, notes, stocks, shares or other securities and all moneys, rights or property which may at any time accrue or be offered (whether by way of bonus, redemption, preference, option or otherwise) in respect of any of the foregoing (and without limitation, shall include any of the foregoing not constituted, evidenced or represented by a certificate or other document but by an entry in the books or other permanent records of the issuer, a trustee or other fiduciary thereof, or a clearance system).
 
23.3	The obligations of the Chargors hereunder shall be joint and several.	
 
23.4	Any reference in this Charge Agreement to another agreement, arrangement or undertaking shall be construed as a reference to such other agreement, arrangement or undertaking as the same may have been, or may from time to time be, amended, varied, novated or supplemented.	
 
23.5	Clause and Schedule headings are for ease of reference only.	
 
The COMMON or CORPORATE SEAL of
 
ACE LIMITED was hereto affixed
 
to this DEED in the presence of:
 
Director
 
Secretary/Director
 
THE COMMON or CORPORATE SEAL of
 
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ACE BERMUDA INSURANCE LTD was hereto affixed
 
to this DEED in the presence of:
 
Director
 
Secretary/Director
 
ACKNOWLEDGED AND AGREED:
 
CITIBANK INTERNATIONAL PLC
As Security Trustee
 
By:
 
Title:
 
THE FIRST SCHEDULE
 
NOTICE OF CHARGE OF CHARGED PORTFOLIO
 
To: [        ]
 
*                                                  
 
(*Contact name at the Custodian)
 
We refer to (i) the Charge Agreement (the “ Charge Agreement ”) dated [            ] entered into by us in favour of Citibank International plc of 336 Strand, London WC2R 1HB (the “ Security Trustee ”), a copy of which is annexed hereto and (ii) the Custodian’s Undertaking in the form of the Second Schedule to the Charge Agreement. Terms defined in the Charge Agreement shall have the same meanings herein.
 
Notice is hereby given by us to you that, by and pursuant to the Charge Agreement, we have charged in favour of the Security Trustee all of the Charged Portfolio.
 
We hereby:
 
(a)	confirm that references to the “Charged Portfolio” are to all the securities and proceeds received from time to time in respect of such securities, which are credited to (i) the account (designated with account number [    ]) in the name of ACE Limited and (ii) the account (designated with account number [    ]) in the name of ACE Bermuda Insurance Ltd., maintained by you in accordance with the terms of our custodian arrangement with you;	
 
(b)	request that you execute the attached Custodian’s Undertaking in favour of the Security Trustee and comply with any entitlement orders and instructions, received by you from	
 
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 	the Security Trustee, to deliver, transfer or assign the securities and monies (together with all certificates and other instruments evidencing title thereto) in the Charged Portfolio [and any entitlement orders or other instructions that you receive from the Security Trustee with respect to the Charged Portfolio shall constitute “Proper Instructions” for the purposes of the Custodian Agreement between us]*;	
 
(c)	confirm that you shall not be liable to us for any action taken or omitted to be taken by you in connection with the Custodian’s Undertaking save in the case of wilful misconduct or gross negligence (and, to the maximum extent permitted by law, shall under no circumstances be liable for indirect, special, punitive or consequential damages);	
 
(d)	indemnify you against any liabilities, costs, claims and expenses (including reasonable legal fees (whether incurred with external or internal legal advisors)) arising from or in connection with the Custodian’s Undertaking or the Charged Portfolio, provided that nothing contained herein shall require that you be indemnified for your wilful misconduct or gross negligence;	
 
[(e)/(f)] 	[notwithstanding the terms of Section IX of the Custodian Agreement dated June 7, 2001, you shall be entitled to debit any of our accounts maintained by you, other than the account (designated with account number []) in the name of ACE Limited and the account (designated with account number [    ]) in the name of ACE Bermuda Insurance Ltd. (hereinafter the “ Charged Accounts ”) if we require you, your affiliates, subsidiaries or agents to advance cash or investments to, for or on behalf of the Charged Portfolio, for any purpose (including but not limited to securities settlements, foreign exchange contracts and assumed settlement) or in the event that you, your subcustodians or their respective nominees shall incur or be assessed any taxes (except your income taxes or those of any of your subcustodians), charges, expenses, assessment, claims or liabilities in connection with the performance of the Custodian’s Undertaking except as may arise from your or your subcustodians’ or their respective nominees’ own gross negligent action, gross negligent failure to act or wilful misconduct. Any of our property at any time held by you (other than the Charged Portfolio) shall be security therefore and should we fail to repay you promptly, upon ten (10) days’ written notice to us, you (save as otherwise provided above) shall be entitled to utilise available cash in any of our accounts (other than the Charged Accounts) maintained by you and to dispose of assets of any of our accounts (other than the Charged Accounts) maintained by you to the extent necessary to obtain reimbursement.]*	
 
[(f)/(g)] 	confirm that (except as may raise from your own gross negligence, bad faith, or wilful misconduct or the gross negligence, bad faith, or wilful misconduct of a subcustodian or agent) you shall be without liability to us for any loss, liability, claim or expense resulting from or caused by events or circumstances beyond your reasonable control, including, without limitation, the interruption, suspension or restriction of trading on or the closure of any securities markets, power or other mechanical or technological failures or interruptions not within your reasonable control, or computer viruses or communications disruptions, work stoppages, natural disasters, or other similar events or acts.	
 
*	To be inserted if State Bank and Trust Company are appointed Custodian.	
 
*	To be inserted if State Bank and Trust Company are appointed Custodian.	
 
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This notice shall be governed by and construed in accordance with the laws of the State of New York.
 
Yours faithfully,

For and on behalf of
ACE Limited	 	 	 	 	
				
 	 	 	 	Dated	 	 	

 
							
For and on behalf of
ACE Bermuda Insurance Ltd.	 	 	 	 	
				
 	 	 	 	Dated	 	 	

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THE SECOND SCHEDULE
 
Custodian’s Undertaking
 
Name of Custodian and address of its registered or principal office:
 
[    ]
 
Attn: [    ]
 
Facsimile no: [    ] (the “ Custodian ”)
 
Name of each Chargor and the address of its registered or principal office:
 
ACE Limited
ACE Global Headquarters
17 Woodbourne Avenue
Hamilton HM08
Bermuda
 
Facsimile no: +441 296 0087
 
ACE Bermuda Insurance Ltd.
ACE Global Headquarters
17 Woodbourne Avenue
Hamilton HM08
Bermuda
 
Facsimile no: +441 296 0087
((1) and (2) together the “ Chargors ” and each a “ Chargor ” )
 
Name of Security Trustee and address of its registered or principal office:
 
Citibank International plc
336 Strand
London WC2R 1HB
 
Attn: Loans Agency
 
Facsimile no: +44 20 7500 4482 (the “ Security Trustee ”)
 
Date of Charge Agreement: [ Date ]
 
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To: the Security Trustee
 
We, the Custodian, refer to the afore-mentioned Charge Agreement (the “ Charge Agreement ”) between the Chargors and the Security Trustee. Save where the context otherwise requires, terms defined in the Charge Agreement shall have the same meanings herein.
 
In consideration of the Security Trustee and the other Finance Parties entering into the Agreement and issuing Letters of Credit thereunder and pursuant to instructions received by the Custodian from the Chargors, the Custodian hereby represents and irrevocably undertakes and agrees to and with the Security Trustee as follows:
 
1.	The Custodian acknowledges the security interest granted by each Chargor in favor of Security Trustee in the Charged Portfolio.	
 
2.	Anything contained herein to the contrary notwithstanding, the Custodian will, without further consent by any Chargor (a) comply with Entitlement Orders originated by the Security Trustee with respect to the Charged Portfolio and any Security Entitlements carried therein, (b) transfer, sell or redeem any of the Charged Portfolio as directed by the Security Trustee, (c) transfer any or all of the Charged Portfolio to any account or accounts designated by the Security Trustee, including an account established in the Security Trustee’s name (whether at the Security Trustee or the Custodian or otherwise), (d) register title to any of the Charged Portfolio in any name specified by the Security Trustee, including the name of the Security Trustee or any of its nominees or agents, without reference to any interest of either Chargor, or (e) otherwise deal with the Charged Portfolio as directed by the Security Trustee.	
 
3.	The Custodian hereby further acknowledges that it holds the Charged Portfolio, all Security Entitlements carried therein, and all other collateral held by the Custodian under this Custodian’s Undertaking or the Charge Agreement, as custodian for the benefit of, and subject to the control of, the Security Trustee. The Custodian shall, by book entry or otherwise, indicate that the Charged Portfolio, and all Security Entitlements carried therein, are subject to the control of the Security Trustee as provided in Section 2.	
 
4.	The Custodian hereby represents and warrants (a) that the records of Custodian show that each Chargor is the sole owner of such Chargor’s portion of the Charged Portfolio, (b) that the Custodian has not been served with any notice of levy or received any notice of any security interest in or other claim to the Charged Portfolio, or any portion of the Charged Portfolio, other than Security Trustee’s claim pursuant to the Charge Agreement, (c) that the Custodian is not presently obliged to accept any entitlement order from any person with respect to the Charged Portfolio, except for entitlement orders that the Custodian is obligated to accept from the Security Trustee under this undertaking and entitlement orders that the Custodian, subject to the provisions of Section 10 below, is obligated to accept from the Chargors, (d) that the Custodian has all necessary corporate power and authority to enter into and perform this undertaking, (e) that the execution, delivery and performance of this undertaking by the Custodian have been duly authorized by all necessary corporate action on the part of the Custodian, (f) that the Custodian is a “securities intermediary” (as that term is defined in Section 8-102(a)(14) of the Uniform Commercial Code as in effect in the state of New York (the “ Code ”)) and is acting in such capacity with respect to the Charged Portfolio and (g) that the Custodian	
 
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 	is not a “clearing corporation” (as that term is defined in Section 8-102(a)(5) of the Code).	
 
5.	Without the prior written consent of the Security Trustee, the Custodian will not enter into any agreement by which the Custodian agrees to comply with any entitlement order of any person other than the Security Trustee or, subject to the provisions of Section 10 below, the Chargors, with respect to any portion or all of the Charged Portfolio. The Custodian (a) shall promptly notify the Security Trustee if any person requests the Custodian to enter into any such agreement or otherwise assert or seeks to assert a lien, encumbrance or adverse claim against any portion or all of the Charged Portfolio and (b) will not acknowledge any limitation on the right of Security Trustee to originate “entitlement orders” (as such term is defined in Section 8-102(8) of the Code, “ Entitlement Orders ”) with respect to or direct the transfer of the Charged Portfolio or any portion thereof.	
 
6.	The Custodian hereby agrees that: (a) each account comprising the Charged Portfolio established by the Custodian (each, a “ Charged Account ”) is and will be maintained as a “securities account” (within the meaning of Section 8-501 of the Code); (b) any credit balances or other property, other than cash, credited to, or held for the credit of, any such Charged Account shall be treated as “financial assets” (within the meaning of Section 8-102(a)(9) of the Code, “ Financial Assets ”) and (c) each Chargor is an “entitlement holder” (within the meaning of Section 8-102(a)(7) of the Code) in respect of the Financial Assets credited to such Charged Account and with respect to such Charged Account and Custodian shall so note in its records pertaining to such Financial Assets and each Charged Account; and (d) all Financial Assets in registered form or payable to or to the order of and credited to any such Charged Account shall be registered in the name of, payable to or to the order of, or specially endorsed to, the Custodian or in blank, or credited to another securities account maintained in the name of the Custodian, and in no case will any Financial Asset credited to any such Charged Account be registered in the name of, payable to or to the order of, or endorsed to, either Chargor except to the extent the foregoing have been subsequently endorsed by such Chargor to the Custodian or in blank.	
 
7.	The Custodian will deliver to the Security Trustee within three business days of the Security Trustee’s request therefor an up-to-date statement or statements of the Charged Portfolio, each component thereof and the aggregate value thereof.	
 
8.	The Custodian will in any event deliver to the Security Trustee not later than the tenth business day of each calendar month a statement or statements, made up as at the close of business on the last business day of the preceding calendar month, of the Charged Portfolio, each component thereof and the aggregate value thereof.	
 
9.	If trades of, or any transactions relating to, a component part of the Charged Portfolio are processed by the Custodian on any Business Day, the Custodian shall notify the Security Trustee as soon as possible (and in any event within three Business Days of such day) of the trades and transactions processed.	
 
10.	The Custodian acknowledges that the Security Trustee has the right, by delivery of written notice (a “ Prohibition Notice ”) to the Custodian, to prohibit each Chargor from	
 
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 	effecting any withdrawals, sales, trades, transfers or exchanges of any of the Charged Portfolio and the Custodian agrees that upon delivery of a Prohibition Notice, the Custodian will cease to honor instructions from either of the Chargors with respect to the Charged Portfolio and will comply with any and all written instructions delivered by the Security Trustee to the Custodian and has no obligation to and will not, investigate the reason for any action taken by the Security Trustee, the amount of any obligations of any Chargor to the Security Trustee, the validity of any of the Security Trustee’s claims against or agreements with either Chargor, the existence of any defaults under such agreements, or any other matter.	
 
11.	The Custodian acknowledges that, unless it receives written instructions from the Security Trustee to the contrary, it shall be entitled to process trades as it may be directed to do so under the terms of its custodial agreement with the [Chargors/each Chargor respectively] only to the extent such trades comprise a disposal to a third party in the market of a component part of the Charged Portfolio and the substitution therefor with the proceeds of such disposition or other securities, save that transfers can be made (a) to the Security Trustee in accordance with the terms of this undertaking or (b) to any person with the Security Trustee’s prior written consent or (c) in respect of any part of the Charged Portfolio representing an excess over the Required Value, to the relevant Chargor or as it may direct, which excess will be determined by the Security Trustee and specified in written notice from the Security Trustee to the Custodian on the date of the request from the Chargors.	
 
12.	After delivery of a Prohibition Notice, the Custodian shall deliver, transfer or assign to the Security Trustee on the Security Trustee’s first written demand securities and monies in the Charged Portfolio as directed by the Security Trustee and all certificates and other instruments evidencing title thereto or necessary or desirable in order for the Security Trustee to acquire good and marketable title thereto. The Security Trustee shall indicate the identity of the securities and monies it wishes to receive and the Custodian shall have no discretion in this matter and shall be fully protected in relying upon any direction received from the Security Trustee.	
 
13.	The Custodian agrees that it will not attempt to assert control, and does not claim and will not accept any security or other interest in any part of the Charged Portfolio, and will not exercise, enforce or attempt to enforce any claim, right of set-off, banker’s lien, clearing lien, counterclaim or similar right against the Charged Portfolio or any portion thereof, or otherwise charge or deduct from the Charged Portfolio any amount whatsoever, except as provided below. All rights and interests of the Custodian in or towards the Charged Portfolio or any part thereof are and shall be subordinated and postponed to the Security Trustee’s rights and interests therein under and pursuant to the Charge Agreement, save that the Custodian shall be entitled to debit any account of the relevant Chargor maintained with the Custodian with any reasonable fees or commissions due and owing by such Chargor to the Custodian in respect of the Charged Portfolio or part thereof or to settle any reasonable bank charges due and owing by such Chargor to the Custodian and incurred in the ordinary course of business for the purchase of securities and/or foreign exchange or contracts for foreign exchange.	
 
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14.	Any notice, demand or other communication required to be:	
 
 	(a)	served on us by you hereunder, may be served by letter properly addressed and deposited with a recognised air express courier or transmitted by facsimile if (a) a telephone call is placed to the officer noted for address purposes on page 1 of this Custodian’s Undertaking notifying such officer of the facsimile transmission and (b) the original is properly addressed and mailed. Any notice, demand or other communication shall be deemed to have been served on us on the third business day following if sent by recognised air express courier and when dispatched if sent in accordance with the facsimile procedures;	
 
 	(b)	made by us to you hereunder, may be transmitted by facsimile to the facsimile number and for the attention of the officer noted on page 1 of this Custodian’s Undertaking, or to any substitute facsimile number or officer as you may notify to us.	
 
15.	The Custodian shall not amend, supplement or otherwise modify its agreements with the Chargors or the Security Trustee governing the establishment and maintenance of the Charged Accounts (including, without limitation the choice of law provision and provisions providing for treatment of property held in any Charged Account as a financial asset) in any respect without the Security Trustee’s prior written consent.	
 
16.	This agreement shall remain in full force and effect until the Custodian receives written notice of its termination given by the Security Trustee and the Custodian shall not terminate the Charged Accounts, and shall not permit either Chargor to terminate the Charged Accounts, without the Security Trustee’s prior written consent.	
 
17.	The Custodian hereby acknowledges that in the event any dispute arises between one or both Chargors, on the one hand, and the Security Trustee, on the other hand, with respect to the payment, ownership or right to possession of the Charged Portfolio or any portion thereof, the Custodian shall take such actions and shall refrain from taking such actions with respect thereto as may be directed by the Security Trustee.	
 
18.	THE CUSTODIAN AGREES THAT THIS UNDERTAKING SHALL BE GOVERNED UNDER AND IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES AND FURTHER AGREES THAT ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST THE CUSTODIAN ARISING OUT OF OR RELATING TO THIS AGREEMENT MAY BE BROUGHT IN THE ENGLISH COURTS OR ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE, COUNTY AND CITY OF NEW YORK. For purposes of this undertaking, the State of New York shall be deemed to be the Custodian’s jurisdiction.	
 
19.	Save as expressly provided herein, the Custodian shall have no further obligations or liabilities to the Security Trustee in relation to the Charged Portfolio and specifically shall have no liability or responsibility for monitoring or determining the compliance by any party with any other agreement including, without limitation, the Charge Agreement.	
 
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(Authorised Signatory)
for and on behalf of the Custodian	
 
[Date]
 
- 116 -

THE SCHEDULE
 
PART A
 
The Required Value is at the date hereof:-
 
US$100 (One hundred United States dollars)
 
or such other amount as may be agreed between the Security Trustee and the Chargors and notified to the Custodian by the Security Trustee from time to time.
 
PART B
 
The initial Security Trustee’s Requirements are:-
 
To the extent of an aggregate amount not less than the Required Value, the Charged Portfolio shall at all times be comprised of the following: (a) cash, (b) fixed income securities issued by or fully and explicitly guaranteed by the central government of an OECD (Organisation for Economic Co-Operation and Development) country, and (c) fixed income securities issued by US government agencies (whose debt obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the US Government) as used in Appendix A, Section III (C), Category I to Regulation H as promulgated by the Board of Governors of the Federal Reserve System and the same are either (a) uncertificated and governed by the provisions of 31 C.F.R. Part 357 or such similar provisions of the Code of Federal Regulations, applicable to United States agency securities as are acceptable to the Security Trustee; or (b) certificated.
 
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SCHEDULE 11
 
F ORM OF S UBSTITUTION N OTICE
 
From: ACE Limited
 
To:     Citibank International plc
 
Dated:
 
Re:     [Applicant 1]
 
           [Applicant 2]
 
Dear Sirs
 
We refer to the £380,000,000 letter of credit agreement originally dated 19 November 1999, (as (a) amended and restated pursuant to the First Restatement Agreement, (b) amended pursuant to the Amendment Agreement, (c) amended and restated pursuant to the Second Restatement Agreement, (d) amended and restated pursuant to the Third Restatement Agreement, and (e) amended and restated pursuant to the Fourth Amendment and Restatement Agreement (the “ Agreement ”) between, inter alia , ACE Limited (the “ Account Party ”), the financial institutions named therein as Banks and Citibank International plc as Agent.
 
Terms defined in the Agreement shall have the same meanings in this Substitution Request.
 
1.	Pursuant to Clause 5 ( Substitution of Letters of Credit ) of the Agreement, the Account Party, on behalf of [    ] (the “ Applicant[s] ”), hereby requests that the Banks substitute for the existing Letter[s] of Credit new Letters of Credit, in each case in accordance with the information annexed hereto as Annex A.	
 
2.	The Account Party hereby certifies that on the date hereof and on the Substitution Date set forth in Annex A, both before and after giving effect to the substitution requested hereby:	
 
 	(i)	no Event of Default or Potential Event of Default has occurred and is continuing;	
 
 	(ii)	each of the representations and warranties of the Account Party contained in the Agreement and each other Finance Document is correct in all material respects on the date hereof, except representations and warranties which expressly refer to an earlier date in which case the same shall be true on and as of such earlier date;	
 
 	(iii)	after giving effect to the substitution requested hereby, the aggregate Sterling Amount of the Outstandings will not exceed the Total Commitments; and	
 
 	(iv)	the Letter[s] of Credit requested hereby [is/are] being extended solely as security to support the underwriting business of the Applicant[s] at Lloyd’s which has been provided in accordance with the requirements of Lloyd’s applicable to [it/them].	
 
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IN WITNESS WHEREOF , the Account Party has caused this Certificate to be executed by its duly authorised officer as of the date and year first written above.

ACE LIMITED	
		
By:	 	 	
 	 		
Name:	 	 	
 	 		
Title:	 	 	

- 119 -

Annex A
 
Letter of Credit Information 1 

1.	  	Name of Beneficiary:                                                                                                                                                                                      	  	 	
			
2.	  	Existing Letter of Credit Number:                                                                                                                                                             	  	 	
			
3.	  	Substitution Date	  	[    ] 2 	
			
4.	  	Amount of new Letter of Credit:	  	£/US$ 3 	
 
1	A separate “Letter of Credit Information” should be completed for each Letter of Credit covered by the Substitution Request.	
 
2	The Substitution Date must be a Business Day within the Substitution Period, and be not less than 30 Business Days after the date of the Substitution Request.	
 
3	This amount must not exceed the maximum amount available under the existing Letter of Credit to be substituted.	
 
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EXHIBIT 10.38
ACE Limited

Computation of Ratio of Earnings to Fixed Charges and Preferred Share Dividends

Fiscal year ended December 31	 	2003	 	2002	 	 	2001	 	 	2000	 	1999	
	
Earnings per Financial Statements	 	$	1,417,482	 	$	76,549	 	 	$	(146,414	)	 	$	542,982	 	$	364,963	
Add (deduct):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Provision for income taxes	 	 	278,347	 	 	(115,688	)	 	 	(78,674	)	 	 	93,908	 	 	28,684	
Fixed charges	 	 	205,758	 	 	218,494	 	 	 	219,849	 	 	 	242,783	 	 	126,138	
	
Earnings for Computations	 	 	1,901,587	 	 	179,355	 	 	 	(5,239	)	 	 	879,673	 	 	519,785	
	
Fixed Charges	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Interest Expense	 	 	177,425	 	 	193,494	 	 	 	199,182	 	 	 	221,450	 	 	105,138	
One third of payments under operating leases	 	 	28,333	 	 	25,000	 	 	 	20,667	 	 	 	21,333	 	 	21,000	
	
Total Fixed Charges	 	 	205,758	 	 	218,494	 	 	 	219,849	 	 	 	242,783	 	 	126,138	
	
Ratio of Earnings to Fixed Charges	 	 	9.2	 	 	(1	)	 	 	(2	)	 	 	3.6	 	 	4.1	
	
Preferred Share Dividends	 	 	36,009	 	 	25,662	 	 	 	25,594	 	 	 	18,391	 	 	–	
Total Fixed Charges and Preferred Share Dividends	 	$	241,767	 	$	244,156	 	 	$	245,443	 	 	$	261,174	 	$	126,138	
	
Ratio of Earnings to Fixed Charges and Preferred Share Dividends	 	 	7.9	 	 	(1	)	 	 	(2	)	 	 	3.4	 	 	4.1	

(1) Earnings for the year ended December 31, 2002 were insufficient to cover fixed charges by $39 million and combined fixed charges and preferred share dividends by $65 million.
(2) Earnings for the year ended December 31, 2001 were insufficient to cover fixed charges by $225 million and combined fixed charges and preferred share dividends by $225 million.

EXHIBIT 14.1
 
Introducing The ACE WAY
 
In our personal lives, there come times when we must make difficult moral and ethical decisions based on our experience, upbringing, beliefs, and on the law. As employees, officers and directors of the ACE Group of Companies, we face similar decisions in the workplace and might wonder how we should conduct ourselves to ensure we live up to ACE expectations. That’s why we put together The ACE WAY: ACE Code of Conduct. Please take some time to read it, and keep it handy for future reference.
 
The ACE Code of Conduct sets forth standards by which all ACE employees, officers and directors must abide as they work for the Company. It may not always be clear how to apply these standards in your daily work; if you have questions please ask your manager, local human resources, legal or audit representative, or call the ACE Ethics Helpline for guidance. Telephone numbers for the ACE Ethics Helpline can be found in the accompanying brochure.
 
We expect you to follow the ACE Code of Conduct strictly. Failure to do so may result in disciplinary action, which may include dismissal, and involve potential criminal or civil liability. We also expect you to report all actual and suspected Code of Conduct violations. There will never be retaliation of any kind against good-faith reports of violations or potential violations of the ACE Code of Conduct.
 
This Code of Conduct is not a comprehensive statement of all policies that apply to employees, officers and directors. For information on any of these, please refer to the detailed ACE policy statements that can be found on ACE IQ.
 
ACE is a law-abiding citizen
 
ACE policy requires employees, officers and directors to comply fully with all applicable laws, rules and regulations. There are more laws applicable to our business than we can mention in this Code of Conduct, and ACE policy statements provide more detail on many of these. Ask your manager, local human resources, legal or audit representative, or call the ACE Ethics Helpline for advice on how to ensure the Company remains in compliance with all laws, rules and regulations.
 
Conflicts of interest: Where do we draw the line?
 
All employees, officers and directors of the Company should be careful to avoid any conflict of interest with regard to the Company. A conflict of interest exists whenever an individual’s private undertakings interfere or conflict—or even appear to interfere or conflict—in any way with the interests of the Company. A conflict situation can arise when an employee, officer or director takes actions or has interests that make it difficult to perform Company work objectively and effectively. Conflicts of interest may also arise when employees, officers or directors, or members of their families receive improper personal benefits as a result of their positions in the Company, whether received from the Company or a third party.
 
Many actions and behaviors can give rise to conflict-of-interest situations. We cannot provide a comprehensive list of all activities to avoid, but examples of potential conflicts include:
 
 	•	Conducting ACE business with family or personal friends—such as awarding an ACE contract to a relative.	

 	•	Owning a significant interest in, or serving as a director, officer, partner, consultant or in any other key role in an outside company that does or seeks to do business with or is a competitor of ACE.	
 
 	•	Taking advantage of a personal investment opportunity that is afforded to you by virtue of your position with ACE.	
 
 	•	Making personal investments in companies that you know are candidates for ACE acquisition or investment.	
 
 	•	Receiving or giving loans or guarantees of obligations to employees, officers and directors and their respective family members. This is sometimes also prohibited by law.	
 
 	•	Accepting business gifts. Please refer to the Business Gifts and Entertainment Policy on ACE IQ for more information.	
 
Conflicts of interest are prohibited as a matter of Company policy, except under guidelines approved by the Board of Directors or by committees of the Board. If you believe the potential for a conflict of interest exists, discuss it with your manager. If you are uncomfortable discussing the matter with your manager, contact your local human resources, legal or audit representative, or call the ACE Ethics Helpline as soon as possible. You will also be required to tell us each year about any conflicts of interest or potential conflicts of interest as part of your Annual Affirmation statement.
 
Don’t always answer when opportunity knocks
 
You owe ACE your loyalty. Among other things, this means you must recognize that corporate opportunities belong to the Company. If, through your work, you become aware of an opportunity that would be appropriate for ACE, you must pursue that opportunity on behalf of the Company, if it is interested, and not on behalf of yourself or another person. You must not use ACE’s property, information or position for personal gain, and you must not compete with the Company.
 
Fair is fair: ACE plays by the rules
 
Each of us must deal fairly with the Company’s customers, suppliers, competitors, officers and employees. We expect you to use your judgment and avoid actions that could be construed as taking unfair advantage or using unfair dealing practices. Examples include manipulating people, concealing necessary information, abusing privileged information or misrepresenting facts.
 
Fairness requires that we deal with our competitors at arm’s length. For example, agreements to restrain trade by setting prices with competitors violate antitrust laws designed to encourage competition. For more information, please refer to the detailed ACE policy statement on compliance with competition laws. All ACE policy statements can be found on ACE IQ.
 
Fair dealing also requires that we do not make illegal payments—which could include gifts, favors, entertainment, and cash—to government officials. All ACE employees must comply with the Foreign Corrupt Practices Act, which prohibits giving anything of value, directly or indirectly, to foreign government officials or political candidates in order to obtain or retain business. For more information, please see the detailed ACE policy statement on the Foreign Corrupt Practices Act on ACE IQ.

Respect for our employees
 
ACE is committed to equal employment opportunity and compliance with all applicable work-related laws and regulations. ACE makes employment decisions and sets all terms and conditions of employment without regard to race, color, religion, age, gender, sexual orientation, national origin, disability, veteran status, marital status or any other characteristic protected by law. ACE does not tolerate sexual, racial, ethnic or other harassment, whether verbal, physical or environmental. To maintain a safe and productive work environment for its employees, customers and visitors, employees are expected to work free from the effects of alcohol and drugs. For more information, please refer to your local ACE policy statements on these subjects.
 
For business or pleasure?
 
You should protect the Company’s assets and ensure their efficient use. Theft, carelessness and waste have direct impacts on the Company’s profitability. All Company assets should be used for legitimate business purposes only.
 
Maintaining a confidence
 
You must maintain the confidentiality of business information entrusted to you by the Company and its customers, except when disclosure is authorized by the Office of the General Counsel or required by law or regulation. Confidential information includes all non-public information that might be of use to competitors of the Company, or harmful to the Company or its customers if disclosed. For example, you must treat information about the Company’s investments and acquisitions, policyholders, personnel, and non public operations and finances as confidential.
 
Your duty to maintain the confidentiality of non-public information continues indefinitely, even after you are no longer employed by ACE. For more information, please consult ACE IQ for detailed ACE policy statements on Proper Treatment of Business Information and the Global Information Security Policy.
 
Restrictions on trading ACE securities
 
Trading in ACE securities based on inside information is both unethical and illegal. Generally, employees, officers and directors who have material non-public information about ACE are not permitted to buy, sell or otherwise trade in ACE securities. This restriction extends to tipping others about or sharing with others such non-public information, since individuals receiving such information might use it to trade in ACE securities.
 
ACE policy prohibits trade in Company securities from two weeks prior to an earnings release until the close of business on the first business day after the release. ACE will inform employees more than two weeks in advance of any proposed earnings release date. If you are an officer of ACE (salary grade 30 or above in the U.S.), you must obtain approval from the Office of the General Counsel before making any trades in ACE securities. For more information, consult ACE IQ for the detailed ACE policy statement about Restrictions on Trade of ACE Limited Securities.

Honesty is the best policy
 
ACE complies with laws designed to prevent insurance fraud. Honesty is an important component of this. You should always be truthful with our regulators. Also, we cannot permit people with certain felony convictions to participate in our business activities. For more information, please see the ACE policy statement on Insurance Fraud, available on ACE IQ.
 
Know when to represent ACE
 
We expect you to act only within the scope of your authority when representing ACE. For example, only senior management or persons in our Communications and Investor Relations Departments are permitted to make public statements or respond to media inquiries concerning the Company. While you are free to make personal political statements, you must do so in a way that does not imply that you speak on behalf of ACE. U.S. employees may not act as agents or representatives for ACE Limited or its Bermuda subsidiaries. Additional guidance can be found in the ACE policy statement on Interaction Between Bermuda and U.S. Operations, available on ACE IQ.
 
Finally, no employee may expand ACE’s operations into any new foreign country without prior consultation with the Office of the General Counsel in Bermuda.
 
ACE goes by the book
 
At ACE, we comply with all financial reporting and accounting regulations. We will not permit the integrity of our financial records or statements to be compromised in any way. We will not condone any off the books transactions. Company and legal policies require that certain records be maintained; employees must not willfully or knowingly falsify, alter, remove or destroy any such documents.
 
If you have concerns or complaints regarding questionable accounting or auditing matters of the Company, you are encouraged to speak with your manager or submit your concerns to the Chairman of the ACE Limited Audit Committee at chmnaudit@ace.bm, or speak with any director who is a member of the Audit Committee. The Audit Committee, subject to duties arising under applicable law, regulations and legal proceedings, will treat all such submissions as confidential.
 
ACE is a public company, so it is critically important that our filings with the U.S. Securities and Exchange Commission (SEC) are accurate and timely. This applies to the entire report filed with the SEC—not just the financial statements. Depending on your position, you may be called upon to provide information necessary to ensure that our public reports are complete, fair and understandable. We expect you to take this responsibility seriously and provide prompt and accurate answers to inquiries related to our public disclosure requirements.
 
Speak up
 
To maintain the Company’s high standards, we expect you to comply with the ACE Code of Conduct, and to let us know if you think others have violated it. If you suspect or have information about any violations or potential violations of this Code of Conduct, or about any actual or planned wrongdoing or unethical behavior involving the Company or any of its employees, you should report it to your manager. If you do not feel comfortable speaking to your manager, contact your local human resources, legal or audit representative, call the

ACE Ethics Helpline, or fill out the form in the back of this guide and mail it to the address provided.
 
From time to time, there may be inquiries to ensure compliance with the ACE Code of Conduct. For example, each year we ask employees to confirm generally that they are not aware of any violations of the Code of Conduct; we expect prompt replies. We or our advisors may seek detailed information to determine whether there has been a violation of a particular standard, and there may be situations in which government officials or regulators initiate an investigation. In these circumstances, we expect your full cooperation.
 
Under unusual circumstances, ACE may waive certain provisions of this Code of Conduct if it believes it is appropriate to do so. Any employee who believes that a waiver may be called for should discuss the matter with the Chief Ethics Officer. Waivers for executive officers or directors of ACE Limited may be made only by the Board of Directors or a committee of the board, and must promptly be disclosed to shareholders.
 
We will not permit retaliation of any kind against good-faith reports or complaints of violations of the Code of Conduct, or other illegal or unethical conduct.
 
How to report a violation
 
If you have information about any violations or potential violations of the ACE Code of Conduct, or about any actual or planned wrongdoing or unethical behavior involving the Company or any of its employees, please speak to your manager, local human resources, legal or audit representative, call the ACE Ethics Helpline or fill out the attached form and return it to:
 
Chief Ethics Officer
Two Liberty Place
TL 35M
1601 Chestnut Street
Philadelphia, PA 19103
USA
 
Revised: February 27, 2004

CODE OF CONDUCT VIOLATION REPORT

Your name (optional):	 	 	

How we may contact you (optional):
 
Phone number                          (specify work or home)                     
 
Email address                          Other                     
 
Please describe the violation or potential violation:

 

 

 

 

 

 
Date:                     

 
Exhibit 21.1
 
Each of the named subsidiaries is not necessarily a “significant subsidiary” as defined in Rule 1-02(w) of Regulation S-X, and the Company has several additional subsidiaries not named below. The unnamed subsidiaries, considered in the aggregate as a single subsidiary, would not constitute a “significant subsidiary” at the end  of the year covered by this report.
 
Subsidiaries of the Registrant

Name	 	Jurisdiction of
Organization	 	Percentage
Ownership	
	
ACE Limited	 	Cayman Islands	 	Publicly held	
ACE Bermuda Insurance Ltd.	 	Bermuda	 	100%	
ACE PCC Insurance Limited	 	Guernsey	 	100%	
Paget Reinsurance International Ltd.	 	Bermuda	 	100%	
ACE Capital Re International Ltd.	 	Bermuda	 	100%	
ACE KRE Holdings Limited	 	Barbados	 	100%	
ACE Capital Re USA Holdings Incorporated	 	Delaware	 	100%	
ACE Capital Re Overseas Ltd.	 	Bermuda	 	100%	
ACE Capital Mortgage Reinsurance Company
(EI# 06-1384770, NAIC# 10021, NY)	 	New York	 	100%	
ACE Capital Title Reinsurance Company
(EI# 06-1434264, NAIC# 50028, NY)	 	New York	 	100%	
ACE Capital Re Inc.	 	New York	 	100%	
Oasis Investments Limited	 	Bermuda	 	67%	
Oasis Investments 2 Ltd.	 	Bermuda	 	67%	
ACE Financial Solutions International, Ltd.	 	Bermuda	 	100%	
ACE European Markets Reinsurance Limited	 	Ireland	 	100%	
ACE European Markets Insurance Limited	 	Ireland	 	100%	
Corporate Officers & Directors Assurance Ltd.	 	Bermuda	 	100%	
Oasis Real Estate Company Ltd.	 	Bermuda	 	100%	
Sovereign Risk Insurance Limited	 	Bermuda	 	50%	
Tripar Partnership	 	Bermuda	 	98%
2% (CODA)	
ACE Realty Holdings Limited	 	Bermuda	 	100%	
Oasis Personnel Limited	 	Cayman Islands	 	100%	
ACE Global Markets Limited	 	United Kingdom	 	100%	
ACE Group Holdings Limited	 	United Kingdom	 	100%	
ACE Tarquin	 	United Kingdom	 	100%	
ACE Capital V Limited	 	United Kingdom	 	100%	
ACE Leadenhall Limited	 	United Kingdom	 	100%	
ACE Underwriting Agencies Limited	 	United Kingdom	 	100%	
ACE Trustees Limited	 	United Kingdom	 	100%	
ACE London Group Limited	 	United Kingdom	 	100%	
ACE Capital Limited	 	United Kingdom	 	100%	
ACE Capital III Limited	 	United Kingdom	 	100%	
ACE Capital IV Limited	 	United Kingdom	 	100%	
ACE London Holdings Limited	 	United Kingdom	 	100%	
ACE Capital II Limited	 	United Kingdom	 	100%	
ACE London Investments Limited	 	United Kingdom	 	100%	
ACE London Aviation Limited	 	United Kingdom	 	100%	
ACE London Underwriting Limited	 	United Kingdom	 	100%	
ACE Underwriting Services Limited	 	United Kingdom	 	100%	
AGM Underwriting Limited	 	United Kingdom	 	100%	
ACE London Services Limited	 	United Kingdom	 	100%	
ACE Capital VI Limited	 	United Kingdom	 	100%	

 

Name	 	Jurisdiction of
Organization	 	Percentage
Ownership	
	
ACE UK Limited	 	United Kingdom	 	77%	
ACE UK Holdings Limited	 	United Kingdom	 	100%	
ACE (MI) Limited	 	United Kingdom	 	100%	
ACE (MS) Limited	 	United Kingdom	 	100%	
ACE UK Underwriting Limited	 	United Kingdom	 	100%	
ACE (PM) Limited	 	United Kingdom	 	100%	
ACE UK Limited	 	United Kingdom	 	23%	
ACE Services Limited	 	Cayman Islands	 	100%	
ACE Holdings (Gibraltar) Limited	 	Gibraltar	 	100%	
ACE Gibraltar Limited	 	Gibraltar	 	51%	
ACE-ii Limited	 	United Kingdom	 	100%	
ACE-ii (Gibraltar) Limited	 	Gibraltar	 	100%	
ACE Underwriting Services (Gibraltar) Limited	 	Gibraltar	 	100%	
Arles Services Limited	 	Gibraltar	 	100%	
Oasis Insurance Services Ltd.	 	Bermuda	 	100%	
ACE Tempest Life Reinsurance Ltd.	 	Bermuda	 	100%	
ACE Tempest Reinsurance Ltd.	 	Bermuda	 	100%	
Oasis Investments Limited	 	Bermuda	 	33%	
Oasis Investments 2 Ltd.	 	Bermuda	 	33%	
AGC Holdings Limited	 	Bermuda	 	100%	
Oasis US Inc.	 	Delaware	 	100%	
ACE Prime Holdings Inc.	 	USA (Delaware)	 	100%	
ACE INA Holdings Inc.	 	USA (Delaware)	 	80%	
ACE Seguros S.A.	 	Argentina	 	99.35%	
ACE Seguradora S.A.	 	Brazil	 	99.9%
0.1% (ACE Prime Holdings Inc.)	
Servicios ACE INA S.A. de C.V.	 	Mexico	 	99.99%
.00002% (ACE Prime Holdings Inc.)	
ACE Tempest Re USA, Inc.	 	USA (Connecticut)	 	100%	
INA Corporation	 	USA (Pennsylvania)	 	100%	
ACE INA Properties, Inc.	 	USA (Delaware)	 	100%	
Conference Facilities, Inc.	 	USA (Pennsylvania)	 	100%	
INA Tax Benefits Reporting, Inc.	 	USA (Delaware)	 	100%	
INA Financial Corporation	 	USA (Delaware)	 	100%	
Brandywine Holdings Corporation	 	USA (Delaware)	 	100%	
Brandywine Run-Off Services, Inc.	 	USA (Delaware)	 	100%	
Cravens, Dargan & Company, Pacific Coast	 	USA (Delaware)	 	100%	
Cravens, Dargan & Company, Pacific Coast of Illinois, Inc.	 	USA (Illinois)	 	100%	
Century Indemnity Company
(EI# 05-6105395, NAIC #20710, PA)	 	USA (Pennsylvania)	 	100%	
Century Reinsurance Company
(EI# 06-0988117, NAIC #35130, PA)	 	USA (Pennsylvania)	 	100%	
ACE American Reinsurance Company
(EI# 23-1740414, NAIC#22705, PA)	 	USA (Pennsylvania)	 	100%	
Brandywine Reinsurance Company S.A.-N.V.	 	Belgium	 	100%	
The 1792 Company	 	USA (Delaware)	 	100%	
Century International Reinsurance Company Ltd.	 	Bermuda	 	100%	
INA Holdings Corporation	 	USA (Delaware)	 	100%	

 

Name	 	Jurisdiction of
Organization	 	Percentage
Ownership	
	
INATrust, fsb	 	Chartered by Office of Thrift Supervision	 	100%	
YouDecide.com, Inc.	 	(Delaware)	 	100%	
CFN Finance, Inc.	 	(Delaware)	 	100%	
CFN Agency, Inc.	 	(Delaware)	 	100%	
PDCN Legal Management Company, Inc.	 	USA (Delaware)	 	100%	
INA Reinsurance Company, Ltd.	 	Bermuda	 	100%	
ACE INA Financial Institution Solutions, Inc.	 	USA (Delaware)	 	100%	
ESIS, Inc.	 	USA (Pennsylvania)	 	100%	
NewMarkets Insurance Agency, Inc.	 	USA (Delaware)	 	100%	
ACE INA Excess and Surplus Insurance Services, Inc.	 	USA (Georgia)	 	100%	
ACE INA Excess and Surplus Insurance Services, Inc.	 	USA (Pennsylvania)	 	100%	
ACE INA Excess and Surplus Insurance Services, Inc.	 	USA (California)	 	100%	
ACE INA Excess and Surplus Insurance Services, Inc.	 	USA (Illinois)	 	100%	
Excess and Surplus Insurance Services, Inc.	 	USA (Texas)	 	100%	
ACE Financial Solutions, Inc.	 	USA (Delaware)	 	100%	
ACE Risk Solutions, Inc.	 	USA (New York)	 	100%	
Indemnity Insurance Company of North America (EI# 06-1016108, NAIC #43575, PA)	 	USA (Pennsylvania)	 	100%	
ACE Indemnity Insurance Company (EI#92-0040526, NAIC #10030, PA)	 	USA (Pennsylvania)	 	100%	
Allied Insurance Company (EI# 23-2021364, NAIC #36528, CA)	 	USA (California)	 	100%	
ACE American Insurance Company (EI#95-2371728, NAIC# 22667, PA)	 	USA (Pennsylvania)	 	100%	
Pacific Employers Insurance Company (EI#95-1077060, NAIC# 22748, PA)	 	USA (Pennsylvania)	 	100%	
ACE Insurance Company of Texas (EI# 74-1480965, NAIC #22721, 22920, TX)	 	USA (Texas)	 	100%	
Illinois Union Insurance Company (EI# 36-2759195, NAIC #27960, IL)	 	USA (Illinois)	 	100%	
INAMAR Insurance Underwriting Agency, Inc.	 	USA (New Jersey)	 	100%	
INAMAR Insurance Underwriting Agency, Inc. of Massachusetts	 	USA (Massachusetts)	 	100%	
INAMAR Insurance Underwriting Agency, Inc. of Texas	 	USA (Texas)	 	100%	
INAMAR Insurance Underwriting Agency, Inc. of Ohio	 	USA (Ohio)	 	100%	
Insurance Company of North America (EI# 23-0723970, NAIC #22713, PA)	 	USA (Pennsylvania)	 	100%	
Bankers Standard Insurance Company (EI# 75-1320184, NAIC #18279, PA)	 	USA (Pennsylvania)	 	100%	
Bankers Standard Fire and Marine Company (EI#75-6014863, NAIC #20591, PA)	 	USA (Pennsylvania)	 	100%	
ACE Property and Casualty Insurance Company (EI# 06-0237820, NAIC, #20699, PA)	 	USA (Pennsylvania)	 	100%	
ACE Employers Insurance Company (EI# 23-2137343, NAIC #38741, PA)	 	USA (Pennsylvania)	 	100%	
ACE Insurance Company of Ohio (EI#23-1859893, NAIC #22764, OH)	 	USA (Ohio)	 	100%	
INA Surplus Insurance Company (EI# 52-1208598, NAIC #42072, PA)	 	USA (Pennsylvania)	 	100%	
ACE Fire Underwriters Insurance Company (EI# 06-6032187, NAIC #20702, PA)	 	USA (Pennsylvania)	 	100%	
Atlantic Employers Insurance Company (EI# 23-2173820, NAIC #38938, NJ)	 	USA (New Jersey)	 	100%	
ALIC, Incorporated	 	USA (Texas)	 	100%	

 

Name	 	Jurisdiction of
Organization	 	Percentage
Ownership	
	
ACE American Lloyds Insurance Company (Sponsored Lloyds Association) (EI# 75-1365570, NAIC #18511, TX)	 	USA (Texas)	 	100%	
ACE Insurance Company of Illinois (EI# 36-2709121, NAIC #22691, IL)	 	USA (Illinois)	 	100%	
ACE Insurance Company of the Midwest (EI# 06-0884361, NAIC #26417, IN)	 	USA (Indiana)	 	100%	
ACE Structured Products, Inc. (formerly INAPRO, Inc.)	 	USA (Delaware)	 	100%	
Recovery Services International, Inc.	 	USA (Delaware)	 	100%	
RSI Health Care Recovery, Inc.	 	USA (Delaware)	 	100%	
American Adjustment Company, Inc.	 	USA (Delaware)	 	100%	
American Lenders Facilities, Inc.	 	USA (California)	 	100%	
ACE INA International Holdings, Ltd.	 	USA (Delaware)	 	100%	
ACE Insurance S.A.	 	Macau	 	99.94%	
ACE CIIC Holdings Limited	 	Cayman Islands	 	100%	
ACE CIIC Insurance Company Egypt S.A.E.	 	Egypt	 	51%	
ACE Life Insurance Company S.A.E.	 	Egypt	 	99.98%	
ACE Synergy Insurance Berhad	 	Malaysia	 	51%	
ACE Insurance S.A.-N.V.	 	Belgium	 	.0523%
99.9477% (ACE INA Overseas Holdings, Inc.)	
ACE Seguros S.A.	 	Chile	 	66.53% (AIIH)
18.70% (AFIA Finance Corporation)
13.90%—(AFIA Finance Corp. Chile Limitada)	
ACE Seguros S.A.	 	Colombia	 	99.958%	
ACE Seguros S.A.	 	Ecuador	 	100%	
ACE Seguros S.A.	 	Mexico	 	99.9%	
Brandywine Reinsurance Co. (UK) Ltd	 	United Kingdom	 	100%	
ACE INA U.K. Ltd.	 	United Kingdom	 	100%	
ACE Life Assurance Co. Ltd.	 	Thailand	 	70%
25% (Oriental)	
ACE Insurance Limited	 	South Africa	 	100%	
ACE Insurance Limited	 	New Zealand	 	100%	
ACE International Management Corporation	 	Pennsylvania	 	100%	
Cover Direct, Inc.	 	USA (Delaware)	 	100%	
ACE INA G.B. Holdings, Ltd.	 	USA (Delaware)	 	100%	
ACE INA Services U.K. Limited	 	United Kingdom	 	100%	
INACAP Sociedad Anonima	 	Nicaragua	 	100%	
INACAP Reaseguros, Sociedad Anonima	 	Nicaragua	 	100%	
Century Inversiones, S.A.	 	Panama	 	100%	
ACE Insurance Limited	 	Australia	 	100%	
ACE INA Superannuation Pty. Limited	 	Australia	 	100%	
ACE Insurance Limited	 	Pakistan	 	100%	
ACE INA Overseas Insurance Company Ltd.	 	Bermuda	 	100%	
ACE Insurance Limited	 	Singapore	 	100%	
ACE Insurance	 	Japan	 	100%	
ACE Songai Service Kabushikigaisha	 	Japan	 	100%	

 

Name	 	Jurisdiction of
Organization	 	Percentage
Ownership	
	
ACE INA Marketing Group C.A.	 	Venezuela	 	100%	
ACE INA Overseas Holdings, Inc.	 	USA (Delaware)	 	100%	
INACAN Holdings, Ltd.	 	Canada	 	100%	
ACE INA Insurance	 	Canada	 	100%	
ACE INA Life Insurance	 	Canada	 	100%	
ACE Insurance S.A.-N.V.	 	Belgium	 	99.9477%
.0523% (AIIH)	
ACE Insurance Company
(EI# 66-0437305, NAIC #30953, PR)	 	Puerto Rico	 	100%	
ACE Insurance Limited	 	Hong Kong	 	100%	
ACE Risk Management International Ltd.	 	Bermuda	 	100%	
DELPANAMA S.A.	 	Panama	 	100%	
INAMEX S.A.	 	Mexico	 	100%	
Oriental Equity Holdings Limited	 	British Virgin Islands	 	100%	
AFIA Finance Corporation	 	USA (Delaware)	 	100%	
AFIA Venezolana C.A.	 	Venezuela	 	100%	
ACE ICNA Italy Societa a Responsabilita Limitata	 	Italy	 	99.7%
0.3% (AIIH)	
ACE Servicios, S.A.	 	Argentina	 	100%	
AFIA Finance Corp. Chile Limitada	 	Chile	 	98%
2% (AIIH)	
PT. ACE INA Insurance	 	Indonesia	 	80%	
RIYAD Insurance Co. Ltd.	 	Bermuda	 	80%	
Safire Private Ltd.	 	Singapore	 	100%	
AFIA (INA) Corporation, Limited	 	USA (Delaware)	 	100%	
AFIA	 	Unincorporated
Association	 	60%	
AFIA (ACE) Corporation, Limited	 	USA (Delaware)	 	100%	
INAVEN, C.A. “Venezuela”	 	Venezuela	 	100%	
ACE U.S. Holdings, Inc.	 	USA (Delaware)	 	100%	
ACE Financial Services International, Inc. (f/k/a ACE Financial Solutions International, Inc.)	 	USA (Delaware)	 	100%	
ACE USA, Inc.	 	USA (Delaware)	 	100%	
ASI Administrative Services Holdings Inc.	 	Canada (Yukon)	 	100%	
Industrial Underwriters Insurance Co. (EI# 75-6015738, NAIC# 21075, TX)	 	USA (Texas)	 	100%	
Rhea International Marketing (L), Inc.	 	Malaysia	 	60%	
Westchester Fire Insurance Company (EI# 13-5481330, NAIC# 21121, NY)	 	USA
(New York)	 	100%	
Westchester Surplus Lines Insurance Co. (EI# 58-2139927, NAIC #10172, GA)	 	USA (Georgia)	 	100%	
Westchester Specialty Services, Inc.	 	USA (Florida)	 	100%	
Westchester Specialty Insurance Services Inc.	 	USA (Nevada)	 	100%	
WDH Corporation	 	USA (Ohio)	 	80%	
Dimension Service Corporation	 	USA (Ohio)	 	80%	
Dimension Holdings Inc.	 	USA (Ohio)	 	80%	
ACE Financial Services Inc./(fka Capital Re Corporation)	 	Delaware	 	100%	
ACE Finance Overseas Limited	 	United Kingdom	 	100%	
AGR Financial Products Inc.	 	Delaware	 	100%	
Capital RE LLC	 	Turks & Caicos	 	100%	
ACE (CR) Holdings	 	United Kingdom	 	100%	
ACE Capital VII Limited	 	United Kingdom	 	100%	

 

Name	 	Jurisdiction of
Organization	 	Percentage
Ownership	
	
ACE (RGB) Holdings Limited	 	United Kingdom	 	100%	
ACE (CIDR) Limited	 	United Kingdom	 	100%	
Global Life Services Limited	 	United Kingdom	 	100%	
Ridge Underwriting Agencies Limited	 	United Kingdom	 	100%	
ACE Guaranty Corp. (EI# 52-1533088, NAIC #30180, MD)	 	Maryland	 	100%	
ACE Guaranty (UK), Ltd.	 	United Kingdom	 	100%	
ACE Risk Assurance Company (EI# 13-4027591, NAIC #10943, MD)	 	Maryland	 	100%	
ACE Asset Management Inc.	 	Delaware	 	100%	
ACE (Barbados) Holdings Limited	 	Barbados	 	100%	
 
The Company owns 22.129% of Huatai Insurance Company of China, Limited. It is not included in the above list as it is owned by three subsidiaries (ACE INA Holdings Inc. 6.129%, ACE Tempest Reinsurance Ltd. 10% and ACE US Holdings, Inc. 6%).
 
6

Exhibit 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS
 
We hereby consent to the incorporation by reference in the Registration Statements of ACE Limited on Form S-3 (File Nos. 333-78841, 333-60985 and 333-88482), Form S-4 (File No. 333-90927) and Form S-8 (File Nos. 33-86146, 333-1400, 333-1402, 333-1404, 333-46301, 333-72299, 333-82175, 333-93867, 333-72301, 333-61038, 333-86102 and 333-103701) of our report dated February 25, 2004, relating to the financial statements and financial statement schedules, which appears in this Form 10-K.
 
PricewaterhouseCoopers LLP
New York, New York
March 11, 2004

 
Exhibit 31.1

 
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
 
I, Brian Duperreault, certify that:
 
1)	I have reviewed this annual report on Form 10-K of ACE Limited;	
 
2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 
3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 
4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:	
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5)	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date March 11, 2004
 
/ S /    B RIAN D UPERREAULT

Chairman and Chief Executive Officer

 
Exhibit 31.2

 
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
 
I, Philip V. Bancroft, certify that:
 
1)	I have reviewed this annual report on Form 10-K of ACE Limited;	
 
2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 
3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 
4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:	
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5)	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Date March 11, 2004
 
/ S /    P HILIP V. B ANCROFT

Chief Financial Officer

 
Exhibit 32.1

 
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
The undersigned officer of ACE Limited (the Corporation) hereby certifies that the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003, fully complies with the applicable reporting requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) and that the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of ACE Limited.

/ S /    B RIAN D UPERREAULT
	
Brian Duperreault
Chairman and
Chief Executive Officer	
 
Dated: March 11, 2004

 
Exhibit 32.2

 
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
The undersigned officer of ACE Limited (the Corporation) hereby certifies that the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2003, fully complies with the applicable reporting requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) and that the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of ACE Limited.

/ S /    P HILIP V. B ANCROFT
	
Philip V. Bancroft
Chief Financial Officer	
 
Dated: March 11, 2004