Table of Contents

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

 
FORM 10-Q

 
x 	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 
For the Quarterly Period Ended June 30, 2004
 
OR
 
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 
For the Transition Period from              to             

Commission File No. 1-11778	 	I.R.S. Employer Identification No. 98-0091805	

 
ACE LIMITED
(Incorporated in the Cayman Islands)

 
ACE Global Headquarters
17 Woodbourne Avenue
Hamilton HM 08
Bermuda
 
Telephone 441-295-5200

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES    x     NO   ¨
 
Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).    YES    x     NO   ¨
 
The number of registrant’s Ordinary Shares ($0.041666667 par value) outstanding as of August 4, 2004 was 284,018,700.

Table of Contents
 ACE LIMITED
 
INDEX TO FORM 10-Q

 	  	Page No.
	
Part I. FINANCIAL INFORMATION	  	 	
			
Item 1.	 	Financial Statements:	  	 	
			
 	 	Consolidated Balance Sheets June 30, 2004 (Unaudited) and December 31, 2003	  	3	
			
 	 	Consolidated Statements of Operations (Unaudited) Three and Six Months Ended June 30, 2004 and 2003	  	4	
			
 	 	Consolidated Statements of Shareholders’ Equity (Unaudited) Six Months Ended June 30, 2004 and 2003	  	5	
			
 	 	Consolidated Statements of Comprehensive Income (Unaudited) Six Months Ended June 30, 2004 and 2003	  	7	
			
 	 	Consolidated Statements of Cash Flows (Unaudited) Six Months Ended June 30, 2004 and 2003	  	8	
			
 	 	Notes to Interim Consolidated Financial Statements (Unaudited)	  	9	
			
Item 2.	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	33	
			
Item 3.	 	Quantitative and Qualitative Disclosures About Market Risk	  	55	
			
Item 4.	 	Controls and Procedures	  	56	
		
Part II. OTHER INFORMATION	  	 	
			
Item 1.	 	Legal Proceedings	  	57	
			
Item 2.	 	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	  	57	
			
Item 4.	 	Submission of Matters to a Vote of Security Holders	  	57	
			
Item 5.	 	Other Information	  	58	
			
Item 6.	 	Exhibits and Reports on Form 8-K	  	58	
 
2

Table of Contents
 ACE LIMITED
PART I FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

 	  	June 30
2004
	 	 	December 31
2003
	 	
 	  	(Unaudited)	 	 	 	 	
 	  	(in thousands of U.S. dollars,
except share and per share data)	 	
Assets	  	 	 	 	 	 	 	 	
Investments and cash	  	 	 	 	 	 	 	 	
Fixed maturities, at fair value (amortized cost - $18,226,520 and $18,006,405)	  	$	18,348,288	 	 	$	18,645,267	 	
Equity securities, at fair value (cost - $846,220 and $401,237)	  	 	952,979	 	 	 	543,811	 	
Securities on loan, at fair value (amortized cost/cost - $1,487,879 and $650,160)	  	 	1,514,734	 	 	 	684,629	 	
Short-term investments, at fair value	  	 	4,039,566	 	 	 	2,927,407	 	
Other investments (cost - $1,143,488 and $602,176)	  	 	1,216,259	 	 	 	645,085	 	
Cash	  	 	663,240	 	 	 	561,650	 	
 	  				 				
Total investments and cash	  	 	26,735,066	 	 	 	24,007,849	 	
			
Accrued investment income	  	 	260,906	 	 	 	258,379	 	
Insurance and reinsurance balances receivable	  	 	3,566,647	 	 	 	2,836,616	 	
Accounts and notes receivable	  	 	195,129	 	 	 	191,519	 	
Reinsurance recoverable	  	 	14,374,339	 	 	 	14,080,716	 	
Deferred policy acquisition costs	  	 	968,602	 	 	 	1,004,753	 	
Prepaid reinsurance premiums	  	 	1,652,426	 	 	 	1,372,568	 	
Funds withheld	  	 	347,407	 	 	 	255,587	 	
Value of reinsurance business assumed	  	 	310,363	 	 	 	346,365	 	
Goodwill	  	 	2,614,107	 	 	 	2,710,830	 	
Deferred tax assets	  	 	1,114,559	 	 	 	1,089,805	 	
Other assets	  	 	1,511,605	 	 	 	1,397,806	 	
 	  				 				
Total assets	  	$	53,651,156	 	 	$	49,552,793	 	
 	  				 				
Liabilities	  	 	 	 	 	 	 	 	
Unpaid losses and loss expenses	  	$	28,224,265	 	 	$	27,154,838	 	
Unearned premiums	  	 	6,555,437	 	 	 	6,050,788	 	
Future policy benefits for life and annuity contracts	  	 	505,298	 	 	 	491,837	 	
Funds withheld	  	 	200,773	 	 	 	208,728	 	
Insurance and reinsurance balances payable	  	 	2,279,573	 	 	 	1,902,622	 	
Contract holder deposit funds	  	 	221,308	 	 	 	212,335	 	
Securities lending collateral	  	 	1,541,684	 	 	 	698,587	 	
Payable for securities purchased	  	 	726,081	 	 	 	369,105	 	
Accounts payable, accrued expenses and other liabilities	  	 	1,234,827	 	 	 	1,206,046	 	
Dividends payable	  	 	59,557	 	 	 	53,182	 	
Short-term debt	  	 	545,740	 	 	 	545,727	 	
Long-term debt	  	 	1,848,767	 	 	 	1,349,202	 	
Trust preferred securities	  	 	487,373	 	 	 	475,000	 	
 	  				 				
Total liabilities	  	 	44,430,683	 	 	 	40,717,997	 	
 	  				 				
Commitments and contingencies	  	 	 	 	 	 	 	 	
Shareholders’ equity	  	 	 	 	 	 	 	 	
Preferred Shares ($1.00 par value, 2,300,000 shares authorized, issued and outstanding)	  	 	2,300	 	 	 	2,300	 	
Ordinary Shares ($0.041666667 par value, 500,000,000 shares authorized; 283,604,445 and 279,897,193 shares issued and outstanding)	  	 	11,817	 	 	 	11,662	 	
Additional paid-in capital	  	 	4,879,892	 	 	 	4,765,355	 	
Unearned stock grant compensation	  	 	(83,828	)	 	 	(44,912	)	
Retained earnings	  	 	4,104,754	 	 	 	3,380,619	 	
Deferred compensation obligation	  	 	12,988	 	 	 	16,687	 	
Accumulated other comprehensive income	  	 	305,538	 	 	 	719,772	 	
Ordinary Shares issued to employee trust	  	 	(12,988	)	 	 	(16,687	)	
 	  				 				
Total shareholders’ equity	  	 	9,220,473	 	 	 	8,834,796	 	
 	  				 				
Total liabilities and shareholders’ equity	  	$	53,651,156	 	 	$	49,552,793	 	

See accompanying notes to the interim consolidated financial statements
 
3

Table of Contents
 ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended June 30, 2004 and 2003
(Unaudited)

 	  	Three Months Ended
June 30
	 	 	Six Months Ended
June 30
	 	
 	  	2004
	 	 	2003
	 	 	2004
	 	 	2003
	 	
 	  	(in thousands of U.S. dollars, except per share data)	 	
Revenues	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross premiums written	  	$	4,040,857	 	 	$	3,404,918	 	 	$	8,456,332	 	 	$	7,517,682	 	
Reinsurance premiums ceded	  	 	(1,173,926	)	 	 	(998,925	)	 	 	(2,351,235	)	 	 	(2,181,637	)	
 	  				 				 				 				
Net premiums written	  	 	2,866,931	 	 	 	2,405,993	 	 	 	6,105,097	 	 	 	5,336,045	 	
Change in unearned premiums	  	 	(78,253	)	 	 	(99,401	)	 	 	(716,742	)	 	 	(957,921	)	
 	  				 				 				 				
Net premiums earned	  	 	2,788,678	 	 	 	2,306,592	 	 	 	5,388,355	 	 	 	4,378,124	 	
Net investment income	  	 	237,060	 	 	 	211,947	 	 	 	474,980	 	 	 	418,359	 	
Net realized gains	  	 	42,202	 	 	 	106,561	 	 	 	99,463	 	 	 	66,472	 	
 	  				 				 				 				
Total revenues	  	 	3,067,940	 	 	 	2,625,100	 	 	 	5,962,798	 	 	 	4,862,955	 	
 	  				 				 				 				
Expenses	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Losses and loss expenses	  	 	1,724,276	 	 	 	1,459,379	 	 	 	3,266,873	 	 	 	2,742,212	 	
Life and annuity benefits	  	 	44,398	 	 	 	43,559	 	 	 	86,122	 	 	 	92,058	 	
Policy acquisition costs	  	 	395,775	 	 	 	333,282	 	 	 	760,689	 	 	 	629,176	 	
Administrative expenses	  	 	309,797	 	 	 	287,288	 	 	 	624,702	 	 	 	546,960	 	
Interest expense	  	 	46,399	 	 	 	43,681	 	 	 	90,671	 	 	 	88,610	 	
Other (income) expense	  	 	5,903	 	 	 	(726	)	 	 	22,983	 	 	 	5,428	 	
 	  				 				 				 				
Total expenses	  	 	2,526,548	 	 	 	2,166,463	 	 	 	4,852,040	 	 	 	4,104,444	 	
 	  				 				 				 				
Income before income tax	  	 	541,392	 	 	 	458,637	 	 	 	1,110,758	 	 	 	758,511	 	
Income tax expense	  	 	128,383	 	 	 	88,169	 	 	 	250,924	 	 	 	140,599	 	
 	  				 				 				 				
Net income	  	$	413,009	 	 	$	370,468	 	 	$	859,834	 	 	$	617,912	 	
 	  				 				 				 				
Basic earnings per share	  	$	1.43	 	 	$	1.35	 	 	$	2.99	 	 	$	2.28	 	
 	  				 				 				 				
Diluted earnings per share	  	$	1.41	 	 	$	1.32	 	 	$	2.94	 	 	$	2.23	 	

See accompanying notes to the interim consolidated financial statements
 
4

Table of Contents
 ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the six months ended June 30, 2004 and 2003
(Unaudited)

 	  	2004
	 	 	2003
	 	
 	  	(in thousands of U.S. dollars)	 	
Preferred Shares	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	$	2,300	 	 	$	—  	 	
Shares issued	  	 	—  	 	 	 	2,300	 	
 	  				 				
Balance – end of period	  	 	2,300	 	 	 	2,300	 	
 	  				 				
Ordinary Shares	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	11,662	 	 	 	10,945	 	
Shares issued	  	 	64	 	 	 	561	 	
Exercise of stock options	  	 	111	 	 	 	86	 	
Issued under Employee Stock Purchase Plan (ESPP)	  	 	6	 	 	 	6	 	
Cancellation of shares	  	 	(26	)	 	 	(25	)	
 	  				 				
Balance – end of period	  	 	11,817	 	 	 	11,573	 	
 	  				 				
Additional paid-in capital	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	4,765,355	 	 	 	3,781,112	 	
Ordinary Shares issued	  	 	67,148	 	 	 	46,076	 	
Exercise of stock options	  	 	61,281	 	 	 	24,465	 	
Ordinary Shares issued under ESPP	  	 	3,678	 	 	 	3,390	 	
Cancellation of Ordinary Shares	  	 	(24,286	)	 	 	(20,319	)	
Other	  	 	6,716	 	 	 	11,109	 	
Preferred Shares issued, net	  	 	—  	 	 	 	554,587	 	
Conversion of Mezzanine equity, net	  	 	—  	 	 	 	310,466	 	
 	  				 				
Balance – end of period	  	 	4,879,892	 	 	 	4,710,886	 	
 	  				 				
Unearned stock grant compensation	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	(44,912	)	 	 	(42,576	)	
Stock grants awarded	  	 	(67,680	)	 	 	(44,899	)	
Stock grants forfeited	  	 	10,644	 	 	 	2,671	 	
Amortization	  	 	18,120	 	 	 	15,796	 	
 	  				 				
Balance – end of period	  	 	(83,828	)	 	 	(69,008	)	
 	  				 				
Retained earnings	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	3,380,619	 	 	 	2,199,313	 	
Net income	  	 	859,834	 	 	 	617,912	 	
Dividends declared on Ordinary Shares	  	 	(113,275	)	 	 	(97,738	)	
Dividends declared on Preferred Shares	  	 	(22,424	)	 	 	—  	 	
Dividends declared on Mezzanine equity	  	 	—  	 	 	 	(9,773	)	
 	  				 				
Balance – end of period	  	 	4,104,754	 	 	 	2,709,714	 	
 	  				 				
Deferred compensation obligation	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	16,687	 	 	 	18,631	 	
(Decrease) increase to obligation	  	 	(3,699	)	 	 	336	 	
 	  				 				
Balance – end of period	  	$	12,988	 	 	$	18,967	 	

See accompanying notes to the interim consolidated financial statements
 
5

Table of Contents
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (cont’d)
For the six months ended June 30, 2004 and 2003
(Unaudited)

 	  	2004
	 	 	2003
	 	
 	  	(in thousands of U.S. dollars)	 	
Accumulated other comprehensive income	  	 	 	 	 	 	 	 	
Net unrealized appreciation (depreciation) on investments	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	$	684,267	 	 	$	476,411	 	
Change in period, net of income tax	  	 	(407,911	)	 	 	351,870	 	
 	  				 				
Balance – end of period	  	 	276,356	 	 	 	828,281	 	
 	  				 				
Minimum pension liability	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	(35,684	)	 	 	—  	 	
Change in period, net of income tax	  	 	(435	)	 	 	(40,000	)	
 	  				 				
Balance – end of period	  	 	(36,119	)	 	 	(40,000	)	
 	  				 				
Cumulative translation adjustment	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	71,189	 	 	 	(36,519	)	
Change in period, net of income tax	  	 	(5,888	)	 	 	60,877	 	
 	  				 				
Balance – end of period	  	 	65,301	 	 	 	24,358	 	
 	  				 				
Accumulated other comprehensive income	  	 	305,538	 	 	 	812,639	 	
 	  				 				
Ordinary Shares issued to employee trust	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	(16,687	)	 	 	(18,631	)	
Decrease (increase) in Ordinary Shares	  	 	3,699	 	 	 	(336	)	
 	  				 				
Balance – end of period	  	 	(12,988	)	 	 	(18,967	)	
 	  				 				
Total shareholders’ equity	  	$	9,220,473	 	 	$	8,178,104	 	

See accompanying notes to the interim consolidated financial statements
 
6

Table of Contents
 ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the six months ended June 30, 2004 and 2003
(Unaudited)

 	  	2004
	 	 	2003
	 	
 	  	(in thousands of U.S. dollars)	 	
Net income	  	$	859,834	 	 	$	617,912	 	
			
Other comprehensive income	  	 	 	 	 	 	 	 	
Net unrealized appreciation (depreciation) on investments	  	 	 	 	 	 	 	 	
Unrealized appreciation (depreciation) on investments	  	 	(386,644	)	 	 	466,152	 	
Reclassification adjustment for net realized (gains) losses included in net income	  	 	(144,017	)	 	 	(37,606	)	
 	  				 				
 	  	 	(530,661	)	 	 	428,546	 	
			
Cumulative translation adjustment	  	 	(21,681	)	 	 	83,846	 	
			
Minimum pension liability	  	 	(629	)	 	 	(59,000	)	
 	  				 				
Other comprehensive income, before income tax	  	 	(552,971	)	 	 	453,392	 	
Income tax benefit (expense) related to other comprehensive income items	  	 	138,737	 	 	 	(80,645	)	
 	  				 				
Other comprehensive income	  	 	(414,234	)	 	 	372,747	 	
 	  				 				
Comprehensive income	  	$	445,600	 	 	$	990,659	 	

See accompanying notes to the interim consolidated financial statements
 
7

Table of Contents
 ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2004 and 2003
(Unaudited)

 	  	2004
	 	 	2003
	 	
 	  	(in thousands of U.S. dollars)	 	
Cash flows from operating activities	  	 	 	 	 	 	 	 	
Net income	  	$	859,834	 	 	$	617,912	 	
Adjustments to reconcile net income to net cash flows from (used for) operating activities:	  	 	 	 	 	 	 	 	
Net realized (gains) losses	  	 	(99,463	)	 	 	(66,472	)	
Amortization of premium/discounts on fixed maturities	  	 	53,908	 	 	 	38,673	 	
Deferred income taxes	  	 	145,300	 	 	 	116,880	 	
Unpaid losses and loss expenses	  	 	1,555,506	 	 	 	502,243	 	
Unearned premiums	  	 	1,024,837	 	 	 	706,387	 	
Future policy benefits for life and annuity contracts	  	 	13,461	 	 	 	27,663	 	
Insurance and reinsurance balances payable	  	 	404,509	 	 	 	(50,554	)	
Accounts payable, accrued expenses and other liabilities	  	 	14,932	 	 	 	(93,358	)	
Insurance and reinsurance balances receivable	  	 	(761,629	)	 	 	(446,356	)	
Reinsurance recoverable	  	 	(400,951	)	 	 	100,535	 	
Deferred policy acquisition costs	  	 	(148,519	)	 	 	(125,155	)	
Prepaid reinsurance premiums	  	 	(283,567	)	 	 	298,073	 	
Funds withheld, net	  	 	(93,787	)	 	 	32,825	 	
Value of reinsurance business assumed	  	 	24,595	 	 	 	7,216	 	
Other	  	 	(29,056	)	 	 	(87,609	)	
 	  				 				
Net cash flows from operating activities	  	$	2,279,910	 	 	$	1,578,903	 	
 	  				 				
Cash flows from investing activities	  	 	 	 	 	 	 	 	
Purchases of fixed maturities	  	$	(13,711,920	)	 	$	(9,463,854	)	
Purchases of equity securities	  	 	(821,428	)	 	 	(65,057	)	
Sales of fixed maturities	  	 	10,604,377	 	 	 	7,253,066	 	
Sales of equity securities	  	 	440,962	 	 	 	62,844	 	
Maturities of fixed maturities	  	 	—  	 	 	 	94,612	 	
Net realized gains (losses) on investment derivatives	  	 	15,081	 	 	 	5,249	 	
Sale of subsidiary (net of cash sold of $82 million)	  	 	953,164	 	 	 	—  	 	
Other	  	 	(93,885	)	 	 	(35,816	)	
 	  				 				
Net cash flows used for investing activities	  	$	(2,613,649	)	 	$	(2,148,956	)	
 	  				 				
Cash flows from financing activities	  	 	 	 	 	 	 	 	
Dividends paid on Ordinary Shares	  	$	(106,900	)	 	$	(92,688	)	
Dividends paid on Preferred Shares	  	 	(22,425	)	 	 	—  	 	
Proceeds from issuance of long-term debt	  	 	499,565	 	 	 	—  	 	
Proceeds from exercise of options for Ordinary Shares	  	 	61,392	 	 	 	24,551	 	
Proceeds from Ordinary Shares issued under ESPP	  	 	3,684	 	 	 	3,396	 	
Net proceeds from short-term debt	  	 	13	 	 	 	99	 	
Net proceeds from issuance of Preferred Shares	  	 	—  	 	 	 	556,887	 	
Dividends paid on Mezzanine equity	  	 	—  	 	 	 	(9,773	)	
 	  				 				
Net cash flows from financing activities	  	$	435,329	 	 	$	482,472	 	
 	  				 				
Net increase (decrease) in cash	  	 	101,590	 	 	 	(87,581	)	
Cash – beginning of period	  	 	561,650	 	 	 	663,355	 	
 	  				 				
Cash – end of period	  	$	663,240	 	 	$	575,774	 	

See accompanying notes to the interim consolidated financial statements
 
8

Table of Contents
 ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1. General
 
The interim unaudited consolidated financial statements, which include the accounts of the Company and its subsidiaries, have been prepared in accordance with accounting principles generally accepted in the United States of America and, in the opinion of management, reflect all adjustments (consisting of normally recurring accruals) necessary for a fair presentation of results for such periods. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the consolidated financial statements, and related notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
 
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 business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance and Financial Services. These segments are described in Note 16.
 
The following table summarizes the Company’s gross premiums written by geographic region for the six months ended June 30, 2004 and 2003. Allocations have been made on the basis of location of risk.

Six Months Ended
	  	North
America
	 	 	Europe
	 	 	Australia &
New Zealand
	 	 	Asia
Pacific
	 	 	Latin America
	 	
June 30, 2004	  	63	%	 	24	%	 	2	%	 	7	%	 	4	%	
June 30, 2003	  	60	%	 	26	%	 	2	%	 	8	%	 	4	%	
 
2. New accounting pronouncements
 
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. Through the Global Reinsurance segment, the Company reinsures annuitization benefits, principally related to guaranteed minimum death benefits (GMDBs) and guaranteed minimum income benefits (GMIBs). The valuation of insurance liabilities related to the Company’s GMDB reinsurance product is subject to certain provisions of the SOP whereas the Company’s GMIB reinsurance product meets the definition of a derivative for accounting purposes and is therefore carried at fair value with changes in fair value recognized in income in the period of the change pursuant to FAS 133. Pursuant to SOP 03-1, liabilities for annuitization benefits, such as the minimum death benefit guarantee, are generally based on cumulative assessments or premiums to date multiplied by a benefit ratio that is determined by estimating the expected value of benefit payments and related adjustment expenses divided by the present value of cumulative assessment or expected fees during the annuitization period. In the event the Company was to anticipate an ultimate loss on the business over the in-force period of the underlying annuities, an additional liability would be established to recognize such losses. The Company adopted SOP 03-1 on January 1, 2004. In its capacity as reinsurer, the Company’s valuation of insurance liabilities related to its GMDB reinsurance program has been materially consistent with the requirements of the SOP. Consequently, the adoption of SOP 03-1 did not have a material impact on the Company’s consolidated financial statements. See Note 6b for further details regarding the Company’s reinsurance programs involving minimum benefit guarantees under annuity contracts.
 
In December 2003, the Financial Accounting Standard Board (FASB) revised its Statement of Financial Accounting Standards 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. (See Note 10). Given that all of the Company’s defined benefit plans cover foreign employees, the Company is required to implement the additional disclosures beginning in its 2004 consolidated financial statements.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
3. Sale of financial and mortgage guaranty business through Assured Guaranty Ltd.
 
On April 28, 2004, the Company completed the sale of 65.3 percent of its financial and mortgage guaranty reinsurance and insurance businesses (transferred business) through the initial public offering (IPO) of 49 million common shares of Assured Guaranty Ltd. (Assured Guaranty) at $18.00 per share. Assured Guaranty was incorporated in Bermuda in August 2003 for the sole purpose of becoming a holding company for the transferred business.
 
Pursuant to the completion of the IPO, the Company received proceeds, net of offering costs, of approximately $835 million and a return of capital of $200 million. The transaction resulted in a reduction of shareholders’ equity of $61.1 million, representing the difference between net proceeds and the carrying value of 65.3 percent of Assured Guaranty at April 28, 2004 as well as taxes incurred on the transaction. The transaction also resulted in a pre-tax realized loss of $6.7 million which is included in realized gains (losses) in the accompanying statement of operations and an after-tax loss of $18.1 million, which consists of the following:

Loss on sale of financial and mortgage guaranty businesses	  	$	(49.7	)	
Realization of accumulated other comprehensive income on companies sold	  	 	43.0	 	
 	  				
Pre-tax loss included in net realized gains (losses)	  	 	(6.7	)	
Income tax expense	  	 	11.4	 	
 	  				
After-tax loss	  	$	(18.1	)	

A description of each component of the loss is as follows:
 
 	•	The loss on the sale of the financial and mortgage guaranty businesses of $49.7 million represents the difference between the carrying value of the Company’s interest in Assured Guaranty sold and net proceeds of the offering.	
 
 	•	The realization of accumulated other comprehensive income on companies sold of $43.0 million principally relates to the unrealized appreciation of available-for-sale securities included in the carrying value of the interest in Assured Guaranty sold; such gains had no effect on shareholders’ equity.	
 
 	•	Income tax expense of $11.4 million principally relates to federal income taxes incurred from the transfer of ACE’s U.S. financial and mortgage guaranty operations to Assured Guaranty and attributed to the Assured Guaranty shares sold by the Company. The income tax expense results from differences in the basis of the assets of the transferred subsidiaries for financial reporting purposes compared to the corresponding tax basis. In connection with its sale and pursuant to a tax allocation agreement, Assured Guaranty will make a tax election that will have the effect of increasing the tax basis of tangible and intangible assets to fair value. Future tax benefits that Assured Guaranty derives from this election will be payable to ACE and recognized by ACE when realized by Assured Guaranty. 	
 
Subsequent to the completion of the IPO, the Company beneficially owns 26 million common shares, or 34.7 percent of Assured Guaranty’s outstanding common shares and accordingly, no longer consolidates its interest in the Assured Guaranty companies. The retained interest is accounted for under the equity method of accounting with the Company’s carrying value of its investment reflected in other investments within the consolidated balance sheet and the proportionate share of earnings reflected in other (income) expense within the consolidated statement of operations. At June 30, 2004, the Company’s carrying value of its investment in Assured Guaranty is $477 million and from the date of the IPO through June 30, 2004, the Company recorded related earnings of $7.7 million. 
 
For the three months ended June 30, 2004, the Company recognized compensation expense of $7.5 million in connection with the settlement of ACE stock awards held by the employees of Assured Guaranty. These expenses are reflected in other (income) expense within the consolidated statement of operations.
 
In connection with the IPO, the Company has entered into reinsurance agreements with Assured Guaranty in order to retain the insurance liabilities of certain run-off businesses, including trade credit and residual value insurance. At their inception, these contracts had no effect on the Company’s income. Additionally, the Company has entered into a number of agreements with Assured Guaranty that will govern certain aspects of the relationship after this offering, including service agreements under which the Company will provide certain services to Assured Guaranty for a period of time.
 
The assets and liabilities of the Assured Guaranty companies aggregated to $2.8 billion and $1.4 billion at December 31, 2003. Total revenues of the Assured Guaranty companies included in the accompanying financial statements were $114.9 million and $193.8 million for the six months ended June 30, 2004 and 2003, respectively. Net income of the Assured Guaranty companies were $39.5 million and $74.4 million for the six months ended June 30, 2004 and 2003, respectively.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
4. Investments
 
The following table summarizes, for all securities in an unrealized loss position at June 30, 2004 (including securities on loan), the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position.

 	  	0 - 12 Months
	  	Over 12 Months
	  	Total
	
 	  	Fair Value
	  	Gross
Unrealized
Loss
	  	Fair Value
	  	Gross
Unrealized
Loss
	  	Fair Value
	  	Gross
Unrealized
Loss
	
 	  	(in thousands of U.S. dollars)	
U.S. Treasury and agency	  	$	2,234,635	  	$	25,360	  	$	29,484	  	$	1,565	  	$	2,264,119	  	$	26,925	
Non-U.S. governments	  	 	1,476,380	  	 	19,449	  	 	—  	  	 	—  	  	 	1,476,380	  	 	19,449	
Corporate securities	  	 	5,884,528	  	 	109,911	  	 	55,069	  	 	4,234	  	 	5,939,597	  	 	114,145	
Mortgage-backed securities	  	 	3,025,847	  	 	52,180	  	 	36,277	  	 	1,771	  	 	3,062,124	  	 	53,951	
States, municipalities and political subdivisions	  	 	137,575	  	 	2,255	  	 	2,218	  	 	282	  	 	139,793	  	 	2,537	
 	  			  			  			  			  			  			
Total fixed maturities	  	 	12,758,965	  	 	209,155	  	 	123,048	  	 	7,852	  	 	12,882,013	  	 	217,007	
Equity securities	  	 	215,299	  	 	7,431	  	 	—  	  	 	—  	  	 	215,299	  	 	7,431	
 	  			  			  			  			  			  			
Total	  	$	12,974,264	  	$	216,586	  	$	123,048	  	$	7,852	  	$	13,097,312	  	$	224,438	

For securities with an unrealized loss position in excess of 12 months, the decline in fair value is principally due to trends in market interest rates between the purchase date and the balance sheet date. Generally, the duration of the loss position ranges from 12-15 months. The Company periodically reevaluates these securities for other-than-temporary impairment based on several factors including, but not limited to, the extent of the unrealized loss position, the current interest rate environment, and the expected holding period. For the three months and six months ended June 30, 2004, respectively, the Company recognized a realized loss for other-than-temporary impairments of $3 million and $4 million for fixed maturities and $2 million and $3 million for equity securities.
 
5. Goodwill
 
FAS No. 142, “Goodwill and Other Intangible Assets” (FAS 142) 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 review performed during the first quarter of 2004, the Company recognized a goodwill impairment loss of $11.3 million primarily relating to the Company’s Lloyd’s life syndicate. On April 28, 2004, the Company completed the sale of Assured Guaranty. As a result of the sale, goodwill was reduced by $85.4 million in the second quarter of 2004. The following table details the movement in goodwill by segment for the six months ended June 30, 2004.

 	  	Insurance –
North
American
	  	Insurance –
Overseas
General
	  	Global
Reinsurance
	  	Financial
Services
	 	 	ACE
Consolidated
	 	
 	  	 	  	(in thousands of U.S. dollars)	 	 	 	 	
Goodwill at beginning of period	  	$	1,127,513	  	$	1,121,636	  	$	364,958	  	$	96,723	 	 	$	2,710,830	 	
Goodwill impairment loss	  	 	—  	  	 	—  	  	 	—  	  	 	(11,305	)	 	 	(11,305	)	
Sale of subsidiary	  	 	—  	  	 	—  	  	 	—  	  	 	(85,418	)	 	 	(85,418	)	
 	  			  			  			  				 				
Goodwill at end of period	  	$	1,127,513	  	$	1,121,636	  	$	364,958	  	$	—  	 	 	$	2,614,107	 	

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
6. Reinsurance
 
a) Consolidated 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 statements of operations are net of reinsurance. Direct, assumed and ceded amounts for these items for the three and six months ended June 30, 2004 and 2003 are as follows:

 	  	Three Months Ended
June 30
	 	 	Six Months Ended
June 30
	 	
 	  	2004
	 	 	2003
	 	 	2004
	 	 	2003
	 	
 	  	(in thousands of U.S. dollars)	 	
Premiums written	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Direct	  	$	3,351,144	 	 	$	2,769,337	 	 	$	6,740,540	 	 	$	5,853,386	 	
Assumed	  	 	689,713	 	 	 	635,581	 	 	 	1,715,792	 	 	 	1,664,296	 	
Ceded	  	 	(1,173,926	)	 	 	(998,925	)	 	 	(2,351,235	)	 	 	(2,181,637	)	
 	  				 				 				 				
Net	  	$	2,866,931	 	 	$	2,405,993	 	 	$	6,105,097	 	 	$	5,336,045	 	
 	  				 				 				 				
Premiums earned	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Direct	  	$	3,209,426	 	 	$	3,001,987	 	 	$	6,255,914	 	 	$	5,600,789	 	
Assumed	  	 	637,060	 	 	 	588,593	 	 	 	1,220,104	 	 	 	1,174,191	 	
Ceded	  	 	(1,057,808	)	 	 	(1,283,988	)	 	 	(2,087,663	)	 	 	(2,396,856	)	
 	  				 				 				 				
Net	  	$	2,788,678	 	 	$	2,306,592	 	 	$	5,388,355	 	 	$	4,378,124	 	

The composition of the Company’s reinsurance recoverable at June 30, 2004 and December 31, 2003, is as follows:

 	  	June 30
2004
	 	 	December 31
2003
	 	
 	  	(in thousands of U.S. dollars)	 	
Reinsurance recoverable on paid losses and loss expenses	  	$	1,221,772	 	 	$	1,277,119	 	
Bad debt reserve on paid losses and loss expenses	  	 	(440,330	)	 	 	(402,680	)	
Reinsurance recoverable on future policy benefits	  	 	15,851	 	 	 	14,668	 	
Reinsurance recoverable on unpaid losses and loss expenses	  	 	14,135,953	 	 	 	13,749,189	 	
Bad debt reserve on unpaid losses and loss expenses	  	 	(558,907	)	 	 	(557,580	)	
 	  				 				
Net reinsurance recoverable	  	$	14,374,339	 	 	$	14,080,716	 	

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. Provisions have been established for amounts estimated to be uncollectible.
 
Following is a breakdown of the Company’s reinsurance recoverable on paid losses at June 30, 2004 and December 31, 2003:

 	  	June 30, 2004
	 	 	December 31, 2003
	 	
Category
	  	Amount
	  	Bad Debt
Reserve
	  	% of Total
Reserve
	 	 	Amount
	  	Bad Debt
Reserve
	  	% of Total
Reserve
	 	
 	  	(in millions of U.S. dollars)	 	
General collections	  	$	619	  	$	35	  	5.7	%	 	$	730	  	$	45	  	6.2	%	
Other	  	 	603	  	 	405	  	67.2	%	 	 	547	  	 	358	  	65.4	%	
 	  			  			  			 			  			  			
Total	  	$	1,222	  	$	440	  	36.0	%	 	$	1,277	  	$	403	  	31.6	%	

General collections balances represents 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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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
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 the reserve for other, considers the merits of the underlying matter, the credit quality of the reinsurer and whether the Company has received collateral or other credit protections such as parental guarantees.
 
b) Reinsurance programs involving minimum benefit guarantees under annuity contracts
 
Beginning in 2000, the Company has been engaged in reinsuring various death and living benefit guarantees associated with variable annuities issued primarily in the United States. Each reinsurance treaty covers variable annuities written during a limited period, typically not exceeding two years. The Company generally receives a monthly premium during the accumulation phase of the covered annuities (in-force) based on a percentage of the underlying accumulated account values. Depending on an annuitant’s age, the accumulation phase can last many years. To limit the Company’s exposure under these programs, all reinsurance treaties include aggregate claim limits and many include an aggregate deductible.
 
The guarantees which are payable on death, referred to as guaranteed minimum death benefits (GMDBs), principally cover shortfalls between accumulated account value at the time of an annuitant’s death and either i) an annuitant’s total deposits; ii) an annuitant’s total deposits plus a minimum annual return; or iii) the highest accumulated account value attained during any policy anniversary date. In addition, a death benefit may be based on a formula specified in the variable annuity contract that uses a percentage of the growth of the underlying contract value. Reinsurance programs covering GMDBs are accounted for pursuant to SOP 03-1. (See Note 2).
 
Under reinsurance programs covering living benefit guarantees, the Company assumes the risk of guaranteed minimum income benefits (GMIBs) associated with variable annuity contracts. The GMIB risk is triggered if, at the time the contract holder elects to convert the accumulated account value to a periodic payment stream (annuitize), the accumulated account value is not sufficient to purchase a guaranteed minimum level of monthly income. The Company’s GMIB reinsurance product meets the definition of a derivative for accounting purposes and is therefore carried at fair value with changes in fair value recognized in income in the period of the change pursuant to FAS 133. As the assuming entity, the Company is obligated to provide coverage until the expiration of the underlying annuities. Therefore, to best disclose the nature of the underlying risk over the exposure period within the statement of operations, the Company presents the change in fair value as follows. Premiums received under the reinsurance treaties are classified as premium. Expected losses allocated to premiums received are classified as life and annuity benefits and valued pursuant to SOP 03-1, similar to GMDB reinsurance. Other changes in fair value, principally arising from changes in expected losses allocated to expected future premiums, are classified as realized gains (losses). As fair value generally represents the cost to exit a business and thus includes a risk margin, the Company may recognize a loss for other changes in fair value during a given period due to temporary adverse changes in the capital markets (i.e., declining interest rates and/or declining equity markets) even when the Company continues to expect the business to be profitable. Management believes this presentation provides the most meaningful disclosure of changes in the underlying risk within the GMIB reinsurance programs for a given reporting period.
 
The presentation of income and expenses relating to GMDB and GMIB reinsurance for the three and six months ending June 30, 2004 and 2003, are as follows:

 	  	Three Months Ended
June 30
	  	Six Months Ended
June 30
	
 	  	2004
	  	2003
	  	2004
	 	 	2003
	
 	  	(in millions of U.S. dollars)	
GMDB	  	 	 	  	 	 	  	 	 	 	 	 	 	
Net premiums earned	  	$	10.3	  	$	3.0	  	$	19.9	 	 	$	15.1	
Life and annuity benefits expense	  	$	3.5	  	$	1.5	  	$	7.3	 	 	$	12.6	
					
GMIB	  	 	 	  	 	 	  	 	 	 	 	 	 	
Net premiums earned	  	$	15.5	  	$	4.1	  	$	28.1	 	 	$	7.2	
Life and annuity benefits expense	  	$	4.5	  	$	2.1	  	$	9.7	 	 	$	3.6	
Realized gains (losses)	  	$	15.4	  	 	—  	  	$	(9.6	)	 	 	—  	
 
At June 30, 2004, reported liabilities for GMDB and GMIB reinsurance were $25.9 million and $42.6 million, respectively, compared with $30.5 million and $22.8 million, respectively at December 31, 2003. Reported liabilities for both GMDB and GMIB reinsurance are determined using internal valuation models. Such valuations require considerable judgment and are subject to significant uncertainty. The valuation of these products is subject to fluctuations arising from, among other factors, changes in interest rates, changes in the equity markets, and changes in the allocation of the investments underlying annuitant’s account value. These models and the related assumptions are continually reviewed by management and enhanced, as appropriate, based upon improvements in modeling techniques and availability of more timely information, such as market conditions and demographics of in-force annuities.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
At June 30, 2004, the Company’s net amount at risk from its GMDB and GMIB reinsurance programs are $350 million and $25 million, respectively. For the GMDB programs, the net amount at risk is defined as the excess, if any, of the current guaranteed value over the current account value. For the GMIB programs, the net amount at risk is defined as the excess, if any, of the present value of the minimum guaranteed annuity payments over the present value of the annuity payments otherwise available to each policyholder.
 
7. Commitments, contingencies and guarantees
 
The Company invests in private equity partnerships with a carrying value of $94 million included in other investments. In connection with these investments, the Company has commitments that may require funding of up to $101 million over the next several years.
 
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.
 
8. Credit facilities
 
In April 2004, the Company replaced its $500 million, 364-day revolving credit facility and its $250 million, five-year revolving credit facility with a $600 million three-year credit facility. This facility is available for general corporate purposes, commercial paper back-up and the issuance of letters of credit (LOCs). At June 30, 2004, the outstanding LOCs issued under the replaced facilities was $63.9 million and commercial paper outstanding was $146 million. There were no other drawings or LOCs issued under these facilities.
 
14

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
9. Debt
 
The following table outlines the Company’s debt at June 30, 2004 and December 31, 2003.

 	  	June 30
2004
	 	December 31
2003
	
 	  	(in millions of U.S. dollars)	
Short-term debt	  	 	 	 	 	 	
ACE INA commercial paper	  	$	146	 	$	146	
ACE INA 8.2 percent Notes due August 2004	  	 	400	 	 	400	
 	  			 			
 	  	 	546	 	 	546	
 	  			 			
Long-term debt	  	 	 	 	 	 	
ACE INA Notes due 2006	  	 	300	 	 	300	
ACE Limited Senior Notes due 2007	  	 	500	 	 	499	
ACE US Holdings Senior Notes due 2008	  	 	250	 	 	250	
ACE INA Subordinated Notes due 2009	  	 	200	 	 	200	
ACE INA Senior Notes due 2014	  	 	499	 	 	—  	
ACE INA Debentures due 2029	  	 	100	 	 	100	
 	  			 			
 	  	$	1,849	 	$	1,349	
 	  			 			
Trust Preferred Securities	  	 	 	 	 	 	
Capital Re LLC Monthly Income Preferred Securities due 2044	  	$	75	 	$	75	
ACE INA Trust Preferred Securities due 2029	  	 	103	 	 	100	
ACE INA Capital Securities due 2030	  	 	309	 	 	300	
 	  			 			
 	  	$	487	 	$	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 totaled $600 million at June 30, 2004) for ACE and for ACE INA. For the six months ended June 30, 2004 and 2003, commercial paper interest rates averaged 1.2 percent and 1.5 percent, respectively.
 
b) ACE INA senior notes 
 
In June 2004, ACE INA issued $500 million of 5.875 percent notes due June 15, 2014. The notes are not redeemable before maturity and do not have the benefit of any sinking fund. These senior unsecured notes are guaranteed on a senior basis by the Company and they rank equally with all of the Company’s other senior obligations. They also 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. The proceeds of the notes were used partly to repay $75 million of Capital Re trust preferred securities on July 12, 2004. The balance will be used to repay $400 million of ACE INA 8.2 percent notes, which mature on August 15, 2004, and for general corporate purposes.
 
10. 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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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Net periodic benefit costs recognized by component for the three and six months ended June 30, 2004 and 2003 is as follows:

 	  	Three Months Ended
June 30
	 	 	Six Months Ended
June 30
	 	
 	  	2004
	 	 	2003
	 	 	2004
	 	 	2003
	 	
 	  	(in thousands of U.S. dollars)	 	
Components of net benefit cost	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Service cost	  	$	1,364	 	 	$	1,354	 	 	$	2,728	 	 	$	2,709	 	
Interest cost	  	 	3,974	 	 	 	3,809	 	 	 	7,946	 	 	 	7,616	 	
Expected return on plan assets	  	 	(3,468	)	 	 	(2,974	)	 	 	(6,936	)	 	 	(5,949	)	
Amortization of net transition asset	  	 	1	 	 	 	1	 	 	 	3	 	 	 	3	 	
Amortization of prior service cost	  	 	25	 	 	 	25	 	 	 	51	 	 	 	49	 	
Amortization of net actuarial loss	  	 	1,583	 	 	 	1,502	 	 	 	3,166	 	 	 	3,006	 	
 	  				 				 				 				
Net benefit cost	  	$	3,479	 	 	$	3,717	 	 	$	6,958	 	 	$	7,434	 	

11. Restricted stock awards
 
Under the Company’s long-term incentive plans, 1,544,080 restricted Ordinary Shares were awarded during the six months ended June 30, 2004, to officers of the Company and its subsidiaries. These shares vest at various dates through June 2008. In addition, during the period, 30,361 restricted Ordinary Shares were awarded to outside directors under the terms of the 1995 Outside Directors Plan. These shares vest in May 2005.
 
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.
 
12. Earnings per share
 
The following table sets forth the computation of basic and diluted earnings per share.

 	  	Three Months Ended
June 30
	 	 	Six Months Ended
June 30
	 	
 	  	2004
	 	 	2003
	 	 	2004
	 	 	2003
	 	
 	  	(in thousands of U.S. dollars, except share and per share data)	 	
Numerator:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	  	$	413,009	 	 	$	370,468	 	 	$	859,834	 	 	$	617,912	 	
Dividends on Preferred Shares	  	 	(11,212	)	 	 	(3,686	)	 	 	(22,548	)	 	 	(3,686	)	
Dividends on Mezzanine equity	  	 	—  	 	 	 	(3,358	)	 	 	—  	 	 	 	(9,773	)	
 	  				 				 				 				
Net income available to holders of Ordinary Shares	  	$	401,797	 	 	$	363,424	 	 	$	837,286	 	 	$	604,453	 	
 	  				 				 				 				
Denominator:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Denominator for basic earnings per share:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted average shares outstanding	  	 	280,007,156	 	 	 	268,260,244	 	 	 	279,477,772	 	 	 	264,957,203	 	
Effect of other dilutive securities	  	 	5,364,008	 	 	 	6,972,095	 	 	 	5,560,172	 	 	 	5,761,774	 	
 	  				 				 				 				
Denominator for diluted earnings per share:	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Adjusted weighted average shares outstanding and assumed conversions	  	 	285,371,164	 	 	 	275,232,339	 	 	 	285,037,944	 	 	 	270,718,977	 	
 	  				 				 				 				
Basic earnings per share	  	$	1.43	 	 	$	1.35	 	 	$	2.99	 	 	$	2.28	 	
 	  				 				 				 				
Diluted earnings per share	  	$	1.41	 	 	$	1.32	 	 	$	2.94	 	 	$	2.23	 	

16

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
13. FAS 148 Pro Forma Disclosures
 
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.
 
Following is a summary of options issued and outstanding for the three and six months ended June 30, 2004 and 2003:

 	  	Year of
Expiration
	  	Average
Exercise
Price
	  	Options for
Ordinary
Shares
	 	 	Year of
Expiration
	  	Average
Exercise
Price
	  	Options for
Ordinary
Shares
	 	
 	  	Three Months Ended June 30, 2004
	 	 	Three Months Ended June 30, 2003
	 	
Balance – beginning of period	  	 	  	 	 	  	18,951,480	 	 	 	  	 	 	  	22,403,136	 	
Options granted	  	2014	  	$	43.31	  	79,490	 	 	2013	  	$	32.05	  	100,250	 	
Options exercised	  	2004-2014	  	$	43.46	  	(1,237,457	)	 	2003-2011	  	$	34.46	  	(1,887,558	)	
Options forfeited	  	2011-2014	  	$	38.54	  	(210,573	)	 	2007-2013	  	$	38.39	  	(170,966	)	
 	  	 	  	 	 	  			 	 	  	 	 	  			
Balance – end of period	  	 	  	 	 	  	17,582,940	 	 	 	  	 	 	  	20,444,862	 	

Six Months Ended June 30, 2004
	 	 	Six Months Ended June 30, 2003
	 	
Balance – beginning of period	  	 	  	 	 	  	18,391,136	 	 	 	  	 	 	  	19,312,287	 	
Options granted	  	2014	  	$	43.54	  	2,135,310	 	 	2013	  	$	27.74	  	3,483,962	 	
Options exercised	  	2004-2014	  	$	43.57	  	(2,669,937	)	 	2003-2011	  	$	34.06	  	(2,071,371	)	
Options forfeited	  	2006-2014	  	$	41.03	  	(273,569	)	 	2003-2013	  	$	39.47	  	(280,016	)	
 	  	 	  	 	 	  			 	 	  	 	 	  			
Balance – end of period	  	 	  	 	 	  	17,582,940	 	 	 	  	 	 	  	20,444,862	 	

The following table outlines the Company’s net income available to holders of Ordinary Shares and diluted earnings per share for the three and six months ended June 30, 2004 and 2003, had the compensation cost been determined in accordance with the fair value method recommended in FAS 123.

 	  	Three Months Ended
June 30
	  	Six Months Ended
June 30
	
 	  	2004
	  	2003
	  	2004
	  	2003
	
 	  	(in thousands of U.S. dollars, except per share data)	
Net income available to holders of Ordinary Shares:	  	 	 	  	 	 	  	 	 	  	 	 	
As reported	  	$	401,797	  	$	363,424	  	$	837,286	  	$	604,453	
Add: Stock-based compensation expense included in reported net income, net of income tax	  	$	14,677	  	$	8,108	  	$	23,829	  	$	12,705	
Deduct: Compensation expense, net of income tax	  	$	21,901	  	$	15,843	  	$	42,100	  	$	26,829	
 	  			  			  			  			
Pro forma	  	$	394,573	  	$	355,689	  	$	819,015	  	$	590,329	
Basic earnings per share:	  	 	 	  	 	 	  	 	 	  	 	 	
As reported	  	$	1.43	  	$	1.35	  	$	2.99	  	$	2.28	
Pro forma	  	$	1.41	  	$	1.32	  	$	2.93	  	$	2.23	
Diluted earnings per share:	  	 	 	  	 	 	  	 	 	  	 	 	
As reported	  	$	1.41	  	$	1.32	  	$	2.94	  	$	2.23	
Pro forma	  	$	1.38	  	$	1.29	  	$	2.88	  	$	2.19	
 
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 for the three months ended June 30, 2004 and 2003, respectively: dividend yield of 1.75 percent and 2.15 percent, expected volatility of 27.09 percent and 32.95 percent, risk free interest rate of 3.23 percent and 2.25 percent. The expected life is five years and four years for 2004 and 2003, respectively, and the forfeiture rate is 5 percent for 2004 and 2003.
 
17

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following weighted-average assumptions were used for the six months ended June 30, 2004 and 2003, respectively: dividend yield of 1.75 percent and 2.46, expected volatility of 26.77 percent and 32.74 percent, risk free interest rate of 2.73 percent and 2.33 percent. The expected life is four years and the forfeiture rate is 5 percent for 2004 and 2003.
 
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.
 
The income tax provision below includes income tax expense of $11.4 million, which relates to federal income taxes incurred from the transfer of ACE’s U.S. financial and mortgage guaranty operations to Assured Guaranty and attributed to the Assured Guaranty shares sold by the Company (See Note 3). The income tax expense results from a higher basis in the assets of the transferred subsidiaries for financial reporting purposes compared to the corresponding tax basis. In connection with its sale and pursuant to a tax allocation agreement, Assured Guaranty will make a tax election that will have the effect of increasing the tax basis of tangible and intangible assets to fair value. Future tax benefits that Assured Guaranty derives from this election will be payable to ACE and recognized by ACE when realized by Assured Guaranty.
 
ACE Prime Holdings and ACE Cap Re USA Holdings (through April 28, 2004), and their respective subsidiaries are subject to income taxes imposed by U.S. authorities and file consolidated U.S. income 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.
 
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 three and six months ended June 30, 2004 and 2003 is as follows:

 	  	Three Months Ended
June 30
	  	Six Months Ended
June 30
	
 	  	2004
	  	2003
	  	2004
	  	2003
	
 	  	(in thousands of U.S. dollars)	
Current tax expense	  	$	36,678	  	$	17,046	  	$	105,624	  	$	23,719	
Deferred tax expense	  	 	91,705	  	 	71,123	  	 	145,300	  	 	116,880	
 	  			  			  			  			
Provision for income taxes	  	$	128,383	  	$	88,169	  	$	250,924	  	$	140,599	

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 three and six months ended June 30, 2004 and 2003, is provided below.

 	  	Three Months Ended
June 30
	 	 	Six Months Ended
June 30
	 	
 	  	2004
	 	 	2003
	 	 	2004
	 	 	2003
	 	
 	  	(in thousands of U.S. dollars)	 	
Expected tax provision at weighted average rate	  	$	91,710	 	 	$	85,758	 	 	$	212,012	 	 	$	138,054	 	
Permanent differences	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Tax-exempt interest	  	 	(2,173	)	 	 	(3,840	)	 	 	(6,848	)	 	 	(7,642	)	
Sale of Assured Guaranty	  	 	35,011	 	 	 	—  	 	 	 	35,011	 	 	 	—  	 	
Goodwill	  	 	—  	 	 	 	525	 	 	 	3,957	 	 	 	1,050	 	
Other	  	 	1,829	 	 	 	1,964	 	 	 	1,630	 	 	 	1,454	 	
Net withholding taxes	  	 	2,006	 	 	 	3,762	 	 	 	5,162	 	 	 	7,683	 	
 	  				 				 				 				
Total provision for income taxes	  	$	128,383	 	 	$	88,169	 	 	$	250,924	 	 	$	140,599	 	

18

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The components of the net deferred tax asset at June 30, 2004 and December 31, 2003 are as follows:

 	  	June 30
2004
	  	December 31
2003
	
 	  	(in thousands of U.S. dollars)	
Deferred tax assets	  	 	 	  	 	 	
Loss reserve discount	  	$	538,579	  	$	518,443	
Unearned premium reserve	  	 	151,279	  	 	114,521	
Foreign tax credits	  	 	291,683	  	 	204,052	
Investments	  	 	123,971	  	 	92,898	
Bad debts	  	 	150,264	  	 	152,619	
Net operating loss carryforward	  	 	234,761	  	 	412,469	
Other	  	 	108,023	  	 	120,203	
 	  			  			
Total deferred tax assets	  	 	1,598,560	  	 	1,615,205	
 	  			  			
Deferred tax liabilities	  	 	 	  	 	 	
Deferred policy acquisition costs	  	 	129,822	  	 	163,199	
Unrealized appreciation on investments	  	 	51,797	  	 	174,547	
Unremitted foreign earnings	  	 	176,641	  	 	52,062	
 	  			  			
Total deferred tax liabilities	  	 	358,260	  	 	389,808	
 	  			  			
Valuation allowance	  	 	125,741	  	 	135,592	
 	  			  			
Net deferred tax asset	  	$	1,114,559	  	$	1,089,805	

The valuation allowance of $126 million at June 30, 2004 and $136 million at December 31, 2003, 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. The change in the valuation allowance of $10 million relates to the business that transferred from the Company to Assured Guaranty.
 
At June 30, 2004, the Company has net operating loss carryforwards for U.S. federal income tax purposes of approximately $671 million. 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. Information provided in connection with outstanding debt of subsidiaries
 
The following tables present condensed consolidating financial information at June 30, 2004 and December 31, 2003 and for the three and six months ended June 30, 2004 and 2003, for ACE Limited (the “Parent Guarantor”) and it’s “Subsidiary Issuers”. The Subsidiary Issuers are direct or indirect wholly-owned subsidiaries of the Parent Guarantor. At June 30, 2004, the Subsidiary Issuer was ACE INA Holdings, Inc and at December 31, 2003, the Subsidiary Issuers were ACE INA Holdings, Inc. and ACE Financial Services, Inc. (formerly Capital Re Corporation). On July 12, 2004, ACE Financial Services, Inc redeemed all $75 million of its trust preferred securities (See Note 17). 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.
 
.
 
19

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Condensed Consolidating Balance Sheet at June 30, 2004
(in thousands of U.S. dollars)

 	  	ACE Limited
(Parent Co.
Guarantor)
	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)
	 	 	Other ACE
Limited
Subsidiaries and
Eliminations (1)
	  	Consolidating
Adjustments  (2)
	 	 	ACE Limited
Consolidated
	
Assets	  	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	
Total investments and cash	  	$	95,766	 	 	$	12,537,157	 	 	$	14,102,143	  	$	—  	 	 	$	26,735,066	
Insurance and reinsurance balances receivable	  	 	—  	 	 	 	2,597,484	 	 	 	969,163	  	 	—  	 	 	 	3,566,647	
Reinsurance recoverable	  	 	—  	 	 	 	12,758,653	 	 	 	1,615,686	  	 	—  	 	 	 	14,374,339	
Goodwill	  	 	—  	 	 	 	2,130,908	 	 	 	483,199	  	 	—  	 	 	 	2,614,107	
Investments in subsidiaries	  	 	9,744,220	 	 	 	—  	 	 	 	—  	  	 	(9,744,220	)	 	 	—  	
Due (to) from subsidiaries and affiliates, net	  	 	(48,264	)	 	 	(37,301	)	 	 	37,301	  	 	48,264	 	 	 	—  	
Other assets	  	 	70,743	 	 	 	5,104,836	 	 	 	1,185,418	  	 	—  	 	 	 	6,360,997	
 	  				 				 			  				 			
Total assets	  	$	9,862,465	 	 	$	35,091,737	 	 	$	18,392,910	  	$	(9,695,956	)	 	$	53,651,156	
 	  				 				 			  				 			
Liabilities	  	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	
Unpaid losses and loss expenses	  	$	—  	 	 	$	20,411,889	 	 	$	7,812,376	  	$	—  	 	 	$	28,224,265	
Unearned premiums	  	 	—  	 	 	 	4,747,216	 	 	 	1,808,221	  	 	 	 	 	 	6,555,437	
Future policy benefits for life and annuity contracts	  	 	—  	 	 	 	—  	 	 	 	505,298	  	 	—  	 	 	 	505,298	
Short-term debt	  	 	—  	 	 	 	545,740	 	 	 	—  	  	 	—  	 	 	 	545,740	
Long-term debt	  	 	499,535	 	 	 	1,099,232	 	 	 	250,000	  	 	—  	 	 	 	1,848,767	
Trust preferred securities	  	 	—  	 	 	 	412,373	 	 	 	75,000	  	 	—  	 	 	 	487,373	
Other liabilities	  	 	142,457	 	 	 	3,731,183	 	 	 	2,390,163	  	 	—  	 	 	 	6,263,803	
 	  				 				 			  				 			
Total liabilities	  	 	641,992	 	 	 	30,947,633	 	 	 	12,841,058	  	 	—  	 	 	 	44,430,683	
 	  				 				 			  				 			
Total shareholders’ equity	  	 	9,220,473	 	 	 	4,144,104	 	 	 	5,551,852	  	 	(9,695,956	)	 	 	9,220,473	
 	  				 				 			  				 			
Total liabilities and shareholders’ equity	  	$	9,862,465	 	 	$	35,091,737	 	 	$	18,392,910	  	$	(9,695,956	)	 	$	53,651,156	

(1)	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
(2)	Includes ACE Limited parent company eliminations.	
 
20

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
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 (to) 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 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.	
 
21

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Condensed Consolidating Statement of Operations
For the three months ended June 30, 2004
(in thousands of U.S. dollars)

 	  	ACE Limited
(Parent Co.
Guarantor)
	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)
	 	 	Other ACE
Limited
Subsidiaries and
Eliminations (1)
	  	Consolidating
Adjustments  (2)
	 	 	ACE Limited
Consolidated
	
Net premiums written	  	$	—  	 	 	$	1,670,397	 	 	$	1,196,534	  	$	—  	 	 	$	2,866,931	
Net premiums earned	  	 	—  	 	 	 	1,581,336	 	 	 	1,207,342	  	 	—  	 	 	 	2,788,678	
Net investment income	  	 	1,273	 	 	 	111,280	 	 	 	125,526	  	 	(1,019	)	 	 	237,060	
Equity in earnings of subsidiaries	  	 	416,790	 	 	 	—  	 	 	 	—  	  	 	(416,790	)	 	 	—  	
Net realized gains (losses)	  	 	26,922	 	 	 	(8,369	)	 	 	23,649	  	 	—  	 	 	 	42,202	
Losses and loss expenses	  	 	—  	 	 	 	1,008,540	 	 	 	715,736	  	 	—  	 	 	 	1,724,276	
Life and annuity benefits	  	 	—  	 	 	 	—  	 	 	 	44,398	  	 	—  	 	 	 	44,398	
Policy acquisition costs and administrative expenses	  	 	26,273	 	 	 	369,585	 	 	 	312,492	  	 	(2,778	)	 	 	705,572	
Interest expense	  	 	5,964	 	 	 	34,949	 	 	 	6,608	  	 	(1,122	)	 	 	46,399	
Other (income) expense	  	 	—  	 	 	 	2,170	 	 	 	3,733	  	 	—  	 	 	 	5,903	
Income tax expense (benefit)	  	 	(261	)	 	 	93,372	 	 	 	35,272	  	 	—  	 	 	 	128,383	
 	  				 				 			  				 			
Net income	  	$	413,009	 	 	$	175,631	 	 	$	238,278	  	$	(413,909	)	 	$	413,009	

Condensed Consolidating Statement of Operations
For the three months ended June 30, 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	  	$	—  	 	 	$	1,167,368	  	$	100,400	  	$	1,138,225	 	 	$	—  	 	 	$	2,405,993	 	
Net premiums earned	  	 	—  	 	 	 	1,127,136	  	 	52,493	  	 	1,126,963	 	 	 	—  	 	 	 	2,306,592	 	
Net investment income	  	 	6,364	 	 	 	89,718	  	 	11,402	  	 	110,208	 	 	 	(5,745	)	 	 	211,947	 	
Equity in earnings of subsidiaries	  	 	406,799	 	 	 	—  	  	 	—  	  	 	—  	 	 	 	(406,799	)	 	 	—  	 	
Net realized gains (losses)	  	 	(5,370	)	 	 	53,110	  	 	12,428	  	 	46,393	 	 	 	—  	 	 	 	106,561	 	
Losses and loss expenses	  	 	—  	 	 	 	778,039	  	 	15,762	  	 	665,578	 	 	 	—  	 	 	 	1,459,379	 	
Life and annuity benefits	  	 	—  	 	 	 	—  	  	 	—  	  	 	43,559	 	 	 	—  	 	 	 	43,559	 	
Policy acquisition costs and administrative expenses	  	 	26,415	 	 	 	291,133	  	 	21,304	  	 	284,538	 	 	 	(2,820	)	 	 	620,570	 	
Interest expense	  	 	9,186	 	 	 	32,048	  	 	1,682	  	 	5,393	 	 	 	(4,628	)	 	 	43,681	 	
Other (income) expense	  	 	—  	 	 	 	449	  	 	—  	  	 	(1,175	)	 	 	—  	 	 	 	(726	)	
Income tax expense	  	 	1,724	 	 	 	55,450	  	 	10,966	  	 	20,029	 	 	 	—  	 	 	 	88,169	 	
 	  				 			  			  				 				 				
Net income	  	$	370,468	 	 	$	112,845	  	$	26,609	  	$	265,642	 	 	$	(405,096	)	 	$	370,468	 	

(1)	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
(2)	Includes ACE Limited parent company eliminations.	
 
22

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Condensed Consolidating Statement of Operations
For the six months ended June 30, 2004
(in thousands of U.S. dollars)

 	  	ACE Limited
(Parent Co.
Guarantor)
	  	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)
	  	Other ACE
Limited
Subsidiaries and
Eliminations (1)
	  	Consolidating
Adjustments  (2)
	 	 	ACE Limited
Consolidated
	
Net premiums written	  	$	—  	  	$	3,459,649	  	$	2,645,448	  	$	—  	 	 	$	6,105,097	
Net premiums earned	  	 	—  	  	 	2,922,388	  	 	2,465,967	  	 	—  	 	 	 	5,388,355	
Net investment income	  	 	4,696	  	 	217,441	  	 	257,098	  	 	(4,255	)	 	 	474,980	
Equity in earnings of subsidiaries	  	 	908,032	  	 	—  	  	 	—  	  	 	(908,032	)	 	 	—  	
Net realized gains (losses)	  	 	12,901	  	 	27,243	  	 	59,319	  	 	—  	 	 	 	99,463	
Losses and loss expenses	  	 	—  	  	 	1,883,631	  	 	1,383,242	  	 	—  	 	 	 	3,266,873	
Life and annuity benefits	  	 	—  	  	 	—  	  	 	86,122	  	 	—  	 	 	 	86,122	
Policy acquisition costs and administrative expenses	  	 	52,840	  	 	706,376	  	 	632,102	  	 	(5,927	)	 	 	1,385,391	
Interest expense	  	 	12,245	  	 	67,485	  	 	13,341	  	 	(2,400	)	 	 	90,671	
Other (income) expense	  	 	—  	  	 	5,496	  	 	17,487	  	 	—  	 	 	 	22,983	
Income tax expense	  	 	710	  	 	174,888	  	 	75,326	  	 	—  	 	 	 	250,924	
 	  			  			  			  				 			
Net income	  	$	859,834	  	$	329,196	  	$	574,764	  	$	(903,960	)	 	$	859,834	

Condensed Consolidating Statement of Operations
For the six months ended June 30, 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	  	$	—  	 	 	$	2,580,396	  	$	152,744	  	$	2,602,905	  	$	—  	 	 	$	5,336,045	
Net premiums earned	  	 	—  	 	 	 	2,103,194	  	 	87,503	  	 	2,187,427	  	 	—  	 	 	 	4,378,124	
Net investment income	  	 	11,796	 	 	 	175,229	  	 	22,803	  	 	219,898	  	 	(11,367	)	 	 	418,359	
Equity in earnings of subsidiaries	  	 	689,384	 	 	 	—  	  	 	—  	  	 	—  	  	 	(689,384	)	 	 	—  	
Net realized gains (losses)	  	 	(13,980	)	 	 	36,842	  	 	9,591	  	 	34,019	  	 	—  	 	 	 	66,472	
Losses and loss expenses	  	 	—  	 	 	 	1,440,495	  	 	23,817	  	 	1,277,900	  	 	—  	 	 	 	2,742,212	
Life and annuity benefits	  	 	—  	 	 	 	—  	  	 	—  	  	 	92,058	  	 	—  	 	 	 	92,058	
Policy acquisition costs and administrative expenses	  	 	46,351	 	 	 	541,940	  	 	36,560	  	 	555,535	  	 	(4,250	)	 	 	1,176,136	
Interest expense	  	 	19,526	 	 	 	65,018	  	 	3,369	  	 	10,854	  	 	(10,157	)	 	 	88,610	
Other (income) expense	  	 	—  	 	 	 	1,449	  	 	—  	  	 	3,979	  	 	—  	 	 	 	5,428	
Income tax expense	  	 	3,411	 	 	 	90,309	  	 	15,315	  	 	31,564	  	 	—  	 	 	 	140,599	
 	  				 			  			  			  				 			
Net income	  	$	617,912	 	 	$	176,054	  	$	40,836	  	$	469,454	  	$	(686,344	)	 	$	617,912	

(1)	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
(2)	Includes ACE Limited parent company eliminations.	
 
23

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Condensed Consolidating Statement of Cash Flows
For the six months ended June 30, 2004
(in thousands of U.S. dollars)

 	  	ACE Limited
(Parent Co.
Guarantor)
	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)
	 	 	Other ACE
Limited
Subsidiaries and
Eliminations (1)
	 	 	ACE Limited
Consolidated
	 	
Net cash flows from operating activities	  	$	50,168	 	 	$	1,237,118	 	 	$	992,624	 	 	$	2,279,910	 	
 	  				 				 				 				
Cash flows from investing activities	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Purchases of fixed maturities	  	 	(53,823	)	 	 	(5,592,298	)	 	 	(8,065,799	)	 	 	(13,711,920	)	
Purchases of equity securities	  	 	—  	 	 	 	(433,095	)	 	 	(388,333	)	 	 	(821,428	)	
Sales of fixed maturities	  	 	21,270	 	 	 	3,789,259	 	 	 	6,793,848	 	 	 	10,604,377	 	
Sales of equity securities	  	 	—  	 	 	 	363,294	 	 	 	77,668	 	 	 	440,962	 	
Net realized gains (losses) on investment derivatives	  	 	13,071	 	 	 	—  	 	 	 	2,010	 	 	 	15,081	 	
Capitalization of subsidiaries	  	 	(540,051	)	 	 	294,892	 	 	 	245,159	 	 	 	—  	 	
Dividends received from subsidiaries	  	 	321,668	 	 	 	—  	 	 	 	(321,668	)	 	 	—  	 	
Sale of subsidiary (net of cash sold)	  	 	—  	 	 	 	—  	 	 	 	953,164	 	 	 	953,164	 	
Other	  	 	—  	 	 	 	(58,929	)	 	 	(34,956	)	 	 	(93,885	)	
 	  				 				 				 				
Net cash flows used for investing activities	  	$	(237,865	)	 	$	(1,636,877	)	 	$	(738,907	)	 	$	(2,613,649	)	
 	  				 				 				 				
Cash flows from financing activities	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends paid on Ordinary Shares	  	 	(106,900	)	 	 	—  	 	 	 	—  	 	 	 	(106,900	)	
Dividends paid on Preferred Shares	  	 	(22,425	)	 	 	—  	 	 	 	—  	 	 	 	(22,425	)	
Proceeds from short-term debt, net	  	 	—  	 	 	 	13	 	 	 	—  	 	 	 	13	 	
Proceeds from long-term debt, net	  	 	—  	 	 	 	499,565	 	 	 	—  	 	 	 	499,565	 	
Advances to (from) affiliates	  	 	271,132	 	 	 	51,261	 	 	 	(322,393	)	 	 	—  	 	
Proceeds from exercise of options for Ordinary Shares	  	 	61,392	 	 	 	—  	 	 	 	—  	 	 	 	61,392	 	
Proceeds from Ordinary Shares issued under ESPP	  	 	3,684	 	 	 	—  	 	 	 	—  	 	 	 	3,684	 	
 	  				 				 				 				
Net cash flows from (used for) financing activities	  	$	206,883	 	 	$	550,839	 	 	$	(322,393	)	 	$	435,329	 	
 	  				 				 				 				
Net increase (decrease) in cash	  	 	19,186	 	 	 	151,080	 	 	 	(68,676	)	 	 	101,590	 	
Cash – beginning of period	  	 	27,260	 	 	 	167,667	 	 	 	366,723	 	 	 	561,650	 	
 	  				 				 				 				
Cash – end of period	  	$	46,446	 	 	$	318,747	 	 	$	298,047	 	 	$	663,240	 	

(1)	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
 
24

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Condensed Consolidating Statement of Cash Flows
For the six months ended June 30, 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	  	$	(82,943	)	 	$	693,843	 	 	$	119,452	 	 	$	848,551	 	 	$	1,578,903	 	
 	  				 				 				 				 				
Cash flows from investing activities	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Purchases of fixed maturities	  	 	(105,686	)	 	 	(3,216,333	)	 	 	(243,478	)	 	 	(5,898,357	)	 	 	(9,463,854	)	
Purchases of equity securities	  	 	—  	 	 	 	(42,850	)	 	 	—  	 	 	 	(22,207	)	 	 	(65,057	)	
Sales of fixed maturities	  	 	60,133	 	 	 	1,677,681	 	 	 	131,695	 	 	 	5,383,557	 	 	 	7,253,066	 	
Sales of equity securities	  	 	—  	 	 	 	35,048	 	 	 	—  	 	 	 	27,796	 	 	 	62,844	 	
Maturities of fixed maturities	  	 	—  	 	 	 	—  	 	 	 	3,000	 	 	 	91,612	 	 	 	94,612	 	
Net realized gains (losses) on investment derivatives	  	 	(14,642	)	 	 	—  	 	 	 	—  	 	 	 	19,891	 	 	 	5,249	 	
Capitalization of subsidiaries	  	 	(653,407	)	 	 	662,759	 	 	 	—  	 	 	 	(9,352	)	 	 	—  	 	
Dividends received from subsidiaries	  	 	306,000	 	 	 	—  	 	 	 	—  	 	 	 	(306,000	)	 	 	—  	 	
Other	  	 	—  	 	 	 	(38,233	)	 	 	—  	 	 	 	2,417	 	 	 	(35,816	)	
 	  				 				 				 				 				
Net cash flows from (used for) investing activities	  	$	(407,602	)	 	$	(921,928	)	 	$	(108,783	)	 	$	(710,643	)	 	$	(2,148,956	)	
 	  				 				 				 				 				
Cash flows from financing activities	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends paid on Ordinary Shares	  	 	(92,688	)	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(92,688	)	
Dividends paid on Mezzanine equity	  	 	(9,773	)	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(9,773	)	
Net proceeds from issuance of preferred shares	  	 	556,887	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	556,887	 	
Proceeds from short-term debt, net	  	 	—  	 	 	 	99	 	 	 	—  	 	 	 	—  	 	 	 	99	 	
Advances to (from) affiliates	  	 	32,289	 	 	 	—  	 	 	 	—  	 	 	 	(32,289	)	 	 	—  	 	
Proceeds from exercise of options for Ordinary Shares	  	 	24,551	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	24,551	 	
Proceeds from Ordinary Shares issued under ESPP	  	 	3,396	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	3,396	 	
 	  				 				 				 				 				
Net cash flows from (used for) financing activities	  	$	514,662	 	 	$	99	 	 	$	—  	 	 	$	(32,289	)	 	$	482,472	 	
 	  				 				 				 				 				
Net increase (decrease) in cash	  	 	24,117	 	 	 	(227,986	)	 	 	10,669	 	 	 	105,619	 	 	 	(87,581	)	
Cash – beginning of period	  	 	2,150	 	 	 	478,161	 	 	 	4,438	 	 	 	178,606	 	 	 	663,355	 	
 	  				 				 				 				 				
Cash – end of period	  	$	26,267	 	 	$	250,175	 	 	$	15,107	 	 	$	284,225	 	 	$	575,774	 	

(1)	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
 
25

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
16. Segment information
 
The Company 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. Subsequent to the IPO, the title insurance business is included in the Insurance – North American segment. 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. Subsequent to the IPO, the trade credit business is included in the Global Reinsurance segment. 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 solutions business in the U.S. and Bermuda and the Company’s share of Assured Guaranty’s earnings. Prior to the IPO of Assured Guaranty the Financial Services segment included the financial guaranty business of ACE Guaranty Corp and ACE Capital Re International. The financial results of the financial guaranty business are included in the results of the financial services segment through April 28, 2004 (the date of the sale). Commencing May 1, 2004, the Company’s proportionate share of Assured Guaranty’s earnings is reflected in other (income) expenses in the Financial Services segment. 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 three and six months ended June 30, 2004 and 2003.	
 
b)	For segment reporting purposes, certain items have been presented in a different manner than in the consolidated financial statements.	
 
26

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Statement of Operations by Segment
For the three months ended June 30, 2004
(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	  	$	2,101,918	  	$	1,500,697	  	$	366,805	 	 	$	—  	 	 	$	3,969,420	  	$	15,231	 	 	$	3,984,651	
Net premiums written	  	 	1,329,765	  	 	1,104,772	  	 	363,835	 	 	 	—  	 	 	 	2,798,372	  	 	13,689	 	 	 	2,812,061	
Net premiums earned	  	 	1,178,418	  	 	1,075,786	  	 	345,569	 	 	 	—  	 	 	 	2,599,773	  	 	133,981	 	 	 	2,733,754	
Losses and loss expenses	  	 	837,395	  	 	624,827	  	 	173,508	 	 	 	—  	 	 	 	1,635,730	  	 	88,546	 	 	 	1,724,276	
Policy acquisition costs	  	 	111,483	  	 	195,387	  	 	73,917	 	 	 	—  	 	 	 	380,787	  	 	9,328	 	 	 	390,115	
Administrative expenses	  	 	114,765	  	 	139,354	  	 	15,477	 	 	 	28,968	 	 	 	298,564	  	 	10,001	 	 	 	308,565	
 	  			  			  				 				 			  				 			
Underwriting income (loss)	  	 	114,775	  	 	116,218	  	 	82,667	 	 	 	(28,968	)	 	 	284,692	  	 	26,106	 	 	 	310,798	
 	  			  			  				 				 			  				 			
Life	  	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	
Gross premiums written	  	 	—  	  	 	—  	  	 	56,206	 	 	 	—  	 	 	 	—  	  	 	—  	 	 	 	56,206	
Net premiums written	  	 	—  	  	 	—  	  	 	54,870	 	 	 	—  	 	 	 	—  	  	 	—  	 	 	 	54,870	
Net premiums earned	  	 	—  	  	 	—  	  	 	54,924	 	 	 	—  	 	 	 	—  	  	 	—  	 	 	 	54,924	
Life and annuity benefits	  	 	—  	  	 	—  	  	 	44,398	 	 	 	—  	 	 	 	—  	  	 	—  	 	 	 	44,398	
Policy acquisition costs	  	 	—  	  	 	—  	  	 	5,660	 	 	 	—  	 	 	 	—  	  	 	—  	 	 	 	5,660	
Administrative expenses	  	 	—  	  	 	—  	  	 	1,232	 	 	 	—  	 	 	 	—  	  	 	—  	 	 	 	1,232	
Net investment income	  	 	—  	  	 	—  	  	 	7,963	 	 	 	—  	 	 	 	—  	  	 	—  	 	 	 	7,963	
 	  			  			  				 				 			  				 			
Underwriting income	  	 	—  	  	 	—  	  	 	11,597	 	 	 	—  	 	 	 	—  	  	 	—  	 	 	 	11,597	
 	  			  			  				 				 			  				 			
Net investment income	  	 	107,013	  	 	55,361	  	 	29,778	 	 	 	806	 	 	 	192,958	  	 	36,139	 	 	 	229,097	
Interest expense	  	 	5,156	  	 	—  	  	 	—  	 	 	 	39,798	 	 	 	44,954	  	 	1,445	 	 	 	46,399	
Other (income) expense	  	 	2,631	  	 	3,739	  	 	161	 	 	 	(587	)	 	 	5,944	  	 	(41	)	 	 	5,903	
Income tax expense (benefit)	  	 	61,122	  	 	60,187	  	 	1,628	 	 	 	(14,219	)	 	 	108,718	  	 	9,980	 	 	 	118,698	
 	  			  			  				 				 			  				 			
Income (loss) excluding net realized gains (losses)	  	 	152,879	  	 	107,653	  	 	122,253	 	 	 	(53,154	)	 	 	318,034	  	 	50,861	 	 	 	380,492	
Net realized gains (losses)	  	 	30,916	  	 	3,020	  	 	11,995	 	 	 	29,137	 	 	 	75,068	  	 	(32,866	)	 	 	42,202	
Tax expense (benefit) on net realized gains (losses)	  	 	8,137	  	 	957	  	 	(1	)	 	 	—  	 	 	 	9,093	  	 	592	 	 	 	9,685	
 	  			  			  				 				 			  				 			
Net income (loss)	  	$	175,658	  	$	109,716	  	$	134,249	 	 	$	(24,017	)	 	$	384,009	  	$	17,403	 	 	$	413,009	

(1)	Includes ACE Limited, ACE INA Holdings and intercompany eliminations.	
(2)	Excludes life reinsurance business.	
 
27

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Statement of Operations by Segment
For the three months ended June 30, 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	  	$	1,648,210	 	 	$	1,243,884	 	 	$	349,194	 	 	$	—  	 	 	$	3,241,288	 	 	$	117,330	 	 	$	3,358,618	 	
Net premiums written	  	 	968,735	 	 	 	916,290	 	 	 	345,414	 	 	 	—  	 	 	 	2,230,439	 	 	 	132,034	 	 	 	2,362,473	 	
Net premiums earned	  	 	919,787	 	 	 	860,142	 	 	 	269,351	 	 	 	—  	 	 	 	2,049,280	 	 	 	215,023	 	 	 	2,264,303	 	
Losses and loss expenses	  	 	636,569	 	 	 	518,617	 	 	 	143,122	 	 	 	—  	 	 	 	1,298,308	 	 	 	161,071	 	 	 	1,459,379	 	
Policy acquisition costs	  	 	100,686	 	 	 	162,581	 	 	 	50,764	 	 	 	—  	 	 	 	314,031	 	 	 	16,709	 	 	 	330,740	 	
Administrative expenses	  	 	102,091	 	 	 	120,975	 	 	 	14,330	 	 	 	28,597	 	 	 	265,993	 	 	 	20,423	 	 	 	286,416	 	
 	  				 				 				 				 				 				 				
Underwriting income (loss)	  	 	80,441	 	 	 	57,969	 	 	 	61,135	 	 	 	(28,597	)	 	 	170,948	 	 	 	16,820	 	 	 	187,768	 	
 	  				 				 				 				 				 				 				
Life	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross premiums written	  	 	—  	 	 	 	—  	 	 	 	46,300	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	46,300	 	
Net premiums written	  	 	—  	 	 	 	—  	 	 	 	43,520	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	43,520	 	
Net premiums earned	  	 	—  	 	 	 	—  	 	 	 	42,289	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	42,289	 	
Life and annuity benefits	  	 	—  	 	 	 	—  	 	 	 	43,559	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	43,559	 	
Policy acquisition costs	  	 	—  	 	 	 	—  	 	 	 	2,542	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	2,542	 	
Administrative expenses	  	 	—  	 	 	 	—  	 	 	 	872	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	872	 	
Net investment income	  	 	—  	 	 	 	—  	 	 	 	8,006	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	8,006	 	
 	  				 				 				 				 				 				 				
Underwriting income	  	 	—  	 	 	 	—  	 	 	 	3,322	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	3,322	 	
 	  				 				 				 				 				 				 				
Net investment income (expense)	  	 	101,091	 	 	 	37,028	 	 	 	21,115	 	 	 	(4,294	)	 	 	154,940	 	 	 	49,001	 	 	 	203,941	 	
Interest expense	  	 	4,838	 	 	 	105	 	 	 	—  	 	 	 	37,327	 	 	 	42,270	 	 	 	1,411	 	 	 	43,681	 	
Other (income) expense	  	 	(174	)	 	 	293	 	 	 	(255	)	 	 	—  	 	 	 	(136	)	 	 	(590	)	 	 	(726	)	
Income tax expense (benefit)	  	 	42,901	 	 	 	24,430	 	 	 	3,778	 	 	 	(13,069	)	 	 	58,040	 	 	 	7,783	 	 	 	65,823	 	
 	  				 				 				 				 				 				 				
Income (loss) excluding net realized gains (losses)	  	 	133,967	 	 	 	70,169	 	 	 	82,049	 	 	 	(57,149	)	 	 	225,714	 	 	 	57,217	 	 	 	286,253	 	
Net realized gains (losses)	  	 	24,923	 	 	 	1,077	 	 	 	13,310	 	 	 	(5,370	)	 	 	33,940	 	 	 	72,621	 	 	 	106,561	 	
Tax expense (benefit) on net realized gains (losses)	  	 	2,681	 	 	 	(103	)	 	 	(292	)	 	 	—  	 	 	 	2,286	 	 	 	20,060	 	 	 	22,346	 	
 	  				 				 				 				 				 				 				
Net income (loss)	  	$	156,209	 	 	$	71,349	 	 	$	95,651	 	 	$	(62,519	)	 	$	257,368	 	 	$	109,778	 	 	$	370,468	 	

(1)	Includes ACE Limited, ACE INA Holdings and intercompany eliminations.	
(2)	Excludes life reinsurance business.	
 
28

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Statement of Operations by Segment
For the six months ended June 30, 2004
(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	  	$	4,007,249	  	$	3,174,307	  	$	943,317	 	 	$	—  	 	 	$	8,124,873	  	$	222,797	 	 	$	8,347,670	
Net premiums written	  	 	2,541,403	  	 	2,303,114	  	 	933,170	 	 	 	—  	 	 	 	5,777,687	  	 	221,473	 	 	 	5,999,160	
Net premiums earned	  	 	2,185,383	  	 	2,109,666	  	 	674,957	 	 	 	—  	 	 	 	4,970,006	  	 	312,894	 	 	 	5,282,900	
Losses and loss expenses	  	 	1,533,353	  	 	1,225,844	  	 	333,194	 	 	 	—  	 	 	 	3,092,391	  	 	174,482	 	 	 	3,266,873	
Policy acquisition costs	  	 	211,946	  	 	380,019	  	 	137,914	 	 	 	—  	 	 	 	729,879	  	 	19,923	 	 	 	749,802	
Administrative expenses	  	 	218,041	  	 	276,870	  	 	34,049	 	 	 	58,982	 	 	 	587,942	  	 	34,520	 	 	 	622,462	
 	  			  			  				 				 			  				 			
Underwriting income (loss)	  	 	222,043	  	 	226,933	  	 	169,800	 	 	 	(58,982	)	 	 	559,794	  	 	83,969	 	 	 	643,763	
 	  			  			  				 				 			  				 			
Life	  	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	
Gross premiums written	  	 	—  	  	 	—  	  	 	108,662	 	 	 	—  	 	 	 	—  	  	 	—  	 	 	 	108,662	
Net premiums written	  	 	—  	  	 	—  	  	 	105,937	 	 	 	—  	 	 	 	—  	  	 	—  	 	 	 	105,937	
Net premiums earned	  	 	—  	  	 	—  	  	 	105,455	 	 	 	—  	 	 	 	—  	  	 	—  	 	 	 	105,455	
Life and annuity benefits	  	 	—  	  	 	—  	  	 	86,122	 	 	 	—  	 	 	 	—  	  	 	—  	 	 	 	86,122	
Policy acquisition costs	  	 	—  	  	 	—  	  	 	10,887	 	 	 	—  	 	 	 	—  	  	 	—  	 	 	 	10,887	
Administrative expenses	  	 	—  	  	 	—  	  	 	2,240	 	 	 	—  	 	 	 	—  	  	 	—  	 	 	 	2,240	
Net investment income	  	 	—  	  	 	—  	  	 	16,354	 	 	 	—  	 	 	 	—  	  	 	—  	 	 	 	16,354	
 	  			  			  				 				 			  				 			
Underwriting income	  	 	—  	  	 	—  	  	 	22,560	 	 	 	—  	 	 	 	—  	  	 	—  	 	 	 	22,560	
 	  			  			  				 				 			  				 			
Net investment income	  	 	211,338	  	 	102,795	  	 	56,243	 	 	 	(894	)	 	 	369,482	  	 	89,144	 	 	 	458,626	
Interest expense	  	 	10,311	  	 	—  	  	 	—  	 	 	 	77,464	 	 	 	87,775	  	 	2,896	 	 	 	90,671	
Other (income) expense	  	 	5,926	  	 	7,128	  	 	(427	)	 	 	(587	)	 	 	12,040	  	 	10,943	 	 	 	22,983	
Income tax expense (benefit)	  	 	116,091	  	 	103,736	  	 	4,596	 	 	 	(27,651	)	 	 	196,772	  	 	23,224	 	 	 	219,996	
 	  			  			  				 				 			  				 			
Income (loss) excluding net realized gains (losses)	  	 	301,053	  	 	218,864	  	 	244,434	 	 	 	(109,102	)	 	 	632,689	  	 	136,050	 	 	 	791,299	
Net realized gains (losses)	  	 	82,642	  	 	27,205	  	 	2,370	 	 	 	15,116	 	 	 	127,333	  	 	(27,870	)	 	 	99,463	
Tax expense (benefit) on net realized gains (losses)	  	 	14,785	  	 	8,363	  	 	(5	)	 	 	—  	 	 	 	23,143	  	 	7,785	 	 	 	30,928	
 	  			  			  				 				 			  				 			
Net income (loss)	  	$	368,910	  	$	237,706	  	$	246,809	 	 	$	(93,986	)	 	$	736,879	  	$	100,395	 	 	$	859,834	

(1)	Includes ACE Limited, ACE INA Holdings and intercompany eliminations.	
(2)	Excludes life reinsurance business.	
 
29

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Statement of Operations by Segment
For the six months ended June 30, 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	  	$	3,312,394	 	 	$	2,649,742	 	 	$	811,184	 	 	$	—  	 	 	$	6,773,320	 	 	$	649,401	 	 	$	7,422,721	
Net premiums written	  	 	1,902,080	 	 	 	1,897,213	 	 	 	788,158	 	 	 	—  	 	 	 	4,587,451	 	 	 	657,763	 	 	 	5,245,214	
Net premiums earned	  	 	1,672,768	 	 	 	1,673,845	 	 	 	517,397	 	 	 	—  	 	 	 	3,864,010	 	 	 	424,264	 	 	 	4,288,274	
Losses and loss expenses	  	 	1,148,928	 	 	 	1,012,215	 	 	 	258,912	 	 	 	—  	 	 	 	2,420,055	 	 	 	322,157	 	 	 	2,742,212	
Policy acquisition costs	  	 	183,739	 	 	 	314,807	 	 	 	96,860	 	 	 	—  	 	 	 	595,406	 	 	 	27,686	 	 	 	623,092	
Administrative expenses	  	 	189,454	 	 	 	235,141	 	 	 	29,293	 	 	 	53,043	 	 	 	506,931	 	 	 	38,440	 	 	 	545,371	
 	  				 				 				 				 				 				 			
Underwriting income (loss)	  	 	150,647	 	 	 	111,682	 	 	 	132,332	 	 	 	(53,043	)	 	 	341,618	 	 	 	35,981	 	 	 	377,599	
 	  				 				 				 				 				 				 			
Life	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross premiums written	  	 	—  	 	 	 	—  	 	 	 	94,961	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	94,961	
Net premiums written	  	 	—  	 	 	 	—  	 	 	 	90,831	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	90,831	
Net premiums earned	  	 	—  	 	 	 	—  	 	 	 	89,850	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	89,850	
Life and annuity benefits	  	 	—  	 	 	 	—  	 	 	 	92,058	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	92,058	
Policy acquisition costs	  	 	—  	 	 	 	—  	 	 	 	6,084	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	6,084	
Administrative expenses	  	 	—  	 	 	 	—  	 	 	 	1,589	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	1,589	
Net investment income	  	 	—  	 	 	 	—  	 	 	 	15,647	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	15,647	
 	  				 				 				 				 				 				 			
Underwriting income	  	 	—  	 	 	 	—  	 	 	 	5,766	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	5,766	
 	  				 				 				 				 				 				 			
Net investment income	  	 	202,152	 	 	 	72,236	 	 	 	39,795	 	 	 	(11,197	)	 	 	302,986	 	 	 	99,726	 	 	 	402,712	
Interest expense	  	 	10,684	 	 	 	105	 	 	 	72	 	 	 	74,879	 	 	 	85,740	 	 	 	2,870	 	 	 	88,610	
Other (income) expense	  	 	6,269	 	 	 	1,293	 	 	 	(1,286	)	 	 	—  	 	 	 	6,276	 	 	 	(848	)	 	 	5,428	
Income tax expense (benefit)	  	 	81,574	 	 	 	47,812	 	 	 	7,509	 	 	 	(27,127	)	 	 	109,768	 	 	 	16,858	 	 	 	126,626	
 	  				 				 				 				 				 				 			
Income (loss) excluding net realized gains (losses)	  	 	254,272	 	 	 	134,708	 	 	 	171,598	 	 	 	(111,992	)	 	 	442,820	 	 	 	116,827	 	 	 	565,413	
Net realized gains (losses)	  	 	6,858	 	 	 	(11,435	)	 	 	16,176	 	 	 	(13,980	)	 	 	(2,381	)	 	 	68,853	 	 	 	66,472	
Tax expense (benefit) on net realized gains (losses)	  	 	(68	)	 	 	(5,172	)	 	 	(540	)	 	 	—  	 	 	 	(5,780	)	 	 	19,753	 	 	 	13,973	
 	  				 				 				 				 				 				 			
Net income (loss)	  	$	261,198	 	 	$	128,445	 	 	$	188,314	 	 	$	(125,972	)	 	$	446,219	 	 	$	165,927	 	 	$	617,912	

(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 June 30, 2004 and December 31, 2003.

 	  	June 30
2004
	  	December 31
2003
	
 	  	(in millions of U.S. dollars)
 	
Life reinsurance	  	$	670	  	$	698	
Corporate	  	 	2,586	  	 	2,483	
All other	  	 	50,395	  	 	46,372	
 	  			  			
Total assets	  	$	53,651	  	$	49,553	

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The following tables summarize the revenues of each segment by product offering for the three and six months ended June 30, 2004 and 2003.
 
Net premiums earned by type of premium
 
Three Months Ended June 30, 2004

 	  	Property &
Casualty
	  	Life, Accident
& Health
	  	Financial
Guaranty
	  	Financial
Solutions
	  	ACE
Consolidated
	
 	  	(in millions of U.S. dollars)	
Insurance – North American	  	$	1,134	  	$	44	  	$	—  	  	$	—  	  	$	1,178	
Insurance – Overseas General	  	 	829	  	 	247	  	 	—  	  	 	—  	  	 	1,076	
Global Reinsurance	  	 	346	  	 	54	  	 	—  	  	 	—  	  	 	400	
Financial Services	  	 	—  	  	 	—  	  	 	17	  	 	117	  	 	134	
 	  			  			  			  			  			
 	  	$	2,309	  	$	345	  	$	17	  	$	117	  	$	2,788	

Three Months Ended June 30, 2003

 	  	Property &
Casualty
	  	Life, Accident
& Health
	  	Financial
Guaranty
	  	Financial
Solutions
	  	ACE
Consolidated
	
 	  	(in millions of U.S. dollars)	
Insurance – North American	  	$	884	  	$	36	  	$	—  	  	$	—  	  	$	920	
Insurance – Overseas General	  	 	673	  	 	187	  	 	—  	  	 	—  	  	 	860	
Global Reinsurance	  	 	269	  	 	42	  	 	—  	  	 	—  	  	 	311	
Financial Services	  	 	—  	  	 	—  	  	 	82	  	 	133	  	 	215	
 	  			  			  			  			  			
 	  	$	1,826	  	$	265	  	$	82	  	$	133	  	$	2,306	

Six Months Ended June 30, 2004

 	  	Property &
Casualty
	  	Life, Accident
& Health
	  	Financial
Guaranty
	  	Financial
Solutions
	  	ACE
Consolidated
	
 	  	(in millions of U.S. dollars)	
Insurance – North American	  	$	2,099	  	$	86	  	$	—  	  	$	—  	  	$	2,185	
Insurance – Overseas General	  	 	1,650	  	 	460	  	 	—  	  	 	—  	  	 	2,110	
Global Reinsurance	  	 	675	  	 	105	  	 	—  	  	 	—  	  	 	780	
Financial Services	  	 	—  	  	 	—  	  	 	104	  	 	209	  	 	313	
 	  			  			  			  			  			
 	  	$	4,424	  	$	651	  	$	104	  	$	209	  	$	5,388	

Six Months Ended June 30, 2003

 	  	Property &
Casualty
	  	Life, Accident
& Health
	  	Financial
Guaranty
	  	Financial
Solutions
	  	ACE
Consolidated
	
 	  	(in millions of U.S. dollars)	
Insurance – North American	  	$	1,600	  	$	73	  	$	—  	  	$	—  	  	$	1,673	
Insurance – Overseas General	  	 	1,307	  	 	367	  	 	—  	  	 	—  	  	 	1,674	
Global Reinsurance	  	 	517	  	 	90	  	 	—  	  	 	—  	  	 	607	
Financial Services	  	 	—  	  	 	—  	  	 	160	  	 	264	  	 	424	
 	  			  			  			  			  			
 	  	$	3,424	  	$	530	  	$	160	  	$	264	  	$	4,378	

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
17. Subsequent event – redemption of subsidiary trust preferred securities
 
On July 12, 2004, Capital Re LLC, redeemed all $75 million of its 7.65% cumulative monthly income preferred securities, series A, due in 2044. The redemption was funded by a portion of the net proceeds of the $500 million 5.875% senior notes recently sold by ACE INA Holdings, Inc.
 
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following is a discussion of our results of operations, financial condition, and liquidity and capital resources as of and for the three and six months ended June 30, 2004. Our results of operations and cash flows for any interim period are not necessarily indicative of our results for the full year. This discussion should be read in conjunction with our Consolidated Financial Statements and related notes and our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2003.
 
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 risks, uncertainties and assumptions about our business that could cause actual results to differ materially from such statements. These risks, uncertainties and assumptions (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 statement of operations, investment portfolio and financing plans;	
 
•	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.	
 
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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. 
 
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 over the last several years, its cash flows tend to be positive. Additionally, ACE has had very favorable loss experience on property businesses. ACE generated approximately $2.3 billion in positive operating cash flow in the six months ended June 30, 2004, while cash and invested assets over this period increased $2.7 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 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 factors such as 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, rate increases are beginning to decelerate while terms and conditions remain favorable. Overall, we believe that current rate levels are adequate for the risks we are writing and that favorable industry conditions should persist at least through the balance of 2004.
 
Sale of Financial and Mortgage Guaranty Business through Assured Guaranty Ltd.
 
On April 28, 2004, we completed the sale of 65.3 percent of our financial and mortgage guaranty reinsurance and insurance businesses (transferred business) through the initial public offering (IPO) of 49 million common shares of Assured Guaranty Ltd. (Assured Guaranty) at $18.00 per share. Assured Guaranty was incorporated in Bermuda in August 2003 for the sole purpose of becoming a holding company for our transferred business.
 
Pursuant to the completion of the IPO, we received proceeds, net of offering costs, of approximately $835 million and a return of capital of $200 million from Assured Guaranty, which were used to support our P&C business and strengthen our balance sheet capital position. The transaction resulted in a reduction of our shareholders’ equity of $61.1 million, representing the difference between net proceeds and the carrying value of 65.3 percent of Assured Guaranty at April 28, 2004 as well as taxes incurred on the transaction. The transaction also resulted in a pretax realized loss of $6.7 million and an after tax loss of $18.1 million. Additionally, in the current quarter we recognized compensation expense of $7.5 million in connection with the settlement of ACE stock awards held by the employees of Assured Guaranty. These expenses are reflected in “Other (income) expense” within the consolidated statement of operations.
 
Subsequent to the IPO, we beneficially own 26 million common shares, or 34.7 percent of Assured Guaranty’s outstanding common shares and accordingly, no longer consolidate our interest in the Assured Guaranty companies. Beginning April 29, 2004, we account for the retained interest under the equity method of accounting with the carrying value of our investment reflected in “Other investments” within the consolidated balance sheet and our proportionate share of earnings reflected in “Other (income) expense” within the consolidated statement of operations. For segment reporting purposes, our proportionate share of earnings is reflected in our Financial Services segment.
 
In connection with the IPO, we have entered into reinsurance agreements with Assured Guaranty in order to retain the insurance liabilities of certain run-off businesses, including trade credit and residual value insurance. At their inception, these contracts had no effect on our net income. Additionally, we have entered into a number of agreements with Assured Guaranty that will govern certain aspects of the relationship after this offering, including service agreements under which we will provide certain services to Assured Guaranty for a period of time.
 
See Note 3 of our Interim Consolidated Financial Statements for more information pertaining to this transaction.
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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. More information regarding the estimates and assumptions required to arrive at these amounts is included in the section entitled “Critical Accounting Estimates” in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2003.
 
Results of Operations – Three and Six Months Ended June 30, 2004 and 2003
 
The discussions that follow include tables, which show both our consolidated and segment operating results for the three and six months ended June 30, 2004 and 2003. 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 net investment income, other (income) expense, interest and income tax expense and net realized gains (losses). We exclude net realized gains (losses), including the tax expense (benefit), 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

 	  	Three Months
Ended June 30
	 	 	Six Months
Ended June 30
	 	
 	  	2004
	 	 	2003
	 	 	2004
	 	 	2003
	 	
 	  	(in millions of U.S. dollars)	 	
Net premiums written	  	$	2,867	 	 	$	2,406	 	 	$	6,105	 	 	$	5,336	 	
					
Net premiums earned	  	 	2,788	 	 	 	2,306	 	 	 	5,388	 	 	 	4,378	 	
Losses and loss expenses	  	 	1,725	 	 	 	1,459	 	 	 	3,267	 	 	 	2,742	 	
Life and annuity benefits	  	 	44	 	 	 	44	 	 	 	86	 	 	 	92	 	
Policy acquisition costs	  	 	396	 	 	 	334	 	 	 	761	 	 	 	630	 	
Administrative expenses	  	 	309	 	 	 	287	 	 	 	624	 	 	 	547	 	
 	  				 				 				 				
Underwriting income	  	 	314	 	 	 	182	 	 	 	650	 	 	 	367	 	
 	  				 				 				 				
Net investment income	  	 	236	 	 	 	211	 	 	 	474	 	 	 	417	 	
Net realized gains	  	 	43	 	 	 	107	 	 	 	100	 	 	 	67	 	
Other (income) expense	  	 	6	 	 	 	(1	)	 	 	23	 	 	 	5	 	
Interest expense	  	 	47	 	 	 	43	 	 	 	91	 	 	 	88	 	
Income tax expense	  	 	127	 	 	 	87	 	 	 	250	 	 	 	140	 	
 	  				 				 				 				
Net income	  	$	413	 	 	$	371	 	 	$	860	 	 	$	618	 	
 	  				 				 				 				
Loss and loss expense ratio	  	 	63.1	%	 	 	64.5	%	 	 	61.8	%	 	 	63.9	%	
Policy acquisition cost ratio	  	 	14.3	%	 	 	14.6	%	 	 	14.2	%	 	 	14.5	%	
Administrative expense ratio	  	 	11.3	%	 	 	12.6	%	 	 	11.8	%	 	 	12.7	%	
Combined ratio	  	 	88.7	%	 	 	91.7	%	 	 	87.8	%	 	 	91.1	%	
 
Net premiums written, which reflect the premiums we retain after purchasing reinsurance protection, increased 19 percent and 14 percent in the three and six months ended June 30, 2004, respectively, compared with the same periods in 2003. Our P&C business reported increases in net premiums written of 25 percent and 26 percent in the three and six months ended June 30, 2004, respectively. Adjusting for the appreciation of foreign currencies relative to the U.S. dollar, net premiums written in our P&C business increased 21 percent and 22 percent in the three and six months ended June 30, 2004, respectively. Net premiums written in our Financial Services business decreased 89 percent and 66 percent, in the same periods. The increase in our P&C business was primarily a result of a robust market for casualty business. The decline in the Financial Services business was primarily due to the de-consolidation of the transferred business for the last two months of the current quarter (subsequent to the IPO) and also due to the non-renewal of several large financial solutions accounts. Our retention ratio (the ratio of net premiums written to gross premiums written) was relatively unchanged at 72 percent for the six months ended June 30, 2004, compared with 71 percent for the same period in 2003.
 
The following table provides a consolidated breakdown of net premiums earned by line of business for the three and six months ended June 30, 2004 and 2003.

 	  	Three Months
Ended June 30
	  	Six Months
Ended June 30
	
 	  	2004
	  	2003
	  	2004
	  	2003
	
 	  	(in millions of U.S. dollars)	
Property and all other	  	$	859	  	$	821	  	$	1,611	  	$	1,549	
Casualty	  	 	1,450	  	 	1,005	  	 	2,813	  	 	1,875	
Personal accident (A&H)	  	 	291	  	 	223	  	 	546	  	 	440	
 	  			  			  			  			
Total P&C	  	 	2,600	  	 	2,049	  	 	4,970	  	 	3,864	
Global Re – life	  	 	54	  	 	42	  	 	105	  	 	90	
Financial guaranty	  	 	17	  	 	82	  	 	104	  	 	160	
Financial solutions	  	 	117	  	 	133	  	 	209	  	 	264	
 	  			  			  			  			
Net premiums earned	  	$	2,788	  	$	2,306	  	$	5,388	  	$	4,378	

Net premiums earned reflect the portion of net premiums written that were recorded as revenues for the period. Net premiums earned in our P&C business increased 27 percent and 29 percent (23 percent and 24 percent, adjusting for foreign exchange) in the three and six months ended June 30, 2004, respectively, compared with the same periods in 2003. Our Financial Services business reported decreases of 38 percent and 26 percent in the three and six months ended June 30, 2004, respectively. The change in net premiums earned for both the P&C and Financial Services businesses is consistent with the trend in net premiums written.
 
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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 decreased in the three and six months ended June 30, 2004, compared with the same periods in 2003, primarily due to lower catastrophe losses and less adverse prior period development. The six months ended June 30, 2004, had negligible catastrophe losses compared with $35 million for the same period in 2003. We incurred $20 million of adverse prior period development and $12 million of adverse development in the three and six months ended June 30, 2004, respectively, compared with adverse development of $12 million and $46 million for the same periods in 2003. The current period’s loss and loss expense ratio does not fully reflect these improvements because it was offset by changes in business mix as we have continued to take advantage of increasing rates and improved market conditions for casualty business, which is typically written at higher loss ratios than property business. 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, resulting in lengthier settlement periods. However, because of the longer claim pay-out duration, we benefit from investing the premiums for a longer period of time, therefore potentially increasing our net investment income.
 
Our policy acquisition costs include commissions, premium taxes, underwriting and other costs that vary with, and are primarily related to, the production of premium. Policy rate increases outpaced policy acquisition costs which caused our policy acquisition cost ratio to decrease in the three and six months ended June 30, 2004, compared with the same periods in 2003. Administrative expenses include all other operating costs. Administrative expenses increased as a result of the growth in our business and the depreciation of the U.S. dollar which had the effect of increasing administrative expenses by $8 million and $21 million in the three and six months ended June 30, 2004, respectively. The administrative expense ratio improved in the current periods due to the increase in net premiums earned and also due to continued expense reduction initiatives, which began in 2003.
 
Underwriting income increased 73 percent and 77 percent in the three and six months ended June 30, 2004, respectively, compared with the same periods in 2003, primarily due to the increase in net premiums earned.
 
Net investment income increased 12 percent and 14 percent in the three and six months ended June 30, 2004, respectively, compared with the same periods in 2003. This increase was due to positive operating cash flows during 2003 and the first half of 2004, partially offset by a reduction in our average invested assets in the last two months of the current quarter due to the sale of Assured Guaranty. See the section entitled “Net Investment Income” for more information.
 
Interest expense increased due to our issuance of $500 million of ACE INA 5.875 percent senior notes during the second quarter.
 
The increase in income tax expense was primarily due to the increase in taxable net income in the current periods. The increased profitability for Insurance - Overseas General and Insurance – North American added $54 million and $91 million to income tax expense in the three and six months ended June 30, 2004. Additionally, we incurred approximately $11 million in income tax expense related to federal income taxes from the transfer of our U.S. financial and mortgage guaranty operations to Assured Guaranty and attributed to the sale of our Assured Guaranty shares. These increases caused our effective tax rate on income excluding net realized gains (losses) to increase to 24 percent and 22 percent in the three and six months ended June 30, 2004, respectively, compared with 19 percent and 18 percent in the same periods in 2003. Our effective tax rate is dependent upon the mix of earnings from different jurisdictions with various tax rates; a change in the geographic mix of earnings would change the effective tax rate. 
 
Net income increased 11 percent and 39 percent in the three and six months ended June 30, 2004, respectively, compared with the same periods in 2003, primarily due to higher underwriting income. The increase in the current quarter was partially offset by lower net realized gains compared with the same quarter in 2003. The appreciation of foreign currencies relative to the U.S. dollar added $9 million and $24 million to our net income in the three and six months ended June 30, 2004, respectively.
 
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Segment Operating Results – Three and Six Months Ended June 30, 2004 and 2003
 
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), errors and omissions (E&O) and medical risk coverages), commercial and recreational marine, program business, accident and health (A&H) - principally being personal accident, aerospace, consumer-oriented products and other specialty lines.

 	  	Three Months
Ended June 30
	 	 	Six Months
Ended June 30
	 	
 	  	2004
	 	 	2003
	 	 	2004
	 	 	2003
	 	
 	  	(in millions of U.S. dollars)	 	
Net premiums written	  	$	1,329	 	 	$	969	 	 	$	2,541	 	 	$	1,902	 	
Net premiums earned	  	 	1,178	 	 	 	920	 	 	 	2,185	 	 	 	1,673	 	
Losses and loss expenses	  	 	837	 	 	 	637	 	 	 	1,533	 	 	 	1,149	 	
Policy acquisition costs	  	 	111	 	 	 	101	 	 	 	212	 	 	 	184	 	
Administrative expenses	  	 	115	 	 	 	102	 	 	 	218	 	 	 	190	 	
 	  				 				 				 				
Underwriting income	  	 	115	 	 	 	80	 	 	 	222	 	 	 	150	 	
 	  				 				 				 				
Net investment income	  	 	107	 	 	 	101	 	 	 	211	 	 	 	202	 	
Other (income) expense	  	 	3	 	 	 	—  	 	 	 	6	 	 	 	6	 	
Interest expense	  	 	5	 	 	 	5	 	 	 	10	 	 	 	11	 	
Income tax expense	  	 	61	 	 	 	42	 	 	 	116	 	 	 	81	 	
 	  				 				 				 				
Income excluding net realized gains	  	 	153	 	 	 	134	 	 	 	301	 	 	 	254	 	
Net realized gains (losses)	  	 	31	 	 	 	25	 	 	 	83	 	 	 	7	 	
Tax expense (benefit) on net realized gains (losses)	  	 	8	 	 	 	3	 	 	 	15	 	 	 	—  	 	
 	  				 				 				 				
Net income	  	$	176	 	 	$	156	 	 	$	369	 	 	$	261	 	
 	  				 				 				 				
Loss and loss expense ratio	  	 	71.1	%	 	 	69.2	%	 	 	70.2	%	 	 	68.7	%	
Policy acquisition cost ratio	  	 	9.5	%	 	 	10.9	%	 	 	9.7	%	 	 	11.0	%	
Administrative expense ratio	  	 	9.7	%	 	 	11.1	%	 	 	10.0	%	 	 	11.3	%	
Combined ratio	  	 	90.3	%	 	 	91.2	%	 	 	89.9	%	 	 	91.0	%	
 
Insurance – North American increased its net premiums written 37 percent and 34 percent in the three and six months ended June 30, 2004, respectively, compared with the same periods in 2003. Insurance – North American has been growing its proportion of casualty lines of business as rates, terms and conditions have been more favorable than property business, which has been under downward pressure in the U.S. over the last several quarters. Insurance – North American’s retention ratio increased to 63 percent for the six months ended June 30, 2004, compared with 57 percent for the same period in 2003. Insurance – North American has been increasing its retention in order to take advantage of improved market conditions for rates and terms and to reduce reliance on reinsurance.
 
The following table provides an entity/divisional breakdown of Insurance – North American’s net premiums earned for the three and six months ended June 30, 2004 and 2003.

 	  	Three Months Ended
June 30
	  	Six Months Ended
June 30
	
 	  	2004
	  	2003
	  	2004
	  	2003
	
 	  	(in millions of U.S. dollars)	
ACE USA	  	$	742	  	$	530	  	$	1,392	  	$	996	
ACE Westchester Specialty	  	 	326	  	 	287	  	 	580	  	 	481	
ACE Bermuda	  	 	110	  	 	103	  	 	213	  	 	196	
 	  			  			  			  			
Net premiums earned	  	$	1,178	  	$	920	  	$	2,185	  	$	1,673	

ACE USA, which includes ACE operations in Canada, provides a broad array of products and services to corporate and consumer clients throughout the U.S. and Canada through licensed insurance companies. Distribution channels include retail brokers, agents, managing general agents, and managing general underwriters. ACE USA’s net premiums earned increased 40 percent in each of the three and six months ended June 30, 2004, compared with the same periods in 2003. ACE USA’s growth in the current periods was
 
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driven by casualty business, particularly professional lines, where submission levels have been strong. In 2004, casualty lines continue to experience generally more favorable policy terms and conditions and a more favorable rate environment than property business. As a result, ACE USA has experienced increased opportunity to write these lines at adequate margins. ACE USA reported solid growth in excess workers’ compensation (primarily high deductible policies in national accounts business) due to new business and rate increases. ACE USA also experienced strong demand for small business workers’ compensation coverage and umbrella excess coverage. Additionally, net premiums earned benefited from increased retention – ACE USA’s retention ratio increased to 66 percent for the six months ended June 30, 2004, compared with 57 percent for the same period in 2003.
 
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 increased 14 percent and 20 percent in the three and six months ended June 30, 2004, respectively, compared with the same periods in 2003. This increase primarily reflects growth in agriculture business over the last year and higher casualty writings due to the robust casualty market. Additionally, due to lower reinsurance costs and the growth in casualty business (which we have been retaining more of due to favorable market conditions), the retention ratio for ACE Westchester Specialty has increased to 55 percent for the six months ended June 30, 2004, compared with 49 percent for the same period in 2003.
 
ACE Bermuda, which specializes in providing professional lines and excess liability coverage, reported an increase in net premiums earned of seven percent and nine percent in the three and six months ended June 30, 2004, respectively, compared with the same periods in 2003. ACE Bermuda reported growth in excess liability and professional lines business on the strength of increased rates and new business primarily written in 2003. Rate increases for these lines have slowed in 2004 and in some lines rates are declining, which will impact net premiums earned in future quarters.
 
The loss and loss expense ratio increased in the three and six months ended June 30, 2004, compared with the same periods in 2003, primarily due to changes in business mix whereby more casualty business was written. Insurance – North American has been increasing its casualty business, which has a longer claim pay-out duration and typically produces higher loss and loss expense ratios than property business. The increase in the loss and loss expense ratio is due to a continued shift towards casualty business in the first half of 2004. Additionally, Insurance – North American incurred adverse prior period development of $42 million and $57 million in the three and six months ended June 30, 2004, respectively, compared with adverse development of $22 million and $47 million for the same periods in 2003. The adverse development in the current quarter is primarily driven by larger than expected settlements on several excess D&O liability policies at ACE Bermuda, and higher than anticipated actual loss emergence in our run-off operations. This adverse development was partially offset by favorable development on property business.
 
The policy acquisition cost ratio decreased in the current periods primarily due to a reduction in premium taxes and commission expenses, relative to the growth in net premiums earned, particularly on casualty lines. Administrative expenses increased 13 percent and 15 percent in the three and six months ended June 30, 2004, respectively, primarily due to the increased costs associated with servicing the growth in Insurance – North American’s product lines. The administrative expense ratio declined due to an increase in net premiums earned that outpaced the growth in expenses.
 
Income excluding net realized gains (losses) increased 14 percent and 19 percent in the three and six months ended June 30, 2004, respectively, compared with the same periods in 2003. This increase was primarily due to higher underwriting income, partially offset by increased income tax expense.
 
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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.

 	  	Three Months
Ended June 30
	 	 	Six Months Ended
June 30
	 	
 	  	2004
	 	 	2003
	 	 	2004
	 	 	2003
	 	
 	  	(in millions of U.S. dollars)	 	
Net premiums written	  	$	1,105	 	 	$	916	 	 	$	2,303	 	 	$	1,897	 	
Net premiums earned	  	 	1,076	 	 	 	860	 	 	 	2,110	 	 	 	1,674	 	
Losses and loss expenses	  	 	625	 	 	 	518	 	 	 	1,226	 	 	 	1,012	 	
Policy acquisition costs	  	 	196	 	 	 	163	 	 	 	380	 	 	 	315	 	
Administrative expenses	  	 	139	 	 	 	121	 	 	 	277	 	 	 	235	 	
 	  				 				 				 				
Underwriting income	  	 	116	 	 	 	58	 	 	 	227	 	 	 	112	 	
 	  				 				 				 				
Net investment income	  	 	55	 	 	 	37	 	 	 	103	 	 	 	72	 	
Other expense	  	 	4	 	 	 	—  	 	 	 	7	 	 	 	1	 	
Interest expense	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	
Income tax expense	  	 	60	 	 	 	25	 	 	 	104	 	 	 	48	 	
 	  				 				 				 				
Income excluding net realized gains (losses)	  	 	107	 	 	 	70	 	 	 	219	 	 	 	135	 	
Net realized gains (losses)	  	 	3	 	 	 	2	 	 	 	27	 	 	 	(11	)	
Tax expense (benefit) on net realized gains (losses)	  	 	1	 	 	 	—  	 	 	 	8	 	 	 	(5	)	
 	  				 				 				 				
Net income	  	$	109	 	 	$	72	 	 	$	238	 	 	$	129	 	
 	  				 				 				 				
Loss and loss expense ratio	  	 	58.1	%	 	 	60.3	%	 	 	58.1	%	 	 	60.5	%	
Policy acquisition cost ratio	  	 	18.2	%	 	 	18.9	%	 	 	18.0	%	 	 	18.8	%	
Administrative expense ratio	  	 	13.0	%	 	 	14.0	%	 	 	13.1	%	 	 	14.0	%	
Combined ratio	  	 	89.3	%	 	 	93.2	%	 	 	89.2	%	 	 	93.3	%	
 
Net premiums written increased 20 percent and 21 percent (11 percent and 10 percent adjusting for foreign exchange) in the three and six months ended June 30, 2004, respectively, compared with the same periods in 2003. This increase was primarily due to growth at ACE International.
 
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 principally accident coverage to individuals and groups outside of U.S. insurance markets. In each of the three and six months ended June 30, 2004, ACE International’s net premiums written increased 27 percent (13 percent adjusting for foreign exchange). Reporting higher premium production across most regions, ACE International recorded net premiums written of $790 million and $1.7 billion in the three and six months ended June 30, 2004, respectively. ACE Europe reported higher P&C and A&H production due to rising rates and new business, partially offset by the non-renewal of a significant account in the first quarter of 2004. ACE Asia Pacific reported strong growth in its A&H lines due to new business and rates holding firm. ACE Asia Pacific’s P&C lines also increased due to rate increases and higher production on casualty lines, partially offset by property rate reductions. ACE Latin America also reported favorable results primarily driven by growth in A&H business especially in Mexico and Brazil.
 
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’ net premiums written increased seven percent (three percent adjusting for foreign exchange) for each of the three and six months ended June 30, 2004. Net premiums written were $315 million and $587 million in the three and six months ended June 30, 2004, respectively. Rate increases continue to be obtained, notably on professional lines and to a lesser extent A&H and marine, however these increases are effectively offset by the softer market conditions that continue to be experienced within the property and the energy lines.
 
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The table below shows net premiums earned by each of the Insurance – Overseas General segment’s key components for the three and six months ended June 30, 2004 and 2003.

 	  	Three Months Ended
June 30
	  	Six Months Ended
June 30
	
 	  	2004
	  	2003
	  	2004
	  	2003
	
 	  	(in millions of U.S. dollars)	
ACE Europe	  	$	495	  	$	360	  	$	958	  	$	684	
ACE Asia Pacific	  	 	114	  	 	88	  	 	229	  	 	172	
ACE Far East	  	 	94	  	 	86	  	 	190	  	 	177	
ACE Latin America	  	 	87	  	 	70	  	 	167	  	 	137	
 	  			  			  			  			
ACE International	  	 	790	  	 	604	  	 	1,544	  	 	1,170	
ACE Global Markets	  	 	286	  	 	256	  	 	566	  	 	504	
 	  			  			  			  			
Net premiums earned	  	$	1,076	  	$	860	  	$	2,110	  	$	1,674	

Insurance – Overseas General increased net premiums earned 25 percent and 26 percent in the three and six months ended June 30, 2004, respectively, compared with the same periods in 2003. ACE International’s increase is attributed to several quarters of growth in P&C and A&H lines and the appreciation of foreign currencies against the U.S. dollar. ACE Global Markets’ increase in net premiums earned was primarily a result of higher net premiums written over the last two years across most of its product lines. Adjusting for the devaluation of the U.S. dollar, Insurance – Overseas General’s net premiums earned increased 16 percent in the three and six months ended June 30, 2004.
 
The loss and loss expense ratio for Insurance – Overseas General declined in the three and six months ended June 30, 2004, primarily due to favorable prior period development and rate increases which outpaced increases in losses and loss expenses. Insurance – Overseas General reported favorable development of $4 million and $12 million in the three and six months ended June 30, 2004, respectively, compared with adverse development of $12 million and $11 million for the same periods in 2003. The favorable development in 2004 relates primarily to fire, technical, and energy lines in the U.K. and Europe partially offset by adverse claim development on the aviation product liability line of business at ACE Global Markets.
 
The policy acquisition cost ratio for Insurance – Overseas General improved in the three and six months ended June 30, 2004, compared with the same periods in 2003. The improvement reflects underwriters’ continued focus on reducing commission charges, with improvements seen particularly within ACE Global Market’s financial lines and A&H divisions, together with changes in business mix. Insurance – Overseas General’s administrative expenses increased 15 percent and 18 percent in the three and six months ended June 30, 2004, primarily due to the depreciation of the U.S. dollar and increased staffing at ACE Europe. The administrative expense ratio for Insurance - Overseas General improved due to the increase in net premiums earned coupled with a reduction in Lloyd’s charges within ACE Global Markets.
 
Underwriting income increased in the three and six months ended June 30, 2004, primarily due to the increase in net premiums earned. Income excluding net realized gains (losses) increased due to the increase in underwriting income and higher net investment income, partially offset by higher income tax expense driven by increased profitability in taxable jurisdictions. The impact of the appreciation of foreign currencies against the U.S. dollar added $24 million to Insurance – Overseas General’s net income in the six months ended June 30, 2004.
 
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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

 	  	Three Months Ended
June 30
	 	 	Six Months Ended
June 30
	 	
 	  	2004
	 	 	2003
	 	 	2004
	 	 	2003
	 	
 	  	(in millions of U.S. dollars)	 	
Net premiums written	  	$	364	 	 	$	345	 	 	$	933	 	 	$	788	 	
Net premiums earned	  	 	346	 	 	 	269	 	 	 	675	 	 	 	517	 	
Losses and loss expenses	  	 	174	 	 	 	143	 	 	 	333	 	 	 	259	 	
Policy acquisition costs	  	 	74	 	 	 	51	 	 	 	138	 	 	 	97	 	
Administrative expenses	  	 	15	 	 	 	14	 	 	 	34	 	 	 	29	 	
 	  				 				 				 				
Underwriting income	  	 	83	 	 	 	61	 	 	 	170	 	 	 	132	 	
 	  				 				 				 				
Net investment income	  	 	29	 	 	 	21	 	 	 	56	 	 	 	40	 	
Other (income) expense	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(1	)	
Income tax expense	  	 	1	 	 	 	3	 	 	 	4	 	 	 	7	 	
 	  				 				 				 				
Income excluding net realized gains	  	 	111	 	 	 	79	 	 	 	222	 	 	 	166	 	
Net realized gains	  	 	(3	)	 	 	25	 	 	 	12	 	 	 	28	 	
Tax expense (benefit) on net realized gains (losses)	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(1	)	
 	  				 				 				 				
Net income	  	$	108	 	 	$	104	 	 	$	234	 	 	$	195	 	
 	  				 				 				 				
Loss and loss expense ratio	  	 	50.2	%	 	 	53.1	%	 	 	49.4	%	 	 	50.0	%	
Policy acquisition cost ratio	  	 	21.4	%	 	 	18.8	%	 	 	20.4	%	 	 	18.7	%	
Administrative expense ratio	  	 	4.5	%	 	 	5.3	%	 	 	5.0	%	 	 	5.7	%	
Combined ratio	  	 	76.1	%	 	 	77.2	%	 	 	74.8	%	 	 	74.4	%	
 
Global Reinsurance’s net premiums written increased six percent and 18 percent in the three and six months ended June 30, 2004, respectively, compared with the same periods in 2003. The rate of growth for net premiums written has declined in the current quarter due to a softening of rates for property and property catastrophe business at ACE Tempest Re Europe and ACE Tempest Re Bermuda. ACE Tempest Re USA partially offset this trend by increasing its P&C volume and taking advantage of higher renewal rates on casualty business.
 
The table below shows net premiums earned by each of the Global Reinsurance segment’s key components for the three and six months ended June 30, 2004 and 2003.

 	  	Three Months Ended
June 30
	  	Six Months Ended
June 30
	
 	  	2004
	  	2003
	  	2004
	  	2003
	
 	  	(in millions of U.S. dollars)	
ACE Tempest Re Europe	  	$	75	  	$	63	  	$	150	  	$	132	
ACE Tempest Re USA	  	 	189	  	 	112	  	 	358	  	 	198	
ACE Tempest Re Bermuda	  	 	82	  	 	94	  	 	167	  	 	187	
 	  			  			  			  			
Net premiums earned	  	$	346	  	$	269	  	$	675	  	$	517	

Net premiums earned increased 29 percent and 31 percent in the three and six months ended June 30, 2004, respectively, compared with the same periods in 2003. This increase was driven by growth in non-catastrophe P&C business which has increased steadily over the last several quarters and comprised approximately 75 percent of the net premiums earned in the six months ended June 30, 2004. The growth in net premiums earned has continued to increase even as gains in net premiums written have slowed at ACE Tempest Re Europe and ACE Tempest Re Bermuda – this is primarily due to the current earning of strong production recorded in recent quarters, especially at ACE Tempest Re USA. ACE Tempest Re USA, which focuses on writing property per risk and casualty reinsurance, reported a 69 percent and 81 percent increase in net premiums earned in the three and six months ended June 30, 2004, respectively, primarily due to increased casualty business written and higher renewal rates. ACE Tempest Re Europe, which most lines of traditional and non-traditional P&C lines with an orientation towards specialty and short-tail products reported a 19 percent and 14 percent increase in net premiums earned in the three and six months ended June 30, 2004, respectively. This increase was
 
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primarily due to significantly higher casualty writings. ACE Tempest Re Bermuda, which principally provides property catastrophe reinsurance globally to insurers of commercial and personal property, reported a 13 percent and 11 percent decrease in net premiums earned in the three and six months ended June 30, 2004, respectively. ACE Tempest Re Bermuda has been experiencing downward pressure on premium production due to the market-wide decline in rates on property catastrophe business.
 
The loss and loss expense ratio decreased in the three and six months ended June 30, 2004, compared with the same periods in 2003, primarily due to a decline in catastrophe losses. We experienced negligible catastrophe losses in the six months ended June 30, 2004, compared with $35 million in the same period in 2003. Property catastrophe business is mainly written at ACE Tempest Re Bermuda. The shift in mix of business that has resulted from growth in non-catastrophe P&C business at ACE Tempest Re USA and ACE Tempest Re Europe partially offset the decrease in Global Reinsurance’s loss and loss expense ratio. Non-catastrophe P&C business typically has higher loss ratios than property catastrophe business (except in periods with high catastrophe losses). 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 had favorable prior period development of $13 million and $26 million for the three and six months ended June 30, 2004, respectively, compared with $13 million of favorable development in each of the same periods in 2003. The favorable development for the current periods relates primarily to property and other short-tail lines. 
 
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. ACE Tempest Re USA’s business is written more on a pro-rata basis versus excess-of-loss, which incurs higher acquisition costs due to higher ceding commissions paid. Administrative expenses increased in the three and six months ended June 30, 2004, primarily due to higher staffing costs to support growth in business at ACE Tempest Re USA. The administrative expense ratio decreased due to increased net premiums earned.
 
Global Reinsurance’s underwriting income increased 36 percent and 29 percent in the three and six months ended June 30, 2004, respectively, compared with the same periods in 2003. The increase was primarily a result of higher net premiums earned, the decrease in catastrophe losses and the favorable prior period development. Income excluding net realized gains (losses) for Global Reinsurance increased 41 percent and 34 percent in the three and six months ended June 30, 2004, respectively, as a result of higher underwriting income and higher net investment income. Foreign exchange did not have a material impact on Global Reinsurance’s income excluding net realized gains in the three and six months ended June 30, 2004.
 
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 undertake typically help clients – ceding companies – to manage mortality, morbidity, investment, 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).

 	  	Three Months Ended
June 30
	  	Six Months Ended
June 30
	
 	  	2004
	  	2003
	  	2004
	  	2003
	
 	  	(in millions of U.S. dollars)	
Net premiums written	  	$55	  	$  44 	  	$106 	  	$91 	
					
Net premiums earned	  	54	  	42 	  	105 	  	90 	
Life and annuity benefits	  	44	  	44 	  	86 	  	92 	
Policy acquisition costs	  	6	  	2 	  	11 	  	6 	
Administrative expenses	  	1	  	1 	  	2 	  	2 	
Net investment income	  	8	  	8 	  	16 	  	15 	
 	  		  		  		  		
Income excluding net realized gains (losses)	  	11	  	3 	  	22 	  	5 	
Net realized gains (losses)	  	15	  	(11)	  	(10)	  	(12)	
 	  		  		  		  		
Net income	  	$26	  	$  (8)	  	$  12 	  	$ (7)	

Income excluding net realized gains (losses) improved in the three and six months ended June 30, 2004, compared with the same periods in 2003, primarily due to the increase in net premiums earned, combined with a decline in life and annuity benefit reserves. Net premiums earned increased in the three and six months ended June 30, 2004, primarily due to higher variable annuity production. Life and annuity benefits decreased, in the first quarter of 2004, primarily due to the increased proportion of premium volume from variable annuity products, which typically have lower expected benefit pay-outs than other business. Net income increased in the current quarter due to the increase in income excluding net realized gains (losses) and the recording of net realized gains, compared with net realized losses in the same quarter in 2003. In the six months ended June 30, 2004, net income increased due to the increase in income excluding net realized gains (losses), partially offset by net realized losses in the first quarter of 2004, which included the fair value adjustment of the derivative component of certain variable annuity products.
 
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Financial Services
 
The Financial Services segment consists of our financial solutions business and our proportionate share of Assured Guaranty’s earnings; which is 100 percent through April 2004 and 34.7 percent thereafter. 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. Assured Guaranty provides credit enhancement products to the municipal finance, structured finance and mortgage markets.
 
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. For more information see the “Critical Accounting Estimates” section in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2003.
 
From April 29, 2004, our proportionate share of Assured Guaranty’s earnings is reflected in “Other (income) expense”.

 	  	Three Months Ended
June 30
	 	 	Six Months Ended
June 30
	 	
 	  	2004
	 	 	2003
	 	 	2004
	 	 	2003
	 	
 	  	(in millions of U.S. dollars)	 	
Net premiums written	  	$	14	 	 	$	132	 	 	$	222	 	 	$	658	 	
Net premiums earned	  	 	134	 	 	 	215	 	 	 	313	 	 	 	424	 	
Losses and loss expenses	  	 	89	 	 	 	161	 	 	 	175	 	 	 	322	 	
Policy acquisition costs	  	 	9	 	 	 	17	 	 	 	20	 	 	 	28	 	
Administrative expenses	  	 	10	 	 	 	20	 	 	 	34	 	 	 	38	 	
 	  				 				 				 				
Underwriting income	  	 	26	 	 	 	17	 	 	 	84	 	 	 	36	 	
 	  				 				 				 				
Net investment income	  	 	36	 	 	 	49	 	 	 	89	 	 	 	100	 	
Other (income) expense	  	 	—  	 	 	 	(1	)	 	 	11	 	 	 	(1	)	
Interest expense	  	 	1	 	 	 	1	 	 	 	3	 	 	 	3	 	
Income tax expense	  	 	10	 	 	 	8	 	 	 	23	 	 	 	17	 	
 	  				 				 				 				
Income excluding net realized gains (losses)	  	 	51	 	 	 	58	 	 	 	136	 	 	 	117	 	
Net realized gains (losses)	  	 	(32	)	 	 	72	 	 	 	(27	)	 	 	69	 	
Tax expense (benefit) on net realized gains (losses)	  	 	1	 	 	 	20	 	 	 	8	 	 	 	20	 	
 	  				 				 				 				
Net income	  	$	18	 	 	$	110	 	 	$	101	 	 	$	166	 	
 	  				 				 				 				
Loss and loss expense ratio	  	 	66.1	%	 	 	74.9	%	 	 	55.8	%	 	 	75.9	%	
Policy acquisition cost ratio	  	 	7.0	%	 	 	7.8	%	 	 	6.4	%	 	 	6.5	%	
Administrative expense ratio	  	 	7.5	%	 	 	9.5	%	 	 	11.0	%	 	 	9.1	%	
Combined ratio	  	 	80.6	%	 	 	92.2	%	 	 	73.2	%	 	 	91.5	%	
 
The Financial Services segment reported decreases in net premiums written of 89 percent and 66 percent in the three and six months ended June 30, 2004, respectively, compared with the same periods in 2003. The current quarter did not include net premiums written from Assured Guaranty (April production was offset by the effect of an inter-company reinsurance transaction which resulted in the transfer of unearned premium reserves to the Global Reinsurance segment), while the same quarter in 2003 included $119 million of net premiums written from financial guaranty business. In addition, this decrease also reflects the first quarter non-renewal of certain financial solutions business and the reversal of unearned premium reserves and related premiums written in connection with the termination of equity CDO business.
 
The Financial Services segment reported a decrease in net premiums earned of 38 percent and 26 percent in the three and six months ended June 30, 2004, respectively. The decrease in the current quarter is primarily due to the sale of Assured Guaranty, while the six-month period was negatively impacted by the non-renewal of several large accounts in the first quarter of 2004. With respect to 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.
 
Financial Services reported a decrease in income excluding realized gains (losses) of 12 percent in the quarter ended June 30, 2004, primarily due to the sale of Assured Guaranty, partially offset by improvements in the financial solutions business, which reported increased underwriting income. The current quarter’s equity pick-up from Assured Guaranty was $8 million and is included in “Other (income) expense”, and was offset by compensation expense of $8 million, related to the IPO. The same quarter in 2003 included income excluding realized gains (losses) attributed to financial guaranty business of $31 million. This segment reported a 16 percent increase in income excluding realized gains (losses) in the six months ended June 30, 2004. This increase was due to higher
 
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underwriting income in the first quarter of 2004, partially offset by a $11 million decrease in net investment income and $11 million of “Other expense” attributed to the recognition of goodwill impairments in the first quarter of 2004. Additionally, Financial Services experienced $5 million and $7 million of favorable prior period development in the three and six months ended June 30, 2004, respectively, compared with favorable development of $9 million and adverse development of $1 million in the same periods in 2003. The development for the current periods relates primarily to favorable development on a high excess of loss assumed multi-year contract partially offset by adverse development on two assumed reinsurance contracts.
 
Net Investment Income

 	  	Three Months
Ended June 30
	 	 	Six Months
Ended June 30
	 	
 	  	2004
	  	2003
	 	 	2004
	 	 	2003
	 	
 	  	(in millions of U.S. dollars)	 	
Insurance – North American	  	$	107	  	$	101	 	 	$	211	 	 	$	202	 	
Insurance – Overseas General	  	 	55	  	 	37	 	 	 	103	 	 	 	72	 	
Global Reinsurance – P&C	  	 	29	  	 	21	 	 	 	56	 	 	 	40	 	
Global Reinsurance – Life	  	 	8	  	 	8	 	 	 	16	 	 	 	15	 	
Financial Services	  	 	36	  	 	49	 	 	 	89	 	 	 	100	 	
Corporate and Other	  	 	1	  	 	(5	)	 	 	(1	)	 	 	(12	)	
 	  			  				 				 				
Net investment income	  	$	236	  	$	211	 	 	$	474	 	 	$	417	 	

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 12 percent and 14 percent in the three and six months ended June 30, 2004, compared with the same periods in 2003. The increased net investment income was primarily due to the positive operating cash flows during 2003 and the first half of 2004 that has resulted in a higher average invested asset base. The positive impact on investment income was partially offset by a reduction in our average invested assets in the last two months of the current quarter due to the sale of Assured Guaranty. The annualized average market yield on fixed maturities was 4.6 percent at June 30, 2004 compared with 3.8 percent at June 30, 2003.
 
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 through the reporting of derivatives at fair value, including financial futures and options, interest rate swaps and credit-default swaps. Changes in unrealized appreciation and depreciation on available-for-sale securities, which result from the revaluation of securities held, are reported as a separate component of accumulated other comprehensive income in shareholders’ equity.
 
The following table presents our pre-tax net realized gains (losses) for the three and six months ended June 30, 2004 and 2003.

 	  	Three Months
Ended June 30
	 	 	Six Months
Ended June 30
	 	
 	  	2004
	 	 	2003
	 	 	2004
	 	 	2003
	 	
 	  	(in millions of U.S. dollars)	 	
Fixed maturities and short-term investments	  	$	(7	)	 	$	49	 	 	$	48	 	 	$	61	 	
Equity securities	  	 	40	 	 	 	(4	)	 	 	68	 	 	 	(54	)	
Other investments	  	 	(4	)	 	 	(11	)	 	 	(11	)	 	 	(11	)	
Currency	  	 	(8	)	 	 	6	 	 	 	(3	)	 	 	15	 	
Financial futures, options and interest rate swaps	  	 	30	 	 	 	15	 	 	 	29	 	 	 	6	 	
Fair value adjustment on insurance derivatives	  	 	(8	)	 	 	52	 	 	 	(31	)	 	 	50	 	
 	  				 				 				 				
Subtotal derivatives	  	 	22	 	 	 	67	 	 	 	(2	)	 	 	56	 	
 	  				 				 				 				
Total net realized gains (losses)	  	$	43	 	 	$	107	 	 	$	100	 	 	$	67	 	

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.
 
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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 and reinsurance of guaranteed minimum income benefits (GMIBs) that are treated as derivatives for accounting purposes; or ii) to mitigate our own risk, principally arising from our investment holdings. We do not consider either type of transaction to be speculative. We recorded a net realized gain of $22 million and a net realized loss of $2 million, in the three and six months ended June 30, 2004, respectively, on all derivative transactions, compared with net realized gains of $67 million and $56 million in the same periods in 2003.
 
With respect to our credit derivatives and GMIB reinsurance businesses (insurance derivatives), we record a portion of the change in fair value in unpaid loss and loss expenses and future policy benefits for life and annuity contracts, respectively, representing our best estimate of loss pay-outs related to fees or premiums earned, 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 the three and six months ended June 30, 2004, were net realized losses of $8 million and $31 million, respectively, compared with net realized gains of $52 million and $50 million in the same periods in 2003. For the three months ended June 30, 2004, the change in fair value was related to many factors including an unrealized loss of approximately $25 million related to the reversal of unrealized gains upon the termination of several credit default swaps. These credit default swaps were covering the equity layer of synthetic CDOs written by our financial solutions business. The unrealized losses were generally offset by increases in net premiums earned. In addition, a net realized gain of $15 million and a net realized loss of $10 million was reported for GMIB reinsurance in the three and six months ended June 30, 2004, respectively. This was principally a result of an increase in interest rates in the second quarter that reduced the related fair value liability versus a decline in interest rates in the first quarter that increased the related fair value liability. In addition to affecting the fair value of guaranties on in-force annuities, interest rate changes also affect the fair value of new annuities attaching to GMIB reinsurance treaties during the current period because they are priced using interest rates prevalent at the inception of the treaty. Based on in-force annuities covered by GMIB reinsurance treaties at June 30, 2004, we estimate that a 50 basis points decline in interest rates would result in an unrealized loss of approximately $37 million. Similarly, we estimate that a one percent decline in the Standard and Poor’s (S&P) Index would result in an unrealized loss of approximately $6 million. These estimated changes in fair value would be recorded as net realized losses in our net income. 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 $30 million and $29 million in the three and six months ended June 30, 2004, respectively, compared with net realized gains of $15 million and $6 million in the same periods in 2003. We recorded net realized gains of $27 million and $13 million on interest rate swaps in the three and six months ended June 30, 2004, respectively, compared with net realized losses of $5 million and $14 million in the same periods in 2003. The interest rate swaps are designed to reduce the negative impact of increases in interest rates on our fixed maturity portfolio. We recorded net realized gains of $3 million and $14 million in the three and six months ended June 30, 2004, respectively, on our S&P equity index futures contracts as the S&P 500 equity index increased 1.7 percent and 3.4 percent during these periods. 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 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 the six months ended June 30, 2004, included write-downs of $4 million related to fixed maturity investments and $3 million related to equity securities as a result of conditions which caused us to conclude the decline in fair value of the investment was “other than temporary”. The six months ended June 30, 2003 included write-downs of $19 million related to fixed maturity investments, $54 million related to equity securities and $16 million related to other investments.
 
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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. For more information on our process for reviewing our investments for possible impairment, see the “Net Realized Gains (Losses)” section in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2003.
 
See Note 4 to the Interim Consolidated Financial Statements for a table which summarizes for all securities in an unrealized loss position at June 30, 2004 (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.
 
Other Income and Expense

 	  	Three Months Ended
June 30
	 	 	Six Months Ended
June 30
	 	
 	  	2004
	 	 	2003
	 	 	2004
	 	 	2003
	 	
 	  	(in millions of U.S. dollars)	 	
Equity in net income of unconsolidated entities	  	$	(8	)	 	$	(4	)	 	$	(10	)	 	$	(5	)	
Minority interest in net income of consolidated entities	  	 	6	 	 	 	3	 	 	 	12	 	 	 	4	 	
Goodwill impairment	  	 	—  	 	 	 	—  	 	 	 	13	 	 	 	6	 	
Compensation expense relating to IPO	  	 	8	 	 	 	—  	 	 	 	8	 	 	 	—  	 	
 	  				 				 				 				
Other (income) expense	  	$	6	 	 	$	(1	)	 	$	23	 	 	$	5	 	

The six months ended June 30, 2004, includes equity in net income of subsidiary of $8 million from Assured Guaranty, which was offset by $8 million in compensation expense in connection with the settlement of ACE stock awards held by the employees of Assured Guaranty. Additionally, we recognized goodwill impairments as a result of a review conducted during the first quarter of 2004.
 
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 3.6 years at June 30, 2004, compared with 3.4 years at December 31, 2003. 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 June 30, 2004 and December 31, 2003.

 	  	June 30, 2004
	  	December 31, 2003
	
 	  	Fair Value
	  	Cost/
Amortized Cost
	  	Fair Value
	  	Cost/
Amortized Cost
	
 	  	(in millions of U.S. dollars)	
Fixed maturities	  	$	18,348	  	$	18,226	  	$	18,645	  	$	18,006	
Securities on loan	  	 	1,515	  	 	1,488	  	 	684	  	 	650	
Short-term investments	  	 	4,040	  	 	4,040	  	 	2,928	  	 	2,928	
Cash	  	 	663	  	 	663	  	 	562	  	 	562	
 	  			  			  			  			
 	  	 	24,566	  	 	24,417	  	 	22,819	  	 	22,146	
Equity securities	  	 	953	  	 	846	  	 	544	  	 	401	
Other investments	  	 	1,216	  	 	1,143	  	 	645	  	 	602	
 	  			  			  			  			
Total investments and cash	  	$	26,735	  	$	26,406	  	$	24,008	  	$	23,149	

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 $1.1 billion at June 30, 2004, compared with $662 million at December 31,
 
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2003. The increase of $2.7 billion in total investments and cash is due to positive cash flows from operations as a result of strong premium volume, issuance of $500 million of debt, and increased securities lending collateral. Additionally, “Other investments” includes our 34.7 percent ($477 million) equity interest in Assured Guaranty. These increases were partially offset by a decline in invested assets due to the sale of Assured Guaranty and an increase in unrealized losses primarily due to the increase in interest rates.
 
The following tables show the market value of our fixed maturities, short-term investments, securities on loan and cash at June 30, 2004 and December 31, 2003. The first table lists elements according to type, and the second according to S&P credit rating.

 	  	June 30, 2004
	 	 	December 31, 2003
	 	
 	  	Market Value
	  	Percentage of
Total
	 	 	Market Value
	  	Percentage of
Total
	 	
 	  	(in millions of
U.S. dollars)	  	 	 	 	(in millions of
U.S. dollars)	  	 	 	
Treasury	  	$	1,773	  	7.2	%	 	$	1,715	  	7.5	%	
Agency	  	 	1,217	  	5.0	%	 	 	1,512	  	6.6	%	
Corporate	  	 	6,809	  	27.7	%	 	 	6,304	  	27.6	%	
Mortgage-backed securities	  	 	4,405	  	17.9	%	 	 	3,894	  	17.1	%	
Asset-backed securities	  	 	832	  	3.4	%	 	 	737	  	3.2	%	
Municipal	  	 	623	  	2.5	%	 	 	1,445	  	6.3	%	
Non-U.S.	  	 	4,203	  	17.1	%	 	 	3,723	  	16.3	%	
Cash and short-term investments	  	 	4,704	  	19.2	%	 	 	3,489	  	15.4	%	
 	  			  			 			  			
Total	  	$	24,566	  	100	%	 	$	22,819	  	100	%	

 	  	Market Value
	  	Percentage of
Total
	 	 	Market Value
	  	Percentage of
Total
	 	
 	  	(in millions of
U.S. dollars)	  	 	 	 	(in millions of
U.S. dollars)	  	 	 	
AAA	  	$	12,780	  	52.0	%	 	$	12,315	  	54.0	%	
AA	  	 	4,159	  	16.9	%	 	 	3,389	  	14.8	%	
A	  	 	3,901	  	15.9	%	 	 	3,534	  	15.5	%	
BBB	  	 	2,048	  	8.3	%	 	 	1,783	  	7.8	%	
BB	  	 	664	  	2.7	%	 	 	709	  	3.1	%	
B	  	 	973	  	3.9	%	 	 	1,029	  	4.5	%	
Other	  	 	41	  	0.3	%	 	 	60	  	0.3	%	
 	  			  			 			  			
Total	  	$	24,566	  	100	%	 	$	22,819	  	100	%	

In accordance with our 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 June 30, 2004, our fixed income investment portfolio included below-investment grade securities and non-rated securities which, in total, comprised approximately seven 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 15 holdings making up approximately 15 percent of the $1.6 billion balance at June 30, 2004. The highest single exposure in this portfolio of securities is $20 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.
 
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 six months ended June 30, 2004. 
 
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 	  	Gross
Losses
	 	 	Reinsurance
Recoverable
	 	 	Net
Losses
	 	
 	  	(in millions of U.S. dollars)	 	
Balance at December 31, 2003	  	$	27,155	 	 	$	13,192	 	 	$	13,963	 	
Losses and loss expenses incurred	  	 	4,750	 	 	 	1,483	 	 	 	3,267	 	
Losses and loss expenses paid	  	 	(3,565	)	 	 	(1,373	)	 	 	(2,192	)	
Sale of Assured Guaranty	  	 	(456	)	 	 	(103	)	 	 	(353	)	
Other (including foreign exchange revaluation)	  	 	340	 	 	 	378	 	 	 	(38	)	
 	  				 				 				
Balance at June 30, 2004	  	$	28,224	 	 	$	13,577	 	 	$	14,647	 	

The process of establishing reserves for claims can be complex and imprecise as it requires the use of informed estimates and judgments. Our estimates and judgments may be revised as claims develop; as additional experience and other data become available; as new or improved methodologies are developed; and as current laws change.
 
We continually evaluate our reserve estimates taking into account new information and discussion and negotiation with our insureds. While we believe our reserve for unpaid losses and loss expenses at June 30, 2004 is adequate, new information or trends, such as judicial action broadening the scope of coverage or expanding liability, may lead to future developments in ultimate losses and loss expenses significantly greater or less than the reserve provided, which could have a material adverse effect on future operating results. More information relating to our loss reserves is included in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2003.
 
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. 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. These amounts include provision for both reported and IBNR claims.
 
The table below presents selected loss reserve data for A&E exposures at June 30, 2004 and December 31, 2003.

 	  	June 30, 2004
	  	December 31, 2003
	
 	  	Gross
	  	Net
	  	Gross
	  	Net
	
 	  	(in millions of U.S. dollars)	
Asbestos	  	$	2,685	  	$	182	  	$	2,899	  	$	277	
Environmental and other latent exposures	  	 	1,045	  	 	178	  	 	1,148	  	 	250	
 	  			  			  			  			
Total	  	$	3,730	  	$	360	  	$	4,047	  	$	527	

Paid losses in the six months ended June 30, 2004 for asbestos claims were $234 million on gross reserves and $98 million on net reserves. Foreign exchange revaluation increased the gross asbestos reserve by $14 million and the net reserve by $1 million in 2004. Environmental and other latent exposure claim payments were $103 million on gross reserves and $72 million on net reserves in the six months ended June 30, 2004.
 
The Pennsylvania Insurance Department requires a biennial, external actuarial review of liabilities residing in the various subsidiaries of Brandywine Holdings (Brandywine), which we acquired when we purchased the P&C business of CIGNA in 1999. That review was last completed during the first quarter of 2003 and we recorded the financial impact in the year ended December 31, 2002. We expect the next review to be complete during the fourth quarter of 2004 and to record the financial impact in the year ending December 31, 2004.
 
Certain active ACE INA companies remain residually liable for pre-1987 general liability and UK business ceded by these companies to the primary Brandywine subsidiary, Century Indemnity Company (“Century”). These potential residual liabilities, which represent only a small portion of liabilities in Century, have in turn been ceded by Century to the Brandywine reinsurance cover provided by National Indemnity Company (“NICO”). While it is possible that some of these residual exposures could ultimately exceed the available NICO limits and return to ACE INA active companies, we believe that the asbestos portion of this subset of exposures exceeding the limit of the NICO cover would constitute only a small portion of ACE’s total asbestos exposure.
 
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
 
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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 and thus far in 2004, 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 $466 million in undiscounted losses were ceded to the aggregate excess of loss reinsurance agreement at June 30, 2004.
 
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 following completion of the remaining issues in the case in the trial court. In addition, the liabilities that are the subject of this California lawsuit are included within our A&E reserves for Brandywine.
 
The current case law regarding A & E claims can be characterized as still evolving and we do not believe that any firm direction will develop in the near future . Therefore, it is not possible to determine the future development of A&E claims with the same degree of reliability as with other types of claims. Such future development will be affected by the extent to which courts continue to expand the liabilities of defendants as well as to expand the intent of the policies and the scope of the coverage, as they have in the past.
 
U.S. 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.
 
More information relating to our A&E loss reserves is included in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2003.
 
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 June 30, 2004 and December 31, 2003.

 	  	June 30
2004
	 	 	December 31
2003
	 	
 	  	(in millions of U.S. dollars)	 	
Reinsurance recoverable on paid losses and loss expenses	  	$	1,222	 	 	$	1,277	 	
Bad debt reserve on paid losses and loss expenses	  	 	(440	)	 	 	(403	)	
Reinsurance recoverable on future policy benefits	  	 	15	 	 	 	15	 	
Reinsurance recoverable on unpaid losses and loss expenses	  	 	14,136	 	 	 	13,749	 	
Bad debt reserve on unpaid losses and loss expenses	  	 	(559	)	 	 	(557	)	
 	  				 				
Net reinsurance recoverable	  	$	14,374	 	 	$	14,081	 	

We evaluate the financial condition of our reinsurers and potential reinsurers on a regular basis and also monitor concentrations of credit risk with reinsurers. Provisions have been established for amounts estimated to be uncollectible.
 
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Following is a breakdown of our reinsurance recoverable on paid losses at June 30, 2004 and December 31, 2003:

 	  	June 30, 2004
	 	 	December 31, 2003
	 	
Category
	  	Amount
	  	Bad Debt
Reserve
	  	% of Total
Reserve
	 	 	Amount
	  	Bad Debt
Reserve
	  	% of Total
Reserve
	 	
 	  	(in millions of U.S. dollars)	 	
General collections	  	$	619	  	$	35	  	5.7	%	 	$	730	  	$	45	  	6.2	%	
Other	  	 	603	  	 	405	  	67.2	%	 	 	547	  	 	358	  	65.4	%	
 	  			  			  			 			  			  			
Total	  	$	1,222	  	$	440	  	36.0	%	 	$	1,277	  	$	403	  	31.6	%	

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 merits of the underlying matter, 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 (on a one quarter lag basis) 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.

Breakdown of Reinsurance Recoverable
	  	March 31
2004
	  	Bad Debt
Reserve
	  	% of Gross
	 	
 	  	(in millions of U.S. dollars)	 	
Categories	  	 	 	  	 	 	  	 	 	
Top 10 reinsurers	  	$	7,885	  	$	94	  	1.2	%	
Other reinsurers balances greater than $20 million	  	 	3,146	  	 	132	  	4.2	%	
Other reinsurers balances less than $20 million	  	 	1,071	  	 	145	  	13.5	%	
Mandatory pools and government agencies	  	 	718	  	 	3	  	0.4	%	
Structured settlements	  	 	425	  	 	2	  	0.5	%	
Captives	  	 	813	  	 	1	  	0.1	%	
Other	  	 	967	  	 	586	  	60.6	%	
 	  			  			  			
Total	  	$	15,025	  	$	963	  	6.4	%	

	
Top 10 Reinsurers (net of collateral)
	
Berkshire Hathaway Insurance Group	
CIGNA	
Equitas	
GE Global Insurance Group	
Hannover	
Lloyd’s of London	
Munich Re	
St. Paul Travelers Companies	
Swiss Re Group	
XL Capital Group	
 
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Other Reinsurers Balances Greater Than $20 million (net of collateral)
	
AIOI Insurance	  	Electric Insurance Company	  	Overseas Partners Ltd.	
Allianz Group	  	Everest Re Group	  	QBE Insurance	
American International Group	  	Fairfax Financial	  	RenaissanceRe Holdings Ltd.	
Arch Capital	  	FM Global Group	  	Royal & Sun Alliance Insurance Group Plc	
Aspen Insurance Holdings Ltd	  	Gerling Group	  	SCOR Group	
AVIVA	  	Great American P&C Insurance Companies	  	Sompo Japan	
AXA	  	Hartford Insurance Group	  	Toa Reinsurance Company	
Chubb Insurance Group	  	Independence Blue Cross (Amerihealth)	  	Trenwick Group	
CNA Insurance Companies	  	ING – Internationale Nederlanden Group	  	White Mountains Insurance Group	
Constellation Reinsurance Company	  	IRB – Brasil Resseguros S.A.	  	WR Berkley Corp.	
Converium Group	  	Liberty Mutual Insurance Companies	  	Zurich Financial Services Group	
DaimlerChrysler Insurance Company	  	Millea Holdings	  	 	
Dominion Ins. Co. Ltd	  	Mitsui Sumitomo Insurance Company Ltd.	  	 	
 
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 six months ended June 30, 2004, 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.
 
Our sale of 65.3 percent of the common shares of Assured Guaranty generated proceeds, net of offering costs, of approximately $835 million and a return of capital of $200 million from Assured Guaranty, which were used to support our P&C business and strengthen our balance sheet capital position.
 
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 the six months ended June 30, 2004, ACE Bermuda and ACE Tempest Life Reinsurance Ltd declared and paid dividends of $172 million and $150 million, respectively. During the six months ended June 30, 2003, ACE Bermuda declared and paid dividends of $281 million, and ACE Cap Re International Ltd. declared and paid dividends of $25 million. We expect that a majority of our dividend inflows for the remainder of 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 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 the current period. 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 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.
 
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.
 
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Our insurance and reinsurance operations provide liquidity in that premiums are received in advance, sometimes substantially in advance, of the time claims are paid. 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 which 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 from operating activities were $2.3 billion in the six months ended June 30, 2004, compared with $1.6 billion in the same period in 2003. The positive operating cash flows were generated primarily from an increase in net premiums written and net investment income, combined with a decrease in loss and loss expenses paid.	
 
 	•	Our consolidated net cash flows used for investing activities increased to $2.6 billion in the six months ended June 30, 2004, and was net of $953 million received from the sale of Assured Guaranty (net of cash sold). This compares with net cash flows used for investing activities of $2.1 billion in the same period in 2003. This increase primarily reflects our strong consolidated net cash flows from operating activities. Net purchases of fixed maturities were $3.1 billion in the six months ended June 30, 2004, compared with $2.2 million in the same period in 2003.	
 
 	•	Our consolidated net cash flows from financing activities decreased to $435 million in the six months ended June 30, 2004, compared with $482 million in the same period in 2003. This decrease was primarily due to a decline in net proceeds on security issuances, higher dividends paid on our Ordinary Shares and the payment of dividends on the Preferred Shares. The current period included net proceeds of $499 million from our debt issuance, whereas the same period in 2003 included net proceeds of $557 million from our Preferred Share issuance. The decrease in net cash flows from financing activities was partially offset by an increase in proceeds from the exercise of options for 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 $133 million in the six months ended June 30, 2004, compared with $359 million in the same period in 2003, 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.
 
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 June 30, 2004 and December 31, 2003.
 
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 	  	June 30
2004
	 	 	December 31
2003
	 	
 	  	(in millions of U.S. dollars)	 	
Short-term debt	  	$	546	 	 	$	546	 	
Long-term debt	  	 	1,849	 	 	 	1,349	 	
 	  				 				
Total debt	  	 	2,395	 	 	 	1,895	 	
 	  				 				
Trust preferred securities	  	 	487	 	 	 	475	 	
Preferred Shares	  	 	557	 	 	 	557	 	
Ordinary shareholders’ equity	  	 	8,663	 	 	 	8,278	 	
 	  				 				
Total shareholders’ equity	  	 	9,220	 	 	 	8,835	 	
 	  				 				
Total capitalization	  	$	12,102	 	 	$	11,205	 	
 	  				 				
Ratio of debt to total capitalization 1	  	 	19.8	%	 	 	16.9	%	
Ratio of debt plus trust preferreds to total capitalization 1	  	 	23.8	%	 	 	21.2	%	

1.	Ratios are higher at June 30, 2004, due to debt having been issued during the second quarter while the planned repayment of debt will occur subsequent to the quarter-end.	
 
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.
 
During the second quarter of 2004, we issued $500 million of ACE INA 5.875 percent senior notes due June 15, 2014. The proceeds of the notes were used partly to repay $75 million of Capital Re trust preferred securities on July 12, 2004. The balance will be used to repay $400 million of ACE INA 8.2 percent notes, which mature on August 15, 2004, and for general corporate purposes.
 
Our diluted book value per Ordinary Share increased to $30.46 at June 30, 2004, compared with $29.46 at December 31, 2003. In calculating our diluted book value per Ordinary Share, we include in the denominator in-the-money options. The expected proceeds from the in-the-money options are included in the numerator. Shareholders’ equity increased $385 million in the six months ended June 30, 2004, primarily due to our net income, partially offset by an increase in unrealized losses on our investment portfolio of $407 million.
 
On January 14, 2004 and April 14, 2004, we paid dividends of 19 cents per Ordinary Share to shareholders of record on December 31, 2003 and March 31, 2004, respectively. On July 14, 2004, we paid dividends of 21 cents per ordinary share to shareholders of record on June 30, 2004. 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. Dividends on the Preferred Shares are payable quarterly, when and if declared by our Board of Directors, in arrears on March 1, June 1, September 1 and December 1 of each year. On March 1, 2004 and June 1, 2004, we paid dividends of $4.875 per Preferred Share (which translates to 48.75 cents per Depositary Share) to shareholders of record on February 29, 2004 and May 31, 2004, respectively.
 
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 June 30, 2004, this authorization had not been utilized.
 
In 2002, we filed a shelf registration statement with the SEC, which became effective in 2003, relating to a number of different types of debt and equity securities. At June 30, 2004, the amount available under the shelf filing was $425 million.
 
Credit Facilities
 
As our Bermuda subsidiaries are not admitted insurers and reinsurers in the U.S., the terms of certain U.S. 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.
 
The following table shows our credit facilities by credit line, usage, expiry date and purpose at June 30, 2004.
 
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 	  	Credit Line 1
	  	Usage
	  	Expiry Date
	  	Purpose
	
Liquidity Facilities	  	 	 	  	 	 	  	 	  	 	
ACE Limited 2	  	$	600	  	$	210	  	April 2007	  	General Corporate	
Secured Operational LOC Facilities	  	 	 	  	 	 	  	 	  	 	
ACE Group	  	 	500	  	 	277	  	Sept. 2006	  	General Corporate	
Unsecured Operational LOC Facilities	  	 	 	  	 	 	  	 	  	 	
ACE Limited	  	 	500	  	 	287	  	Sept. 2004	  	General Corporate	
ACE Limited	  	 	100	  	 	91	  	Oct. 2004	  	General Corporate	
ACE Global Markets	  	 	200	  	 	200	  	Oct. 2004	  	General Corporate	
ACE Tempest Re	  	 	200	  	 	55	  	Dec. 2004	  	General Corporate	
ACE International	  	 	27	  	 	27	  	Various	  	General Corporate	
Unsecured Capital Facilities	  	 	 	  	 	 	  	 	  	 	
ACE Limited 3	  	 	695	  	 	690	  	Nov. 2008	  	General Corporate	
 	  			  			  	 	  	 	
Total	  	$	2,822	  	$	1,837	  	 	  	 	

1.	Certain facilities are guaranteed by operating subsidiaries and/or ACE Limited	
2.	Commercial paper back-up facility, may also be used for LOCs	
3.	Supports ACE Global Markets underwriting capacity for Lloyd’s Syndicate 2488-2004 capacity of £550 million (approximately $1 billion)	
 
Some of the facilities noted above require that we maintain certain covenants, all of which have been met at June 30, 2004. These covenants include:
 
(i)	maintenance of a minimum consolidated net worth covenant of not less than $6.0 billion (subject to a reset provision on the last day of each fiscal year) plus 25 percent of cumulative net income since December 31, 2003, plus 50 percent of net proceeds of any issuance of equity interests subsequent to December 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 June 30, 2004, (a) the minimum consolidated net worth requirement under the covenant described in (i) above was $6.2 billion and our actual consolidated net worth as calculated under that covenant was $8.9 billion; and (b) our ratio of debt to total capitalization was 0.20 to 1.
 
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 last renewal date of the ACE Global Markets unsecured LOC), this requirement related to ACE Bermuda.
 
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.
 
Recent Accounting Pronouncements
 
See Note 2 to the Interim Consolidated Financial Statements for a discussion of recent accounting pronouncements.
 
 Item 3. 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. Due to the classification of the majority of our debt and equity securities as available-for-sale, changes in interest rates, equity prices or foreign currency exchange rates will have an immediate affect on comprehensive income and shareholders’ equity but will not ordinarily have an immediate affect on net income. Nevertheless, changes in interest rates and equity prices affect consolidated net income when, and if, a security is sold or impaired. We also 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.
 
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Changes in the fair value of these derivative instruments have an immediate affect on both net income and shareholders’ equity. 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 3.6 percent at June 30, 2004, compared with 3.4 percent at December 31, 2003. This equates to a pre-tax decrease in market value of approximately $754 million on a fixed income portfolio valued at $21 billion at June 30, 2004. This compares with an approximately $696 million pre-tax decrease in market value on a fixed income portfolio valued at $20.6 billion at December 31, 2003. 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 $1.1 billion at June 30, 2004, compared with $662 million at December 31, 2003. 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 pretax declines in fair value of $108 million and $66 million at June 30, 2004 and December 31, 2003, respectively. 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 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.
 
Item 4. 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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ACE LIMITED
PART II OTHER INFORMATION
 
 Item 1. 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 unpaid losses and loss expenses 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 and 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 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
 
This table provides information with respect to purchases by the Company of its Ordinary Shares during the six months ended June 30, 2004:
 
Issuer’s Purchases of Equity Securities*

Period
	  	Total Number of
Shares Purchased**
	  	Average Price
Paid per Share**
	  	Total Number of
Shares Purchased as
Part of Publicly
Announced Plan*
	  	Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Plan*
	
January 1, 2004 through
January 31, 2004	  	16,945	  	$	39.95	  	—  	  	$	250 million	
February 1, 2004 through
February 29, 2004	  	25,663	  	$	44.07	  	—  	  	$	250 million	
March 1, 2004 through
March 31 , 2004	  	170,085	  	$	44.78	  	—  	  	$	250 million	
April 1, 2004 through
April 30, 2004	  	307	  	$	44.96	  	—  	  	$	250 million	
May 1, 2004 through
May 31, 2004	  	80,427	  	$	43.52	  	—  	  	$	250 million	
June 1, 2004 through
June 30, 2004	  	33,113	  	$	42.88	  	—  	  	$	250 million	
 	  		  	 	 	  	 	  	 	 	
Total	  	326,540	  	 	 	  	 	  	 	 	

* 	As part of ACE’s capital management program, in November 2001, the Company’s Board of Directors authorized the repurchase of any ACE issued debt or capital securities including Ordinary Shares, up to $250 million. At June 30, 2004, this authorization had not been utilized.	
**	This column reflects the following transactions during the six months ended June 30, 2004: (i) the surrender to the Company of 244,701 shares of Common Stock to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees, (ii) the surrender to the Company of 32,723 shares of Common Stock to satisfy tax withholding obligations in connection with the exercise of employee stock options, and (iii) the surrender to the Company of 49,116 shares of Common Stock to pay the option cost on options exercised.	
 
 Item 4. Submissions of Matters to a Vote of Security Holders
 
The Annual General Meeting was held on May 27, 2004.
 
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The following matters were voted on at the Annual General Meeting:
 
a) The following directors were elected.

 	  	Term Expiring
	  	Shares with
Votes in Favor
	  	Shares with
Votes Withheld
	
Brian Duperreault	  	2007	  	243,949,675	  	3,014,145	
Robert M. Hernandez	  	2007	  	222,327,081	  	24,636,739	
Peter Menikoff	  	2007	  	244,915,912	  	2,047,908	
Robert Ripp	  	2007	  	244,919,431	  	2,044,389	
Dermot F. Smurfit	  	2007	  	222,329,502	  	24,634,318	
 
The number of shares abstained was NIL and the number of broker non-votes was NIL.
 
 	b)	The ACE Limited 2004 Long-Term Incentive Plan was approved.	
 
The holders of 197,215,103 shares voted in favor, 31,223,061 shares voted against and 1,197,359 shares abstained. There were 17,328,297 broker non-votes
 
 	c)	The appointment of PricewaterhouseCoopers LLP as independent registered public accountants for the Company for the year ended December 31, 2004 was ratified and approved.	
 
The holders of 243,356,737 shares voted in favor, 2,515,932 shares voted against and 1,091,151 shares abstained. There were no broker non-votes 
 
Item 5. Other Information
 
1.	On May 27, 2004, the Company declared a quarterly dividend of $0.21 per Ordinary Share payable on July 14, 2004, to shareholders of record on June 30, 2004.	
 
2.	On May 27, 2004, the Company declared a dividend of $4.875 per Preferred Share, payable on June 1, 2004, to shareholders of record on May 31, 2004.	
 
 Item 6. Exhibits and Reports on Form 8-K
 
1.	Exhibits	
 
10.1*	ACE Limited 2004 Long-Term Incentive Plan (as amended through the First Amendment)	
 
10.2	Master Separation Agreement among ACE Limited, ACE Financial Services Inc., ACE Bermuda Insurance Ltd., and Assured Guaranty Ltd. dated as of April 27, 2004 (Incorporated by reference to Exhibit 10.8 to Assured Guaranty’s Registration Statement on Form S-1, Post-Effective Amendment No. 1 (Reg. No. 333-111491))	
 
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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2.	Reports on Form 8-K	
 
The Company filed a Form 8-K current report (date of earliest event reported: June 2, 2004) pertaining to its computation of ratio of earnings to fixed charges and preferred share dividends.
 
The Company filed a Form 8-K current report (date of earliest event reported: June 9, 2004) pertaining to documents filed in connection with the sale of $500 million, 5.875 percent Senior Notes due June 15, 2014.
 
The Company filed a Form 8-K/A current report (date of earliest event reported: June 9, 2004) amending documents filed in connection with the sale of $500 million, 5.875 percent Senior Notes due June 15, 2014.
 
The Company filed a Form 8-K current report (date of earliest event reported: July 27, 2004) pertaining to ACE Limited’s press release reporting its second quarter 2004 results and the availability of its second quarter 2004 financial supplement.
 
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ACE LIMITED
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.

 	  	ACE LIMITED	
		
August 6, 2004	  	/ S /    E VAN G REENBERG        
	
 	  	Evan Greenberg
President and Chief
Executive Officer	
		
August 6, 2004	  	/ S /    P HILIP V. B ANCROFT        
	
 	  	Philip V. Bancroft
Chief Financial Officer	
 
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ACE LIMITED
EXHIBITS

Exhibit
Number
	 	 	Description
	  	Numbered
Page

 	 	 	Exhibits	  	 	
			
10.1	*	 	ACE Limited 2004 Long-Term Incentive Plan (as amended through the First Amendment)	  	 	
			
10.2	 	 	Master Separation Agreement among ACE Limited, ACE Financial Services Inc., ACE Bermuda Insurance Ltd., and Assured Guaranty Ltd. dated as of April 27, 2004 (Incorporated by reference to Exhibit 10.8 to Assured Guaranty’s Registration Statement on Form S-1, Post-Effective Amendment No. 1 (Reg. No. 333-111491))	  	 	
			
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	
 
61

Exhibit 10.1
 
ACE LIMITED
2004 LONG-TERM INCENTIVE PLAN
(As amended through the First Amendment)
 
SECTION 1
GENERAL
 
1.1. Purpose . The ACE Limited 2004 Long-Term Incentive Plan (the “Plan”) has been established by ACE Limited (the “Company”) to (i) attract and retain persons eligible to participate in the Plan; (ii) motivate Participants, by means of appropriate incentives, to achieve long-range goals; (iii) provide incentive compensation opportunities that are competitive with those of other similar companies; and (iv) further identify Participants’ interests with those of the Company’s other shareholders through compensation that is based on the Company’s ordinary shares of stock; and thereby promote the long-term financial interest of the Company and the Subsidiaries, including the growth in value of the Company’s equity and enhancement of long-term shareholder return.
 
1.2. Participation . Subject to the terms and conditions of the Plan, the Committee shall determine and designate, from time to time, from among the Eligible Individuals (including transferees of Eligible Individuals to the extent the transfer is permitted by the Plan and the applicable Award Agreement), those persons who will be granted one or more Awards under the Plan, and thereby become “Participants” in the Plan.
 
1.3. Operation, Administration, and Definitions . The operation and administration of the Plan, including the Awards made under the Plan, shall be subject to the provisions of Section 5 (relating to operation and administration). Capitalized terms in the Plan shall be defined as set forth in the Plan (including the definition provisions of Section 9).
 
SECTION 2
OPTIONS AND SARS
 
2.1. Definitions .
 
(a)	The grant of an “Option” entitles the Participant to purchase shares of Stock at an Exercise Price established by the Committee. Any Option granted under this Section 2 may be either an incentive stock option (an “ISO”) or a non-qualified option (an “NQO”), as determined in the discretion of the Committee. An “ISO” is an Option that is intended to satisfy the requirements applicable to an “incentive stock option” described in section 422(b) of the Code. An “NQO” is an Option that is not intended to be an “incentive stock option” as that term is described in section 422(b) of the Code.	
 
(b)	A stock appreciation right (an “SAR”) entitles the Participant to receive, in cash or Stock (as determined in accordance with subsection 2.5), value equal to (or otherwise based on) the excess of: (a) the Fair Market Value of a specified number of shares of Stock at the time of exercise; over (b) an Exercise Price established by the Committee.	
 
2.2. Exercise Price . The “Exercise Price” of each Option and SAR granted under this Section 2 shall be established by the Committee or shall be determined by a method established

by the Committee at the time the Option or SAR is granted. The Exercise Price shall not be less than 100% of the Fair Market Value of a share of Stock on the date of grant (or, if greater, the par value of a share of Stock); provided, however, that the Committee, in its discretion, may establish an Exercise Price of an Option or SAR granted under this Section 2 that varies based on the stock price of a comparator group of companies or such other index as is selected by the Committee (resulting in an Exercise Price that may at times be less than the Fair Market Value of a share of Stock on the date of grant); and further provided that such variable price shall not be used if the Committee intends that the Options or SARs be Performance-Based Compensation and/or the Options be Incentive Stock Options, and the use of such variable pricing would preclude such treatment.
 
2.3. Exercise . An Option and an SAR shall be exercisable in accordance with such terms and conditions and during such periods as may be established by the Committee. In no event, however, shall an Option or SAR expire later than ten years after the date of its grant.
 
2.4. Payment of Option Exercise Price . The payment of the Exercise Price of an Option granted under this Section 2 shall be subject to the following:
 
(a)	Subject to the following provisions of this subsection 2.4, the full Exercise Price for shares of Stock purchased upon the exercise of any Option shall be paid at the time of such exercise (except that, in the case of an exercise arrangement approved by the Committee and described in paragraph 2.4(c), payment may be made as soon as practicable after the exercise).	
 
(b)	Subject to applicable law, the Exercise Price shall be payable in cash, by promissory note, or by tendering, by either actual delivery of shares or by attestation, shares of Stock acceptable to the Committee, and valued at Fair Market Value as of the day of exercise, or in any combination thereof, as determined by the Committee; provided that, except as otherwise provided by the Committee, payments made with shares of Stock in accordance with this paragraph (b) shall be limited to shares held by the Participant for not less than six months prior to the payment date.	
 
(c)	Subject to applicable law, the Committee may permit a Participant to elect to pay the Exercise Price upon the exercise of an Option by irrevocably authorizing a third party to sell shares of Stock (or a sufficient portion of the shares) acquired upon exercise of the Option and remit to the Company a sufficient portion of the sale proceeds to pay the entire Exercise Price and any tax withholding resulting from such exercise.	
 
2.5. Settlement of Award . Settlement of Options and SARs is subject to subsection 5.7.
 
2.6. No Repricing . Except for either adjustments pursuant to paragraph 5.2(f) (relating to the adjustment of shares), or reductions of the Exercise Price approved by the Company’s shareholders, the Exercise Price for any outstanding Option may not be decreased after the date of grant nor may an outstanding Option granted under the Plan be surrendered to the Company as consideration for the grant of a replacement Option with a lower Exercise Price.
 
2.7. Grants of Options and SARs . An Option may but need not be in tandem with an SAR, and an SAR may but need not be in tandem with an Option. If an Option is in tandem with
 
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an SAR, the Exercise Price of both the Option and SAR shall be the same, and the exercise of the Option or SAR with respect to a share of Stock shall cancel the corresponding tandem SAR or Option right with respect to such share. If an SAR is in tandem with an Option but is granted after the grant of the Option, or if an Option is in tandem with an SAR but is granted after the grant of the SAR, the later granted tandem Award shall have the same Exercise Price as the earlier granted Award, but the Exercise Price for the later granted Award may be less than the Fair Market Value of the Stock at the time of such grant.
 
SECTION 3
FULL VALUE AWARDS
 
3.1. Definition . A “Full Value” Award is a grant of one or more shares of Stock or a right to receive one or more shares of Stock in the future, with such grant subject to one or more of the following, as determined by the Committee:
 
(a)	The grant shall be in consideration of a Participant’s previously performed services, or surrender of other compensation that may be due.	
 
(b)	The grant shall be contingent on the achievement of performance or other objectives during a specified period.	
 
(c)	The grant shall be subject to a risk of forfeiture or other restrictions that will lapse upon the achievement of one or more goals relating to completion of service by the Participant, or achievement of performance or other objectives.	

 	 	The grant of Full Value Awards may also be subject	
 	 	to such other conditions, restrictions and	
 	 	contingencies, as determined by the Committee.	
 
3.2. Restrictions on Awards .
 
(a)	The Committee may designate a Full Value Award granted to any Participant as “performance-based compensation” as that term is used in section 162(m) of the Code. To the extent required by Code section 162(m), any Full Value Award so designated shall be conditioned on the achievement of one or more performance objectives. The performance objectives shall be based on Performance Measures selected by the Committee. For Awards under this Section 3 intended to be “performance-based compensation,” the grant of the Awards and the establishment of the performance objectives shall be made during the period required under Code section 162(m).	
 
(b)	If the right to become vested in a Full Value Award is conditioned on the completion of a specified period of service with the Company or the Subsidiaries, without achievement of Performance Measures or other performance objectives (whether or not related to the Performance Measures) being required as a condition of vesting, and without it being granted in lieu of other compensation, then the required period of service for full vesting shall be not less than three years (subject to acceleration of vesting, to the extent permitted by the Committee, in the event of the Participant’s death, disability, retirement, change in control or involuntary termination).	
 
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SECTION 4
CASH INCENTIVE AWARDS
 
A Cash Incentive Award is the grant of a right to receive a payment of cash (or in the discretion of the Committee, Stock having value equivalent to the cash otherwise payable) that is contingent on achievement of performance or other objectives over a specified period established by the Committee. The grant of Cash Incentive Awards may also be subject to such other conditions, restrictions and contingencies, as determined by the Committee. The Committee may designate a Cash Incentive Award granted to any Participant as “performance-based compensation” as that term is used in section 162(m) of the Code. To the extent required by Code section 162(m), any such Award so designated shall be conditioned on the achievement of one or more performance objectives. The performance objectives shall be based on Performance Measures as selected by the Committee. For Awards under this Section 4 intended to be “performance-based compensation,” the grant of the Awards and the establishment of the performance objectives shall be made during the period required under Code section 162(m).
 
SECTION 5
OPERATION AND ADMINISTRATION
 
5.1. Effective Date . Subject to the approval of the shareholders of the Company at the Company’s 2004 annual meeting of its shareholders, the Plan shall be effective as of February 25, 2004 (the “Effective Date”); provided, however, that, to the extent not prohibited by applicable law or the applicable rules of any stock exchange, Awards may be granted contingent on approval of the Plan by the shareholders of the Company at such annual meeting. The Plan shall be unlimited in duration and, in the event of Plan termination, shall remain in effect as long as any Awards under it are outstanding; provided, however, that no Awards may be granted under the Plan after the ten-year anniversary of the Effective Date.
 
5.2. Shares and Other Amounts Subject to Plan . The shares of Stock for which Awards may be granted under the Plan shall be subject to the following:
 
(a)	The shares of Stock with respect to which Awards may be made under the Plan shall be (i) shares currently authorized but unissued; (ii) to the extent permitted by applicable law, currently held or acquired by the Company as treasury shares, including shares purchased in the open market or in private transactions; or (iii) shares purchased in the open market by a direct or indirect wholly-owned subsidiary of the Company (as determined by the Chairman, the Chief Executive Officer or any executive officer of the Company). The Company may contribute to the subsidiary an amount sufficient to accomplish the purchase in the open market of the shares of Stock to be so acquired (as determined by the Chairman, the Chief Executive Officer or any executive officer of the Company).	
 
(b)	Subject to the following provisions of this subsection 5.2, the maximum number of shares of Stock that may be delivered to Participants and their beneficiaries under the Plan shall be equal to the sum of: (i) 15,000,000 shares of Stock; and (ii) any shares of Stock that are represented by awards granted under the ACE Limited 1995 Long-Term Incentive Plan, the ACE Limited 1995 Outside Directors Plan, the ACE Limited 1998 Long-Term Incentive Plan, and the ACE Limited 1999 Replacement Long-Term Incentive Plan (the	
 
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“Prior Plans”) that are forfeited, expire or are canceled after the Effective Date without delivery of shares of Stock or which result in the forfeiture of the shares of Stock back to the Company to the extent that such shares would have been added back to the reserve under the terms of the applicable Prior Plan.
 
(c)	To the extent provided by the Committee, any Award may be settled in cash rather than Stock.	
 
(d)	Only shares of Stock, if any, actually delivered to the Participant or beneficiary on an unrestricted basis with respect to an Award shall be treated as delivered for purposes of the determination under paragraph (b) above, regardless of whether the Award is denominated in Stock or cash. Consistent with the foregoing:	
 
 	(i)	To the extent any shares of Stock covered by an Award are not delivered to a Participant or beneficiary because the Award is forfeited or canceled, or the shares of Stock are not delivered on an unrestricted basis (including, without limitation, by reason of the Award being settled in cash or used to satisfy the applicable tax withholding obligation), such shares shall not be deemed to have been delivered for purposes of the determination under paragraph (b) above.	
 
 	(ii)	If the exercise price of any Option granted under the Plan or any Prior Plan, or the tax withholding obligation with respect to any Award granted under the Plan or any Prior Plan, is satisfied by tendering shares of Stock to the Company (by either actual delivery or by attestation), only the number of shares of Stock issued net of the shares of Stock tendered shall be deemed delivered for purposes of determining the number of shares of Stock available for delivery under the Plan.	
 
(e)	Subject to paragraph 5.2(f), the following additional maximums are imposed under the Plan.	
 
 	(i)	The maximum number of shares of Stock that may be delivered to Participants and their beneficiaries with respect to ISOs granted under the Plan shall be 15,000,000 shares; provided, however, that to the extent that shares not delivered must be counted against this limit as a condition of satisfying the rules applicable to ISOs, such rules shall apply to the limit on ISOs granted under the Plan.	
 
 	(ii)	The maximum number of shares that may be covered by Awards granted to any one Participant during any one calendar-year period pursuant to Section 2 (relating to Options and SARs) shall be 1,000,000 shares. For purposes of this paragraph (ii), if an Option is in tandem with an SAR, such that the exercise of the Option or SAR with respect to a share of Stock cancels the tandem SAR or Option right, respectively, with respect to such share, the tandem Option and SAR rights with respect to each share of Stock shall be counted as covering but one share of Stock for purposes of applying the limitations of this paragraph (ii).	
 
 	(iii)	The maximum number of shares of Stock that may be issued in conjunction with Awards granted pursuant to Section 3 (relating to Full Value Awards) shall be 10,000,000 shares.	
 
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 	(iv)	For Full Value Awards that are intended to be “performance-based compensation” (as that term is used for purposes of Code section 162(m)), no more than 500,000 shares of Stock may be delivered pursuant to such Awards granted to any Participant during any one-calendar-year period; provided that Awards described in this paragraph (iv), that are intended to be performance-based compensation, shall be subject to the following:	
 
 	(A)	If the Awards are denominated in Stock but an equivalent amount of cash is delivered in lieu of delivery of shares of Stock, the foregoing limit shall be applied based on the methodology used by the Committee to convert the number of shares of Stock into cash.	
 
 	(B)	If delivery of Stock or cash is deferred until after shares of Stock have been earned, any adjustment in the amount delivered to reflect actual or deemed investment experience after the date the shares are earned shall be disregarded.	
 
 	(v)	For Cash Incentive Value Awards that are intended to be “performance-based compensation” (as that term is used for purposes of Code section 162(m)), the maximum amount payable to any Participant with respect to an performance period shall equal $500,000 multiplied by the number of calendar months included in that performance period; provided that Awards described in this paragraph (v), that are intended to be performance-based compensation, shall be subject to the following:	
 
 	(A)	If the Awards are denominated in cash but an equivalent amount of Stock is delivered in lieu of delivery of cash, the foregoing limit shall be applied to the cash based on the methodology used by the Committee to convert the cash into shares of Stock.	
 
 	(B)	If delivery of Stock or cash is deferred until after cash has been earned, any adjustment in the amount delivered to reflect actual or deemed investment experience after the date the cash is earned shall be disregarded.	
 
(f)	In the event of a corporate transaction involving the Company (including, without limitation, any stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination or exchange of shares), the Committee may adjust Awards to preserve the benefits or potential benefits of the Awards. Action by the Committee may include: (i) adjustment of the number and kind of shares which may be delivered under the Plan; (ii) adjustment of the number and kind of shares subject to outstanding Awards; (iii) adjustment of the Exercise Price of outstanding Options and SARs; and (iv) any other adjustments that the Committee determines to be equitable (which may include, without limitation, (I) replacement of Awards with other Awards which the Committee determines have comparable value and which are based on stock of a company resulting from the transaction, and (II) cancellation of the Award in return for cash payment of the current value of the Award,	
 
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determined as though the Award is fully vested at the time of payment, provided that in the case of an Option, the amount of such payment may be the excess of value of the Stock subject to the Option at the time of the transaction over the exercise price).
 
5.3. General Restrictions . Delivery of shares of Stock or other amounts under the Plan shall be subject to the following:
 
(a)	Notwithstanding any other provision of the Plan, the Company shall have no obligation to deliver any shares of Stock or make any other distribution of benefits under the Plan unless such delivery or distribution complies with all applicable laws (including, without limitation, the requirements of the United States Securities Act of 1933), and the applicable requirements of any securities exchange or similar entity.	
 
(b)	To the extent that the Plan provides for issuance of stock certificates to reflect the issuance of shares of Stock, the issuance may be effected on a non-certificated basis, to the extent not prohibited by applicable law or the applicable rules of any stock exchange.	
 
5.4. Tax Withholding . All distributions under the Plan are subject to withholding of all applicable taxes, and the Committee may condition the delivery of any shares or other benefits under the Plan on satisfaction of the applicable withholding obligations. Except as otherwise provided by the Committee, such withholding obligations may be satisfied (i) through cash payment by the Participant; (ii) through the surrender of shares of Stock which the Participant already owns (provided, however, that to the extent shares described in this clause (ii) are used to satisfy more than the minimum statutory withholding obligation, as described below, then, except as otherwise provided by the Committee, payments made with shares of Stock in accordance with this clause (ii) shall be limited to shares held by the Participant for not less than six months prior to the payment date); or (iii) through the surrender of shares of Stock to which the Participant is otherwise entitled under the Plan, provided, however, that such shares under this clause (iii) may be used to satisfy not more than the Company’s minimum statutory withholding obligation (based on minimum statutory withholding rates for Federal and state tax purposes, including payroll taxes, that are applicable to such supplemental taxable income).
 
5.5. Grant and Use of Awards . In the discretion of the Committee, a Participant may be granted any Award permitted under the provisions of the Plan, and more than one Award may be granted to a Participant. Awards may be granted as alternatives to or replacement of awards granted or outstanding under the Plan, or any other plan or arrangement of the Company or a Subsidiary (including a plan or arrangement of a business or entity, all or a portion of which is acquired by the Company or a Subsidiary). Subject to the overall limitation on the number of shares of Stock that may be delivered under the Plan, the Committee may use available shares of Stock as the form of payment for compensation, grants or rights earned or due under any other compensation plans or arrangements of the Company or a Subsidiary, including the plans and arrangements of the Company or a Subsidiary assumed in business combinations. Notwithstanding the provisions of subsection 2.2, Options and SARs granted under the Plan in replacement for awards under plans and arrangements of the Company or a Subsidiary assumed in business combinations may provide for Exercise Prices that are less than the Fair Market Value of the Stock at the time of the replacement grants, if the Committee determines that such Exercise Price is appropriate to preserve the economic benefit of the award.
 
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5.6. Dividends and Dividend Equivalents . An Award (including without limitation an Option or SAR Award) may provide the Participant with the right to receive dividend or dividend equivalent payments with respect to Stock subject to the Award (both before and after the Stock subject to the Award is earned, vested, or acquired), which payments may be either made currently or credited to an account for the Participant, and may be settled in cash or Stock, as determined by the Committee. Any such settlements, and any such crediting of dividends or dividend equivalents or reinvestment in shares of Stock, may be subject to such conditions, restrictions and contingencies as the Committee shall establish, including the reinvestment of such credited amounts in Stock equivalents.
 
5.7. Settlement of Awards . The obligation to make payments and distributions with respect to Awards may be satisfied through cash payments, the delivery of shares of Stock, the granting of replacement Awards, or combination thereof as the Committee shall determine. Satisfaction of any such obligations under an Award, which is sometimes referred to as “settlement” of the Award, may be subject to such conditions, restrictions and contingencies as the Committee shall determine. The Committee may permit or require the deferral of any Award payment, subject to such rules and procedures as it may establish, which may include provisions for the payment or crediting of interest or dividend equivalents, and may include converting such credits into deferred Stock equivalents. Each Subsidiary shall be liable for payment of cash due under the Plan with respect to any Participant to the extent that such benefits are attributable to the services rendered for that Subsidiary by the Participant. Any disputes relating to liability of a Subsidiary for cash payments shall be resolved by the Committee.
 
5.8. Transferability . Except as otherwise provided by the Committee, Awards under the Plan are not transferable except as designated by the Participant by will or by the laws of descent and distribution.
 
5.9. Form and Time of Elections . Unless otherwise specified herein, each election required or permitted to be made by any Participant or other person entitled to benefits under the Plan, and any permitted modification, or revocation thereof, shall be in writing filed with the Committee at such times, in such form, and subject to such restrictions and limitations, not inconsistent with the terms of the Plan, as the Committee shall require.
 
5.10. Agreement With Company . An Award under the Plan shall be subject to such terms and conditions, not inconsistent with the Plan, as the Committee shall, in its sole discretion, prescribe. The terms and conditions of any Award to any Participant shall be reflected in such form of written (including electronic) document as is determined by the Committee. A copy of such document shall be provided to the Participant, and the Committee may, but need not require that the Participant sign a copy of such document. Such document is referred to in the Plan as an “Award Agreement” regardless of whether any Participant signature is required.
 
5.11. Action by Company or Subsidiary . Any action required or permitted to be taken by the Company or any Subsidiary shall be by resolution of its board of directors, or by action of one or more members of the board (including a committee of the board) who are duly authorized to act for the board, or (except to the extent prohibited by applicable law or applicable rules of any stock exchange) by a duly authorized officer of such company.
 
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5.12. Gender and Number . Where the context admits, words in any gender shall include any other gender, words in the singular shall include the plural and the plural shall include the singular.
 
5.13. Limitation of Implied Rights .
 
(a)	Neither a Participant nor any other person shall, by reason of participation in the Plan, acquire any right in or title to any assets, funds or property of the Company or any Subsidiary whatsoever, including, without limitation, any specific funds, assets, or other property which the Company or any Subsidiary, in its sole discretion, may set aside in anticipation of a liability under the Plan. A Participant shall have only a contractual right to the Stock or amounts, if any, payable under the Plan, unsecured by any assets of the Company or any Subsidiary, and nothing contained in the Plan shall constitute a guarantee that the assets of the Company or any Subsidiary shall be sufficient to pay any benefits to any person.	
 
(b)	The Plan does not constitute a contract of employment, and selection as a Participant will not give any participating employee or other individual the right to be retained in the employ of the Company or any Subsidiary or the right to continue to provide services to the Company or any Subsidiary, nor any right or claim to any benefit under the Plan, unless such right or claim has specifically accrued under the terms of the Plan. Except as otherwise provided in the Plan, no Award under the Plan shall confer upon the holder thereof any rights as a shareholder of the Company prior to the date on which the individual fulfills all conditions for receipt of such rights.	
 
5.14. Benefits Under Qualified Retirement Plans . Except as otherwise provided by the Committee, Awards to a Participant (including the grant and the receipt of benefits) under the Plan shall be disregarded for purposes of determining the Participant’s benefits under any Qualified Retirement Plan and other plans maintained by the Participant’s employer. The term “Qualified Retirement Plan” means any plan of the Company or a Subsidiary that is intended to be qualified under section 401(a) of the Code.
 
5.15. Evidence . Evidence required of anyone under the Plan may be by certificate, affidavit, document or other information which the person acting on it considers pertinent and reliable, and signed, made or presented by the proper party or parties.
 
SECTION 6
CHANGE IN CONTROL
 
Subject to the provisions of paragraph 5.2(f) (relating to the adjustment of shares), the occurrence of a Change in Control shall have the effect, if any, with respect to any Award as set forth in the Award Agreement or, to the extent not prohibited by the Plan or the Award Agreement, as provided by the Committee.
 
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SECTION 7
COMMITTEE
 
7.1. Administration . The authority to control and manage the operation and administration of the Plan shall be vested in a committee (the “Committee”) in accordance with this Section 7. The Committee shall be selected by the Board, and shall consist solely of two or more members of the Board. If the Committee does not exist, or for any other reason determined by the Board, and to the extent not prohibited by applicable law or the applicable rules of any stock exchange, the Board may take any action under the Plan that would otherwise be the responsibility of the Committee.
 
7.2. Powers of Committee . The Committee’s administration of the Plan shall be subject to the following:
 
(a)	Subject to the provisions of the Plan, the Committee will have the authority and discretion to select from among the Eligible Individuals those persons who shall receive Awards, to determine the time or times of receipt, to determine the types of Awards and the number of shares covered by the Awards, to establish the terms, conditions, performance criteria, restrictions, and other provisions of such Awards, and (subject to the restrictions imposed by Section 8) to cancel or suspend Awards.	
 
(b)	To the extent that the Committee determines that the restrictions imposed by the Plan preclude the achievement of the material purposes of the Awards in jurisdictions outside the United States, the Cayman Islands, and Bermuda, the Committee will have the authority and discretion to modify those restrictions as the Committee determines to be necessary or appropriate to conform to applicable requirements or practices of jurisdictions outside of the United States, the Cayman Islands, and Bermuda.	
 
(c)	The Committee will have the authority and discretion to interpret the Plan, to establish, amend, and rescind any rules and regulations relating to the Plan, to determine the terms and provisions of any Award Agreement made pursuant to the Plan, and to make all other determinations that may be necessary or advisable for the administration of the Plan.	
 
(d)	Any interpretation of the Plan by the Committee and any decision made by it under the Plan is final and binding on all persons.	
 
(e)	In controlling and managing the operation and administration of the Plan, the Committee shall take action in a manner that conforms to the Memorandum and Articles of Association, and applicable corporate law.	
 
7.3. Delegation by Committee . Except to the extent prohibited by applicable law or the applicable rules of a stock exchange, the Committee may allocate all or any portion of its responsibilities and powers to any one or more of its members and may delegate all or any part of its responsibilities and powers to any person or persons selected by it. Any such allocation or delegation may be revoked by the Committee at any time.
 
7.4. Information to be Furnished to Committee . The Company and Subsidiaries shall furnish the Committee with such data and information as it determines may be required for it to
 
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discharge its duties. The records of the Company and Subsidiaries as to an employee’s or Participant’s employment (or other provision of services), termination of employment (or cessation of the provision of services), leave of absence, reemployment and compensation shall be conclusive on all persons unless determined to be incorrect. Participants and other persons entitled to benefits under the Plan must furnish the Committee such evidence, data or information as the Committee considers desirable to carry out the terms of the Plan.
 
SECTION 8
AMENDMENT AND TERMINATION
 
The Board may, at any time, amend or terminate the Plan, and may amend any Award Agreement, provided that no amendment or termination may, in the absence of written consent to the change by the affected Participant (or, if the Participant is not then living, the affected beneficiary), adversely affect the rights of any Participant or beneficiary under any Award granted under the Plan prior to the date such amendment is adopted by the Board; and further provided that adjustments pursuant to paragraph 5.2(f) shall not be subject to the foregoing limitations of this Section 8; and further provided that the provisions of subsection 2.6 (relating to Option repricing) cannot be amended unless the amendment is approved by the Company’s shareholders. Approval by the Company’s shareholders will be required for any material revision to the terms of the Plan, with the Committee’s determination of “material revision” to take into account the exemptions under the rules of the New York Stock Exchange.
 
SECTION 9
DEFINED TERMS
 
In addition to the other definitions contained herein, the following definitions shall apply:
 
(a)	Award . The term “Award” means any award or benefit granted under the Plan, including, without limitation, the grant of Options, SARs, Full Value Awards, and Cash Incentive Awards.	
 
(b)	Board . The term “Board” means the Board of Directors of the Company.	
 
(c)	Change in Control . The term “Change in Control” shall mean the occurrence of any one of the following events:	
 
 	(i)	any “person,” as such term is used in Sections 3(a)(9) and 13(d) of the United States Securities Exchange Act of 1934, becomes a “beneficial owner,” as such term is used in Rule 13d-3 promulgated under that act, of 50% or more of the Voting Stock (as defined below) of the Company;	
 
 	(ii)	the majority of the Board consists of individuals other than Incumbent Directors, which term means the members of the Board on the Effective Date; provided that any person becoming a director subsequent to such date whose election or nomination for election was supported by three-quarters of the directors who then comprised the Incumbent Directors shall be considered to be an Incumbent Director;	
 
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 	(iii)	the Company adopts any plan of liquidation providing for the distribution of all or substantially all of its assets;	
 
 	(iv)	all or substantially all of the assets or business of the Company is disposed of pursuant to a merger, consolidation or other transaction (unless the shareholders of the Company immediately prior to such merger, consolidation or other transaction beneficially own, directly or indirectly, in substantially the same proportion as they owned the Voting Stock of the Company, all of the Voting Stock or other ownership interests of the entity or entities, if any, that succeed to the business of the Company); or	
 
 	(v)	the Company combines with another company and is the surviving corporation but, immediately after the combination, the shareholders of the Company immediately prior to the combination hold, directly or indirectly, 50% or less of the Voting Stock of the combined company (there being excluded from the number of shares held by such shareholders, but not from the Voting Stock of the combined company, any shares received by Affiliates (as defined below) of such other company in exchange for stock of such other company).	
 
For the purpose of this definition of “Change in Control,” (I) an “Affiliate” of a person or other entity shall mean a person or other entity that directly or indirectly controls, is controlled by, or is under common control with the person or other entity specified and (II) “Voting Stock” shall mean capital stock of any class or classes having general voting power under ordinary circumstances, in the absence of contingencies, to elect the directors of a corporation.
 
(d)	Code . The term “Code” means the United States Internal Revenue Code of 1986, as amended. A reference to any provision of the Code shall include reference to any successor provision of the Code.	
 
(e)	Dollars . As used in the Plan, the term “dollars” or numbers preceded by the symbol “$” shall mean amounts in United States dollars.	
 
(f)	Eligible Individual . For purposes of the Plan, the term “Eligible Individual” means any employee of the Company or a Subsidiary, and any consultant, director, or other person providing services to the Company or a Subsidiary; provided, however, that an ISO may only be granted to an employee of the Company or a Subsidiary. An Award may be granted to an employee or other individual providing services, in connection with hiring, retention or otherwise, prior to the date the employee first performs services for the Company or the Subsidiaries, provided that such Awards shall not become vested prior to the date the employee or service provider first performs such services.	
 
(g)	Fair Market Value . Except as otherwise provided by the Committee, the “Fair Market Value” of a share of Stock as of any date shall be the closing market composite price for such Stock as reported for the New York Stock Exchange - Composite Transactions on that date or, if Stock is not traded on that date, on the next preceding date on which Stock was traded.	
 
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(h)	Performance Measures . The “Performance Measures” shall be based on any one or more of the following Company, Subsidiary, operating unit or division performance measures: gross premiums written; net premiums written; net premiums earned; net investment income; losses and loss expenses; underwriting and administrative expenses; operating expenses; cash flow(s); operating income; earnings before interest and taxes; net income; stock price; dividends; strategic business objectives, consisting of one or more objectives based on meeting specified cost targets, business expansion goals, and goals relating to acquisitions or divestitures; or any combination thereof. Each goal may be expressed on an absolute and/or relative basis, may be based on or otherwise employ comparisons based on internal targets, the past performance of the Company and/or the past or current performance of other companies, and in the case of earnings-based measures, may use or employ comparisons relating to capital, shareholders’ equity and/or shares outstanding, investments or to assets or net assets.	
 
(i)	Subsidiary . For purposes of the Plan, the term “Subsidiary” means any corporation, partnership, joint venture or other entity during any period in which at least a fifty percent voting or profits interest is owned, directly or indirectly, by the Company (or by any entity that is a successor to the Company), and any other business venture designated by the Committee in which the Company (or any entity that is a successor to the Company) has a significant interest, as determined in the discretion of the Committee.	
 
(j)	Stock . The term “Stock” means mean ordinary shares of stock of the Company.	
 
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Exhibit 31.1
 
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
 
I, Evan Greenberg, certify that:
 
 	1)	I have reviewed this quarterly report on Form 10-Q 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 August 6, 2004
 
/ S /    E VAN G REENBERG

President 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 quarterly report on Form 10-Q 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 August 6, 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 Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, 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-Q fairly presents, in all material respects, the financial condition and results of operations of ACE Limited.

Dated: August 6, 2004	 	/ S /    E VAN G REENBERG
	
 	 	Evan Greenberg
President and
Chief Executive Officer	

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 Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, 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-Q fairly presents, in all material respects, the financial condition and results of operations of ACE Limited.

Dated: August 6, 2004	 	/ S /    P HILIP V. B ANCROFT
	
 	 	Philip V. Bancroft
Chief Financial Officer