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

FORM 10-K/A
Amendment No. 1
 
x 
Annual Report Pursuant to Section 13 or 15(d) of	
the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003
OR
¨ 
Transition Report Pursuant to Section 13 or 15(d) of	
the Securities Exchange Act of 1934
Commission File Number 1-11778

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

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨ 
 
Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ No ¨ 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference into Part III of this form 10-K or any amendment to this form 10-K. þ 
 
As of March 8, 2004, there were 281,150,572 Ordinary Shares par value $0.041666667 of the registrant outstanding. The aggregate market value of voting stock held by non-affiliates as of June 30, 2003 was approximately $8.1 billion. For the purposes of this computation, shares held by directors and officers of the registrant have been excluded. Such exclusion is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant.

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

 

Explanatory Note
This Annual Report on Form 10-K/A amends the following information which was previously reported in the registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 which was filed on March 15, 2004: Analysis of Losses and Loss Expenses Development (i) Gross liability re-estimated for 2000, 2001 and 2002, (ii) Reinsurance recoverable on unpaid losses for 2000, 2001 and 2002 and (iii) Cumulative redundancy/(deficiency) on gross unpaid for 2000, 2001 and 2002.

 

Cautionary Statement Regarding Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Any written or oral statements made by us or on our behalf may include forward-looking statements that reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors (which are described in more detail elsewhere herein and in other documents we file with the Securities and Exchange Commission (SEC)) include but are not limited to:
 
• global political conditions, the occurrence of any terrorist attacks, including any nuclear, biological or chemical events, or the outbreak and effects of war, and possible business disruption or economic contraction that may result from such events;
• the ability to collect reinsurance recoverable, credit developments of reinsurers, and any delays with respect thereto;
• the occurrence of catastrophic events or other insured or reinsured events with a frequency or severity exceeding our estimates;
• actual loss experience from insured or reinsured events;
• the uncertainties of the loss-reserving and claims-settlement processes, including the difficulties associated with assessing environmental damage and asbestos-related latent injuries, the impact of aggregate-policy-coverage limits, and the impact of bankruptcy protection sought by various asbestos producers and other related businesses;
• judicial decisions and rulings, new theories of liability, and legal tactics;
• the effects of public company bankruptcies and/or accounting restatements, as well as disclosures by and investigations of public companies relating to possible accounting irregularities, and other corporate governance issues, including the effects of such events on:
• the capital markets;
• the markets for directors and officers and errors and omissions insurance; and
• claims and litigation arising out of such disclosures or practices by other companies;
• the impact of the September 11 tragedy and its aftermath on our insureds, reinsureds, and on the insurance and reinsurance industry;
• uncertainties relating to governmental, legislative and regulatory policies, developments and treaties, which, among other things, could subject us to insurance regulation or taxation in additional jurisdictions or affect our current operations;
• the actual amount of new and renewal business, market acceptance of our products, and risks associated with the introduction of new products and services and entering new markets, including regulatory constraints on exit strategies;
• the competitive environment in which we operate, including trends in pricing or in policy terms and conditions, which may differ from our projections;
• actions that rating agencies may take from time to time, such as changes in our claims-paying, financial strength or credit ratings;
• developments in global financial markets, including changes in interest rates, stock markets and other financial markets, and foreign currency exchange rate fluctuations, which could affect our investment portfolio, financing plans, and planned public offering of our financial guaranty business;
• changing rates of inflation and other economic conditions;
• the amount of dividends received from subsidiaries;
• loss of the services of any of our executive officers without suitable replacements being recruited in a reasonable time frame;
• the ability of technology to perform as anticipated; and
• management’s response to these factors.
 
The words “believe”, “anticipate”, “estimate”, “project”, “should”, “plan”, “expect”, “intend”, “hope”, “will likely result” or “will continue”, and variations thereof and similar expressions, identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future events or otherwise. 
 
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PART I

 ITEM 1. Business

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

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

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

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

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

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

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

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

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

 	 	Years ended September 30
	 	 	Years ended December 31
	
(in millions of U.S. dollars)	 	1993	 	 	1994	 	 	1995	 	 	1996	 	 	1997	 	1998	 	 	1999(1)	 	 	2000	 	 	2001	 	 	2002	 	 	2003	
	
Gross unpaid	 	$	766	 	 	$	1,176	 	 	$	1,492	 	 	$	1,978	 	 	$	2,112	 	$	3,738	 	 	$	16,460	 	 	$	17,388	 	 	$	20,728	 	 	$	24,315	 	 	$	27,155	
Net unpaid	 	 	766	 	 	 	1,176	 	 	 	1,489	 	 	 	1,892	 	 	 	2,007	 	 	2,678	 	 	 	8,909	 	 	 	9,065	 	 	 	10,099	 	 	 	11,318	 	 	 	13,963	
Net paid (Cumulative) As Of:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    1 year later	 	 	127	 	 	 	67	 	 	 	80	 	 	 	359	 	 	 	337	 	 	1,018	 	 	 	2,711	 	 	 	2,404	 	 	 	2,685	 	 	 	2,640	 	 	 	 	
    2 years later	 	 	183	 	 	 	122	 	 	 	414	 	 	 	663	 	 	 	925	 	 	1,480	 	 	 	4,077	 	 	 	3,831	 	 	 	4,596	 	 	 	 	 	 	 	 	
    3 years later	 	 	229	 	 	 	452	 	 	 	696	 	 	 	1,248	 	 	 	1,066	 	 	1,656	 	 	 	5,133	 	 	 	5,095	 	 	 	 	 	 	 	 	 	 	 	 	
    4 years later	 	 	559	 	 	 	726	 	 	 	1,259	 	 	 	1,372	 	 	 	1,171	 	 	1,813	 	 	 	6,132	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    5 years later	 	 	838	 	 	 	1,286	 	 	 	1,380	 	 	 	1,465	 	 	 	1,197	 	 	1,979	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    6 years later	 	 	1,398	 	 	 	1,369	 	 	 	1,468	 	 	 	1,481	 	 	 	1,235	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    7 years later	 	 	1,481	 	 	 	1,450	 	 	 	1,481	 	 	 	1,517	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    8 years later	 	 	1,562	 	 	 	1,438	 	 	 	1,516	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    9 years later	 	 	1,550	 	 	 	1,458	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
  10 years later	 	 	1,564	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Liability Re-estimated As Of:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    End of year	 	$	766	 	 	$	1,176	 	 	$	1,489	 	 	$	1,892	 	 	$	2,007	 	$	2,678	 	 	$	8,909	 	 	$	9,065	 	 	$	10,099	 	 	$	11,318	 	 	$	13,963	
    1 year later	 	 	966	 	 	 	1,177	 	 	 	1,489	 	 	 	1,892	 	 	 	1,990	 	 	2,753	 	 	 	8,848	 	 	 	9,159	 	 	 	10,808	 	 	 	11,490	 	 	 	 	
    2 years later	 	 	1,068	 	 	 	1,228	 	 	 	1,489	 	 	 	1,881	 	 	 	1,915	 	 	2,747	 	 	 	8,851	 	 	 	9,727	 	 	 	11,006	 	 	 	 	 	 	 	 	
    3 years later	 	 	1,211	 	 	 	1,387	 	 	 	1,480	 	 	 	1,824	 	 	 	1,853	 	 	2,722	 	 	 	9,371	 	 	 	9,963	 	 	 	 	 	 	 	 	 	 	 	 	
    4 years later	 	 	1,430	 	 	 	1,401	 	 	 	1,495	 	 	 	1,852	 	 	 	1,833	 	 	2,730	 	 	 	9,512	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    5 years later	 	 	1,443	 	 	 	1,472	 	 	 	1,589	 	 	 	1,932	 	 	 	1,816	 	 	2,715	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    6 years later	 	 	1,580	 	 	 	1,530	 	 	 	1,679	 	 	 	1,931	 	 	 	1,829	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    7 years later	 	 	1,642	 	 	 	1,606	 	 	 	1,654	 	 	 	1,936	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    8 years later	 	 	1,713	 	 	 	1,566	 	 	 	1,672	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
    9 years later	 	 	1,672	 	 	 	1,580	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
  10 years later	 	 	1,686	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cumulative redundancy/ (deficiency)	 	 	(920	)	 	 	(404	)	 	 	(183	)	 	 	(44	)	 	 	178	 	 	(37	)	 	 	(603	)	 	 	(898	)	 	 	(907	)	 	 	(172) (2)	 	 	 	 	
Gross unpaid losses and loss expenses end of year	 	 	766	 	 	 	1,176	 	 	 	1,492	 	 	 	1,978	 	 	 	2,112	 	 	3,738	 	 	 	16,460	 	 	 	17,388	 	 	 	20,728	 	 	 	24,315	 	 	 	27,155	
Reinsurance recoverable on unpaid losses	 	 	—	 	 	 	—	 	 	 	3	 	 	 	86	 	 	 	105	 	 	1,060	 	 	 	7,551	 	 	 	8,323	 	 	 	10,629	 	 	 	12,997	 	 	 	13,192	
	
Net unpaid losses and loss expenses	 	 	766	 	 	 	1,176	 	 	 	1,489	 	 	 	1,892	 	 	 	2,007	 	 	2,678	 	 	 	8,909	 	 	 	9,065	 	 	 	10,099	 	 	 	11,318	 	 	 	13,963	
	
Gross liability re-estimated	 	 	1,686	 	 	 	1,580	 	 	 	1,674	 	 	 	2,012	 	 	 	1,868	 	 	3,967	 	 	 	20,877	 	 	 	21,591	 	 	 	24,385	 	 	 	25,002	 	 	 	 	
Reinsurance recoverable on unpaid losses	 	 	—	 	 	 	—	 	 	 	2	 	 	 	76	 	 	 	39	 	 	1,252	 	 	 	11,365	 	 	 	11,628	 	 	 	13,379	 	 	 	13,512	 	 	 	 	
	
Net liability re-estimated	 	 	1,686	 	 	 	1,580	 	 	 	1,672	 	 	 	1,936	 	 	 	1,829	 	 	2,715	 	 	 	9,512	 	 	 	9,963	 	 	 	11,006	 	 	 	11,490	 	 	 	 	
	
Cumulative redundancy/(deficiency) on gross unpaid	 	 	(920	)	 	 	(404	)	 	 	(182	)	 	 	(34	)	 	 	244	 	 	(229	)	 	 	(4,417	)	 	 	(4,203	)	 	 	(3,657	)	 	 	(687	)	 	 	 	

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

Reconciliation of Unpaid Losses and Loss Expenses

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

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

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

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

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

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SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 	 	ACE Limited	
		
By:	 	/ S /    P HILIP V. B ANCROFT	
 	 		
 	 	Philip V. Bancroft
Chief Financial Officer 	
 
April 5, 2004

Exhibit 31.1

 
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Brian Duperreault, certify that:
 
1)	I have reviewed this Amendment No. 1 to the annual report on Form 10-K/A 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)	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
 
4)	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 April 5, 2004
 
/ S /    B RIAN D UPERREAULT

Chairman and Chief Executive Officer

 
Exhibit 31.2

 
CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Philip V. Bancroft, certify that:
 
1)	I have reviewed this Amendment No. 1 to the annual report on Form 10-K/A 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)	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
 
4)	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 April 5, 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 Amendment No. 1 to the Corporation’s Annual Report on Form 10-K/A for the year ended December 31, 2003, fully complies with the applicable reporting requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) and that the information contained in the Form 10-K/A fairly presents, in all material respects, the financial condition and results of operations of ACE Limited.

/ S /    B RIAN D UPERREAULT
	
Brian Duperreault
Chairman and
Chief Executive Officer	
 
Dated: April 5, 2004

 
Exhibit 32.2

 
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
The undersigned officer of ACE Limited (the Corporation) hereby certifies that the Amendment No. 1 to the Corporation’s Annual Report on Form 10-K/A for the year ended December 31, 2003, fully complies with the applicable reporting requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) and that the information contained in the Form 10-K/A fairly presents, in all material respects, the financial condition and results of operations of ACE Limited.

/ S /    P HILIP V. B ANCROFT
	
Philip V. Bancroft
Chief Financial Officer	
 
Dated: April 5, 2004