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UNITED STATES
 
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
FORM 10-Q/A
(Amendment No. 1)
 
x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 
For the Quarterly Period Ended March 31, 2005
 
OR
 
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 
For the Transition Period from                      to                     

Commission File No. 1-11778	 	I.R.S. Employer Identification No. 98-0091805	
 
ACE LIMITED
 
(Incorporated in the Cayman Islands)
ACE Global Headquarters
17 Woodbourne Avenue
Hamilton HM 08
Bermuda
 
Telephone 441-295-5200
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
YES   þ             NO   ¨
 
Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
 
YES   þ              NO   ¨
 
The number of registrant’s Ordinary Shares ($0.041666667 par value) outstanding as of May 4, 2005 was 287,460,034.
 
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Explanatory Note
 
This Form 10-Q/A for the Quarterly Period ended March 31, 2005 is being filed for the purpose of amending the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005 of ACE Limited (ACE) to reflect the restatement of ACE’s financial results described herein for the quarterly periods ended March 31, 2005 and 2004.
 
Information in this Form 10-Q/A is generally stated as of March 31, 2005 and generally does not reflect any subsequent information or events other than the restatement, except that certain statements, such as the descriptions of legal proceedings and insurance industry investigations and related matters, have been revised to reflect events and developments subsequent to March 31, 2005. Current information with respect to ACE is contained in its Form 10-K/A for the year ended December 31, 2004.
 
Restatement of Previously Issued Financial Statements
 
ACE has restated its financial statements for the years ended December 31, 2004, 2003, 2002, 2001 and 2000, the quarters ended March 31, June 30, September 30, and December 31, 2004 and 2003. ACE’s previously issued financial statements for these and prior periods should no longer be relied upon. See Selected Financial Data, Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 3 of Notes to Financial Statements in the 2004 Form 10-K/A and Note 14 of Notes to Financial Statements included herein for a discussion of the restatement and a reconciliation of previously reported amounts to the restated amounts.
 
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 ACE LIMITED
 
INDEX OF AMENDED ITEMS

 	  	 	  	Page No.

Part I. FINANCIAL INFORMATION	  	 	
			
Item 1.	  	Financial Statements:	  	 	
			
 	  	Consolidated Balance Sheets
March 31, 2005 (Unaudited) and December 31, 2004, as restated	  	4	
			
 	  	Consolidated Statements of Operations and Comprehensive Income (Unaudited)
Three Months Ended March 31, 2005 and 2004, as restated	  	5	
			
 	  	Consolidated Statements of Shareholders’ Equity (Unaudited)
Three Months Ended March 31, 2005 and 2004, as restated	  	6	
			
 	  	Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2005 and 2004, as restated	  	8	
			
 	  	Notes to Interim Consolidated Financial Statements (Unaudited), as restated	  	9	
			
Item 2.	  	Management’s Discussion and Analysis of Financial Condition and Results of Operations, as restated	  	37	
			
Item 4.	  	Controls and Procedures	  	67	
		
Part II. OTHER INFORMATION	  	 	
			
Item 1.	  	Legal Proceedings	  	68	
			
Item 2	  	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	  	68	
			
Item 5	  	Other Information	  	68	
			
Item 6.	  	Exhibits	  	68	
 
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 ACE LIMITED
PART I FINANCIAL INFORMATION
 
 Item 1.	Financial Statements	
 
ACE LIMITED AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS

 	  	March 31
2005
(Restated)
	 	 	December 31
2004
(Restated)
	 	
 	  	(Unaudited)	 	 	 	 	
 	  	(in thousands of U.S. dollars,
except share and per share data)	 	
Assets	  	 	 	 	 	 	 	 	
Investments	  	 	 	 	 	 	 	 	
Fixed maturities available for sale, at fair value (amortized cost - $ 20,217,063 and $22,422,318)	  	$	20,335,842	 	 	$	22,890,866	 	
Fixed maturities held to maturity, at amortized cost (fair value - $3,206,649)	  	 	3,211,021	 	 	 	—  	 	
Equity securities, at fair value (cost - $1,169,538 and $1,060,671)	  	 	1,350,993	 	 	 	1,265,588	 	
Short-term investments, at fair value (amortized cost - $2,156,481 and $2,163,384)	  	 	2,156,461	 	 	 	2,163,176	 	
Other investments (cost - $563,550 and $551,075)	  	 	622,114	 	 	 	605,731	 	
 	  				 				
Total investments	  	 	27,676,431	 	 	 	26,925,361	 	
			
Cash	  	 	574,118	 	 	 	497,896	 	
Securities lending collateral	  	 	1,255,326	 	 	 	1,059,135	 	
Accrued investment income	  	 	308,826	 	 	 	309,356	 	
Insurance and reinsurance balances receivable	  	 	3,694,666	 	 	 	3,255,065	 	
Accounts and notes receivable	  	 	195,382	 	 	 	195,710	 	
Reinsurance recoverable	  	 	14,268,290	 	 	 	14,882,219	 	
Deferred policy acquisition costs	  	 	999,633	 	 	 	944,456	 	
Prepaid reinsurance premiums	  	 	1,426,971	 	 	 	1,355,306	 	
Funds withheld	  	 	298,147	 	 	 	339,122	 	
Value of reinsurance business assumed	  	 	274,010	 	 	 	273,140	 	
Goodwill	  	 	2,695,449	 	 	 	2,699,449	 	
Deferred tax assets	  	 	1,177,810	 	 	 	1,173,416	 	
Investments in partially-owned insurance companies (cost - $770,623 and $754,590)	  	 	815,707	 	 	 	795,652	 	
Other assets	  	 	1,347,965	 	 	 	1,477,694	 	
 	  				 				
Total assets	  	$	57,008,731	 	 	$	56,182,977	 	
 	  				 				
Liabilities	  	 	 	 	 	 	 	 	
Unpaid losses and loss expenses	  	$	31,425,625	 	 	$	31,483,431	 	
Unearned premiums	  	 	6,527,031	 	 	 	5,982,897	 	
Future policy benefits for life and annuity contracts	  	 	507,186	 	 	 	509,005	 	
Funds withheld	  	 	131,020	 	 	 	141,177	 	
Insurance and reinsurance balances payable	  	 	2,290,038	 	 	 	2,336,657	 	
Deposit liabilities	  	 	301,524	 	 	 	343,487	 	
Securities lending payable	  	 	1,255,326	 	 	 	1,059,135	 	
Payable for securities purchased	  	 	629,614	 	 	 	507,054	 	
Accounts payable, accrued expenses and other liabilities	  	 	1,502,859	 	 	 	1,507,408	 	
Dividends payable	  	 	60,344	 	 	 	59,739	 	
Short-term debt	  	 	147,059	 	 	 	146,295	 	
Long-term debt	  	 	1,849,008	 	 	 	1,848,927	 	
Trust preferred securities	  	 	412,373	 	 	 	412,373	 	
 	  				 				
Total liabilities	  	 	47,039,007	 	 	 	46,337,585	 	
 	  				 				
Commitments and contingencies Shareholders’ equity	  	 	 	 	 	 	 	 	
Preferred Shares ($1.00 par value, 2,300,000 shares authorized, issued and outstanding)	  	 	2,300	 	 	 	2,300	 	
Ordinary Shares ($0.041666667 par value, 500,000,000 shares authorized; 287,353,327 and 284,478,525 shares issued and outstanding)	  	 	11,973	 	 	 	11,853	 	
Additional paid-in capital	  	 	5,007,534	 	 	 	4,904,728	 	
Unearned stock grant compensation	  	 	(114,581	)	 	 	(56,836	)	
Retained earnings	  	 	4,614,588	 	 	 	4,249,571	 	
Deferred compensation obligation	  	 	12,273	 	 	 	11,829	 	
Accumulated other comprehensive income	  	 	447,910	 	 	 	733,776	 	
Ordinary Shares issued to employee trust	  	 	(12,273	)	 	 	(11,829	)	
 	  				 				
Total shareholders’ equity	  	 	9,969,724	 	 	 	9,845,392	 	
 	  				 				
Total liabilities and shareholders’ equity	  	$	57,008,731	 	 	$	56,182,977	 	

See accompanying notes to the interim consolidated financial statements
 
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 ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
For the three months ended March 31, 2005 and 2004
(Unaudited)

 	  	Three Months Ended
March 31
	 	
 	  	2005
(Restated)
	 	 	2004
(Restated)
	 	
 	  	(in thousands of U.S. dollars,
except per share data)	 	
Revenues	  	 	 	 	 	 	 	 	
Gross premiums written	  	$	4,543,166	 	 	$	4,417,744	 	
Reinsurance premiums ceded	  	 	(1,176,864	)	 	 	(1,197,577	)	
 	  				 				
Net premiums written	  	 	3,366,302	 	 	 	3,220,167	 	
Change in unearned premiums	  	 	(489,475	)	 	 	(633,010	)	
 	  				 				
Net premiums earned	  	 	2,876,827	 	 	 	2,587,157	 	
Net investment income	  	 	285,018	 	 	 	242,014	 	
Net realized gains (losses)	  	 	(13,972	)	 	 	57,095	 	
 	  				 				
Total revenues	  	 	3,147,873	 	 	 	2,886,266	 	
 	  				 				
Expenses	  	 	 	 	 	 	 	 	
Losses and loss expenses	  	 	1,788,861	 	 	 	1,529,493	 	
Life and annuity benefits	  	 	34,837	 	 	 	41,724	 	
Policy acquisition costs	  	 	388,614	 	 	 	364,914	 	
Administrative expenses	  	 	336,015	 	 	 	317,626	 	
Interest expense	  	 	42,679	 	 	 	44,272	 	
Other (income) expense	  	 	(5,617	)	 	 	16,959	 	
 	  				 				
Total expenses	  	 	2,585,389	 	 	 	2,314,988	 	
 	  				 				
Income before income tax	  	 	562,484	 	 	 	571,278	 	
Income tax expense	  	 	125,910	 	 	 	123,849	 	
 	  				 				
Net income	  	$	436,574	 	 	$	447,429	 	
 	  				 				
Other comprehensive income	  	 	 	 	 	 	 	 	
Net unrealized appreciation (depreciation) on investments	  	 	 	 	 	 	 	 	
Unrealized appreciation (depreciation) arising during the period	  	 	(301,291	)	 	 	237,998	 	
Reclassification adjustment for net realized (gains) losses included in net income	  	 	(47,820	)	 	 	(60,830	)	
 	  				 				
 	  	 	(349,111	)	 	 	177,168	 	
Cumulative translation adjustments	  	 	(11,449	)	 	 	2,177	 	
Minimum pension liability	  	 	1,948	 	 	 	(1,991	)	
 	  				 				
Other comprehensive income (loss), before income tax	  	 	(358,612	)	 	 	177,354	 	
Income tax benefit (expense) related to other comprehensive income items	  	 	72,746	 	 	 	(40,540	)	
 	  				 				
Other comprehensive income (loss)	  	 	(285,866	)	 	 	136,814	 	
 	  				 				
Comprehensive income	  	$	150,708	 	 	$	584,243	 	
 	  				 				
Basic earnings per share	  	$	1.50	 	 	$	1.56	 	
 	  				 				
Diluted earnings per share	  	$	1.48	 	 	$	1.53	 	

See accompanying notes to the interim consolidated financial statements
 
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 ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the three months ended March 31, 2005 and 2004
(Unaudited)

 	  	2005
(Restated)
	 	 	2004
(Restated)
	 	
 	  	(in thousands of U.S. dollars)	 	
Preferred Shares	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	$	2,300	 	 	$	2,300	 	
Shares issued	  	 	—  	 	 	 	—  	 	
 	  				 				
Balance – end of period	  	 	2,300	 	 	 	2,300	 	
 	  				 				
Ordinary Shares	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	11,853	 	 	 	11,662	 	
Shares issued	  	 	68	 	 	 	64	 	
Exercise of stock options	  	 	59	 	 	 	60	 	
Issued under Employee Stock Purchase Plan (ESPP)	  	 	5	 	 	 	5	 	
Cancellation of shares	  	 	(12	)	 	 	(10	)	
 	  				 				
Balance – end of period	  	 	11,973	 	 	 	11,781	 	
 	  				 				
Additional paid-in capital	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	4,904,728	 	 	 	4,766,208	 	
Ordinary Shares issued	  	 	72,721	 	 	 	66,399	 	
Exercise of stock options	  	 	38,807	 	 	 	34,346	 	
Ordinary Shares issued under ESPP	  	 	3,906	 	 	 	3,678	 	
Cancellation of Ordinary Shares	  	 	(12,628	)	 	 	(10,531	)	
Other	  	 	—  	 	 	 	5,429	 	
 	  				 				
Balance – end of period	  	 	5,007,534	 	 	 	4,865,529	 	
 	  				 				
Unearned stock grant compensation	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	(56,836	)	 	 	(44,912	)	
Stock grants awarded	  	 	(72,864	)	 	 	(66,421	)	
Stock grants forfeited	  	 	2,313	 	 	 	1,736	 	
Amortization	  	 	12,806	 	 	 	11,709	 	
 	  				 				
Balance – end of period	  	 	(114,581	)	 	 	(97,888	)	
 	  				 				
Retained earnings	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	4,249,571	 	 	 	3,374,419	 	
Net income	  	 	436,574	 	 	 	447,429	 	
Dividends declared on Ordinary Shares	  	 	(60,344	)	 	 	(53,717	)	
Dividends declared on Preferred Shares	  	 	(11,213	)	 	 	(11,213	)	
 	  				 				
Balance – end of period	  	 	4,614,588	 	 	 	3,756,918	 	
 	  				 				
Deferred compensation obligation	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	11,829	 	 	 	16,687	 	
Increase (decrease) to obligation	  	 	444	 	 	 	(39	)	
 	  				 				
Balance – end of period	  	$	12,273	 	 	$	16,648	 	

See accompanying notes to the interim consolidated financial statements
 
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ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (cont’d)
For the three months ended March 31, 2005 and 2004
(Unaudited)

 	  	2005
(Restated)
	 	 	2004
(Restated)
	 	
 	  	(in thousands of U.S. dollars)	 	
Accumulated other comprehensive income	  	 	 	 	 	 	 	 	
Net unrealized appreciation (depreciation) on investments	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	$	633,817	 	 	$	684,267	 	
Change in period	  	 	(349,111	)	 	 	177,168	 	
Income tax benefit (expense)	  	 	68,597	 	 	 	(47,984	)	
 	  				 				
Balance – end of period	  	 	353,303	 	 	 	813,451	 	
 	  				 				
Minimum pension liability	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	(64,162	)	 	 	(35,684	)	
Change in period	  	 	1,948	 	 	 	(1,991	)	
Income tax benefit (expense)	  	 	(478	)	 	 	869	 	
 	  				 				
Balance – end of period	  	 	(62,692	)	 	 	(36,806	)	
 	  				 				
Cumulative translation adjustment	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	164,121	 	 	 	64,838	 	
Change in period	  	 	(11,449	)	 	 	2,177	 	
Income tax benefit	  	 	4,627	 	 	 	6,575	 	
 	  				 				
Balance – end of period	  	 	157,299	 	 	 	73,590	 	
 	  				 				
Accumulated other comprehensive income	  	 	447,910	 	 	 	850,235	 	
 	  				 				
Ordinary Shares issued to employee trust	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	(11,829	)	 	 	(16,687	)	
(Increase) decrease in Ordinary Shares	  	 	(444	)	 	 	39	 	
 	  				 				
Balance – end of period	  	 	(12,273	)	 	 	(16,648	)	
 	  				 				
Total shareholders’ equity	  	$	9,969,724	 	 	$	9,388,875	 	

See accompanying notes to the interim consolidated financial statements
 
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 ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2005 and 2004
(Unaudited)

 	  	2005
(Restated)
	 	 	2004
(Restated)
	 	
 	  	(in thousands of U.S. dollars)	 	
Cash flows from operating activities	  	 	 	 	 	 	 	 	
Net income	  	$	436,574	 	 	$	447,429	 	
Adjustments to reconcile net income to net cash flows from operating activities:	  	 	 	 	 	 	 	 	
Net realized (gains) losses	  	 	13,972	 	 	 	(57,095	)	
Amortization of premium/discounts on fixed maturities	  	 	31,245	 	 	 	25,972	 	
Deferred income taxes	  	 	61,955	 	 	 	56,389	 	
Unpaid losses and loss expenses	  	 	584,130	 	 	 	488,123	 	
Unearned premiums	  	 	587,140	 	 	 	804,708	 	
Future policy benefits for life and annuity contracts	  	 	(1,819	)	 	 	3,943	 	
Insurance and reinsurance balances payable	  	 	(39,532	)	 	 	300,632	 	
Accounts payable, accrued expenses and other liabilities	  	 	38,458	 	 	 	(7,642	)	
Insurance and reinsurance balances receivable	  	 	(470,289	)	 	 	(657,987	)	
Reinsurance recoverable	  	 	(10,153	)	 	 	14,409	 	
Deferred policy acquisition costs	  	 	(56,764	)	 	 	(97,377	)	
Prepaid reinsurance premiums	  	 	(93,512	)	 	 	(163,835	)	
Funds withheld, net	  	 	29,958	 	 	 	(3,788	)	
Value of reinsurance business assumed	  	 	(870	)	 	 	18,326	 	
Other	  	 	103,032	 	 	 	3,702	 	
 	  				 				
Net cash flows from operating activities	  	 	1,213,525	 	 	 	1,175,909	 	
 	  				 				
Cash flows used for investing activities	  	 	 	 	 	 	 	 	
Purchases of fixed maturities available for sale	  	 	(6,029,769	)	 	 	(6,003,886	)	
Purchases of equity securities	  	 	(179,872	)	 	 	(109,176	)	
Sales of fixed maturities available for sale	  	 	5,048,555	 	 	 	4,895,148	 	
Sales of equity securities	  	 	85,135	 	 	 	105,369	 	
Maturities of fixed maturities available for sale	  	 	—  	 	 	 	160	 	
Net proceeds from (payments made on) the settlement of investment derivatives	  	 	51	 	 	 	(877	)	
Other	  	 	(30,177	)	 	 	6,932	 	
 	  				 				
Net cash flows used for investing activities	  	 	(1,106,077	)	 	 	(1,106,330	)	
 	  				 				
Cash flows used for financing activities	  	 	 	 	 	 	 	 	
Dividends paid on Ordinary Shares	  	 	(59,739	)	 	 	(53,182	)	
Dividends paid on Preferred Shares	  	 	(11,213	)	 	 	(11,213	)	
Net proceeds from (repayment of) short-term debt	  	 	764	 	 	 	(14	)	
Proceeds from exercise of options for Ordinary Shares	  	 	38,866	 	 	 	34,406	 	
Proceeds from Ordinary Shares issued under ESPP	  	 	3,911	 	 	 	3,683	 	
 	  				 				
Net cash flows used for financing activities	  	 	(27,411	)	 	 	(26,320	)	
 	  				 				
Effect of foreign currency rate changes on cash and cash equivalents	  	 	(3,815	)	 	 	8,977	 	
 	  				 				
Net increase in cash	  	 	76,222	 	 	 	52,236	 	
Cash – beginning of period	  	 	497,896	 	 	 	558,944	 	
 	  				 				
Cash – end of period	  	$	574,118	 	 	$	611,180	 	

See accompanying notes to the interim consolidated financial statements
 
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 ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.	General	
 
ACE Limited (ACE or the Company) is a holding company incorporated with limited liability under the Cayman Islands Companies Law and maintains its business office in Bermuda. The Company, through its various subsidiaries, provides a broad range of insurance and reinsurance products to insureds worldwide. ACE operates through four business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance and Financial Services. These segments are described in Note 13.
 
The interim unaudited consolidated financial statements, which include the accounts of the Company and its subsidiaries, have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and, in the opinion of management, reflect all adjustments (consisting of normally recurring accruals) necessary for a fair presentation of results for such periods. Certain items in the prior year financial statements have been reclassified to conform to the current year presentation. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the consolidated financial statements, and related notes thereto, included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2004.
 
On April 28, 2004, the Company sold 65.3 percent of its financial and mortgage guaranty reinsurance and insurance businesses through the initial public offering (IPO) of 49 million common shares of Assured Guaranty Ltd. (Assured Guaranty). Subsequent to the completion of the IPO, the Company beneficially owns 26 million common shares or 34.7 percent of Assured Guaranty’s outstanding common shares and, accordingly, no longer consolidates its interest in the Assured Guaranty companies. The retained interest is accounted for using the equity method of accounting with the Company’s carrying value of its investment reflected in “Investments in partially-owned insurance companies” within the consolidated balance sheet and the proportionate share of earnings reflected in “Other (income) expense” within the consolidated statement of operations.
 
ACE has restated its financial statements for the years ended December 31, 2004, 2003, 2002, 2001, and 2000, each of the quarters in the years 2003 and 2004, and the quarter ended March 31, 2005. The primary purpose of the restatement is to correct the accounting treatment for eight finite risk transactions. ACE has also included in the restatement correction of certain unrelated errors, previously identified but considered to be of an immaterial nature. For additional information see Note 14 to the accompanying Consolidated Financial Statements and our Annual Report on Form 10-K/A for the year ended December 31, 2004 (Note 3 to the Consolidated Financial Statements) for a discussion of the restatement and a reconciliation of previously reported amounts to the restated amounts. All amounts included herein for the prior periods have been adjusted to reflect the restatement.
 
2.	Significant accounting policies	
 
a)	Investments	
 
Securities classified as held to maturity are securities that the Company has the ability and intent to hold to maturity or redemption and are carried at amortized cost less declines in value that are deemed other than temporary. Changes in the market value of the held to maturity securities, except for declines that are other than temporary, are not reflected in the Company’s financial statements. All other debt and equity securities are classified as available for sale and are carried at fair value. Transfers of securities to the held to maturity portfolio are recorded at fair value at the date of transfer. The unrealized appreciation (depreciation) for securities transferred from available for sale to held to maturity are included in accumulated other comprehensive income or loss and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistent with the amortization or accretion of premium or discount on the associated security.
 
b)	Stock-based compensation	
 
The Company accounts for stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). No compensation expense for stock options is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of the grant.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following table outlines the Company’s net income available to holders of Ordinary Shares and diluted earnings per share for the periods indicated had the compensation cost been determined in accordance with the fair value method recommended in Statement of Financial Accounting Standard (FAS) No. 123, “Accounting for Stock-Based compensation” (FAS 123).

 	  	Three Months Ended
March 31
	
 	  	2005
(Restated)
	  	2004
(Restated)
	
 	  	(in thousands of U.S. dollars, except per
share data)	
Net income available to holders of Ordinary Shares:	  	 	 	  	 	 	
As reported	  	$	425,238	  	$	436,093	
Add: Stock-based compensation expense included in reported net income, net of income tax	  	 	9,247	  	 	9,957	
Deduct: Compensation expense, net of income tax	  	 	12,430	  	 	21,002	
Pro forma	  	$	422,055	  	$	425,048	
Basic earnings per share:	  	 	 	  	 	 	
As reported	  	$	1.50	  	$	1.56	
Pro forma	  	$	1.49	  	$	1.52	
Diluted earnings per share:	  	 	 	  	 	 	
As reported	  	$	1.48	  	$	1.53	
Pro forma	  	$	1.47	  	$	1.50	
 
The fair value of the options issued is estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions used for grants for the periods indicated:

 	  	Three Months Ended
March 31
	 	
 	  	2005
	 	 	2004
	 	
Dividend yield	  	1.89	%	 	1.74	%	
Expected volatility	  	22.36	%	 	26.76	%	
Risk free interest rate	  	3.87	%	 	2.71	%	
Forfeiture rate	  	5	%	 	5	%	
Expected life	  	4 years	 	 	4 years	 	
 
c)	New accounting pronouncements	
 
In December 2004, the Financial Accounting Standards Board (FASB) issued FAS 123R “Share-Based Payment – a revision of FAS 123” that supersedes APB 25, Accounting for Stock Issued to Employees. This statement requires all companies to measure and record compensation cost for all share-based payment awards (including employee stock options) at grant-date fair value. In accordance with APB 25, the Company has not recognized compensation expense for employee stock options in net income because the exercise price equaled the market value of the underlying common stock on the grant date. In addition, the Company has not recognized expenses related to its employee stock purchase plan. Upon adopting FAS 123R the Company will be required to expense employee stock options and its employee stock purchase plan. On April 14, 2005, the SEC delayed the required effective date of FAS 123R for public companies. FAS 123R is now effective for public companies for annual, rather than interim, periods that begin after June 15, 2005. Accordingly, the Company has decided to delay its adoption of FAS 123R to January 1, 2006.
 
In adopting FAS 123R, the Company will apply the modified-prospective transition method. Under this method, the Company will recognize compensation costs for all share-based payments granted, modified, or settled after January 1, 2006, as well as for any awards that were granted prior to January 1, 2006 for which the requisite service has not been provided as of January 1, 2006 (i.e., unvested awards). Unvested awards are to be expensed consistent with the valuation used in previous disclosures of the pro forma effect of FAS 123. As described in Note 2(b) above, the Company uses the Black-Scholes option-pricing model to disclose the pro forma effect of FAS 123. With respect to awards granted after the adoption
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
of FAS 123R, the Company is evaluating alternative models and assumptions to be used to determine the fair value of stock compensation. Accordingly, the ultimate amount of expense to be recognized in connection with the adoption of FAS 123R is dependent on the model and related assumptions used to determine the fair value of the options awarded as well as the actual number of employee stock options to be awarded in the future. Assuming the number of options granted for the period April 1, 2005 through December 31, 2006 is consistent with grants of the past two years, the Company estimates pre-tax stock compensation expense related to the adoption of FAS 123R will range from $18 million to $22 million for the year ended December 31, 2006.
 
3.	Investments	
 
a)	Transfers of securities	
 
Given the significant growth in the Company’s investment portfolio over the last several years, as well as continued efforts to manage the diversification of the portfolio on an enterprise-wide basis, the Company has implemented a strategy to hold to maturity certain fixed maturity securities that are considered essential holdings in a diversified portfolio of our size. Because the Company has the intent to hold such securities to maturity, they have been reclassified from available for sale to held to maturity in the consolidated financial statements for the quarter ended March 31, 2005. A transfer of such securities with a carrying value (fair value) of $3.2 billion was made during the first quarter of 2005. The unrealized appreciation on the date of transfer was $16 million.
 
b)	Fixed maturities	
 
The fair values and amortized costs of fixed maturities at March 31, 2005, are as follows:

 	  	Available for Sale
(Restated)
	  	Held to Maturity
	
 	  	Fair Value
	  	Amortized
Cost
	  	Fair
Value
	  	Amortized
Cost
	
 	  	(in thousands of U.S. dollars)	
U.S. Treasury and agency	  	$	2,162,614	  	$	2,173,338	  	$	1,081,940	  	$	1,081,944	
Foreign	  	 	5,361,068	  	 	5,297,476	  	 	43,652	  	 	43,682	
Corporate securities	  	 	8,104,800	  	 	8,019,819	  	 	717,601	  	 	718,693	
Mortgage-backed securities	  	 	4,430,737	  	 	4,459,831	  	 	1,080,909	  	 	1,081,477	
States, municipalities and political subdivisions	  	 	276,623	  	 	266,599	  	 	282,547	  	 	285,225	
 	  			  			  			  			
 	  	$	20,335,842	  	$	20,217,063	  	$	3,206,649	  	$	3,211,021	

The fixed maturities by contractual maturity at March 31, 2005, are as follows:

 	  	Available for Sale
(Restated)
	  	Held to Maturity
	
 	  	Fair Value
	  	Amortized
Cost
	  	Fair
Value
	  	Amortized
Cost
	
 	  	(in thousands of U.S. dollars)	
Maturity period	  	 	 	  	 	 	  	 	 	  	 	 	
Less than 1 year	  	$	1,264,400	  	$	1,258,236	  	$	146,963	  	$	147,041	
1 – 5 years	  	 	7,636,995	  	 	7,610,396	  	 	957,124	  	 	959,300	
5 – 10 years	  	 	5,538,729	  	 	5,458,966	  	 	932,652	  	 	933,979	
Greater than 10 years	  	 	1,537,567	  	 	1,502,600	  	 	89,001	  	 	89,224	
 	  			  			  			  			
 	  	 	15,977,691	  	 	15,830,198	  	 	2,125,740	  	 	2,129,544	
Mortgage-backed securities	  	 	4,358,151	  	 	4,386,865	  	 	1,080,909	  	 	1,081,477	
 	  			  			  			  			
 	  	$	20,335,842	  	$	20,217,063	  	$	3,206,649	  	$	3,211,021	

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
c)	Gross unrealized loss	
 
The following table summarizes, for all securities in an unrealized loss position at March 31, 2005, the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position.

 	  	0 - 12 Months
	 	 	Over 12 Months
	 	 	Total
	 	
 	  	Fair Value
	  	Gross
Unrealized
Loss
	 	 	Fair
Value
	  	Gross
Unrealized
Loss
	 	 	Fair Value
	  	Gross
Unrealized
Loss
	 	
 	  	(in thousands of U.S. dollars) (Restated)	 	
U.S. Treasury and agency	  	$	2,715,193	  	$	(18,607	)	 	$	36,909	  	$	(1,810	)	 	$	2,752,102	  	$	(20,417	)	
Foreign	  	 	3,336,616	  	 	(26,106	)	 	 	—  	  	 	—  	 	 	 	3,336,616	  	 	(26,106	)	
Corporate securities	  	 	5,684,268	  	 	(81,318	)	 	 	31,170	  	 	(608	)	 	 	5,715,438	  	 	(81,926	)	
Mortgage-backed securities	  	 	4,525,699	  	 	(42,325	)	 	 	27,782	  	 	(1,246	)	 	 	4,553,481	  	 	(43,571	)	
States, municipalities and political subdivisions	  	 	327,454	  	 	(3,833	)	 	 	—  	  	 	—  	 	 	 	327,454	  	 	(3,833	)	
 	  			  				 			  				 			  				
Total fixed maturities	  	 	16,589,230	  	 	(172,189	)	 	 	95,861	  	 	(3,664	)	 	 	16,685,091	  	 	(175,853	)	
Equities	  	 	552,231	  	 	(20,744	)	 	 	—  	  	 	—  	 	 	 	552,231	  	 	(20,744	)	
Other investments	  	 	—  	  	 	—  	 	 	 	—  	  	 	—  	 	 	 	—  	  	 	—  	 	
 	  			  				 			  				 			  				
Total	  	$	17,141,461	  	$	(192,933	)	 	$	95,861	  	$	(3,664	)	 	$	17,237,322	  	$	(196,597	)	

4.	Goodwill	
 
All goodwill recognized in the Company’s consolidated balance sheet is assigned to one or more reporting units and each unit is tested for impairment annually. During the quarter ended March 31, 2005, the Company completed the sale of a wholly-owned service company which at the time of the sale was carrying goodwill of $4 million on their financial statements. The following table details the movement in goodwill by segment for the three months ended March 31, 2005.

 	  	Insurance –
North
American
	 	 	Insurance –
Overseas
General
	  	Global
Reinsurance
	  	ACE
Consolidated
	 	
 	  	(in thousands of U.S. dollars) (Restated)	 	
Goodwill at beginning of period	  	$	1,171,874	 	 	$	1,162,617	  	$	364,958	  	$	2,699,449	 	
Sale of subsidiary	  	 	(4,000	)	 	 	—  	  	 	—  	  	 	(4,000	)	
 	  				 			  			  				
Goodwill at end of period	  	$	1,167,874	 	 	$	1,162,617	  	$	364,958	  	$	2,695,449	 	

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
5.	Reinsurance	
 
a)	Consolidated reinsurance	
 
The Company purchases reinsurance to manage various exposures including catastrophe risks. Although reinsurance agreements contractually obligate the Company’s reinsurers to reimburse it for the agreed-upon portion of its gross paid losses, they do not discharge the primary liability of the Company. The amounts for net premiums written and net premiums earned in the statements of operations are net of reinsurance. Direct, assumed and ceded premiums for the periods indicated are as follows:

 	  	Three Months Ended
March 31
	 	
 	  	2005
(Restated)
	 	 	2004
(Restated)
	 	
 	  	(in thousands of U.S. dollars)	 	
Premiums written	  	 	 	 	 	 	 	 	
Direct	  	$	3,321,896	 	 	$	3,391,665	 	
Assumed	  	 	1,221,270	 	 	 	1,026,079	 	
Ceded	  	 	(1,176,864	)	 	 	(1,197,577	)	
 	  				 				
Net	  	$	3,366,302	 	 	$	3,220,167	 	
 	  				 				
Premiums earned	  	 	 	 	 	 	 	 	
Direct	  	$	2,957,935	 	 	$	3,048,757	 	
Assumed	  	 	959,120	 	 	 	583,044	 	
Ceded	  	 	(1,040,228	)	 	 	(1,044,644	)	
 	  				 				
Net	  	$	2,876,827	 	 	$	2,587,157	 	

b)	Reinsurance recoverable on ceded reinsurance	
 
The composition of the Company’s reinsurance recoverable at March 31, 2005 and December 31, 2004, is as follows:

 	  	March 31
2005
(Restated)
	 	 	December
31 2004
(Restated)
	 	
 	  	(in thousands of U.S. dollars)	 	
Reinsurance recoverable on paid losses and loss expenses	  	$	1,204,396	 	 	$	1,209,731	 	
Bad debt reserve on paid losses and loss expenses	  	 	(305,229	)	 	 	(308,921	)	
Reinsurance recoverable on future policy benefits	  	 	13,978	 	 	 	15,271	 	
Reinsurance recoverable on unpaid losses and loss expenses	  	 	13,966,660	 	 	 	14,585,562	 	
Bad debt reserve on unpaid losses and loss expenses	  	 	(611,515	)	 	 	(619,424	)	
 	  				 				
Net reinsurance recoverable	  	$	14,268,290	 	 	$	14,882,219	 	

The Company evaluates the financial condition of its reinsurers and potential reinsurers on a regular basis and also monitors concentrations of credit risk with reinsurers. The provision for uncollectible reinsurance is required principally due to the failure of reinsurers to indemnify ACE, primarily because of disputes under reinsurance contracts and insolvencies. Provisions have been established for amounts estimated to be uncollectible.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Following is a breakdown of the Company’s reinsurance recoverable on paid losses at March 31, 2005 and December 31, 2004.

 	  	March 31, 2005 (Restated)
	 	 	December 31, 2004 (Restated)
	 	
Category
	  	Amount
	  	Bad Debt
Reserve
	  	% of Total
Reserve
	 	 	Amount
	  	Bad Debt
Reserve
	  	% of Total
Reserve
	 	
 	  	(in millions of U.S. dollars)	 	
General collections	  	$	712	  	$	37	  	5.2	%	 	$	716	  	$	37	  	5.2	%	
Other	  	 	492	  	 	268	  	54.5	%	 	 	494	  	 	272	  	55.1	%	
 	  			  			  			 			  			  			
Total	  	$	1,204	  	$	305	  	25.3	%	 	$	1,210	  	$	309	  	25.5	%	

General collections balances represents amounts in the process of collection in the normal course of business for which the Company has no indication of dispute or credit-related issues.
 
The other category includes amounts recoverable that are in dispute or are from companies who are in supervision, rehabilitation or liquidation for the Brandywine Group and active operations. The Company’s estimation of this reserve considers the merits of the underlying matter, the credit quality of the reinsurer and whether the Company has received collateral or other credit protections such as parental guarantees.
 
c)	Reinsurance programs involving minimum benefit guarantees under annuity contracts	
 
The Company reinsures various death and living benefit guarantees associated with variable annuities issued primarily in the United States. Each reinsurance treaty covers variable annuities written during a limited period, typically not exceeding two years. The Company generally receives a monthly premium during the accumulation phase of the covered annuities (in-force) based on a percentage of the underlying accumulated account values. Depending on an annuitant’s age, the accumulation phase can last many years. To limit the Company’s exposure under these programs, all reinsurance treaties include aggregate claim limits and many include an aggregate deductible.
 
The guarantees which are payable on death, referred to as guaranteed minimum death benefits (GMDBs), principally cover shortfalls between accumulated account value at the time of an annuitant’s death and either i) an annuitant’s total deposits; ii) an annuitant’s total deposits plus a minimum annual return; or iii) the highest accumulated account value attained during any policy anniversary date. In addition, a death benefit may be based on a formula specified in the variable annuity contract that uses a percentage of the growth of the underlying contract value. Reinsurance programs covering GMDBs are accounted for pursuant to Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (SOP 03-1).
 
Under reinsurance programs covering living benefit guarantees, the Company assumes the risk of guaranteed minimum income benefits (GMIBs) associated with variable annuity contracts. The GMIB risk is triggered if, at the time the contract holder elects to convert the accumulated account value to a periodic payment stream (annuitize), the accumulated account value is not sufficient to provide a guaranteed minimum level of monthly income. The Company’s GMIB reinsurance product meets the definition of a derivative for accounting purposes and is therefore carried at fair value with changes in fair value recognized in income in the period of the change pursuant to FAS 133 and classified as described below. As the assuming entity, the Company is obligated to provide coverage until the expiration of the underlying annuities. Premiums received under the reinsurance treaties are classified as premium. Expected losses allocated to premiums received are classified as life and annuity benefits and valued pursuant to SOP 03-1, similar to GMDB reinsurance. Other changes in fair value, principally arising from changes in expected losses allocated to expected future premiums, are classified as realized gains (losses). As fair value generally represents the cost to exit a business and thus includes a risk margin, the Company may recognize a loss for other changes in fair value during a given period due to adverse changes in the capital markets (e.g., declining interest rates and/or declining equity markets) even when the Company continues to expect the business to be profitable. Management believes this presentation provides the most meaningful disclosure of changes in the underlying risk within the GMIB reinsurance programs for a given reporting period.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The presentation of income and expenses relating to GMDB and GMIB reinsurance for the periods indicated are as follows:

 	  	Three Months Ended
March 31
	 	
 	  	2005
	 	 	2004
	 	
 	  	(in millions of U.S. dollars)	 	
GMDB	  	 	 	 	 	 	 	 	
Net premiums earned	  	$	17.5	 	 	$	9.6	 	
Life and annuity benefits expense	  	$	8.3	 	 	$	3.8	 	
			
GMIB	  	 	 	 	 	 	 	 	
Net premiums earned	  	$	20.6	 	 	$	12.6	 	
Life and annuity benefits expense	  	$	2.4	 	 	$	5.2	 	
Realized gains (losses)	  	$	(20.6	)	 	$	(25.0	)	
 
At March 31, 2005, reported liabilities for GMDB and GMIB reinsurance were $37 million and $51.6 million, respectively, compared with $31.3 million and $28.7 million, respectively, at December 31, 2004. Reported liabilities for both GMDB and GMIB reinsurance are determined using internal valuation models. Such valuations require considerable judgment and are subject to significant uncertainty. The valuation of these products is subject to fluctuations arising from, among other factors, changes in interest rates, changes in the equity markets, and changes in the allocation of the investments underlying annuitant’s account value. These models and the related assumptions are continually reviewed by management and enhanced, as appropriate, based upon improvements in modeling techniques and availability of more timely information, such as market conditions and demographics of in-force annuities.
 
At March 31, 2005, the Company’s net amount at risk from its GMDB and GMIB reinsurance programs was $395 million and $18 million, respectively. For the GMDB programs, the net amount at risk is defined as the excess, if any, of the current guaranteed value over the current account value. For the GMIB programs, the net amount at risk is defined as the excess, if any, of the present value of the minimum guaranteed annuity payments over the present value of the annuity payments assumed (under the terms of the reinsurance contract) to be available to each policyholder.
 
6.	Commitments, contingencies and guarantees	
 
a)	Other investments	
 
The Company invests in limited partnerships with a carrying value of $102 million included in other investments. In connection with these investments, the Company has commitments that may require funding of up to $100 million over the next several years.
 
b)	Credit facilities	
 
On July 1, 2005, the Company replaced two letter of credit facilities which in aggregate permitted up to $1.35 billion of LOCs with two new letter of credit facilities permitting up to $1.5 billion of LOCs. During the quarter ended June 30, 2005, the Company reduced the facility used to fulfill the requirements of Lloyd’s for open years of account, from £380 million to £284 million.
 
c)	Legal proceedings	
 
(i)	Claims and Other Litigation	
 
The Company’s insurance subsidiaries are subject to claims litigation involving disputed interpretations of policy coverages and, in some jurisdictions, direct actions by allegedly-injured persons seeking damages from policyholders. These lawsuits, involving claims on policies issued by the Company’s subsidiaries which are typical to the insurance industry in general and in the normal course of business, are considered in the Company’s loss and loss expense reserves which are discussed in the P&C loss reserves discussion. In addition to claims litigation, the Company and its subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on insurance policies.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
This category of business litigation typically involves, inter alia, allegations of underwriting errors or misconduct, employment claims, regulatory activity or disputes arising from business ventures. In the opinion of ACE’s management, ACE’s ultimate liability for these matters is not likely to have a material adverse effect on ACE’s consolidated financial condition, although it is possible that the effect could be material to ACE’s consolidated results of operations for an individual reporting period.
 
(ii)	Subpoenas	
 
On October 14, 2004, the New York Attorney General (NYAG) filed a civil suit against Marsh & McLennan Companies Inc. (Marsh), alleging that certain Marsh business practices were fraudulent and violated antitrust and securities laws. ACE was not named as a defendant in the suit, although ACE was named as one of four insurance companies whose employees participated in the practices in question. There can be no assurance that ACE will not be named in future actions brought by the NYAG or any other state attorneys general. In addition, an underwriter who is no longer employed by ACE has pleaded guilty to a misdemeanor based on these practices. ACE is cooperating and will continue to cooperate with the attorneys general.
 
ACE, its subsidiaries and affiliates have received numerous subpoenas, interrogatories, and civil investigative demands in connection with the pending investigations of insurance industry practices. These inquiries have been issued by a number of attorneys general, state departments of insurance, and state and federal regulatory authorities, including the NYAG, the Pennsylvania Department of Insurance, and the Securities and Exchange Commission. These inquiries seek information concerning underwriting practices and non-traditional or loss mitigation insurance products. ACE is cooperating and will continue to cooperate with such inquiries.
 
ACE has been conducting its own investigation that encompassed the subjects raised by the NYAG, the other state attorneys general and the SEC. The investigation has been conducted by a team from the firm of Debevoise & Plimpton LLP. The team is headed by former United States Attorney Mary Jo White and has operated under the direction of the Audit Committee of the Board of Directors. The Audit Committee of the Board of Directors has retained Cleary Gottlieb Steen & Hamilton, special outside counsel, to advise it in connection with these matters. ACE has terminated three employees, one of whom has pleaded guilty to a misdemeanor, and has suspended two other employees as a result of the internal investigation. ACE’s internal investigations pertaining to underwriting practices and non-traditional or loss mitigation insurance products are essentially complete. 
 
(iii)	Business practice-related litigation	
 
In January 2005, the Connecticut Attorney General (the CTAG) filed a civil suit against a subsidiary of ACE in Connecticut state court under the Connecticut Unfair Trade Practices Act. The CTAG’s suit alleges that an ACE subsidiary made an unauthorized and undisclosed payment to a broker who placed a portfolio of state workers’ compensation cases with ACE and seeks restitution to the state and payment of punitive damages. ACE believes that it has not violated any law or duty to the state and has filed a motion to dismiss the action. The State of Connecticut has not yet responded to the motion. 
 
ACE, ACE INA Holdings, Inc. and ACE USA have been named in the following federal putative nationwide class actions brought by insurance policyholders. Bayou Steel Corporation v. ACE INA Holdings, et al. (Case No. 04 CV 5391 E.D. Pa) (filed November 18, 2004); Eagle Creek, Inc. v. ACE INA Holdings, et al. (Case No. 04 CV 5255; E.D. Pa.) (filed November 10, 2004); Stephen Lewis vs. Marsh & McLennan Companies, Inc., et al. (Case No. 04 CV 7847; N.D. Ill.) (filed December 6, 2004); Opticare Health Systems, Inc. v. Marsh & McLennan Companies, Inc., et al. (Case No. 04 CV 06954; S.D.N.Y.) (filed October 19, 2004); Diane Preuss v. Marsh & McLennan Companies, et al. (Case No. 04 CV 78553; N.D. Ill.) (filed December 6, 2004); Redwood Oil Company v. Marsh & McLennan Companies, Inc. (Case No. 05 C 0390; N.D. Ill.) (filed January 21, 2005, dismissed voluntarily by plaintiff); Shell Vacations LLC v. Marsh & McLennan Companies, Inc., et al. (Case No. 05 C 0270; N.D. Ill.) (filed January 14, 2005); Edward Macuish v. Marsh & McLennan Companies, Inc., et al. (Case No. 2005 CV 00440; N.D. Ill.) (filed January 25, 2005 and later dismissed); Edward Macuish v. Marsh & McLennan Companies, Inc., et al. (Case No. 2005 CV 00440; D. N.J.) (filed March 21, 2005); David Boros v. Marsh & McLennan Companies, Inc., et al. (Case No. C050543EDL; N.D. Calf.) (filed February 4, 2005), Robert Mulcahy v. Arthur J. Gallagher & Co., et al. (Case No. 2005 CV 01064; D. N.J.) (filed February 23, 2005); Golden Gate Bridge, Highway and Transportation District vs. Marsh & McLennan Companies, Inc., et.al. (Case No. 05-1214, D. N.J.) filed February 23, 2005); The Prococcianti Group vs. Marsh & McLennan Companies, Inc., et. al. (Case No. 05-1368, D. N.J.) (filed March 7, 2005); Palm Tree Computers Systems, Inc. et al. v. ACE USA et al .(Case No. 6:05-cv-418-ACC-JGG)(filed February 16, 2005) (Case originally filed in the Eighteenth Judicial Circuit in and for Seminole County, Florida. AIG and The Hartford removed case. Motion to remand pending); Cellect LLC et al. v. Marsh & McLennan Companies, Inc. et al. (Case No. 05-2255; D. N.J.) (filed April 27, 2005); New England Regional Council of Carpenters et al. v. Marsh & McLennan Companies, Inc.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
(Case No. 05-2256; D. N.J.) (filed April 27, 2005); Bensley Construction, Inc. et al. v. Marsh & McLennan Companies, Inc. (Case No. 2005-00277; D. Mass.) (filed May 20, 2005) (Case removed from state court. Motion to remand is pending). In each of these cases, the plaintiff has sued a number of other insurance entities in addition to the ACE entities. The Judicial Panel on Multidistrict Litigation (JPML) consolidated these cases, as well as other putative class actions in which no ACE entity is named as a party in the District of New Jersey.
 
On August 1, 2005, Plaintiffs filed two consolidated amended complaints – one concerning commercial insurance and the other concerning employee benefit plans.
 
 	•	 	In the commercial insurance complaint, the plaintiffs named ACE Limited, ACE INA Holdings, Inc., ACE USA, Inc., ACE American Insurance Co., Illinois Union Insurance Co., and Indemnity Insurance Co. of North America. They allege that insurers, including certain ACE entities, and brokers conspired to increase premiums and allocate customers through the use of “B” quotes and contingent commissions. In addition, the complaints allege that the broker defendants received additional income by improperly placing their clients’ business with insurers through related wholesale entities that act as intermediaries between the broker and insurer. Plaintiffs also allege that broker defendants tied the purchase of primary insurance with the placement of such coverage with reinsurance carriers through the broker defendants’ reinsurance broker subsidiaries. In the commercial insurance consolidated complaint, plaintiffs assert the following causes of action against ACE: Federal Racketeer Influenced and Corrupt Organization Act (RICO), federal antitrust law, state antitrust law, aiding and abetting breach of fiduciary duty, and unjust enrichment.	
 
 	•	 	In the employee benefits complaint, the plaintiffs named ACE Limited, ACE USA, and Insurance Company of North America. They allege that insurers, including certain ACE entities, and brokers conspired to increase premiums and allocate customers through the use of “B” quotes and contingent commissions. In addition, the complaints allege that the broker defendants received additional income by improperly placing their clients’ business with insurers through related wholesale entities that act as intermediaries between the broker and insurer. Plaintiffs also allege that defendants improperly charged communication fees, which plaintiffs claim are also known as “enrollment fees” or “service/administrative fees”. Plaintiffs also allege that insurers transferred their insureds’ business, with who they had direct contracts with and no broker involvement, to insurance brokers in exchange for the insurance brokers steering additional business to the insurers. Plaintiffs also allege that broker defendants tied the purchase of primary insurance with the placement of such coverage with reinsurance carriers through the broker defendants’ reinsurance broker subsidiaries. In the employee benefits consolidated complaint, plaintiffs assert the following causes of action against ACE: Federal Racketeer Influenced and Corrupt Organization Act (RICO), federal antitrust law, state antitrust law, Employee Retirement Income Security Act (ERISA), aiding and abetting breach of fiduciary duty, and unjust enrichment.	
 
In both cases, the plaintiffs have sought unspecified compensatory damages and reimbursement of expenses, including legal fees.
 
Illinois Union Insurance Company, an ACE subsidiary, has been named in a state court class action: Van Emden Management Corporation v. Marsh & McLennan Companies, Inc., et al. (Case No. 05-0066A; Superior Court of Massachusetts) (filed January 13, 2005). The allegations are similar to the allegations in the federal class actions identified above. Plaintiffs assert causes of action under Massachusetts’ antitrust statute and Massachusetts’ consumer protection statute. Plaintiffs also assert a conspiracy cause of action and seek an injunction. Plaintiffs have sought unspecified compensatory damages and reimbursement of expenses, including legal fees.
 
ACE American Insurance Co., an ACE subsidiary, has been named in a state court lawsuit in Florida: Office Depot, Inc. v. Marsh & McLennan Companies, Inc. et al. (Case No. 502005CA004396; Circuit Court of the 15th Judicial Circuit in Palm Beach County Florida) (filed June 22, 2005). The allegations are similar to the allegations in the federal class actions identified above. Plaintiffs assert the following causes of action against ACE American Insurance Co.: conspiracy and concerted action to aid and abet Marsh’s breaches of fiduciary duties, conspiracy and concerted action to aid and abet Marsh’s fraud, antitrust violation under Florida law, deceptive and unfair trade practices, unjust enrichment, civil RICO under Florida law, commercial bribery, and punitive damages. Plaintiff has sought unspecified compensatory damages and reimbursement of expenses, including legal fees.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
ACE has been named in the following four putative securities class action suits: John Mahaney, Jr. v. ACE Limited, et al. (Case No. 04 CV 07696; S.D.N.Y) (filed October 18, 2004); Steven Burda v. ACE Limited, et al. ; (Case No. 04 CV 833; S.D.N.Y.) (filed October 21, 2004); Thomas E. Barton v. ACE Limited, et al. ; (Case No. 04 CV 8683; S.D.N.Y.) (filed November 1, 2004); and Friends of Ariel Center for Policy Research v. ACE Limited, et al. (Case No. 04 CV 04907; E.D. Pa.) (filed October 19, 2004). Evan G. Greenberg, ACE’s President and Chief Executive Officer, Brian Duperreault, ACE’s Chairman and former Chief Executive Officer, and Philip V. Bancroft, ACE’s Chief Financial Officer were also named as defendants in each of these suits. In addition, Dominic J. Frederico, ACE’s former Vice Chairman and former President and Chief Operating Officer, and Christopher Z. Marshall, ACE’s former Chief Financial Officer, were named as defendants in the Burda action. On January 3, 2005, the Burda and Barton actions were consolidated for all purposes into the Mahaney action. In December 2004, the defendants filed a motion with the JPML seeking consolidation of the cases for pretrial purposes in the Eastern District of Pennsylvania. The JPML granted that motion, consolidating the four cases in the Eastern District of Pennsylvania. The lead plaintiff has not been chosen in the consolidated proceeding. Nor has a consolidated complaint been filed. In the four complaints, the plaintiffs assert claims solely under Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act), Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act (control person liability). The plaintiffs allege that ACE’s public statements and securities filings should have revealed that insurers, including certain ACE entities and brokers conspired to increase premiums and allocate customers through the use of “B” quotes and contingent commissions and that ACE’s revenue and earnings were inflated by premiums which it may have to forfeit by fines or judgments.
 
ACE understands that it has been named as a defendant in a derivative suit filed in Delaware Chancery Court by shareholders of Marsh. The derivative suit seeks to recover damages for Marsh and its subsidiary, Marsh, Inc., against officers and directors of Marsh, American International Group Inc. (AIG), AIG’s chief executive officer, and ACE. The suit alleges that the defendants damaged Marsh and Marsh, Inc. by participating in a bid rigging scheme and obtaining “kickbacks” in the form of contingent commissions. The suit alleges that ACE knowingly participated in the officers’ and directors’ breaches of fiduciary duty to Marsh, Inc. and Marsh. The plaintiff has sought unspecified compensatory damages and reimbursement of expenses, including legal fees. ACE has not been served in this action, though no assurance can be given that it will not be served.
 
ACE Limited and Evan Greenberg, as a former officer and director of AIG, have been named in In re American International Group, Inc. (AIG) Derivative Litigation , which is a shareholder derivative action brought by AIG’s shareholders. The allegations against ACE concern the alleged bid rigging and contingent commission scheme as similarly alleged in the federal policyholder cases. Plaintiffs assert the following causes of action against ACE: breach of fiduciary duty and aiding and abetting breaches of fiduciary duties.
 
All of these suits seek compensatory damages without specifying an amount. As a result, ACE cannot at this time estimate its potential costs related to these legal matters and accordingly no liability for compensatory damages has been established in the Consolidated Financial Statements. The quarter ended March 31, 2005, includes approximately $30 million of investigation related legal expenses. Additionally, as of June 30, 2005, ACE has paid and accrued over $44 million for legal related fees since the investigation began.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
7.	Debt	
 
The following table outlines the Company’s debt at March 31, 2005 and December 31, 2004.

 	  	March 31
2005
	  	December 31
2004
	
 	  	(in millions of U.S. dollars)	
Short-term debt	  	 	 	  	 	 	
Reverse Repurchase Agreements	  	$	147	  	$	146	
 	  			  			
 	  	 	147	  	 	146	
 	  			  			
Long-term debt	  	 	 	  	 	 	
ACE INA Notes due 2006	  	 	300	  	 	300	
ACE Limited Senior Notes due 2007	  	 	500	  	 	500	
ACE US Holdings Senior Notes due 2008	  	 	250	  	 	250	
ACE INA Subordinated Notes due 2009	  	 	200	  	 	200	
ACE INA Senior Notes due 2014	  	 	499	  	 	499	
ACE INA Debentures due 2029	  	 	100	  	 	100	
 	  			  			
 	  	 	1,849	  	 	1,849	
 	  			  			
Trust preferred securities	  	 	 	  	 	 	
ACE INA Trust Preferred Securities due 2029	  	 	103	  	 	103	
ACE INA Capital Securities due 2030	  	 	309	  	 	309	
 	  			  			
 	  	$	412	  	$	412	

a)	Short-term debt	
 
The Company has commercial paper programs that use revolving credit facilities as back-up facilities and provide for up to $2.8 billion in commercial paper issuance (subject to the availability of back-up facilities, which currently total $600 million) for ACE and for ACE INA. During the quarter ended June 30, 2005, the Company reduced the commercial paper programs at ACE and ACE INA from $2.8 billion to $1.2 billion, to reflect the level of back-up facilities available. At March 31, 2005, short-term debt consisted of $147 million of amounts owed to brokers under securities repurchase transactions .
 
8.	Employee benefit plans	
 
a)	Defined benefit plans	
 
The Company maintains non-contributory defined benefit plans that cover certain foreign employees, principally located in Europe and Asia. The Company does not provide any such plans to U.S. based employees. Benefits under these plans are based on employees’ years of service and compensation during final years of service. All underlying defined benefit plans are subject to periodic actuarial valuation by qualified local actuarial firms. The Company funds the plans at the amount required by local tax and legal requirements for sponsoring a defined benefit retirement plan. The accumulated benefit obligation is compared to plan assets, both as defined in FAS No. 87, “Employers’ Accounting for Pensions”, and any resulting deficiency is recorded as an additional minimum liability.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following table details the net periodic benefit costs recognized by component for the periods indicated.

 	  	Three Months Ended
March 31
	 	
 	  	2005
	 	 	2004
	 	
 	  	(in thousands of U.S. dollars)	 	
Components of net periodic benefit cost	  	 	 	 	 	 	 	 	
Service cost	  	$	1,748	 	 	$	1,364	 	
Interest cost	  	 	4,861	 	 	 	3,972	 	
Expected return on plan assets	  	 	(3,462	)	 	 	(3,468	)	
Amortization of net transition asset	  	 	1	 	 	 	2	 	
Amortization of prior service cost	  	 	36	 	 	 	26	 	
Amortization of net actuarial loss	  	 	1,731	 	 	 	1,583	 	
 	  				 				
Net periodic benefit cost	  	$	4,915	 	 	$	3,479	 	

b)	Restricted stock awards	
 
Under the Company’s long-term incentive plans, 1,636,665 and 1,508,080 restricted Ordinary Shares were awarded during the three months ended March 31, 2005 and 2004, respectively, to officers of the Company and its subsidiaries. These shares vest at various dates through March 2009 and 2008.
 
At the time of grant the market value of the shares awarded under these grants is recorded as unearned stock grant compensation and is presented as a separate component of shareholders’ equity. The unearned compensation is charged to income over the vesting period using the accelerated method.
 
9.	Other (income) expense	
 
The following table details the components of other (income) expense as reflected in the consolidated statements of operations for the periods indicated.

 	  	Three Months Ended
March 31
	 	
 	  	2005
(Restated)
	 	 	2004
(Restated)
	 	
 	  	(in thousands of U.S. dollars)	 	
Equity in net income of partially- owned companies	  	$	(11,615	)	 	$	(1,446	)	
Minority interest expense	  	 	5,057	 	 	 	5,700	 	
Other	  	 	941	 	 	 	1,400	 	
Goodwill impairment	  	 	—  	 	 	 	11,305	 	
 	  				 				
Other (income) expense	  	$	(5,617	)	 	$	16,959	 	

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
10.	Earnings per share	
 
The following table sets forth the computation of basic and diluted earnings per share for the periods indicated.

 	  	Three Months Ended
March 31
	 	
 	  	2005
(Restated)
	 	 	2004
(Restated)
	 	
 	  	(in thousands of U.S. dollars, except
share and per share data)	 	
Numerator:	  	 	 	 	 	 	 	 	
Net income	  	$	436,574	 	 	$	447,429	 	
Dividends on Preferred Shares	  	 	(11,336	)	 	 	(11,336	)	
 	  				 				
Net income available to holders of Ordinary Shares	  	$	425,238	 	 	$	436,093	 	
 	  				 				
Denominator:	  	 	 	 	 	 	 	 	
Denominator for basic earnings per share:	  	 	 	 	 	 	 	 	
Weighted average shares outstanding	  	 	283,179,820	 	 	 	278,937,204	 	
Effect of other dilutive securities	  	 	4,385,550	 	 	 	5,352,364	 	
 	  				 				
Denominator for diluted earnings per share:	  	 	 	 	 	 	 	 	
Adjusted weighted average shares outstanding and assumed conversions	  	 	287,565,370	 	 	 	284,289,568	 	
 	  				 				
Basic earnings per share	  	$	1.50	 	 	$	1.56	 	
 	  				 				
Diluted earnings per share	  	$	1.48	 	 	$	1.53	 	

11.	Taxation	
 
Under current Cayman Islands’ law, the Company is not required to pay any taxes in the Cayman Islands on its income or capital gains. The Company has received an undertaking that, in the event of any taxes being imposed, the Company will be exempted from taxation in the Cayman Islands until the year 2013. Under current Bermuda law, the Company and its Bermuda subsidiaries are not required to pay any taxes in Bermuda on their income or capital gains. The Company has received an undertaking from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, the Company will be exempt from taxation in Bermuda until March 2016.
 
Income from the Company’s operations at Lloyd’s is subject to United Kingdom corporation taxes. Lloyd’s is required to pay U.S. income tax on U.S. connected income (U.S. income) written by Lloyd’s syndicates. Lloyd’s has a closing agreement with the IRS whereby the amount of tax due on this business is calculated by Lloyd’s and remitted directly to the IRS. These amounts are then charged to the personal accounts of the Names/Corporate Members in proportion to their participation in the relevant syndicates. The Company’s Corporate Members are subject to this arrangement but, as U.K. domiciled companies, will receive U.K. corporation tax credits for any U.S. income tax incurred up to the value of the equivalent U.K. corporation income tax charge on the U.S. income.
 
ACE Prime Holdings and its respective subsidiaries are subject to income taxes imposed by U.S. authorities and file a consolidated U.S. tax return. Should ACE Prime Holdings pay a dividend to the Company, withholding taxes will apply. Currently, however, no withholding taxes are accrued with respect to such unremitted earnings as management has no intention of subjecting these earnings to withholding tax. The cumulative amount that would be subject to withholding tax if distributed, as well as the determination of the associated tax liability are not practicable to compute, however, such amount would be material to the Company. Certain international operations of the Company are also subject to income taxes imposed by the jurisdictions in which they operate.
 
The Company is not subject to taxation other than as stated above. There can be no assurance that there will not be changes in applicable laws, regulations or treaties, which might require the Company to change the way it operates or become subject to taxation.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The income tax provision for the periods indicated is as follows:

 	  	Three Months Ended
March 31
	
 	  	2005
(Restated)
	  	2004
(Restated)
	
 	  	(in thousands of U.S. dollars)	
Current tax expense	  	$	63,955	  	$	67,459	
Deferred tax expense	  	 	61,955	  	 	56,390	
 	  			  			
Provision for income taxes	  	$	125,910	  	$	123,849	

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

 	  	Three Months Ended
March 31
	 	
 	  	2005
(Restated)
	 	 	2004
(Restated)
	 	
 	  	(in thousands of U.S. dollars)	 	
Expected tax provision at weighted average rate	  	$	131,051	 	 	$	123,904	 	
Permanent differences	  	 	 	 	 	 	 	 	
Tax-exempt interest	  	 	(1,673	)	 	 	(4,098	)	
American Jobs Creation Act Repatriation	  	 	(8,356	)	 	 	—  	 	
Other	  	 	2,748	 	 	 	(3,342	)	
Goodwill	  	 	—  	 	 	 	3,957	 	
Net withholding taxes	  	 	2,140	 	 	 	3,428	 	
 	  				 				
Total provision for income taxes	  	$	125,910	 	 	$	123,849	 	

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The components of the net deferred tax asset for the periods indicated are as follows:

 	  	March 31
2005
(Restated)
	  	December 31
2004
(Restated)
	
 	  	(in thousands of U.S. dollars)	
Deferred tax assets	  	 	 	  	 	 	
Loss reserve discount	  	$	605,103	  	$	607,354	
Unearned premium reserve	  	 	155,015	  	 	142,540	
Foreign tax credits	  	 	448,345	  	 	431,437	
Investments	  	 	127,663	  	 	127,078	
Bad debts	  	 	172,735	  	 	171,432	
Net operating loss carry-forward	  	 	155,918	  	 	228,264	
Other, net	  	 	69,014	  	 	72,959	
 	  			  			
Total deferred tax assets	  	 	1,733,793	  	 	1,781,064	
 	  			  			
Deferred tax liabilities	  	 	 	  	 	 	
Deferred policy acquisition costs	  	 	134,583	  	 	131,805	
Unrealized appreciation on investments	  	 	66,561	  	 	135,158	
Unremitted foreign earnings	  	 	265,920	  	 	251,122	
 	  			  			
Total deferred tax liabilities	  	 	467,064	  	 	518,085	
 	  			  			
Valuation allowance	  	 	88,919	  	 	89,563	
 	  			  			
Net deferred tax asset	  	$	1,177,810	  	$	1,173,416	

The valuation allowance of $89 million at March 31, 2005 and at December 31, 2004, reflects management’s assessment, based on available information, that it is more likely than not that a portion of the deferred tax asset will not be realized due to the inability of certain foreign subsidiaries to generate sufficient taxable income or the inability to utilize foreign tax credits. Adjustments to the valuation allowances are made when there is a change in management’s assessment of the amount of deferred tax asset that is realizable. The $0.6 million reduction in the valuation allowance during the period relates to the change in the excess of tax basis over financial reporting basis of a foreign subsidiary due to currency translation adjustments .
 
At March 31, 2005, the Company has net operating loss carryforwards for U.S. federal income tax purposes of approximately $445 million. The net operating loss carryforwards are available to offset future U.S. federal taxable income and, if unutilized, will expire in the years 2021-2022. In addition, the Company has a foreign tax credit carryforward in the amount of $50 million which, if unutilized, will expire in the years 2011-2014. The Company has an alternative minimum tax credit carryforward of $20.8 million which can be carried forward indefinitely.
 
American Jobs Creation Act of 2004
 
On October 22, 2004, the American Jobs Creation Act (the Act) was signed into law by the President of the United States. The Act provides for the election of a special one-time tax deduction of 85 percent of certain foreign earnings that are repatriated (as defined in the Act) under a Domestic Reinvestment Plan to its United States parent corporation in either the parent’s last tax year that began before the enactment date, or the first tax year that begins during the one-year period beginning on the date of enactment. The Company expects to apply the provisions of the Act to certain of its applicable subsidiaries.
 
In January 2005 and May 2005, the United States Treasury issued its guidance on selected provisions of the Act and on July 21, 2005, the Tax Technical Corrections Act of 2005 was introduced (H.R. 3376 and S. 1447). Guidance issued to date provides clarification on several technical issues, with the remaining issues addressed in the proposed Technical Corrections Act.
 
During the three and six months ended June 30, 2005, the Company repatriated foreign earnings of approximately $325 million and $367 million, respectively, subject to Domestic Reinvestment Plans that would qualify under the Act based on
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
the guidance issued to date. Of the $367 million repatriated foreign earnings to date, approximately $250 million will qualify for preferential tax treatment. For the three and six months ended June 30, 2005, the tax benefit associated with these repatriations was $19 million and $27 million, respectively, and was a result of the reduction of the net deferred tax liability associated with these repatriated earnings, based on guidance issued to date. The tax benefit recorded in the quarter ended June 30, 2005 included the tax benefit associated with distributions in that quarter, as well as adjustments to the previously recorded tax benefits based on United States Treasury guidance issued in May 2005. The tax benefit recorded to date may increase by as much as approximately $7 million if the Tax Technical Corrections Act of 2005 is passed.
 
Additional earnings repatriations up to the limitation under the Act of $500 million may be completed through the remainder of 2005. Based on guidance issued to date, the Company is evaluating potential additional repatriations and is not in a position to complete the evaluation or determine the total associated tax impact as a result of the Act. However, based on its analysis to date, it is possible that the Company may ultimately repatriate up to an additional $250 million up to the limitation of qualifying dividends, with an associated tax benefit of up to $44 million. The Company expects to be in a position to finalize its assessment by September 2005.
 
12.	Information provided in connection with outstanding debt of subsidiary	
 
The following tables present condensed consolidating financial information at March 31, 2005 and December 31, 2004 and for the three months ended March 31, 2005 and 2004, for ACE Limited (the “Parent Guarantor”) and its “Subsidiary Issuer”, ACE INA Holdings, Inc. The Subsidiary Issuer is an indirect wholly-owned subsidiary of the Parent Guarantor. Investments in subsidiaries are accounted for by the Parent Guarantor under the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are reflected in the Parent Guarantor’s investment accounts and earnings. The Parent Guarantor fully and unconditionally guarantees certain of the debt of the Subsidiary Issuer.
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Condensed Consolidating Balance Sheet at March 31, 2005
(in thousands of U.S. dollars)
(Restated)

 	  	ACE Limited
(Parent Co.
Guarantor)
	  	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)
	 	 	Other ACE
Limited
Subsidiaries and
Eliminations (1) 
	  	Consolidating
Adjustments  (2) 
	 	 	ACE Limited
Consolidated
	
Assets	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	
Investments	  	$	58,225	  	$	14,386,304	 	 	$	13,231,902	  	$	—  	 	 	$	27,676,431	
Cash	  	 	33,736	  	 	232,668	 	 	 	307,714	  	 	—  	 	 	 	574,118	
Insurance and reinsurance balances receivable	  	 	—  	  	 	2,872,539	 	 	 	822,127	  	 	—  	 	 	 	3,694,666	
Reinsurance recoverable	  	 	—  	  	 	13,371,112	 	 	 	897,178	  	 	—  	 	 	 	14,268,290	
Goodwill	  	 	—  	  	 	2,213,408	 	 	 	482,041	  	 	—  	 	 	 	2,695,449	
Investments in subsidiaries	  	 	10,477,595	  	 	—  	 	 	 	—  	  	 	(10,477,595	)	 	 	—  	
Due (to) from subsidiaries and affiliates, net	  	 	50,957	  	 	(179,817	)	 	 	179,817	  	 	(50,957	)	 	 	—  	
Other assets	  	 	38,247	  	 	5,786,442	 	 	 	2,275,088	  	 	—  	 	 	 	8,099,777	
 	  			  				 			  				 			
Total assets	  	$	10,658,760	  	$	38,682,656	 	 	$	18,195,867	  	$	(10,528,552	)	 	$	57,008,731	
 	  			  				 			  				 			
Liabilities	  	 	 	  	 	 	 	 	 	 	  	 	 	 	 	 	 	
Unpaid losses and loss expenses	  	$	—  	  	$	23,186,669	 	 	$	8,238,956	  	$	—  	 	 	$	31,425,625	
Unearned premiums	  	 	—  	  	 	4,898,318	 	 	 	1,628,713	  	 	—  	 	 	 	6,527,031	
Future policy benefits for life and annuity contracts	  	 	—  	  	 	—  	 	 	 	507,186	  	 	—  	 	 	 	507,186	
Short-term debt	  	 	—  	  	 	—  	 	 	 	147,059	  	 	—  	 	 	 	147,059	
Long-term debt	  	 	499,662	  	 	1,099,346	 	 	 	250,000	  	 	—  	 	 	 	1,849,008	
Trust preferred securities	  	 	—  	  	 	412,373	 	 	 	—  	  	 	—  	 	 	 	412,373	
Other liabilities	  	 	189,374	  	 	4,446,629	 	 	 	1,534,722	  	 	—  	 	 	 	6,170,725	
 	  			  				 			  				 			
Total liabilities	  	 	689,036	  	 	34,043,335	 	 	 	12,306,636	  	 	—  	 	 	 	47,039,007	
 	  			  				 			  				 			
Total shareholders’ equity	  	 	9,969,724	  	 	4,639,321	 	 	 	5,889,231	  	 	(10,528,552	)	 	 	9,969,724	
 	  			  				 			  				 			
Total liabilities and shareholders’ equity	  	$	10,658,760	  	$	38,682,656	 	 	$	18,195,867	  	$	(10,528,552	)	 	$	57,008,731	

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

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Condensed Consolidating Balance Sheet at December 31, 2004
(in thousands of U.S. dollars)
(Restated)

 	  	ACE Limited
(Parent Co.
Guarantor)
	  	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)
	  	Other ACE
Limited
Subsidiaries and
Eliminations (1) 
	 	 	Consolidating
Adjustments  (2) 
	 	 	ACE Limited
Consolidated
	
Assets	  	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	
Investments	  	$	81,919	  	$	14,182,263	  	$	12,661,179	 	 	$	—  	 	 	$	26,925,361	
Cash	  	 	6,327	  	 	116,323	  	 	375,246	 	 	 	—  	 	 	 	497,896	
Insurance and reinsurance balances receivable	  	 	—  	  	 	2,508,100	  	 	746,965	 	 	 	—  	 	 	 	3,255,065	
Reinsurance recoverable	  	 	—  	  	 	13,779,754	  	 	1,102,465	 	 	 	—  	 	 	 	14,882,219	
Goodwill	  	 	—  	  	 	2,213,408	  	 	486,041	 	 	 	—  	 	 	 	2,699,449	
Investments in subsidiaries	  	 	10,509,227	  	 	—  	  	 	—  	 	 	 	(10,509,227	)	 	 	—  	
Other assets	  	 	35,831	  	 	5,359,211	  	 	2,527,945	 	 	 	—  	 	 	 	7,922,987	
 	  			  			  				 				 			
Total assets	  	$	10,633,304	  	$	38,159,059	  	$	17,899,841	 	 	$	(10,509,227	)	 	$	56,182,977	
 	  			  			  				 				 			
Liabilities	  	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	
Unpaid losses and loss expenses	  	$	—  	  	$	23,258,462	  	$	8,224,969	 	 	$	—  	 	 	$	31,483,431	
Unearned premiums	  	 	—  	  	 	4,448,329	  	 	1,534,568	 	 	 	—  	 	 	 	5,982,897	
Future policy benefits for life and annuity contracts	  	 	—  	  	 	—  	  	 	509,005	 	 	 	—  	 	 	 	509,005	
Due to (from) subsidiaries and affiliates, net	  	 	123,689	  	 	164,114	  	 	(164,114	)	 	 	(123,689	)	 	 	—  	
Short-term debt	  	 	—  	  	 	—  	  	 	146,295	 	 	 	—  	 	 	 	146,295	
Long-term debt	  	 	499,620	  	 	1,099,307	  	 	250,000	 	 	 	—  	 	 	 	1,848,927	
Trust preferred securities	  	 	—  	  	 	412,373	  	 	—  	 	 	 	—  	 	 	 	412,373	
Other liabilities	  	 	164,603	  	 	4,307,899	  	 	1,482,155	 	 	 	—  	 	 	 	5,954,657	
 	  			  			  				 				 			
Total liabilities	  	 	787,912	  	 	33,690,484	  	 	11,982,878	 	 	 	(123,689	)	 	 	46,337,585	
 	  			  			  				 				 			
Total shareholders’ equity	  	 	9,845,392	  	 	4,468,575	  	 	5,916,963	 	 	 	(10,385,538	)	 	 	9,845,392	
 	  			  			  				 				 			
Total liabilities and shareholders’ equity	  	$	10,633,304	  	$	38,159,059	  	$	17,899,841	 	 	$	(10,509,227	)	 	$	56,182,977	

(1)	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
(2)	Includes ACE Limited parent company eliminations.	
 
26

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Condensed Consolidating Statement of Operations
For the three months ended March 31, 2005
(in thousands of U.S. dollars)
(Restated)

 	  	ACE Limited
(Parent Co.
Guarantor)
	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)
	  	Other ACE
Limited
Subsidiaries and
Eliminations  (1) 
	 	 	Consolidating
Adjustments  (2) 
	 	 	ACE Limited
Consolidated
	 	
Net premiums written	  	$	—  	 	 	$	1,992,093	  	$	1,374,209	 	 	$	—  	 	 	$	3,366,302	 	
Net premiums earned	  	 	—  	 	 	 	1,678,168	  	 	1,198,659	 	 	 	—  	 	 	 	2,876,827	 	
Net investment income	  	 	(215	)	 	 	142,142	  	 	143,091	 	 	 	—  	 	 	 	285,018	 	
Equity in earnings of subsidiaries	  	 	480,558	 	 	 	—  	  	 	—  	 	 	 	(480,558	)	 	 	—  	 	
Net realized gains (losses)	  	 	(4,414	)	 	 	17,449	  	 	(27,007	)	 	 	—  	 	 	 	(13,972	)	
Losses and loss expenses	  	 	—  	 	 	 	1,073,073	  	 	715,788	 	 	 	—  	 	 	 	1,788,861	 	
Life and annuity benefits	  	 	—  	 	 	 	—  	  	 	34,837	 	 	 	—  	 	 	 	34,837	 	
Policy acquisition costs and administrative expenses	  	 	32,230	 	 	 	416,174	  	 	281,965	 	 	 	(5,740	)	 	 	724,629	 	
Interest expense	  	 	7,125	 	 	 	31,935	  	 	5,575	 	 	 	(1,956	)	 	 	42,679	 	
Other (income) expense	  	 	—  	 	 	 	694	  	 	(6,311	)	 	 	—  	 	 	 	(5,617	)	
Income tax expense	  	 	—  	 	 	 	103,522	  	 	22,388	 	 	 	—  	 	 	 	125,910	 	
 	  				 			  				 				 				
Net income	  	$	436,574	 	 	$	212,361	  	$	260,501	 	 	$	(472,862	)	 	$	436,574	 	

Condensed Consolidating Statement of Operations
For the three months ended March 31, 2004
(in thousands of U.S. dollars)
(Restated)

 	  	ACE Limited
(Parent Co.
Guarantor)
	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)
	  	Other ACE
Limited
Subsidiaries and
Eliminations  (1) 
	  	Consolidating
Adjustments  (2) 
	 	 	ACE Limited
Consolidated
	
Net premiums written	  	$	—  	 	 	$	1,789,063	  	$	1,431,104	  	$	—  	 	 	$	3,220,167	
Net premiums earned	  	 	—  	 	 	 	1,340,863	  	 	1,246,294	  	 	—  	 	 	 	2,587,157	
Net investment income	  	 	4,472	 	 	 	102,015	  	 	138,763	  	 	(3,236	)	 	 	242,014	
Equity in earnings of subsidiaries	  	 	492,649	 	 	 	—  	  	 	—  	  	 	(492,649	)	 	 	—  	
Net realized gains (losses)	  	 	(14,021	)	 	 	35,474	  	 	35,642	  	 	—  	 	 	 	57,095	
Losses and loss expenses	  	 	—  	 	 	 	876,593	  	 	652,900	  	 	—  	 	 	 	1,529,493	
Life and annuity benefits	  	 	—  	 	 	 	—  	  	 	41,724	  	 	—  	 	 	 	41,724	
Policy acquisition costs and administrative expenses	  	 	28,421	 	 	 	337,658	  	 	313,312	  	 	3,149	 	 	 	682,540	
Interest expense	  	 	6,280	 	 	 	32,536	  	 	6,733	  	 	(1,277	)	 	 	44,272	
Other (income) expense	  	 	—  	 	 	 	3,064	  	 	13,895	  	 	—  	 	 	 	16,959	
Income tax expense	  	 	970	 	 	 	81,523	  	 	41,356	  	 	—  	 	 	 	123,849	
 	  				 			  			  				 			
Net income	  	$	447,429	 	 	$	146,978	  	$	350,779	  	$	(497,757	)	 	$	447,429	

(1)	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
(2)	Includes ACE Limited parent company eliminations.	
 
27

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Condensed Consolidating Statement of Cash Flows
For the three months ended March 31, 2005
(in thousands of U.S. dollars)
(Restated)

 	  	ACE Limited
(Parent Co.
Guarantor)
	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)
	 	 	Other ACE
Limited
Subsidiaries and
Eliminations (1) 
	 	 	ACE Limited
Consolidated
	 	
Net cash flows from (used for) operating activities	  	$	(11,525	)	 	$	715,370	 	 	$	509,680	 	 	$	1,213,525	 	
 	  				 				 				 				
Cash flows used for investing activities	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Purchases of fixed maturities available for sale	  	 	23,734	 	 	 	(2,654,698	)	 	 	(3,398,805	)	 	 	(6,029,769	)	
Purchases of equity securities	  	 	—  	 	 	 	(102,299	)	 	 	(77,573	)	 	 	(179,872	)	
Sales of fixed maturities available for sale	  	 	—  	 	 	 	1,918,706	 	 	 	3,129,849	 	 	 	5,048,555	 	
Sales of equity securities	  	 	—  	 	 	 	54,918	 	 	 	30,217	 	 	 	85,135	 	
Net proceeds from the settlement of investment derivatives	  	 	(4,414	)	 	 	—  	 	 	 	4,465	 	 	 	51	 	
Capitalization of subsidiaries	  	 	(100,000	)	 	 	100,000	 	 	 	—  	 	 	 	—  	 	
Dividends received from subsidiaries	  	 	274,912	 	 	 	—  	 	 	 	(274,912	)	 	 	—  	 	
Other	  	 	—  	 	 	 	804	 	 	 	(30,981	)	 	 	(30,177	)	
 	  				 				 				 				
Net cash flows from (used for) investing activities	  	$	194,232	 	 	$	(682,569	)	 	$	(617,740	)	 	$	(1,106,077	)	
 	  				 				 				 				
Cash flows from (used for) financing activities	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends paid on Ordinary Shares	  	 	(59,739	)	 	 	—  	 	 	 	—  	 	 	 	(59,739	)	
Dividends paid on Preferred Shares	  	 	(11,213	)	 	 	—  	 	 	 	—  	 	 	 	(11,213	)	
Net proceeds from short-term debt	  	 	—  	 	 	 	—  	 	 	 	764	 	 	 	764	 	
Proceeds from exercise of options for Ordinary Shares	  	 	38,866	 	 	 	—  	 	 	 	—  	 	 	 	38,866	 	
Proceeds from Ordinary Shares issued under ESPP	  	 	3,911	 	 	 	—  	 	 	 	—  	 	 	 	3,911	 	
Advances (to) from affiliates	  	 	(127,123	)	 	 	(24,085	)	 	 	151,208	 	 	 	—  	 	
 	  				 				 				 				
Net cash flows from (used for) financing activities	  	$	(155,298	)	 	$	(24,085	)	 	$	151,972	 	 	$	(27,411	)	
 	  				 				 				 				
Effect of foreign currency rate changes on cash and cash equivalents	  	$	—  	 	 	$	(1,580	)	 	$	(2,235	)	 	$	(3,815	)	
 	  				 				 				 				
Net increase in cash	  	 	27,409	 	 	 	7,136	 	 	 	41,677	 	 	 	76,222	 	
Cash – beginning of period	  	 	6,327	 	 	 	225,532	 	 	 	266,037	 	 	 	497,896	 	
 	  				 				 				 				
Cash – end of period	  	$	33,736	 	 	$	232,668	 	 	$	307,714	 	 	$	574,118	 	

(1)	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
 
28

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Condensed Consolidating Statement of Cash Flows
For the three months ended March 31, 2004
(in thousands of U.S. dollars)
(Restated)

 	  	ACE Limited
(Parent Co.
Guarantor)
	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)
	 	 	Other ACE
Limited
Subsidiaries and
Eliminations (1) 
	 	 	ACE Limited
Consolidated
	 	
Net cash flows from (used for) operating activities	  	$	(29,876	)	 	$	798,666	 	 	$	407,119	 	 	$	1,175,909	 	
 	  				 				 				 				
Cash flows from (used for) investing activities	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Purchases of fixed maturities	  	 	(26,877	)	 	 	(2,911,988	)	 	 	(3,065,021	)	 	 	(6,003,886	)	
Purchases of equity securities	  	 	—  	 	 	 	(36,302	)	 	 	(72,874	)	 	 	(109,176	)	
Sales of fixed maturities	  	 	—  	 	 	 	2,039,543	 	 	 	2,855,605	 	 	 	4,895,148	 	
Sales of equity securities	  	 	—  	 	 	 	35,840	 	 	 	69,529	 	 	 	105,369	 	
Maturities of fixed maturities	  	 	—  	 	 	 	—  	 	 	 	160	 	 	 	160	 	
Net proceeds from (payments made on) the settlement of investment derivatives	  	 	(14,021	)	 	 	—  	 	 	 	13,144	 	 	 	(877	)	
Capitalization of subsidiaries	  	 	(37,987	)	 	 	57,994	 	 	 	(20,007	)	 	 	—  	 	
Dividends received from subsidiaries	  	 	235,834	 	 	 	—  	 	 	 	(235,834	)	 	 	—  	 	
Other	  	 	—  	 	 	 	86,671	 	 	 	(79,739	)	 	 	6,932	 	
 	  				 				 				 				
Net cash flows from (used for) investing activities	  	$	156,949	 	 	$	(728,242	)	 	$	(535,037	)	 	$	(1,106,330	)	
 	  				 				 				 				
Cash flows from (used for) financing activities	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends paid on Ordinary Shares	  	 	(53,182	)	 	 	—  	 	 	 	—  	 	 	 	(53,182	)	
Dividends paid on Preferred Shares	  	 	(11,213	)	 	 	—  	 	 	 	—  	 	 	 	(11,213	)	
Proceeds from short-term debt, net	  	 	—  	 	 	 	(14	)	 	 	—  	 	 	 	(14	)	
Proceeds from exercise of options for Ordinary Shares	  	 	34,406	 	 	 	—  	 	 	 	—  	 	 	 	34,406	 	
Proceeds from Ordinary Shares issued under ESPP	  	 	3,683	 	 	 	—  	 	 	 	—  	 	 	 	3,683	 	
Advances to (from) affiliates	  	 	(108,927	)	 	 	26,204	 	 	 	82,723	 	 	 	—  	 	
 	  				 				 				 				
Net cash flows from (used for) financing activities	  	$	(135,233	)	 	$	26,190	 	 	$	82,723	 	 	$	(26,320	)	
 	  				 				 				 				
Effect of foreign currency rate changes on cash and cash equivalents	  	$	—  	 	 	$	3,932	 	 	$	5,045	 	 	$	8,977	 	
 	  				 				 				 				
Net increase (decrease) in cash	  	 	(8,160	)	 	 	100,546	 	 	 	(40,150	)	 	 	52,236	 	
Cash – beginning of period	  	 	27,260	 	 	 	164,872	 	 	 	366,812	 	 	 	558,944	 	
 	  				 				 				 				
Cash – end of period	  	$	19,100	 	 	$	265,418	 	 	$	326,662	 	 	$	611,180	 	

(1)	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
 
29

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
13.	Segment information	
 
The Company operates through four business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance and Financial Services. These segments distribute their products through various forms of brokers and agencies. Insurance - North American, Insurance - Overseas General and Global Reinsurance utilize direct marketing programs to reach clients. Additionally, Insurance - North American has formed internet distribution channels for some of its products and Global Reinsurance and Financial Services have established relationships with reinsurance intermediaries.
 
The Insurance – North American segment includes the operations of ACE USA, ACE Canada and ACE Bermuda, excluding the financial solutions business in both the U.S. and Bermuda, which are included in the Financial Services segment. These operations provide a broad range of property and casualty insurance and reinsurance products, including excess liability, excess property, professional lines, aerospace, accident and health coverages and claim and risk management products and services, to a diverse group of commercial and non-commercial enterprises and consumers. Subsequent to the IPO of Assured Guaranty, the title insurance business is included in the Insurance – North American segment. The operations of ACE USA also include the run-off operations, which include Brandywine, Commercial Insurance Services, residual market workers’ compensation business, pools and syndicates not attributable to a single business group, the run-off of open market facilities and the run-off results of various other smaller exited lines of business. Run-off operations do not actively sell insurance products, but are responsible for the management of existing policies and related claims.
 
The Insurance – Overseas General segment consists of ACE International and the insurance operations of ACE Global Markets. ACE International includes ACE INA’s network of indigenous insurance operations, which were acquired in 1999. The segment has four regions of operations: ACE Asia Pacific, ACE Far East, ACE Latin America and the ACE European Group, (which comprises ACE Europe, ACE INA UK Limited and the insurance operations of ACE Global Markets). ACE Global Markets provides funds at Lloyd’s to support underwriting by the Lloyd’s syndicates managed by Lloyd’s managing agencies which are owned by the Company (including for segment purposes Lloyd’s operations owned by ACE Financial Services). The reinsurance operation of ACE Global Markets is included in the Global Reinsurance segment. Companies within the Insurance – Overseas General segment write a variety of insurance products including property, casualty, professional lines (D&O and E&O), marine, energy, aviation, political risk, consumer-oriented products and A&H – principally being supplemental accident.
 
The Global Reinsurance segment comprises ACE Tempest Re Bermuda, ACE Tempest Re USA and ACE Tempest Re Europe. These subsidiaries provide property catastrophe, casualty and property reinsurance. Subsequent to the IPO of Assured Guaranty, the trade credit business is included in the Global Reinsurance segment. Global Reinsurance also includes the operations of ACE Tempest Life Re. The principal business of ACE Tempest Life Re is to provide reinsurance coverage to other life insurance companies.
 
The Financial Services segment includes the financial solutions business in the U.S. and Bermuda and the Company’s share of Assured Guaranty’s earnings. Prior to the IPO of Assured Guaranty, the Financial Services segment included the financial guaranty business of ACE Guaranty Corp. and ACE Capital Re International. The financial results of the transferred business are included in the results of the Financial Services segment through April 28, 2004 (the date of the sale). Commencing April 29, 2004, the Company’s proportionate share of Assured Guaranty’s earnings is reflected in other (income) expenses in the Financial Services segment. The financial solutions business includes insurance and reinsurance solutions to complex risks that generally cannot be adequately addressed by the traditional insurance marketplace. It consists of securitization and risk trading, finite and structured risk products, and retroactive contracts in the form of loss portfolio transfers.
 
Corporate and other includes ACE Limited and ACE INA Holdings (Corporate) and intercompany eliminations. In addition, included in losses and loss expenses for the quarter ended March 31, 2005 are losses incurred in connection with the commutation of ceded reinsurance contracts that resulted from a differential between the consideration received from reinsurers and the related reduction of reinsurance recoverables, principally related to the time value of money. Due to the Company’s initiatives to reduce reinsurance recoverable balances and thereby encourage such commutations, losses recognized in connection with the commutation of ceded reinsurance contracts are generally not considered when assessing
 
30

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
segment performance and accordingly, are directly allocated to Corporate. Additionally, the Company does not consider the development of loss reserves related to the September 11 tragedy in assessing segment performance as these loss reserves are managed by Corporate. Accordingly, the effect of the related loss reserve development on net income is reported within Corporate. There were no losses related to the September 11 tragedy included in Corporate for the three months ended March 31, 2005 and 2004.
 
For segment reporting purposes, certain items have been presented in a different manner than in the consolidated financial statements. The following tables summarize the  operations by segment for the periods indicated.
 
Statement of Operations by Segment
For the three months ended March 31, 2005
(in thousands of U.S. dollars)
(Restated)

 	  	Insurance –
North
American
	 	 	Insurance-
Overseas
General
	  	Global
Reinsurance
	 	 	Corporate
and
Other
	 	 	Consolidated
Property &
Casualty (1) 
	 	 	Financial
Services
	 	 	ACE
Consolidated
	 	
Gross premiums written	  	$	2,150,434	 	 	$	1,636,674	  	$	535,680	 	 	$	—  	 	 	$	4,322,788	 	 	$	162,705	 	 	$	4,485,493	 	
Net premiums written	  	 	1,424,797	 	 	 	1,195,343	  	 	526,879	 	 	 	—  	 	 	 	3,147,019	 	 	 	161,634	 	 	 	3,308,653	 	
Net premiums earned	  	 	1,285,486	 	 	 	1,087,476	  	 	356,606	 	 	 	—  	 	 	 	2,729,568	 	 	 	89,662	 	 	 	2,819,230	 	
Losses and loss expenses	  	 	891,618	 	 	 	609,973	  	 	205,450	 	 	 	(888	)	 	 	1,706,153	 	 	 	82,708	 	 	 	1,788,861	 	
Policy acquisition costs	  	 	117,403	 	 	 	192,112	  	 	72,985	 	 	 	—  	 	 	 	382,500	 	 	 	2,006	 	 	 	384,506	 	
Administrative expenses	  	 	110,917	 	 	 	147,642	  	 	15,303	 	 	 	56,240	 	 	 	330,102	 	 	 	4,106	 	 	 	334,208	 	
 	  				 			  				 				 				 				 				
Underwriting income (loss)	  	 	165,548	 	 	 	137,749	  	 	62,868	 	 	 	(55,352	)	 	 	310,813	 	 	 	842	 	 	 	311,655	 	
 	  				 			  				 				 				 				 				
Life	  	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross premiums written	  	 	—  	 	 	 	—  	  	 	57,673	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	57,673	 	
Net premiums written	  	 	—  	 	 	 	—  	  	 	57,649	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	57,649	 	
Net premiums earned	  	 	—  	 	 	 	—  	  	 	57,597	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	57,597	 	
Life and annuity benefits	  	 	—  	 	 	 	—  	  	 	34,837	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	34,837	 	
Policy acquisition costs	  	 	—  	 	 	 	—  	  	 	4,108	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	4,108	 	
Administrative expenses	  	 	—  	 	 	 	—  	  	 	1,807	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	1,807	 	
Net investment income	  	 	—  	 	 	 	—  	  	 	9,189	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	9,189	 	
 	  				 			  				 				 				 				 				
Underwriting income	  	 	—  	 	 	 	—  	  	 	26,034	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	26,034	 	
 	  				 			  				 				 				 				 				
Net investment income	  	 	130,729	 	 	 	74,325	  	 	39,357	 	 	 	(200	)	 	 	244,211	 	 	 	31,618	 	 	 	275,829	 	
Net realized gains (losses)	  	 	(10,642	)	 	 	17,641	  	 	(22,131	)	 	 	(4,415	)	 	 	(19,547	)	 	 	5,575	 	 	 	(13,972	)	
Interest expense	  	 	5,151	 	 	 	—  	  	 	766	 	 	 	36,762	 	 	 	42,679	 	 	 	—  	 	 	 	42,679	 	
Other (income) expense	  	 	228	 	 	 	5,970	  	 	942	 	 	 	(294	)	 	 	6,846	 	 	 	(12,463	)	 	 	(5,617	)	
Income tax expense (benefit)	  	 	80,205	 	 	 	51,577	  	 	9,133	 	 	 	(20,653	)	 	 	120,262	 	 	 	5,648	 	 	 	125,910	 	
 	  				 			  				 				 				 				 				
Net income (loss)	  	$	200,051	 	 	$	172,168	  	$	95,287	 	 	$	(75,782	)	 	$	365,690	 	 	$	44,850	 	 	$	436,574	 	

(1)	Excludes life reinsurance business.	
 
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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Statement of Operations by Segment
For the three months ended March 31, 2004
(in thousands of U.S. dollars)
(Restated)

 	  	Insurance –
North
American
	  	Insurance -
Overseas
General
	  	Global
Reinsurance
	 	 	Corporate
and
Other
	 	 	Consolidated
Property &
Casualty (1) 
	  	Financial
Services
	  	ACE
Consolidated
	
Gross premiums written	  	$	1,905,331	  	$	1,673,610	  	$	578,781	 	 	$	—  	 	 	$	4,157,722	  	$	207,566	  	$	4,365,288	
Net premiums written	  	 	1,211,449	  	 	1,178,263	  	 	571,604	 	 	 	—  	 	 	 	2,961,316	  	 	207,784	  	 	3,169,100	
Net premiums earned	  	 	1,006,776	  	 	1,019,280	  	 	331,657	 	 	 	—  	 	 	 	2,357,713	  	 	178,913	  	 	2,536,626	
Losses and loss expenses	  	 	697,460	  	 	586,415	  	 	159,686	 	 	 	—  	 	 	 	1,443,561	  	 	85,932	  	 	1,529,493	
Policy acquisition costs	  	 	100,463	  	 	184,632	  	 	63,997	 	 	 	—  	 	 	 	349,092	  	 	10,595	  	 	359,687	
Administrative expenses	  	 	103,276	  	 	137,516	  	 	18,572	 	 	 	32,735	 	 	 	292,099	  	 	24,519	  	 	316,618	
 	  			  			  				 				 			  			  			
Underwriting income (loss)	  	 	105,577	  	 	110,717	  	 	89,402	 	 	 	(32,735	)	 	 	272,961	  	 	57,867	  	 	330,828	
 	  			  			  				 				 			  			  			
Life	  	 	 	  	 	 	  	 	 	 	 	 	 	 	 	 	 	  	 	 	  	 	 	
Gross premiums written	  	 	—  	  	 	—  	  	 	52,456	 	 	 	—  	 	 	 	—  	  	 	—  	  	 	52,456	
Net premiums written	  	 	—  	  	 	—  	  	 	51,067	 	 	 	—  	 	 	 	—  	  	 	—  	  	 	51,067	
Net premiums earned	  	 	—  	  	 	—  	  	 	50,531	 	 	 	—  	 	 	 	—  	  	 	—  	  	 	50,531	
Life and annuity benefits	  	 	—  	  	 	—  	  	 	41,724	 	 	 	—  	 	 	 	—  	  	 	—  	  	 	41,724	
Policy acquisition costs	  	 	—  	  	 	—  	  	 	5,227	 	 	 	—  	 	 	 	—  	  	 	—  	  	 	5,227	
Administrative expenses	  	 	—  	  	 	—  	  	 	1,008	 	 	 	—  	 	 	 	—  	  	 	—  	  	 	1,008	
Net investment income	  	 	—  	  	 	—  	  	 	8,391	 	 	 	—  	 	 	 	—  	  	 	—  	  	 	8,391	
 	  			  			  				 				 			  			  			
Underwriting income	  	 	—  	  	 	—  	  	 	10,963	 	 	 	—  	 	 	 	—  	  	 	—  	  	 	10,963	
 	  			  			  				 				 			  			  			
Net investment income	  	 	103,934	  	 	50,002	  	 	26,465	 	 	 	217	 	 	 	180,618	  	 	53,005	  	 	233,623	
Net realized gains (losses)	  	 	51,560	  	 	24,185	  	 	(9,625	)	 	 	(14,021	)	 	 	52,099	  	 	4,996	  	 	57,095	
Interest expense	  	 	5,155	  	 	—  	  	 	—  	 	 	 	37,666	 	 	 	42,821	  	 	1,451	  	 	44,272	
Other (income) expense	  	 	3,295	  	 	3,389	  	 	(588	)	 	 	—  	 	 	 	6,096	  	 	10,863	  	 	16,959	
Income tax expense (benefit)	  	 	61,901	  	 	51,777	  	 	3,123	 	 	 	(13,431	)	 	 	103,370	  	 	20,479	  	 	123,849	
 	  			  			  				 				 			  			  			
Net income (loss)	  	$	190,720	  	$	129,738	  	$	114,670	 	 	$	(70,774	)	 	$	353,391	  	$	83,075	  	$	447,429	

(1)	Excludes life reinsurance business.	
 
Underwriting assets for property and casualty and financial services are reviewed in total by management for purposes of decision-making. The Company does not allocate assets to its segments. Assets are specifically identified for our life reinsurance operations and corporate holding companies, including ACE Limited and ACE INA Holdings.
 
The following table summarizes the identifiable assets at March 31, 2005 and December 31, 2004.

 	  	March 31
2005
(Restated)
	  	December 31
2004
(Restated)
	
 	  	(in millions of U.S. dollars)	
Life reinsurance	  	$	773	  	$	749	
Corporate	  	 	2,216	  	 	2,125	
All other	  	 	54,020	  	 	53,309	
 	  			  			
Total assets	  	$	57,009	  	$	56,183	

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following tables summarize the revenues of each segment by product offering for the periods indicated.
 
Net premiums earned by type of premium
													
 	  	Property &
Casualty
	  	Life, Accident
& Health
	  	Financial
Services
	  	ACE
Consolidated
	
 	  	(in millions of U.S. dollars)	
Three Months Ended March 31, 2005 (Restated)	  	 	 	  	 	 	  	 	 	  	 	 	
Insurance – North American	  	$	1,238	  	$	47	  	$	—  	  	$	1,285	
Insurance – Overseas General	  	 	836	  	 	252	  	 	—  	  	 	1,088	
Global Reinsurance	  	 	356	  	 	58	  	 	—  	  	 	414	
Financial Services	  	 	—  	  	 	—  	  	 	90	  	 	90	
 	  			  			  			  			
 	  	$	2,430	  	$	357	  	$	90	  	$	2,877	

Three Months Ended March 31, 2004 (Restated)	  	 	 	  	 	 	  	 	 	  	 	 	
Insurance – North American	  	$	965	  	$	42	  	$	—  	  	$	1,007	
Insurance – Overseas General	  	 	806	  	 	213	  	 	—  	  	 	1,019	
Global Reinsurance	  	 	332	  	 	51	  	 	—  	  	 	383	
Financial Services	  	 	—  	  	 	—  	  	 	179	  	 	179	
 	  			  			  			  			
 	  	$	2,103	  	$	306	  	$	179	  	$	2,588	

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

Three Months
Ended
	  	North America
	 	Europe
	 	Australia &
New Zealand
	 	Asia
Pacific
	 	Latin
America
	
March 31, 2005	  	58%	 	28%	 	2%	 	7%	 	5%	
March 31, 2004	  	60 %	 	27%	 	3%	 	6%	 	4%	
 
14.	Restatement of previously issued financial statements	
 
On July 18, 2005, ACE’s Board of Directors approved management’s recommendation to correct its accounting for eight contracts pursuant to the conclusions of the independent investigation and internal review. The eight contracts consist of three reinsurance contracts purchased by ACE or a predecessor organization, three contracts sold by ACE, and two intercompany transactions. Of these, management determined that seven did not meet applicable risk transfer requirements and should have been recorded as deposits. Each of these eight contracts originated prior to 2002. Some of these contracts involved written or oral agreements, understandings or discussions pertaining to risk expectations that were inappropriately not factored into the accounting treatment at the time of origination. In certain instances, agreements of this sort reduced or eliminated the anticipated risk transfer upon which the original accounting was based and resulted in the need for correction and the restatement of prior years financial statements. Only two of such contracts were in force at December 31, 2004.
 
In addition to the eight contracts identified in the investigation, the Company has corrected the accounting for certain deferred compensation plans as well as certain unrelated, previously known, errors, which were considered immaterial to require a restatement, but had been corrected in the periods identified.
 
Pursuant to these corrections, the Company has restated its previously reported financial statements as of and for the years ended December 31, 2004, 2003, 2002, 2001, and 2000, as well as each of the quarters in the years 2004 and 2003. Consequently, ACE’s previously issued financial statements for these periods should no longer be relied upon. As of March 31, 2005, ACE was in compliance with all debt covenants after considering the impact of the restatement.
 
33

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Reinsurance Contracts Purchased. Management has concluded that three ceded reinsurance contracts historically accounted for as reinsurance did not transfer sufficient risk at their inception. The change from reinsurance to deposit accounting for these contracts had the most significant effect on our historical financial statements relative to other corrections, comprising the majority of the change in yearly or quarterly net income related to the restatement. For the quarters ended March 31, 2005 and 2004, respectively, the restatement of these contracts resulted in an increase (decrease) in net income of $183 thousand and $(485) thousand.
 
Insurance and Reinsurance Contracts Sold. Management has concluded that two insurance contracts sold by a Bermuda subsidiary and one reinsurance contract sold by an ACE USA subsidiary did not assume sufficient risk. These contracts were terminated prior to the restatement and covered periods from 1999 through the first quarter of 2004. For the quarters ended March 31, 2005 and 2004, respectively, the restatement of these contracts resulted in an increase in net income of $0 and $79 thousand.
 
Intercompany Transactions. The investigation identified one intercompany transaction that should have been accounted for as a deposit and one intercompany transaction in which the contract was not properly eliminated in consolidation. For the quarters ended March 31, 2005 and 2004, respectively, the restatement of these contracts resulted in an increase in net income of $0 and $4 thousand.
 
Other Adjustments. The accounting for certain deferred compensation plans has been corrected in connection with the restatement. ACE has revised the original accounting for these plans from that of a fixed plan to a variable plan and has thus recognized compensation expense that had previously not been recognized. Other adjustments were also recorded in connection with the restatement that includes miscellaneous corrections previously made in ACE’s financial statements, such as the write-off of certain balance sheet accounts in connection with reconciliations prepared during its internal controls effort in 2004. Through the restatement, ACE is reallocating adjustments made in previous reporting periods to their proper periods. For the quarters ended March 31, 2005 and 2004, respectively, the restatement of these items resulted in an increase in net income of $3.4 million and $1 million.
 
Effect of Restatement
 
The effect of the restatement on shareholders’ equity is as follows:

 	  	March 31
2005
	 	 	March 31
2004
	 	
 	  	(in thousands of U.S. dollars)	 	
Shareholders’ equity as reported	  	$	9,965,300	 	 	$	9,396,820	 	
Restatement adjustments:	  	 	 	 	 	 	 	 	
Net income	  	 	3,546	 	 	 	604	 	
Additional paid in capital	  	 	4,833	 	 	 	1,661	 	
Net unrealized depreciation on investments	  	 	(11,352	)	 	 	2,341	 	
Cumulative translation adjustments	  	 	—  	 	 	 	(6,351	)	
Cumulative effect of restatement	  	 	7,397	 	 	 	(6,200	)	
 	  				 				
Shareholders’ equity restated	  	$	9,969,724	 	 	$	9,388,875	 	

The effect of the restatement on the Consolidated Financial Statements is included in the tables below. The cash flow was adjusted to reflect the consolidation of the trusts described above and other miscellaneous corrections.
 
34

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Consolidated Balance Sheets, March 31, 2005 and 2004

 	  	2005
(As reported)
	 	 	2005
(Restated)
	 	 	2004
(As reported)
	 	 	2004
(Restated)
	 	
 	  	(in thousands of U.S. dollars)	 	
Assets	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Investments	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed maturities, available for sale, at fair value	  	$	20,188,127	 	 	$	20,335,842	 	 	$	21,010,978	 	 	$	21,150,315	 	
Fixed to maturities, held to maturity, at amortized cost	  	 	3,211,021	 	 	 	3,211,021	 	 	 	—  	 	 	 	—  	 	
Equity securities, at fair value	  	 	1,350,993	 	 	 	1,350,993	 	 	 	590,512	 	 	 	590,512	 	
Short-term investments, at fair value	  	 	2,135,226	 	 	 	2,156,461	 	 	 	2,122,663	 	 	 	2,129,525	 	
Other investments	  	 	521,157	 	 	 	622,114	 	 	 	374,401	 	 	 	465,200	 	
 	  				 				 				 				
Total investments	  	 	27,406,524	 	 	 	27,676,431	 	 	 	24,098,554	 	 	 	24,335,552	 	
					
Cash	  	 	574,118	 	 	 	574,118	 	 	 	613,886	 	 	 	611,180	 	
Securities lending collateral	  	 	1,255,326	 	 	 	1,255,326	 	 	 	1,207,953	 	 	 	1,207,953	 	
Accrued investment income	  	 	306,828	 	 	 	308,826	 	 	 	275,888	 	 	 	277,425	 	
Insurance and reinsurance balances receivable	  	 	3,692,013	 	 	 	3,694,666	 	 	 	3,492,535	 	 	 	3,483,902	 	
Accounts and notes receivable	  	 	195,382	 	 	 	195,382	 	 	 	170,083	 	 	 	168,686	 	
Reinsurance recoverable	  	 	14,608,236	 	 	 	14,268,290	 	 	 	14,062,255	 	 	 	13,322,442	 	
Deferred policy acquisition costs	  	 	999,633	 	 	 	999,633	 	 	 	1,108,456	 	 	 	1,108,456	 	
Prepaid reinsurance premiums	  	 	1,426,971	 	 	 	1,426,971	 	 	 	1,578,228	 	 	 	1,443,794	 	
Funds withheld	  	 	298,147	 	 	 	298,147	 	 	 	238,833	 	 	 	239,669	 	
Value of reinsurance business assumed	  	 	274,010	 	 	 	274,010	 	 	 	328,039	 	 	 	328,039	 	
Goodwill	  	 	2,608,449	 	 	 	2,695,449	 	 	 	2,699,525	 	 	 	2,786,525	 	
Deferred tax assets	  	 	1,171,745	 	 	 	1,177,810	 	 	 	997,034	 	 	 	1,021,776	 	
Investments in partially-owned insurance companies	  	 	822,588	 	 	 	815,707	 	 	 	268,110	 	 	 	268,110	 	
Other assets	  	 	1,324,795	 	 	 	1,347,965	 	 	 	1,339,170	 	 	 	1,722,414	 	
 	  				 				 				 				
Total assets	  	$	56,964,765	 	 	$	57,008,731	 	 	$	52,478,549	 	 	$	52,325,923	 	
 	  				 				 				 				
Liabilities	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Unpaid losses and loss expenses	  	$	31,425,625	 	 	$	31,425,625	 	 	$	27,696,872	 	 	$	27,624,578	 	
Unearned premiums	  	 	6,527,031	 	 	 	6,527,031	 	 	 	6,929,562	 	 	 	6,731,438	 	
Future policy benefits for life and annuity contracts	  	 	507,186	 	 	 	507,186	 	 	 	495,780	 	 	 	495,780	 	
Funds withheld	  	 	131,020	 	 	 	131,020	 	 	 	188,275	 	 	 	187,943	 	
Insurance and reinsurance balances payable	  	 	2,259,848	 	 	 	2,290,038	 	 	 	2,145,287	 	 	 	2,220,694	 	
Deposit liabilities	  	 	301,524	 	 	 	301,524	 	 	 	217,443	 	 	 	217,564	 	
Securities lending collateral	  	 	1,255,326	 	 	 	1,255,326	 	 	 	1,207,953	 	 	 	1,207,953	 	
Payable for securities purchased	  	 	629,614	 	 	 	629,614	 	 	 	569,861	 	 	 	569,861	 	
Accounts payable, accrued expenses and other liabilities	  	 	1,493,507	 	 	 	1,502,859	 	 	 	1,194,625	 	 	 	1,245,166	 	
Dividends payable	  	 	60,344	 	 	 	60,344	 	 	 	53,717	 	 	 	53,717	 	
Short-term debt	  	 	147,059	 	 	 	147,059	 	 	 	545,713	 	 	 	545,713	 	
Long-term debt	  	 	1,849,008	 	 	 	1,849,008	 	 	 	1,349,268	 	 	 	1,349,268	 	
Trust preferred securities	  	 	412,373	 	 	 	412,373	 	 	 	487,373	 	 	 	487,373	 	
 	  				 				 				 				
Total liabilities	  	 	46,999,465	 	 	 	47,039,007	 	 	 	43,081,729	 	 	 	42,937,048	 	
 	  				 				 				 				
Commitments and contingencies Shareholders’ equity	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Preferred Shares	  	 	2,300	 	 	 	2,300	 	 	 	2,300	 	 	 	2,300	 	
Ordinary Shares	  	 	11,973	 	 	 	11,973	 	 	 	11,781	 	 	 	11,781	 	
Additional paid-in capital	  	 	5,002,701	 	 	 	5,007,534	 	 	 	4,863,868	 	 	 	4,865,529	 	
Unearned stock grant compensation	  	 	(114,581	)	 	 	(114,581	)	 	 	(97,888	)	 	 	(97,888	)	
Retained earnings	  	 	4,603,645	 	 	 	4,614,588	 	 	 	3,762,514	 	 	 	3,756,918	 	
Deferred compensation obligation	  	 	12,273	 	 	 	12,273	 	 	 	16,648	 	 	 	16,648	 	
Accumulated other comprehensive income	  	 	459,262	 	 	 	447,910	 	 	 	854,245	 	 	 	850,235	 	
Ordinary Shares issued to employee trust	  	 	(12,273	)	 	 	(12,273	)	 	 	(16,648	)	 	 	(16,648	)	
 	  				 				 				 				
Total shareholders’ equity	  	 	9,965,300	 	 	 	9,969,724	 	 	 	9,396,820	 	 	 	9,388,875	 	
 	  				 				 				 				
Total liabilities and shareholders’ equity	  	$	56,964,765	 	 	$	57,008,731	 	 	$	52,478,549	 	 	$	52,325,923	 	

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ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Consolidated Statements of Operations for three months ended March 31, 2005 and 2004

  	  	2005
(As reported)
	 	 	2005
(Restated)
	 	 	2004
(As reported)
	 	 	2004
(Restated)
	 	
 	  	(in thousands of U.S. dollars, except per share data)	 	
Revenues	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross premiums written	  	$	4,542,531	 	 	$	4,543,166	 	 	$	4,415,475	 	 	$	4,417,744	 	
Reinsurance premiums ceded	  	 	(1,177,389	)	 	 	(1,176,864	)	 	 	(1,177,309	)	 	 	(1,197,577	)	
 	  				 				 				 				
Net premiums written	  	 	3,365,142	 	 	 	3,366,302	 	 	 	3,238,166	 	 	 	3,220,167	 	
Change in unearned premiums	  	 	(489,255	)	 	 	(489,475	)	 	 	(638,489	)	 	 	(633,010	)	
 	  				 				 				 				
Net premiums earned	  	 	2,875,887	 	 	 	2,876,827	 	 	 	2,599,677	 	 	 	2,587,157	 	
Net investment income	  	 	283,647	 	 	 	285,018	 	 	 	237,920	 	 	 	242,014	 	
Net realized gains (losses)	  	 	(3,852	)	 	 	(13,972	)	 	 	57,261	 	 	 	57,095	 	
 	  				 				 				 				
Total revenues	  	 	3,155,682	 	 	 	3,147,873	 	 	 	2,894,858	 	 	 	2,886,266	 	
 	  				 				 				 				
Expenses	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Losses and loss expenses	  	 	1,785,763	 	 	 	1,788,861	 	 	 	1,542,597	 	 	 	1,529,493	 	
Life and annuity benefits	  	 	34,837	 	 	 	34,837	 	 	 	41,724	 	 	 	41,724	 	
Policy acquisition costs	  	 	388,614	 	 	 	388,614	 	 	 	364,914	 	 	 	364,914	 	
Administrative expenses	  	 	355,537	 	 	 	336,015	 	 	 	314,905	 	 	 	317,626	 	
Interest expense	  	 	42,679	 	 	 	42,679	 	 	 	44,272	 	 	 	44,272	 	
Other (income) expense	  	 	(4,559	)	 	 	(5,617	)	 	 	17,080	 	 	 	16,959	 	
 	  				 				 				 				
Total expenses	  	 	2,602,871	 	 	 	2,585,389	 	 	 	2,325,492	 	 	 	2,314,988	 	
 	  				 				 				 				
Income (loss) before income tax	  	 	552,811	 	 	 	562,484	 	 	 	569,366	 	 	 	571,278	 	
Income tax expense (benefit)	  	 	119,783	 	 	 	125,910	 	 	 	122,541	 	 	 	123,849	 	
 	  				 				 				 				
Net income	  	$	433,028	 	 	$	436,574	 	 	$	446,825	 	 	$	447,429	 	
 	  				 				 				 				
Basic earnings per share	  	$	1.49	 	 	$	1.50	 	 	$	1.56	 	 	$	1.56	 	
 	  				 				 				 				
Diluted earnings per share	  	$	1.46	 	 	$	1.48	 	 	$	1.53	 	 	$	1.53	 	

Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004

  	  	2005
(As Reported)
	 	 	2005
(Restated)
	 	 	2004
(As Reported)
	 	 	2004
(Restated)
	 	
 	  	(in thousands of U.S. dollars)	 	
Net cash flows from operating activities	  	$	1,210,312	 	 	$	1,213,525	 	 	$	1,161,903	 	 	$	1,175,909	 	
					
Net cash flows used for investing activities	  	 	(1,138,963	)	 	 	(1,106,077	)	 	 	(1,093,566	)	 	 	(1,106,330	)	
					
Net cash flows used for financing activities	  	 	(27,411	)	 	 	(27,411	)	 	 	(26,320	)	 	 	(26,320	)	
					
Effect of foreign currency rate changes on cash and cash equivalents	  	 	(3,815	)	 	 	(3,815	)	 	 	10,219	 	 	 	8,977	 	
 	  				 				 				 				
Net increase in cash	  	$	40,123	 	 	$	76,222	 	 	$	52,236	 	 	$	52,236	 	
Cash – beginning of period	  	 	533,995	 	 	 	497,896	 	 	 	561,650	 	 	 	558,944	 	
 	  				 				 				 				
Cash – end of period	  	$	574,118	 	 	$	574,118	 	 	$	613,886	 	 	$	611,180	 	

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 Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	
 
The following is a discussion of our results of operations, financial condition, and liquidity and capital resources as of and for the three months ended March 31, 2005. Our results of operations and cash flows for any interim period are not necessarily indicative of our results for the full year. This discussion should be read in conjunction with our Consolidated Financial Statements and related notes and our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K/A for the year ended December 31, 2004.
 
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Any written or oral statements made by us or on our behalf may include forward-looking statements that reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks, uncertainties and assumptions about our business that could cause actual results to differ materially from such statements. These risks, uncertainties and assumptions (which are described in more detail elsewhere herein and in other documents we file with the Securities and Exchange Commission (SEC)) include but are not limited to:
 
 	•	 	global political conditions, the occurrence of any terrorist attacks, including any nuclear, biological or chemical events, or the outbreak and effects of war, and possible business disruption or economic contraction that may result from such events;	
 
 	•	 	the ability to collect reinsurance recoverable, credit developments of reinsurers, and any delays with respect thereto and changes in the cost, quality or availability of reinsurance;	
 
 	•	 	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 and the timing of claim payments;	
 
 	•	 	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 and the timing of loss payments;	
 
 	•	 	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;	
 
 	•	 	uncertainties relating to governmental, legislative and regulatory policies, developments, investigations 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 and changes in market conditions that could render our business strategies ineffective or obsolete;	
 
 	•	 	actions that rating agencies may take from time to time, such as changes in our claims-paying, financial strength or credit ratings;	
 
 	•	 	developments in global financial markets, including changes in interest rates, stock markets and other financial markets, and foreign currency exchange rate fluctuations, which could affect our statement of operations, investment portfolio and financing plans;	
 
 	•	 	the potential impact from government-mandated insurance coverage for acts of terrorism;	
 
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 	•	 	the availability of borrowings and letters of credit under our credit facilities;	
 
 	•	 	changes in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers;	
 
 	•	 	material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements;	
 
 	•	 	the effects of investigations into market practices in the U.S. property and casualty industry;	
 
 	•	 	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. 
 
Overview
 
ACE Limited (ACE) is the Bermuda-based holding company of the ACE Group of Companies, incorporated with limited liability under the Cayman Islands Companies Law. We created our business office in Bermuda in 1985 when we initially incorporated the Company and we continue to maintain our corporate headquarters in Bermuda. Through our various operating subsidiaries, we provide a broad range of insurance and reinsurance products to businesses and individuals worldwide through operations in more than 140 countries. Our long-term business strategy focuses on sustained growth in book value achieved through a combination of underwriting and investment income. By doing so, we provide value to our clients and shareholders through the utilization of our substantial capital base in the insurance and reinsurance markets.
 
As an insurance and reinsurance company, we generate gross revenues from two principal sources, premiums which are usually paid in advance of loss payments, and dividends and interest income earned on invested assets. Cash flow is generated from premiums collected and investment income received less paid losses and loss expenses.
 
Invested assets are generally held in liquid, investment grade fixed income securities of relatively short duration. We also invest a small portion of our assets in less liquid or higher risk assets in an attempt to achieve higher risk-adjusted returns. Claims payments in any short-term period are highly unpredictable due to the random nature of loss events and the timing of claims awards or settlements. The value of investments held to pay future claims is subject to market forces such as the level of interest rates, stock market volatility and credit events such as corporate defaults. The actual cost of claims is also volatile based on loss trends, inflation rates, court awards and catastrophes. We believe that our cash balances, our highly liquid investments, credit facilities and reinsurance protection provide sufficient liquidity to meet any unforeseen claim demands that might occur in the year ahead.
 
The insurance industry is highly competitive with many companies offering similar coverage. The rates, terms and conditions related to the products we offer have historically changed depending on the timing of the insurance cycle. During periods of excess underwriting capacity, as defined by availability of capital, competition can result in lower pricing and less favorable terms and conditions. During periods of reduced underwriting capacity, pricing and terms and conditions are generally more favorable. For the quarter ended March 31, 2005, we have observed continued weakness in rates and while terms and conditions were generally favorable, they have begun to relax. As a result, our net premiums written were stable overall and declined in several of our businesses – a reflection of our underwriting discipline.
 
We are actively following developments on possible legislation to move all U.S. asbestos bodily injury claims to a federal trust for compensation in accordance with an established set of medical criteria and claim values. The trust would be funded by asbestos defendants and their insurers. The current bill, as it stands, requires a number of changes in order to win our support and we are working to get those accepted in the next draft of the bill.
 
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Insurance Industry Investigations and Related Matters
 
On October 14, 2004, the New York Attorney General (NYAG) filed a civil suit against Marsh & McLennan Companies Inc. (Marsh), alleging that certain Marsh business practices were fraudulent and violated antitrust and securities laws. ACE was not named as a defendant in the suit, although ACE was named as one of four insurance companies whose employees participated in the practices in question. There can be no assurance that ACE will not be named in future actions brought by the NYAG or any other state attorneys general. In addition, an underwriter who is no longer employed by ACE has pleaded guilty to a misdemeanor based on these practices. ACE is cooperating and will continue to cooperate with the attorneys general.
 
ACE, its subsidiaries and affiliates have received numerous subpoenas, interrogatories, and civil investigative demands in connection with the pending investigations of insurance industry practices. These inquiries have been issued by a number of attorneys general, state departments of insurance, and state and federal regulatory authorities, including the NYAG, the Pennsylvania Department of Insurance, and the Securities and Exchange Commission. These inquiries seek information concerning underwriting practices and non-traditional or loss mitigation insurance products. ACE is cooperating and will continue to cooperate with such inquiries.
 
ACE has been conducting, its own investigation that encompassed the subjects raised by the NYAG, the other state attorneys general and the SEC. The investigation has been conducted by a team from the firm of Debevoise & Plimpton LLP. The team is headed by former United States Attorney Mary Jo White and has operated under the direction of the Audit Committee of the Board of Directors. The Audit Committee of the Board of Directors has retained Cleary Gottlieb Steen & Hamilton, special outside counsel, to advise it in connection with these matters. ACE has terminated three employees, one of whom has pleaded guilty to a misdemeanor, and has suspended two other employees as a result of the internal investigation. ACE’s internal investigations pertaining to underwriting practices and non-traditional or loss mitigation insurance products are essentially complete. (See Note 14 to the accompanying Consolidated Financial Statements for further information concerning the investigation into non-traditional or loss mitigation products). 
 
In January 2005, the Connecticut Attorney General (the CTAG) filed a civil suit against a subsidiary of ACE in Connecticut state court under the Connecticut Unfair Trade Practices Act. The CTAG’s suit alleges that an ACE subsidiary made an unauthorized and undisclosed payment to a broker who placed a portfolio of state workers’ compensation cases with ACE and seeks restitution to the state and payment of punitive damages. ACE believes that it has not violated any law or duty to the state and has filed a motion to dismiss the action. The State of Connecticut has not yet responded to the motion. 
 
ACE, ACE INA Holdings, Inc. and ACE USA have been named in the following federal putative nationwide class actions brought by insurance policyholders. Bayou Steel Corporation v. ACE INA Holdings, et al. (Case No. 04 CV 5391 E.D. Pa) (filed November 18, 2004); Eagle Creek, Inc. v. ACE INA Holdings, et al. (Case No. 04 CV 5255; E.D. Pa.) (filed November 10, 2004); Stephen Lewis vs. Marsh & McLennan Companies, Inc., et al. (Case No. 04 CV 7847; N.D. Ill.) (filed December 6, 2004); Opticare Health Systems, Inc. v. Marsh & McLennan Companies, Inc., et al. (Case No. 04 CV 06954; S.D.N.Y.) (filed October 19, 2004); Diane Preuss v. Marsh & McLennan Companies, et al. (Case No. 04 CV 78553; N.D. Ill.) (filed December 6, 2004); Redwood Oil Company v. Marsh & McLennan Companies, Inc. (Case No. 05 C 0390; N.D. Ill.) (filed January 21, 2005, dismissed voluntarily by plaintiff); Shell Vacations LLC v. Marsh & McLennan Companies, Inc., et al. (Case No. 05 C 0270; N.D. Ill.) (filed January 14, 2005); Edward Macuish v. Marsh & McLennan Companies, Inc., et al. (Case No. 2005 CV 00440; N.D. Ill.) (filed January 25, 2005 and later dismissed); Edward Macuish v. Marsh & McLennan Companies, Inc., et al. (Case No. 2005 CV 00440; D. N.J.) (filed March 21, 2005); David Boros v. Marsh & McLennan Companies, Inc., et al. (Case No. C050543EDL; N.D. Calf.) (filed February 4, 2005), Robert Mulcahy v. Arthur J. Gallagher & Co., et al. (Case No. 2005 CV 01064; D. N.J.) (filed February 23, 2005); Golden Gate Bridge, Highway and Transportation District vs. Marsh & McLennan Companies, Inc., et.al. (Case No. 05-1214, D. N.J.) filed February 23, 2005); The Prococcianti Group vs. Marsh & McLennan Companies, Inc., et. al. (Case No. 05-1368, D. N.J.) (filed March 7, 2005); Palm Tree Computers Systems, Inc. et al. v. ACE USA et al .(Case No. 6:05-cv-418-ACC-JGG)(filed February 16, 2005) (Case originally filed in the Eighteenth Judicial Circuit in and for Seminole County, Florida. AIG and The Hartford removed case. Motion to remand pending); Cellect LLC et al. v. Marsh & McLennan Companies, Inc. et al. (Case No. 05-2255; D. N.J.) (filed April 27, 2005); New England Regional Council of Carpenters et al. v. Marsh & McLennan Companies, Inc. (Case No. 05-2256; D. N.J.) (filed April 27, 2005); Bensley Construction, Inc. et al. v. Marsh & McLennan Companies, Inc. (Case No. 2005-00277; D. Mass.) (filed May 20, 2005) (Case removed from state court. Motion to remand is pending). In each of these cases, the plaintiff has sued a number of other insurance entities in addition to the ACE entities. The Judicial Panel on Multidistrict Litigation (JPML) consolidated these cases, as well as other putative class actions in which no ACE entity is named as a party in the District of New Jersey.
 
On August 1, 2005, Plaintiffs filed two consolidated amended complaints – one concerning commercial insurance and the other concerning employee benefit plans.
 
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 	•	 	In the commercial insurance complaint, the plaintiffs named ACE Limited, ACE INA Holdings, Inc., ACE USA, Inc., ACE American Insurance Co., Illinois Union Insurance Co., and Indemnity Insurance Co. of North America. They allege that insurers, including certain ACE entities, and brokers conspired to increase premiums and allocate customers through the use of “B” quotes and contingent commissions. In addition, the complaints allege that the broker defendants received additional income by improperly placing their clients’ business with insurers through related wholesale entities that act as intermediaries between the broker and insurer. Plaintiffs also allege that broker defendants tied the purchase of primary insurance with the placement of such coverage with reinsurance carriers through the broker defendants’ reinsurance broker subsidiaries. In the commercial insurance consolidated complaint, plaintiffs assert the following causes of action against ACE: Federal Racketeer Influenced and Corrupt Organization Act (RICO), federal antitrust law, state antitrust law, aiding and abetting breach of fiduciary duty, and unjust enrichment.	
 
 	•	 	In the employee benefits complaint, the plaintiffs named ACE Limited, ACE USA, and Insurance Company of North America. They allege that insurers, including certain ACE entities, and brokers conspired to increase premiums and allocate customers through the use of “B” quotes and contingent commissions. In addition, the complaints allege that the broker defendants received additional income by improperly placing their clients’ business with insurers through related wholesale entities that act as intermediaries between the broker and insurer. Plaintiffs also allege that defendants improperly charged communication fees, which plaintiffs claim are also known as “enrollment fees” or “service/administrative fees”. Plaintiffs also allege that insurers transferred their insureds’ business, with who they had direct contracts with and no broker involvement, to insurance brokers in exchange for the insurance brokers steering additional business to the insurers. Plaintiffs also allege that broker defendants tied the purchase of primary insurance with the placement of such coverage with reinsurance carriers through the broker defendants’ reinsurance broker subsidiaries. In the employee benefits consolidated complaint, plaintiffs assert the following causes of action against ACE: Federal Racketeer Influenced and Corrupt Organization Act (RICO), federal antitrust law, state antitrust law, Employee Retirement Income Security Act (ERISA), aiding and abetting breach of fiduciary duty, and unjust enrichment.	
 
In both cases, the plaintiffs have sought unspecified compensatory damages and reimbursement of expenses, including legal fees.
 
Illinois Union Insurance Company, an ACE subsidiary, has been named in a state court class action: Van Emden Management Corporation v. Marsh & McLennan Companies, Inc., et al. (Case No. 05-0066A; Superior Court of Massachusetts) (filed January 13, 2005). The allegations are similar to the allegations in the federal class actions identified above. Plaintiffs assert causes of action under Massachusetts’ antitrust statute and Massachusetts’ consumer protection statute. Plaintiffs also assert a conspiracy cause of action and seek an injunction. Plaintiffs have sought unspecified compensatory damages and reimbursement of expenses, including legal fees.
 
ACE American Insurance Co., an ACE subsidiary, has been named in a state court lawsuit in Florida: Office Depot, Inc. v. Marsh & McLennan Companies, Inc. et al. (Case No. 502005CA004396; Circuit Court of the 15th Judicial Circuit in Palm Beach County Florida) (filed June 22, 2005). The allegations are similar to the allegations in the federal class actions identified above. Plaintiffs assert the following causes of action against ACE American Insurance Co.: conspiracy and concerted action to aid and abet Marsh’s breaches of fiduciary duties, conspiracy and concerted action to aid and abet Marsh’s fraud, antitrust violation under Florida law, deceptive and unfair trade practices, unjust enrichment, civil RICO under Florida law, commercial bribery, and punitive damages. Plaintiff has sought unspecified compensatory damages and reimbursement of expenses, including legal fees.
 
ACE has been named in the following four putative securities class action suits: John Mahaney, Jr. v. ACE Limited, et al. (Case No. 04 CV 07696; S.D.N.Y) (filed October 18, 2004); Steven Burda v. ACE Limited, et al. ; (Case No. 04 CV 833; S.D.N.Y.) (filed October 21, 2004); Thomas E. Barton v. ACE Limited, et al. ; (Case No. 04 CV 8683; S.D.N.Y.) (filed November 1, 2004); and Friends of Ariel Center for Policy Research v. ACE Limited, et al. (Case No. 04 CV 04907; E.D. Pa.) (filed October 19, 2004). Evan G. Greenberg, ACE’s President and Chief Executive Officer, Brian Duperreault, ACE’s Chairman and former Chief Executive Officer, and Philip V. Bancroft, ACE’s Chief Financial Officer were also named as defendants in each of these suits. In addition, Dominic J. Frederico, ACE’s former Vice Chairman and former President and Chief Operating Officer, and Christopher Z. Marshall, ACE’s former Chief Financial Officer, were named as defendants in the Burda action. On January 3, 2005, the Burda and Barton actions were consolidated for all purposes into the Mahaney action. In December 2004, the defendants filed a motion with the JPML seeking consolidation of the cases for pretrial purposes in the Eastern District of Pennsylvania. The JPML granted that motion, consolidating the four cases in the Eastern District of Pennsylvania. The lead plaintiff has not been chosen in the consolidated proceeding. Nor has a consolidated complaint been filed. In the four
 
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complaints, the plaintiffs assert claims solely under Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act), Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act (control person liability). The plaintiffs allege that ACE’s public statements and securities filings should have revealed that insurers, including certain ACE entities and brokers conspired to increase premiums and allocate customers through the use of “B” quotes and contingent commissions and that ACE’s revenue and earnings were inflated by premiums which it may have to forfeit by fines or judgments.
 
ACE understands that it has been named as a defendant in a derivative suit filed in Delaware Chancery Court by shareholders of Marsh. The derivative suit seeks to recover damages for Marsh and its subsidiary, Marsh, Inc., against officers and directors of Marsh, American International Group Inc. (AIG), AIG’s chief executive officer, and ACE. The suit alleges that the defendants damaged Marsh and Marsh, Inc. by participating in a bid rigging scheme and obtaining “kickbacks” in the form of contingent commissions. The suit alleges that ACE knowingly participated in the officers’ and directors’ breaches of fiduciary duty to Marsh, Inc. and Marsh. The plaintiff has sought unspecified compensatory damages and reimbursement of expenses, including legal fees. ACE has not been served in this action, though no assurance can be given that it will not be served.
 
ACE Limited and Evan Greenberg, as a former officer and director of AIG, have been named in In re American International Group, Inc. (AIG) Derivative Litigation , which is a shareholder derivative action brought by AIG’s shareholders. The allegations against ACE concern the alleged bid rigging and contingent commission scheme as similarly alleged in the federal policyholder cases. Plaintiffs assert the following causes of action against ACE: breach of fiduciary duty and aiding and abetting breaches of fiduciary duties.
 
All of these suits seek compensatory damages without specifying an amount. As a result, ACE cannot at this time estimate its potential costs related to these legal matters and accordingly no liability for compensatory damages has been established in the Consolidated Financial Statements. The quarter ended March 31, 2005, includes approximately $30 million of investigation related expenses. Additionally, as of June 30, 2005, ACE has paid and accrued over $44 million for legal related fees since the investigation began. In the opinion of ACE’s management, ACE’s ultimate liability for these matters is not likely to have a material adverse effect on ACE’s consolidated financial condition, although it is possible that the effect could be material to ACE’s consolidated results of operations for an individual reporting period.
 
Restatement of Previously Issued Financial Statements
 
ACE has restated its financial statements for the years ended December 31, 2004, 2003, 2002, 2001, and 2000, each of the quarters in the years 2003 and 2004, and the quarter ended March 31, 2005. The primary purpose of the restatement is to correct the accounting treatment for eight finite risk transactions. ACE has also included in the restatement correction of certain unrelated errors, previously identified but considered to be of an immaterial nature. The cumulative impact of the restatement through the first quarter of 2005 is an increase of shareholders’ equity of $4 million. The cumulative effect of the restatement for certain finite contracts as of the first quarter of 2005 is to increase shareholders’ equity by approximately $16 million. The cumulative of the other unrelated corrections is to decrease shareholders’ equity by approximately $12 million. For additional information see Note 14 to the accompanying Consolidated Financial Statements and our Annual Report on Form 10-K/A for the year ended December 31, 2004 (Note 3 to the Consolidated Financial Statements) for a discussion of the restatement and a reconciliation of previously reported amounts to the restated amounts. All amounts included herein for the prior periods have been adjusted to reflect the restatement.
 
Critical Accounting Estimates
 
Our Consolidated Financial Statements include amounts that, either by their nature or due to requirements of accounting principles generally accepted in the U.S. (GAAP), are determined using best estimates and assumptions. While we believe that the amounts included in our Consolidated Financial Statements reflect our best judgment, actual amounts could ultimately materially differ from those currently presented in our Consolidated Financial Statements. We believe the items that require the most subjective and complex estimates are:
 
 	•	 	unpaid losses and loss expense reserves, including asbestos reserves;	
 
 	•	 	reinsurance recoverable, including our bad debt provision;	
 
 	•	 	impairments to the carrying value of our investment portfolio;	
 
 	•	 	the valuation of deferred tax assets;	
 
 	•	 	the fair value of certain derivatives;	
 
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 	•	 	the valuation of goodwill; and	
 
 	•	 	assessment of risk transfer for certain structured insurance and reinsurance contracts.	
 
We believe our accounting policies for these items are of critical importance to our Consolidated Financial Statements. More information regarding our critical accounting estimates is included in the section entitled “Critical Accounting Estimates” in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K/A for the year ended December 31, 2004.
 
Sale of Financial and Mortgage Guaranty Business through Assured Guaranty Ltd.
 
On April 28, 2004, we sold 65.3 percent of our financial and mortgage guaranty reinsurance and insurance businesses through the initial public offering (IPO) of 49 million common shares of Assured Guaranty Ltd. (Assured Guaranty). Subsequent to the completion of the IPO, we beneficially own 26 million common shares or 34.7 percent of Assured Guaranty’s outstanding common shares and, accordingly, no longer consolidate our interest in the Assured Guaranty companies. We account for our retained interest under the equity method of accounting and reflect the value of our investment in “Investments in partially-owned insurance companies” within our consolidated balance sheet and the proportionate share of earnings reflected in “Other (income) expense” within our consolidated statement of operations.
 
Results of Operations – Three Months Ended March 31, 2005 and 2004
 
The discussions that follow include tables, which show both our consolidated and segment operating results for the three months ended March 31, 2005 and 2004. In presenting our operating results, we have discussed our performance with reference to underwriting results, which is a non-GAAP measure. We consider this measure, which may be defined differently by other companies, to be important in understanding our overall results of operations. Underwriting results are calculated by subtracting losses and loss expenses, life and annuity benefits, policy acquisition costs and administrative expenses from net premiums earned. We use underwriting results and operating ratios to monitor the results of our operations without the impact of certain factors, including investment income, other income and expenses, interest and income tax expense and net realized gains (losses). We believe the use of these measures enhance the understanding of our results of operations by highlighting the underlying profitability of our insurance business. Underwriting results should not be viewed as a substitute for measures determined in accordance with GAAP.
 
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Consolidated Operating Results

 	  	Three Months Ended
March 31
	
 	  	2005
(Restated)
	 	 	2004
(Restated)
	
 	  	(in millions of U.S. dollars)	
Net premiums written	  	$	3,366	 	 	$	3,220	
Net premiums earned	  	 	2,877	 	 	 	2,588	
Net investment income	  	 	285	 	 	 	242	
Net realized gains (losses)	  	 	(14	)	 	 	57	
 	  				 			
Total revenues	  	 	3,148	 	 	 	2,887	
 	  				 			
Losses and loss expenses	  	 	1,789	 	 	 	1,529	
Life and annuity benefits	  	 	35	 	 	 	42	
Policy acquisition costs	  	 	388	 	 	 	365	
Administrative expenses	  	 	336	 	 	 	318	
Interest expense	  	 	42	 	 	 	44	
Other (income) expense	  	 	(5	)	 	 	17	
 	  				 			
Total expenses	  	$	2,585	 	 	$	2,315	
 	  				 			
Income before income tax	  	 	563	 	 	 	572	
Income tax expense	  	 	126	 	 	 	124	
 	  				 			
Net income	  	$	437	 	 	$	448	

Net premiums written, which reflect the premiums we retain after purchasing reinsurance protection, increased four percent in the quarter ended March 31, 2005, compared with the same quarter of 2004. This increase was principally driven by growth in the U.S. casualty operations of the Insurance-North American segment, partially offset by modest declines in our other segments. Our property and casualty (P&C) net premiums written, which exclude the Financial Services segment and our life reinsurance business, increased six percent (four percent adjusting for the appreciation of foreign currencies relative to the U.S. dollar).
 
The following table provides a consolidated breakdown of net premiums earned by line of business for the periods indicated.

 	  	Three Months Ended March 31 (Restated)
	 	
 	  	2005
	  	% of
total
	 	 	2004
	  	% of
Total
	 	
 	  	(in millions of
U.S. dollars)	  	 	 	 	(in millions of
U.S. dollars)	  	 	 	
Property and all Other	  	$	874	  	30	%	 	$	771	  	30	%	
Casualty	  	 	1,556	  	54	%	 	 	1,332	  	51	%	
Personal Accident (A&H)	  	 	299	  	11	%	 	 	255	  	10	%	
 	  			  			 			  			
Total P&C	  	 	2,729	  	95	%	 	 	2,358	  	91	%	
Global Re – life	  	 	58	  	2	%	 	 	51	  	2	%	
Financial Services	  	 	90	  	3	%	 	 	179	  	7	%	
 	  			  			 			  			
Net premiums earned	  	$	2,877	  	100	%	 	$	2,588	  	100	%	

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Net premiums earned reflect the portion of net premiums written that were recorded as revenues for the period as the exposure period expires. Net premiums earned in our P&C business increased 16 percent (13 percent, adjusting for foreign exchange) in the quarter ended March 31, 2005, compared with the same quarter of 2004. Our Financial Services business reported a decrease in net premiums earned of 50 percent in the quarter ended March 31, 2005, compared with the same quarter of 2004. The change in net premiums earned for P&C business is consistent with the development in net premiums written. For our Financial Services segment, the decrease is primarily related to the sale of Assured Guaranty – the quarter ended March 31, 2004, included $87 million of net premiums earned from financial guaranty business prior to the IPO. 
 
Net investment income increased 18 percent in the quarter ended March 31, 2005, compared with the same quarter of 2004. The increase in net investment income was primarily due to positive operating cash flows, which have resulted in a higher overall average invested asset base.
 
In evaluating our P&C and Financial Services businesses we use the combined ratio, the loss and loss expense ratio, the policy acquisition cost ratio and the administrative expense ratio. We calculate these ratios by dividing the respective expense amounts by net premiums earned. We do not calculate these ratios for the life reinsurance business as we do not use these measures to monitor or manage that business. The combined ratio is determined by adding the loss and loss expense ratio, the policy acquisition cost ratio and the administrative expense ratio. A combined ratio under 100 percent indicates underwriting income, and a combined ratio exceeding 100 percent indicates underwriting losses.
 
The following table shows our consolidated loss and loss expense ratio, policy acquisition ratio, administrative expense ratio and combined ratio for the periods indicated.

 	  	Three Months Ended March 31
	 	
 	  	2005
(Restated)
	 	 	2004
(Restated)
	 	
Loss and loss expense ratio	  	63.5	%	 	60.3	%	
Policy acquisition cost ratio	  	13.6	%	 	14.2	%	
Administrative expense ratio	  	11.9	%	 	12.5	%	
Combined ratio	  	89.0	%	 	87.0	%	
 
Our loss and loss expense ratio increased 3.2 percentage points in the quarter ended March 31, 2005, compared with the same quarter of 2004. This increase was primarily due to a higher loss and loss expense ratio in our Financial Services segment and, to a lesser extent, net adverse prior period development. The following table shows the impact of prior period development on our loss and loss expense ratio for the periods indicated.

 	  	Three Months Ended March 31
	 	
 	  	2005
(Restated)
	 	 	2004
(Restated)
	 	
Loss and loss expense ratio, as reported	  	63.5	%	 	60.3	%	
Catastrophe losses	  	(0.1	)%	 	—  	 	
Prior period development	  	(1.1	)%	 	0.9	%	
 	  			 			
Loss and loss expense ratio, adjusted	  	62.3	%	 	61.2	%	

We recorded $3 million in catastrophe losses, related to European windstorms, in the quarter ended March 31, 2005, compared with nil in the same quarter of 2004. Our loss and loss expense ratio is also impacted by prior period development. Prior period development arises from changes to loss estimates recognized in the current year that relate to loss reserves first reported in previous calendar years and excludes the effect of losses from the development of earned premium from previous accident years. For purposes of analysis and disclosure, management views prior period development to be changes in the nominal value of loss estimates from period to period and excludes changes in loss estimates that do not arise from the emergence of claims, such as those related to uncollectible reinsurance, interest, or foreign currency. Accordingly, specific items excluded from prior period development include the following: gains/losses related to foreign currency translation that affect both the valuation of unpaid losses and loss expenses and losses incurred; losses recognized from the early termination or commutation of reinsurance agreements that principally relate to the time value of money; changes in the value of reinsurance business assumed reflected in losses incurred but principally related to the time value of money and losses that
 
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arise from changes in estimates of earned premiums from prior accident years. We experienced net adverse prior period development of $30 million for the quarter ended March 31, 2005, compared with net favorable prior period development of $22 million in the same quarter of 2004. Our Segment Operating Results, below, contain further detail of the prior period development recognized in our Consolidated Financial Statements.
 
Policy acquisition costs include commissions, premium taxes, underwriting and other costs that vary with, and are primarily related to, the production of premium. Administrative expenses include all other operating costs. Our policy acquisition cost ratio decreased in the quarter ended March 31, 2005, compared with the same quarter of 2004, primarily due to improvements in the Insurance – North American segment. Our administrative expenses increased primarily due to approximately $30 million of legal costs in connection with the investigations by the various attorneys general and related matters and $9 million due to costs associated with servicing business growth, partially offset by the decline of approximately $21 million as we no longer consolidate our interest in the Assured Guaranty companies. The Company’s proportionate share of Assured Guaranty’s earnings is reflected in other (income) expenses in the Financial Services segment. Our administrative expense ratio decreased primarily due to the increase in premiums earned.
 
Interest expense decreased in the quarter ended March 31, 2005, compared with the same quarter of 2004. This was primarily due to the $75 million of Capital Re LLC preferred securities which were outstanding during the quarter ended March 31, 2004, and redeemed on July 12, 2004. 
 
Segment Operating Results – Three Months Ended March 31, 2005 and 2004
 
Our business consists of four segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Financial Services. Our Annual Report on Form 10-K/A for the year ended December 31, 2004, includes more information on each of our segments in the section entitled, “Segment Information”, under Item 1.
 
Insurance - North American
 
The Insurance – North American segment comprises our P&C insurance operations in the U.S., Bermuda and Canada. This segment writes a variety of insurance products including property, casualty (general liability, workers’ compensation, risk management, professional lines (directors and officers (D&O) and errors and omissions coverages (E&O)), marine, program business, aerospace, consumer-oriented products, specialty lines and accident and health (A&H) - principally being personal accident.

 	  	Three Months Ended March 31
	 	
 	  	2005
(Restated)
	 	 	2004
(Restated)
	 	
 	  	(in millions of U.S. dollars)	 	
Net premiums written	  	$	1,425	 	 	$	1,211	 	
Net premiums earned	  	 	1,285	 	 	 	1,007	 	
Losses and loss expenses	  	 	892	 	 	 	698	 	
Policy acquisition costs	  	 	117	 	 	 	100	 	
Administrative expenses	  	 	111	 	 	 	103	 	
 	  				 				
Underwriting income	  	$	165	 	 	$	106	 	
 	  				 				
Net investment income	  	 	131	 	 	 	104	 	
Net realized gains (losses)	  	 	(11	)	 	 	52	 	
Interest expense	  	 	5	 	 	 	5	 	
Other expense	  	 	—  	 	 	 	3	 	
Income tax expense	  	 	80	 	 	 	63	 	
 	  				 				
Net income	  	$	200	 	 	$	191	 	
 	  				 				
Loss and loss expense ratio	  	 	69.4	%	 	 	69.3	%	
Policy acquisition cost ratio	  	 	9.1	%	 	 	10.0	%	
Administrative expense ratio	  	 	8.6	%	 	 	10.3	%	
Combined ratio	  	 	87.1	%	 	 	89.6	%	
 
Net premiums written for the Insurance – North American segment increased 18 percent in the quarter ended March 31, 2005, compared with the same quarter in 2004. The increase was primarily related to new business in our risk management unit and growth emanating from recently established casualty units. Additionally, Insurance – North American’s retention ratio increased to 66 percent for the quarter ended March 31, 2005, compared with 64 percent for the same quarter of 2004.
 
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The following tables provide an entity/divisional breakdown of Insurance – North American’s net premiums earned for the periods indicated.

 	  	Three Months Ended March 31
	 	
 	  	2005
(Restated)
	  	% of
total
	 	 	2004
	  	% of
total
	 	
 	  	(in millions of
U.S. dollars)	  	 	 	 	(in millions of
U.S. dollars)	  	 	 	
Property and all Other	  	$	320	  	25	%	 	277	  	28	%	
Casualty	  	 	918	  	71	%	 	688	  	68	%	
Personal Accident (A&H)	  	 	47	  	4	%	 	42	  	4	%	
 	  			  			 		  			
Net premiums earned	  	$	1,285	  	100	%	 	1,007	  	100	%	

							
 	  	Three Months Ended March 31
	
 	  	2005
(Restated)
	  	2004
	
 	  	(in millions of U.S. dollars)	
ACE USA	  	$	848	  	$	650	
ACE Westchester Specialty	  	 	332	  	 	254	
ACE Bermuda	  	 	105	  	 	103	
 	  			  			
Net premiums earned	  	$	1,285	  	$	1,007	

ACE USA, which includes ACE operations in Canada, provides a broad array of products and services to corporate and consumer clients throughout the U.S. and Canada, through licensed insurance companies. Distribution channels include retail brokers, agents, managing general agents, and managing general underwriters. Net premiums earned for ACE USA increased 30 percent in the quarter ended March 31, 2005, compared with the same quarter in 2004. Consistent with net premiums written, the increase was related to our risk management unit which reported growth in demand for its custom coverage solutions for large companies and national accounts and construction wrap-up programs. Additionally, ACE USA benefited from continued growth in new business units offering workers’ compensation and medical liability coverage. The current quarter’s growth in net premiums earned has outpaced the growth of net premiums written, reflecting the launch of new products first offered in late 2003, expanded distribution and the more favorable rate environment experienced in 2004 and 2003.
 
ACE Westchester Specialty specializes in the wholesale distribution of excess and surplus lines property, inland marine and casualty coverages and products. ACE Westchester Specialty also provides coverage for agriculture business and specialty programs through its Program division. ACE Westchester Specialty’s net premiums earned for the quarter ended March 31, 2005, increased 31 percent compared with the same quarter of 2004. This increase primarily reflects growth in agriculture (crop) and casualty business.
 
ACE Bermuda, which specializes in providing professional lines and excess liability coverage, reported an increase in net premiums earned of two percent in the quarter ended March 31, 2005, compared with the same quarter of 2004. This increase is primarily due to modest prior period growth in net premiums written on excess liability business, partially offset by a decrease in professional lines business due to continued competition between carriers, which has put downward pressure on rates.
 
Insurance – North American’s loss and loss expense ratio increased 0.1 percentage points in the quarter ended March 31, 2005, compared with the same quarter of 2004. The following table shows the impact of the prior period development on our loss and loss expense ratio for the periods indicated.
 
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 	  	Three Months Ended March 31
	 	
 	  	2005
(Restated)
	 	 	2004
(Restated)
	 	
Loss and loss expense ratio, as reported	  	69.4	%	 	69.3	%	
Adverse prior period development	  	(1.7	)%	 	(1.6	)%	
 	  			 			
Loss and loss expense ratio, adjusted	  	67.7	%	 	67.7	%	

The loss and loss expense ratio for the quarter ended March 31, 2005, was negatively impacted by net adverse prior period development of $22 million, representing 0.2 percent of the segment’s net unpaid loss and loss expense reserves at January 1, 2005. This compares with net adverse prior period development of $16 million for the same quarter of 2004, representing 0.2 percent of the segment’s net unpaid loss and loss expense reserves at January 1, 2004. The prior period development for the quarter ended March 31, 2005, was the net result of several underlying favorable and adverse movements, the most significant of which was $19 million of adverse prior period development impacting the 2002 and 2001 accident years relating to changes in the legal and claim positions on an account that provided financial guarantee insurance to a now bankrupt facility that ran leasing pools. The prior period development for the quarter ended March 31, 2004, was the net result of several underlying favorable and adverse movements. The adverse development related primarily to excess liability, aviation and auto residual value business, partially offset by favorable development on property, satellite and political risk business.
 
Insurance – North American’s policy acquisition ratio decreased in the quarter ended March 31, 2005, compared with the same quarter of 2004, primarily due to lower overall commission expenses resulting from a shift in our business mix whereby higher-commission professional lines represented a lower proportion of our total production. Administrative expenses increased primarily due to the increased costs associated with servicing business growth and recently established units at ACE USA and ACE Westchester Specialty, partially offset by reduced expenses at ACE Bermuda.
 
Insurance - Overseas General
 
The Insurance – Overseas General segment comprises ACE International, our network of indigenous insurance operations, and the insurance operations of ACE Global Markets, our excess and surplus lines writer (which underwrites P&C insurance through Lloyd’s Syndicate 2488 and ACE European Group Limited (formerly known as ACE INA UK Limited)). The Insurance – Overseas General segment writes a variety of insurance products including property, casualty consisting of general liability, professional lines (D&O and E&O), marine, energy, aviation, political risk, consumer-oriented products and A&H – principally being personal accident.
 
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 	  	Three Months Ended March 31
	 	
 	  	2005
(Restated)
	 	 	2004
(Restated)
	 	
 	  	(in millions of U.S. dollars)	 	
Net premiums written	  	$	1,195	 	 	$	1,178	 	
Net premiums earned	  	 	1,088	 	 	 	1,019	 	
Losses and loss expenses	  	 	610	 	 	 	586	 	
Policy acquisition costs	  	 	192	 	 	 	185	 	
Administrative expenses	  	 	148	 	 	 	138	 	
 	  				 				
Underwriting income	  	$	138	 	 	$	110	 	
 	  				 				
Net investment income	  	 	74	 	 	 	50	 	
Net realized gains	  	 	18	 	 	 	24	 	
Other expense	  	 	6	 	 	 	3	 	
Income tax expense	  	 	52	 	 	 	51	 	
 	  				 				
Net income	  	$	172	 	 	$	130	 	
 	  				 				
Loss and loss expense ratio	  	 	56.1	%	 	 	57.5	%	
Policy acquisition cost ratio	  	 	17.7	%	 	 	18.1	%	
Administrative expense ratio	  	 	13.6	%	 	 	13.5	%	
Combined ratio	  	 	87.4	%	 	 	89.1	%	
 
Net premiums written increased one percent (decreased three percent adjusting for foreign exchange) in the quarter ended March 31, 2005, compared with the same quarter of 2004. Decreases in production were offset by the weakening of the U.S. dollar against the British pound sterling and the Euro.
 
ACE International’s P&C operations are organized geographically and along product lines. Property insurance products include traditional commercial fire coverage as well as energy industry-related coverages. Principal casualty products are commercial general liability and liability coverage for multinational organizations. Through our professional lines, we provide D&O and professional indemnity coverages for medium to large clients. The A&H insurance operations provide principally accident coverage to individuals and groups outside of U.S. insurance markets. ACE International’s net premiums written increased four percent (decreased one percent adjusting for foreign exchange) to $966 million for the quarter ended March 31, 2005, compared with $926 million for the same quarter of 2004. This increase was primarily due to the weakening of the U.S. dollar, as strong A&H growth was offset by lower P&C writings. ACE Europe, which accounted for approximately two-thirds of ACE International’s net premiums written for the quarter ended March 31, 2005, reported a decline in production, particularly on U.K. P&C business, as increased competitive conditions have resulted in lower rates and a deterioration of terms. ACE Latin American experienced robust demand for its A&H product offerings, particularly in Mexico and Brazil.
 
ACE Global Markets’ main lines of business include aviation, property, energy, professional lines, marine, political risk and A&H. ACE Global Markets’ net premiums written decreased nine percent (ten percent adjusting for foreign exchange) to $229 million in the quarter ended March 31, 2005, compared with $252 million in the same quarter of 2004. This decrease was due in part to rate reductions within the professional lines.
 
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The following two tables provide a line of business and entity/divisional breakdown of Insurance – Overseas General’s net premiums earned for the periods indicated.

 	  	Three Months Ended March 31
(Restated)
	 	
 	  	2005
	  	% of
total
	 	 	2004
	  	% of
total
	 	
 	  	(in millions
of U.S.
dollars)	  	 	 	 	(in millions
of U.S.
dollars)	  	 	 	
Property and all Other	  	$	401	  	37	%	 	$	323	  	32	%	
Casualty	  	 	435	  	40	%	 	 	483	  	47	%	
Personal Accident (A&H)	  	 	252	  	23	%	 	 	213	  	21	%	
 	  			  			 			  			
Net premiums earned	  	$	1,088	  	100	%	 	$	1,019	  	100	%	

							
 	  	Three Months Ended March 31
	
 	  	2005
(Restated)
	  	2004
(Restated)
	
 	  	(in millions of U.S. dollars)	
ACE Europe	  	$	475	  	$	463	
ACE Asia Pacific	  	 	134	  	 	115	
ACE Far East	  	 	99	  	 	96	
ACE Latin America	  	 	102	  	 	80	
 	  			  			
ACE International	  	 	810	  	 	754	
ACE Global Markets	  	 	278	  	 	265	
 	  			  			
Net premiums earned	  	$	1,088	  	$	1,019	

Insurance – Overseas General increased net premiums earned seven percent in the quarter ended March 31, 2005, compared with the same quarter of 2004 (two percent adjusting for foreign exchange). The increase was primarily due to growth in property and A&H business at ACE International and aviation writings at ACE Global Markets, partially offset by decreases in casualty business across the segment, reflecting the decline in rates, late in 2004.
 
Insurance – Overseas General’s loss and loss expense ratio decreased 1.4 percentage points in the quarter ended March 31, 2005, compared with the same quarter of 2004, primarily due to favorable current accident year experience at ACE Europe and to a lesser extent, changes in the mix of business - mainly the increase in A&H, which typically experiences lower loss ratios than other types of business. The following table shows the impact of prior period development on our loss and loss expense ratio for the periods indicated.

 	  	Three Months Ended March 31
	 	
 	  	2005
	 	 	2004
(Restated)
	 	
Loss and loss expense ratio, as reported	  	56.1	%	 	57.5	%	
Prior period development	  	(0.6	)%	 	2.3	%	
 	  			 			
Loss and loss expense ratio, adjusted	  	55.5	%	 	59.8	%	

The loss and loss expense ratio for the quarter ended March 31, 2005, was negatively impacted by net adverse prior period development of $7 million, representing 0.1 percent of the segment’s net unpaid loss and loss expense reserves at January 1, 2005. This compares with net favorable prior period development of $23 million for the same quarter of 2004, representing 0.6 percent of the segment’s net unpaid loss and loss expense reserves at January 1, 2004. The net prior period development for the quarter ended March 31, 2005, was the net result of several underlying favorable and adverse movements, the most significant of which were:
 
 	•	 	Favorable development of $35 million on short-tail property, tech and energy lines and $15 million on short-tail European A&H lines (personal accident) lines identified as part of our standard quarterly reserving process arising from the favorable emergence of actual claims relative to expectations used to establish the reserves, principally related to the 2004 and 2003 accident years.	
 
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 	•	 	Adverse development of $41 million on ACE’s share of a consortium that reinsured U.S. workers compensation business across the 1995-1999 underwriting years. The adverse development arose following the completion in the quarter of a financial and actuarial review of updated bordereaux information received from the client.	
 
 	•	 	Adverse development of $7 million on discontinued lines arising from re-evaluation of ceded reinsurance on an individual energy claim on the 2000 accident year.	
 
The net prior period development for the quarter ended March 31, 2004, was the net result of several underlying favorable and adverse movements. The adverse prior period development related primarily to significant adverse development from U.S. International casualty business and to a lesser extent in other casualty lines in the U.K. and Europe as well as marine and aviation. This was offset by significant favorable prior period development on property catastrophe and casualty lines and to a lesser extent on financial lines and fire, technical and energy lines.
 
The policy acquisition cost ratio for Insurance – Overseas General improved in the quarter ended March 31, 2005, compared with the same quarter of 2004, which was negatively impacted by a one-time reinstatement cost at ACE Global Markets. Insurance – Overseas General administrative expenses increased seven percent in the quarter ended March 31, 2005, primarily due to the depreciation of the U.S. dollar, and to a lesser extent increased headcount at ACE Europe.
 
Global Reinsurance
 
The Global Reinsurance segment comprises the operations of the ACE Tempest Re Group – ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re Europe, and ACE Tempest Life Re (ACE Life Re). ACE Life Re is our Bermuda-based life reinsurance operation and is addressed separately.
 
Property and Casualty Reinsurance

 	  	Three Months Ended March 31
	 	
 	  	2005
(Restated)
	 	 	2004
(Restated)
	 	
 	  	(in millions of U.S. dollars)	 	
Net premiums written	  	$	527	 	 	$	572	 	
Net premiums earned	  	 	356	 	 	 	332	 	
Losses and loss expenses	  	 	205	 	 	 	160	 	
Policy acquisition costs	  	 	73	 	 	 	64	 	
Administrative expenses	  	 	15	 	 	 	18	 	
 	  				 				
Underwriting income	  	$	63	 	 	$	90	 	
 	  				 				
Net investment income	  	 	39	 	 	 	27	 	
Net realized gains (losses)	  	 	(6	)	 	 	15	 	
Other (income) expense	  	 	1	 	 	 	—  	 	
Income tax expense	  	 	9	 	 	 	3	 	
 	  				 				
Net income	  	$	86	 	 	$	129	 	
 	  				 				
Loss and loss expense ratio	  	 	57.6	%	 	 	48.1	%	
Policy acquisition cost ratio	  	 	20.5	%	 	 	19.3	%	
Administrative expense ratio	  	 	4.3	%	 	 	5.6	%	
Combined ratio	  	 	82.4	%	 	 	73.0	%	
 
Global Reinsurance’s net premiums written decreased eight percent in the quarter ended March 31, 2005, compared with the same quarter of 2004. This decrease was primarily related to continued weakness in the rate environment for property, and property catastrophe lines and, in Europe, softening rates on casualty business.
 
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The following two tables provide a line of business and entity/divisional breakdown of Global Reinsurance’s net premiums earned for the periods indicated.

 	 	Three Months Ended March 31
	 	
 	 	2005
	 	% of
total
	 	 	2004
(Restated)
	 	% of
total
	 	
 	 	(in millions of
U.S. dollars)	 	 	 	 	(in millions of
U.S. dollars)	 	 	 	
Property and all Other	 	$	86	 	24	%	 	$	86	 	26	%	
Casualty	 	 	203	 	57	%	 	 	162	 	49	%	
Property Catastrophe	 	 	67	 	19	%	 	 	84	 	25	%	
 	 			 			 			 			
Net premiums earned	 	$	356	 	100	%	 	$	332	 	100	%	

							
 	  	Three Months Ended March 31
	
 	  	2005
	  	2004 (Restated)
	
 	  	(in millions of U.S. dollars)	
ACE Tempest Re Europe	  	$	76	  	$	75	
ACE Tempest Re USA	  	 	212	  	 	171	
ACE Tempest Re Bermuda	  	 	68	  	 	86	
 	  			  			
Net premiums earned	  	$	356	  	$	332	

Net premiums earned increased seven percent in the quarter ended March 31, 2005, compared with the same quarter of 2004. The increase was primarily driven by strong production written in prior periods on non-catastrophe P&C business. Non-catastrophe P&C business has represented a growing portion of Global Reinsurance’s net premiums written over the last three years, and in general, has experienced more favorable market conditions over this time period compared with catastrophe lines.
 
ACE Tempest Re USA, which focuses on writing property per risk and casualty reinsurance, reported a 24 percent increase in net premiums earned in the quarter ended March 31, 2005, compared with the same quarter of 2004, primarily due to new business and higher renewal rates, mainly on policies written in 2004. ACE Tempest Re Europe, which writes most lines of P&C with an orientation towards specialty and short-tail products, reported stable net premiums earned in the quarter ended March 31, 2005, as declines in rates on property catastrophe business, were offset by growth in net premiums earned on casualty business written in 2004. ACE Tempest Re Bermuda, which principally provides property catastrophe reinsurance globally to insurers of commercial and personal property, reported a 21 percent decrease in net premiums earned in the quarter ended March 31, 2005, compared with the same quarter of 2004. A market-wide decline in rates on property catastrophe business, combined with the commitment to maintaining our underwriting standards has resulted in downward pressure on premium production for ACE Tempest Re Bermuda.
 
The loss and loss expense ratio increased 9.5 percentage points in the quarter ended March 31, 2005, compared with the same quarter of 2004. The prior year quarter benefited from net favorable prior period development, and a lack of catastrophe losses, while changes in the mix of business has had the effect of increasing the loss and loss expense ratio for the current quarter. The following table shows the impact of catastrophe losses and prior period development on our loss and loss expense ratio for the periods indicated.

 	  	Three Months Ended March 31
	 	
 	  	2005
	 	 	2004 (Restated)
	 	
Loss and loss expense ratio, as reported	  	57.6	%	 	48.1	%	
Catastrophe losses	  	(0.8	)%	 	—  	 	
Favorable prior period development	  	—  	 	 	4.0	%	
 	  			 			
Loss and loss expense ratio, adjusted	  	56.8	%	 	52.1	%	

Global Reinsurance recorded $3 million in catastrophe losses, related to European windstorms, in the quarter ended March 31, 2005, compared with nil in the same quarter of 2004. The loss and loss expense ratio for the quarter ended March 31, 2005, was not impacted by net prior period development. This compares with net favorable prior period development of $13 million
 
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for the same quarter of 2004, representing 1.1 percent of the segment’s net unpaid loss and loss expense reserves at January 1, 2004. The net prior period development for the quarter ended March 31, 2005, was the net result of several offsetting favorable and adverse movements on reserves established following catastrophe events for property and property catastrophe lines of business. These movements were identified as part of our standard quarterly reserving process and included $17 million of adverse prior period development on the third quarter 2004 storms principally related to increased loss estimates on certain previously reported claims and $10 million of miscellaneous favorable development on accident years 2003 and prior. The net prior period development for the quarter ended March 31, 2004, was the net result of favorable development on reserves established following catastrophe events for property and property catastrophe lines of business. The remaining increase in the loss and loss expense ratio was primarily related to the shift in mix of business that has resulted from growth in non-catastrophe P&C business at ACE Tempest Re USA and ACE Tempest Re Europe. Non-catastrophe P&C business typically exhibits higher loss ratios than property catastrophe business (except for periods with high catastrophe losses).
 
Global Reinsurance’s policy acquisition cost ratio increased in the quarter ended March 31, 2005, compared with the same quarter of 2004, due to the higher proportion of business generated from ACE Tempest Re USA, relative to ACE Tempest Re Europe and ACE Tempest Re Bermuda. ACE Tempest Re USA’s business is written more on a pro-rata basis (versus excess-of-loss), which incurs higher acquisition costs due to the higher level of ceding commissions paid. Administrative expenses decreased, primarily due to a reduction of expenses associated with Sarbanes-Oxley compliance.
 
Life Reinsurance
 
ACE Life Re principally provides reinsurance coverage to other life insurance companies, focusing on guarantees included in certain fixed and variable annuity products. The reinsurance transactions ACE Life Re enters into typically help clients (ceding companies) to manage mortality, morbidity, lapse and/or capital market risks embedded in their books of business. Sophisticated stochastic modeling techniques are used to price reinsurance products based on robust actuarial and investment models which incorporate a number of factors. These factors include assumptions for mortality, morbidity, expenses, demographics, persistency, investment returns, macroeconomic factors such as inflation and taxation and certain regulatory factors such as reserve and surplus requirements. ACE Life Re’s reinsurance treaties are non-proportional in nature, all of which incorporate some form of annual claim limit, and many of which include an aggregate claim limit as well as either an annual or aggregate claim deductible. ACE Life Re also uses modeling software to monitor, measure, and manage the aggregate exposure which is bound by limits set by senior management.
 
We assess the performance of our life reinsurance business based on life underwriting income which includes net investment income.

 	  	Three Months Ended March 31
	 	
 	  	2005
	 	 	2004
	 	
 	  	(in millions of U.S. dollars)	 	
Net premiums written	  	$	58	 	 	$	51	 	
Net premiums earned	  	 	58	 	 	 	51	 	
Life and annuity benefits	  	 	35	 	 	 	42	 	
Policy acquisition costs	  	 	4	 	 	 	5	 	
Administrative expenses	  	 	2	 	 	 	1	 	
Net investment income	  	 	9	 	 	 	8	 	
 	  				 				
Life underwriting income	  	 	26	 	 	 	11	 	
Net realized losses	  	 	(16	)	 	 	(25	)	
 	  				 				
Net income (loss)	  	$	10	 	 	$	(14	)	

Life underwriting income improved in the quarter ended March 31, 2005, compared with the same quarter of 2004, primarily due to the increase in net premiums earned, combined with the decrease in life and annuity benefits. Net premiums earned increased due to higher variable annuity production, partially offset by the continued decrease in production of group long-term disability business, which was discontinued in 2002. Life and annuity benefits declined primarily due to the decrease in group long-term disability business, which typically incurs higher benefit ratios than other types of business and also experienced a reserve strengthening in the prior year quarter. Net income increased, due to higher life underwriting income, combined with lower net realized losses in the quarter ended March 31, 2005, compared with the same quarter of 2004. The net realized losses for both periods consisted primarily of fair value adjustments on guaranteed minimum income benefits (GMIBs), due to movements in interest rates and the equity markets.
 
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Financial Services
 
The Financial Services segment consists of our financial solutions business and our proportionate share of Assured Guaranty’s earnings, which is 100 percent through April 28, 2004, and 34.7 percent thereafter. The financial solutions operations provide one-off insurance and reinsurance solutions to clients with unique or complex risks, which are not adequately addressed in the traditional insurance market. Each financial solutions contract is structured to meet the needs of each client. Assured Guaranty provides credit enhancement products to the municipal finance, structured finance and mortgage markets.
 
Certain products (principally credit protection oriented) issued by the Financial Services segment have been determined to meet the definition of a derivative under FAS 133. For more information see the section entitled “Critical Accounting Estimates”, under Item 7 of our Annual Report on Form 10-K/A for the year ended December 31, 2004.
 
From April 29, 2004, our proportionate share of Assured Guaranty’s earnings is reflected in “Other (income) expense” in our consolidated statement of operations. The equity in net income recorded from Assured Guaranty for the quarter ended March 31, 2005 was $12 million.

 	  	Three Months Ended March 31
	 	
 	  	2005
(Restated)
	 	 	2004
(Restated)
	 	
 	  	(in millions of U.S. dollars)	 	
Net premiums written	  	$	161	 	 	$	208	 	
Net premiums earned	  	 	90	 	 	 	179	 	
Losses and loss expenses	  	 	83	 	 	 	85	 	
Policy acquisition costs	  	 	2	 	 	 	11	 	
Administrative expenses	  	 	4	 	 	 	25	 	
 	  				 				
Underwriting income	  	$	1	 	 	$	58	 	
 	  				 				
Net investment income	  	 	32	 	 	 	53	 	
Net realized gains	  	 	6	 	 	 	5	 	
Interest expense	  	 	—  	 	 	 	2	 	
Other (income) expense	  	 	(12	)	 	 	11	 	
Income tax expense	  	 	6	 	 	 	20	 	
 	  				 				
Net income	  	$	45	 	 	$	83	 	
 	  				 				
Loss and loss expense ratio	  	 	92.2	%	 	 	48.0	%	
Policy acquisition cost ratio	  	 	2.2	%	 	 	5.9	%	
Administrative expense ratio	  	 	4.6	%	 	 	13.7	%	
Combined ratio	  	 	99.0	%	 	 	67.6	%	
 
Financial Services reported a decrease in net premiums written of 23 percent in the quarter ended March 31, 2005, compared with the same quarter of 2004. With respect to the financial solutions business, premium volume can vary significantly from period to period and therefore premiums written in any one period are not indicative of premiums to be written in future periods. Financial Services did not write any loss portfolio transfers (LPTs) in the quarters ended March 31, 2005 and 2004.
 
The Financial Services segment reported a significant decrease in underwriting income in the quarter ended March 31, 2005, compared with the same quarter of 2004. The quarter ended March 31, 2004, included $44 million of underwriting income from financial guaranty business prior to the IPO, mainly driven by an especially low loss and loss expense ratio due to the settlement of one-time transactions in preparation for the IPO. In addition, the loss and loss expense ratio for the quarter ended March 31, 2005, was negatively impacted by $1 million of adverse prior period development, representing less than 0.1 percent of the segment’s net unpaid loss and loss expense reserves at January 1, 2005. This compares with $2 million of favorable prior period development for the same quarter of 2004, representing less than 0.1 percent of the segment’s net unpaid loss and loss expense reserves at January 1, 2004. The prior period development for the quarter ended March 31, 2005, was the net result of several underlying modest favorable and adverse movements. The prior period development for the quarter ended March 31, 2004, was the net result of several underlying favorable and adverse movements relating primarily to favorable prior period development on LPT business, partially offset by adverse prior period development on credit business.
 
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Net Investment Income

 	  	Three Months Ended March 31
	
 	  	2005
(Restated)
	  	2004
(Restated)
	
 	  	(in millions of U.S. dollars)	
Insurance – North American	  	$	131	  	$	104	
Insurance – Overseas General	  	 	74	  	 	50	
Global Reinsurance – P&C	  	 	39	  	 	27	
Global Reinsurance – Life	  	 	9	  	 	8	
Financial Services	  	 	32	  	 	53	
Corporate and Other	  	 	—  	  	 	—  	
 	  			  			
Net investment income	  	$	285	  	$	242	

Net investment income is influenced by a number of factors, including the amounts and timing of inward and outward cash flows, the level of interest rates, and changes in overall asset allocation. Net investment income increased 18 percent in the quarter ended March 31, 2005, compared with the same quarter of 2004. The increase in net investment income was primarily due to positive operating cash flows, which have resulted in a higher overall average invested asset base. Additionally, the investment portfolio’s average yield on fixed maturities increased to 4.5 percent at March 31, 2005, compared with 4.0 percent at March 31, 2004. These positive influences were partially offset by the impact from the sale of Assured Guaranty in 2004, which reduced the average invested asset base for Financial Services and resulted in an approximately 40 percent decline in net investment income for that segment.
 
Net Realized Gains (Losses)
 
Our investment strategy takes a long-term view, and our investment portfolio is actively managed to maximize total return within certain specific guidelines, designed to minimize risk. During the quarter ended March 31, 2005, we transferred securities that we have the ability and intent to hold to maturity or redemption from the available for sale classification to the held to maturity classification. The transfer was made at the fair value at the date of transfer (refer to the section entitled “Investments” for more information). Our held to maturity investment portfolio is reported at amortized cost. Our available for sale investment portfolio is reported at fair value. The effect of market movements on our available for sale investment portfolio impacts net income (through net realized gains (losses)) when securities are sold or when “other than temporary” impairments are recorded on invested assets. Additionally, net income is impacted through the reporting of changes in the fair value of derivatives, including financial futures, options, spread lock swaps, GMIB reinsurance, and credit-default swaps. Changes in unrealized appreciation and depreciation on available for sale securities, which result from the revaluation of securities held, are reported as a separate component of accumulated other comprehensive income in shareholders’ equity.
 
The following table presents our pre-tax net realized gains (losses) for the periods indicated:

 	  	Three Months Ended March 31
	 	
 	  	2005
(Restated)
	 	 	2004
	 	
 	  	(in millions of U.S. dollars)	 	
Fixed maturities and short-term investments	  	$	(5	)	 	$	55	 	
Equity securities	  	 	14	 	 	 	28	 	
Other investments	  	 	2	 	 	 	(7	)	
Currency	  	 	(3	)	 	 	5	 	
Derivatives:	  	 	 	 	 	 	 	 	
Financial futures, options, spread lock swaps and interest rate swaps	  	 	—  	 	 	 	(1	)	
Fair value adjustment on insurance derivatives	  	 	(22	)	 	 	(23	)	
 	  				 				
Subtotal derivatives	  	 	(22	)	 	 	(24	)	
 	  				 				
Total net realized gains (losses)	  	$	(14	)	 	$	57	 	

Subject to investment guidelines approved by our Finance and Investment Committee (relating to asset classes, credit quality, and liquidity), our investment managers generally have the ability to sell securities from our available for sale investment
 
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portfolio when they determine that an alternative security with comparable risks is likely to provide a higher investment return, considering the realized gain or loss on sale and differential in future investment income. Often, sales of individual securities occur when investment managers conclude there are changes in the credit quality of a particular security or, for other reasons, market value is apt to deteriorate. Further, we may sell securities when we conclude it is prudent to reduce a concentration in a particular issuer or industry. Therefore, sales volume may increase in a volatile credit market in which credit spreads and thus the market value of fixed maturity investments are subject to significant changes in a short period of time. The interest rate environment will tend to have a limited effect on sales volume but extreme conditions could have an affect on the magnitude of realized gains or losses. For example, in a declining rate environment, the market value of securities increase, resulting in a greater likelihood of net realized gains and we would therefore tend to reduce the average duration of our fixed maturity investment portfolio. An increasing rate environment would tend to have the opposite effect. The effect of a high level of realized losses or gains for a particular period will tend to be offset by increases or decreases in investment income, respectively, in subsequent periods. From a liquidity perspective, our greatest risk is that we could be forced to sell a large volume of securities at a loss (i.e., in a high interest rate environment) to meet operating needs and are thus unable to reinvest proceeds to recoup such losses with future investment income (see section entitled “Liquidity and Capital Resources” for more information).
 
FAS 133 requires us to recognize all derivatives as either assets or liabilities on our consolidated balance sheet and measure them at fair value. We record the gains and losses resulting from the fair value measurement of derivatives in net realized gains (losses). We participate in derivative instruments in two principal ways as follows: i) to offer protection to others as the seller or writer of the derivative, such as our GMIB reinsurance contracts that are treated as derivatives for accounting purposes or ii) to mitigate our own risk, principally arising from our investment holdings. We do not consider either type of transaction to be speculative. In the quarters ended March 31, 2005 and 2004, we recorded net realized losses of $22 million and $24 million, respectively, on derivative transactions. For an analysis of the effect of changes in interest rates and equity indices on the fair value of derivatives and the resulting impact on our net income, refer to Item 7A. of our Annual Report on Form 10-K/A for the year ended December 31, 2004.
 
With respect to our GMIB reinsurance, we record a portion of the change in fair value in future policy benefits for life and annuity contracts, representing our best estimate of loss pay-outs related to fees or premiums earned, and a portion in net realized gains (losses), representing other changes in fair value. For the quarter ended March 31, 2005, the fair value adjustment included in net realized gains (losses), was net realized losses of $14 million, compared with $23 million in the same quarter of 2004. The change in fair value for the quarter ended March 31, 2005, was primarily related to a $21 million net realized loss from GMIB reinsurance. The changes in the fair value of GMIBs are determined using internal valuation models. Such valuations require considerable judgment and are subject to significant uncertainty. The valuation of these products is subject to fluctuations arising from, among other factors, changes in interest rates, changes in the equity markets, and changes in the allocation of the investments underlying annuitant’s account value. These models and the related assumptions are continually reviewed by management and enhanced, as appropriate, based upon improvements in modeling techniques and availability of more timely information, such as market conditions and demographics of in-force annuities.
 
We recorded a net realized gain of $2 million on spread lock swaps in the quarter ended March 31, 2005, compared with a net realized loss of $14 million on interest rate swaps in the same quarter of 2004. This was offset by a net realized loss of $2 million and a net realized gain of $13 million on our futures contracts in the quarters ended March 31, 2005 and 2004, respectively. The spread lock swaps and interest rate swaps are designed to reduce the negative impact of increases in interest rates on our fixed maturity portfolio. For the quarter ended March 31, 2005, we recorded a net realized gain of $2 million on our fixed income futures contracts and we recorded a net realized loss of $4 million on our S&P equity index futures contracts as the S&P 500 equity index decreased two percent during the quarter. We use foreign currency forward contracts to minimize the effect of fluctuating foreign currencies on certain non-U.S. dollar holdings in our portfolio that are not specifically matching foreign currency liabilities. These contracts are not designated as specific hedges and we record all realized and unrealized gains and losses on these contracts as net realized gains (losses) in the period in which the currency values change.
 
We regularly review our investment portfolio for possible impairment based on criteria including economic conditions, credit loss experience and issuer-specific developments. If there is a decline in a security’s net realizable value, we must determine whether that decline is temporary or “other than temporary”. If we believe a decline in the value of a particular investment is temporary, we record it as an unrealized depreciation in our shareholders’ equity. If we believe the decline is “other than temporary”, we write down the carrying value of the investment and record a net realized loss in our statement of operations. The decision to recognize a decline in the value of a security carried at fair value as “other than temporary” rather than temporary has no impact on our book value. Once a security is identified as having a potential “other than temporary” impairment, we determine whether or not cost will ultimately be recovered and whether we have the intent and ability to hold the security until an expected recovery period, absent a significant change in facts that is expected to have a material adverse financial effect on the issuer.
 
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Our net realized gains (losses) in the quarter ended March 31, 2005 included write-downs of $20 million related to fixed maturity investments and $1 million related to equity securities, as a result of conditions which caused us to conclude the decline in fair value of the investment was “other than temporary”. This compares with write-downs of $1 million related to fixed maturity investments and $1 million related to equity securities for the quarter ended March 31, 2004.
 
The process of determining whether a decline in value is temporary or “other than temporary” requires considerable judgment and differs depending on whether or not the security is traded on a public market as well as by type of security. We review all of our fixed maturities and equity securities for potential impairment each quarter. See our Annual Report on Form 10-K/A for the year ended December 31, 2004 (Note 5 (e) to the Consolidated Financial Statements) for criteria we consider in assessing potential impairment.
 
Other Income and Expense Items

 	  	Three Months Ended March 31
	 	
 	  	2005
(Restated)
	 	 	2004
(Restated)
	 	
 	  	(in millions of U.S. dollars)	 	
Equity in net income of unconsolidated entities	  	$	(11	)	 	$	(1	)	
Minority interest expense	  	 	5	 	 	 	6	 	
Other	  	 	1	 	 	 	1	 	
Goodwill impairment	  	 	—  	 	 	 	11	 	
 	  				 				
Other (income) expense	  	$	(5	)	 	$	17	 	

Other income for the quarter ended March 31, 2005, was primarily composed of $13 million related to equity in net income of Assured Guaranty. We incurred no goodwill impairments in the quarter ended March 31, 2005, although our goodwill balance was reduced by $4 million in connection with the sale of a wholly-owned service company.
 
Investments
 
Our principal investment objective is to ensure that funds are available to meet our insurance and reinsurance obligations. Within this broad liquidity constraint, the purpose of our investment portfolio’s structure is to maximize total return subject to specifically approved guidelines of overall asset classes, credit quality, liquidity and volatility of expected returns. Our investment portfolio is invested primarily in fixed income securities with an average credit quality of AA, as rated by the independent investment rating service S&P. The portfolio is externally managed by independent, professional investment managers. The average duration of our fixed income securities, including the effect of spread lock swaps, declined to 3.1 years at March 31, 2005, compared with 3.4 years at December 31, 2004. Our “other investments” principally comprise direct investments, investments in investment funds and investments in limited partnerships.
 
Given the significant growth in our investment portfolio over the last several years, as well as our continued efforts to manage the diversification of the portfolio on an enterprise-wide basis, we have implemented a strategy to hold to maturity certain fixed maturity securities that are considered essential holdings in a diversified portfolio of our size. Because we have the intent to hold such securities to maturity, they have been reclassified from available for sale to held to maturity in our consolidated financial statements for the quarter ended March 31, 2005. A transfer of such securities with a carrying value (fair value) of $3.2 billion was made during the first quarter of 2005. The unrealized appreciation (depreciation) at the date of the transfer continues to be reported in a separate component of stockholders’ equity and is to be amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount. The unrealized appreciation on the date of transfer was $16 million.
 
Our debt securities include fixed-maturity securities, which are classified as either held to maturity or available for sale. Securities classified as held to maturity are securities that we have the ability and intent to hold to maturity or redemption and are carried at amortized cost. All other debt securities and our equity securities are classified as available for sale and are carried at fair value. The net unrealized appreciation (depreciation) on securities available for sale, plus the unamortized unrealized appreciation (depreciation) on debt securities transferred to the held to maturity portfolio, less related deferred income taxes, are included in accumulated other comprehensive income.
 
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The following table shows the fair value and cost/amortized cost of our invested assets at March 31, 2005 and December 31, 2004.

 	  	March 31, 2005
(Restated)
	  	December 31, 2004
(Restated)
	
 	  	Fair Value
	  	Cost/
Amortized Cost
	  	Fair Value
	  	Cost/
Amortized Cost
	
 	  	(in millions of U.S. dollars)	
Fixed maturities available for sale	  	$	20,336	  	$	20,217	  	$	22,891	  	$	22,422	
Fixed maturities held to maturity	  	 	3,207	  	 	3,211	  	 	—  	  	 	—  	
Short-term investments	  	 	2,156	  	 	2,156	  	 	2,163	  	 	2,163	
 	  			  			  			  			
 	  	 	25,699	  	 	25,584	  	 	25,054	  	 	24,585	
Equity securities	  	 	1,351	  	 	1,170	  	 	1,265	  	 	1,061	
Other investments	  	 	622	  	 	564	  	 	606	  	 	551	
 	  			  			  			  			
Total investments	  	$	27,672	  	$	27,318	  	$	26,925	  	$	26,197	

We also gain exposure to equity markets through the use of derivative instruments. The combined equity exposure through both our equity portfolio and derivative instruments was valued at $1.5 billion at March 31, 2005, compared with $1.4 billion at December 31, 2004. The increase of $747 million in the fair value of total investments is due to positive cash flows from operations during the quarter ended March 31, 2005. The increase in total investments was partially offset by unrealized depreciation of $349 million, mainly on fixed maturities, due to the increase in U.S. short-term interest rates.
 
The following tables show the market value of our fixed maturities and short-term investments at March 31, 2005 and December 31, 2004. The first table lists elements according to type and the second according to S&P credit rating.

 	  	March 31, 2005
(Restated)
	 	 	December 31, 2004
(Restated)
	 	
 	  	Market
Value
	  	Percentage
of Total
	 	 	Market
Value
	  	Percentage
of Total
	 	
 	  	(in millions of
U.S. dollars)	  	 	 	 	(in millions of
U.S. dollars)	  	 	 	
Treasury	  	$	1,728	  	7	%	 	$	1,551	  	7	%	
Agency	  	 	1,517	  	6	%	 	 	1,547	  	7	%	
Corporate	  	 	7,615	  	30	%	 	 	7,614	  	30	%	
Mortgage-backed securities	  	 	5,504	  	21	%	 	 	5,034	  	20	%	
Asset-backed securities	  	 	1,215	  	5	%	 	 	1,225	  	5	%	
Municipal	  	 	559	  	2	%	 	 	566	  	2	%	
Non-US	  	 	5,405	  	21	%	 	 	5,376	  	21	%	
Cash and cash equivalents	  	 	2,156	  	8	%	 	 	2,141	  	8	%	
 	  			  			 			  			
Total	  	$	25,699	  	100	%	 	$	25,054	  	100	%	

													
 	  	Market
Value
	  	Percentage
of Total
	 	 	Market
Value
	  	Percentage
of Total
	 	
 	  	(in millions
of U.S.
dollars)	  	 	 	 	(in millions
of U.S.
dollars)	  	 	 	
AAA	  	$	14,743	  	57	%	 	$	13,890	  	55	%	
AA	  	 	2,475	  	10	%	 	 	2,634	  	11	%	
A	  	 	4,451	  	17	%	 	 	4,397	  	18	%	
BBB	  	 	2,182	  	9	%	 	 	2,275	  	9	%	
BB	  	 	817	  	3	%	 	 	774	  	3	%	
B	  	 	982	  	4	%	 	 	1,041	  	4	%	
Other	  	 	49	  	—  	 	 	 	43	  	—  	 	
 	  			  			 			  			
Total	  	$	25,699	  	100	%	 	$	25,054	  	100	%	

In accordance with our investment process, we invest in below-investment grade securities through dedicated investment portfolios managed by external investments managers that have investment professionals specifically dedicated to this asset
 
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class. At March 31, 2005, our fixed income investment portfolio included below-investment grade and non-rated securities which, in total, comprised approximately seven percent of our fixed income portfolio. We define a security as being below-investment grade if it has an S&P credit rating of BB or less. Our below investment-grade and non-rated portfolio includes approximately 750 issues, with the top 15 holdings making up approximately 11 percent of the $1.9 billion balance at March 31, 2005. The highest single exposure in this portfolio of securities is $19 million. Below-investment grade securities have different characteristics than investment grade corporate debt securities. Risk of loss from default by the borrower is greater with below-investment grade securities. Below-investment grade securities are generally unsecured and are often subordinated to other creditors of the issuer. Also, issuers of below-investment grade securities usually have higher levels of debt and are more sensitive to adverse economic conditions such as recession or increasing interest rates, than are investment grade issuers. We reduce the overall risk in the below-investment grade portfolio, as in all investments, through careful credit analysis, strict investment policy guidelines, and diversification by issuer and/or guarantor as well as by industry.
 
Unpaid Losses and Loss Expenses
 
We establish reserves for the estimated unpaid ultimate liability for losses and loss expenses under the terms of our policies and agreements. These reserves take into account estimates both for claims that have been reported and for IBNR, and include estimates of expenses associated with processing and settling claims. The table below presents a roll forward of our unpaid losses and loss expenses for the quarter ended March 31, 2005.

 	  	Gross
Losses
	 	 	Reinsurance
Recoverable
	 	 	Net
Losses
	 	
 	  	(in millions of U.S. dollars)
(Restated)
	 	
Balance at December 31, 2004 (Restated)	  	$	31,483	 	 	$	13,966	 	 	$	17,517	 	
Losses and loss expenses incurred	  	 	2,536	 	 	 	747	 	 	 	1,789	 	
Losses and loss expenses paid	  	 	(1,998	)	 	 	(763	)	 	 	(1,235	)	
Other (including foreign exchange revaluation)	  	 	(595	)	 	 	(595	)	 	 	—  	 	
 	  				 				 				
Balance at March 31, 2005 (Restated)	  	$	31,426	 	 	$	13,355	 	 	$	18,071	 	

The process of establishing reserves for claims can be complex and is subject to considerable variability as it requires the use of informed estimates and judgments. Our estimates and judgments may be revised as additional experience and other data become available and are reviewed; as new or improved methodologies are developed; or as current laws change. The following table shows our total reserves segregated between case reserves and IBNR reserves.

 	  	March 31, 2005 (Restated)
	  	December 31, 2004 (Restated)
	
 	  	Gross
	  	Ceded
	  	Net
	  	Gross
	  	Ceded
	  	Net
	
 	  	(in millions of U.S. dollars)	
Case reserves	  	$	14,683	  	$	5,878	  	$	8,805	  	$	14,797	  	$	6,003	  	$	8,794	
IBNR	  	 	16,743	  	 	7,477	  	 	9,266	  	 	16,686	  	 	7,963	  	 	8,723	
 	  			  			  			  			  			  			
Total	  	$	31,426	  	$	13,355	  	$	18,071	  	$	31,483	  	$	13,966	  	$	17,517	

During the quarter we completed a novation of certain business that we fronted for CIGNA, which resulted in a reduction of gross and ceded reserves of approximately $600 million. The ultimate novation of this business was anticipated under our 1999 agreement that was entered into in connection with the purchase of CIGNA’s P&C businesses.
 
We continually evaluate our reserve estimates taking into account new information and discussion and negotiation with our insureds. We estimate the ultimate loss amounts by projecting losses as of the valuation date using loss development patterns derived from historical data. In addition, a tail factor is applied to the projected loss amount to reflect further potential development beyond the period of historical record. While we believe our reserve for unpaid losses and loss expenses at March 31, 2005 is adequate, new information or trends, such as judicial action broadening the scope of coverage or expanding liability, may lead to future developments in ultimate losses and loss expenses significantly greater or less than the reserve provided, which could have a material adverse effect on future operating results. Particularly significant variables for which a change in assumption could have a material effect on unpaid losses and loss expenses include, but are not limited to, the following:
 
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Insurance - North American Segment
 
Given the long reporting and paid development pattern, the tail factors used to project actual current losses to ultimate losses for claims covered by our middle market workers’ compensation policies require considerable judgment that could be material to consolidated losses and loss expense reserves. Specifically, a one percent change in the tail factor could cause approximately a $45 million change, either positively or negatively, for the selected net loss and loss expense ultimate for that segment. We believe that our selected tail factors represent the most likely loss development based on historical loss payment patterns of this and other comparable long-tail lines of business as well as the current legal and economic environment. The actual tail factor could vary by several percentage points from the tail factor selected. Because tail factors are stated in terms of decimals (e.g., 1.125) and often, the actuary’s choice regarding reasonably supportable tail factors range within percentages of each other, the realistic change in tail factors can be expressed in percentage points.
 
Our ACE Bermuda operations write predominantly high excess of loss claims made professional liability business typically with attachment points in excess of $100 million. Claims development for this business can vary significantly for individual claims and historically could vary by as much as $50 million per claim depending on the nature of the loss.
 
Insurance – Overseas General
 
Certain international long tail lines, such as casualty and professional lines, are particularly susceptible to changes in loss trend and claim inflation. Heightened perceptions of tort and settlement awards around the world are increasing the demand for these products as well as contributing to the uncertainty of the reserving estimates. Our reserving methods rely heavily on loss development patterns estimated from historical data and while we attempt to adjust such factors for known changes in the current tort environment, it is possible that such factors may not entirely reflect all recent trends in tort environments. For example, a three month delay of our selected loss development patterns could increase reserve estimates on long tail casualty and professional lines by approximately $69 million.
 
Global Reinsurance
 
Typically there is inherent uncertainty around the length of paid and reporting development patterns, especially for certain casualty lines such as excess workers’ compensation or general liability, which may take up to 30 years to fully develop. This uncertainty is accentuated by the need to supplement client development patterns with industry development patterns as justified by the credibility of the data. The underlying source and selection of the final development pattern can thus have a significant impact on the selected net loss and loss expense ultimate. For example, a 10 percent slowing or quickening of the development pattern for certain long-tail lines could cause the ultimate loss derived by the reported Bornhuetter-Ferguson method to increase by as much as three percent, or $33 million.
 
Assumed Reinsurance
 
At March 31, 2005, net unpaid losses and loss expenses for the Global Reinsurance segment aggregated to $1.5 billion, consisting of $395 million of case reserves and $1.1 billion of IBNR. For the current quarter, increases in Global Reinsurance’s net unpaid losses and loss expenses were partially offset by claim payments made in connection with third quarter 2004 storms.
 
On occasion, there will be differences between our carried loss reserves and unearned premium reserves and the amount of loss reserves and unearned premium reserves recorded at ceding companies. This is due to the fact that we only receive consistent and timely information from ceding companies with respect to case reserves. For IBNR, we use historical experience and other statistical information, depending on the type of business, to estimate the ultimate loss (see Unpaid Losses and Loss Expenses for more information). We estimate our unearned premium reserve by applying estimated earning patterns to net premiums written for each treaty based upon that treaty’s coverage basis (i.e. risks attaching or losses occurring). At March 31, 2005, the case reserves reported to us by our ceding companies were $379 million, compared with the $395 million we recorded. We do, on occasion, post additional case reserves in addition to the amounts reported by our cedants when our evaluation of the ultimate value of a reported claim is different than the evaluation of that claim by our cedant.
 
Asbestos and Environmental Liabilities
 
Included in our liabilities for losses and loss expenses are amounts for asbestos, environmental and latent injury damage claims and expenses (A&E). These A&E liabilities principally relate to claims arising from remediation costs associated with hazardous waste sites and bodily-injury claims related to asbestos products and environmental hazards. The estimation of these liabilities is particularly sensitive to the recent legal environment, including specific settlements that may be used as precedents to settle future claims. These liabilities include provision for both reported and IBNR claims.
 
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Our exposure to A&E claims principally arises out of liabilities acquired when we purchased Westchester Specialty in 1998 and the P&C business of CIGNA in 1999, with the larger exposure contained within the liabilities acquired in the CIGNA transaction. In 1996, prior to our acquisition of the P&C business of CIGNA, the Pennsylvania Insurance Commissioner approved a plan to restructure INA Financial Corporation and its subsidiaries (the “Restructuring”) which included the division of Insurance Company of North America (INA) into two separate corporations: (1) an active insurance company that retained the INA name and continued to write P&C business and (2) an inactive run-off company, now called Century Indemnity Company (Century). As a result of the division, the A&E liabilities of INA were allocated to Century and extinguished, as a matter of Pennsylvania law, as liabilities of INA. As part of the Restructuring, the A&E liabilities of various U.S. affiliates of INA were reinsured to Century, and Century and certain other run-off companies housing A&E liabilities were contributed to Brandywine Holdings Corporation (Brandywine Holdings). As part of the 1999 acquisition of the P&C business of CIGNA, we acquired Brandywine Holdings and its various subsidiaries.
 
Incurred losses and loss expenses associated with A&E exposures have been very modest in the three months ended March 31, 2005. An internal, ground-up review of our consolidated A&E liabilities conducted during the second half of 2004 identified recent trends resulting in revised indications at that time. During this same period, a team of external actuaries performed an evaluation as to the adequacy of the reserves of Century and its two U.S. insurance subsidiaries, ACE American Reinsurance Company (ACE American Re), and Century Reinsurance Company (Century Re), both Pennsylvania insurers. The external review was conducted in accordance with the Brandywine restructuring order, which requires that an external actuarial review of Century’s reserves be completed every two years. The studies were completed early in 2005 and adjustments were recorded as of December 31, 2004. Activity in the period since completing the studies has not indicated a need to further adjust ultimate A&E reserves. Our A&E reserves are not discounted and do not reflect any anticipated changes in the legal, social or economic environment, or any benefit from future legislative reforms.
 
Reinsurance and Other Considerations relating to ACE’s Ultimate A&E and other Run-off Exposures
 
Westchester Specialty
 
As part of the acquisition of Westchester Specialty, National Indemnity Company (NICO) provided a 75 percent pro-rata share of $1 billion of reinsurance protection for adverse development on loss and loss adjustment expense reserves. At December 31, 2004, the remaining unused limit under this NICO Westchester Specialty cover was $499 million.
 
Brandywine Run-off Entities
 
As part of the acquisition of the CIGNA P&C business, NICO provided $2.5 billion of reinsurance protection to Century on all Brandywine loss and loss adjustment expense reserves and on the A&E reserves of various ACE INA insurance subsidiaries reinsured by Century (in each case, including uncollectible reinsurance). The benefits of this NICO agreement (the “Brandywine NICO Agreement”) flow to the other Brandywine companies and to the ACE INA insurance subsidiaries through reinsurance agreements between those companies and Century. The Brandywine NICO Agreement was exhausted on an incurred basis with the increase in the A&E reserves in the fourth quarter of 2002.
 
In addition to housing a significant portion of our A&E exposure, the Brandywine operations include run-off liabilities related to various insurance and reinsurance businesses. The following companies comprise ACE’s Brandywine operations: Century, a Pennsylvania insurer, Century Re, ACE American Re, Brandywine Reinsurance Company S.A.-N.V., a Belgium insurer (Brandywine SANV), Century International Reinsurance Company Ltd., a Bermuda insurer (CIRC), and Brandywine Reinsurance Company (UK) Ltd., a U.K. insurer (BRUK). All of the Brandywine companies are direct or indirect subsidiaries of Brandywine Holdings except for BRUK, which is a direct subsidiary of ACE INA International Holdings, Ltd. (ACE INA International Holdings). BRUK’s liabilities have been ceded to Century through CIRC.
 
The U.S.-based ACE INA companies assumed two contractual obligations in respect of the Brandywine operations in connection with the Restructuring: a dividend retention fund obligation and a surplus maintenance obligation in the form of an aggregate excess of loss reinsurance agreement. In accordance with the Brandywine restructuring order, INA Financial Corporation established and funded a dividend retention fund (the “Dividend Retention Fund”) consisting of $50 million plus investment earnings. The full balance of the Dividend Retention Fund was contributed to Century as of December 31, 2002. To the extent future dividends are paid by INA Holdings Corporation to its parent, INA Financial Corporation, and to the extent INA Financial Corporation then pays such dividends to INA Corporation, a portion of those dividends must be withheld to replenish the principal of the Dividend Retention Fund to $50 million within five years. In 2004 and 2003, no such
 
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dividends were paid, and therefore no replenishment of the Dividend Retention Fund occurred. The obligation to maintain and to replenish the Dividend Retention Fund as necessary and to the extent dividends are paid is ongoing until ACE INA receives prior written approval from the Pennsylvania Insurance Commissioner to terminate the fund.
 
In addition, the ACE INA insurance subsidiaries are obligated to provide insurance coverage to Century in the amount of $800 million under an aggregate excess of loss reinsurance agreement (the “Aggregate Excess of Loss Agreement”) if the statutory capital and surplus of Century falls below $25 million or if Century lacks liquid assets with which to pay claims as they become due, after giving effect to the contribution of the balance, if any, of the Dividend Retention Fund. Coverage under the Aggregate Excess of Loss Agreement was triggered as of December 31, 2002 following contribution of the balance of the Dividend Retention Fund, because Century’s capital and surplus fell below $25 million at December 31, 2002.
 
Effective December 31, 2004, ACE INA Holdings contributed $100 million to Century in exchange for a surplus note. After giving effect to the contribution and issuance of the surplus note, the statutory surplus of Century at December 31, 2004 was $25 million and approximately $458 million in statutory-basis losses were ceded to the Aggregate Excess of Loss Agreement. Century reports the amount ceded under the Aggregate Excess of Loss Agreement in accordance with statutory accounting principles, which differ from GAAP by, among other things, allowing Century to discount its asbestos and environmental reserves. For GAAP reporting purposes, intercompany reinsurance recoverables related to the Aggregate Excess of Loss Agreement are eliminated in consolidation. To estimate ACE’s remaining claim exposure under the Aggregate Excess of Loss Agreement under GAAP, we adjust the statutory cession to exclude the discount embedded in statutory loss reserves. At December 31, 2004, approximately $769 million in GAAP basis losses were ceded under the Aggregate Excess of Loss Agreement, leaving a remaining limit of coverage under that agreement of approximately $31 million. If the limit of coverage were to be exhausted, ACE’s results would nevertheless continue to recognize losses arising from any adverse loss reserve development of the Brandywine entities for so long as those companies remain consolidated subsidiaries of ACE.
 
Uncertainties Relating to ACE’s Ultimate Brandywine Exposure
 
In addition to the Dividend Retention Fund and Aggregate Excess of Loss Agreement commitments described above, certain ACE entities are primarily liable for asbestos, environmental and other exposures that they have reinsured to Century. Accordingly, if Century were to become insolvent and ACE were to lose control of Century, some or all of the recoverables due to these ACE companies from Century could become uncollectible, yet those ACE entities would continue to be responsible to pay claims to their insureds or reinsureds. Under such circumstances, ACE would recognize a loss in its consolidated statement of operations. As of December 31, 2004, the aggregate reinsurance balances ceded by the active ACE companies to Century were $1.58 billion. At December 31, 2004, Century’s carried reserves (including reserves ceded by the active ACE companies to Century) were $5.1 billion. We believe the intercompany reinsurance recoverables, which relate to liabilities payable over many years (i.e., 25 years or more), are not impaired at this time. The liabilities ceded to Century by its affiliates have in turn been ceded by Century to NICO and, as of December 31, 2004, approximately $2 billion of cover remains on a paid basis. As a result, any economic exposure there may be to adverse developments in the future is substantially less than the nominal value of the reinsurance recoverables. The impact of the transaction described below would reduce the balance due from Century to active ACE companies by $90 million. Should Century’s loss reserves experience adverse development in the future and should Century be placed into rehabilitation or liquidation, the reinsurance recoverables due to Century’s affiliates would be payable only after the payment in full of all administrative expenses and direct policy liabilities. Thus, the intercompany reinsurance recoverables would be at risk to the extent of the shortage of assets remaining to pay these recoverables. As of December 31, 2004, reserves ceded by Century to the active ACE companies and other amounts owed to Century by the ACE active companies were $930 million in the aggregate.
 
In a lawsuit filed in California state court in December 1999 (AICCO, Inc v. Insurance Company of North America, et al.) certain competitors of ACE USA challenged the validity of the Restructuring under California’s Unfair Competition Law, Business and Professions Code Section 17200 (UCL). The lawsuit claims that the Restructuring is not applicable to California policyholders under the UCL because it constituted a transfer of liabilities without the consent of the policyholders. The suit also claims that the notice of the Restructuring was misleading. In November 2004, the voters of California approved Proposition 64 amending the UCL by, inter alia, requiring that lawsuits brought under the UCL be brought by plaintiffs who have suffered actual injury as a result of the challenged business practice. In response to a motion to dismiss brought by ACE USA, the court ruled in February 2005 that the competitors/plaintiffs who brought this suit have not alleged actual injury as required by Proposition 64 and dismissed the suit. The time for appeal has not yet run and it is possible that the plaintiffs will appeal the ruling.

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Pending Sale of Certain Brandywine Companies
 
On January 5, 2005, Century and ACE INA International Holdings entered into a Stock Purchase Agreement with Randall & Quilter Investment Holdings Limited (“R&Q”), which provides for the sale of ACE American Re, BRUK and Brandywine SANV to R&Q. Closing of the sale is subject to the satisfaction of certain conditions, including without limitation the obtaining of all necessary consents and approvals from third parties, including the Pennsylvania Insurance Department and the Financial Services Authority of the United Kingdom, and the commutation of certain affiliate reinsurance agreements. In connection with certain of these commutations, Century’s assumed loss reserves would be reduced and an associated amount of coverage would become available under the Aggregate Excess of Loss Agreement.
 
We are pursuing potential options for the disposition of other Brandywine entities, including a possible sale of Century. There can be no assurance that any such sale or other disposition will be consummated. 
 
Legislative Initiatives
 
Congress has been working on possible legislation to move all U.S. asbestos bodily-injury claims to a federal trust for compensation in accordance with an established set of medical criteria and claim values. The trust would be funded by asbestos defendants and their insurers. As currently proposed, ACE would be one of the insurer participants. However, we cannot predict if any such proposed legislation will be modified or adopted.
 
Reinsurance
 
One of the ways we manage our loss exposure is through the use of reinsurance. While reinsurance agreements are designed to limit our losses from large exposures and permit recovery of a portion of direct unpaid losses, reinsurance does not relieve us of our liability to our insureds. Accordingly, the losses and loss expense reserves on our balance sheet represent our total unpaid gross losses. The reinsurance recoverable represents anticipated recoveries of a portion of those gross unpaid losses as well as amounts recoverable from reinsurers with respect to claims paid. The table below presents our net reinsurance recoverable at March 31, 2005 and December 31, 2004.

 	  	March 31
2005
(Restated)
	 	 	December 31
2004
(Restated)
	 	
 	  	(in millions of U.S. dollars)	 	
Reinsurance recoverable on paid losses and loss expenses	  	$	1,204	 	 	$	1,210	 	
Bad debt reserve on paid losses and loss expenses	  	 	(305	)	 	 	(309	)	
Reinsurance recoverable on future policy benefits	  	 	14	 	 	 	15	 	
Reinsurance recoverable on unpaid losses and loss expenses	  	 	13,967	 	 	 	14,585	 	
Bad debt reserve on unpaid losses and loss expenses	  	 	(612	)	 	 	(619	)	
 	  				 				
Net reinsurance recoverable	  	$	14,268	 	 	$	14,882	 	

Our reinsurance recoverable on unpaid losses and loss expenses decreased $614 million during the quarter ended March 31, 2005. This decrease was primarily due to the novation of approximately $600 million of reinsurance recoverable on unpaid losses and loss expenses as intended under our 1999 agreement in connection with the purchase of CIGNA’s P&C businesses.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Liquidity
 
Liquidity is a measure of a company’s ability to generate cash flows sufficient to meet short-term and long-term cash requirements of its business operations. As a holding company, ACE Limited possesses assets that consist primarily of the stock of its subsidiaries, and of other investments. In addition to net investment income, our cash flows currently depend primarily on dividends or other statutorily permissible payments. Historically, these dividends and other payments have come from our Bermuda-based operating subsidiaries, which we refer to as our Bermuda subsidiaries.
 
As an insurance company, one of our principal responsibilities to our clients is to ensure that we have ready access to funds to settle large unforeseen claims. Given anticipated growth in premiums and a lengthening of the average duration of our claim liabilities due to a higher proportionate growth in long-tail relative to short-tail business, we expect that positive cash flow from operations (underwriting activities and investment income) will be sufficient to cover cash outflows under most loss scenarios through 2005. To further ensure the sufficiency of funds to settle unforeseen claims, we hold a certain amount of invested assets in cash and short-term investments and maintain available credit facilities. In addition, for certain insurance,
 
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reinsurance, or deposit contracts that tend to have relatively large and reasonably predictable cash outflows, such as loss portfolio contracts, we attempt to establish dedicated portfolios of assets that are duration-matched with the related liabilities. With respect to the duration of our overall investment portfolio, we manage asset durations to both maximize return given current market conditions and provide sufficient liquidity to cover future loss payments. In a low rate environment, the overall duration of our fixed maturity investments tends to be shorter and in a high rate environment, such durations tend to be longer.
 
Despite our safeguards, if paid losses accelerated beyond our ability to fund such paid losses from current operating cash flows, we might need to either liquidate a portion of our investment portfolio or arrange for financing. Potential events causing such a liquidity strain could be several significant catastrophes occurring in a relatively short period of time or large scale uncollectible reinsurance recoverables on paid losses (as a result of coverage disputes, reinsurers’ credit problems or decreases in the value of collateral supporting reinsurance recoverables). Additional strain on liquidity could occur if the investments sold to fund loss payments were sold at depressed prices. Because each subsidiary focuses on a more limited number of specific product lines than is collectively available from the ACE group of companies, the mix of business tends to be less diverse at the subsidiary level. As a result, the probability of a liquidity strain, as described above, may be greater for individual subsidiaries than when liquidity is assessed on a consolidated basis. If such a liquidity strain were to occur in a subsidiary, we may be required to contribute capital to the particular subsidiary and/or curtail dividends from the subsidiary to support holding company operations. 
 
The payments of dividends or other statutorily permissible distributions from our operating companies are subject to the laws and regulations applicable to each jurisdiction, as well as the need to maintain capital levels adequate to support the insurance and reinsurance operations, including financial strength ratings issued by independent rating agencies, which are discussed below. During the quarter ended March 31, 2005, we were able to meet all of our obligations, including the payment of dividends declared on our Ordinary Shares and Preferred Shares, with our net cash flow and dividends received. Should the need arise, we generally have access to the debt markets and other available credit facilities that are discussed below.
 
We assess which subsidiaries to draw dividends from based on a number of factors. Considerations such as regulatory and legal restrictions as well as the subsidiary’s financial condition are paramount to the dividend decision. The legal restrictions on the payment of dividends from retained earnings by our Bermuda subsidiaries are currently satisfied by the share capital and additional paid-in capital of each of the Bermuda subsidiaries. During the quarter ended March 31, 2005, ACE Bermuda and ACE Tempest Life Reinsurance Ltd declared and paid dividends of $243 million and $32 million, respectively. During the quarter ended March 31, 2004, ACE Bermuda and ACE Tempest Life Reinsurance Ltd declared and paid dividends of $86 million and $150 million, respectively. We expect that a majority of our cash inflows for the remainder of 2005 will be from our Bermuda subsidiaries.
 
The payment of any dividends from ACE Global Markets or its subsidiaries would be subject to applicable U.K. insurance laws and regulations including those promulgated by the Society of Lloyd’s. ACE INA’s U.S. insurance subsidiaries may pay dividends, without prior regulatory approval, only from earned surplus and subject to certain annual limitations and the maintenance of a minimum capital requirement. ACE INA’s international subsidiaries are also subject to insurance laws and regulations particular to the countries in which the subsidiaries operate. These laws and regulations include restrictions that limit the amount of dividends payable without prior approval of regulatory insurance authorities.
 
We did not receive any dividends from ACE Global Markets or ACE INA during the quarter ended March 31, 2005. ACE INA issued debt to provide partial financing for the ACE INA acquisition and for other operating needs. This debt is serviced by statutorily permissible distributions by ACE INA’s insurance subsidiaries to ACE INA as well as other group resources.
 
Our consolidated sources of funds consist primarily of net premiums written, net investment income and proceeds from sales and maturities of investments. Funds are used primarily to pay claims, operating expenses, dividends and for the purchase of investments. After satisfying our cash requirements, excess cash flows from these underwriting and investing activities are invested.
 
Our insurance and reinsurance operations provide liquidity in that premiums are received in advance, sometimes substantially in advance, of the time claims are paid. Generally cash flows are affected by claim payments that, due to the nature of our operations, may comprise large loss payments on a limited number of claims and which can fluctuate significantly from period to period. The irregular timing of these loss payments can create significant variations in cash flows from operations between periods.
 
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Sources of liquidity include cash from operations, financing arrangements or routine sales of investments.
 
 	•	 	Our consolidated net cash flows from operating activities were $1.2 billion for the quarters ended March 31, 2005 and 2004. These amounts reflect net income for each quarter, adjusted for non-cash items and changes in working capital. Net income was stable for the indicated periods. Net cash flows from operating activities in the quarter ended March 31, 2005, were bolstered by increases in unearned premiums and unpaid losses and loss expenses, partially offset by an increase in insurance and reinsurance balances receivable. Typically, the adjustments to net income reflect the fact that there is a significant period of time between the recording of a loss (ranging up to several years or more) and the actual claim payment. Non-cash items for the quarter ended March 31, 2005, reflect the impact of the novation of approximately $600 million of gross and ceded reserves, which had no impact on our net cash flows from operating activities.	
 
 	•	 	Our consolidated net cash flows used for investing activities were $1.1 billion for the quarters ended March 31, 2005 and 2004. For the indicated periods, net cash flows used for investing activities were related principally to purchases of fixed maturities. Net purchases of fixed maturities were $1 billion in the quarter ended March 31, 2005, compared with $1.1 billion in the same quarter of 2004.	
 
 	•	 	Our consolidated net cash flows used for financing activities were $27 million in the quarter ended March 31, 2005, compared with $26 million in the same quarter of 2004. For the indicated periods, net cash flows usage for financing activities were primarily related to dividends paid, partially offset by proceeds from exercise of options.	
 
Although our ongoing operations continue to generate positive cash flows, our cash flows are currently impacted by a large book of loss reserves from businesses in run-off. The run-off operations generated negative operating cash flows of $99 million in the quarter ended March 31, 2005, compared with $2 million in the same quarter of 2004, primarily due to reinsurance collections on claim payments in 2004.
 
Both internal and external forces influence our financial condition, results of operations and cash flows. Claim settlements, premium levels and investment returns may be impacted by changing rates of inflation and other economic conditions. In many cases, significant periods of time, ranging up to several years or more, may lapse between the occurrence of an insured loss, the reporting of the loss to us and the settlement of the liability for that loss. We believe that our cash balances, cash flow from operations, routine sales of investments and the liquidity provided by our credit facilities, as discussed below, are adequate to meet expected cash requirements.
 
ACE and its subsidiaries are assigned debt and financial strength (insurance) ratings from internationally recognized rating agencies, including S&P, A.M. Best, Moody’s Investors Service and Fitch IBCA. The ratings issued on our companies by these agencies are announced publicly and are available directly from the agencies. Our website, acelimited.com, also contains some information about our ratings, which can be found under the “Investor Information” tab.
 
Financial strength ratings represent the opinions of the rating agencies on the financial strength of a company and its capacity to meet the obligations of insurance policies. Independent ratings are one of the important factors that establish our competitive position in the insurance markets. The rating agencies consider many factors in determining the financial strength rating of an insurance company, including the relative level of statutory surplus necessary to support the business operations of the company. These ratings are based upon factors relevant to policyholders, agents and intermediaries and are not directed toward the protection of investors. Such ratings are not recommendations to buy, sell or hold securities.
 
Debt ratings apply to short-term and long-term debt as well as preferred stock. These ratings are assessments of the likelihood that we will make timely payments of principal and interest and preferred stock dividends.
 
It is possible that, in the future, one or more of the rating agencies may reduce our existing ratings. If one or more of our ratings were downgraded, we could incur higher borrowing costs and our ability to access the capital markets could be impacted. In addition, our insurance and reinsurance operations could be adversely impacted by a downgrade in our financial strength ratings, including a possible reduction in demand for our products in certain markets.
 
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Capital Resources
 
Capital resources consist of funds deployed or available to be deployed to support our business operations. The following table summarizes the components of our capital resources at March 31, 2005 and December 31, 2004.

 	  	March 31
2005
(Restated)
	 	 	December 31
2004
(Restated)
	 	
 	  	(in millions of U.S. dollars)	 	
Short-term debt	  	$	147	 	 	$	146	 	
Long-term debt	  	 	1,849	 	 	 	1,849	 	
 	  				 				
Total debt	  	 	1,996	 	 	 	1,995	 	
 	  				 				
Trust preferred securities	  	 	412	 	 	 	412	 	
Preferred shares	  	 	557	 	 	 	557	 	
Ordinary shareholders’ equity	  	 	9,413	 	 	 	9,288	 	
 	  				 				
Total shareholders’ equity	  	 	9,970	 	 	 	9,845	 	
 	  				 				
Total capitalization	  	$	12,378	 	 	$	12,252	 	
 	  				 				
Ratio of debt to total capitalization	  	 	16.1	%	 	 	16.3	%	
Ratio of debt plus trust preferreds to total capitalization	  	 	19.5	%	 	 	19.6	%	
 
We believe our financial strength provides us with the flexibility and capacity to obtain funds externally through debt or equity financing on both a short-term and long-term basis. Our ability to access the capital markets is dependent on, among other things, market conditions and our perceived financial strength. We have accessed both the debt and equity markets from time to time.
 
Our diluted book value per Ordinary Share increased to $32.64 at March 31, 2005, compared with $32.51 at December 31, 2004. In calculating our diluted book value per Ordinary Share, we include in the denominator, in-the-money options. The expected proceeds from the in-the-money options are included in the numerator. Shareholders’ equity increased $125 million in the quarter ended March 31, 2005, primarily due to net income of $437 million, partially offset by unrealized deprecation on our investment portfolio of $280 million net of income tax and dividends declared of $72 million.
 
On January 14, 2005, and April 14, 2005, we paid dividends of 21 cents per ordinary share to shareholders of record on December 31, 2004 and March 31, 2005, respectively. We have paid dividends each quarter since we became a public company in 1993. However, the declaration, payment and value of future dividends on ordinary shares is at the discretion of our Board of Directors and will be dependent upon our profits, financial requirements and other factors, including legal restrictions on the payment of dividends and such other factors as our Board of Directors deems relevant. Dividends on the preferred shares are payable quarterly, when and if declared by our Boards of Directors, in arrears on March 1, June 1, September 1 and December 1 of each year. On March 1, 2005 we paid a dividend of $4.875 per preferred share to shareholders of record on February 28, 2005.
 
As part of our capital management program, in November 2001, our Board of Directors authorized the repurchase of any ACE issued debt or capital securities including Ordinary Shares, up to $250 million. At March 31, 2005, this authorization had not been utilized. During 2004, we filed a shelf registration statement with the SEC relating to the issuance of up to $1.5 billion of certain types of debt and equity securities. This registration became effective during the first quarter of 2005.
 
Credit Facilities
 
As our Bermuda subsidiaries are not admitted insurers and reinsurers in the U.S., the terms of certain U.S. insurance and reinsurance contracts require them to provide letters of credit (LOCs) to clients. In addition, ACE Global Markets is required to satisfy certain U.S. regulatory trust fund requirements which can be met by the issuance of LOCs. LOCs may also be used for general corporate purposes.
 
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The following table shows our credit facilities by credit line, usage and expiry date at March 31, 2005.

 	  	Credit Line 1
	  	Usage
	  	Expiry Date
	
 	  	(in millions of U.S. dollars)	
Unsecured Liquidity Facilities	  	 	 	  	 	 	  	 	
ACE Limited 2	  	$	600	  	$	64	  	April 2007	
Secured Operational LOC Facilities	  	 	 	  	 	 	  	 	
ACE Limited 3	  	 	500	  	 	269	  	Sept. 2007	
Other 4	  	 	82	  	 	82	  	Various	
Unsecured Operational LOC Facilities	  	 	 	  	 	 	  	 	
ACE Limited 5	  	 	850	  	 	756	  	Sept. 2007	
Unsecured Capital Facilities	  	 	 	  	 	 	  	 	
ACE Limited 6	  	 	713	  	 	690	  	Dec. 2009	
 	  			  			  	 	
Total	  	$	2,745	  	$	1,861	  	 	

1.	Certain facilities are guaranteed by operating subsidiaries and/or ACE Limited	
 
2.	Commercial paper back-up facility, may also be used for LOCs	
 
3.	On July 1, 2005, this facility was replaced by a letter of credit permitting the issuance of up to $500 million of LOCs on a secured basis and expiring on July 1, 2010.	
 
4.	These facilities are issued in the name of ACE European Group Limited, Lloyd’s Syndicate 2488 and Century Indemnity Insurance Company.	
 
5.	On July 1, 2005, this facility was replaced by a letter of credit permitting the issuance of up to $1 billion of LOCs on an unsecured basis and expiring on July 1, 2010.	
 
6.	Supports ACE Global Markets underwriting capacity for Lloyd’s Syndicate 2488-2005 capacity of £400 million (approximately $750 million). During the second quarter of 2005, this facility was reduced from £380 million to £284 million.	
 
With the exception of the LOC facilities noted under “Other”, the facilities noted above require that we maintain certain covenants, all of which have been met at March 31, 2005. These covenants include:
 
(i)	maintenance of a minimum consolidated net worth in an amount not less than the “Minimum Amount”. For the purpose of this calculation, the Minimum Amount is an amount equal to the sum of the base amount (currently $6.4 billion) plus 25 percent of consolidated net income for each fiscal quarter, ending after the date on which the current base amount became effective, plus 50 percent of any increase in consolidated net worth during the same period, attributable to the issuance of ordinary and preferred shares. The Minimum Amount is subject to a reset provision on the last day of each fiscal year; and	
 
(ii)	maintenance of a maximum debt to total capitalization ratio of not greater than 0.35 to 1. Under this covenant, debt does not include trust preferred securities or mezzanine equity, except where the ratio of the sum of trust preferred securities and mezzanine equity to total capitalization is greater than 15 percent. In this circumstance, the amount greater than 15 percent would be included in the debt to total capitalization ratio.	
 
At March 31, 2005, (a) the minimum consolidated net worth requirement under the covenant described in (i) above was $6.5 billion and our actual consolidated net worth as calculated under that covenant was $9.6 billion; and (b) our ratio of debt to total capitalization was 0.16 to 1.
 
In addition to these covenants, the ACE Global Markets capital facility requires that collateral be posted if the financial strength rating of ACE Limited falls to S&P BBB+ or lower.
 
Our failure to comply with the covenants under any credit facility would, subject to grace periods in the case of certain covenants, result in an event of default. This could require us to repay any outstanding borrowings or to cash collateralize letters of credit under such facility. An event of default under one or more credit facilities with outstanding credit extensions of $25 million or more would result in an event of default under all of the facilities described above.
 
American Jobs Creation Act of 2004
 
On October 22, 2004, the American Jobs Creation Act (the Act) was signed into law by the President of the United States. The Act provides for the election of a special one-time tax deduction of 85 percent of certain foreign earnings that are repatriated (as defined in the Act) under a Domestic Reinvestment Plan to its United States parent corporation in either the parent’s last tax year that began before the enactment date, or the first tax year that begins during the one-year period beginning on the date of enactment. We expect to apply the provisions of the Act to certain of our applicable subsidiaries.
 
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In January and May 2005, the United States Treasury issued its guidance on selected provisions of the Act and on July 21, 2005, the Tax Technical Corrections Act of 2005 was introduced (H.R. 3376 and S.1447). Guidance issued to date provides clarification on several technical issues, with the remaining issues addressed in the proposed Technical Corrections Act.
 
During the three and six months ended June 30, 2005, we repatriated foreign earnings of approximately $325 million and $367 million, respectively, subject to Domestic Reinvestment Plans that would qualify under the Act based on the guidance issued to date. Of the $367 million repatriated foreign earnings to date, approximately $250 million will qualify for preferential tax treatment. For the three and six months ended June 30, 2005, the tax benefit associated with these repatriations was $19 million and $27 million, respectively, and was a result of the reduction of the net deferred tax liability associated with these repatriated earnings, based on guidance issued to date. The tax benefit recorded in the quarter ended June 30, 2005, included the tax benefit associated with distributions in that quarter, as well as adjustments to the previously recorded tax benefits based on United States Treasury guidance issued in May 2005. The tax benefit recorded to date may increase by as much as approximately $7 million if the Tax Technical Corrections Act is passed.
 
Additional earnings repatriations up to the limitation under the Act of $500 million may be completed through the remainder of 2005. Based on guidance issued to date, we are evaluating potential additional repatriations and are not in a position to complete our evaluation or determine the total associated tax impact as a result of the Act. However, based on our analysis to date it is possible that we may ultimately repatriate up to an additional $250 million up to the limitation of qualifying dividends, with an associated tax benefit of up to $44 million. We expect to be in a position to finalize our assessment by September 2005.
 
Recent Accounting Pronouncements
 
See Note 2 (c) to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.
 
 Item 4.	Controls and Procedures	
 
As of the end of the period covered by this report, the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in allowing information required to be disclosed in reports filed under the Securities and Exchange Act of 1934 to be recorded, processed, summarized and reported within time periods specified in the rules and forms of the SEC.
 
During the quarter ended March 31, 2005, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
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ACE LIMITED
 PART II OTHER INFORMATION
 
 Item 1.	Legal Proceedings	
 
Our insurance subsidiaries are subject to claims litigation involving disputed interpretations of policy coverages and in some jurisdictions, direct actions by allegedly injured persons seeking damages from policyholders. These lawsuits involving claims on policies issued by our subsidiaries which are typical to the insurance industry in general and in the normal course of business, are considered in our loss and loss expense reserves which are discussed in the unpaid losses and loss expenses discussion. In addition to claims litigation, we and our subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on insurance policies. This category of business litigation typically involves, inter alia, allegations of underwriting errors or misconduct, employment claims, regulatory activity or disputes arising from our business ventures. While the outcomes of the business litigation involving us cannot be predicted with certainty at this point, we are disputing and will continue to dispute allegations against us that are without merit and believe that the ultimate outcomes of matters in this category of business litigation will not have a material adverse effect on our financial condition, future operating results or liquidity, although an adverse resolution of a number of these items could have a material adverse effect on our results of operations in a particular quarter or fiscal year.
 
Information on the Company’s legal proceedings is set forth in the section entitled, “Insurance Industry Investigations and Related Matters”, included under Part I, Item 2.
 
 Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	
 
This table provides information with respect to purchases by the Company of its Ordinary Shares during the three months ended March 31,  2005.
 
Issuer’s Purchases of Equity Securities

Period
	  	Total
Number of
Shares
Purchased
	  	Average Price
Paid per Share
	  	Total Number of
Shares Purchased as
Part of Publicly
Announced Plan*
	  	Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Plan*
	
January 1, 2005 through January 31, 2005	  	174	  	$	41.20	  	—  	  	$	250 million	
February 1, 2005 through February 28, 2005	  	3,100	  	$	41.67	  	—  	  	$	250 million	
March 1, 2005 through March 31, 2005	  	229,121	  	$	44.86	  	—  	  	$	250 million	
 	  		  	 	 	  	 	  	 	 	
Total	  	232,395	  	 	 	  	 	  	 	 	

*	As part of ACE’s capital management program, in November 2001, the Company’s Board of Directors authorized the repurchase of any ACE issued debt or capital securities including Ordinary Shares, up to $250 million. At March 31, 2005, this authorization had not been utilized.	
 
**	For the three months ended March 31, 2005, this column relates entirely to the surrender to the Company of shares of Common Stock to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees.	
 
 Item 5.	Other Information	
 
1.	On February 24, 2005, the Company declared a quarterly dividend of $0.21 per Ordinary Share payable on April 14, 2005, to shareholders of record on March 31, 2005.	
 
2.	On February 24, 2005, the Company declared a dividend of $4.875 per Preferred Share, payable on March 1, 2005, to shareholders of record on February 28, 2005.	
 
 Item 6.	Exhibits	
 
Exhibits

10.1	 	Description of Executive Officer Cash Compensation. (Incorporated by reference to Exhibit 10.1 to Form 10Q of the company for the quarter ended March 31, 2005)	
		
31.1	 	Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.	
 
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31.2	 	Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.	
		
32.1	 	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.	
		
32.2	 	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.	
 
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ACE LIMITED
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 	 	 	 	ACE LIMITED	
			
August 12, 2005	 	 	 	/ S / E VAN G. G REENBERG
	
 	 	 	 	Evan G. Greenberg	
 	 	 	 	President and Chief
Executive Officer	
			
August 12, 2005	 	 	 	/ S / P HILIP V. B ANCROFT
	
 	 	 	 	Philip V. Bancroft	
 	 	 	 	Chief Financial Officer	
 
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ACE LIMITED
EXHIBITS

Exhibit
Number
	 	Description    
	
 	 	Exhibits	
		
10.1	 	Description of Executive Officer Cash Compensation. (Incorporated by reference to Exhibit 10.1 to Form 10Q of the company for the quarter ended March 31, 2005)	
		
31.1	 	Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.	
		
31.2	 	Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.	
		
32.1	 	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.	
		
32.2	 	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.	
 
71
 
Exhibit 31.1
 
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
 
I, Evan G. Greenberg, certify that:
 
 	1)	I have reviewed this quarterly report on Form 10-Q/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)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 
 	4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c) 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
 
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
 	5)	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date August 12, 2005

/ S /    E VAN G. G REENBERG	
Evan G. Greenberg	
President and
Chief Executive Officer	
 
Exhibit 31.2
 
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
 
I, Philip V. Bancroft, certify that:
 
 	1)	I have reviewed this quarterly report on Form 10-Q/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)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 
 	4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c) 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
 
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
 	5)	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date August 12, 2005

/ S /    P HILIP V. B ANCROFT	
Philip V. Bancroft	
Chief Financial Officer	
 
Exhibit 32.1
 
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
The undersigned officer of ACE Limited (the “Corporation”) hereby certifies that the Corporation’s Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2005, fully complies with the applicable reporting requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) and that the information contained in the Form 10-Q/A fairly presents, in all material respects, the financial condition and results of operations of ACE Limited.

					
Dated: August 12, 2005	 	 	 	/ S /    E VAN G. G REENBERG	
 	 	 	 	Evan G. Greenberg	
 	 	 	 	President and Chief Executive Officer	
 
Exhibit 32.2
 
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
The undersigned officer of ACE Limited (the “Corporation”) hereby certifies that the Corporation’s Quarterly Report on Form 10-Q/A for the quarter ended March 31, 2005, fully complies with the applicable reporting requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) and that the information contained in the Form 10-Q/A fairly presents, in all material respects, the financial condition and results of operations of ACE Limited.

					
Dated: August 12, 2005	 	 	 	/ S /    P HILIP V. B ANCROFT	
 	 	 	 	Philip V. Bancroft	
 	 	 	 	Chief Financial Officer