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

FORM 10-K
x 	Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934	
For the fiscal year ended December 31, 2007
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

ACE LIMITED
(Exact name of registrant as specified in its charter)
			
Cayman Islands	  	98-0091805	
(State or other jurisdiction of incorporation or organization)	  	(I.R.S. Employer Identification No.)	
ACE Global Headquarters
17 Woodbourne Avenue
Hamilton HM 08
Bermuda
(Address of principal executive offices, Zip Code)
(441) 295-5200
(Registrant’s telephone number, including area code)

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

Title of each class	 	Name of each exchange on which registered	
Ordinary Shares, par value $0.041666667 per share	 	New York Stock Exchange	
		
Depository Shares, each representing one-tenth of a share of 7.80 percent Cumulative
Redeemable Preferred Shares, Series C (Liquidation Preference $25.00 per Depository
Share)	 	New York Stock Exchange	

Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES   þ   NO   ¨ 
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES   ¨   NO   þ 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES   þ   NO   ¨ 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference into Part III of this Form 10-K or any amendment to this Form 10-K.   ¨ 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer   þ             Accelerated filer   ¨             
 
Non-accelerated filer   ¨             (Do not check if a smaller reporting company) Smaller reporting company   ¨ 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  YES   ¨   NO   þ 
 
The aggregate market value of voting stock held by non-affiliates as of June 30, 2007 (the last business day of the registrant’s most recently completed second fiscal quarter), was approximately $21 billion. For the purposes of this computation, shares held by directors and officers of the registrant have been excluded. Such exclusion is not intended, nor shall it be deemed, to be an admission that such persons are affiliates of the registrant.
 
As of February 26, 2008, there were 329,888,123 Ordinary Shares par value $0.041666667 of the registrant outstanding.

Documents Incorporated By Reference
 
Certain portions of the registrant’s definitive proxy statement relating to its 2008 Annual General Meeting of Shareholders are incorporated by reference in Part III of this report.

Table of Contents
 ACE LIMITED INDEX TO 10-K

PART I	  	 	  	Page	
ITEM 1.	  	Business	  	3	
ITEM 1A.	  	Risk Factors	  	18	
ITEM 1B.	  	Unresolved Staff Comments	  	28	
ITEM 2.	  	Properties	  	29	
ITEM 3.	  	Legal Proceedings	  	29	
ITEM 4.	  	Submission of Matters to a Vote of Security Holders	  	29	
			
PART II	  	 	  	 	
ITEM 5.	  	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	  	31	
ITEM 6.	  	Selected Financial Data	  	33	
ITEM 7.	  	Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	34	
ITEM 7A.	  	Quantitative and Qualitative Disclosures About Market Risk	  	80	
ITEM 8.	  	Financial Statements and Supplementary Data	  	83	
ITEM 9.	  	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	  	83	
ITEM 9A.	  	Controls and Procedures	  	83	
ITEM 9A(T).	  	Controls and Procedures	  	83	
ITEM 9B.	  	Other Information	  	83	
			
PART III	  	 	  	 	
ITEM 10.	  	Directors, Executive Officers and Corporate Governance	  	84	
ITEM 11.	  	Executive Compensation	  	84	
ITEM 12.	  	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	  	84	
ITEM 13.	  	Certain Relationships and Related Transactions, and Director Independence	  	86	
ITEM 14.	  	Principal Accounting Fees and Services	  	86	
			
PART IV	  	 	  	 	
ITEM 15.	  	Exhibits, Financial Statement Schedules	  	87	

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
 
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Any written or oral statements made by us or on our behalf may include forward-looking statements that reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks, uncertainties and other factors that could, should potential events occur, cause actual results to differ materially from such statements. These risks, uncertainties and other factors (which are described in more detail elsewhere herein and in other documents we file with the Securities and Exchange Commission (SEC)) include but are not limited to:
• the failure of our acquisition of Combined Insurance Company of America (Combined) transaction to close, any difference in the performance by Combined and its subsidiaries from what is currently expected by us, or the failure to realize anticipated expense-related efficiencies from our acquisition of Combined;
• losses arising out of natural or man-made catastrophes such as hurricanes, typhoons, earthquakes, floods, hailstorms, windstorms, climate change, or terrorism which could be affected by:
• the number of insureds and ceding companies affected;
• the amount and timing of losses actually incurred and reported by insureds;
• the impact of these losses on our reinsurers and the amount and timing of reinsurance recoverables actually received;
• the cost of building materials and labor to reconstruct properties following a catastrophic event; and
• complex coverage and regulatory issues such as whether losses occurred from storm surge or flooding and related lawsuits.
• actions that rating agencies may take from time to time, such as changes in our claims-paying ability, financial strength, or credit ratings or placing these ratings on credit watch negative or the equivalent;
• global political conditions, the occurrence of any terrorist attacks, including any nuclear, radiological, 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 recoverables, 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 large individual claims or catastrophe oriented results, 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, legal tactics, and settlement terms;
• 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 (D&O) and errors and omissions (E&O) insurance; and
• claims and litigation arising out of such disclosures or practices by other companies;
• uncertainties relating to governmental, legislative, and regulatory policies, developments, actions, 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;
• 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;
• 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;
 
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• the effects of investigations into market practices in the property and casualty (P&C) 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 our technology resources to perform as anticipated; and
• management’s response to these factors and actual events (including, but not limited, to those described above).
 
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. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future events, or otherwise.
 
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 PART I

 ITEM 1. 	Business	

General Development of Business
ACE Limited (ACE) is a Bermuda-based holding company incorporated with limited liability under the Cayman Islands Companies Law. ACE and its direct and indirect subsidiaries (collectively, the ACE Group of Companies, the Company, we, us, or our) are a global property and casualty insurance and reinsurance organization. We provide a diversified range of products and services to commercial and individual customers in more than 140 countries and jurisdictions.
We have grown our business through increased premium volume, expansion of product offerings and geographic reach, and acquisition of other companies. On December 14, 2007, we entered into a stock purchase agreement with Aon Corporation, pursuant to which we have agreed to purchase all the outstanding shares of capital stock of Combined Insurance Company of America (Combined) and fourteen Combined subsidiaries. The all cash purchase price is $2.4 billion, subject to certain post-closing adjustments. Combined, which was founded in 1919 and headquartered in Glenview, Illinois, is a leading underwriter and distributor of specialty individual accident and supplemental health insurance products that are targeted to middle income consumers in the U.S., Europe, Canada, and Asia Pacific. Combined serves more than four million policyholders worldwide. We expect this transaction to be completed during the second quarter of 2008. We believe that this acquisition will add balance and capability to our existing accident and health (A&H) business and offers meaningful opportunity for future revenue and earnings growth.

Employees
At December 31, 2007, there were approximately 10,000 employees in the ACE Group of Companies. We believe that employee relations are satisfactory.

Customers
For most of the commercial lines of business that we offer, insureds typically use the services of an insurance broker. An insurance broker acts as an agent for the insureds, offering advice on the types and amount of insurance to purchase and also assisting in the negotiation of price and terms and conditions. We obtain business from the major international insurance brokers and typically pay a commission to brokers for any business accepted and bound. Loss of all or a substantial portion of the business provided by one or more of these brokers could have a material adverse effect on our business. We also use direct marketing techniques in our personal accident lines, selling to consumers through affinity partnerships and financial institutions. In our opinion, no material part of our business is dependent upon a single insured or group of insureds. We do not believe that the loss of any one insured would have a material adverse effect on our financial condition or results of operations and no one insured or group of affiliated insureds account for as much as 10 percent of our consolidated revenues.

Competition
Competition in the domestic and international insurance and reinsurance marketplace is substantial. Competition varies by type of business and geographic area. Competitors include other stock companies, mutual companies, alternative risk sharing groups (such as group captives and catastrophe pools), and other underwriting organizations. These companies sell through various distribution channels and business models, across a broad array of product lines, and with a high level of variation regarding geographic, marketing and customer segmentation. We compete for business not only on the basis of price, but also on the basis of availability of coverage desired by customers and quality of service. Our ability to compete is dependent on a number of factors, particularly our ability to maintain the appropriate financial strength ratings as assigned by independent rating agencies. Our strong capital position and global platform affords us opportunities for growth not available to smaller or less diversified insurance companies. Competitive information by segment is included in each of the segment discussions.

Trademarks and Trade Names
We use various trademarks and trade names in our business. These trademarks and trade names protect names of certain products and services we offer and are important to the extent they provide goodwill and name recognition in the insurance industry. We use commercially reasonable efforts to protect these proprietary rights, including various trade secret and trademark laws. One or more of the trademarks and trade names could be material to our ability to sell our products and services. We have taken appropriate steps to protect our ownership of key names and we believe it is unlikely that anyone would be able to prevent us from using names in places or circumstances material to our operations.
 
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Available Information
We make available free of charge through our Internet site (www.acelimited.com, under Investor Information / Financial Reports or Investor Information / SEC – Section 16 Filings) our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Exchange Act (15 U.S.C. 78m(a) or 78o(d)) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
We also make available free of charge through our Internet site (under Investor Information / Corporate Governance) our Corporate Governance Guidelines, our Code of Conduct, and Charters for our Board Committees. These documents are also available in print to any shareholder who requests them from our Investor Relations Department by:
Telephone: (441) 299-9283
Facsimile: (441) 292-8675
E-mail: investorrelations@ace.bm
Nothing on our Internet site should be considered incorporated by reference into this report.

Segment Information
We operate through the following business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life Insurance and Reinsurance.
The following table sets forth an analysis of net premiums earned by segment for the years ended December 31, 2007, 2006, and 2005. Additional financial information about our segments, including gross premium written by geographic area, is included in Note 16 to the Consolidated Financial Statements, under Item 8.

(in millions of U.S. dollars)	 	2007 Net
Premiums
Earned	 	 	  	Percentage
Change	 	 	 	  	2006 Net
Premiums
Earned	 	 	 	Percentage
Change	 	 	 	 	2005 Net
Premiums
Earned	
Insurance – North American	 	$	6,007	 	 	  	5	%	 	 	  	$	5,719	 	 	 	–	 	 	 	 	$	5,730	
Insurance – Overseas General	 	 	4,623	 	 	  	7	%	 	 	  	 	4,321	 	 	 	2	%	 	 	 	 	4,239	
Global Reinsurance	 	 	1,299	 	 	  	(14	)%	 	 	  	 	1,511	 	 	 	(1	)%	 	 	 	 	1,531	
Life Insurance and Reinsurance	 	 	368	 	 	  	34	%	 	 	  	 	274	 	 	 	10	%	 	 	 	 	248	
 	 	$	12,297	 	 	  	4	%	 	 	  	$	11,825	 	 	 	–	 	 	 	 	$	11,748	
 
Insurance – North American
 
Background
The Insurance – North American segment comprises our P&C operations in the U.S., Canada, and Bermuda. This segment, which accounted for approximately half of our consolidated 2007 net premiums earned, includes the operations of ACE USA (including ACE Canada), ACE Westchester Specialty Group (ACE Westchester), ACE Bermuda, and various run-off operations.
ACE USA, our retail business, operates through several insurance companies using a network of offices throughout the U.S. and Canada. These operations provide a broad array of P&C, A&H, and risk management products and services to a diverse group of commercial and non-commercial enterprises and consumers. ACE USA is this segment’s largest operation and represented approximately 70 percent of this segment’s net premiums earned in 2007.
ACE Westchester specializes in the wholesale distribution of excess, surplus, and specialty P&C products. ACE Bermuda provides commercial insurance products on an excess basis to a global client base, covering risks that are generally low in frequency and high in severity.
The run-off operations include Brandywine Holdings Corporation (Brandywine), Commercial Insurance Services (CIS), residual market workers’ compensation business, pools and syndicates not attributable to a single business group, and other 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.
 
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Products and Distribution
ACE USA primarily distributes its insurance products through a limited number of brokers. In addition to using brokers, certain products are also distributed through channels such as general agents, independent agents, managing general agents, managing general underwriters, alliances, affinity groups, and direct marketing operations. These products include general liability, excess liability, property, workers’ compensation, commercial marine, automobile liability, professional lines (D&O and E&O), medical liability, aerospace, and A&H coverages, as well as claims and risk management products and services. ACE USA has also established internet distribution channels for some of its products.
ACE USA’s on-going operations are organized into distinct business units, each offering specialized products and services targeted at specific niche markets.
• ACE Risk Management offers a wide range of customized casualty products to respond to the needs of mid- to large-size companies, including national accounts, irrespective of industry. These programs are designed to help insureds address the significant costs of financing and managing risk for workers’ compensation and general and auto liability coverages. A variety of program structures are offered to support each client’s risk financing needs including: large deductible captives, third-party rent-a-captives, funded deductibles, and net present value and other risk financing structures. ACE Risk Management ceased assuming securitization and financial guarantee exposure in 2004.
• ACE Global Underwriting Group, specializing in global programs and specialty coverages, provides comprehensive risk management programs and services to mid- to large-size U.S.-based companies, not-for-profit, and government entities. The group’s key products include global property, corporate risk property, inland marine, foreign casualty, commercial marine, energy, and aerospace. In addition, this group provides specialty personal lines coverage for recreational marine distributed through a network of specialty agents.
• ACE Casualty Risk offers products and services to a broad range of customers, ranging from middle market to the large multinational clients. Key coverages offered by ACE Casualty Risk include umbrella and excess liability, environmental risk for commercial and industrial risks, and wrap-up programs which protect contractors and project sponsors with multi-risk coverage on large single- and multi-location construction projects. Small businesses can purchase workers’ compensation coverage through this unit’s internet-based ACE Complete sm product.
• ACE Professional Risk (Professional Risk) provides management liability and professional liability (D&O and E&O), as well as surety products that are designed to meet the needs of our insureds.
• ACE Canada (ACE USA’s Canadian operations) offers a broad range of P&C products as well as Life and A&H coverage. ACE Canada specializes in providing customized P&C and A&H products to commercial and industrial clients as well as to groups and associations, operating nationally or internationally.
• ACE Accident & Health works with employers, travel agencies, and affinity groups to offer a variety of accident and other supplemental insurance programs. Key products include Employee Benefit Plans (basic and voluntary accidental death and dismemberment, limited medical insurance for vision, dental and prescription drugs), occupational accident, student accident, and worldwide travel accident and global medical programs. ACE Accident & Health also provides specialty personal lines products, including credit card enhancement programs (identity theft, rental car collision damage waiver, trip travel and purchase protection benefits), and disaster recovery programs distributed through affinity groups.
• ACE Medical Risk offers a wide range of liability products for the healthcare industry. These include primary coverages for professional liability and general liability for selected types of medical facilities, excess/umbrella liability for medical facilities, primary and excess coverages for products liability for biotechnology and specialty pharmaceutical companies, and liability insurance for human clinical trials.
• ESIS Inc. (ESIS), ACE USA’s in-house third-party claims administrator, performs claims management and risk control services for organizations that self-insure P&C exposures. These services include comprehensive medical managed care, integrated disability services and pre-loss control and risk management services. Additional insurance-related services are offered by ESIS’s Recovery Services International, which provides salvage and subrogation and health care recovery services.
ACE Westchester offers wholesale distribution of property, inland marine, casualty, professional lines, and environmental liability products. Through its Program division, ACE Westchester also provides coverage for agriculture business and specialty programs, writing a variety of commercial coverages through program agents, including sports/leisure activities, farm, and crop/hail insurance.
ACE Bermuda targets low-frequency, high-severity business on an excess of loss basis. Its principal lines of business are excess liability, professional lines, excess property, and political risk, the latter being written on a subscription basis by Sovereign Risk Insurance Ltd. (Sovereign), a wholly owned managing agent. ACE Bermuda accesses its clients primarily through the Bermuda offices of major, internationally recognized insurance brokers.
 
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Competitive Environment
ACE USA and ACE Westchester compete against a number of large, national carriers as well as regional competitors in certain territories. The markets in which ACE USA and ACE Westchester compete are subject to significant cycles of fluctuating capacity and wide disparities in price adequacy. We strive to offer superior service, which we believe has differentiated us from our competitors. The ACE USA and ACE Westchester operations pursue a specialist strategy and focus on market opportunities where we can compete effectively based on service levels and product design, while still achieving an adequate level of profitability. A competitive advantage is also achieved through ACE USA’s innovative product offerings and our ability to provide multiple products to a single client due to our nationwide local presence. An additional competitive strength of all our domestic commercial units is the ability to deliver global products and coverage to customers in concert with our Insurance – Overseas General segment. ACE USA has grown, in part, from the leveraging of cross-marketing opportunities with our other operations to take advantage of our organization’s global presence. ACE Bermuda competes against international commercial carriers writing business on an excess of loss basis.
 
Insurance – Overseas General
 
Background
The Insurance – Overseas General segment accounted for 38 percent of consolidated 2007 net premiums earned. Insurance – Overseas General consists of ACE International, our network of indigenous retail insurance operations, and the wholesale insurance operations of ACE Global Markets, our London-based excess and surplus lines business that includes Lloyd’s Syndicate 2488 (Syndicate 2488). ACE International maintains a presence in every major insurance market in the world and is organized geographically along product lines that provide dedicated underwriting focus to customers. ACE Global Markets offers an extensive product range through its unique parallel distribution of products via ACE European Group Limited (AEGL) and Syndicate 2488. ACE provides funds at Lloyd’s to support underwriting by Syndicate 2488, which is managed by ACE Underwriting Agencies Limited and had an underwriting capacity of £400 million in 2007. AEGL is London-based and regulated by the Financial Services Authority, the U.K. insurance regulator. AEGL underwrites U.K. and Continental Europe insurance and reinsurance business.
 
Products and Distribution
ACE International’s P&C business is generally written, on both a direct and assumed basis, through major international, regional, and local brokers. A&H and other consumer lines products are distributed through brokers, agents, direct marketing programs, and sponsor relationships. Property insurance products include traditional commercial fire coverage as well as energy industry-related and other technical coverages. Principal casualty products are commercial primary and excess casualty and general liability. ACE International provides D&O and professional indemnity coverages. Marine cargo and hull coverages are written in the London market as well as in marine markets throughout the world. The A&H insurance operations provide products that are designed to meet the insurance needs of individuals and groups outside of U.S. insurance markets. These products have been representing an increasing portion of ACE International’s business in recent years and include, but are not limited to, accidental death, medical and hospital indemnity, and income protection coverages. ACE International’s personal lines operations provide specialty products and services designed to meet the needs of specific target markets and include, but are not limited to, property damage, auto, homeowners, and personal liability.
Following is a discussion of Insurance – Overseas General’s four regions of operations: ACE European Group (which is comprised of ACE Europe and ACE Global Markets branded business), ACE Asia Pacific, ACE Far East, and ACE Latin America.
• ACE European Group is headquartered in London and offers a broad range of P&C and specialty coverages principally directed at large and mid-sized corporations, as well as individual consumers. ACE European Group operates in every major market in the European Union. Commercial products are principally distributed through brokers while consumer products (mainly A&H) are distributed through brokers as well as through direct marketing programs. ACE European Group also has operations in South Africa, Central and Eastern Europe, the Commonwealth of Independent States (the CIS), and the Middle East and North Africa. Our operations in South Africa write P&C and A&H business. Central and Eastern Europe and the CIS markets are serviced through our Warsaw and Moscow offices which were opened in 2005. The Middle East and North Africa region includes insurance subsidiaries and joint ventures in Egypt, Saudi Arabia, Pakistan, and Bahrain. ACE Global Markets primarily underwrites P&C insurance through Syndicate 2488 and AEGL. ACE Global Markets utilizes Syndicate 2488 to underwrite P&C business on a global basis through Lloyd’s worldwide licenses. ACE Global Markets utilizes AEGL to underwrite similar classes of business through its network of U.K. and Continental Europe licenses, and in the U.S. where it is eligible to write excess & surplus business. Factors influencing the decision to place business with Syndicate 2488 or AEGL
 
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include licensing eligibilities, capitalization requirements, and client/broker preference. All business underwritten by ACE Global Markets is accessed through registered brokers. The main lines of business include aviation, property, energy, professional lines, marine, political risk, and A&H.
• ACE Asia Pacific is headquartered in Singapore and has an extensive network of operations serving Australia, Hong Kong, India, Indonesia, Korea, Macau, Malaysia, New Zealand, the Philippines, Singapore, Taiwan, Thailand, and Vietnam. ACE Asia Pacific offers a broad range of P&C, A&H, and specialty coverages principally directed at large and mid-sized corporations as well as individual consumers. This region also provides management, underwriting, and administrative support to our equity investee, Huatai Insurance Company of China, Limited.
• ACE Far East is based in Tokyo and offers a broad range of P&C, A&H, and personal lines insurance products and services to businesses and consumers in Japan, principally delivered through an extensive agency network.
• ACE Latin America includes business operations throughout Latin America and the Caribbean, including offices in Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, and Puerto Rico. ACE Latin America focuses on providing P&C, A&H, and specialty personal lines insurance products and services to both large and small commercial clients as well as individual consumers. ACE Latin America distributes its products through brokers (for its commercial business) and direct marketing and sponsored programs (for its consumer business).
 
Competitive Environment
ACE International’s primary competitors include U.S.-based companies with global operations, as well as non-U.S. global carriers and indigenous companies in regional and local markets. For the A&H lines of business, locally-based competitors include financial institutions and bank-owned insurance subsidiaries. Our international operations have the distinct advantage of being part of one of the few international insurance groups with a global network of licensed companies able to write policies on a locally admitted basis. The principal competitive factors that affect the international operations are underwriting expertise and pricing, relative operating efficiency, product differentiation, producer relations, and the quality of policyholder services. A competitive strength of our international operations is our global network and breadth of insurance programs, which assist individuals and business organizations to meet their risk management objectives. Insurance operations in over 50 countries also represent a competitive advantage in terms of depth of local technical expertise, accomplishing a spread of risk, and offering a global network to service multi-national accounts.
ACE Global Markets is one of the preeminent international specialty insurers in London and is an established lead underwriter on a significant portion of the risks underwritten, particularly within the aviation and marine lines of business. This leadership position allows ACE Global Markets to set the policy terms and conditions of many of the policies written. All lines of business face competition, depending on the business class, from Lloyd’s syndicates, the London market, and other major international insurers and reinsurers. Competition for international risks is also seen from domestic insurers in the country of origin of the insured. ACE Global Markets differentiates itself from competitors through long standing experience in its product lines, its multiple insurance entities (Syndicate 2488 and AEGL), and the quality of its underwriting and claims service.
 
Global Reinsurance
 
Background
The Global Reinsurance segment, which accounted for 11 percent of consolidated 2007 net premiums earned, represents ACE’s reinsurance operations comprising ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re Europe, and ACE Tempest Re Canada. Global Reinsurance markets its reinsurance products worldwide under the ACE Tempest Re brand name and provides a broad range of coverages to a diverse array of primary P&C companies. Global Reinsurance has expanded beyond catastrophe lines to become a leading global multi-line reinsurance business with underwriting offices in Bermuda, Stamford, Montreal, London, and Zurich. This has reduced the volatility of ACE’s reinsurance operations by diversifying Global Reinsurance’s business to offer a comprehensive range of products to satisfy client demand. We consider an expanded product offering vital to competing effectively in the reinsurance market, but not at the expense of profitability.
 
Products and Distribution
Global Reinsurance services clients globally through its major units: ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re Europe, and ACE Tempest Re Canada. Through these operations, we are able to provide a complete portfolio of products on a global basis to clients. Major international brokers submit business to one or more of these units’ underwriting teams who have built strong relationships with both key brokers and clients by explaining their approach and demonstrating consistently open, responsive, and dependable service.
 
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Through reinsurance intermediaries, ACE Tempest Re Bermuda principally provides property catastrophe reinsurance globally to insurers of commercial and personal property. Property catastrophe reinsurance on an occurrence basis protects a ceding company against an accumulation of losses covered by its issued insurance policies, arising from a common event or occurrence. ACE Tempest Re Bermuda underwrites reinsurance principally on an excess of loss basis, meaning that its exposure only arises after the ceding company’s accumulated losses have exceeded the attachment point of the reinsurance policy. ACE Tempest Re Bermuda also writes other types of reinsurance on a limited basis for selected clients. Examples include proportional property (reinsurer shares a proportional part of the premiums and losses of the ceding company) and per risk excess of loss treaty reinsurance (coverage applies on a per risk basis rather than per event or aggregate basis), together with specialty lines (catastrophe workers’ compensation and terrorism).
ACE Tempest Re USA writes all lines of traditional and specialty P&C reinsurance for the North American market, with a focus on writing property per risk and casualty reinsurance, including medical malpractice and surety, principally on a treaty basis, with a weighting towards casualty. This unit’s diversified portfolio is produced through reinsurance intermediaries.
ACE Tempest Re Europe provides treaty reinsurance of P&C business of insurance companies worldwide, with emphasis on non-U.S. and London market risks. ACE Tempest Re Europe writes all lines of traditional and specialty reinsurance including property, casualty, marine, aviation, and medical malpractice through our London- and Zurich-based divisions. The London-based divisions of ACE Tempest Re Europe focus on the development of business sourced through London market brokers and, consequently, write a diverse book of international business utilizing Lloyd’s global licensing and the Company market licensing. The Zurich-based division focuses on providing reinsurance to continental European insurers via continental European brokers.
ACE Tempest Re Canada commenced writing business in 2007, offering a full array of P&C reinsurance to the Canadian market. ACE Tempest Re Canada provides its coverage through its Canadian company platform and also offers its clients access to Lloyd’s Syndicate 2488.
 
Competitive Environment
The Global Reinsurance segment competes worldwide with major U.S. and non-U.S. reinsurers as well as reinsurance departments of numerous multi-line insurance organizations. Global Reinsurance is considered a lead reinsurer and is typically involved in the negotiation and quotation of the terms and conditions of the majority of the contracts in which it participates. Global Reinsurance competes effectively in P&C markets worldwide because of its strong capital position, the quality of service provided to customers, the leading role it plays in setting the terms, pricing, and conditions in negotiating contracts, and its customized approach to risk selection. The key competitors in our markets vary by geographic region and product line and we have also experienced clients who are increasing their retention. Further, over the last several years, capital markets participants have developed financial products intended to compete with traditional reinsurance. In addition, government sponsored or backed catastrophe funds can affect demand for reinsurance.
 
Life Insurance and Reinsurance
 
Background
Life Insurance and Reinsurance, which accounted for three percent of consolidated 2007 net premiums earned, includes the operations of ACE Tempest Life Re (ACE Life Re) and ACE International Life. ACE Life Re helps clients (ceding companies) manage mortality, morbidity, lapse, and/or capital market risks embedded in their books of business. ACE Life Re comprises two companies. The first is a Bermuda-based niche player in the life reinsurance market that provides reinsurance coverage to other life insurance companies, focusing on guarantees included in certain fixed and variable annuity products. The second is a U.S.-based traditional life reinsurance company licensed in 49 states and the District of Columbia, offering reinsurance capacity for the individual life business utilizing yearly renewable term and coinsurance structures. ACE International Life provides traditional life insurance protection and investment and savings products to individuals in several countries including China, Egypt, Taiwan, Thailand, Vietnam, the United Arab Emirates, and various Latin American countries.
 
Products and Distribution
ACE Life Re markets its products directly to clients as well as through reinsurance intermediaries. The marketing plan seeks to capitalize on the relationships developed by our executive officers and underwriters with members of the actuarial profession and executives at client companies. ACE Life Re targets potential ceding insurers that it believes would benefit from its reinsurance products based on analysis of publicly available information and other industry data. In addition, reinsurance transactions are often placed by reinsurance intermediaries and consultants. ACE Life Re works with such third party marketers in an effort to maintain a high degree of visibility in the reinsurance marketplace. ACE Life Re’s strategy and business does
 
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not depend on a single client or a few clients. To date, we have entered into reinsurance agreements with more than 30 clients. A significant percentage of our total revenue and income in Bermuda derives from our core line of business, which is reinsurance of variable annuity guarantees. Our primary focus in the Bermuda operation remains the variable annuity line of business, in which our main goals are to successfully manage the current portfolio while continuing expansion into international variable annuity products and potential opportunities in new variable annuity guarantees and variable life products. In the U.S., our core business is growing and is comprised of treaties with significant players in the U.S. individual life insurance market. We will continue to grow this line by entering into reinsurance agreements that are consistent with our underwriting and profit objectives.
ACE International Life offers a broad portfolio of products including whole life, endowment plans, individual term life, group term life, personal accident, universal life, and variable annuity contracts. The policies written by ACE International Life generally provide funds for dependents of insureds after death but many also have a savings component. ACE International Life sells to consumers through a variety of distribution channels including agency, bancassurance and telemarketing through affinity groups. We plan to continue to expand this business with a focus on opportunities in emerging markets that we believe will ultimately result in strong and sustainable operating profits as well as favorable return on capital commitments after an initial growth period.
 
Competitive Environment
Until recently, there had been little competition for ACE Life Re in the variable annuity reinsurance marketplace. After years of being the only major reinsurer actively writing new reinsurance of variable annuity guarantees, new entrants have emerged. We view the increased competition as a favorable development as long as the new entrants are rational and reasonable with their pricing and underwriting. We believe their entry will create a viable reinsurance market for these risks that will give direct writers the opportunity to evaluate reinsurance against alternative means of managing the variable annuity risk (such as hedging). The life reinsurance market for traditional mortality risk is highly competitive as most of the reinsurance companies are well established, have significant operating histories, strong claims-paying ability ratings, and long-standing client relationships through existing treaties with ceding companies. ACE Life Re competes effectively by leveraging the strength of its client relationships, underwriting expertise and capacity, and our brand name and capital position.
ACE International Life’s competition differs by location but generally includes multi-national insurers, and in some locations, local insurers, joint ventures, or state-owned insurers. ACE’s financial strength and reputation as an entrepreneurial organization with a global presence gives ACE International Life a strong base from which to compete.

Underwriting
ACE is an underwriting company and we strive to emphasize quality of underwriting rather than volume of business or market share. Our underwriting strategy is to employ consistent, disciplined pricing and risk selection in order to maintain a profitable book of business throughout market cycles. Clearly defined underwriting authorities, standards, and guidelines are in place in each of our local operations and global profit centers. Global product boards ensure consistency of approach and the establishment of best practices throughout the world. Our priority is to help ensure adherence to criteria for risk selection by maintaining high levels of experience and expertise in our underwriting staff. In addition, we employ a business review structure that helps ensure control of risk quality and conservative use of policy limits and terms and conditions.
Qualified actuaries in each region work closely with the underwriting teams to provide additional expertise in the underwriting process. We use sophisticated catastrophe loss and risk modeling techniques designed to ensure appropriate spread of risk and to analyze correlation of risk across different product lines and territories. This helps to ensure that losses are contained within our risk tolerances and appetite for individual products lines, businesses, and ACE as a whole. We also purchase reinsurance as a tool to diversify risk and limit the net loss potential of catastrophes and large or unusually hazardous risks. For more information refer to “Insurance and Reinsurance Markets”, under Item 1A, “Catastrophe Exposure Management” and “Natural Catastrophe Reinsurance Program”, under Item 7, and Note 4 to the Consolidated Financial Statements, under Item 8.
 
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Reinsurance Protection
As part of our risk management strategy, we purchase reinsurance protection to mitigate our exposure to losses, including catastrophes, to an acceptable level. Although reinsurance agreements contractually obligate our reinsurers to reimburse us for an agreed-upon portion of our gross paid losses, this reinsurance does not discharge our primary liability to our insureds and, thus, we remain liable for the gross direct loss. In certain countries, reinsurer selection is limited by local laws or regulations. In those areas where there is more freedom of choice, the counterparty is selected based upon its financial strength, management, line of business expertise, and its price for assuming the risk transferred. In support of this process, we maintain an ACE authorized reinsurer list that stratifies these authorized reinsurers by classes of business and acceptable limits. This list is maintained by our Reinsurance Security Committee (RSC), a committee comprised of senior management personnel, and a dedicated reinsurer security team. Changes to the list are authorized by the RSC and recommended to the Chair of the Group Risk Committee. The reinsurers on the authorized list and potential new markets are regularly reviewed, and the list may be modified following these reviews. In addition to the authorized list, there is a formal exception process that allows authorized reinsurance buyers to use reinsurers already on the authorized list for higher limits or different lines of business, for example, or other reinsurers not on the authorized list if their use is supported by compelling business reasons for a particular reinsurance program.
A separate policy and process exists for captive reinsurance companies. Generally, these reinsurance companies are established by our clients or our clients have an interest in them. It is generally our policy to obtain collateral equal to the expected losses that may be ceded to the captive. Where appropriate, exceptions to the collateral requirement are granted but only after senior management review. Specific collateral guidelines and an exception process are in place for ACE USA and Insurance – Overseas General, both of which have credit management units evaluating the captive’s credit quality and that of their parent company. The credit management units, working with actuarial, determine reasonable exposure estimates (collateral calculations), ensure receipt of collateral in a form acceptable to the Company, and coordinate collateral adjustments as and when needed. Currently, financial reviews and expected loss evaluations are performed annually for active captive accounts and as needed for run-off exposures. In addition to collateral, parental guarantees are often used to enhance the credit quality of the captive.
In general, we seek to place our reinsurance with highly rated companies with which we have a strong trading relationship. For more information refer to “Catastrophe Exposure Management” and “Natural Catastrophe Reinsurance Program”, under Item 7, and Note 4 to the Consolidated Financial Statements, under Item 8.

Unpaid Losses and Loss Expenses
We establish reserves for unpaid losses and loss expenses, which are estimates of future payments of reported and unreported claims for losses and related expenses, with respect to insured events that have occurred. The process of establishing loss reserves for P&C claims can be complex and is subject to considerable variability as it requires the use of informed estimates and judgments based on circumstances known at the date of accrual. These estimates and judgments are based on numerous factors, and may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed, or as current laws change. We have actuarial staff in each of our operating segments who analyze insurance reserves and regularly evaluate the levels of loss reserves, taking into consideration factors that may impact the ultimate settlement value of the unpaid losses and loss expenses. Any such revisions could result in future changes in estimates of losses or reinsurance recoverable and would be reflected in our results of operations in the period in which the estimates are changed. Losses and loss expenses are charged to income as incurred. The reserve for unpaid losses and loss expenses represents the estimated ultimate losses and loss expenses less paid losses and loss expenses, and comprises case reserves and incurred but not reported (IBNR) loss reserves. With the exception of certain structured settlements, for which the timing and amount of future claim payments are reliably determinable, our loss reserves are not discounted for time value. In connection with these structured settlements, we carry reserves of $117 million, net of discount, at December 31, 2007.
We implicitly consider the impact of various forms of inflation, for example medical and judicial, in estimating the reserve for unpaid losses and loss expenses. There is no precise method for subsequently evaluating the adequacy of the consideration given to inflation, since claim settlements are affected by many factors.
During the loss settlement period, which can be many years in duration, additional facts regarding individual claims and trends often will become known. As these become apparent, case reserves may be adjusted by allocation from IBNR without any change in the overall reserve. In addition, the circumstances of individual claims or the application of statistical and
 
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actuarial methods to loss experience data may lead to the adjustment of the overall reserves upward or downward from time to time. Accordingly, the ultimate settlement of losses may be significantly greater than or less than reported loss and loss expense reserves.
We have considered asbestos and environmental (A&E) claims and claims expenses in establishing the liability for unpaid losses and loss expenses and have developed reserving methods which incorporate new sources of data with historical experience to estimate the ultimate losses arising from A&E exposures. The reserves for A&E claims and claims expenses represent management’s best estimate of future loss and loss expense payments and recoveries that are expected to develop over the next several decades. We continuously monitor evolving case law and its effect on environmental and latent injury claims and we monitor A&E claims activity quarterly and perform a full reserve review annually.
For each product line, management, in conjunction with internal actuaries, develops a “best estimate” of the ultimate settlement value of the unpaid losses and loss expenses that it believes provides a reasonable estimate of the required reserve. We evaluate our estimates of reserves quarterly in light of developing information and discussions and negotiations with our insureds. While we are unable at this time to determine whether additional reserves, which could have a material adverse effect upon our financial condition, results of operations, and cash flows, may be necessary in the future, we believe that our reserves for unpaid losses and loss expenses are adequate as of December 31, 2007.
For more information refer to “Critical Accounting Estimates – Unpaid losses and loss expenses”, under Item 7 and Note 6 to the Consolidated Financial Statements, under Item 8.
The “Analysis of Losses and Loss Expenses Development” table shown below presents for each balance sheet date over the period 1997-2007, the gross and net loss and loss expense reserves recorded at the balance sheet date and subsequent payments from the net reserves. The reserves represent the amount required for the estimated future settlement value of liabilities incurred at or prior to the balance sheet date and those estimates may change subsequent to the balance sheet date as new information emerges regarding the ultimate settlement value of the liability. Accordingly, the table also presents through December 31, 2007, for each balance sheet date, the cumulative impact of subsequent valuations of the liabilities incurred at the original balance sheet date. The data in the table is presented in accordance with reporting requirements of the SEC. This table should be interpreted with care by those not familiar with its format or those who are familiar with other triangulations arranged by origin year of loss such as accident or underwriting year rather than balance sheet date, as shown below. To clarify the interpretation of the table, we use the reserves established at December 31, 1999, in the following example.
The top two lines of the table show for successive balance sheet dates the gross and net unpaid losses and loss expenses recorded as provision for liabilities incurred at or prior to each balance sheet date. It can be seen that at December 31, 1999, a reserve of $9.057 billion net of reinsurance had been established.
The upper (paid) triangulation presents the net amounts paid as of periods subsequent to the balance sheet date. Hence in the 2000 financial year, $2.663 billion of payments were made from the December 31, 1999, reserve balance established for liabilities incurred prior to the 2000 financial year. At the end of the 2007 financial year this block of liabilities had resulted in cumulative net payments of $7.310 billion.
The lower triangulation within the table shows the revised estimate of the net liability originally recorded at each balance sheet date as of the end of subsequent financial years. With the benefit of actual loss emergence and hindsight over the intervening period, the net liabilities incurred as of December 31, 1999, are now estimated to be $10.492 billion, rather than the original estimate of $9.057 billion. One of the key drivers of this change has been adverse development on latent claims that we categorize as asbestos and environmental losses and other run-off liabilities covered under the National Indemnity Company (NICO) reinsurance treaties. Of the cumulative deficiency of $1.435 billion recognized in the seven years since December 31, 1999, $368 million relates to non-latent claims and $1.067 billion relates to latent claims. The deficiency of $1.435 billion was identified and recorded as follows; $45 million redundant in 2000, $8 million deficient in 2001, $558 million deficient in 2002, $149 million deficient in 2003, $874 million deficient in 2004, $121 million redundant in 2005, $41 million deficient in 2006, and $29 million redundant in 2007.
Importantly, the cumulative deficiency or redundancy for different balance sheet dates are not independent and therefore, should not be added together. In the last year, we have revised our estimate of the December 31, 1999, liabilities from $10.521 billion to $10.492 billion. This favorable development of $29 million will also be included in each column to the right of the December 31, 1999, column to recognize that this additional amount was also required in the reserves established for each annual balance sheet date from December 31, 2000, to December 31, 2007.
The loss development table shows that our original estimate of the net unpaid loss and loss expense requirement at December 31, 2006, of $22.008 billion has, with the benefit of actual loss emergence and hindsight, been revised to $21.791 billion at December 31, 2007. This favorable movement of $217 million is referred to as prior period development
 
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and is the net result of a number of underlying movements both favorable and adverse. The key underlying movements are discussed in more detail within the “Prior Period Development” section of Item 7.
In the table following certain recorded balances for accidents years 2006 and prior in Insurance – North American were re-classified across accident years. This resulted in favorable development of approximately $155 million on accident years 2003-2005 and adverse development of $153 million on accident years 2002 and prior. Within Insurance – Overseas General long-tail lines, there was $23 million of favorable development on the 2003-2005 accident years following a change in selection of actuarial methods. In addition, an update of our detailed annual evaluation of the excess exposures at Insurance – Overseas General resulted in net favorable prior period development of $20 million which comprised strengthening of $45 million in accident year 2006 and $89 million in accident years 2003 and prior and a release of $154 million in accident years 2004 and 2005.
The bottom lines of the table show the re-estimated amount of previously recorded gross liabilities at December 31, 2007, together with the change in reinsurance recoverable. Similar to the net liabilities, the cumulative redundancy or deficiency on the gross liability is the difference between the gross liability originally recorded and the re-estimated gross liability at December 31, 2007. For example, with respect to the gross unpaid loss and loss expenses of $16.713 billion for 1999, by December 31, 2007, this gross liability was re-estimated to be $22.811 billion, resulting in the cumulative deficiency on the gross liability originally recorded for the 1999 balance sheet year of $6.098 billion. This deficiency relates primarily to U.S. liabilities, including A&E liabilities for 1995 and prior. The gross deficiency results in a net deficiency of $1.435 billion as a result of substantial reinsurance coverage that reduces the gross loss; approximately $2.2 billion was covered by reinsurance placed when the risks were originally written and $1.25 billion of the remaining liability has been ceded to NICO.
We do not consider it appropriate to extrapolate future deficiencies or redundancies based upon the table, as conditions and trends that have affected development of the liability in the past may not necessarily recur in the future. We believe that our current estimates of net liabilities appropriately reflect our current knowledge of the business profile and the prevailing market, social, legal and economic conditions while giving due consideration to historical trends and volatility evidenced in our markets over the longer term. The key issues and considerations involved in establishing our estimate of the net liabilities are discussed in more detail within the “Critical Accounting Estimates – Unpaid losses and loss expenses” section of Item 7.
On July 2, 1999, we changed our fiscal year-end from September 30 to December 31. As a result, the information provided for the 1999 year is actually for the 15-month period from October 1, 1998, through December 31, 1999. Prior to December 31, 1999, the net unpaid losses and loss expenses are in respect of annual periods ending on September 30 of each year. We acquired Tarquin (a Lloyds managing agency) on July 9, 1998. The Tarquin acquisition was accounted for using the pooling-of-interest method and, accordingly, loss experience prior to this acquisition is included in the table consistent with the reporting of loss reserves in our restated 1996 and 1997 consolidated financial statements, as presented subsequent to this acquisition. On January 2, 1998, we acquired ACE US Holdings; on April 1, 1998, we acquired CAT Limited; and on July 2, 1999, we acquired ACE INA (CIGNA’s P&C business). The unpaid loss information for ACE US Holdings, CAT Limited, and ACE INA has been included in the table commencing in the year of acquisition. As a result, 1999 includes net reserves of $6.8 billion related to ACE INA at the date of acquisition and subsequent development thereon. On April 28, 2004, we completed the sale of 65.3 percent of Assured Guaranty Ltd. (AGO). The historical loss information for AGO has been removed from the table.
 
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Analysis of Losses and Loss Expenses Development

 	 	Years ended
September 30	 	 	 	 	Years ended December 31	
(in millions of U.S.
dollars)	 	1997	 	 	 	1998	 	 	 	 	1999 (1)	 	 	 	 	2000	 	 	 	 	2001	 	 	 	 	2002	 	 	 	 	2003	 	 	 	 	2004	 	 	 	 	2005	 	 	 	 	2006	 	 	 	 	2007	
Gross unpaid loss	 	$	2,112	 	 	 	$	3,738	 	 	 	 	$	16,713	 	 	 	 	$	17,184	 	 	 	 	$	20,555	 	 	 	 	$	24,143	 	 	 	 	$	26,605	 	 	 	 	$	31,483	 	 	 	 	$	35,055	 	 	 	 	$	35,517	 	 	 	 	$	37,112	
Net unpaid loss	 	 	2,007	 	 	 	 	2,677	 	 	 	 	 	9,057	 	 	 	 	 	9,075	 	 	 	 	 	10,226	 	 	 	 	 	11,546	 	 	 	 	 	14,203	 	 	 	 	 	17,517	 	 	 	 	 	20,458	 	 	 	 	 	22,008	 	 	 	 	 	23,592	
Net paid
(Cumulative)
As Of:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
1 year later	 	 	337	 	 	 	 	1,018	 	 	 	 	 	2,663	 	 	 	 	 	2,380	 	 	 	 	 	2,627	 	 	 	 	 	2,610	 	 	 	 	 	2,747	 	 	 	 	 	3,293	 	 	 	 	 	3,711	 	 	 	 	 	4,038 	(2)	 	 	 	 	 	
2 years later	 	 	925	 	 	 	 	1,480	 	 	 	 	 	4,023	 	 	 	 	 	3,798	 	 	 	 	 	4,598	 	 	 	 	 	4,185	 	 	 	 	 	4,770	 	 	 	 	 	5,483	 	 	 	 	 	6,487	 	 	 	 	 	 	 	 	 	 	 	 	
3 years later	 	 	1,066	 	 	 	 	1,656	 	 	 	 	 	5,081	 	 	 	 	 	5,111	 	 	 	 	 	5,468	 	 	 	 	 	5,622	 	 	 	 	 	6,318	 	 	 	 	 	7,222	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
4 years later	 	 	1,171	 	 	 	 	1,813	 	 	 	 	 	6,116	 	 	 	 	 	5,406	 	 	 	 	 	6,588	 	 	 	 	 	6,815	 	 	 	 	 	7,711	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
5 years later	 	 	1,197	 	 	 	 	1,979	 	 	 	 	 	6,225	 	 	 	 	 	6,094	 	 	 	 	 	7,395	 	 	 	 	 	7,838	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
6 years later	 	 	1,235	 	 	 	 	2,035	 	 	 	 	 	6,742	 	 	 	 	 	6,528	 	 	 	 	 	7,913	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
7 years later	 	 	1,274	 	 	 	 	2,240	 	 	 	 	 	7,093	 	 	 	 	 	6,849	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
8 years later	 	 	1,414	 	 	 	 	2,294	 	 	 	 	 	7,310	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
9 years later	 	 	1,428	 	 	 	 	2,356	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
10 years later	 	 	1,475	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net Liability
Re-estimated
As Of:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
End of year	 	$	2,007	 	 	 	$	2,677	 	 	 	 	$	9,057	 	 	 	 	$	9,075	 	 	 	 	$	10,226	 	 	 	 	$	11,546	 	 	 	 	$	14,203	 	 	 	 	$	17,517	 	 	 	 	$	20,458	 	 	 	 	$	22,008	 	 	 	 	$	23,592	
1 year later	 	 	1,990	 	 	 	 	2,752	 	 	 	 	 	9,012	 	 	 	 	 	9,230	 	 	 	 	 	10,975	 	 	 	 	 	11,696	 	 	 	 	 	14,739	 	 	 	 	 	17,603	 	 	 	 	 	20,446	 	 	 	 	 	21,791	 	 	 	 	 	 	
2 years later	 	 	1,915	 	 	 	 	2,747	 	 	 	 	 	9,020	 	 	 	 	 	9,883	 	 	 	 	 	11,265	 	 	 	 	 	12,731	 	 	 	 	 	14,985	 	 	 	 	 	17,651	 	 	 	 	 	20,366	 	 	 	 	 	 	 	 	 	 	 	 	
3 years later	 	 	1,853	 	 	 	 	2,719	 	 	 	 	 	9,578	 	 	 	 	 	10,139	 	 	 	 	 	12,249	 	 	 	 	 	12,993	 	 	 	 	 	15,249	 	 	 	 	 	17,629	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
4 years later	 	 	1,833	 	 	 	 	2,704	 	 	 	 	 	9,727	 	 	 	 	 	11,014	 	 	 	 	 	12,432	 	 	 	 	 	13,307	 	 	 	 	 	15,532	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
5 years later	 	 	1,815	 	 	 	 	2,688	 	 	 	 	 	10,601	 	 	 	 	 	10,947	 	 	 	 	 	12,588	 	 	 	 	 	13,669	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
6 years later	 	 	1,828	 	 	 	 	2,826	 	 	 	 	 	10,480	 	 	 	 	 	11,112	 	 	 	 	 	12,720	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
7 years later	 	 	1,846	 	 	 	 	2,696	 	 	 	 	 	10,521	 	 	 	 	 	11,135	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
8 years later	 	 	1,773	 	 	 	 	2,674	 	 	 	 	 	10,492	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
9 years later	 	 	1,767	 	 	 	 	2,652	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
10 years later	 	 	1,779	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cumulative redundancy/ (deficiency) on net unpaid	 	 	228	 	 	 	 	25	 	 	 	 	 	(1,435	)	 	 	 	 	(2,060	)	 	 	 	 	(2,494	)	 	 	 	 	(2,123	)	 	 	 	 	(1,329	)	 	 	 	 	(112	)	 	 	 	 	92	 	 	 	 	 	217	 	 	 	 	 	 	
Cumulative deficiency related to A&E	 	 	–	 	 	 	 	(33	)	 	 	 	 	(1,067	)	 	 	 	 	(1,067	)	 	 	 	 	(1,062	)	 	 	 	 	(546	)	 	 	 	 	(546	)	 	 	 	 	(81	)	 	 	 	 	(81	)	 	 	 	 	(29	)	 	 	 	 	 	
Cumulative redundancy/ (deficiency) on net unpaid	 	 	228	 	 	 	 	58	 	 	 	 	 	(368	)	 	 	 	 	(993	)	 	 	 	 	(1,432	)	 	 	 	 	(1,577	)	 	 	 	 	(783	)	 	 	 	 	(31	)	 	 	 	 	173	 	 	 	 	 	246	 	 	 	 	 	 	
Gross unpaid losses and loss expenses end of year	 	$	2,112	 	 	 	$	3,738	 	 	 	 	$	16,713	 	 	 	 	$	17,184	 	 	 	 	$	20,555	 	 	 	 	$	24,143	 	 	 	 	$	26,605	 	 	 	 	$	31,483	 	 	 	 	$	35,055	 	 	 	 	$	35,517	 	 	 	 	$	37,112	
Reinsurance recoverable on unpaid losses	 	 	105	 	 	 	 	1,061	 	 	 	 	 	7,656	 	 	 	 	 	8,109	 	 	 	 	 	10,329	 	 	 	 	 	12,597	 	 	 	 	 	12,402	 	 	 	 	 	13,966	 	 	 	 	 	14,597	 	 	 	 	 	13,509	 	 	 	 	 	13,520	
Net unpaid losses and loss expenses	 	 	2,007	 	 	 	 	2,677	 	 	 	 	 	9,057	 	 	 	 	 	9,075	 	 	 	 	 	10,226	 	 	 	 	 	11,546	 	 	 	 	 	14,203	 	 	 	 	 	17,517	 	 	 	 	 	20,458	 	 	 	 	 	22,008	 	 	 	 	 	23,592	
Gross liability re-estimated	 	 	1,799	 	 	 	 	4,255	 	 	 	 	 	22,811	 	 	 	 	 	23,875	 	 	 	 	 	27,807	 	 	 	 	 	28,875	 	 	 	 	 	29,958	 	 	 	 	 	32,070	 	 	 	 	 	34,409	 	 	 	 	 	34,972	 	 	 	 	 	 	
Reinsurance recoverable on unpaid losses	 	 	20	 	 	 	 	1,603	 	 	 	 	 	12,319	 	 	 	 	 	12,740	 	 	 	 	 	15,087	 	 	 	 	 	15,206	 	 	 	 	 	14,426	 	 	 	 	 	14,441	 	 	 	 	 	14,043	 	 	 	 	 	13,181	 	 	 	 	 	 	
Net liability re-estimated	 	 	1,779	 	 	 	 	2,652	 	 	 	 	 	10,492	 	 	 	 	 	11,135	 	 	 	 	 	12,720	 	 	 	 	 	13,669	 	 	 	 	 	15,532	 	 	 	 	 	17,629	 	 	 	 	 	20,366	 	 	 	 	 	21,791	 	 	 	 	 	 	
Cumulative redundancy/ (deficiency) on gross unpaid losses	 	 	313	 	 	 	 	(517	)	 	 	 	 	(6,098	)	 	 	 	 	(6,691	)	 	 	 	 	(7,252	)	 	 	 	 	(4,732	)	 	 	 	 	(3,353	)	 	 	 	 	(587	)	 	 	 	 	646	 	 	 	 	 	545	 	 	 	 	 	 	
(1) The 1999 year is for the 15-month period ended December 31, 1999.
(2) This amount does not agree to the reconciliation of unpaid losses and loss expenses on the table following due to the accounting treatment of a novation of a retroactive assumed loss portfolio transfer from 2002 resulting in the elimination of the deferred asset of $79 million and the reduction of the related reserve.
 
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Reconciliation of Unpaid Losses and Loss Expenses

Years ended December 31
(in millions of U.S. dollars)	 	2007 	 	 	 	2006 	 	 	 	2005 	
Gross unpaid losses and loss expenses at beginning of year	 	$	35,517 	 	 	 	$	35,055 	 	 	 	$	31,483 	
Reinsurance recoverable on unpaid losses	 	 	(13,509)	 	 	 	 	(14,597)	 	 	 	 	(13,966)	
Net unpaid losses and loss expenses at beginning of year	 	 	22,008 	 	 	 	 	20,458 	 	 	 	 	17,517 	
Sale of certain run-off subsidiaries	 	 	– 	 	 	 	 	(472)	 	 	 	 	– 	
Total	 	 	22,008 	 	 	 	 	19,986 	 	 	 	 	17,517 	
Net losses and loss expenses incurred in respect of losses occurring in:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Current year	 	 	7,568 	 	 	 	 	7,082 	 	 	 	 	8,485 	
Prior year	 	 	(217)	 	 	 	 	(12)	 	 	 	 	86 	
Total	 	 	7,351 	 	 	 	 	7,070 	 	 	 	 	8,571 	
Net losses and loss expenses paid in respect of losses occurring in:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Current year	 	 	1,975 	 	 	 	 	1,748 	 	 	 	 	2,076 	
Prior year	 	 	3,959 	 	 	 	 	3,711 	 	 	 	 	3,293 	
Total	 	 	5,934 	 	 	 	 	5,459 	 	 	 	 	5,369 	
Foreign currency revaluation and other	 	 	167 	 	 	 	 	411 	 	 	 	 	(261)	
Net unpaid losses and loss expenses at end of year	 	 	23,592 	 	 	 	 	22,008 	 	 	 	 	20,458 	
Reinsurance recoverable on unpaid losses	 	 	13,520 	 	 	 	 	13,509 	 	 	 	 	14,597 	
Gross unpaid losses and loss expenses at end of year	 	$	37,112 	 	 	 	$	35,517 	 	 	 	$	35,055 	
 
Net losses and loss expenses incurred for the year ended December 31, 2007, were $7.4 billion, compared with $7.1 billion and $8.6 billion in 2006 and 2005, respectively. Net losses and loss expenses incurred for 2007 and 2006 include $217 million and $12 million of net favorable prior period development, respectively, and 2005 includes $86 million of net adverse prior period development. For more information, refer to the “Prior Period Development” section of Item 7.
 
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Investments
 
Our principal investment objective is to ensure that funds will be available to meet our primary insurance and reinsurance obligations. Within this broad liquidity constraint, the investment portfolio’s structure seeks to maximize return subject to specifically-approved guidelines of overall asset classes, credit quality, liquidity, and volatility of expected returns. As such, our investment portfolio is invested primarily in investment-grade fixed-income securities as measured by the major rating agencies.
The management of our investment portfolio is the responsibility of ACE Asset Management. ACE Asset Management, an indirect wholly-owned subsidiary of ACE, operates principally to guide and direct our investment process. In this regard, ACE Asset Management:
• conducts formal asset allocation modeling for each of the ACE subsidiaries, providing formal recommendations for the portfolio’s structure;
• establishes recommended investment guidelines that are appropriate to the prescribed asset allocation targets;
• provides the analysis, evaluation, and selection of our external investment advisors;
• establishes and develops investment-related analytics to enhance portfolio engineering and risk control;
• monitors and aggregates the correlated risk of the overall investment portfolio; and
• provides governance over the investment process for each of our operating companies to ensure consistency of approach and adherence to investment guidelines.
For the portfolio, we determine allowable, targeted asset allocation and ranges for each of the operating segments. These asset allocation targets are derived from sophisticated asset and liability modeling that measures correlated histories of returns and volatility of returns. Allowable investment classes are further refined through analysis of our operating environment, including expected volatility of cash flows, overall capital position, regulatory, and rating agency considerations.
The Finance and Investment Committee of the Board of Directors approves asset allocation targets and reviews our investment policy to ensure that it is consistent with our overall goals, strategies, and objectives. Overall investment guidelines are reviewed and approved by the Finance and Investment Committee to ensure that appropriate levels of portfolio liquidity, credit quality, diversification, and volatility are maintained. In addition, the Finance and Investment Committee systematically reviews the portfolio’s exposures to capture any potential violations of investment guidelines.
Within the guidelines and asset allocation parameters established by the Finance and Investment Committee, individual investment committees of the operating segments determine tactical asset allocation. Additionally, these committees review all investment-related activity that affects their operating company, including the selection of outside investment advisors, proposed asset allocations changes, and the systematic review of investment guidelines.
For additional information regarding the investment portfolio, including breakdowns of the sector and maturity distributions, refer to Note 3 to the Consolidated Financial Statements, under Item 8.

Regulation
 
Our insurance and reinsurance subsidiaries conduct business globally, including in all 50 states of the United States and the District of Columbia. Our businesses in each of these jurisdictions are subject to varying degrees of regulation and supervision. The laws and regulations of the jurisdictions in which our insurance and reinsurance subsidiaries are domiciled require, among other things, that these subsidiaries maintain minimum levels of statutory capital, surplus and liquidity, meet solvency standards, and submit to periodic examinations of their financial condition. The complex regulatory environments in which ACE operates are subject to change and are regularly monitored. The following is an overview discussion of regulations for our operations in Bermuda, the U.S., and internationally.
 
Bermuda Operations
In Bermuda, our insurance subsidiaries are principally regulated by the Insurance Act 1978 (as amended) and related regulations (the Act). The Act imposes solvency and liquidity standards as well as auditing and reporting requirements, and grants the Bermuda Monetary Authority (the Authority) powers to supervise, investigate, and intervene in the affairs of insurance companies. Significant requirements include the appointment of an independent auditor, the appointment of a loss reserve specialist, and the filing of the Annual Statutory Financial Return with the Executive Member responsible for Insurance (the Executive). The Executive is the chief administrative officer under the Act. We must comply with provisions of the Companies Act 1981 regulating the payment of dividends and distributions. A Bermuda company may not declare or pay a dividend or
 
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make a distribution out of contributed surplus if there are reasonable grounds for believing that: (a) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (b) the realizable value of the company’s assets would thereby be less than the aggregate of its liabilities and its issued share capital and share premium accounts. Further, an insurer may not declare or pay any dividends during any financial year if it would cause the insurer to fail to meet its relevant margins, and an insurer which fails to meet its relevant margins on the last day of any financial year may not, without the approval of the Minister of Finance, declare or pay any dividends during the next financial year. In addition, some of ACE’s Bermuda subsidiaries qualify as “Class 4” insurers and may not in any financial year pay dividends which would exceed 25 percent of their total statutory capital and surplus, as shown on their statutory balance sheet in relation to the previous financial year, unless they file a solvency affidavit at least seven days in advance.
The Executive may appoint an inspector with extensive powers to investigate the affairs of an insurer if he or she believes that an investigation is required in the interest of the insurer’s policyholders or persons who may become policyholders. In order to verify or supplement information otherwise provided to him, the Executive may direct an insurer to produce documents or information relating to matters connected with the insurer’s business. If it appears to the Executive that there is a risk of the insurer becoming insolvent, or that the insurer is in breach of the Act or any conditions of its registration under the Act, the Executive may direct the insurer not to take on any new insurance business, not to vary any insurance contract if the effect would be to increase the insurer’s liabilities, not to make certain investments, to realize certain investments, to maintain in, or transfer to the custody of a specified bank certain assets, not to declare or pay any dividends or other distributions, or to restrict the making of such payments and/or to limit its premium income.
The Act also requires the Authority to supervise persons carrying on insurance business, insurance managers, and intermediaries with the aim of protecting the interests of clients and potential clients of such persons.
The Act requires every insurer to appoint a principal representative resident in Bermuda and to maintain a principal office in Bermuda. The principal representative must be knowledgeable in insurance and is responsible for arranging the maintenance and custody of the statutory accounting records and for filing the annual Statutory Financial Return.
 
U.S. Operations
Our U.S. insurance subsidiaries are subject to extensive regulation and supervision by the states in which they do business. The laws of the various states establish departments of insurance with broad authority to regulate, among other things: the standards of solvency that must be met and maintained, the licensing of insurers and their producers, approval of policy forms and rates, the nature of and limitations on investments, restrictions on the size of the risks which may be insured under a single policy, deposits of securities for the benefit of policyholders, requirements for the acceptability of reinsurers, periodic examinations of the affairs of insurance companies, the form and content of reports of financial condition required to be filed, and the adequacy of reserves for unearned premiums, losses, and other purposes.
Our U.S. insurance subsidiaries are required to file detailed annual and quarterly reports with state insurance regulators in each of the states in which they do business. In addition, our U.S. insurance subsidiaries’ operations and accounts are subject to examination at regular intervals by state regulators.
All states have enacted legislation that regulates insurance holding companies. This legislation provides that each insurance company in the system is required to register with the insurance department of its state of domicile and furnish information concerning the operations of companies within the holding company system that may materially affect the operations, management, or financial condition of the insurers within the system. All transactions within a holding company system must be fair and equitable. Notice to the insurance departments is required prior to the consummation of transactions affecting the ownership or control of an insurer and of certain material transactions between an insurer and an entity in its holding company system; in addition, certain transactions may not be consummated without the department’s prior approval.
Statutory surplus is an important measure utilized by the regulators and rating agencies to assess our U.S. insurance subsidiaries’ ability to support business operations and provide dividend capacity. Our U.S. insurance subsidiaries are subject to various state statutory and regulatory restrictions that limit the amount of dividends that may be paid without prior approval from regulatory authorities. These restrictions differ by state, but are generally based on calculations incorporating statutory surplus, statutory net income, and/or investment income.
The National Association of Insurance Commissioners (NAIC) has a risk-based capital requirement for P&C insurance companies. This risk-based capital formula is used by many state regulatory authorities to identify insurance companies that may be undercapitalized and which merit further regulatory attention. These requirements are designed to monitor capital adequacy using a formula that prescribes a series of risk measurements to determine a minimum capital amount for an insurance company, based on the profile of the individual company. The ratio of a company’s actual policyholder surplus to its
 
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minimum capital requirement will determine whether any state regulatory action is required. There are progressive risk-based capital failure levels that trigger more stringent regulatory action. If an insurer’s policyholders’ surplus falls below the Mandatory Control Level (70 percent of the Authorized Control Level, as defined by the NAIC), the relevant insurance commissioner is required to place the insurer under regulatory control. However, an insurance commissioner may allow a P&C company operating below the Mandatory Control Level that is writing no business and is running off its existing business to continue its run-off. Brandywine is running off its liabilities consistent with the terms of an order issued by the Insurance Commissioner of Pennsylvania. This includes periodic reporting obligations to the Pennsylvania Insurance Department.
In November 2002, the U.S. Congress passed the Terrorism Risk Insurance Act (TRIA), which was amended and restated in 2005, and again in 2007. The 2007 TRIA extension renews the program for seven years, through 2014. TRIA was enacted to ensure the availability of insurance coverage for certain types of terrorist acts in the U.S. and requires that qualifying insurers offer terrorism insurance coverage in all P&C insurance policies on terms not materially different than terms applicable to other losses. The U.S. federal government covers 85 percent of the losses from covered certified acts of terrorism, in excess of a specified deductible amount calculated as a percentage of an affiliated insurance group’s prior year premiums on commercial lines policies covering risks in the U.S. This specified deductible amount is 20 percent of such premiums for losses occurring in the prior year. Further, to trigger coverage under TRIA, the aggregate industry P&C insurance losses resulting from an act of terrorism must exceed $100 million. In the 2007 extension, TRIA was expanded to apply to losses resulting from attacks that have been committed by individuals on behalf of a foreign person or foreign interest, as well as acts of domestic terrorism. Further, any such attack must be certified as an “act of terrorism” by the U.S. federal government, and such decision is not subject to judicial review.
Our U.S. subsidiaries are also subject to the general laws of the states and other jurisdictions in which they do business. Beginning in 2004, ACE and its subsidiaries and affiliates received numerous subpoenas, interrogatories, and civil investigative demands in connection with certain investigations of insurance industry practices. These inquiries have been issued by a number of attorneys general, state departments of insurance, and other authorities, including the New York Attorney General (NYAG), the Pennsylvania Department of Insurance, and the SEC. These inquiries seek information concerning underwriting practices and non-traditional or loss mitigation insurance products. To the extent they are ongoing, ACE is cooperating and will continue to cooperate with such inquiries. Information on the insurance industry investigations, including settlement agreements and related matters, is set forth in Note 9 to the Consolidated Financial Statements, under Item 8.
 
International Operations
The extent of insurance regulation varies significantly among the countries in which the non-U.S. ACE operations conduct business. While each country imposes licensing, solvency, auditing, and financial reporting requirements, the type and extent of the requirements differ substantially. For example:
• in some countries, insurers are required to prepare and file quarterly financial reports, and in others, only annual reports;
• some regulators require intermediaries to be involved in the sale of insurance products, whereas other regulators permit direct sales contact between the insurer and the customer;
• the extent of restrictions imposed upon an insurer’s use of foreign reinsurance vary;
• policy form filing and rate regulation vary by country;
• the frequency of contact and periodic on-site examinations by insurance authorities differ by country; and
• regulatory requirements relating to insurer dividend policies vary by country.
Significant variations can also be found in the size, structure, and resources of the local regulatory departments that oversee insurance activities. Certain regulators prefer close relationships with all subject insurers and others operate a risk-based approach.
ACE operates in some countries through subsidiaries and in some countries through branches of those subsidiaries. Local capital requirements applicable to a subsidiary generally include its branches. Certain ACE companies are jointly owned with local companies to comply with legal requirements for local ownership. Other legal requirements include discretionary licensing procedures, compulsory cessions of reinsurance, local retention of funds and records, and foreign exchange controls. ACE’s international companies are also subject to multinational application of certain U.S. laws.

Tax Matters
Refer to “Risk Factors”, under Item 1A below, and Note 2 m) to the Consolidated Financial Statements, under Item 8.
 
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 ITEM 1A.	Risk Factors	
 
Factors that could have a material impact on our results of operations or financial condition are outlined below. Additional risks not presently known to us or that we currently deem insignificant may also impair our business or results of operations as they become known facts or as facts and circumstances change. Any of the risks described below could result in a significant or material adverse effect on our results of operations or financial condition.
 
Business
 
Our financial condition could be adversely affected by the occurrence of natural and man-made disasters.
We have substantial exposure to losses resulting from natural disasters, man-made catastrophes, and other catastrophic events. Catastrophes can be caused by various events, including hurricanes, typhoons, earthquakes, hailstorms, explosions, severe winter weather, fires, war, acts of terrorism, political instability, and other natural or man-made disasters. The incidence and severity of catastrophes are inherently unpredictable and our losses from catastrophes could be substantial. In addition, climate conditions, primarily global temperatures, may be increasing, which may in the future increase the frequency and severity of natural catastrophes and the losses resulting there from. The occurrence of claims from catastrophic events could result in substantial volatility in our results of operations or financial condition for any fiscal quarter or year. Increases in the values and concentrations of insured property may also increase the severity of these occurrences in the future. Although we attempt to manage our exposure to such events through the use of underwriting controls and the purchase of third-party reinsurance, catastrophic events are inherently unpredictable and the actual nature of such events when they occur could be more frequent or severe than contemplated in our pricing and risk management expectations. As a result, the occurrence of one or more catastrophic events could have a material adverse effect on our results of operations or financial condition. Refer to “Catastrophe Exposure Management”, under Item 7 for more information.
 
If actual claims exceed our loss reserves, our financial results could be adversely affected.
Our results of operations and financial condition depend upon our ability to assess accurately the potential losses associated with the risks that we insure and reinsure. We establish reserves for unpaid losses and loss expenses, which are estimates of future payments of reported and unreported claims for losses and related expenses, with respect to insured events that have occurred at or prior to the date of the balance sheet. The process of establishing reserves can be highly complex and is subject to considerable variability as it requires the use of informed estimates and judgments. These estimates and judgments are based on numerous factors, and may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed, as loss trends and claims inflation impact future payments, or as current laws or interpretations thereof change.
We have actuarial staff in each of our operating segments who analyze insurance reserves and regularly evaluate the levels of loss reserves. Any such evaluations could result in future changes in estimates of losses or reinsurance recoverable and would be reflected in our results of operations in the period in which the estimates are changed. Losses and loss expenses are charged to income as incurred. Reserves for unpaid losses and loss expenses represent the estimated ultimate losses and loss expenses less paid losses and loss expenses, and is comprised of case reserves and IBNR. During the loss settlement period, which can be many years in duration for some of our lines of business, additional facts regarding individual claims and trends often will become known. As these become apparent, case reserves may be adjusted by allocation from IBNR without any change in overall reserves. In addition, application of statistical and actuarial methods may require the adjustment of overall reserves upward or downward from time to time.
Included in our liabilities for losses and loss expenses are liabilities for latent claims such as A&E. These claims are principally related to claims arising from remediation costs associated with hazardous waste sites and bodily-injury claims related to exposure to asbestos products and environmental hazards. The estimation of these liabilities is subject to many complex variables including: the current legal environment; specific settlements that may be used as precedents to settle future claims; assumptions regarding multiple recoveries by claimants against various defendants; the ability of a claimant to bring a claim in a state in which they have no residency or exposure; the ability of a policyholder to claim the right to non-products coverage; whether high-level excess policies have the potential to be accessed given the policyholder’s claim trends and liability situation; payments to unimpaired claimants; and the potential liability of peripheral defendants.
Accordingly, the ultimate settlement of losses may be significantly greater or less than the loss and loss expense reserves held at the date of the balance sheet. If our loss reserves are determined to be inadequate, we will be required to increase loss reserves at the time of such determination and our net income will be reduced. If the increase in loss reserves is large enough,
 
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we could incur an operating loss and a reduction of our capital. Refer to “Asbestos and Environmental and Other Run-Off Liabilities”, under Item 7 and Note 6 to the Consolidated Financial Statements, under Item 8.
 
The effects of emerging claim and coverage issues on our business are uncertain.
As industry practices and legislative, regulatory, judicial, social, and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the frequency and severity of claims. In some instances, these changes may not become apparent until some time after we have issued insurance or reinsurance contracts that are affected by the changes. As a result, the full extent of liability under our insurance or reinsurance contracts may not be known for many years after a contract is issued.
 
The failure of any of the loss limitation methods we employ could have an adverse effect on our results of operations or financial condition.
We seek to limit our loss exposure by writing a number of our insurance and reinsurance contracts on an excess of loss basis. Excess of loss insurance and reinsurance indemnifies the insured against losses in excess of a specified amount. In addition, we limit program size for each client and purchase third-party reinsurance for our own account. In the case of our assumed proportional reinsurance treaties, we seek per occurrence limitations or loss and loss expense ratio caps to limit the impact of losses ceded by the client. In proportional reinsurance, the reinsurer shares a proportional part of the premiums and losses of the reinsured. We also seek to limit our loss exposure by geographic diversification. Geographic zone limitations involve significant underwriting judgments, including the determination of the area of the zones and the inclusion of a particular policy within a particular zone’s limits. Various provisions of our policies, such as limitations or exclusions from coverage or choice of forum negotiated to limit our risks, may not be enforceable in the manner we intend. As a result, one or more catastrophic or other events could result in claims that substantially exceed our expectations, which could have an adverse effect on our results of operations or financial condition.
 
We may be unable to purchase reinsurance, and if we successfully purchase reinsurance, we are subject to the possibility of non-payment.
We purchase reinsurance to protect certain ACE companies against catastrophes, to increase the amount of protection we can provide our clients, and as part of our overall risk management strategy. Our reinsurance business also purchases some retrocessional protection. A retrocessional reinsurance agreement allows a reinsurer to cede to another company all or part of the reinsurance that was originally assumed by the reinsurer. A reinsurer’s or retrocessionaire’s insolvency, or inability or unwillingness to make timely payments under the terms of its reinsurance agreement with us, could have an adverse effect on us because we remain liable to the insured. From time to time, market conditions have limited, and in some cases have prevented, insurers and reinsurers from obtaining the types and amounts of reinsurance or retrocessional reinsurance that they consider adequate for their business needs.
There is no guarantee our desired amounts of reinsurance or retrocessional reinsurance will be available in the marketplace in the future. In addition to capacity risk, the remaining capacity may not be on terms we deem appropriate or acceptable or with companies with whom we want to do business. Finally, we face some degree of counterparty risk whenever we purchase reinsurance or retrocessional reinsurance. Consequently, the insolvency, inability or unwillingness of any of our present or future reinsurers to make timely payments to us under the terms of our reinsurance or retrocessional agreements could have an adverse effect on us. At December 31, 2007, we had $14.4 billion of reinsurance recoverables, net of reserves for uncollectible recoverables.
As part of the restructuring of INA Financial Corporation and its subsidiaries that occurred in 1996, Insurance Company of North America (INA) was divided into two separate corporations: an active insurance company that retained the INA name and continued to write P&C business and an inactive run-off company, now called Century Indemnity Company (Century). The A&E exposures of substantially all of INA’s U.S. P&C companies, now our subsidiaries, were either allocated to Century (as a result of the restructuring) or reinsured to subsidiaries of Brandywine, primarily Century. Certain of our subsidiaries are primarily liable for A&E and other exposures they have reinsured to Century. As of December 31, 2007, the aggregate reinsurance balances ceded by our active subsidiaries to Century were $1.5 billion. Should Century experience adverse loss reserve 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 certain expenses and liabilities, including 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. While we believe the intercompany reinsurance recoverables from
 
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Century are not impaired at this time, we cannot assure you that adverse development with respect to Century’s loss reserves will not result in Century’s insolvency, which could result in our recognizing a loss to the extent of any uncollectible reinsurance from Century. For further information regarding our reinsurance exposure to Century, refer to “Asbestos and Environmental and Other Run-Off Liabilities”, under Item 7.
 
Our net income may be volatile because certain products offered by our Life business expose us to reserve and fair value liability changes that are directly affected by market factors.
Under reinsurance programs covering variable annuity guarantees, we assume the risk of guaranteed minimum death benefits (GMDB) and guaranteed minimum income benefits (GMIB) associated with variable annuity contracts. Our net income is directly impacted by changes in the reserves calculated in connection with the reinsurance of GMDB and GMIB liabilities. In addition, our net income is directly impacted by the change in the fair value of the GMIB liability. The reserve and fair value liability calculations are directly affected by market factors, the most significant of which are equity levels, interest rate levels, and implied equity volatilities. ACE views our variable annuity reinsurance business as having a similar risk profile to that of catastrophe reinsurance, with the probability of a cumulative long term economic net loss relatively small. However, in the short run, adverse changes in market factors will have an adverse impact on both life underwriting income and our net income, which may be material. Refer to the “Critical Accounting Estimates – Guaranteed minimum income benefits derivatives”, under Item 7 and “Quantitative and Qualitative Disclosures about Market Risk – Reinsurance of GMIB and GMDB guarantees”, under Item 7A for more information.
 
A failure in our operational systems or infrastructure or those of third parties could disrupt business, damage our reputation, and cause losses.
ACE’s operations rely on the secure processing, storage, and transmission of confidential and other information in its computer systems and networks. ACE’s business depends on effective information systems and the integrity and timeliness of the data it uses to run its business. Our ability to adequately price products and services, to establish reserves, to provide effective and efficient service to our customers, and to timely and accurately report our financial results also depends significantly on the integrity of the data in our information systems. Although we take protective measures and endeavor to modify them as circumstances warrant, our computer systems, software, and networks may be vulnerable to unauthorized access, computer viruses or other malicious code, and other events that could have security consequences. If one or more of such events occur, this potentially could jeopardize ACE’s or our clients’ or counterparties’ confidential and other information processed and stored in, and transmitted through, our computer systems and networks, or otherwise cause interruptions or malfunctions in ACE’s, its clients’, its counterparties’, or third parties’ operations, which could result in significant losses or reputational damage. ACE may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to litigation and financial losses that are either not insured against or not fully covered by insurance maintained.
Despite the contingency plans and facilities we have in place, our ability to conduct business may be adversely affected by a disruption of the infrastructure that supports our business in the communities in which we are located. This may include a disruption involving electrical, communications, transportation, or other services used by ACE. These disruptions may occur, for example, as a result of events that affect only the buildings occupied by ACE or as a result of events with a broader effect on the cities where those buildings are located. If a disruption occurs in one location and ACE employees in that location are unable to occupy its offices and conduct business or communicate with or travel to other locations, our ability to service and interact with clients may suffer and we may not be able to successfully implement contingency plans that depend on communication or travel.
 
Employee error and misconduct may be difficult to detect and prevent and could adversely affect our business, results of operations, and financial condition.
Losses may result from, among other things, fraud, errors, failure to document transactions properly or to obtain proper internal authorization, or failure to comply with regulatory requirements. It is not always possible to deter or prevent employee misconduct and the precautions ACE takes to prevent and detect this activity may not be effective in all cases. Resultant losses could adversely affect our business, results of operations, and financial condition.
 
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Financial Strength Ratings
 
A decline in our ratings could affect our standing among brokers and customers and cause our premiums and earnings to decrease.
Ratings have become an increasingly important factor in establishing the competitive position of insurance and reinsurance companies. The objective of these rating systems is to provide an opinion of an insurer’s financial strength and ability to meet ongoing obligations to its policyholders. Our financial strength ratings reflect the rating agencies’ opinions of our claims paying ability, are not evaluations directed to investors in our securities, and are not recommendations to buy, sell, or hold our securities. If our financial strength ratings are reduced from their current levels by one or more of these rating agencies, our competitive position in the insurance industry could suffer and it would be more difficult for us to market our products. A downgrade, therefore, could result in a substantial loss of business as insureds, ceding companies, and brokers move to other insurers and reinsurers with higher ratings. We cannot give any assurance regarding whether or to what extent any of the rating agencies may downgrade our ratings in the future.
 
Loss of Key Executives
 
We could be adversely affected by the loss of one or more key executives or by an inability to attract and retain qualified personnel.
Our success depends on our ability to retain the services of our existing key executives and to attract and retain additional qualified personnel in the future. The loss of the services of any of our key executives or the inability to hire and retain other highly qualified personnel in the future could adversely affect our ability to conduct our business. We do not maintain key person life insurance policies with respect to our employees.
Many of our senior executives working in Bermuda, including our Chairman, President and Chief Executive Officer, our Chief Financial Officer, our Chief Accounting Officer, our Chief Actuary, and our General Counsel, are not Bermudian. Under Bermuda law, non-Bermudians (other than spouses of Bermudians and holders of permanent resident’s certificates) may not engage in any gainful occupation in Bermuda without an appropriate governmental work permit. Our success may depend in part on the continued services of key employees in Bermuda. A work permit may be granted or renewed upon showing that, after proper public advertisement, no Bermudian (or spouse of a Bermudian or holder of a permanent resident’s certificate) is available who meets the minimum standards reasonably required by the employer. The Bermuda government’s policy places a six-year term limit on individuals with work permits, subject to certain exemptions for key employees. A work permit may be issued with an expiry date that is one to five years later, and no assurances can be given that any work permit will be issued or, if issued, renewed upon the expiration of the relevant term. It is possible that Bermuda could change its laws or policies in a way that would make it more difficult for non-Bermudians to obtain work permits.
 
Reliance on Brokers
 
Since we depend on a few brokers for a large portion of our revenues, loss of business provided by any one of them could adversely affect us.
We market our insurance and reinsurance worldwide primarily through insurance and reinsurance brokers. Marsh, Inc. and its affiliates and Aon Corporation and its affiliates provided approximately 17 percent and 11 percent, respectively, of our gross premiums written in the year ended December 31, 2007. Loss of all or a substantial portion of the business provided by one or more of these brokers could have a material adverse effect on our business.
 
Our reliance on brokers subjects us to their credit risk.
In accordance with industry practice, we generally pay amounts owed on claims under our insurance and reinsurance contracts to brokers, and these brokers, in turn, pay these amounts over to the clients that have purchased insurance or reinsurance from us. Although the law is unsettled and depends upon the facts and circumstances of the particular case, in some jurisdictions, if a broker fails to make such a payment, we might remain liable to the insured or ceding insurer for the deficiency. Conversely, in certain jurisdictions, when the insured or ceding insurer pays premiums for these policies to brokers for payment over to us, these premiums might be considered to have been paid and the insured or ceding insurer will no longer be liable to us for those amounts, whether or not we have actually received the premiums from the broker. Consequently, we assume a degree of credit risk associated with brokers with whom we transact business. However, due to the unsettled and fact-specific nature of the law, we are unable to quantify our exposure to this risk. To date, we have not experienced any material losses related to these credit risks.
 
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Liquidity and Investments
 
Our investment performance may affect our financial results and ability to conduct business.
Our funds are invested by professional investment management firms under the direction of our management team in accordance with investment guidelines approved by the Finance and Investment Committee of the Board of Directors. Although our investment guidelines stress diversification of risks and conservation of principal and liquidity, our investments are subject to market risks, as well as risks inherent in individual securities. The volatility of our loss claims may force us to liquidate securities, which may cause us to incur capital losses. Investment losses could significantly decrease our book value, thereby affecting our ability to conduct business.
 
We may be adversely affected by interest rate changes.
Our operating results are affected by the performance of our investment portfolio. Our investment portfolio contains fixed income investments and may be adversely affected by changes in interest rates. Volatility in interest rates could also have an adverse effect on our investment income and operating results. For example, if interest rates decline, funds reinvested will earn less than the maturing investment.
Interest rates are highly sensitive to many factors, including monetary and fiscal policies, and domestic and international political conditions. Although we take measures to manage the risks of investing in a changing interest rate environment, we may not be able to effectively mitigate interest rate sensitivity. Our mitigation efforts include maintaining a high quality portfolio with a relatively short duration to reduce the effect of interest rate changes on book value. A significant increase in interest rates could have an adverse effect on our book value. Refer to “Quantitative and Qualitative Disclosures about Market Risk – Interest rate risk”, under Item 7A.
 
We may require additional capital in the future, which may not be available or may be available only on unfavorable terms.
Our future capital requirements depend on many factors, including our ability to write new business successfully and to establish premium rates and reserves at levels sufficient to cover losses. We may need to raise additional funds through financings. Any equity or debt financing, if available at all, may be on terms that are not favorable to us. In the case of equity financings, dilution to our shareholders could result, and in any case such securities may have rights, preferences, and privileges that are senior to those of our Ordinary Shares. If we cannot obtain adequate capital on favorable terms, or at all, our business, operating results, and financial condition could be adversely affected.
 
Our investment portfolio has exposure to below investment-grade securities that have a higher degree of credit or default risk which could adversely effect our results of operations and financial condition.
Our fixed income portfolio is primarily invested in high quality, investment-grade securities. However, we invest a smaller portion of the portfolio in below investment-grade securities. These securities, which pay a higher rate of interest, also have a higher degree of credit or default risk. These securities may also be less liquid in times of economic weakness or market disruptions. While we have put in place procedures to monitor the credit risk and liquidity of our invested assets, it is possible that, in periods of economic weakness, we may experience default losses in our portfolio. This may result in a reduction of net income and capital.
 
We could be adversely affected by a downgrade of the financial strength or financial enhancement ratings of any of AGO’s insurance subsidiaries, and our net income may be volatile because AGO assumes credit derivatives which are marked-to-market quarterly.
AGO is a Bermuda based holding company that provides, through its operating subsidiaries, credit enhancement products to the public finance, structured finance, and mortgage markets. Our relationship with AGO is limited to our equity investment, which had a carrying value of $392 million at December 31, 2007. We conduct no financial guaranty business directly or with AGO and we retain no financial guaranty exposures with AGO.
The ratings assigned by the major rating agencies to AGO’s insurance subsidiaries are subject to periodic review and may be downgraded by one or more of the rating agencies at any time. If the ratings of any of AGO’s insurance subsidiaries were reduced below current levels by any of the rating agencies, it could have an adverse effect on the affected subsidiary’s competitive position and its prospects for future business opportunities. In certain circumstances, a ratings downgrade may also entitle a ceding company to recapture business ceded to an AGO subsidiary or, alternatively, to retroactively increase cession commissions to an AGO subsidiary, either of which could result in a potentially significant negative impact to AGO earnings, and, therefore, our proportionate share thereof.
 
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AGO’s net income and, therefore, our proportionate share thereof, may be volatile because a portion of the credit risk AGO assumes is in the form of credit derivatives that are marked-to-market quarterly. Any event causing credit spreads on an underlying security referenced in a credit derivative in AGO’s portfolio either to widen or to tighten will affect the fair value of the credit derivative and may increase the volatility of AGO’s earnings and, therefore, our proportionate share (24 percent) thereof. For the year ended December 31, 2007, our other (income) expense included our equity in the net loss of AGO of $68 million, primarily due to mark-to-market losses in AGO’s credit derivatives portfolio, our portion of which was $122 million. These losses were recorded as realized losses by AGO.
 
Exchange Rates
 
Our operating results may be adversely affected by currency fluctuations.
Our functional currency is the U.S. dollar. Many of our non-U.S. companies maintain both assets and liabilities in local currencies. Therefore, foreign exchange risk is generally limited to net assets denominated in those foreign currencies. Foreign exchange risk is reviewed as part of our risk management process. Locally required capital levels are invested in home currencies in order to satisfy regulatory requirements and to support local insurance operations. The principal currencies creating foreign exchange risk are the British pound sterling, the euro, and the Canadian dollar. For the year ended December 31, 2007, approximately 10 percent of our net assets were denominated in foreign currencies. We may experience losses resulting from fluctuations in the values of non-U.S. currencies, which could adversely impact our results of operations and financial condition. Refer to “Quantitative and Qualitative Disclosures about Market Risk – Foreign currency exchange rate risk”, under Item 7A.
 
Regulatory and Other Governmental Developments
 
The regulatory regimes under which we operate, and potential changes thereto, could have an adverse effect on our business.
Our insurance and reinsurance subsidiaries conduct business globally, including in all 50 states of the United States and the District of Columbia. Our businesses in each of these jurisdictions are subject to varying degrees of regulation and supervision. The laws and regulations of the jurisdictions in which our insurance and reinsurance subsidiaries are domiciled require, among other things, that these subsidiaries maintain minimum levels of statutory capital, surplus, and liquidity, meet solvency standards, and submit to periodic examinations of their financial condition. In some jurisdictions, laws and regulations also restrict payments of dividends and reductions of capital. Applicable statutes, regulations, and policies may also restrict the ability of these subsidiaries to write insurance and reinsurance policies, to make certain investments, and to distribute funds. The purpose of insurance laws and regulations generally is to protect insureds and ceding insurance companies, not our shareholders. We may not be able to comply fully with, or obtain appropriate exemptions from, applicable statutes and regulations. Failure to comply with or to obtain appropriate authorizations and/or exemptions under any applicable laws and regulations could result in restrictions on our ability to do business or undertake activities that are regulated in one or more of the jurisdictions in which we conduct business and could subject us to fines and other sanctions. In addition, changes in the laws or regulations to which our insurance and reinsurance subsidiaries are subject could have an adverse effect on our business. In addition, our ability to consummate our anticipated acquisition of Combined, as well as the timing of such consummation, is subject to numerous regulatory approvals as well as other customary closing conditions.
 
Current legal and regulatory activities relating to insurance brokers and agents, contingent commissions and certain finite-risk insurance products could adversely affect our business, results of operations, and financial condition.
As described in greater detail in Note 9 to the Consolidated Financial Statements, under Item 8, ACE has received numerous regulatory inquiries, subpoenas, interrogatories, and civil investigative demands from regulatory authorities in connection with pending investigations of insurance industry practices. ACE is cooperating and will continue to cooperate with such inquiries. We cannot assure you that we will not receive any additional requests for information or subpoenas or what actions, if any, any of these governmental agencies will take as a result of these investigations. Additionally, at this time, we are unable to predict the potential effects, if any, that these actions may have upon the insurance and reinsurance markets and industry business practices or what, if any, changes may be made to laws and regulations regarding the industry and financial reporting. Any of the foregoing could adversely affect our business, results of operations, and financial condition.
 
Events may result in political, regulatory, and industry initiatives which could adversely affect our business.
Government intervention has occurred in the insurance and reinsurance markets in relation to terrorism coverage both in the U.S. and through industry initiatives in other countries. TRIA, which was enacted in 2002 to ensure the availability of
 
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insurance coverage for certain types of terrorist acts in the U.S., was extended in 2007 for seven years, through 2014. Refer to “Regulation – U.S. Operations” for more information.
Government intervention and the possibility of future interventions has created uncertainty in the insurance and reinsurance markets about the definition of terrorist acts and the extent to which future coverages will extend to terrorist acts. Government regulators are generally concerned with the protection of policyholders to the exclusion of other constituencies, including shareholders of insurers and reinsurers. While we cannot predict the exact nature, timing, or scope of possible governmental initiatives, such proposals could adversely affect our business by:
• providing insurance and reinsurance capacity in markets and to consumers that we target;
• requiring our participation in industry pools and guaranty associations;
• expanding the scope of coverage under existing policies;
• regulating the terms of insurance and reinsurance policies; or
• disproportionately benefiting the companies of one country over those of another.
The insurance industry is also affected by political, judicial, and legal developments that may create new and expanded theories of liability. Such changes may result in delays or cancellations of products and services by insurers and reinsurers, which could adversely affect our business.
 
Our operations in developing nations expose us to political developments that could have an adverse effect on our business, liquidity, results of operations, and financial condition.
Our international operations include operations in various developing nations. Both current and future foreign operations could be adversely affected by unfavorable political developments including law changes, tax changes, regulatory restrictions, and nationalization of ACE operations without compensation. Adverse actions from any one country could have an adverse effect on our business, liquidity, results of operations, and financial condition depending on the magnitude of the event and ACE’s net financial exposure at that time in that country.
 
Company Structure
 
Our ability to pay dividends and to make payments on indebtedness may be constrained by our holding company structure.
ACE Limited is a holding company and does not have any significant operations or assets other than its ownership of the shares of its operating insurance and reinsurance subsidiaries. Dividends and other permitted distributions from our insurance subsidiaries are our primary source of funds to meet ongoing cash requirements, including any future debt service payments and other expenses, and to pay dividends to our shareholders. Some of our insurance subsidiaries are subject to significant regulatory restrictions limiting their ability to declare and pay dividends. The inability of our insurance subsidiaries to pay dividends in an amount sufficient to enable us to meet our cash requirements at the holding company level could have an adverse effect on our operations and our ability to pay dividends to our shareholders and/or meet our debt service obligations.
 
ACE Limited is a Cayman Islands company with headquarters in Bermuda; it may be difficult for you to enforce judgments against it or its directors and executive officers.
ACE Limited is incorporated pursuant to the laws of the Cayman Islands, and our principal executive offices are located in Bermuda. In addition, certain of our directors and officers reside outside the United States, and all or a substantial portion of our assets and the assets of such persons are located in jurisdictions outside the United States. As such, it may be difficult or impossible to affect service of process within the United States upon those persons or to recover against us or them on judgments of U.S. courts, including judgments predicated upon civil liability provisions of the U.S. federal securities laws.
ACE has been advised by Maples and Calder, its Cayman Islands counsel, that there is doubt as to whether the courts of the Cayman Islands would enforce:
• judgments of U.S. courts based upon the civil liability provisions of the U.S. Federal securities laws obtained in actions against ACE or its directors and officers, who reside outside the United States; or
• original actions brought in the Cayman Islands against these persons or ACE predicated solely upon U.S. Federal securities laws.
ACE has also been advised by Maples and Calder that there is no treaty in effect between the United States and the Cayman Islands providing for this enforcement, and there are grounds upon which Cayman Islands courts may not enforce judgments of United States courts. Some remedies available under the laws of United States jurisdictions, including some remedies available under the U.S. Federal securities laws, would not be allowed in Cayman Islands courts as these could be contrary to that nation’s public policy.
 
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Insurance and Reinsurance Markets
 
Competition in the insurance and reinsurance markets could reduce our margins.
Insurance and reinsurance markets are highly competitive. We compete on an international and regional basis with major U.S., Bermuda, European, and other international insurers and reinsurers and with underwriting syndicates, some of which have greater financial, marketing, and management resources than we do. We also compete with new companies that continue to be formed to enter the insurance and reinsurance markets. In addition, capital market participants have recently created alternative products that are intended to compete with reinsurance products. Increased competition could result in fewer submissions, lower premium rates, and less favorable policy terms and conditions, which could reduce our margins.
 
Insurance and reinsurance markets are historically cyclical, and we expect to experience periods with excess underwriting capacity and unfavorable premium rates.
The insurance and reinsurance markets have historically been cyclical, characterized by periods of intense price competition due to excessive underwriting capacity as well as periods when shortages of capacity permitted favorable premium levels. An increase in premium levels is often offset by an increasing supply of insurance and reinsurance capacity, either by capital provided by new entrants or by the commitment of additional capital by existing insurers or reinsurers, which may cause prices to decrease. Any of these factors could lead to a significant reduction in premium rates, less favorable policy terms, and fewer submissions for our underwriting services. In addition to these considerations, changes in the frequency and severity of losses suffered by insureds and insurers may affect the cycles of the insurance and reinsurance markets significantly.
 
Charter Documents and Applicable Law
 
There are provisions in our charter documents that may reduce the voting rights and restrict the transfer of our Ordinary Shares.
Our Articles of Association generally provide that shareholders have one vote for each ordinary share held by them and are entitled to vote at all meetings of shareholders. However, the voting rights exercisable by a shareholder may be limited so that certain persons or groups are not deemed to hold 10 percent or more of the voting power conferred by our Ordinary Shares. Under these provisions, some shareholders may have the ability to exercise their voting rights limited to less than one vote per share. Moreover, these provisions could have the effect of reducing the voting power of some shareholders who would not otherwise be subject to the limitation by virtue of their direct share ownership. In addition, our Board of Directors may decline to register a transfer of any Ordinary Shares under some circumstances, including if a transfer would increase the ownership of our Ordinary Shares by certain persons or groups to 10 percent or more.
 
Applicable laws may make it difficult to effect a change of control of our company.
Before a person can acquire control of a U.S. insurance company, prior written approval must be obtained from the insurance commissioner of the state where the domestic insurer is domiciled. Prior to granting approval of an application to acquire control of a domestic insurer, the state insurance commissioner will consider such factors as the financial strength of the applicant, the integrity and management of the applicant’s Board of Directors and executive officers, the acquirer’s plans for the future operations of the domestic insurer, and any anti-competitive results that may arise from the consummation of the acquisition of control. Generally, state statutes provide that control over a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing 10 percent or more of the voting securities of the domestic insurer. Because a person acquiring 10 percent or more of our Ordinary Shares would indirectly control the same percentage of the stock of our U.S. insurance subsidiaries, the insurance change of control laws of various U.S. jurisdictions would likely apply to such a transaction.
We and certain of our U.K. subsidiaries are subject to the regulatory jurisdiction of the Council of Lloyd’s. Lloyd’s imposes an absolute prohibition on any person being a 10 percent controller of a corporate member without first notifying Lloyd’s and receiving their consent. Because a person acquiring 10 percent or more of our Ordinary Shares would indirectly control the same percentage of the stock of our subsidiary, that is a Lloyd’s corporate member, the Lloyd’s restrictions on becoming a controller of a corporate member would likely apply to such a transaction.
Laws of other jurisdictions in which one or more of our existing subsidiaries are, or a future subsidiary may be, organized or domiciled may contain similar restrictions on the acquisition of control of ACE.
While our Articles of Association limit the voting power of any shareholder to less than 10 percent, there can be no assurance that the applicable regulatory body would agree that a shareholder who owned 10 percent or more of our Ordinary Shares did not, because of the limitation on the voting power of such shares, control the applicable insurance subsidiary.
 
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These laws may discourage potential acquisition proposals and may delay, deter, or prevent a change of control of the Company, including transactions that some or all of our shareholders might consider to be desirable.
 
U.S. persons who own our Ordinary Shares may have more difficulty in protecting their interests than U.S. persons who are shareholders of a U.S. corporation.
The Companies Law (2004 Revision) of the Cayman Islands, which applies to us, differs in certain material respects from laws generally applicable to U.S. corporations and their shareholders. These differences include the manner in which directors must disclose transactions in which they have an interest, the rights of shareholders to bring class action and derivative lawsuits, and the scope of indemnification available to directors and officers.
 
Anti-takeover provisions in our charter and corporate documents could impede an attempt to replace our directors or to effect a change of control, which could diminish the value of our Ordinary Shares.
Our Articles of Association contain provisions that may make it more difficult for shareholders to replace directors and could delay or prevent a change of control that a shareholder might consider favorable. These provisions include a staggered Board of Directors, limitations on the ability of shareholders to remove directors other than for cause, limitations on voting rights, and restrictions on transfer of our Ordinary Shares. In addition, we have in place a shareholder rights plan which would cause extreme dilution to any person or group that attempts to acquire a significant interest in the Company without advance approval of our Board of Directors. These provisions may prevent a shareholder from receiving the benefit from any premium over the market price of our Ordinary Shares offered by a bidder in a potential takeover. Even in the absence of an attempt to effect a change in management or a takeover attempt, these provisions may adversely affect the prevailing market price of our Ordinary Shares if they are viewed as discouraging takeover attempts in the future.
 
Taxation
 
We may become subject to taxes in Bermuda after March 28, 2016, which may have an adverse effect on our results of operations and your investment.
The Bermuda Minister of Finance, under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, as amended, has given each of ACE Limited and its Bermuda insurance subsidiaries a written assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax would not be applicable to those companies or any of their respective operations, shares, debentures, or other obligations until March 28, 2016, except insofar as such tax would apply to persons ordinarily resident in Bermuda or is payable by us in respect of real property owned or leased by us in Bermuda. Given the limited duration of the Minister of Finance’s assurance, we cannot be certain that we will not be subject to any Bermuda tax after March 28, 2016.
 
We may become subject to taxes in the Cayman Islands after January 31, 2026, which may have an adverse effect on our results of operations and your investment.
Under current Cayman Islands law, we are not obligated to pay any taxes in the Cayman Islands on our income or gains. We have received an undertaking from the Governor in Cabinet of the Cayman Islands pursuant to the provisions of the Tax Concessions Law, as amended, that until January 31, 2026, (i) no subsequently enacted law imposing any tax on profits, income, gains, or appreciation shall apply to us and (ii) no such tax and no tax in the nature of an estate duty or an inheritance tax shall be payable on any of our Ordinary Shares, debentures, or other obligations. Under current law, no tax will be payable on the transfer or other disposition of our Ordinary Shares. The Cayman Islands currently impose stamp duties on certain categories of documents; however, our current operations do not involve the payment of stamp duties in any material amount. The Cayman Islands also currently impose an annual corporate fee upon all exempted companies incorporated in the Cayman Islands. Given the limited duration of the undertaking from the Governor in Cabinet of the Cayman Islands, we cannot be certain that we will not be subject to any Cayman Islands tax after January 31, 2026.
 
ACE Limited and our Bermuda-based subsidiaries may become subject to U.S. tax, which may have an adverse effect on our results of operations and your investment.
ACE Limited, ACE Bermuda Insurance Ltd., ACE Tempest Life Reinsurance Ltd., and our other Bermuda-based insurance subsidiaries operate in a manner so that none of these companies should be subject to U.S. tax (other than U.S. excise tax on insurance and reinsurance premium income attributable to insuring or reinsuring U.S. risks and U.S. withholding tax on some types of U.S. source investment income), because none of these companies should be treated as engaged in a trade or busi-
 
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ness within the United States. However, because there is considerable uncertainty as to the activities that constitute being engaged in a trade or business within the United States, we cannot be certain that the Internal Revenue Service (IRS) will not contend successfully that any of ACE Limited or its Bermuda-based subsidiaries is/are engaged in a trade or business in the United States. If ACE Limited or any of its Bermuda-based subsidiaries were considered to be engaged in a trade or business in the United States, such entity could be subject to U.S. corporate income and additional branch profits taxes on the portion of its earnings effectively connected to such U.S. business, in which case its results of operations and your investment could be adversely affected.
 
If you acquire 10 percent or more of ACE Limited’s shares, you may be subject to taxation under the “controlled foreign corporation” (the CFC) rules.
Under certain circumstances, a U.S. person who owns 10 percent or more of the voting power of a foreign corporation that is a CFC (a foreign corporation in which 10 percent U.S. shareholders own more than 50 percent of the voting power or value of the stock of a foreign corporation or more than 25 percent of a foreign insurance corporation) for an uninterrupted period of 30 days or more during a taxable year must include in gross income for U.S. federal income tax purposes such “10 percent U.S. Shareholder’s” pro rata share of the CFC’s “subpart F income”, even if the subpart F income is not distributed to such 10 percent U.S. Shareholder if such 10 percent U.S. Shareholder owns (directly or indirectly through foreign entities) any of our shares on the last day of our fiscal year. Subpart F income of a foreign insurance corporation typically includes foreign personal holding company income (such as interest, dividends, and other types of passive income), as well as insurance and reinsurance income (including underwriting and investment income) attributable to the insurance of risks situated outside the CFC’s country of incorporation.
We believe that because of the dispersion of our share ownership, provisions in our organizational documents that limit voting power, and other factors, no U.S. person or U.S. Partnership who acquires shares of ACE Limited directly or indirectly through one or more foreign entities should be required to include our subpart F income in income under the CFC rules of the IRS Code. It is possible, however, that the IRS could challenge the effectiveness of these provisions and that a court could sustain such a challenge, in which case your investment could be adversely affected if you own 10 percent or more of ACE Limited’s stock.
 
U.S. persons who hold shares may be subject to U.S. federal income taxation at ordinary income rates on their proportionate share of our Related Person Insurance Income (RPII).
If the RPII of any of our non-U.S. insurance subsidiaries (each a “Non-U.S. Insurance Subsidiary”) were to equal or exceed 20 percent of that company’s gross insurance income in any taxable year and direct or indirect insureds (and persons related to those insureds) own directly or indirectly through foreign entities 20 percent or more of the voting power or value of ACE Limited, then a U.S. person who owns any shares of ACE Limited (directly or indirectly through foreign entities) on the last day of the taxable year would be required to include in its income for U.S. federal income tax purposes such person’s pro rata share of such company’s RPII for the entire taxable year, determined as if such RPII were distributed proportionately only to U.S. persons at that date regardless of whether such income is distributed. In addition, any RPII that is includible in the income of a U.S. tax-exempt organization may be treated as unrelated business taxable income. We believe that the gross RPII of each Non-U.S. Insurance Subsidiary did not in prior years of operation and is not expected in the foreseeable future to equal or exceed 20 percent of each such company’s gross insurance income, and we do not expect the direct or indirect insureds of each Non-U.S. Insurance Subsidiary (and persons related to such insureds) to directly or indirectly own 20 percent or more of either the voting power or value of our shares, but we cannot be certain that this will be the case because some of the factors which determine the extent of RPII may be beyond our control. If these thresholds are met or exceeded, and if you are an affected U.S. person, your investment could be adversely affected.
 
U.S. persons who hold shares will be subject to adverse tax consequences if we are considered to be a Passive Foreign Investment Company (PFIC) for U.S. federal income tax purposes.
If ACE Limited is considered a PFIC for U.S. federal income tax purposes, a U.S. person who owns any shares of ACE Limited will be subject to adverse tax consequences, including subjecting the investor to a greater tax liability than might otherwise apply and subjecting the investor to tax on amounts in advance of when tax would otherwise be imposed, in which case your investment could be adversely affected. In addition, if ACE Limited were considered a PFIC, upon the death of any U.S. individual owning shares, such individual’s heirs or estate would not be entitled to a “step-up” in the basis of the shares which might otherwise be available under U.S. federal income tax laws. We believe that we are not, have not been, and currently do not expect to become, a PFIC for U.S. federal income tax purposes. We cannot assure you, however, that we will not be
 
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deemed a PFIC by the IRS. If we were considered a PFIC, it could have adverse tax consequences for an investor that is subject to U.S. federal income taxation. There are currently no regulations regarding the application of the PFIC provisions to an insurance company. New regulations or pronouncements interpreting or clarifying these rules may be forthcoming. We cannot predict what impact, if any, such guidance would have on an investor that is subject to U.S. federal income taxation.
 
U.S. tax-exempt organizations who own our shares may recognize unrelated business taxable income.
A U.S. tax-exempt organization may recognize unrelated business taxable income if a portion of our insurance income is allocated to the organization, which generally would be the case if either we are a CFC and the tax-exempt shareholder is a 10 percent U.S. shareholder or there is RPII, certain exceptions do not apply, and the tax-exempt organization, directly or indirectly through foreign entities, owns any shares of ACE Limited. Although we do not believe that any U.S. persons or U.S. Partnerships should be allocated such insurance income, we cannot be certain that this will be the case. Potential U.S. tax-exempt investors are advised to consult their tax advisors.
 
The Organization for Economic Cooperation and Development and the European Union are considering measures that might encourage countries to increase our taxes.
A number of multilateral organizations, including the European Union, the Organization for Economic Cooperation and Development (OECD), the Financial Action Task Force, and the Financial Stability Forum (FSF) have, in recent years, identified some countries as not participating in adequate information exchange, engaging in harmful tax practices, or not maintaining adequate controls to prevent corruption, such as money laundering activities. Recommendations to limit such harmful practices are under consideration by these organizations, and a report published on November 27, 2001 by the OECD at the behest of the FSF titled “Behind the Corporate Veil: Using Corporate Entities for Illicit Purposes”, contains an extensive discussion of specific recommendations. The OECD has threatened non-member jurisdictions that do not agree to cooperate with the OECD with punitive sanctions by OECD member countries, though specific sanctions have yet to be adopted by OECD member countries. It is as yet unclear what these sanctions will be, who will adopt them, and when or if they will be imposed. In an April 18, 2002 report, updated as of June 2004, Bermuda was not listed as an uncooperative tax haven jurisdiction by the OECD because it previously committed to eliminate harmful tax practices and to embrace international tax standards for transparency, exchange of information, and the elimination of regimes for financial and other services that attract businesses with no substantial domestic activity. We cannot assure you, however, that the action taken by Bermuda would be sufficient to preclude all effects of the measures or sanctions described above, which, if ultimately adopted, could adversely affect Bermuda companies such as us.
 
Changes in U.S. federal income tax law could adversely affect an investment in our shares.
Legislation is periodically introduced in the U.S. Congress intended to eliminate some perceived tax advantages of companies (including insurance companies) that have legal domiciles outside the United States but have certain U.S. connections. It is possible that legislative proposals could emerge in the future that could have an adverse impact on us or our shareholders. See following risk factor for currently proposed legislation.
 
Currently, there is proposed legislation in the U.S. that could exclude our shareholders from advantageous capital gains rates.
Under current law, individual U.S. holders of ACE Limited shares are taxed on dividends at advantageous capital gains rates rather than ordinary income tax rates. Currently, there is proposed legislation before both Houses of Congress that would exclude shareholders of foreign corporations from this advantageous capital gains rate treatment unless either (i) the corporation is organized or created in a country that has entered into a “comprehensive income tax treaty” with the U.S. or (ii) the stock of such corporation is readily tradable on an established securities market in the U.S. and the corporation is organized or created in a country that has a “comprehensive income tax system” that the U.S. Secretary of the Treasury determines is satisfactory for this purpose. ACE Limited would not satisfy either of these tests and, accordingly, if this legislation became law, individual U.S. shareholders would no longer qualify for the advantageous capital gains rates on ACE Limited dividends.

 ITEM 1B.	Unresolved Staff Comments	
 
There are currently no unresolved SEC staff comments regarding our periodic or current reports.
 
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 ITEM 2.	Properties	
 
We maintain office facilities around the world including in North America, Bermuda, the U.K., Europe, Latin America, Asia, and the Far East. Most of our office facilities are leased, although we own major facilities in Bermuda and Philadelphia. Management considers its office facilities suitable and adequate for the current level of operations.

 ITEM 3.	Legal Proceedings	
 
Our insurance subsidiaries are subject to claims litigation involving disputed interpretations of policy coverages and, in some jurisdictions, direct actions by allegedly-injured persons seeking damages from policyholders. These lawsuits, involving claims on policies issued by our subsidiaries which are typical to the insurance industry in general and in the normal course of business, are considered in our loss and loss expense reserves which are discussed in the P&C loss reserves discussion. In addition to claims litigation, we and our subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on insurance policies. This category of business litigation typically involves, among other things, 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 the 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.
More information relating to legal proceedings is set forth in Note 9 to the Consolidated Financial Statements, under Item 8.

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

Name	  	Age	  	Position	
Evan G. Greenberg	  	53	  	Chairman, President, Chief Executive Officer, and Director	
John W. Keogh	  	43	  	Chief Executive Officer, ACE Overseas General	
Brian E. Dowd	  	45	  	Chief Executive Officer, Insurance – North America	
Philip V. Bancroft	  	48	  	Chief Financial Officer	
Robert F. Cusumano	  	51	  	General Counsel and Secretary	
Paul B. Medini	  	50	  	Chief Accounting Officer	
Evan G. Greenberg has been a director of ACE since August 2002. Mr. Greenberg was elected Chairman of the Board of Directors in May 2007. Mr. Greenberg was appointed to the position of President and Chief Executive Officer of ACE in May 2004, and in June 2003, was appointed President and Chief Operating Officer of ACE. Mr. Greenberg was appointed to the position of Chief Executive Officer of ACE Overseas General in April 2002. He joined ACE as Vice Chairman, ACE Limited, and Chief Executive Officer of ACE Tempest Re in November 2001. Prior to joining ACE, Mr. Greenberg was most recently President and Chief Operating Officer of American International Group (AIG), a position he held from 1997 until 2000.
John W. Keogh joined ACE as Chief Executive Officer of ACE Overseas General in April 2006. Prior to joining ACE, Mr. Keogh served as Senior Vice President, Domestic General Insurance of AIG, and President and Chief Executive Officer of National Union Fire Insurance Company, AIG’s member company that specializes in D&O and fiduciary liability coverages. Mr. Keogh joined AIG in 1986, and he had served in a number of senior positions there including as Executive Vice President of AIG’s Domestic Brokerage Group, and as President and Chief Operating Officer of AIG’s Lexington Insurance Company unit.
Brian E. Dowd was appointed Chief Executive Officer of Insurance – North America in May 2006. In January 2005, Mr. Dowd was named Chairman and Chief Executive Officer of ACE USA, Chairman of ACE Westchester and President of ACE INA Holdings Inc. From 2002 until 2005, Mr. Dowd was President and Chief Executive Officer of ACE Westchester. In January 2004, he was elected to the position of Office of the Chairman of ACE INA Holdings Inc. – a position which Mr. Dowd currently holds along with that of President. Mr. Dowd served as Executive Vice President, ACE USA Property Division from 1999 through 2001 when he was appointed President, ACE Specialty P&C Group. Mr. Dowd joined ACE in 1995.
Philip V. Bancroft was appointed Chief Financial Officer of ACE in January 2002. For nearly twenty years, Mr. Bancroft worked for PricewaterhouseCoopers LLP. Prior to joining ACE, he served as partner-in-charge of the New York Regional Insurance Practice. Mr. Bancroft had been a partner with PricewaterhouseCoopers LLP for 10 years.
Robert F. Cusumano was appointed General Counsel and Secretary of ACE in March 2005. Mr. Cusumano joined ACE from the international law firm of Debevoise & Plimpton LLP, where he was a partner and a member of the firm’s Litigation Department from 2003 to 2005. From 1990 to 2003, Mr. Cusumano was a partner with the law firm of Simpson Thatcher and Bartlett.
Paul B. Medini was appointed Chief Accounting Officer of ACE in October 2003. For twenty-two years, Mr. Medini worked for PricewaterhouseCoopers LLP. Prior to joining ACE, he served as a partner in their insurance industry practice.
 
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 PART II

 ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	
 
(a) Our Ordinary Shares, par value $0.041666667 per share, have been listed on the New York Stock Exchange since March 25, 1993.
The following table sets forth the high and low closing sales prices of our Ordinary Shares per fiscal quarters, as reported on the New York Stock Exchange Composite Tape for the periods indicated:

 	 	2007	 	 	 	 	 	 	 	2006	 	 	 	 	
 	 	High	 	 	 	Low	 	 	 	High	 	 	 	Low	
Quarter ending March 31	 	$	60.35	 	 	 	$	53.22	 	 	 	$	56.66	 	 	 	$	52.01	
Quarter ending June 30	 	$	62.54	 	 	 	$	57.21	 	 	 	$	55.54	 	 	 	$	48.18	
Quarter ending September 30	 	$	63.97	 	 	 	$	54.23	 	 	 	$	55.98	 	 	 	$	48.99	
Quarter ending December 31	 	$	63.33	 	 	 	$	56.83	 	 	 	$	61.16	 	 	 	$	54.09	
 
The last reported sale price of the Ordinary Shares on the New York Stock Exchange Composite Tape on February 26, 2008 was $58.97.
(b) The approximate number of record holders of Ordinary Shares as of February 26, 2008 was 3,092.
(c) The following table represents dividends paid per Ordinary Share to shareholders of record on each of the following dates:

Shareholders of Record as of:	  	 	  	Shareholders of Record as of:	  	 	
March 31, 2007	  	$	0.25	  	March 31, 2006	  	$	0.23	
June 30, 2007	  	$	0.27	  	June 30, 2006	  	$	0.25	
September 30, 2007	  	$	0.27	  	September 30, 2006	  	$	0.25	
December 31, 2007	  	$	0.27	  	December 31, 2006	  	$	0.25	
 
ACE Limited is a holding company whose principal source of income is investment income and dividends from its operating subsidiaries. The ability of the operating subsidiaries to pay dividends to us and our ability to pay dividends to our shareholders are each subject to legal and regulatory restrictions. The declaration and payment of future dividends will be at the discretion of the Board of Directors and will be dependent upon the profits and financial requirements of ACE and other factors, including legal restrictions on the payment of dividends and such other factors as the Board of Directors deems relevant. Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
(d) The following table provides information with respect to purchases by the Company of its Ordinary Shares during the three months ended December 31, 2007:
 
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**	
October 1, 2007 through October 31, 2007	 	4,111	 	 	 	$	61.30	 	 	 	–	 	 	 	$	250 million	
November 1, 2007 through November 30, 2007	 	794	 	 	 	$	57.93	 	 	 	–	 	 	 	$	250 million	
December 1, 2007 through December 31, 2007	 	6,997	 	 	 	$	59.66	 	 	 	–	 	 	 	$	250 million	
Total	 	11,902	 	 	 	 	 	 	 	 	–	 	 	 	$	250 million	
* For the three months ended December 31, 2007, this column represents the surrender to the Company of 11,902 Ordinary Shares to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees.
** 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 December 31, 2007, this authorization had not been utilized.
 
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(e) Set forth below is a line graph comparing the dollar change in the cumulative total shareholder return on the Company’s Ordinary Shares from December 31, 2002, through December 31, 2007, as compared to the cumulative total return of the Standard & Poor’s 500 Stock Index and the cumulative total return of the Standard & Poor’s Property-Casualty Insurance Index. The chart depicts the value on December 31, 2003, 2004, 2005, 2006, and 2007, of a $100 investment made on December 31, 2002, with all dividends reinvested.

 
																			
 	 	Years ended December 31	
 	 	2002	 	2003	 	2004	 	2005	 	2006	 	2007	
ACE Limited	 	$	100	 	$	144	 	$	152	 	$	194	 	$	223	 	$	232	
S&P 500 Index	 	$	100	 	$	129	 	$	143	 	$	151	 	$	174	 	$	186	
S&P 500 P&C Index	 	$	100	 	$	126	 	$	139	 	$	160	 	$	181	 	$	156	
 
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 ITEM 6.	Selected Financial Data	
 
The following table sets forth selected consolidated financial data of the Company as of and for the years ended December 31, 2007, 2006, 2005, 2004, and 2003. These selected financial and other data should be read in conjunction with the Consolidated Financial Statements and related notes, under Item 8, and with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

(in millions of U.S. dollars, except share, per share data,
and selected data)	 	2007	 	 	 	 	2006	 	 	 	 	2005	 	 	 	 	2004	 	 	 	 	2003	 	
Operations data:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	 	$	12,297	 	 	 	 	$	11,825	 	 	 	 	$	11,748	 	 	 	 	$	11,110	 	 	 	 	$	9,727	 	
Net investment income	 	 	1,918	 	 	 	 	 	1,601	 	 	 	 	 	1,264	 	 	 	 	 	1,013	 	 	 	 	 	900	 	
Net realized gains (losses)	 	 	(61	)	 	 	 	 	(98	)	 	 	 	 	76	 	 	 	 	 	197	 	 	 	 	 	265	 	
Losses and loss expenses	 	 	7,351	 	 	 	 	 	7,070	 	 	 	 	 	8,571	 	 	 	 	 	7,690	 	 	 	 	 	6,167	 	
Life and annuity benefits	 	 	168	 	 	 	 	 	123	 	 	 	 	 	143	 	 	 	 	 	175	 	 	 	 	 	182	 	
Policy acquisition costs and administrative expenses	 	 	3,226	 	 	 	 	 	3,171	 	 	 	 	 	2,924	 	 	 	 	 	2,824	 	 	 	 	 	2,539	 	
Interest expense	 	 	175	 	 	 	 	 	176	 	 	 	 	 	174	 	 	 	 	 	183	 	 	 	 	 	177	 	
Other (income) expense	 	 	81	 	 	 	 	 	(35	)	 	 	 	 	(25	)	 	 	 	 	9	 	 	 	 	 	34	 	
Income tax expense	 	 	575	 	 	 	 	 	522	 	 	 	 	 	273	 	 	 	 	 	286	 	 	 	 	 	311	 	
Income before cumulative effect	 	 	2,578	 	 	 	 	 	2,301	 	 	 	 	 	1,028	 	 	 	 	 	1,153	 	 	 	 	 	1,482	 	
Cumulative effect of a change in accounting principle (net of income tax)	 	 	–	 	 	 	 	 	4	 	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	–	 	
Net income	 	 	2,578	 	 	 	 	 	2,305	 	 	 	 	 	1,028	 	 	 	 	 	1,153	 	 	 	 	 	1,482	 	
Dividends on Preferred Shares	 	 	(45	)	 	 	 	 	(45	)	 	 	 	 	(45	)	 	 	 	 	(45	)	 	 	 	 	(26	)	
Dividends on Mezzanine equity	 	 	–	 	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	(10	)	
Net income available to holders of Ordinary Shares	 	$	2,533	 	 	 	 	$	2,260	 	 	 	 	$	983	 	 	 	 	$	1,108	 	 	 	 	$	1,446	 	
Diluted earnings per share before cumulative effect of a change in accounting principle	 	$	7.66	 	 	 	 	$	6.90	 	 	 	 	$	3.31	 	 	 	 	$	3.88	 	 	 	 	$	5.25	 	
Diluted earnings per share (1)	 	$	7.66	 	 	 	 	$	6.91	 	 	 	 	$	3.31	 	 	 	 	$	3.88	 	 	 	 	$	5.25	 	
Balance sheet data (at end of period):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total investments	 	$	41,779	 	 	 	 	$	36,601	 	 	 	 	$	31,842	 	 	 	 	$	26,925	 	 	 	 	$	22,555	 	
Cash	 	 	510	 	 	 	 	 	565	 	 	 	 	 	512	 	 	 	 	 	498	 	 	 	 	 	559	 	
Total assets	 	 	72,090	 	 	 	 	 	67,135	 	 	 	 	 	62,440	 	 	 	 	 	56,183	 	 	 	 	 	49,317	 	
Net unpaid losses and loss expenses	 	 	23,592	 	 	 	 	 	22,008	 	 	 	 	 	20,458	 	 	 	 	 	17,517	 	 	 	 	 	14,674	 	
Net future policy benefits for life and annuity contracts	 	 	537	 	 	 	 	 	508	 	 	 	 	 	510	 	 	 	 	 	494	 	 	 	 	 	477	 	
Long-term debt	 	 	1,811	 	 	 	 	 	1,560	 	 	 	 	 	1,811	 	 	 	 	 	1,849	 	 	 	 	 	1,349	 	
Trust preferred securities	 	 	309	 	 	 	 	 	309	 	 	 	 	 	309	 	 	 	 	 	412	 	 	 	 	 	475	 	
Total liabilities	 	 	55,413	 	 	 	 	 	52,857	 	 	 	 	 	50,628	 	 	 	 	 	46,338	 	 	 	 	 	40,494	 	
Shareholders’ equity	 	 	16,677	 	 	 	 	 	14,278	 	 	 	 	 	11,812	 	 	 	 	 	9,845	 	 	 	 	 	8,823	 	
Book value per share	 	$	48.89	 	 	 	 	$	42.03	 	 	 	 	$	34.81	 	 	 	 	$	32.65	 	 	 	 	$	29.53	 	
Selected data	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Loss and loss expense ratio (2)	 	 	61.6%	 	 	 	 	 	61.2%	 	 	 	 	 	74.5%	 	 	 	 	 	70.7%	 	 	 	 	 	64.6%	 	
Underwriting and administrative expense ratio (3)	 	 	26.3%	 	 	 	 	 	26.9%	 	 	 	 	 	25.0%	 	 	 	 	 	25.6%	 	 	 	 	 	26.4%	 	
Combined ratio (4)	 	 	87.9%	 	 	 	 	 	88.1%	 	 	 	 	 	99.5%	 	 	 	 	 	96.3%	 	 	 	 	 	91.0%	 	
Net loss reserves to capital and surplus ratio (5)	 	 	144.7%	 	 	 	 	 	157.7%	 	 	 	 	 	177.5%	 	 	 	 	 	182.9%	 	 	 	 	 	171.7%	 	
Weighted average shares outstanding – diluted	 	 	330,447,721	 	 	 	 	 	327,232,022	 	 	 	 	 	297,299,883	 	 	 	 	 	285,485,472	 	 	 	 	 	275,655,969	 	
Cash dividends per share	 	$	1.06	 	 	 	 	$	0.98	 	 	 	 	$	0.90	 	 	 	 	$	0.82	 	 	 	 	$	0.74	 	
(1) Diluted earnings per share is calculated by dividing net income available to holders of Ordinary Shares by weighted average shares outstanding – diluted.
(2) The loss and loss expense ratio is calculated by dividing the losses and loss expenses by net premiums earned excluding life insurance and reinsurance premiums. Net premiums earned for life insurance and reinsurance were $368 million, $274 million, $248 million, $226 million, and $187 million for the years ended December 31, 2007, 2006, 2005, 2004, and 2003, respectively.
(3) The underwriting and administrative expense ratio is calculated by dividing the policy acquisition costs and administrative expenses by net premiums earned excluding life insurance and reinsurance premiums.
(4) The combined ratio is the sum of the loss and loss expense ratio and the underwriting and administrative expense ratio.
(5) The net loss reserves to capital and surplus ratio is calculated by dividing the sum of the net unpaid losses and loss expenses and net future policy benefits for life and annuity contracts by shareholders’ equity.
 
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 ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	
 
The following is a discussion of our results of operations, financial condition, and liquidity and capital resources as of and for the year ended December 31, 2007. This discussion should be read in conjunction with the Consolidated Financial Statements and related notes, under Item 8 of this Form 10-K.

Overview
ACE Limited (ACE) is a Bermuda-based holding company incorporated with limited liability under the Cayman Islands Companies Law. ACE and its direct and indirect subsidiaries are a global property and casualty (P&C) insurance and reinsurance organization, servicing the insurance needs of commercial and individual customers in more than 140 countries and jurisdictions. Our product and geographic diversification differentiates us from the vast majority of our competitors and has been a source of stability during periods of industry volatility. 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.
Our senior management team is well-seasoned in the insurance industry and its attention to operational efficiency, maintaining balance sheet strength, and enforcing strong underwriting and financial discipline across the whole organization has laid the foundation for sustained earnings and book value growth. We are organized along a profit center structure by line of business and territory that does not necessarily correspond to corporate legal entities. Profit centers can access various legal entities, subject to licensing and other regulatory rules. Profit centers are expected to generate underwriting income and appropriate risk-adjusted returns. This corporate structure has facilitated the development of management talent by giving each profit center’s senior management team the necessary autonomy within underwriting authorities to make operating decisions and create products and coverages needed by its target customer base. We are an underwriting organization and senior management is focused on delivering underwriting profit. We strive to achieve underwriting income by only writing policies which we believe adequately compensate us for the risk we accept. We will not sacrifice underwriting income for growth. Distinction in service is an additional area of focus and a means to set us apart from our competition.
As an insurance and reinsurance company, we generate gross revenues from two principal sources: premiums and investment income. Cash flow is generated from premiums collected and investment income received less paid losses and loss expenses, policy acquisition costs, and administrative expenses. Invested assets are generally held in liquid, investment grade fixed income securities of relatively short duration. We invest in equity securities in the U.S. and international markets. A small portion of our assets are held 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 balance, 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.
On December 14, 2007, we entered into a stock purchase agreement with Aon Corporation, pursuant to which we have agreed to purchase all the outstanding shares of capital stock of Combined Insurance Company of America (Combined) and fourteen Combined subsidiaries. The all-cash purchase price is $2.4 billion, subject to certain post-closing adjustments. Combined, which was founded in 1919 and is headquartered in Glenview, Illinois, is a leading underwriter and distributor of specialty individual accident and supplemental health insurance products that are targeted to middle income consumers in the U.S., Europe, Canada, and Asia Pacific. Combined serves more than four million policyholders worldwide. We expect this transaction to be completed during the second quarter of 2008. We believe that this acquisition will add balance and capability to our existing accident and health (A&H) business and offers meaningful opportunity for future revenue and earnings growth.
 
Outlook
The insurance industry is highly competitive with many companies offering similar coverage. The rates and 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. Pricing and terms and conditions are generally more favorable during periods of reduced underwriting capacity.
 
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The P&C industry is currently in a period of excess underwriting capacity and, as a result, prices are declining globally. The rate of decline is accelerating in some classes and staying relatively flat in others. Overall, the market continues to become more competitive and, given these conditions, we are focused on maintaining the levels of our renewals and writing less new business. This is reflected in our net premiums written which decreased slightly in 2007, compared with 2006. Despite this downward trend, we continue to see opportunity to expand our P&C business in the short- and longer-term in many places as we adapt our business to take advantage of the macroeconomic trends (and the risks that accompany them) taking place around the world. With considerable balance sheet strength, we also have the ability to grow both organically and opportunistically though acquisitions. Our A&H business continues to do well, growing 18 percent in 2007, compared with 2006. We continue to see good long-term opportunity to grow our A&H franchise, particularly in the developing markets of Asia Pacific and Latin America, among other territories. Our life insurance and reinsurance business also had a very good year and together with A&H and the addition of Combined will represent close to 23 percent of our net premiums earned, on a pro-forma basis.
The financial markets crisis, which was triggered by defaults of sub-prime mortgages in the third quarter of 2007, continues to dominate the landscape and is spreading to other forms of credit and beyond the U.S. This is contributing to a significant slowdown in the U.S. economy, and possibly recession, and we believe this will have a global impact. At the same time, there is the specter of inflation, and efforts to stimulate the U.S. economy may well increase the risk of inflation. Inflation and recession can have an impact on P&C operating results (particularly revenue) and claims frequency and severity. The financial and economic conditions are deteriorating in the face of a soft and softening global P&C market. We are adjusting quickly to ensure all levels of our underwriting organization, with the support of our claims and actuarial groups, focus on and manage risk with a clear recognition of the environment. On the asset side of the balance sheet, our conservative investment posture has served us well. Our exposure to sub-prime asset-backed securities was $135 million at December 31, 2007, which represented less than one percent of our investment portfolio. Refer to “Investments” for more information. On the liability side of the balance sheet, the sub-prime crisis will be a sizable casualty event for the commercial P&C industry and particularly for those who have significant financial institution exposure. While we are underwriters of financial institution D&O and E&O business, it is not a significant part of our portfolio. In fact, we are relatively modest participants in this segment of the market. We estimate the size of the financial institutions market for D&O and E&O to be approximately $3-$4 billion in gross premiums written. ACE writes approximately $188 million of gross premiums in connection with U.S. exposed business which gives us less than a four percent market share. Our net premiums written are $143 million and our average net limit is $7.7 million for D&O and $3.2 million for E&O. All of the business is “claims made,” where determination of coverage is triggered by the date the insured first becomes aware of a claim or potential claim, and all legal defense expenses incurred by the insurer in defending the insured are covered under the policy. We may have losses from sub-prime-related events, and we have reflected that in our 2007 loss and loss expense ratios as appropriate.

Insurance Industry Investigations and Related Matters
Information on the insurance industry investigations and related matters is set forth in Note 9 f) to the Consolidated Financial Statements, under Item 8.

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. We believe the items that require the most subjective and complex estimates are:
• unpaid loss and loss expense reserves, including asbestos and environmental (A&E) reserves;
• reinsurance recoverable, including a provision for uncollectible reinsurance;
• impairments to the carrying value of our investment portfolio;
• the valuation of deferred tax assets;
• the valuation of derivative instruments related to guaranteed minimum income benefits (GMIB);
• the valuation of goodwill; and
• the 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. The following discussion provides more information regarding the estimates and assumptions required to arrive at these amounts and should be read in conjunction with the sections entitled: Prior Period Development, Asbestos and Environmental
 
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and Other Run-off Liabilities, Reinsurance Recoverable on Ceded Reinsurance, Investments, Net Realized Gains (Losses), and Other Income and Expense Items.
 
Unpaid losses and loss expenses
As an insurance and reinsurance company, we are required, by applicable laws and regulations and GAAP, to establish loss and loss expense reserves for the estimated unpaid portion of the ultimate liability for losses and loss expenses under the terms of our policies and agreements with our insured and reinsured customers. The estimate of the liabilities includes provision for claims that have been reported but unpaid at the balance sheet date (case reserves) and for future obligations from claims that have been incurred but not reported (IBNR) at the balance sheet date (IBNR may also include a provision for additional development on reported claims in instances where the case reserve is viewed to be insufficient). The reserves provide for liabilities on the premium earned on policies as of the balance sheet date. The loss reserve also includes an estimate of expenses associated with processing and settling these unpaid claims (loss expenses). At December 31, 2007, our unpaid loss and loss expense reserves were $37.1 billion. With the exception of certain structured settlements, for which the timing and amount of future claim payments are reliably determinable, our loss reserves are not discounted for time value. In connection with such structured settlements, we carry reserves of $117 million (net of discount).
The table below presents a roll-forward of our unpaid losses and loss expenses for the indicated periods.

(in millions of U.S. dollars)	 	Gross 
Losses 	 	 	 	Reinsurance 
Recoverable 	 	 	 	Net Losses 	
Balance at December 31, 2005	 	$	35,055 	 	 	 	$	14,597 	 	 	 	$	20,458 	
Losses and loss expenses incurred	 	 	9,902 	 	 	 	 	2,832 	 	 	 	 	7,070 	
Losses and loss expenses paid	 	 	(9,230)	 	 	 	 	(3,771)	 	 	 	 	(5,459)	
Sale of certain run-off reinsurance subsidiaries	 	 	(789)	 	 	 	 	(317)	 	 	 	 	(472)	
Other (including foreign exchange revaluation)	 	 	579 	 	 	 	 	168 	 	 	 	 	411 	
Balance at December 31, 2006	 	 	35,517 	 	 	 	$	13,509 	 	 	 	$	22,008 	
Losses and loss expenses incurred	 	 	10,831 	 	 	 	 	3,480 	 	 	 	 	7,351 	
Losses and loss expenses paid	 	 	(9,516)	 	 	 	 	(3,582)	 	 	 	 	(5,934)	
Other (including foreign exchange revaluation)	 	 	280 	 	 	 	 	113 	 	 	 	 	167 	
Balance at December 31, 2007	 	$	37,112 	 	 	 	$	13,520 	 	 	 	$	23,592 	
 
The process of establishing loss reserves for property and casualty claims can be complex and is subject to considerable variability as it requires the use of informed estimates and judgments based on circumstances known at the date of accrual. The following table shows our total reserves segregated between case reserves (including loss expense reserves) and IBNR reserves at December 31, 2007 and 2006.

 	 	2007	 	 	 	2006	
(in millions of U.S. dollars)	 	Gross	 	 	 	Ceded	 	 	 	Net	 	 	 	Gross	 	 	 	Ceded	 	 	 	Net	
Case reserves	 	$	15,625	 	 	 	$	6,077	 	 	 	$	9,548	 	 	 	$	15,592	 	 	 	$	6,135	 	 	 	$	9,457	
IBNR	 	 	21,487	 	 	 	 	7,443	 	 	 	 	14,044	 	 	 	 	19,925	 	 	 	 	7,374	 	 	 	 	12,551	
Total	 	$	37,112	 	 	 	$	13,520	 	 	 	$	23,592	 	 	 	$	35,517	 	 	 	$	13,509	 	 	 	$	22,008	
 
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The following table segregates the loss reserves by line of business including property and all other, casualty, and personal accident (A&H) at December 31, 2007 and 2006. In the table, loss expenses are defined to include unallocated and allocated loss adjustment expenses. For certain lines, in particular ACE International and ACE Bermuda products, loss adjustment expenses are included in IBNR and not in loss expenses.

 	 	2007	 	 	 	2006	
(in millions of U.S. dollars)	 	Gross	 	 	 	Ceded	 	 	 	Net	 	 	 	Gross	 	 	 	Ceded	 	 	 	Net	
Property and all other	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Case reserves	 	$	2,901	 	 	 	$	1,256	 	 	 	$	1,645	 	 	 	$	3,137	 	 	 	$	1,306	 	 	 	$	1,831	
Loss expenses	 	 	230	 	 	 	 	55	 	 	 	 	175	 	 	 	 	167	 	 	 	 	34	 	 	 	 	133	
IBNR	 	 	2,824	 	 	 	 	1,095	 	 	 	 	1,729	 	 	 	 	2,509	 	 	 	 	979	 	 	 	 	1,530	
Subtotal	 	 	5,955	 	 	 	 	2,406	 	 	 	 	3,549	 	 	 	 	5,813	 	 	 	 	2,319	 	 	 	 	3,494	
Casualty	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Case reserves	 	 	8,747	 	 	 	 	3,150	 	 	 	 	5,597	 	 	 	 	8,889	 	 	 	 	3,255	 	 	 	 	5,634	
Loss expenses	 	 	3,348	 	 	 	 	1,544	 	 	 	 	1,804	 	 	 	 	3,023	 	 	 	 	1,469	 	 	 	 	1,554	
IBNR	 	 	18,070	 	 	 	 	6,193	 	 	 	 	11,877	 	 	 	 	16,926	 	 	 	 	6,268	 	 	 	 	10,658	
Subtotal	 	 	30,165	 	 	 	 	10,887	 	 	 	 	19,278	 	 	 	 	28,838	 	 	 	 	10,992	 	 	 	 	17,846	
A&H	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Case reserves	 	 	370	 	 	 	 	68	 	 	 	 	302	 	 	 	 	351	 	 	 	 	69	 	 	 	 	282	
Loss expenses	 	 	29	 	 	 	 	4	 	 	 	 	25	 	 	 	 	25	 	 	 	 	2	 	 	 	 	23	
IBNR	 	 	593	 	 	 	 	155	 	 	 	 	438	 	 	 	 	490	 	 	 	 	127	 	 	 	 	363	
Subtotal	 	 	992	 	 	 	 	227	 	 	 	 	765	 	 	 	 	866	 	 	 	 	198	 	 	 	 	668	
Total	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Case reserves	 	 	12,018	 	 	 	 	4,474	 	 	 	 	7,544	 	 	 	 	12,377	 	 	 	 	4,630	 	 	 	 	7,747	
Loss expenses	 	 	3,607	 	 	 	 	1,603	 	 	 	 	2,004	 	 	 	 	3,215	 	 	 	 	1,505	 	 	 	 	1,710	
IBNR	 	 	21,487	 	 	 	 	7,443	 	 	 	 	14,044	 	 	 	 	19,925	 	 	 	 	7,374	 	 	 	 	12,551	
Total	 	$	37,112	 	 	 	$	13,520	 	 	 	$	23,592	 	 	 	$	35,517	 	 	 	$	13,509	 	 	 	$	22,008	
 
The judgments used to estimate unpaid loss and loss expense reserves require different considerations depending upon the individual circumstances underlying the insured loss. For example, the reserves established for an excess casualty claim, A&E claims, losses from major catastrophic events, or the IBNR for product lines will each require different assumptions and judgments to be made. Necessary judgments are based on numerous factors and may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed, or as current laws change. Hence, ultimate loss payments will differ from the estimate of the ultimate liability made at the balance sheet date. Changes to our previous estimates of prior period loss reserves can impact the reported calendar year underwriting results by worsening our reported results if the prior year reserves prove to be deficient or improving our reported results if the prior year reserves prove to be redundant. The potential for variation in loss reserves is impacted by numerous factors, which we explain below.
We establish loss and loss expense reserves to reflect our liabilities from claims for all of the insurance and reinsurance business that we write. For those claims reported by insureds or ceding companies to us prior to the balance sheet date, case reserves are established by claims personnel as appropriate based on the circumstances of the claim(s), standard claim handling practices, and professional judgment. In respect of those claims that have been incurred but not reported prior to the balance sheet date, there is by definition limited actual information to form the reserve estimate and reliance is placed upon historical loss experience and actuarial methods to project the ultimate loss obligations and the corresponding amount of IBNR. Furthermore, for our assumed reinsurance operation, Global Reinsurance, an additional case reserve may sometimes be established above the amount notified by the ceding company if the notified case reserve is judged to be insufficient by Global Reinsurance’s claims department (refer to “Assumed reinsurance” below).
We have actuarial staff within each of our operating segments who analyze loss reserves and regularly project estimates of ultimate losses and the required IBNR reserve. IBNR reserve estimates are generally calculated by first projecting the ultimate amount of expected claims for a product line and subtracting paid losses and case reserves for reported claims. The judgments involved in projecting the ultimate losses may involve the use and interpretation of various actuarial projection methods as well
 
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as more qualitative factors that may impact the ultimate value of the losses such as actual loss experience, loss development patterns, and industry data. In addition, since standard actuarial projection methods place reliance on the extrapolation of historical data and patterns, the estimate of the IBNR reserve also requires judgment by actuaries and management to consider the impact from more contemporary and subjective factors. Among some of the factors that might be considered are changes in business mix or volume, changes in ceded reinsurance structures, reported and projected loss trends, inflation, legal environment, and the terms and conditions of the contracts sold to our insured parties. Finally, adjustments may be required to ensure that the derived IBNR reflects the exposure arising on the earned portion of premium as at the balance sheet date.
Typically, for each product line, one or more standard actuarial reserving methods may be used to estimate ultimate losses and loss expenses and from these estimates a single actuarial provisional estimate is selected. Exceptions to the use of standard actuarial projection methods occur for individual claims of significance that require complex legal, claims, and actuarial analysis and judgment (i.e., A&E account projections or high excess casualty accounts in litigation). In addition, claims arising from catastrophic events require evaluation based upon our exposure at the time of the event and the circumstances of the catastrophe and its post-event impact that do not utilize standard actuarial loss projection methods.
The standard actuarial reserving methods may include, but are not necessarily limited to, paid and reported loss development, expected loss ratio, and Bornhuetter-Ferguson methods. A general description of these methods is provided below. In the subsequent discussion on short and long-tail business, reference is also made where appropriate to how consideration in method selection impacted 2007 results. In addition to these standard methods, we may use other recognized actuarial methods and approaches depending upon the product line characteristics and available data. To ensure that the projections of future loss emergence from historical loss development patterns are representative of the underlying business, the historical loss and premium data is required to be of sufficient homogeneity and credibility. For example, to improve data homogeneity, we may group product line data further by similar risk attribute (e.g., geography, coverage such as property versus liability exposure, or origin year), project losses for these homogenous groups and then combine these results to provide the overall product line estimate. The premium and loss data is aggregated by origin year (e.g., the year in which the losses were incurred or “accident year”) and annual or quarterly periods subsequent to the origin year. Implicit in the standard accepted actuarial methodologies that we generally utilize is the need for two fundamental assumptions: first, the expected loss ratio for each origin year (i.e., accident, report, or underwriting) and second, the pattern in which losses are expected to emerge over time for each origin year.
The expected loss ratio for any particular origin year is selected giving consideration to a number of potential factors including historical loss ratios adjusted for intervening premium and loss trends, industry benchmarks, the results of policy level loss modeling at the time of underwriting, and other more subjective considerations of the product line and external environment as noted above. For the more recent origin years, the expected loss ratio for a given origin year is established at the start of the origin year as part of the planning process. This analysis is performed in conjunction with underwriters and management. The expected loss ratio method arrives at an ultimate loss estimate by taking this estimate of the initial expected ultimate loss ratio and multiplying by the corresponding premium base. This method is most commonly used for immature origin periods on product lines where the actual paid or reported loss experience is not yet credible enough to override our initial expectations of the ultimate loss ratio. In addition, the expected loss ratio may be modified should underlying assumptions such as loss trend or premium rate changes differ from the original assumptions.
Our assumed paid and reported development patterns provide a benchmark against which the actual emerging loss experience can be monitored. Where possible, development patterns are selected based on historical loss emergence by origin year with appropriate allowance for changes in business mix, claims handling process, or ceded reinsurance that are likely to lead to a discernible difference between the rate of historical and future loss emergence. For product lines where the historical data is viewed to have low statistical credibility, the selected development patterns will also reflect relevant industry benchmarks and/or experience from similar product lines written elsewhere within ACE. This typically arises for product lines that are relatively immature or with high severity/low frequency portfolios and for which our historical experience exhibits considerable volatility and/or lacks credibility. The paid and reported loss development methods convert the assumed loss emergence pattern to a set of multiplicative factors which are then applied to actual paid or reported losses to arrive at an estimate of ultimate losses for each period. Due to their multiplicative nature, the paid and reported loss development methods magnify deviations between actual and expected loss emergence. Therefore, these methods tend to be favored for more mature origin periods and for those portfolios where the loss emergence has been relatively consistent over time.
The Bornhuetter-Ferguson method is essentially a combination of the expected loss ratio method and the loss development method, under which the loss development method is given more weight as the origin year matures. This approach allows a logical transition between the expected loss ratio method which is generally utilized at earlier maturities and the loss
 
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development methods which are favored at latter maturities. We usually apply this method using reported loss data although paid data may be used.
The applicability of reserve methods will also be determined by the attachment point of the policy or contract with the insured or ceding company. In the case of low attachment points typical of primary or working layer reinsurance, the experience will tend to be more frequency driven. These product types allow for the standard actuarial methods to be used in determining loss reserve levels, as it is often customary to have the appropriate historical record and volume of claims experience to rely upon. In the case of high attachment points typical of excess insurance or excess of loss reinsurance, the experience will tend to be severity driven, as only a loss of significant size will enter the layer. For structured or unique contracts, most common to the financial solutions business (which we have ceased writing) and, to a lesser extent, our reinsurance business, the standard actuarial methods need to be tempered with an analysis of each contract’s terms, original pricing information, subsequent internal and external analyses of the ongoing contracts, market exposures and history, and qualitative input from claims managers.
Our recorded reserves represent management’s best estimate of the provision for unpaid claims as of the balance sheet date. Each product line has an actuarial reserve review performed and an actuarial provisional estimate is established at the review’s conclusion. The process to select the actuarial provisional estimate, when more than one estimate is available, may differ across product lines. For example, an actuary may base the provisional estimate on loss projections developed using an incurred loss development approach instead of a paid loss development approach when reported losses are viewed to be a more credible indication of the ultimate loss compared with paid losses. The availability of estimates by different projection techniques will depend upon the product line, the underwriting circumstances, and the maturity of the loss emergence. For a well-established product line with sufficient volume and history, the actuarial provisional estimate may be drawn from a weighting of paid and reported loss development and/or Bornhuetter-Ferguson methods. However, for a new long-tail product line for which we have limited data and experience or a rapidly growing line, the emerging loss experience will unlikely have sufficient stability to allow selection of loss development or Bornhuetter-Ferguson methods and reliance will be placed upon the initial expected loss ratio method as the actuarial provisional estimate until the experience matures.
The actuarial provisional estimate is then developed into management’s best estimate with collaboration with underwriting, claims, legal, and finance departments and culminates with the input of reserve committees. Each business unit reserve committee includes the participation of the relevant parties from actuarial, finance, claims, and executive management and has the responsibility for finalizing and approving the estimate to be used as management’s best estimate. Reserves are further reviewed by ACE’s Chief Actuary and senior management. The objective of such a process is to determine a single estimate that we believe represents a better estimate than any other. Such an estimate is viewed by management to support the most likely outcome of ultimate loss settlements and is determined based on several factors including, but not limited to:
• Segmentation of data to provide sufficient homogeneity and credibility for loss projection methods;
• Extent of internal historical loss data, and industry where required;
• Historical variability of loss estimates compared with actual loss experience;
• Perceived credibility of emerged loss experience; and
• Nature and extent of underlying assumptions.
Management does not build in any specific provision for uncertainty.
We do not calculate a range of loss reserve estimates for our individual loss reserve studies. In particular, ranges are not necessarily a true reflection of the potential volatility between loss reserves estimated at the balance sheet date and the ultimate settlement value of losses. This is due to the fact that an actuarial range is developed based on known events as of the valuation date whereas actual volatility or prior period development has historically been reported in subsequent Consolidated Financial Statements, in part from events and circumstances that were unknown as of the original valuation date. While we believe that our recorded reserves are reasonable and represent management’s best estimate for each product line as of the current valuation date, future changes to our view of the ultimate liabilities are possible. A five percent change in our net loss reserves equates to $1.1 billion and represents 37 percent of our net income before taxes for 2007 and seven percent of shareholders’ equity at December 31, 2007. Historically, including A&E reserve charges, our reserves, at times, have developed in excess of 10 percent of recorded amounts. Refer to “Analysis of Losses and Loss Expense Development”, under Item 1 for a summary of historical volatility between estimated loss reserves and ultimate loss settlements.
We perform internal loss reserve studies for all product lines at least once a year; the timing of such studies varies throughout the year. External loss reserve studies are performed periodically and are compared to our internal results. Additionally, each quarter for each product line, we review the emergence of actual losses relative to expectations used in reserving. If warranted from findings in loss emergence tests, we will accelerate the timing of our product line reserve studies. Finally, external loss reserve studies are performed annually and are compared to our internal results to ensure reasonability of internal findings.
 
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The time period between the date of loss occurrence and the final payment date of the ensuing claim(s) is referred to as the “claim-tail”. The following is a discussion of specific reserving considerations for both short-tail and long-tail product lines. In this section, we reference the nature of recent prior period development to give a high-level understanding of how these considerations translate through the reserving process into financial decisions. Refer to “Segment Operating Results” for more information on prior period development.
 
Short-tail business
Short-tail business generally describes product lines for which losses are usually known and paid shortly after the loss actually occurs. This would include, for example, most property, personal accident, aviation hull, and automobile physical damage policies that are written. There are some exceptions on certain product lines (e.g., workers’ compensation catastrophe) or events (e.g., major hurricanes) where the event has occurred, but the final settlement amount is highly variable and not known with certainty for a potentially lengthy period. Due to the short reporting development pattern for these product lines, our estimate of ultimate losses from any particular accident period responds quickly to the latest loss data. We will typically assign credibility to methods that incorporate actual loss emergence, such as the paid and reported loss development and Bornhuetter-Ferguson methods, sooner than would be the case for long-tail lines at a similar stage of development from the origin year. The reserving process for short-tail losses arising from catastrophic events typically involves the determination by the claims department, in conjunction with underwriters and actuaries, of our exposure and likely losses immediately following an event and the subsequent regular refinement of those losses as our insureds provide updated actual loss information.
For the 2007 accident year, the short-tail line loss reserves were typically established using the expected loss ratio method for the non-catastrophe exposures. In addition, reserves were also established for losses arising on catastrophe activity during 2007. The underlying calculation for the non-catastrophe portion requires initial expected loss ratios by product line, as adjusted for actual experience during the progression of the 2007 calendar year. As previously noted, the derivation of initial loss ratios incorporates actuarial assumptions on projections of prior years’ loss experience, past and future loss, and exposure trends, rate adequacy of new and renewal business, and ceded reinsurance costs. In addition, we considered our view of terms and conditions and the market environment, which by their nature tend to be more judgmental relative to other factors. For our short-tail businesses taken as a whole, overall loss trend assumptions have not differed significantly relative to prior years. Because there is some random volatility of non-catastrophe loss experience from year to year, we considered average loss experience over several years when developing loss estimates for the current accident year. Therefore, while there has been favorable loss development in recent years on non-catastrophe exposures, the effect of this favorable development on expected loss ratios for the current accident year is relatively small. Further, other considerations, such as rate reductions and broadening of terms and conditions in a competitive market somewhat offset this favorable effect.
In terms of prior accident years, the bulk of changes made in the 2007 calendar year arose from the 2006 and 2005 accident years. Specifically, the Insurance – Overseas General segment experienced $121 million of favorable development due to lower than anticipated loss emergence on the 2005 and 2006 accident years and the Insurance –North American segment experienced $115 million of adverse development related to 2004 and 2005 catastrophes. In both instances, these prior period movements were primarily the result of changes to the ultimate loss estimates for the respective 2004 to 2006 accident years to better reflect the latest reported loss data rather than any changes to underlying actuarial assumptions such as loss development patterns.
The process used to establish the 2007 year-end reserves for the 2004 and 2005 catastrophes involved a detailed review by the claims department of the causation and coverage issues of each underlying claim. Given the unique circumstances around the events, historical trends and loss development patterns are not applicable. As discussed in the prior period development discussions under “Segment Operating Results”, the actual claims experience was worse than anticipated and, as such, the ultimate loss estimates were revised to reflect that loss emergence. For the reserves covering the non-catastrophe- related exposures in the 2006 and prior accident years, the change in ultimate loss reflected recognition of actual favorable loss emergence rather than explicit changes to assumptions on the loss development patterns to project future loss emergence. The actual non-catastrophe related loss emergence over 2005-2007 calendar years has been favorable but within a range of expected outcomes and the experience from these years was considered when establishing the expectation of 2007 accident year losses. For a detailed analysis of changes in assumptions related to prior accident year reserves during calendar year 2007, refer to “Prior Period Development”.
 
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Long-tail business
Long-tail business describes lines of business for which specific losses may not be known for some period and claims can take significant time to emerge. This includes most casualty lines such as general liability, directors and officers’ liability (D&O) and workers’ compensation. There are many factors contributing to the uncertainty and volatility of long-tail business. Among these are:
• Our historical loss data and experience is often too immature and lacking in credibility to place reliance upon for reserving purposes. Instead, we place reliance in our reserve methods on industry loss ratios or industry benchmark development patterns that are anticipated to reflect the nature and coverage of the underwritten business and its future development. For such product lines, actual loss experience is apt to differ from industry loss statistics that are based on averages as well as loss experience of previous underwriting years;
• The inherent uncertainty around loss trends, claims inflation (e.g., medical and judicial) and underlying economic conditions;
• The inherent uncertainty of the estimated duration of the paid and reporting loss development patterns beyond the historical record requires that professional judgment be used in the determination of the length of the patterns based on the historical data and other information;
• The inherent uncertainty of assuming historical paid and reported loss development patterns on older origin years will be representative of subsequent loss emergence on newer origin years. For example, changes in establishing case reserves can distort reported loss development patterns or changes in ceded reinsurance structures by origin year can distort the development of paid and reported losses;
• The possibility of future litigation, legislative or judicial change that might impact future loss experience relative to prior loss experience relied upon in loss reserve analyses;
• Loss reserve analyses typically require loss or other data be grouped by common characteristics in some manner. If data from two combined lines of business exhibit different characteristics, such as loss payment patterns, the credibility of the reserve estimate could be affected. Additionally, since casualty lines of business can have significant intricacies in the terms and conditions afforded to the insured, there is an inherent risk as to the homogeneity of the underlying data used in performing reserve analyses; and
• The applicability of the price change data used to estimate ultimate loss ratios for most recent origin years.
As can be seen from the above, various factors are considered when determining appropriate data, assumptions, and methods used to establish the loss reserve for the long-tail product lines. These factors will also vary by origin year for given product lines. The derivation of loss development patterns from data and the selection of a tail factor to project ultimate losses from actual loss emergence require considerable judgment, particularly with respect to the extent of historical loss experience that provides credible support to changes in key reserving assumptions. Examples of the relationship between changes in historical loss experience and key reserving assumptions are provided below.
For those long-tail product lines that are less claim frequency and more claim severity oriented, such as professional lines and high excess casualty, we placed more reliance upon expert legal and claims review of the specific circumstance underlying reported cases rather than loss development patterns. The assumptions used for these lines of business were updated in response to new claim and legal advice judged to be of significance.
For the 2007 accident year, loss reserves were typically established through the application of individual product line initial expected loss ratios that require contemplation of assumptions similar in nature to those noted in the short-tail line discussion. Our assumptions on loss trend and development patterns reflect reliance on our historical loss data provided the length of history and homogeneity afford credibility. Given the recent growth on a number of product lines, such as general casualty and financial lines, our historical loss data is less extensive and our assumptions require judgmental use of industry loss trends and development patterns. We note that industry patterns are not always available to match the nature of the business being written; this issue is particularly problematic for non-U.S. exposed lines. Given the underlying volatility of the long-tail product lines and the lengthy period required for full paid and reported loss emergence, we typically assign little to no credibility to actual loss emergence in the recent development periods. Accordingly, we generally used the initial expected loss ratio method for the 2007 and immediately preceding origin years to establish reserves by product line. We monitor actual paid and reported loss emergence with expected loss emergence for each key individual product line. While recent experience has generally been favorable relative to our internal expectations, we do not yet believe experience is sufficiently credible for us to consider moving to loss-based projection methods in setting reserves. Our best estimate based on information received to date for our 2007 loss ratios reflect what we believe is our exposure to sub-prime losses (E&O and D&O).
Given the nature of long-tail casualty business and related reserving considerations, for the major long-tail lines in Insurance – North American, Insurance – Overseas General, and Global Reinsurance, no changes of significance were made to
 
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the key actuarial assumptions for the loss trend (aside from changes to inflation assumptions), exposure trend, and loss development patterns used to establish the 2007 accident year reserves relative to prior accident years.
Typically for the 2004-2006 accident years, to the extent that actual loss emergence in calendar year 2007 differed from our expectation in the more recent origin years, the deviation was not seen as sufficiently credible, particularly given the volatility and lengthy period for full loss emergence, to alter either our booked ultimate loss selections or the set of actuarial assumptions underlying the reserving review for that particular portfolio. Such judgments were made with due consideration to the factors impacting reserve uncertainty as discussed above. However, for some product lines, credibility was assigned to emerging loss experience and this is discussed further below and in the section entitled “Prior Period Development”.
For more mature accident years, typically 2003 and prior, we used paid and reported loss patterns in the reserve setting process on older accident years where sufficient credibility existed. For those lines lacking data credibility, we placed reliance upon the latest benchmark patterns (where available) from external industry bodies such as Insurance Services Office (ISO) or the National Council on Compensation Insurance, Inc. (NCCI). Accordingly, the assumptions used to project loss estimates will not fully reflect our own actual loss experience until credibility is determined.
In contrast to short-tail lines, the prior period development in 2007 for long-tail lines of business arose across a number of accident years in the Insurance – North American and Insurance – Overseas General segments, typically more removed from the recent accident years. The movements were generally the result of actual loss emergence in calendar year 2007 that differed materially from the expected loss emergence and these deviations were significant enough in certain product lines to warrant revising the projections. The nature of the assumptions altered in 2007, and impacting the prior accident years, varies by the specifics of each product line. For example, in Insurance – North American the alterations to estimates for national account casualty and workers’ compensation lines involved retaining the original paid and reported loss development assumptions but assigning greater credibility to actual loss experience; i.e. more weight was given to paid and reported loss development and Bornhuetter-Ferguson methods rather than the expected loss ratio methods on the 2002-2004 accident years. This resulted in $21 million favorable development and $28 million adverse development for the casualty and workers’ compensation lines, respectively. Similarly, for Insurance – Overseas General, there was $23 million of favorable development on the 2003-2005 accident years as more weight was given to paid and reported loss development and Bornhuetter-Ferguson methods rather than the expected loss ratio methods. In addition, an update of our detailed annual evaluation of the excess exposures at Insurance – Overseas General resulted in net favorable prior period development of $20 million which comprised strengthening of $89 million in accident years 2003 and prior and $45 million in accident year 2006 and a release of $154 million in accident years 2004 and 2005.
While we believe our reserve for unpaid losses and loss expenses at December 31, 2007, is adequate, new information or emerging trends different from assumptions may lead to future developments in ultimate losses and loss expenses significantly greater or less than the reserve provided, which could have a material effect on future operating results. As noted previously, our best estimate of required loss reserves for most portfolios is judgmentally selected for each origin year after considering the results from any number of reserving methodologies rather than being a purely mechanical process. Therefore, it is difficult to convey, in a simple and quantitative manner, the impact that a change to a single assumption will have on our best estimate. In the examples shown below, we attempt to give an indication of the potential impact by isolating a single change for a specific reserving method that would be pertinent in establishing the best estimate for the product line described. We consider each of the following sensitivity analyses to represent a reasonably likely deviation in the underlying assumption.
 
Insurance – North American
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 inactive middle market workers’ compensation business requires considerable judgment that could be material to consolidated loss and loss expense reserves. Specifically, when applying the paid loss development method, a one percent change in the tail factor (i.e., 1.04 changed to either 1.05 or 1.03) would cause a change of approximately $46 million, either positively or negatively, for the projected net loss and loss expense reserves. This is relative to recorded net loss and loss expense reserves of approximately $285 million.
Our ACE Bermuda operations write predominantly high excess liability coverage on an occurrence-first-reported basis (typically with attachment points in excess of $300 million and limits of $100 million gross or less) and D&O and other professional-liability coverage on a claims-made basis (typically with attachment points in excess of $100 million and limits of $50 million gross or less). Claims development for this business can vary significantly for individual claims and historically could vary by as much as $50 million per claim for professional liability and $100 million per claim for excess liability depending on the nature of the loss.
 
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Insurance – Overseas General
Certain 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 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, when applying the reported loss development method, the lengthening by six months of our selected loss development patterns would increase reserve estimates on long-tail casualty and professional lines by approximately $271 million. This movement is relative to recorded net loss and loss expense reserves of approximately $3.4 billion.
 
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 losses and loss expenses ultimate. For example, a twenty percent shortening or lengthening of the development patterns used for U.S. long-tail lines would cause the loss reserve estimate derived by the reported Bornhuetter-Ferguson method for these lines to change by approximately $140 million. This movement is relative to recorded net loss and loss expense reserves of approximately $1.7 billion.
 
Assumed reinsurance
At December 31, 2007, net unpaid losses and loss expenses for the Global Reinsurance segment aggregated to $2.8 billion, consisting of $750 million of case reserves and $2.0 billion of IBNR. In comparison, at December 31, 2006, net unpaid losses and loss expenses for the Global Reinsurance segment aggregated to $2.6 billion, consisting of $778 million of case reserves and $1.8 billion of IBNR.
For catastrophe business, we principally estimate unpaid losses and loss expenses on an event basis by considering various sources of information, including specific loss estimates reported by our cedants, ceding company and overall industry loss estimates reported by our brokers, and our internal data regarding reinsured exposures related to the geographical location of the event. Our internal data analysis enables us to establish catastrophe reserves for known events with more certainty at an earlier date than would be the case if we solely relied on reports from third parties to determine carried reserves.
For our casualty reinsurance business, we generally rely on ceding companies to report claims and then use that data as a key input to estimate unpaid losses and loss expenses. Due to the reliance on claims information reported by ceding companies, as well as other factors, the estimation of unpaid losses and loss expenses for assumed reinsurance includes certain risks and uncertainties that are unique relative to our direct insurance business. These include, but are not necessarily limited to, the following:
• The reported claims information could be inaccurate;
• Typically, a lag exists between the reporting of a loss event to a ceding company and its reporting to us as a reinsurance claim. The use of a broker to transmit financial information from a ceding company to us increases the reporting lag. Because most of our reinsurance business is produced by brokers, ceding companies generally first submit claim and other financial information to brokers, who then report the proportionate share of such information to each reinsurer of a particular treaty. The reporting lag generally results in a longer period of time between the date a claim is incurred and the date a claim is reported compared with direct insurance operations. Therefore, the risk of delayed recognition of loss reserve development is higher for assumed reinsurance than for direct insurance lines; and
• The historical claims data for a particular reinsurance contract can be limited relative to our insurance business in that there may be less historical information available. Further, for certain coverages provided by products, such as excess of loss contracts, there may be relatively few expected claims in a particular year so the actual number of claims may be susceptible to significant variability. In such cases, the actuary often relies on industry data from several recognized sources.
We mitigate the above risks in several ways. In addition to routine analytical reviews of ceding company reports to ensure reported claims information appears reasonable, we perform regular underwriting and claims audits of certain ceding companies to ensure reported claims information is accurate, complete, and timely. As appropriate, audit findings are used to adjust claims in the reserving process. We also use our knowledge of the historical development of losses from individual ceding companies to adjust the level of adequacy we believe exists in the reported ceded losses.
 
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On occasion, there will be differences between our carried loss reserves and unearned premiums reserves and the amount of loss reserves and unearned premiums reserves reported by the ceding companies. This is due to the fact that we receive consistent and timely information from ceding companies only 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 premiums 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 December 31, 2007, the case reserves reported to us by our ceding companies were $723 million, compared with the $750 million we recorded. Our policy is to 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.
Within the Insurance – North American segment, we also have exposure to certain liability reinsurance lines that have been in run-off since 1994. Unpaid losses and loss expenses relating to this run-off reinsurance business resides within the Brandywine Division of our Insurance – North American segment. Most of the remaining unpaid losses and loss expense reserves for the run-off reinsurance business relate to A&E claims. (Refer to “Asbestos and Environmental and Other Run-off Liabilities” for more information.)
 
Asbestos and environmental reserves
Included in our liabilities for losses and loss expenses are liabilities for asbestos and environmental claims and expenses. These claims are principally related to claims arising from remediation costs associated with hazardous waste sites and bodily-injury claims related to exposure to asbestos products and environmental hazards. The estimation of these liabilities is particularly sensitive to the recent legal environment, including specific settlements that may be used as precedents to settle future claims.
During 2007, we conducted a review of our consolidated A&E liabilities as of June 30, 2007. As a result of the internal review, we concluded that our net loss reserves for the Brandywine operations, including A&E, were adequate and, therefore, no change to the carried reserve was required. An internal review was also conducted during 2006 for our consolidated A&E liabilities as of June 30, 2006. For that review, we concluded that our net loss reserves for the Brandywine operations, including A&E, were adequate and, therefore, no change to the carried net reserve was required, while the gross loss reserves increased by approximately $210 million.
In 2006, a team of external actuaries performed an evaluation as to the adequacy of the reserves of Century Indemnity Company (Century). This 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 results of the external review were addressed with the Pennsylvania Insurance Department and no changes to statutory-basis loss reserves were deemed necessary. Our A&E reserves are not discounted and do not reflect any anticipated future changes in the legal, social, or economic environment, or any benefit from future legislative reforms.
There are many complex variables that we consider when estimating the reserves for our inventory of asbestos accounts and these variables may directly impact the predicted outcome. We believe the most significant variables relating to our A&E reserves include assumptions regarding trends with respect to claim severity and the frequency of higher severity claims, the ability of a claimant to bring a claim in a state in which they have no residency or exposure, the ability of a policyholder to claim the right to non-products coverage, whether high-level excess policies have the potential to be accessed given the policyholders claim trends and liability situation, and payments to unimpaired claimants and the potential liability of peripheral defendants. Based on the policies, the facts, the law, and a careful analysis of the impact that these factors will likely have on any given account, we estimate the potential liability for indemnity, policyholder defense costs, and coverage litigation expense.
The results in asbestos cases announced by other carriers may well have little or no relevance to us because coverage exposures are highly dependent upon the specific facts of individual coverage and resolution status of disputes among carriers, policyholders, and claimants.
Refer to “Asbestos and Environmental and Other Run-off Liabilities” for more information.
 
Reinsurance recoverable
Reinsurance recoverable includes the balances due to us from reinsurance companies for paid and unpaid losses and loss expenses, and is presented net of a provision for uncollectible reinsurance. The provision for uncollectible reinsurance is determined based upon a review of the financial condition of the reinsurers and other factors. Ceded reinsurance contracts do not relieve our primary obligation to our policyholders. Consequently, an exposure exists with respect to reinsurance recover-
 
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able to the extent that any reinsurer is unable to meet its obligations or disputes the liabilities assumed under the reinsurance contracts. We determine the reinsurance recoverable on unpaid losses and loss expenses using actuarial estimates as well as a determination of our ability to cede unpaid losses and loss expenses under existing reinsurance contracts.
The recognition of a reinsurance recoverable asset requires two key judgments. The first judgment involves our estimation based on the amount of gross reserves and the percentage of that amount which may be ceded to reinsurers. Ceded IBNR, which is a major component of the reinsurance recoverable on unpaid losses and loss expenses, is generally developed as part of our loss reserving process and, consequently, its estimation is subject to similar risks and uncertainties as the estimation of gross IBNR (refer to “Critical Accounting Estimates – Unpaid losses and loss expenses”). The second judgment involves our estimate of the amount of the reinsurance recoverable balance that we may ultimately be unable to recover from reinsurers due to insolvency, contractual dispute, or for other reasons. Amounts estimated to be uncollectible are reflected in a provision that reduces the reinsurance recoverable asset and, in turn, shareholders’ equity. Changes in the provision for uncollectible reinsurance are reflected in net income.
Although the contractual obligation of individual reinsurers to pay their reinsurance obligations is based on specific contract provisions, the collectability of such amounts requires estimation by management. The majority of the balance we have accrued as recoverable will not be due for collection until sometime in the future, in some cases, several decades from now. Over this period of time, economic conditions and operational performance of a particular reinsurer may impact their ability to meet these obligations and while they may continue to acknowledge their contractual obligation to do so, they may not have the financial resources or willingness to fully meet their obligation to us.
To estimate the provision for uncollectible reinsurance, the reinsurance recoverable must first be determined for each reinsurer. This determination is based on a process rather than an estimate, although an element of judgment must be applied. As part of the process, ceded IBNR is allocated to reinsurance contracts because ceded IBNR is not generally calculated on a contract by contract basis. The allocations are generally based on premiums ceded under reinsurance contracts, adjusted for actual loss experience and historical relationships between gross and ceded losses. If actual experience varies materially from historical experience, including that used to determine ceded premium, the allocation of reinsurance recoverable by reinsurer will change. While such change is unlikely to result in a large percentage change in the provision for uncollectible reinsurance, it could, nevertheless, have a material effect on our net income in the period recorded.
Generally, we use a default analysis to estimate uncollectible reinsurance. The primary components of the default analysis are reinsurance recoverable balances by reinsurer, net of collateral, and default factors used to estimate the probability that the reinsurer may be unable to meet its future obligations in full. The definition of collateral for this purpose requires some judgment and is generally limited to assets held in an ACE-only beneficiary trust, letters of credit, and liabilities held by us with the same legal entity for which we believe there is a right of offset. We do not currently include multi-beneficiary trusts. However, we have several reinsurers that have established multi-beneficiary trusts for which certain of our companies are beneficiaries. The determination of the default factor is principally based on the financial strength rating of the reinsurer and a corresponding default factor applicable to the financial strength rating. Default factors require considerable judgment and are determined using the current financial strength rating, or rating equivalent, of each reinsurer as well as other key considerations and assumptions. Significant considerations and assumptions include, but are not necessarily limited to, the following:
• For reinsurers that maintain a financial strength rating from a major rating agency, and for which recoverable balances are considered representative of the larger population (i.e., default probabilities are consistent with similarly rated reinsurers and payment durations conform to averages), the judgment exercised by management to determine the provision for uncollectible reinsurance of each reinsurer is typically limited because the financial rating is based on a published source and the default factor we apply is based on a default factor of a major rating agency applicable to the particular rating class. Default factors applied for financial ratings of AAA, AA, A, BBB, BB, B, and CCC, are 0.5 percent, 1.2 percent, 1.9 percent, 4.7 percent, 9.6 percent, 23.8 percent and 49.7 percent, respectively. Because the model we use is predicated on the default factors of a major rating agency, we do not generally consider alternative factors. However, when a recoverable is expected to be paid in a brief period of time by a highly-rated reinsurer, such as certain property catastrophe claims, a default factor may not be applied;
• For balances recoverable from reinsurers that are both unrated by a major rating agency and for which management is unable to determine a credible rating equivalent based on a parent, affiliate, or peer company, we determine a rating equivalent based on an analysis of the reinsurer that considers an assessment of the creditworthiness of the particular entity, industry benchmarks, or other factors as considered appropriate. We then apply the applicable default factor for that rating class. For balances recoverable from unrated reinsurers for which our ceded reserve is below a certain threshold, we generally apply a default factor of 25 percent;
 
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• For balances recoverable from reinsurers that are either insolvent or under regulatory supervision, we establish a default factor and resulting provision for uncollectible reinsurance based on specific facts and circumstances surrounding each company. Upon initial notification of an insolvency, we generally recognize expense for a substantial portion of all balances outstanding, net of collateral, through a combination of write-offs of recoverable balances and increases to the provision for uncollectible reinsurance. When regulatory action is taken on a reinsurer, we generally recognize a default factor by estimating an expected recovery on all balances outstanding, net of collateral. When sufficient credible information becomes available, we adjust the provision for uncollectible reinsurance by establishing a default factor pursuant to information received; and
• For captives and other recoverables, management determines the provision for uncollectible reinsurance based on the specific facts and circumstances.
The following table summarizes reinsurance recoverables and the provision for uncollectible reinsurance for each type of recoverable balance at December 31, 2007.

(in millions of U.S. dollars)	 	Total
Reinsurance
Recoverables	 	 	 	Recoverables
(Net of Usable
Collateral)	 	 	 	Provision for
Uncollectible
Reinsurance	
Type	 	 	 	 	 	 	 	 	 	 	 	 	 	
Reinsurers with credit ratings	 	$	11,452	 	 	 	$	10,561	 	 	 	$	232	
Reinsurers not rated	 	 	708	 	 	 	 	583	 	 	 	 	259	
Reinsurers under supervision and insolvent reinsurers	 	 	195	 	 	 	 	181	 	 	 	 	128	
Captives	 	 	1,508	 	 	 	 	423	 	 	 	 	21	
Other – structured settlements and pools	 	 	1,185	 	 	 	 	1,185	 	 	 	 	46	
Total	 	$	15,048	 	 	 	$	12,933	 	 	 	$	686	
 
At December 31, 2007, the use of different assumptions within our approach could have a material effect on the provision for uncollectible reinsurance reflected in our Consolidated Financial Statements. To the extent the creditworthiness of our reinsurers were to deteriorate due to an adverse event affecting the reinsurance industry, such as a large number of major catastrophes, actual uncollectible amounts could be significantly greater than our provision for uncollectible reinsurance. Such an event could have a material adverse effect on our financial condition, results of operations, and our liquidity. Given the various considerations used to estimate our uncollectible provision, we cannot precisely quantify the effect a specific industry event may have on the provision for uncollectible reinsurance. However, based on the composition (particularly the average credit quality) of the reinsurance recoverable balance at December 31, 2007, we estimate that a ratings downgrade of one notch for all rated reinsurers (i.e, from A to A- or A- to BBB+) could increase our provision for uncollectible reinsurance by approximately $166 million or approximately one percent of the reinsurance recoverable balance, assuming no other changes relevant to the calculation. While a ratings downgrade would result in an increase in our provision for uncollectible reinsurance and a charge to earnings in that period, a downgrade in and of itself does not imply that we will be unable to collect all of the ceded reinsurance recoverable from the reinsurers in question. Refer to Note 4 to the Consolidated Financial Statements, under Item 8, for more information.
 
Investments
Our fixed maturity investments are classified as either “available for sale” or “held to maturity”. Our available for sale portfolio is reported at fair value with changes in fair value reflected in shareholders’ equity as a separate component of accumulated other comprehensive income. Fair value is determined using the quoted market price of these securities provided by either independent pricing services, or when such prices are not available, by reference to broker or underwriter bid indications. We regularly review our impaired investments (i.e., those debt securities for which fair value is below amortized cost or those equity securities for which fair value is below cost) for a possible “other-than-temporary” impairment. If we believe a decline in the value of a particular investment is temporary, we record the decline as an unrealized loss in our shareholders’ equity. If we believe the decline is “other-than-temporary”, we write down the book value of the investment and record a realized loss in our consolidated statement of operations. An impairment is considered “other-than-temporary” unless we have the ability and intent to hold the investment to recovery of the cost of the investment, and evidence indicating the cost of the investment is recoverable within a reasonable period outweighs evidence to the contrary. The determination as to whether or not the decline is “other-than-temporary” principally requires the following critical judgments: i) the circumstances that require management to make a specific assessment as to whether or not the decline is “other-than-temporary”, such as the time period an investment has been in a loss position and the significance of the decline; and ii) for those securities to be assessed, whether we have the
 
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ability and intent to hold the security through an expected recovery period, absent a significant change in facts that would be expected to have a material adverse effect on either the financial markets or the financial position of the issuer.
With respect to securities where the decline in value is determined to be temporary and the security’s value is not written down, a subsequent decision may be made to sell that security and realize a loss. Subsequent decisions on security sales could be made based on changes in liquidity needs (i.e., arising from a large insured loss such as a catastrophe), internal risk management considerations, the financial condition of the issuer or its industry, market conditions, and new investment opportunities. Day to day management of the majority of our investment portfolio is outsourced to third-party investment managers. The dynamic nature of portfolio management may result in a subsequent decision to sell the security and realize the loss based upon new circumstances such as those related to the changes described above. We believe that subsequent decisions to sell such securities are consistent with the classification of the majority of our portfolio as available for sale. The gross unrealized loss at December 31, 2007, for all securities in a loss position was $391 million with $6 million in an unrealized loss position for over 12 months ($4 million was related to fixed maturities held to maturity). Our net realized losses in 2007 included write-downs of $141 million of which $123 million was related to fixed maturities. This compares with write-downs of $214 million and $88 million in 2006 and 2005, respectively. The impairments recorded in 2007 and 2006 were primarily due to an increase in market interest rates from the date of security purchase and as such, were not credit-related.
Because our investment portfolio is the largest component of consolidated assets and a multiple of shareholders’ equity, adverse changes in economic conditions subsequent to the balance sheet date could result in “other-than-temporary” impairments that are material to our financial condition and operating results. Such economic changes could arise from overall changes in the financial markets and specific changes to industries, companies, or foreign governments in which we maintain relatively large investment holdings. Further, an increase in interest rates could result in an increased number of fixed maturities for which we cannot support the intent to hold to recovery. More information regarding our process for reviewing our portfolio for possible impairments can be found in the section entitled “Net Realized Gains (Losses)”.
 
Deferred tax assets
Many of our insurance businesses operate in income tax-paying jurisdictions. Our deferred tax assets and liabilities primarily result from temporary differences between the amounts recorded in our Consolidated Financial Statements and the tax basis of our assets and liabilities. We determine deferred tax assets and liabilities separately for each tax-paying component (an individual entity or group of entities that is consolidated for tax purposes) in each tax jurisdiction.
At December 31, 2007, our net deferred tax asset was $1.1 billion. (Refer to Note 7 to the Consolidated Financial Statements, under Item 8, for more information). At each balance sheet date, management assesses the need to establish a valuation allowance that reduces deferred tax assets when it is more likely than not that all, or some portion, of the deferred tax assets will not be realized. The valuation allowance is based on all available information including projections of future taxable income from each tax-paying component in each tax jurisdiction, principally derived from business plans and available tax planning strategies. Projections of future taxable income incorporate several assumptions of future business and operations that are apt to differ from actual experience. If, in the future, our assumptions and estimates that resulted in our forecast of future taxable income for each tax-paying component proves to be incorrect, an additional valuation allowance could become necessary. This could have a material adverse effect on our financial condition, results of operations, and liquidity. At December 31, 2007, the valuation allowance of $41 million (including $24 million with respect to foreign tax credits) reflects management’s assessment that it is more likely than not that a portion of the deferred tax asset will not be realized due to the inability of certain foreign subsidiaries to generate sufficient taxable income or the inability to utilize foreign tax credits.
 
Guaranteed minimum income benefits derivatives
Under reinsurance programs covering living benefit guarantees, we assume the risk of guaranteed minimum income benefits associated with variable annuity contracts. Our 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 net realized gains (losses) in the period of the change pursuant to Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133). We believe that the most meaningful presentation of these derivatives is to reflect cash inflows or revenue as net premiums earned, and to record estimates of the average modeled value of future cash outflows as incurred losses. For GMIB reinsurance, we recognize benefit reserves consistent with AICPA Statement of Position 03-1, Accounting and Reporting by Insurance Enterprises for Certain Non-traditional Long-duration Contracts and for Separate Accounts (SOP 03-1). Changes in this reserve are included in life underwriting income. The incremental difference between fair value and SOP 03-1 benefit reserves is reflected in other assets or other liabilities in the balance sheet and related changes in fair value are reflected in net realized gains (losses) in the consolidated statement of operations. We generally hold these derivative con-
 
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tracts to maturity. Where we hold a derivative to maturity, the cumulative gains and losses will net to zero. Refer to Note 2j) to the Consolidated Financial Statements, under Item 8, for further description of this product and related accounting treatment. For a sensitivity discussion of the effect of changes in interest rates and equity indices on the fair value of GMIBs, and the resulting impact on our net income, refer to Item 7A.
The fair value of GMIB reinsurance is estimated using an internal valuation model which includes the use of management estimates and current market information. All of our treaties contain claim limits, which are factored into the valuation model. The fair value depends on a number of factors, including changes in interest rates, changes in equity markets, changes in market volatility, changes in policyholder behavior, and changes in policyholder mortality. The model and related assumptions are continuously re-evaluated by management and enhanced, as appropriate, based upon improvements in modeling techniques and availability of more timely market information, such as market conditions and demographics of in-force annuities. Due to the inherent uncertainties of the assumptions used in the valuation models to determine the fair value of these derivative products, actual experience may differ from the estimates reflected in our Consolidated Financial Statements, and the differences may be material.
The two most significant policyholder behavior assumptions include lapse rates and annuitization rates using the guaranteed benefit (GMIB annuitization rate). Assumptions regarding lapse rates and GMIB annuitization rates differ by treaty but the underlying methodology to determine rates applied to each treaty is comparable. The assumptions regarding lapse and GMIB annuitization rates determined for each treaty are based on a dynamic calculation that uses several underlying factors. The effect of changes in key market factors on assumed lapse and annuitization rates is principally based on historical experience for variable annuity contracts as well as considerable judgment, particularly for newer benefits with limited historical experience.
A lapse rate is the percentage of in-force policies surrendered in a given calendar year. All else equal, as lapse rates increase, ultimate claim payments will decrease. The GMIB annuitization rate is the percentage of policies for which the customer will elect to annuitize using the guaranteed benefit provided under the GMIB. All else equal, as GMIB annuitization rates increase, ultimate claim payments will increase, subject to treaty claim limits.
Key factors affecting the lapse rate assumption include investment performance and policy duration. We generally assume that lapse rates increase with policy duration with a significant increase in rates after the end of the surrender charge period. As investment performance of underlying fund investments declines, and guarantees become more valuable, lapse rates are anticipated to decrease thereby increasing the expected value of claims on minimum guarantees and thus benefit reserves and the incremental fair value liability.
Key factors affecting the GMIB annuitization rate include investment performance and interest rates after the GMIB waiting period. As investment performance of underlying fund investments declines, the monthly income available to a policyholder who annuitizes their account value falls; this makes the GMIB more valuable. As the GMIB becomes more valuable, our modeling assumes that annuitization rates will increase, resulting in higher benefit reserves and fair value liability. The same is true in an environment where long-term interest rates are decreasing.
Net realized losses for 2007 included $185 million for GMIB reinsurance, compared with $nil in 2006 and net realized gains of $18 million in 2005, excluding changes in the fair value of specific derivative instruments held to partially offset the risk in the variable annuity guarantee reinsurance portfolio. These derivatives do not receive hedge accounting treatment. Refer to “Net Realized Gains (Losses)” for more information.
 
Goodwill
Goodwill, which represents the excess of the cost of our acquisitions over the fair value of net assets we acquired, was $2.7 billion at December 31, 2007. The ACE INA acquisition resulted in approximately 80 percent of this balance. Goodwill is not amortized but is subject to a periodic evaluation of impairment. It is our policy to test goodwill as well as other intangible assets for impairments on an annual basis. The impairment tests in 2007, in the aggregate, show a fair value in excess of the carrying value. Goodwill is assigned to applicable reporting units of acquired entities at acquisition. The most significant reporting units are the domestic and international divisions of ACE INA acquired in 1999; ACE Tempest Re’s catastrophe businesses acquired in 1996 and 1998; and Tarquin Limited acquired in 1998. There are other reporting units that resulted from smaller acquisitions that are also assessed annually. In our impairment tests, to estimate the fair value of a reporting unit, we principally use both an earnings model, which considers forecasted earnings and other financial ratios of the reporting unit as well as relevant financial data of comparable companies to the reporting unit such as the relationship of price to earnings for recent transactions and market valuations of publicly traded companies, and an analysis of the present value of estimated net cash flows. We must assess whether the current fair value of our operating units is at least equal to the fair value used in the determination of goodwill. In doing this, we make assumptions and estimates about the profitability attributable to our operat-
 
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ing segments, as this is important in assessing whether an impairment has occurred. If, in the future, our assumptions and estimates made in assessing the fair value of acquired entities change, goodwill could be materially adjusted. This would cause us to write-down the carrying value of goodwill and could have a material adverse effect on our results of operations in the period the charge is taken.
 
Risk transfer
In the ordinary course of business, we both purchase (or cede) and sell (or assume) P&C reinsurance protection. In 2002, as a matter of policy, we discontinued the purchase of all finite reinsurance contracts. For both ceded and assumed reinsurance, risk transfer requirements must be met in order to use reinsurance accounting, principally resulting in the recognition of cash flows under the contract as premiums and losses. If risk transfer requirements are not met, a contract is to be accounted for as a deposit, typically resulting in the recognition of cash flows under the contract through a deposit asset or liability and not as revenue or expense. To meet risk transfer requirements, a reinsurance contract must include both insurance risk, consisting of underwriting and timing risk, and a reasonable possibility of a significant loss for the assuming entity. We also apply similar risk transfer requirements to determine whether certain commercial insurance contracts should be accounted for as insurance or a deposit. Contracts that include fixed premium (i.e., premium not subject to adjustment based on loss experience under the contract) for fixed coverage generally transfer risk and do not require judgment.
Reinsurance and insurance contracts that include both significant risk sharing provisions, such as adjustments to premiums or loss coverage based on loss experience, and relatively low policy limits as evidenced by a high proportion of maximum premium assessments to loss limits, can require considerable judgment to determine whether or not risk transfer requirements are met. For such contracts, often referred to as finite or structured products, we require that risk transfer be specifically assessed for each contract by developing expected cash flow analyses at contract inception. To support risk transfer, the cash flow analyses must support the fact that a significant loss is reasonably possible, such as a scenario in which the ratio of the net present value of losses divided by the net present value of premiums equals or exceeds 110 percent. For purposes of cash flow analyses, we generally use a risk-free rate of return consistent with the expected average duration of loss payments. In addition, to support insurance risk, we must prove the reinsurer’s risk of loss varies with that of the reinsured and/or support various scenarios under which the assuming entity can recognize a significant loss.
To ensure risk transfer requirements are routinely assessed, quantitative risk transfer analyses and memoranda supporting risk transfer are developed by underwriters for all structured products. We have established protocols for structured products that include criteria triggering an accounting review of the contract prior to quoting. If any criterion is triggered, a contract must be reviewed by a committee established by each of our operating segments with reporting oversight, including peer review, from our global Structured Transaction Review Committee.
With respect to ceded reinsurance, we entered into a few multi-year excess of loss retrospectively-rated contracts, principally in 2002, some of which remain in-force. These contracts principally provide severity protection for specific product divisions. Because traditional one-year reinsurance coverage had become relatively costly, these contracts were generally entered into to secure a more cost-effective reinsurance program. All of these contracts transferred risk and have been accounted for as reinsurance. In addition, we maintain a few aggregate excess of loss reinsurance contracts that were principally entered into prior to 2003, such as the National Indemnity Company (NICO) contracts referred to in the section entitled, “Asbestos and Environmental and Other Run-off Liabilities”. Subsequent to the ACE INA acquisition, we have not purchased any retroactive ceded reinsurance contracts.
With respect to assumed reinsurance and insurance contracts, products giving rise to judgments regarding risk transfer were primarily sold by our financial solutions business. Although we have ceased writing financial solutions business, several contracts remain in-force and principally include multi-year retrospectively-rated contracts and loss portfolio transfers. Because transfer of insurance risk is generally a primary client motivation for purchasing these products, relatively few P&C insurance and reinsurance contracts have historically been written for which we concluded that risk transfer criteria had not been met. For certain insurance contracts that have been reported as deposits, the insured desired to self-insure a risk but was required, legally or otherwise, to purchase insurance so that claimants would be protected by a licensed insurance company in the event of non-payment from the insured.
A significant portion of ACE Tempest Re USA’s business is written through quota share treaties (approximately $461 million of net premiums earned in 2007, comprised of $324 million of first dollar quota share treaties and $137 million of excess quota share treaties), some of which are categorized as structured products. Structured quota share treaties typically contain relatively low aggregate policy limits, a feature that reduces loss coverage in some manner and a profit sharing provision. Accounting standard setters for both GAAP and statutory reporting have undertaken projects to re-evaluate risk transfer guidance, including accounting models that could ultimately require the bifurcation of structured quota share treaties into
 
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insurance and financing elements, and perhaps other quota share contracts not currently categorized as structured, into a reinsurance and financing component. New guidance in this area has the potential to have a significant impact on the amount of premiums and losses recognized under these contracts but we expect little impact to our net income.
 
Consolidated Operating Results – Years Ended December 31, 2007, 2006, and 2005

(in millions of U.S. dollars)	 	2007	 	 	 	 	2006	 	 	 	 	2005	 	
Net premiums written	 	$	11,979	 	 	 	 	$	12,030	 	 	 	 	$	11,792	 	
Net premiums earned	 	 	12,297	 	 	 	 	 	11,825	 	 	 	 	 	11,748	 	
Net investment income	 	 	1,918	 	 	 	 	 	1,601	 	 	 	 	 	1,264	 	
Net realized gains (losses)	 	 	(61	)	 	 	 	 	(98	)	 	 	 	 	76	 	
Total revenues	 	$	14,154	 	 	 	 	$	13,328	 	 	 	 	$	13,088	 	
Losses and loss expenses	 	 	7,351	 	 	 	 	 	7,070	 	 	 	 	 	8,571	 	
Life and annuity benefits	 	 	168	 	 	 	 	 	123	 	 	 	 	 	143	 	
Policy acquisition costs	 	 	1,771	 	 	 	 	 	1,715	 	 	 	 	 	1,663	 	
Administrative expenses	 	 	1,455	 	 	 	 	 	1,456	 	 	 	 	 	1,261	 	
Interest expense	 	 	175	 	 	 	 	 	176	 	 	 	 	 	174	 	
Other (income) expense	 	 	81	 	 	 	 	 	(35	)	 	 	 	 	(25	)	
Total expenses	 	 	11,001	 	 	 	 	 	10,505	 	 	 	 	 	11,787	 	
Income before income tax	 	 	3,153	 	 	 	 	 	2,823	 	 	 	 	 	1,301	 	
Income tax expense	 	 	575	 	 	 	 	 	522	 	 	 	 	 	273	 	
Cumulative effect of a change in accounting principle	 	 	–	 	 	 	 	 	4	 	 	 	 	 	–	 	
Net income	 	$	2,578	 	 	 	 	$	2,305	 	 	 	 	$	1,028	 	
 
Net premiums written, which reflect the premiums we retain after purchasing reinsurance protection, decreased slightly in 2007, compared with 2006. During 2007, we experienced competitive conditions, particularly in our Global Reinsurance segment, offset by favorable foreign exchange impact and growth in our international A&H business. Our ACE USA operations reported modest growth driven primarily by specialty casualty and energy lines as well as professional risk and a large assumed portfolio contract. ACE Westchester Specialty (ACE Westchester) reported a decrease in production due to very competitive conditions on P&C lines. Net premiums written increased two percent in 2006, compared with 2005. The increase was primarily driven by production gains in many of ACE USA’s and ACE Westchester’s businesses, A&H growth at ACE International, and increased rates on short-tail lines at ACE Global Markets. These increases were partially offset by a decline in international financial solutions business, which we have ceased writing. The 2005 year was impacted by net catastrophe-related reinstatement premiums, which reduced net premiums written and earned by $68 million.
The following table provides a consolidated breakdown of net premiums earned by line of business for the years ended December 31, 2007, 2006, and 2005.

(in millions of U.S. dollars)	 	2007	 	 	 	% of
total	 	 	 	2006	 	 	 	% of
total	 	 	 	2005	 	 	 	% of
total	
Property and all other	 	$	3,787	 	 	 	31%	 	 	 	$	3,618	 	 	 	31%	 	 	 	$	3,560	 	 	 	30%	
Casualty	 	 	6,464	 	 	 	52%	 	 	 	 	6,506	 	 	 	55%	 	 	 	 	6,698	 	 	 	57%	
Personal accident (A&H)	 	 	1,678	 	 	 	14%	 	 	 	 	1,427	 	 	 	12%	 	 	 	 	1,242	 	 	 	11%	
Total P&C	 	 	11,929	 	 	 	97%	 	 	 	 	11,551	 	 	 	98%	 	 	 	 	11,500	 	 	 	98%	
Life	 	 	368	 	 	 	3%	 	 	 	 	274	 	 	 	2%	 	 	 	 	248	 	 	 	2%	
Net premiums earned	 	$	12,297	 	 	 	100%	 	 	 	$	11,825	 	 	 	100%	 	 	 	$	11,748	 	 	 	100%	
 
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 increased four percent in 2007, compared with 2006. This increase was primarily related to increased production at ACE USA and ACE International as well as our life operations, partially offset by decreased production at our Global Reinsurance segment. Net premiums earned were stable in 2006, compared with 2005 as increases in A&H were offset by significant decreases in financial solutions business, which we have ceased writing.
 
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Net investment income increased 20 percent in 2007, compared with 2006, and 27 percent in 2006, compared with 2005. These increases were primarily due to investment of positive operating cash flows and net proceeds from our approximately $1.5 billion public offering in October 2005, which have resulted in a higher overall average invested asset base.
In evaluating our P&C business, 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 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 years ended December 31, 2007, 2006, and 2005.

 	 	2007	 	 	 	2006	 	 	 	2005	
Loss and loss expense ratio	 	61.6%	 	 	 	61.2%	 	 	 	74.5%	
Policy acquisition cost ratio	 	14.5%	 	 	 	14.6%	 	 	 	14.2%	
Administrative expense ratio	 	11.8%	 	 	 	12.3%	 	 	 	10.8%	
Combined ratio	 	87.9%	 	 	 	88.1%	 	 	 	99.5%	
 
The following table shows the impact of catastrophe losses and prior period development on our loss and loss expense ratio for the years ended December 31, 2007, 2006, and 2005.

 	 	2007	 	 	 	2006	 	 	 	2005	
Loss and loss expense ratio, as reported	 	61.6 %	 	 	 	61.2 %	 	 	 	74.5 %	
Catastrophe losses	 	(1.3)%	 	 	 	(0.1)%	 	 	 	(11.4)%	
Prior period development	 	1.8 %	 	 	 	0.1 %	 	 	 	(0.7)%	
Loss and loss expense ratio, adjusted	 	62.1 %	 	 	 	61.2 %	 	 	 	62.4 %	
 
We recorded $159 million in net catastrophe losses in 2007, compared with $17 million in 2006, and $1.4 billion in 2005. For 2007, our catastrophe losses were primarily related to floods in the U.K., Australia, and the U.S. and also include the impact of European windstorm Kyrill. In 2005, the catastrophe losses were primarily associated with Hurricanes Katrina, Rita, and Wilma.
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. We experienced $217 million of net favorable prior period development in 2007. This compares with $12 million of net favorable prior period development in 2006, and $86 million of net adverse prior period development in 2005. The favorable prior period development in 2007 was the net result of several underlying favorable and adverse movements; refer to “Prior Period Development”. Our loss and loss expense ratio was negatively impacted by an increase in current year accident losses, reflecting current market conditions.
Our 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. For 2007, our policy acquisition cost ratio was stable. A&H business typically incurs higher acquisition costs relative to other lines, and therefore, our growth in this area has had a negative impact on our policy acquisition cost ratio. This increasing trend on our policy acquisition costs was offset in 2007 by reduced ceding commission at ACE Tempest Re USA. Our policy acquisition cost ratio increased in 2006 primarily due to changes in business mix and the favorable impact in 2005 of net premiums earned on multi-year contracts in connection with the significant 2005 catastrophe losses which, generally, did not incur acquisition costs.
Our administrative expenses in 2007 were stable compared with 2006, despite an adverse impact of foreign exchange. We continue to focus on reducing expenses where possible. Our administrative expense ratio decreased in 2007, compared with 2006, due to the increase in net premiums earned. For 2006, the administrative expense ratio increased, compared with 2005, primarily due to global expansion, including staff additions and infrastructure enhancements at ACE USA, ACE Westchester, ACE Life, and ACE International. Administrative expenses in 2006 also include $80 million related to the settlement with certain governmental agencies from their investigations of various insurance industry practices. For 2005, administrative
 
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expenses were reduced by the release of an accrual in Insurance – North American and higher net profits from ACE USA’s ESIS (claims services) operation, which we include in administrative expenses.
Our effective income tax rate, which we calculate as income tax expense divided by income before income tax, is dependent upon the mix of earnings from different jurisdictions with various tax rates. A change in the geographic mix of earnings would change the effective income tax rate. Our effective tax rate on net income was 18 percent in 2007 and 2006, compared with 21 percent in 2005. We decreased our liability for unrecognized tax benefits in the amount of $39 million in 2007 due primarily to a change in tax regulation. In 2005, a substantial portion of our catastrophe losses occurred in jurisdictions where we do not incur income tax, causing our income to decline without a commensurate decrease in income tax expense.
The growth in our net income in 2007, compared with 2006, is reflective of the strength, diversity, and balance in our organization. All of our segments contributed to our net income.
 
Prior Period Development
The favorable prior period development of $217 million during the year ended December 31, 2007, was the net result of several underlying favorable and adverse movements. In the sections following the table below, significant prior period movements within each reporting segment are discussed in more detail.
The following table summarizes prior period development, (favorable) and adverse, by segment and claim-tail attribute for the years ended December 31, 2007 and 2006. Note that short-tail as used here includes the previously reported categories of short-tail and specialty.

(in millions of U.S. dollars, except for percentages)	 	Long-tail	 	 	 	 	Short-tail	 	 	 	 	Total	 	 	 	 	% of net
unpaid
reserves*	
2007	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Insurance – North American	 	$	39	 	 	 	 	$	(30	)	 	 	 	$	9	 	 	 	 	0.1%	
Insurance – Overseas General	 	 	(53	)	 	 	 	 	(139	)	 	 	 	 	(192	)	 	 	 	3.2%	
Global Reinsurance	 	 	13	 	 	 	 	 	(47	)	 	 	 	 	(34	)	 	 	 	1.3%	
Total	 	$	(1	)	 	 	 	$	(216	)	 	 	 	$	(217	)	 	 	 	1.0%	
2006	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Insurance – North American	 	$	60	 	 	 	 	$	5	 	 	 	 	$	65	 	 	 	 	0.5%	
Insurance – Overseas General	 	 	20	 	 	 	 	 	(92	)	 	 	 	 	(72	)	 	 	 	1.3%	
Global Reinsurance	 	 	(3	)	 	 	 	 	(2	)	 	 	 	 	(5	)	 	 	 	0.2%	
Total	 	$	77	 	 	 	 	$	(89	)	 	 	 	$	(12	)	 	 	 	0.1%	
* Calculated based on the segment beginning of period net unpaid loss and loss expense reserves.
 
Insurance – North American
Insurance – North American incurred net adverse prior period development of $9 million in 2007, representing 0.1 percent of the segment’s net unpaid loss and loss expense reserves at December 31, 2006. The net prior period development in 2007 was the net result of several underlying favorable and adverse movements, driven by the following principal changes:
• Net adverse development of $39 million on long-tail business including:
• Adverse development of $21 million due to an adjustment made in 2006 relating to IBNR reserves on commuted ceded reinsurance contracts, identified and resolved during 2007;
• Adverse development of $33 million on two related specialty claims from a runoff financial guaranty program affecting accident year 2000 due to adverse judicial rulings rendered during the 2007 calendar year;
• Adverse development on our estimates of future allocated claims expense on two separate portfolios of workers’ compensation insurance totaling $28 million. This change in estimate affected our national accounts workers’ compensation business (principally accident years 2002-2004) and a runoff portfolio of workers’ compensation servicing carrier business (covering accident years 1996 and prior). For the national accounts business, the change was principally in our high deductible portfolio. Based on analyses completed during 2007, we have increased our tail factor for allocated loss adjustment expenses (ALAE) as well as our ratios of ALAE to loss used in our projection methodologies. Small movements in these assumptions produce a leveraged increase in the loss estimates across a number of accident years;
• Adverse development on our estimates of ultimate loss on a collection of runoff professional liability and medical programs totaling $20 million. These increases were the direct result of a review of all open claims that was completed
 
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during 2007. This claims review identified a number of cases where adverse change in facts and circumstances led to a significant deviation from our estimates of ultimate claim value;
• Favorable development in our estimate of ultimate loss and ALAE of $18 million in our surety business. This improvement was heavily concentrated in the 2005 and 2006 accident years. In the 2007 calendar year, the level of late reported claims and development on known claims for this portfolio was significantly below historical levels for this line of business resulting in a reduction in all loss projection methods;
• Favorable development on our national accounts casualty business, primarily general liability, of $21 million for the 2002-2004 accident years. Development on these portfolios continues to be favorable relative to the original assumptions used to price the products. Actual paid and incurred loss activity in 2007 has been lower than assumed in our prior projections and we have modified our estimates accordingly; and
• Favorable development of $25 million on our foreign casualty portfolio for the 2004 and prior accident years. This is partly due to an adjustment for a reserve established in 2006 for a single large claim, but also due to low levels of reported and paid loss activity on our foreign captive business. This particular line has net exposure on a per occurrence basis excess of high deductibles/self-insured retentions and an aggregate basis excess of an aggregate attachment point. Expected loss emergence patterns used in our 2006 review projected higher loss development for the 2004 and prior accident years than emerged during 2007 prompting a reduction in our projection of ultimate losses.
• Net favorable development of $30 million on short-tail business including:
• Adverse development totaling $115 million relating to increases in our estimates of loss for the 2005 storms primarily in our ACE Westchester operation but also some modest development in our offshore energy business. This development was due primarily to a relatively small number of losses on excess policies with large exposed limits. These losses reached settlement during 2007 for amounts in excess of our case reserves prompting adjustments to our projections of ultimate losses. The claims handling associated with the 2005 hurricanes has involved complex and unique causation and coverage issues. These issues continue to be present and may have a further material adverse impact on our financial results;
• Favorable development of $33 million on ACE Westchester crop/hail business. This was the direct effect of recording the final settlement of the 2006 pool year from the bordereau received during the 2007 calendar year;
• Favorable development of $52 million in our workers’ compensation business due to the absence of multi-claimant events such as industrial accidents for the 2006 accident year. The majority of our exposure for these perils falls under our national accounts high deductible line of business. We evaluate this exposure annually after the accident year has closed allowing for the late identification of significant losses. Our review in 2007 of potential 2006 accident year losses has led to a decrease in our estimate of the required provision for these claims;
• Favorable development in our estimates of ultimate losses for first party lines including property and auto physical damage in our ACE Canada operations totaling $18 million, affecting primarily the 2006 accident year. Incurred loss development during calendar year 2007 on the 2006 accident year was lower than historical averages which formed the basis for our prior projections. Given the relatively short reporting pattern for this business, the actual loss emergence was assigned credibility and the ultimate loss estimates revised accordingly;
• Favorable development in our estimates of ultimate loss of $19 million on our Canadian A&H portfolio. We have limited historical experience for this product line. Losses were originally recorded using an expected loss ratio method. Actual loss emergence in calendar year 2007 has proven to be more favorable than our prior projections. Given the relatively short reporting pattern for this business, the actual loss emergence was assigned credibility and the ultimate loss estimates revised accordingly; and
• Favorable development in our estimates of ultimate loss of $28 million on short tail, non-catastrophe losses in our ACE Westchester property and inland marine product lines. Attritional incurred loss activity on the 2005 and 2006 accident years in the 2007 calendar year was lower than historical averages which formed the basis for our prior projections.
Insurance – North American incurred net adverse prior period development of $65 million in 2006, representing 0.5 percent of the segment’s net unpaid loss and loss expense reserves at December 31, 2005. The net prior period development in 2006 was the net result of several underlying favorable and adverse movements, driven by the following principal changes:
• Net adverse development of $60 million on long-tail business including:
• Adverse development of $57 million on a small number of run-off portfolios in the U.S. with predominantly middle market workers’ compensation exposures from accident years 1996 and prior. In 2006, we lengthened the selected tail factors due to an increasing trend observed in industry statistics published in 2006, and a modest deterioration in our claims experience related to the medical cost component of individual claims that emerged since the prior study;
 
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• Adverse development of $42 million on the ACE Bermuda D&O book from report years 2000-2002 driven by case estimate increases on large claims following significant events in the mediation process during 2006, including increased plaintiff demands, settlement conferences, and court proceedings;
• Favorable development of $29 million on the ACE Bermuda excess liability book driven by the settlement of a single claim in 2006 from the 1991 report year on terms more favorable than the assumptions used to establish the reserve. The reserve was released following receipt of the ruling’s terms in 2006; and
• Favorable development of $13 million on large national account workers’ compensation business written by ACE USA. We observed reported claims frequency in 2006 lower than anticipated.
• Net adverse development of $5 million on short-tail business including:
• Adverse development of $182 million related to property claims arising from 2005 catastrophes. The majority of this increase is related to property losses from Hurricane Katrina. The nature and extent of Hurricane Katrina resulted in some claims that increased over previously reported damage estimates. Factors leading to these increases included demand surge and some impact to previously unimpaired layers of excess coverage;
• Favorable development on ACE Westchester’s crop/hail business of $60 million due to recording of the final settlement of the 2005 crop results. In line with normal practice for this type of business, ACE did not receive final loss reports for the 2005 year until 2006. Therefore, the prior period movements were direct results of the loss amounts within the initial and final loss reports issued during the first and second quarters of 2006 being lower than our preliminary estimates;
• Favorable development of $51 million on ACE USA’s workers’ compensation short-tail catastrophe and industrial accident exposure arising from 2004 and 2005 accident years, due to favorable trends in reported loss development. For the 2004 and 2005 accident years, claims arising from industrial or travel accidents trended favorably in 2006 relative to how earlier accident years had developed at the same period of maturity; and
• Net favorable development of $46 million related to the 2004 and 2005 accident years. This favorable activity was primarily in our aerospace and surety lines of business. Both of these businesses are relatively new, in that as recently as 2002 our premium volume was minimal and we have grown these businesses significantly since then. During 2006, we concluded the loss experience had become sufficiently credible, due to the degree of elapsed time, for us to begin to consider loss based projection methods which resulted in favorable prior loss development of $14 million and $18 million, respectively.
We experienced $103 million of net adverse prior period development in 2005, representing 0.9 percent of the segment’s net unpaid loss and loss expense reserves at December 31, 2004.
 
Insurance – Overseas General
Insurance – Overseas General experienced net favorable prior period development of $192 million in 2007, representing 3.2 percent of the segment’s net unpaid loss and loss expense reserves at December 31, 2006. The net prior period development for 2007 was the net result of several underlying favorable and adverse movements, driven by the following principal changes:
• Net favorable development of $53 million on long-tail lines of business including:
• Net favorable development of $33 million in the 2006 and prior accident years for Insurance – Overseas General long-tail lines, primarily casualty and financial lines. This favorable prior period development was in response to the annual review of long-tail lines completed during the year. There was $23 million of net favorable development for Insurance – Overseas General on the 2003-2005 accident years driven by reductions in loss development method indications and greater credibility being assigned to Bornhuetter-Ferguson projections versus expected loss ratio methods. This shift in credibility weighting between reserving methods is common practice and allows for greater recognition of actual loss emergence as accident years mature;
• Net favorable development of $20 million as a result of an update of the detailed annual evaluation of the excess exposures in Insurance – Overseas General which comprised strengthening of $89 million in accident years 2003 and prior, and $45 million in accident year 2006, and a release of $154 million in accident years 2004 and 2005; and
• Adverse development of $11 million in ACE Global Markets’ long-tail professional lines, primarily in years of account 1999-2003. This adverse prior period development was largely in response to claims department recommendations on three accounts based on updated information received during the course of claim settlement in calendar year 2007.
• Net favorable development of $139 million on short-tail lines of business including:
• Favorable development of $84 million on short-tail property and fire lines primarily in the 2006 accident year in ACE International. The favorable development during the past year was due in large part to shifting credibility away from Bornhuetter-Ferguson methods and relying more heavily on loss development patterns as case incurred loss became a more accurate predictor of ultimate loss. This shift in credibility tended to reduce indicated ultimate losses since, with hindsight, our initial expected loss ratios have proven to be conservative;
 
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• Favorable development of $13 million on 2005 hurricane losses in ACE Global Markets. This adjustment was due to the fact that after 24 months of development, it was concluded that there would be no new reported claims;
• Favorable development of $30 million on specialty A&H primarily in the 2005 and 2006 accident years in ACE Europe. This favorable prior period development followed the completion of the regular reserve review and was driven by better than expected loss experience relative to prior reserving assumptions. The favorable experience arose in direct marketing A&H businesses across several countries with no particular underlying claim or loss emergence trend identifiable;
• Favorable development of $28 million on specialty marine, primarily in the 2005 and 2006 accident years in both ACE International and ACE Global Markets. This favorable prior period development was largely in response to claims department recommendations on several large claims based on updated information received during claim settlement in calendar year 2007; and
• Adverse development of $9 million on specialty consumer lines, primarily in accident year 2006. This adverse development was primarily driven by further deterioration of ACE International’s homeowner’s warranty business in Norway. The indicated ultimate loss was revised upwards in 2007 in response to several key claim metrics underlying the reserve estimate: number of reopened claims, loss adjustment expenses, and frequency and severity of late reported claims.
Insurance – Overseas General experienced net favorable prior period development of $72 million in 2006, representing 1.3 percent of the segment’s net unpaid loss and loss expense reserves at December 31, 2005. The net prior period development for 2006 was the net result of several underlying favorable and adverse movements, driven by the following principal changes:
• Net adverse development of $20 million on long-tail lines of business including:
• Adverse development of $29 million on the ACE Global Markets’ professional lines portfolio. In 2006, we continued to experience greater than expected reported loss activity related to years of account 2003 and prior, largely from claims related to corporate failures, allegations of management misconduct, and accounting irregularities. As a result, we have increased the expected ultimate loss ratios for these years in response to updated claim and legal information received in 2006 on specific cases;
• Adverse development of $14 million on asbestos liabilities, excluding a provision for uncollectible reinsurance, resulting from the completion of our annual analysis of our international A&E exposures by a joint legal and actuarial team during the fourth quarter of 2006; and
• Net favorable development of $23 million on ACE International’s non-A&E exposures from the 2002-2004 accident years. This movement was driven by continued favorable loss emergence, most notably on the U.K. casualty and Asia Pacific financial lines portfolios, as a result of favorable severity trends in 2006.
• Net favorable development of $92 million on short-tail lines of business including:
• Net favorable development of $111 million on short-tail property and fire lines, mainly related to accident years 2004 and 2005. The favorable development in 2006 was driven by lower than anticipated frequency and severity of late reported property claims that emerged during 2006, and favorable development and settlement of several previously reported large losses; and
• Net adverse development of $19 million on other short-tail business including aviation, A&H, marine, consumer lines, and political risk. Most of the adverse development was driven by higher than expected loss activity in 2006 at ACE Global Markets, primarily on accident years 2002 and prior.
We experienced $5 million of net adverse development in 2005, representing 0.1 percent of the segment’s net unpaid loss and loss expense reserves at December 31, 2004.
 
Global Reinsurance
Global Reinsurance experienced net favorable prior period development of $34 million in 2007, representing 1.3 percent of the segment’s net unpaid loss and loss expense reserves at December 31, 2006. The net prior period development recorded in 2007 was the net result of several underlying favorable and adverse movements. The largest adverse movement was related to long-tail lines of business for ACE Tempest Re USA of $13 million mainly as a result of higher than expected claims reported over the last few quarters primarily in the treaty years 2000-2005 for casualty and workers’ compensation business on several accounts. Favorable movements of $47 million largely related to claim closings on short-tail property and other short-tail lines of business primarily from treaty years 2005 and prior were recorded in 2007.
Global Reinsurance experienced net favorable prior period development of $5 million in 2006, representing 0.2 percent of the segment’s net unpaid loss and loss expense reserves at December 31, 2005. The net prior period development in 2006 was the net result of several underlying favorable and adverse movements. The largest adverse movement was related to catastrophes from the 2005 accident year of $29 million as a result of increased loss reports from cedants. Favorable movements
 
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largely related to property business from accident years prior to 2005 and a number of small movements on different specialty portfolios.
We experienced $22 million of net favorable prior period development in 2005, representing 1.4 percent of the segment’s net unpaid loss and loss expense reserves at December 31, 2004.
 
Segment Operating Results – Years Ended December 31, 2007, 2006, and 2005
The discussions that follow include tables, which show our segment operating results for the three years ended December 31, 2007, 2006, and 2005. In presenting our segment 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 net investment income, other (income) expense, interest expense, income tax expense, and net realized gains (losses). We believe the use of these measures enhances the understanding of our results of operations by highlighting the underlying profitability of our insurance and reinsurance businesses. Underwriting results should not be viewed as a substitute for measures determined in accordance with GAAP.
We operate through the following business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life Insurance and Reinsurance. For more information on each of our segments refer to “Segment Information”, under Item 1.

Insurance – North American
The Insurance – North American segment comprises our P&C operations in the U.S., Canada, and Bermuda. This segment includes the operations of ACE USA (including ACE Canada), ACE Westchester, ACE Bermuda, and various run-off operations, including Brandywine Holdings Corporation (Brandywine Holdings).

(in millions of U.S. dollars)	 	2007	 	 	 	2006	 	 	 	 	2005	
Net premiums written	 	$	5,833	 	 	 	$	5,940	 	 	 	 	$	5,803	
Net premiums earned	 	 	6,007	 	 	 	 	5,719	 	 	 	 	 	5,730	
Losses and loss expenses	 	 	4,269	 	 	 	 	4,026	 	 	 	 	 	4,577	
Policy acquisition costs	 	 	515	 	 	 	 	530	 	 	 	 	 	503	
Administrative expenses	 	 	530	 	 	 	 	502	 	 	 	 	 	427	
Underwriting income	 	 	693	 	 	 	 	661	 	 	 	 	 	223	
Net investment income	 	 	1,034	 	 	 	 	876	 	 	 	 	 	698	
Net realized gains (losses)	 	 	125	 	 	 	 	(83	)	 	 	 	 	15	
Other (income) expense	 	 	11	 	 	 	 	(2	)	 	 	 	 	18	
Income tax expense	 	 	468	 	 	 	 	352	 	 	 	 	 	235	
Net income	 	$	1,373	 	 	 	$	1,104	 	 	 	 	$	683	
Loss and loss expense ratio	 	 	71.1%	 	 	 	 	70.4%	 	 	 	 	 	79.9%	
Policy acquisition cost ratio	 	 	8.6%	 	 	 	 	9.2%	 	 	 	 	 	8.8%	
Administrative expense ratio	 	 	8.8%	 	 	 	 	8.8%	 	 	 	 	 	7.4%	
Combined ratio	 	 	88.5%	 	 	 	 	88.4%	 	 	 	 	 	96.1%	
 
Net premiums written for the Insurance – North American segment decreased two percent in 2007, compared with 2006. This decrease was primarily due to a decline in new and renewal business at ACE Westchester, our wholesale operation, which experienced very competitive conditions on P&C lines. ACE Westchester also reported a decrease in retention of gross premiums written, primarily due to changes in business mix. ACE Bermuda reported a decrease in net premiums written primarily due to a decline in assumed loss portfolio business as well as excess liability and professional lines, partially offset by an increase in political risk writings in 2007, compared with 2006. ACE USA, this segment’s U.S.-based retail division, reported modest growth driven primarily by specialty casualty and energy lines as well as professional risk and a large assumed portfolio contract. These increases were partially offset by declines in production in ACE USA’s large account risk management unit and the curtailment of middle market workers’ compensation writings in response to unfavorable market
 
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conditions. Net premiums written increased two percent in 2006 compared with 2005. This increase was primarily driven by ACE USA which reported growth across many lines, including commercial property, energy, aerospace, and financial solutions. ACE Bermuda reported a significant decline in its financial solutions business as net premiums written in 2005 were bolstered by catastrophe-related reinstatement premiums on multi-year contracts. ACE Westchester reported modest growth driven primarily by primary and excess casualty, inland marine, environmental, and professional risk business.
The following two tables provide a line of business and entity/divisional breakdown of Insurance – North American’s net premiums earned for the years ended December 31, 2007, 2006, and 2005.

(in millions of U.S. dollars)	 	2007	 	 	 	% of
total	 	 	 	2006	 	 	 	% of
total	 	 	 	2005	 	 	 	% of
total	
Line of Business	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Property and all other	 	$	1,462	 	 	 	24%	 	 	 	$	1,289	 	 	 	22%	 	 	 	$	1,249	 	 	 	22%	
Casualty	 	 	4,298	 	 	 	72%	 	 	 	 	4,228	 	 	 	74%	 	 	 	 	4,299	 	 	 	75%	
Personal accident (A&H)	 	 	247	 	 	 	4%	 	 	 	 	202	 	 	 	4%	 	 	 	 	182	 	 	 	3%	
Net premiums earned	 	$	6,007	 	 	 	100%	 	 	 	$	5,719	 	 	 	100%	 	 	 	$	5,730	 	 	 	100%	
Entity/Division	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
ACE USA	 	$	4,196	 	 	 	70%	 	 	 	$	3,795	 	 	 	66%	 	 	 	$	3,666	 	 	 	64%	
ACE Westchester	 	 	1,420	 	 	 	24%	 	 	 	 	1,465	 	 	 	26%	 	 	 	 	1,385	 	 	 	24%	
ACE Bermuda	 	 	391	 	 	 	6%	 	 	 	 	459	 	 	 	8%	 	 	 	 	679	 	 	 	12%	
Net premiums earned	 	$	6,007	 	 	 	100%	 	 	 	$	5,719	 	 	 	100%	 	 	 	$	5,730	 	 	 	100%	
 
ACE USA’s net premiums earned increased 11 percent in 2007, compared with 2006. The increase was primarily driven by the assumed loss portfolio contract noted above, as well as new business in the energy unit, and growth in specialty casualty lines, including professional risk, umbrella excess, custom casualty, and environmental. ACE USA’s curtailment of middle market worker’s compensation business partially offset these increases. ACE USA’s net premiums earned increased four percent in 2006, compared with 2005. This increase was primarily driven by growth in specialty casualty and commercial property lines.
ACE Westchester’s net premiums earned decreased three percent in 2007, compared with 2006. This decrease was primarily due to lower production in casualty lines resulting from more competitive market conditions, partially offset by increased crop/hail business, which benefited from higher commodity prices. ACE Westchester’s net premiums earned increased six percent in 2006, compared with 2005. This increase was primarily driven by increased primary and excess casualty, inland marine, environmental and professional risk business and also the negative impact of catastrophe-related reinstatement premiums on the 2005 year.
ACE Bermuda’s net premiums earned decreased 15 percent in 2007, compared with 2006. The decrease was primarily due to our curtailment of financial solutions business in 2006. ACE Bermuda’s net premiums earned decreased 32 percent in 2006, compared with 2005. This decrease was a result of the decline in financial solutions business, including the positive impact on the prior year of catastrophe-related reinstatement premiums on multi-year contracts.
Insurance – North American’s loss and loss expense ratio increased in 2007, compared with 2006. The following table shows the impact of catastrophe losses and prior period development on our loss and loss expense ratio for the years ended December 31, 2007, 2006, and 2005.

 	 	2007	 	 	 	2006	 	 	 	2005	
Loss and loss expense ratio, as reported	 	71.1 %	 	 	 	70.4 %	 	 	 	79.9 %	
Catastrophe losses	 	(0.3)%	 	 	 	–	 	 	 	(8.9)%	
Prior period development	 	(0.2)%	 	 	 	(1.2)%	 	 	 	(1.8)%	
Loss and loss expense ratio, adjusted	 	70.6 %	 	 	 	69.2 %	 	 	 	69.2 %	
 
Insurance – North American’s catastrophe losses were $16 million in 2007, compared with $nil in 2006, and $557 million in 2005. Current year catastrophe losses were primarily associated with floods in the U.S. Catastrophe losses in 2005 were significant and included losses from Hurricanes Katrina, Rita, and Wilma. Insurance – North American incurred net adverse prior period development of $9 million in 2007. This compares with net adverse prior period development of $65 million and $103 million in 2006 and 2005, respectively. Refer to “Prior Period Development” for more information. Insurance – North
 
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American’s loss and loss expense ratio was negatively impacted by an increase in current year accident losses, reflecting current market conditions.
Insurance – North American’s policy acquisition cost ratio decreased in 2007 compared with 2006. The decrease was primarily related to reductions in the policy acquisition cost ratio at ACE USA and ACE Westchester. For ACE USA, the decline reflects higher ceding commissions as well as lower premium taxes due to reassessment of obligations for premium-based assessments and guaranty funds. In addition, the assumed loss portfolio transfer contract, noted above, incurred low acquisition costs, which is typical for these transactions. For ACE Westchester, the decline in the policy acquisition cost ratio was primarily due to lower profit share commissions on crop business in 2007, compared with 2006. Insurance – North American’s policy acquisition cost ratio increased in 2006, compared with 2005, which benefited from premiums earned on multi-year contracts which generally do not incur acquisition costs.
Administrative expenses increased in 2007, compared with 2006. This increase was primarily due to increased staffing costs at ACE USA, as well as a $15 million decrease in net profits for ACE USA’s ESIS operation (third party claim services), which we include in administrative expenses. The administrative expense ratio was stable in 2007, compared with 2006, as net premiums earned increased. Administrative expenses increased in 2006, compared with 2005 as the 2005 year was favorably impacted by the reduction of $42 million in various accruals determined not to be needed. Additionally, net profits for ACE USA’s ESIS operation were $14 million lower in 2006, compared with 2005.

Insurance – Overseas General
The Insurance – Overseas General segment consists of ACE International, which comprises our network of indigenous insurance operations, and the wholesale insurance operations of ACE Global Markets, our London market underwriting unit including Lloyd’s Syndicate 2488. This segment has four regions of operations: ACE European Group, which is comprised of ACE Europe and ACE Global Markets branded business, ACE Asia Pacific, ACE Far East, and ACE Latin America.

(in millions of U.S. dollars)	 	2007	 	 	 	 	2006	 	 	 	 	2005	
Net premiums written	 	$	4,568	 	 	 	 	$	4,266	 	 	 	 	$	4,195	
Net premiums earned	 	 	4,623	 	 	 	 	 	4,321	 	 	 	 	 	4,239	
Losses and loss expenses	 	 	2,420	 	 	 	 	 	2,259	 	 	 	 	 	2,583	
Policy acquisition costs	 	 	963	 	 	 	 	 	856	 	 	 	 	 	836	
Administrative expenses	 	 	669	 	 	 	 	 	609	 	 	 	 	 	566	
Underwriting income	 	 	571	 	 	 	 	 	597	 	 	 	 	 	254	
Net investment income	 	 	450	 	 	 	 	 	370	 	 	 	 	 	319	
Net realized gains (losses)	 	 	(69	)	 	 	 	 	(16	)	 	 	 	 	51	
Other (income) expense	 	 	(20	)	 	 	 	 	10	 	 	 	 	 	16	
Income tax expense	 	 	183	 	 	 	 	 	206	 	 	 	 	 	107	
Net income	 	$	789	 	 	 	 	$	735	 	 	 	 	$	501	
Loss and loss expense ratio	 	 	52.4%	 	 	 	 	 	52.3%	 	 	 	 	 	60.9%	
Policy acquisition cost ratio	 	 	20.8%	 	 	 	 	 	19.8%	 	 	 	 	 	19.7%	
Administrative expense ratio	 	 	14.5%	 	 	 	 	 	14.1%	 	 	 	 	 	13.4%	
Combined ratio	 	 	87.7%	 	 	 	 	 	86.2%	 	 	 	 	 	94.0%	
 
Insurance – Overseas General’s net premiums written increased seven percent in 2007, compared with 2006. Foreign exchange impact on ACE International’s results accounted for most of this increase as both the euro and the pound sterling strengthened significantly relative to the U.S. dollar during 2007 (refer to the table below for impact of foreign exchange on net premiums written and earned). ACE International reported growth in A&H business in virtually all of its regions of operation, particularly in Latin America, Europe, and Asia Pacific. On the P&C side, growth in continental Europe was more than offset by a decline in net premiums written in the U.K. and Asia Pacific due to competitive conditions for new accounts and adverse pricing on renewal business. ACE Global Markets reported increased reinsurance costs combined with rate decreases due to competition in aviation, property, and financial lines, partially offset by increased production in energy, political risk, and A&H lines. Insurance – Overseas General’s net premiums written increased two percent in 2006, compared with 2005. The 2005 year was impacted by catastrophe-related reinstatement premiums, which reduced net premiums written and earned by $38 million, primarily at ACE Global Markets.
 
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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 years ended December 31, 2007, 2006, and 2005.

(in millions of U.S. dollars)	 	2007	 	 	 	%of
total	 	 	 	2006	 	 	 	% of
total	 	 	 	2005	 	 	 	% of
total	
Line of Business	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Property and all other	 	$	1,697	 	 	 	37%	 	 	 	$	1,617	 	 	 	37%	 	 	 	$	1,609	 	 	 	38%	
Casualty	 	 	1,495	 	 	 	32%	 	 	 	 	1,479	 	 	 	34%	 	 	 	 	1,570	 	 	 	37%	
Personal accident (A&H)	 	 	1,431	 	 	 	31%	 	 	 	 	1,225	 	 	 	29%	 	 	 	 	1,060	 	 	 	25%	
Net premiums earned	 	$	4,623	 	 	 	100%	 	 	 	$	4,321	 	 	 	100%	 	 	 	$	4,239	 	 	 	100%	
Entity/Division	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
ACE Europe	 	$	1,999	 	 	 	43%	 	 	 	$	1,819	 	 	 	42%	 	 	 	$	1,865	 	 	 	44%	
ACE Asia Pacific	 	 	631	 	 	 	14%	 	 	 	 	590	 	 	 	14%	 	 	 	 	545	 	 	 	13%	
ACE Far East	 	 	365	 	 	 	8%	 	 	 	 	361	 	 	 	8%	 	 	 	 	378	 	 	 	9%	
ACE Latin America	 	 	633	 	 	 	14%	 	 	 	 	521	 	 	 	12%	 	 	 	 	416	 	 	 	10%	
ACE International	 	 	3,628	 	 	 	79%	 	 	 	 	3,291	 	 	 	76%	 	 	 	 	3,204	 	 	 	76%	
ACE Global Markets	 	 	995	 	 	 	21%	 	 	 	 	1,030	 	 	 	24%	 	 	 	 	1,035	 	 	 	24%	
Net premiums earned	 	$	4,623	 	 	 	100%	 	 	 	$	4,321	 	 	 	100%	 	 	 	$	4,239	 	 	 	100%	
 
Insurance – Overseas General reported a seven percent increase in net premiums earned in 2007, compared with 2006. This increase was primarily driven by a favorable foreign exchange impact on ACE International business. Net premiums earned for this segment increased two percent in 2006, compared with 2005. In 2006, this segment experienced growth in A&H business, offset by weakening market conditions for P&C business and higher reinsurance costs. Additionally, 2005 was impacted by catastrophe-related reinstatement premiums of $38 million.
ACE International’s net premiums earned increased 10 percent in 2007, compared with 2006, primarily due to the impact of foreign exchange. This segment continues to grow its A&H business which has offset weak market conditions for U.K. and Asia Pacific P&C business, and higher reinsurance costs for certain lines. ACE Asia Pacific and ACE Latin America reported increases in net premiums earned primarily driven by solid growth in A&H business. These regions have been successfully utilizing unique and innovative distribution channels to grow their A&H customer base. ACE International reported a three percent increase in net premiums earned in 2006, compared with 2005. This increase was primarily driven by growth of A&H business, partially offset by weakness in P&C lines in the U.K.
ACE Global Markets’ net premiums earned decreased three percent in 2007, compared with 2006. This decrease was primarily due to decreased production, higher reinsurance costs, and changes in business mix, specifically the growth of energy lines which earn over a longer period than other types of business. Net premiums earned for ACE Global Markets were stable in 2006, compared with 2005, as the decrease in catastrophe-related reinstatement premiums was offset by higher reinsurance costs in 2006, particularly on aviation, energy, property, and marine lines.
Insurance – Overseas General conducts business internationally and in most major foreign currencies. The following table summarizes the approximate effect of changes in foreign currency exchange rates on the growth of net premiums written and earned for the years ended December 31, 2007 and 2006.

 	 	2007	 	 	 	2006	
Net premiums written:	 	 	 	 	 	 	
Growth in original currency	 	0.6%	 	 	 	2.7 %	
Foreign exchange effect	 	6.5%	 	 	 	(1.0)%	
Growth as reported in U.S. dollars	 	7.1%	 	 	 	1.7 %	
Net premiums earned:	 	 	 	 	 	 	
Growth in original currency	 	0.7%	 	 	 	2.3 %	
Foreign exchange effect	 	6.3%	 	 	 	(0.4)%	
Growth as reported in U.S. dollars	 	7.0%	 	 	 	1.9 %	
 
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The following table shows the impact of catastrophe losses and prior period development on our loss and loss expense ratio for the years ended December 31, 2007, 2006, and 2005.

 	 	2007	 	 	 	2006	 	 	 	2005	
Loss and loss expense ratio, as reported	 	52.4 %	 	 	 	52.3 %	 	 	 	60.9 %	
Catastrophe losses	 	(2.0)%	 	 	 	(0.1)%	 	 	 	(5.2)%	
Prior period development	 	4.2 %	 	 	 	1.7 %	 	 	 	(0.1)%	
Loss and loss expense ratio, adjusted	 	54.6 %	 	 	 	53.9 %	 	 	 	55.6 %	
 
Net catastrophe losses for 2007 were $94 million, compared with $3 million and $201 million in 2006 and 2005, respectively. In 2005, the catastrophe losses were primarily associated with Hurricanes Katrina, Rita, and Wilma. Insurance – Overseas General incurred net favorable prior period development of $192 million and $72 million in 2007 and 2006, respectively. This compares with net adverse prior period development of $5 million in 2005. Refer to “Prior Period Development” for more information.
Insurance – Overseas General’s policy acquisition cost ratio has increased over the last three years primarily due to changes in business mix at ACE International, specifically the growth of A&H business, which typically attracts higher commission rates than other business. The increasing impact on policy acquisition costs from A&H growth was partially offset by increased ceding commissions on political, financial, and energy lines at ACE Global Markets. Insurance – Overseas General’s administrative expense ratio increased in 2007, compared with 2006, primarily due to the impact of foreign exchange. Additionally, ACE International reported increased costs associated with its entrance into emerging markets, specifically Eastern Europe and the Middle East, and in support of A&H growth at Asia Pacific. The increase in 2006, compared with 2005, was primarily due to investments in global expansion including staff additions and infrastructure enhancements at ACE International.

Global Reinsurance
The Global Reinsurance segment represents ACE’s reinsurance operations, comprising ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re Europe, and ACE Tempest Re Canada. Global Reinsurance markets its reinsurance products worldwide under the ACE Tempest Re brand name and provides a broad range of coverages to a diverse array of primary P&C companies.

(in millions of U.S. dollars)	 	2007	 	 	 	2006	 	 	 	2005	 	
Net premiums written	 	$	1,197	 	 	 	$	1,550	 	 	 	$	1,546	 	
Net premiums earned	 	 	1,299	 	 	 	 	1,511	 	 	 	 	1,531	 	
Losses and loss expenses	 	 	664	 	 	 	 	784	 	 	 	 	1,402	 	
Policy acquisition costs	 	 	248	 	 	 	 	303	 	 	 	 	300	 	
Administrative expenses	 	 	64	 	 	 	 	62	 	 	 	 	60	 	
Underwriting income (loss)	 	 	323	 	 	 	 	362	 	 	 	 	(231	)	
Net investment income	 	 	274	 	 	 	 	221	 	 	 	 	173	 	
Net realized gains (losses)	 	 	21	 	 	 	 	10	 	 	 	 	(4	)	
Interest expense	 	 	–	 	 	 	 	–	 	 	 	 	3	 	
Other (income) expense	 	 	4	 	 	 	 	8	 	 	 	 	11	 	
Income tax expense	 	 	32	 	 	 	 	38	 	 	 	 	11	 	
Net income (loss)	 	$	582	 	 	 	$	547	 	 	 	$	(87	)	
Loss and loss expense ratio	 	 	51.1%	 	 	 	 	51.8%	 	 	 	 	91.6%	 	
Policy acquisition cost ratio	 	 	19.1%	 	 	 	 	20.1%	 	 	 	 	19.6%	 	
Administrative expense ratio	 	 	4.9%	 	 	 	 	4.1%	 	 	 	 	3.9%	 	
Combined ratio	 	 	75.1%	 	 	 	 	76.0%	 	 	 	 	115.1%	 	
 
Global Reinsurance’s net premiums written decreased 23 percent in 2007, compared with 2006. During 2007, Global Reinsurance experienced intense competition across all of its regions of operations, which resulted in our not renewing several
 
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large policies, as well as clients increasing their retentions. Net premiums written for the Global Reinsurance segment were stable in 2006 compared with 2005. For 2006, this segment benefited from increased rates on property catastrophe coverages following two years of unprecedented hurricane activity, partially offset by lower casualty rates in Europe, and the cancellation of a large property account in the U.S. The year ended December 31, 2005, was impacted by catastrophe-related assumed reinstatement premiums, which increased net premiums written and earned by $46 million.
The following two tables provide a line of business and entity/divisional breakdown of Global Reinsurance’s net premiums earned for the years ended December 31, 2007, 2006, and 2005.

(in millions of U.S. dollars)	 	2007	 	 	 	% of
total	 	 	 	2006	 	 	 	% of
total	 	 	 	2005	 	 	 	% of
total	
Line of Business	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Property and all other	 	$	285	 	 	 	22%	 	 	 	$	354	 	 	 	23%	 	 	 	$	354	 	 	 	23%	
Casualty	 	 	671	 	 	 	52%	 	 	 	 	799	 	 	 	52%	 	 	 	 	829	 	 	 	54%	
Property catastrophe	 	 	343	 	 	 	26%	 	 	 	 	358	 	 	 	25%	 	 	 	 	348	 	 	 	23%	
Net premiums earned	 	$	1,299	 	 	 	100%	 	 	 	$	1,511	 	 	 	100%	 	 	 	$	1,531	 	 	 	100%	
Entity/Division	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
ACE Tempest Re Bermuda	 	$	356	 	 	 	27%	 	 	 	$	367	 	 	 	24%	 	 	 	$	349	 	 	 	23%	
ACE Tempest Re USA	 	 	693	 	 	 	53%	 	 	 	 	872	 	 	 	58%	 	 	 	 	887	 	 	 	58%	
ACE Tempest Re Europe	 	 	241	 	 	 	19%	 	 	 	 	272	 	 	 	18%	 	 	 	 	295	 	 	 	19%	
ACE Tempest Re Canada	 	 	9	 	 	 	1%	 	 	 	 	–	 	 	 	–%	 	 	 	 	–	 	 	 	–%	
Net premiums earned	 	$	1,299	 	 	 	100%	 	 	 	$	1,511	 	 	 	100%	 	 	 	$	1,531	 	 	 	100%	
 
Global Reinsurance’s net premiums earned decreased 14 percent in 2007, compared with 2006. This decrease was primarily due to lower 2007 production at ACE Tempest Re Bermuda, ACE Tempest Re USA, and ACE Tempest Re Europe. ACE Tempest Re Canada commenced writing business in 2007. Global Reinsurance’s net premiums earned decreased one percent in 2006, compared with 2005, primarily due to reduced assumed reinstatement premiums at ACE Tempest Re Bermuda and ACE Tempest Re Europe and the cancellation of a large homeowner’s account at ACE Tempest Re USA.
The following table shows the impact of catastrophe losses and prior period development on our loss and loss expense ratio for the years ended December 31, 2007, 2006, and 2005.

 	 	2007	 	 	 	2006	 	 	 	2005	
Loss and loss expense ratio, as reported	 	51.1 %	 	 	 	51.8 %	 	 	 	91.6 %	
Catastrophe losses	 	(3.8)%	 	 	 	(0.9)%	 	 	 	(37.7)%	
Prior period development	 	2.6 %	 	 	 	0.4 %	 	 	 	1.4 %	
Loss and loss expense ratio, adjusted	 	49.9 %	 	 	 	51.3 %	 	 	 	55.3 %	
 
Global Reinsurance recorded net catastrophe losses of $49 million in 2007. This compares with net catastrophe losses of $14 million and $601 million in 2006 and 2005, respectively. In 2005, the catastrophe losses were primarily associated with Hurricanes Katrina, Rita, and Wilma. Global Reinsurance incurred net favorable prior period development of $34 million in 2007. This compares with net favorable prior period development of $5 million and $22 million in 2006 and 2005, respectively. Refer to “Prior Period Development” for more information. The remaining decreases to the loss and loss expense ratio in 2006 were primarily due to favorable current accident year experience on property business and changes in business mix. In 2006, there was a greater proportion of property and property catastrophe business and pro-rata business, which generally carries a lower loss ratio than excess of loss business.
Global Reinsurance’s policy acquisition cost ratio decreased in 2007, compared with 2006, primarily due to changes in business mix, and lower ceding commissions at ACE Tempest Re USA. The policy acquisition cost ratio increased for Global Reinsurance in 2006, compared with 2005, primarily due to higher ceding commissions at ACE Tempest Re USA and the impact on the prior year of catastrophe-related assumed reinstatement premiums, which do not generate acquisition costs. Administrative expenses have been stable over the last three years. The administrative expense ratio increased over the last three years primarily due to the decrease in net premiums earned.
 
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Life Insurance and Reinsurance
Life Insurance and Reinsurance includes the operations of ACE Tempest Life Re (ACE Life Re) and ACE International Life (ACE Life). We assess the performance of our life insurance and reinsurance business based on life underwriting income which includes net investment income.

(in millions of U.S. dollars)	 	2007	 	 	 	 	2006	 	 	 	 	2005	 	
Net premiums written	 	$	381	 	 	 	 	$	274	 	 	 	 	$	248	 	
Net premiums earned	 	 	368	 	 	 	 	 	274	 	 	 	 	 	248	 	
Life and annuity benefits	 	 	168	 	 	 	 	 	123	 	 	 	 	 	143	 	
Policy acquisition costs	 	 	45	 	 	 	 	 	26	 	 	 	 	 	24	 	
Administrative expenses	 	 	50	 	 	 	 	 	35	 	 	 	 	 	19	 	
Net investment income	 	 	55	 	 	 	 	 	42	 	 	 	 	 	36	 	
Life underwriting income	 	 	160	 	 	 	 	 	132	 	 	 	 	 	98	 	
Net realized gains (losses)	 	 	(164	)	 	 	 	 	(36	)	 	 	 	 	19	 	
Other (income) expense	 	 	1	 	 	 	 	 	–	 	 	 	 	 	–	 	
Income tax expense (benefit)	 	 	(8	)	 	 	 	 	(6	)	 	 	 	 	(2	)	
Net income	 	$	3	 	 	 	 	$	102	 	 	 	 	$	119	 	
 
Life underwriting income increased 21 percent in 2007, compared with 2006, primarily due to the profitability of the Bermuda-based non-traditional reinsurance business and improvement in the profitability of run-off disability reinsurance business. Additionally, there has been a slight decline in underwriting losses at ACE Life and the U.S.-based traditional life reinsurance business due to growth in premiums and investment income during their early development. Net premiums earned overall increased 34 percent in 2007, compared with 2006. Life Insurance and Reinsurance’s administrative expenses increased primarily due to increased expenses to support business development opportunities at ACE Life and the U.S.-based traditional life reinsurance business, which was launched in 2006. Net realized gains (losses) primarily consist of changes in reported liabilities on GMIB reinsurance carried at fair value and, to a lesser extent, sales of invested assets. For 2007, substantially all of the realized loss related to an increase in reported liabilities on GMIB reinsurance resulting from adverse financial market conditions, including a reduction in long-term interest rates, and an increase in implied volatility for both equities and interest rates. Life underwriting income increased 35 percent in 2006, compared with 2005. Net premiums earned increased 10 percent primarily due to growth in variable annuity business at ACE Life Re and ACE Life’s international operations. Life and annuity benefits declined due to favorable experience on variable annuity business combined with a decrease in group long-term disability business, which typically incurs higher benefit ratios than other types of business.

Net Investment Income

(in millions of U.S. dollars)	 	2007	 	 	 	 	2006	 	 	 	 	2005	 	
Fixed maturities	 	$	1,773	 	 	 	 	$	1,463	 	 	 	 	$	1,170	 	
Short-term investments	 	 	130	 	 	 	 	 	119	 	 	 	 	 	86	 	
Equity securities	 	 	68	 	 	 	 	 	57	 	 	 	 	 	50	 	
Other	 	 	25	 	 	 	 	 	26	 	 	 	 	 	22	 	
Gross investment income	 	 	1,996	 	 	 	 	 	1,665	 	 	 	 	 	1,328	 	
Investment expenses	 	 	(78	)	 	 	 	 	(64	)	 	 	 	 	(64	)	
Net investment income	 	$	1,918	 	 	 	 	$	1,601	 	 	 	 	$	1,264	 	
 
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 20 percent in 2007, compared with 2006, and 27 percent in 2006, compared with 2005. The increase in net investment income is primarily due to several years of positive operating cash flows which have resulted in a higher overall average invested asset base. The investment portfolio’s average market yield on fixed maturities was 5.3 percent at December 31, 2007, compared
 
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with 5.4 percent and 5.0 percent at December 31, 2006 and 2005, respectively. The following table shows the return on average invested assets for the years ended December 31, 2007, 2006, and 2005.

(in millions of U.S. dollars)	 	2007	 	 	 	2006	 	 	 	2005	
Average invested assets	 	$	38,804	 	 	 	$	34,007	 	 	 	$	29,118	
Net investment income	 	$	1,918	 	 	 	$	1,601	 	 	 	$	1,264	
Return on average invested assets	 	 	4.9%	 	 	 	 	4.7%	 	 	 	 	4.3%	

Net Realized Gains (Losses)
We take a long-term view with our investment strategy and our investment managers manage our investment portfolio to maximize total return within certain specific guidelines designed to minimize risk. The majority of our investment portfolio is available for sale and reported at fair value. Our held to maturity investment portfolio is reported at amortized cost.
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, swaps, and GMIB reinsurance. 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 years ended December 31, 2007, 2006, and 2005.

(in millions of U.S. dollars)	 	2007	 	 	 	 	2006	 	 	 	 	2005	 	
Fixed maturities	 	$	(98	)	 	 	 	$	(220	)	 	 	 	$	(45	)	
Equity securities	 	 	162	 	 	 	 	 	163	 	 	 	 	 	76	 	
Foreign exchange gains (losses)	 	 	4	 	 	 	 	 	(13	)	 	 	 	 	–	 	
Other	 	 	37	 	 	 	 	 	28	 	 	 	 	 	4	 	
Sale of run-off reinsurance subsidiaries	 	 	–	 	 	 	 	 	(23	)	 	 	 	 	–	 	
Derivatives:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Equity and fixed income derivatives	 	 	(19	)	 	 	 	 	(18	)	 	 	 	 	12	 	
Fair value adjustment on insurance derivatives	 	 	(147	)	 	 	 	 	(15	)	 	 	 	 	29	 	
Subtotal derivatives	 	 	(166	)	 	 	 	 	(33	)	 	 	 	 	41	 	
Total net realized gains (losses)	 	$	(61	)	 	 	 	$	(98	)	 	 	 	$	76	 	
 
Subject to investment guidelines approved by our Finance and Investment Committee of the Board of Directors (relating to asset classes, credit quality, and liquidity), our investment managers generally have the ability to sell securities from our available for sale investment portfolio with the concurrence of ACE management 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 of the held security 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, securities 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 securities sales volume but extreme conditions could have an effect on the magnitude of realized gains or losses. For example, in a declining interest rate environment, the market value of securities increases, 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 interest 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 (Refer to “Liquidity and Capital Resources” for more information).
 
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In 2007, we recorded net realized losses of $166 million on derivative transactions. This compares with a net realized loss of $33 million and a net realized gain of $41 million in 2006 and 2005, respectively. For a sensitivity discussion 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.
We regularly review our investment portfolio for possible impairment based on criteria including economic conditions, credit loss experience, and issuer-specific developments. If there is a decline in a security’s net realizable value, we must determine whether that decline is temporary or “other-than-temporary”. If we believe a decline in the value of a particular investment is temporary, we record it as an unrealized loss in our shareholders’ equity. If we believe the decline is “other-than-temporary”, we write down the book 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.
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. Refer to Note 3 e) to the Consolidated Financial Statements, under Item 8, for criteria we consider in assessing potential impairment and for a table which summarizes all of our securities in an unrealized loss position at December 31, 2007 and 2006.
Our net realized losses in 2007 included write-downs of $141 million as a result of conditions which caused us to conclude that the decline in fair value was “other-than-temporary”. This compares with write-downs of $214 million and $88 million in 2006 and 2005, respectively. The impairments were primarily due to an increase in market interest rates from the date of security purchase and as such, were not credit-related.
A breakdown of write-downs by security type is included in Note 3 f) to the Consolidated Financial Statements, under  Item 8.

Other Income and Expense Items

Years Ended December 31
(in millions of U.S. dollars)	 	2007	 	 	 	2006 	 	 	 	2005 	
Equity in net (income) loss of partially-owned companies	 	$	39	 	 	 	$	(60)	 	 	 	$	(60)	
Minority interest (income) expense	 	 	7	 	 	 	 	8 	 	 	 	 	16 	
Federal excise tax	 	 	18	 	 	 	 	10 	 	 	 	 	7 	
Other	 	 	17	 	 	 	 	7 	 	 	 	 	12 	
Other (income) expense	 	$	81	 	 	 	$	(35)	 	 	 	$	(25)	
 
Other (income) expense is primarily comprised of our equity in net income of Assured Guaranty Ltd. (included in equity in net income of partially-owned companies). During 2007, Assured Guaranty Ltd. (AGO) recorded mark to market losses in its credit derivatives portfolio, our portion of which was $122 million. These losses were reported as realized losses by AGO. Our relationship with AGO is limited to our equity investment, which had a carrying value of $392 million at December 31, 2007. We conduct no financial guaranty business directly or with AGO and we retain no financial guaranty exposures with AGO. For more information, refer to Item 1A. Risk Factors under Liquidity and Investments. Other income and expense also includes certain excise taxes incurred as a result of capital management initiatives. These transactions are considered capital in nature and are excluded from underwriting results.

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 Standard and Poor’s (S&P). The portfolio is externally managed by independent, professional investment managers. The average duration of our fixed income securities, including the effect of options and swaps, was 3.5 years
 
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at December 31, 2007, compared with 3.3 years at December 31, 2006. We estimate that a 100 basis point (bps) increase in interest rates would reduce our book value by approximately $1.3 billion. Our “Other investments” are principally comprised of direct investments, investment funds, and limited partnerships. Our exposure to sub-prime asset backed securities was $135 million at December 31, 2007, which represented less than one percent of our investment portfolio. We do not expect any material investment loss from our exposure to sub-prime mortgages. We hold no collateralized debt obligations or collateralized loan obligations in our investment portfolio.
The following table shows the fair value and cost/amortized cost of our invested assets at December 31, 2007 and 2006.

 	 	2007	 	 	 	2006	
(in millions of U.S. dollars)	 	Fair
Value	 	 	 	Cost/
Amortized Cost	 	 	 	Fair
Value	 	 	 	Cost/
Amortized Cost	
Fixed maturities available for sale	 	$	33,184	 	 	 	$	32,994	 	 	 	$	28,540	 	 	 	$	28,389	
Fixed maturities held to maturity	 	 	3,015	 	 	 	 	2,987	 	 	 	 	3,015	 	 	 	 	3,047	
Short-term investments	 	 	2,631	 	 	 	 	2,631	 	 	 	 	2,456	 	 	 	 	2,456	
 	 	 	38,830	 	 	 	 	38,612	 	 	 	 	34,011	 	 	 	 	33,892	
Equity securities	 	 	1,837	 	 	 	 	1,618	 	 	 	 	1,713	 	 	 	 	1,372	
Other investments	 	 	1,140	 	 	 	 	880	 	 	 	 	845	 	 	 	 	661	
Total investments	 	$	41,807	 	 	 	$	41,110	 	 	 	$	36,569	 	 	 	$	35,925	
 
The fair value of our total investments increased $5.3 billion in 2007, compared with 2006, primarily due to the investment of $4.3 billion of positive cash flows in the current period.
The following tables show the market value of our fixed maturities and short-term investments at December 31, 2007 and 2006. The first table lists investments according to type and the second according to S&P credit rating.

 	 	2007	 	 	 	2006	
(in millions of U.S. dollars)	 	Market
Value	 	 	 	Percentage of
Total	 	 	 	Market
Value	 	 	 	Percentage of
Total	
Treasury	 	$	1,145	 	 	 	3%	 	 	 	$	1,322	 	 	 	4%	
Agency	 	 	1,820	 	 	 	5%	 	 	 	 	2,207	 	 	 	7%	
Corporate	 	 	9,015	 	 	 	23%	 	 	 	 	7,394	 	 	 	22%	
Mortgage-backed securities	 	 	13,733	 	 	 	35%	 	 	 	 	11,346	 	 	 	33%	
Asset-backed securities	 	 	1,150	 	 	 	3%	 	 	 	 	2,020	 	 	 	6%	
Municipal	 	 	1,844	 	 	 	5%	 	 	 	 	809	 	 	 	2%	
Non-U.S.	 	 	7,492	 	 	 	19%	 	 	 	 	6,457	 	 	 	19%	
Short-term investments	 	 	2,631	 	 	 	7%	 	 	 	 	2,456	 	 	 	7%	
Total	 	$	38,830	 	 	 	100%	 	 	 	$	34,011	 	 	 	100%	
AAA	 	$	24,553	 	 	 	63%	 	 	 	$	22,471	 	 	 	66%	
AA	 	 	3,747	 	 	 	10%	 	 	 	 	2,725	 	 	 	8%	
A	 	 	4,590	 	 	 	12%	 	 	 	 	3,909	 	 	 	12%	
BBB	 	 	3,297	 	 	 	8%	 	 	 	 	2,498	 	 	 	7%	
BB	 	 	1,073	 	 	 	3%	 	 	 	 	943	 	 	 	3%	
B	 	 	1,481	 	 	 	4%	 	 	 	 	1,365	 	 	 	4%	
Other	 	 	89	 	 	 	–	 	 	 	 	100	 	 	 	–	
Total	 	$	38,830	 	 	 	100%	 	 	 	$	34,011	 	 	 	100%	
 
Municipal bond portfolio
With regard to our $1.8 billion municipal bond portfolio, financial guarantee companies insure approximately $850 million. These investments are made based on the underlying credit of the issuer and, as such, any decline in value because of a downgrade of bond insurers would be minimal. For example, without the AAA insurance guarantees, the average rating of this portfolio would fall to AA from AA+, which would result in a nominal decline in value. We would expect a similar market impact from the loss of AAA insurance guarantees on our $250 million in other investments wrapped by financial guarantors.
 
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Mortgage-backed and asset-backed securities
Additional details on the mortgage-backed and asset-backed components of our investment portfolio at December 31, 2007, are provided below:
 
Mortgage-backed and Asset-backed Securities
Market Value

 	 	S&P Credit Rating	
(in millions of U.S. dollars)	 	AAA	 	 	 	AA	 	 	 	A	 	 	 	BBB	 	 	 	BB
and below	 	 	 	Total	
Mortgage-backed securities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Residential mortgage-backed (RMBS)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
GNMA	 	$	395	 	 	 	$	–	 	 	 	$	–	 	 	 	$	–	 	 	 	$	–	 	 	 	$	395	
FNMA	 	 	5,330	 	 	 	 	–	 	 	 	 	–	 	 	 	 	–	 	 	 	 	–	 	 	 	 	5,330	
Freddie Mac	 	 	2,287	 	 	 	 	–	 	 	 	 	–	 	 	 	 	–	 	 	 	 	–	 	 	 	 	2,287	
Total agency RMBS	 	 	8,012	 	 	 	 	–	 	 	 	 	–	 	 	 	 	–	 	 	 	 	–	 	 	 	 	8,012	
Non-agency RMBS	 	 	3,070	 	 	 	 	11	 	 	 	 	1	 	 	 	 	12	 	 	 	 	–	 	 	 	 	3,094	
Total RMBS	 	 	11,082	 	 	 	 	11	 	 	 	 	1	 	 	 	 	12	 	 	 	 	–	 	 	 	 	11,106	
Commercial mortgage-backed	 	 	2,611	 	 	 	 	3	 	 	 	 	10	 	 	 	 	3	 	 	 	 	–	 	 	 	 	2,627	
Total mortgage-backed securities	 	$	13,693	 	 	 	$	14	 	 	 	$	11	 	 	 	$	15	 	 	 	$	–	 	 	 	$	13,733	
Asset-backed securities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Sub-prime	 	$	125	 	 	 	$	2	 	 	 	$	8	 	 	 	$	–	 	 	 	$	–	 	 	 	$	135	
Credit Cards	 	 	76	 	 	 	 	–	 	 	 	 	17	 	 	 	 	8	 	 	 	 	–	 	 	 	 	101	
Autos	 	 	621	 	 	 	 	27	 	 	 	 	8	 	 	 	 	–	 	 	 	 	–	 	 	 	 	656	
Other	 	 	255	 	 	 	 	–	 	 	 	 	3	 	 	 	 	–	 	 	 	 	–	 	 	 	 	258	
Total asset-backed securities	 	$	1,077	 	 	 	$	29	 	 	 	$	36	 	 	 	$	8	 	 	 	$	–	 	 	 	$	1,150	
 
Mortgage-backed and Asset-backed Securities
Book Value

 	 	S&P Credit Rating	
(in millions of U.S. dollars)	 	AAA	 	 	 	AA	 	 	 	A	 	 	 	BBB	 	 	 	BB
and below	 	 	 	Total	
Mortgage-backed securities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Residential mortgage-backed (RMBS)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
GNMA	 	$	390	 	 	 	$	–	 	 	 	$	–	 	 	 	$	–	 	 	 	$	–	 	 	 	$	390	
FNMA	 	 	5,272	 	 	 	 	–	 	 	 	 	–	 	 	 	 	–	 	 	 	 	–	 	 	 	 	5,272	
Freddie Mac	 	 	2,259	 	 	 	 	–	 	 	 	 	–	 	 	 	 	–	 	 	 	 	–	 	 	 	 	2,259	
Total agency RMBS	 	 	7,921	 	 	 	 	–	 	 	 	 	–	 	 	 	 	–	 	 	 	 	–	 	 	 	 	7,921	
Non-agency RMBS	 	 	3,066	 	 	 	 	11	 	 	 	 	1	 	 	 	 	12	 	 	 	 	–	 	 	 	 	3,090	
Total RMBS	 	 	10,987	 	 	 	 	11	 	 	 	 	1	 	 	 	 	12	 	 	 	 	–	 	 	 	 	11,011	
Commercial mortgage-backed	 	 	2,574	 	 	 	 	3	 	 	 	 	10	 	 	 	 	3	 	 	 	 	–	 	 	 	 	2,590	
Total mortgage-backed securities	 	$	13,561	 	 	 	$	14	 	 	 	$	11	 	 	 	$	15	 	 	 	$	–	 	 	 	$	13,601	
Asset-backed securities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Sub-prime	 	$	135	 	 	 	$	2	 	 	 	$	8	 	 	 	$	–	 	 	 	$	–	 	 	 	$	145	
Credit Cards	 	 	74	 	 	 	 	–	 	 	 	 	17	 	 	 	 	8	 	 	 	 	–	 	 	 	 	99	
Autos	 	 	619	 	 	 	 	27	 	 	 	 	7	 	 	 	 	–	 	 	 	 	–	 	 	 	 	653	
Other	 	 	254	 	 	 	 	–	 	 	 	 	3	 	 	 	 	–	 	 	 	 	–	 	 	 	 	257	
Total asset-backed securities	 	$	1,082	 	 	 	$	29	 	 	 	$	35	 	 	 	$	8	 	 	 	$	–	 	 	 	$	1,154	
 
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Below-investment grade securities
In accordance with our investment process, we invest in below-investment grade securities through dedicated investment portfolios actively managed by external investment managers that have investment professionals specifically dedicated to this asset class. At December 31, 2007, 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 800 issues, with the top 15 holdings making up approximately 12 percent of the $2.6 billion balance at December 31, 2007. The greatest single exposure in this portfolio of securities is $28 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.

Restricted Assets
We are required to maintain assets on deposit with various regulatory authorities to support our insurance and reinsurance operations. These requirements are generally promulgated in the statutory regulations of the individual jurisdictions. The assets on deposit are available to settle insurance and reinsurance liabilities. We also utilize trust funds in certain large transactions where the trust funds are set up for the benefit of the ceding companies and generally take the place of letter of credit (LOC) requirements. We also have investments in segregated portfolios primarily to provide collateral or guarantees for LOCs and debt instruments. Refer to Notes 8 and 9 to the Consolidated Financial Statements, under Item 8, for more information.
The following table identifies the value of restricted assets at December 31, 2007 and 2006.

(in millions of U.S. dollars)	 	2007	 	 	 	2006	
Deposits with U.S. regulatory authorities	 	$	1,068	 	 	 	$	999	
Deposits with non-U.S. regulatory authorities	 	 	2,101	 	 	 	 	1,968	
Assets used for collateral or guarantees	 	 	1,116	 	 	 	 	1,045	
Trust funds	 	 	4,349	 	 	 	 	3,008	
 	 	$	8,634	 	 	 	$	7,020	
 
The value of restricted assets increased 23 percent in 2007 compared with 2006, primarily due to an assumed loss portfolio contract (written during the first quarter of 2007) and the increased use of trust funds in support of U.S. managed business ceded by U.S. insurance entities of ACE USA  to ACE Tempest Re Bermuda.

Reinsurance Recoverable on Ceded Reinsurance
The composition of our reinsurance recoverable at December 31, 2007 and 2006, is as follows:

(in millions of U.S. dollars)	 	2007	 	 	 	 	2006	 	
Reinsurance recoverable on unpaid losses and loss expenses	 	$	13,990	 	 	 	 	$	13,903	 	
Provision for uncollectible reinsurance on unpaid losses and loss expenses	 	 	(470	)	 	 	 	 	(394	)	
Reinsurance recoverable on unpaid losses and loss expenses, net of a provision for uncollectible reinsurance	 	 	13,520	 	 	 	 	 	13,509	 	
Reinsurance recoverable on paid losses and loss expenses	 	 	1,050	 	 	 	 	 	1,316	 	
Provision for uncollectible reinsurance on paid losses and loss expenses	 	 	(216	)	 	 	 	 	(255	)	
Reinsurance recoverable on future policy benefits	 	 	8	 	 	 	 	 	10	 	
Net reinsurance recoverable	 	$	14,362	 	 	 	 	$	14,580	 	
 
We evaluate the financial condition of our reinsurers and potential reinsurers on a regular basis and also monitor concentrations of credit risk with reinsurers. The provision for uncollectible reinsurance is required principally due to the failure of reinsurers to indemnify us, primarily because of disputes under reinsurance contracts and insolvencies. Provisions have been established for amounts estimated to be uncollectible.
 
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Asbestos and Environmental and Other Run-off Liabilities
Included in our liabilities for losses and loss expenses are amounts for A&E. These A&E liabilities principally relate to claims arising from bodily-injury claims related to asbestos products and remediation costs associated with hazardous waste sites. The estimation of these liabilities is particularly sensitive to future changes in the legal, social, and economic environment. We have not assumed any such future changes in setting the value of our A&E reserves, which include provisions for both reported and IBNR claims.
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, predominantly all A&E and certain other liabilities of INA were allocated to Century and extinguished, as a matter of Pennsylvania law, as liabilities of INA. As part of the Restructuring, most A&E liabilities of various U.S. affiliates of INA were reinsured to Century, and Century and certain other run-off companies having A&E and other liabilities were contributed to Brandywine Holdings. As part of the 1999 acquisition of the P&C business of CIGNA, we acquired Brandywine Holdings and its various subsidiaries. For more information refer to “Brandywine Run-Off Entities” below.
The table below presents a roll forward of our consolidated A&E loss reserves, allocated and unallocated loss expense reserves for A&E exposures, and the provision for uncollectible reinsurance for the year ended December 31, 2007.

 	 	Asbestos    	 	Environmental   	 	Total	 	
(in millions of U.S. dollars)	 	Gross	 	 	 	 	Net	 	 	 	 	Gross	 	 	 	 	Net	 	 	 	 	Gross	 	 	 	 	Net	 	
Balance at December 31, 2006	 	$	3,221	 	 	 	 	$	1,611	 	 	 	 	$	489	 	 	 	 	$	433	 	 	 	 	$	3,710	 	 	 	 	$	2,044	 	
Incurred activity	 	 	–	 	 	 	 	 	(6	)	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	(6	)	
Payment activity	 	 	(284	)	 	 	 	 	(115	)	 	 	 	 	(71	)	 	 	 	 	(40	)	 	 	 	 	(355	)	 	 	 	 	(155	)	
Foreign currency revaluation	 	 	5	 	 	 	 	 	2	 	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	5	 	 	 	 	 	2	 	
Balance at December 31, 2007	 	$	2,942	 	 	 	 	$	1,492	 	 	 	 	$	418	 	 	 	 	$	393	 	 	 	 	$	3,360	 	 	 	 	$	1,885	 	
 
The A&E net loss reserves including allocated and unallocated loss expense reserves and provision for uncollectible reinsurance at December 31, 2007, of $1.885 billion shown in the above table are comprised of $1.323 billion in reserves held by Brandywine run-off companies, $224 million of reserves held by Westchester Specialty, $169 million of reserves held by ACE Bermuda, $148 million of reserves held by Insurance – Overseas General, and $21 million of reserves held by active ACE USA companies.
The net figures in the above table reflect third-party reinsurance other than reinsurance provided by NICO under three aggregate excess of loss contracts described below (collectively, the NICO contracts). We exclude the NICO contracts as they cover non-A&E liabilities as well as A&E liabilities. The split of coverage provided under the NICO contracts for A&E liabilities as compared to non-A&E liabilities is entirely dependant on the timing of the payment of the related claims. Our ability to make an estimate of this split is not practicable. We believe, instead, that the A&E discussion is best provided excluding the NICO contracts, while separately discussing the NICO contracts in relation to the total subject business, both A&E and non-A&E, covered by those contracts. With certain exceptions, the NICO contracts provide coverage for our net A&E incurred losses and allocated loss expenses within the limits of coverage and above ACE’s retention levels. These exceptions include losses arising from certain operations of Insurance – Overseas General and participations by ACE Bermuda as a co-reinsurer or retrocessionaire in the NICO contracts.
 
Brandywine run-off – impact of NICO contracts on ACE’s run-off liabilities
As part of the acquisition of CIGNA’s P&C business, NICO provided $2.5 billion of reinsurance protection to Century on all Brandywine loss and allocated 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 contract (the “Brandywine NICO Agreement”) flow to the other Brandywine companies and to the ACE INA insurance subsidiaries through agreements between those companies and Century. The Brandywine NICO Agreement was exhausted on an incurred basis in the fourth quarter of 2002.
 
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The following table presents a roll forward of net loss reserves, allocated and unallocated loss adjustment expense reserves, and provision for uncollectible reinsurance in respect of Brandywine operations only, including the impact of the Brandywine NICO Agreement. The table presents Brandywine incurred activity for the year ended December 31, 2007.

 	 	Brandywine	 	 	 	 	NICO
Coverage (3)	 	 	 	 	Net of NICO
Coverage	 	
(in millions of U.S. dollars)	 	A&E (1)	 	 	 	 	Other (2)	 	 	 	 	Total	 	 	 	 			 		 			
Balance at December 31, 2006	 	$	1,503	 	 	 	 	$	1,101	 	 	 	 	$	2,604	 	 	 	 	$	1,811	 	 	 	 	$	793	 	
Incurred activity	 	 	(8	)	 	 	 	 	33	 	 	 	 	 	25	 	 	 	 	 	–	 	 	 	 	 	25	 	
Payment activity	 	 	(172	)	 	 	 	 	(94	)	 	 	 	 	(266	)	 	 	 	 	(214	)	 	 	 	 	(52	)	
Balance at December 31, 2007	 	$	1,323	 	 	 	 	$	1,040	 	 	 	 	$	2,363	 	 	 	 	$	1,597	 	 	 	 	$	766	 	
(1) The balance at December 31, 2006, has been reduced by $25 million of provision for uncollectible reinsurance as this balance was unrelated to A&E exposures.
(2) Other consists primarily of workers’ compensation, non-A&E general liability losses, and provision for uncollectible reinsurance on non-A&E business.
(3) The balance at December 31, 2006, has been adjusted by $104 million to reflect a change in reporting to an incurred basis from a cash-received basis.
 
The Brandywine A&E incurred benefit of $8 million was a result of a recovery recorded on a casualty clash reinsurance cover. The Brandywine Other incurred loss of $33 million is principally comprised of a reclassification of bad debt charges of $26 million from our active company run-off operations to Brandywine.
 
Reserve reviews
During 2007, we conducted an internal review of our consolidated A&E liabilities as of June 30, 2007. As a result of the internal review, we concluded that our net loss reserves for the Brandywine operations, including A&E, were adequate and, therefore, no change to the carried reserve was required. An internal review was also conducted during 2006 for our consolidated A&E liabilities as of June 30, 2006. For that review, we concluded that our net loss reserves for the Brandywine operations, including A&E, were adequate and, therefore, no change to the carried net reserve was required, while the gross loss reserves increased by approximately $210 million.
In 2006, a team of external actuaries performed an evaluation as to the adequacy of the reserves of Century. This 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 results of the external review were addressed with the Pennsylvania Insurance Department and no changes to statutory-basis loss reserves were deemed necessary. Our A&E reserves are not discounted and do not reflect any anticipated future changes in the legal, social, or economic environment, or any benefit from future legislative reforms.
 
Westchester Specialty – impact of NICO contracts on ACE’s run-off liabilities
As part of the acquisition of Westchester Specialty in 1998, NICO provided a 75 percent pro-rata share of $1 billion of reinsurance protection on losses and loss adjustment expenses incurred on or before December 31, 1996, in excess of a retention of $721 million (the 1998 NICO Agreement). NICO has also provided an 85 percent pro-rata share of $150 million of reinsurance protection on losses and allocated loss adjustment expenses incurred on or before December 31, 1992, in excess of a retention of $755 million (the 1992 NICO Agreement). At December 31, 2007, the remaining unused incurred limit under the 1998 NICO Agreement was $488 million, which is only available for losses and loss adjustment expenses. The 1992 NICO Agreement is exhausted on an incurred basis.
The following table presents a roll forward of net loss reserves, allocated and unallocated loss adjustment expense reserves, and provision for uncollectible reinsurance in respect of 1996 and prior Westchester Specialty operations that are the subject business of the NICO covers. The table presents incurred activity for the year ended December 31, 2007.

 	 	Westchester Specialty	 	 	 	 	NICO
Coverage (3)	 	 	 	 	Net of
NICO
Coverage	
(in millions of U.S. dollars)	 	A&E (1)	 	 	 	Other (2)	 	 	 	 	Total	 	 	 	 			 		 		
Balance at December 31, 2006	 	$	221	 	 	 	$	147	 	 	 	 	$	368	 	 	 	 	$	327	 	 	 	 	$	41	
Incurred activity	 	 	–	 	 	 	 	2	 	 	 	 	 	2	 	 	 	 	 	–	 	 	 	 	 	2	
Payment activity	 	 	3	 	 	 	 	(29	)	 	 	 	 	(26	)	 	 	 	 	(29	)	 	 	 	 	3	
Balance at December 31, 2007	 	$	224	 	 	 	$	120	 	 	 	 	$	344	 	 	 	 	$	298	 	 	 	 	$	46	
(1) The balance at December 31, 2006, has been reduced by $50 million of reinsurance recoverable as this balance was unrelated to A&E exposures.
(2) Other consists primarily of non-A&E general liability and products liability losses.
(3) The balance at December 31, 2006, has been adjusted by $19 million to reflect a change in reporting to an incurred basis from a cash-received basis.
 
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Reserving considerations
For asbestos, we face claims relating to policies issued to manufacturers, distributors, installers, and other parties in the chain of commerce for asbestos and products containing asbestos. Claims can be filed by individual claimants or groups of claimants with the potential for hundreds of individual claimants at one time. Claimants will generally allege damages across an extended time period which may coincide with multiple policies for a single insured.
Environmental claims present exposure for remediation and defense costs associated with the contamination of property as a result of pollution. It is common, especially for larger defendants, to be named as a potentially responsible party (PRP) at multiple sites. Our environmental claim count definition is based on policyholder by site numbers. For example, if a policyholder were named as a PRP at 10 pollution sites, we would track this as 10 claim counts. In addition, should we have multiple policyholders identified as PRP’s at the same waste site, each would constitute a separate claim count.
The table below summarizes count information for asbestos and environmental claims for the years ended December 31, 2007 and 2006, for direct policies only, and excludes claims from assumed reinsurance.

 	 	2007	 	 	 	2006	
Asbestos (by causative agent)	 	 	 	 	 	 	
Open at the beginning of year	 	1,391	 	 	 	1,349	
Newly reported	 	87	 	 	 	80	
Closed or otherwise disposed	 	309	 	 	 	38	
Open at end of year	 	1,169	 	 	 	1,391	
Environmental (by site)	 	 	 	 	 	 	
Open at the beginning of year	 	6,424	 	 	 	6,902	
Newly reported	 	206	 	 	 	220	
Closed or otherwise disposed	 	1,498	 	 	 	698	
Open at end of year	 	5,132	 	 	 	6,424	
 
In 2007, the number of newly reported asbestos claims rose nine percent to 87, compared with 80 new claims in 2006. The total pending asbestos claims decreased 16 percent to 1,169 at December 31, 2007, compared with 1,391 at December 31, 2006. This decrease in pending claims is influenced by the number of closings during the period. This decrease in claims was attributable, in part, to the formal closing of files that had been inactive for some time. A review of the inactive files revealed that payment was no longer sought on the files, therefore, the files were closed.
In 2007, the number of newly reported environmental claims continued the decline experienced in recent years. The number of new sites in 2007 declined six percent to 206, compared with 220 in 2006. Total pending environmental claims at December 31, 2007, declined 20 percent to 5,132, compared with 6,424 at December 31, 2006. This decrease in claims was attributable, in part, to the formal closing of files that had been inactive for some time. A review of the inactive files revealed that payment was no longer sought on the files, therefore, the files were closed.
The following table shows our gross and net survival ratios for our A&E loss reserves and ALAE reserves at December 31, 2007.

 	 	2007 Survival Ratios	 	2006 Survival Ratios	
 	 	3 Year	 	1 Year	 	3 Year	 	1 Year	
 	 	Gross	 	Net	 	Gross	 	Net	 	Gross	 	Net	 	Gross	 	Net	
Asbestos	 	10.2	 	10.7	 	10.6	 	10.6	 	10.9	 	10.5	 	8.8	 	7.6	
Environmental	 	4.5	 	6.6	 	5.7	 	9.8	 	4.0	 	6.0	 	5.8	 	6.7	
Total	 	8.9	 	9.3	 	9.6	 	10.4	 	8.9	 	8.9	 	8.3	 	7.4	
 
The net ratios reflect third party reinsurance other than the aggregate excess reinsurance provided under the NICO contracts. These survival ratios are calculated by dividing the asbestos or environmental loss and ALAE reserves by the average asbestos or environmental loss and ALAE payments for the three most recent calendar years (3 year survival ratio), and by asbestos or environmental loss and ALAE payments in 2007 (1 year survival ratio). The survival ratios provide only a very rough measure of reserve adequacy and are significantly impacted by a number of factors such as aggressive settlement practices, variations in gross to ceded relationships within the asbestos or environmental claims and levels of coverage provided. We, therefore,
 
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urge caution in using these very simplistic ratios to gauge reserve adequacy and note that the 1 year survival ratios, particularly, are likely to move considerably from year to year for the reasons just described.
Three year gross and net survival ratios remained relatively consistent with the comparable three year ratios at December 31, 2006. The 1 year net survival ratio for asbestos increased to 10.6 from 7.6 in 2006. The 2006 net 1 year survival ratio for asbestos was adversely affected by a favorable settlement that resulted in a full buyback of policy obligations on a significant account that resulted in a large increase in payments for the year.
 
Brandywine run-off entities
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 (a Pennsylvania insurer), and Century International Reinsurance Company Ltd. (a Bermuda insurer (CIRC)). All of the Brandywine companies are direct or indirect subsidiaries of Brandywine Holdings.
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 2007, 2006, and 2005, no such 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, an ACE INA insurance subsidiary provided reinsurance 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, 2007, was $25 million and approximately $321 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 upon consolidation. To estimate ACE’s remaining claim exposure under the Aggregate Excess of Loss Agreement on a GAAP basis, we adjust the statutory cession to exclude the discount embedded in statutory loss reserves and we adjust the statutory provision for uncollectible reinsurance to a GAAP basis amount. At December 31, 2007, approximately $572 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 $228 million. At December 31, 2006, the remaining limit of coverage under the agreement was $255 million. While we believe ACE has no legal obligation to fund losses above the Aggregate Excess of Loss Agreement limit of coverage, ACE’s consolidated results would nevertheless continue to include any losses above the limit of coverage for so long as the Brandywine 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, 2007, the aggregate reinsurance balances ceded by the active ACE companies to Century were approximately $1.5 billion. At December 31, 2007, Century’s carried gross reserves (including reserves ceded by the active ACE companies to Century) were $3.5 billion. We believe the intercompany reinsurance recoverables, which relate to
 
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liabilities payable over many years (i.e., 25 years or more), are not impaired at this time. A substantial portion of the liabilities ceded to Century by its affiliates have in turn been ceded by Century to NICO and, as of December 31, 2007, approximately $1.6 billion of cover remains on a paid basis. Should Century’s loss reserves experience adverse development in the future and should Century be placed into rehabilitation or liquidation, the reinsurance recoverables due from Century to its affiliates would be payable only after the payment in full of certain expenses and liabilities, including 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, 2007, losses ceded by Century to the active ACE companies and other amounts owed to Century by the active ACE companies were approximately $523 million in the aggregate.
 
Sale of Certain Brandywine Companies
Refer to Note 9 i) to the Consolidated Financial Statements, under Item 8.

Catastrophe Management
We continue to closely monitor our catastrophe accumulation around the world and have significantly reduced our U.S. wind exposure since 2005. Our modeled annual aggregate 1 in 100 year return period U.S. hurricane probable maximum loss, net of reinsurance is approximately $918 million; i.e., there is a one percent chance that ACE’s losses incurred in any year from U.S. hurricanes could be in excess of $918 million (or less than six percent of our total shareholders’ equity at December 31, 2007). We estimate that at such loss levels, aggregate industry losses are approximately $133 billion. If the 2005 hurricanes were to recur, our net losses on an “as-if” basis would be 30 percent lower. ACE’s modeled losses reflect our in-force portfolio and catastrophe reinsurance program as of October 1, 2007. The modeling estimates of both ACE and industry loss levels are inherently uncertain owing to key assumptions. First, while the use of third-party catastrophe modeling packages to simulate hurricane losses is prevalent within the insurance industry, the models are reliant upon significant meteorology and engineering assumptions to estimate hurricane losses. In particular, modeled hurricane events are not always a representation of actual events and ensuing additional loss potential. Second, there is no universal standard in the preparation of insured data for use in the models and the running of the modeling software. Third, we are reliant upon third-party estimates of industry insured exposures and there is significant variation possible around the relationship between ACE’s loss and that of the industry following an event. Fourth, we assume that our reinsurance recoveries following an event are fully collectible. These loss estimates do not represent ACE’s potential maximum exposures and it is highly likely that ACE’s actual incurred losses would vary materially from the modeled estimates.

Natural Catastrophe Reinsurance Program
ACE’s core catastrophe reinsurance program provides protection against natural catastrophes impacting its primary operations (i.e., excluding assumed reinsurance) and consists of two separate towers.
First, for losses arising out of North America, our core traditional program renewed on January 1, 2008, and we purchased $123 million part of $300 million excess of $200 million in coverage and we purchased $118 million part of $200 million excess of $300 million in coverage. We also purchased $9 million part of $100 million excess of $200 million retention. The combined effect of our traditional program purchase is that we have 50 percent of $100 million excess of $200 million in coverage placed and we have 100 percent of $200 million excess of $300 million layer placed. In addition, we have purchased a reinsurance treaty that provides $100 million part of $175 million in coverage for U.S. property perils other than U.S. wind excess of $500 million. This cover essentially replaces a swap agreement that was effective at January 1, 2007, and provided us certain earthquake protection. Each program noted above has a single reinstatement available. In addition to the foregoing, we have in place a multi-year, peril specific program from a major reinsurer that is backed by their credit worthiness and the issuance of fully collateralized catastrophe bonds. Under this multi-year coverage, we have $200 million of U.S. hurricane coverage in excess of $504 million attachment point. In addition, we have purchased U.S. earthquake coverage with a territorial scope of California, the Pacific Northwest, and the central U.S. This cover is 25 percent of $200 million of loss incurred in excess of $683 million attachment point. Finally, we also purchased a combined U.S. earthquake (covering the three territories noted above) and U.S. hurricane top layer cover of $100 million part of $150 million of loss incurred in excess of an $817 million attachment point. These multi-year programs do not have a reinstatement feature. To keep the expected loss the same each year of these multi-year covers, the attachment point is adjusted annually, either up or down, based upon an independent modeling firm’s review of the exposure data underlying each program. As noted above, we did not renew the swap agreement and instead purchased a like amount of coverage in the traditional reinsurance marketplace. By way of comparison, the 2007 program has potentially approximately $36 million less in coverage for U.S. hurricane and Cal-
 
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ifornia earthquake than the expiring program. We consider our effective retention to be approximately $250 million but this will depend upon the nature of the loss and the interplay between the underlying per risk programs and certain other coverages purchased by individual business units.
Second, for losses arising outside of North America and effective July 1, 2007, our core program is made up of two layers. We have protection of $100 million from a single catastrophic event in excess of the retention of $50 million with two reinstatements. In addition, we have another layer that provides $100 million in protection excess of $150 million with one reinstatement. There is further protection above this core program for specific geographic regions, being $100 million excess of $250 million for Asia Pacific and $150 million excess of $250 million for Europe. Each of these top layers has a single reinstatement. In addition, there are various underlying per risk and catastrophe treaties underlying the core program’s retention of $50 million. In comparison to the prior year, the core program and the specific layer for Asia Pacific were each reduced by $50 million, and the Europe specific layer was increased by $50 million.

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 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 ACE’s 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. We expect that positive cash flows from operations (underwriting activities and investment income) will be sufficient to cover cash outflows under most loss scenarios through 2008. 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 (refer to the section entitled “Credit Facilities” below). In addition, for certain insurance, reinsurance, or deposit contracts that tend to have relatively large and reasonably predictable cash outflows, 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 interest rate environment, the overall duration of our fixed maturity investments tends to be shorter and in a high interest rate environment, such durations tend to be longer. Given the current low-rate environment, at December 31, 2007, the average duration of our fixed maturity investments (3.5 years) is less than the average expected duration of our insurance liabilities (3.8 years).
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 include 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 could liquidate a portion of the portfolio as well as 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 2007, 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 flows and dividends received. Should the need arise, we generally have access to the capital markets and other available credit facilities.
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. In 2007, ACE Bermuda declared and paid
 
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dividends of $168 million. During 2006, ACE Bermuda and ACE Tempest Life Reinsurance declared and paid dividends of $491 million and $125 million, respectively. We expect that a majority of our cash inflows in 2008 will be from our Bermuda subsidiaries.
The payment of any dividends from ACE Global Markets or its subsidiaries is subject to applicable U.K. insurance laws and regulations. In addition, the release of funds by Syndicate 2488 to subsidiaries of ACE Global Markets is subject to regulations promulgated by the Society of Lloyd’s. ACE INA’s U.S. insurance subsidiaries may pay dividends, without prior regulatory approval, subject to restrictions set out in state law of the subsidiary’s domicile (or, if applicable, “commercial domicile”). 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 sometimes include restrictions that limit the amount of dividends payable without prior approval of regulatory insurance authorities.
ACE Limited did not receive any dividends from ACE Global Markets or ACE INA in 2007 and 2006. The debt issued by ACE INA to provide partial financing for the ACE INA acquisition and for other operating needs 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, and dividends and to service debt and purchase 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 be comprised of 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. Refer to “Contractual Obligations and Commitments” for our estimate for future claim payments by period.
Sources of liquidity include cash from operations, routine sales of investments, and financing arrangements. The following is a discussion of our cash flows for the years ended December 31, 2007 and 2006.
• Our consolidated net cash flows from operating activities were $4.7 billion in 2007, compared with $4.1 billion in 2006. These amounts reflect net income for each period, adjusted for non-cash items and changes in working capital. Net income increased to $2.6 billion in 2007, compared with $2.3 billion in 2006. For 2007, significant adjustments included increases in unpaid losses and loss expenses and unearned premiums of $838 million due to growth in our A&H line and a decrease in reinsurance recoverable of $343 million. Net cash flows from operating activities in 2006 were negatively impacted by increased catastrophe loss payments.
• Our consolidated net cash flows used for investing activities were $4.5 billion in 2007, compared with $3.8 billion in 2006. For the indicated periods, net cash flows used for investing activities were related principally to net purchases of fixed maturities. The 2006 year included the impact of the sale of the run-off companies which reduced cash and investments by approximately $500 million.
• Our consolidated net cash flows used for financing activities were $253 million in 2007, compared with $284 million in 2006. Net cash flows used for financing activities in 2007 were primarily comprised of dividends paid on Ordinary Shares, partially offset by proceeds from the exercise of options for Ordinary Shares.
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. As discussed under “Long-term Debt”, below, we have issued debt and secured lender commitments totaling approximately $750 million in connection with our agreement to purchase Combined. We expect the balance of the approximately $2.4 billion purchase price ($1.65 billion) to be funded using internally generated resources.
In order to enhance cash management efficiency during periods of short-term timing mismatches between expected inflows and outflows of cash by currency, in 2006, we entered into agreements with a bank provider to implement two international multi-currency notional cash pooling programs. In each program, participating ACE entities establish deposit accounts in different currencies with the bank provider and each day the credit or debit balances in every account are notionally translated into a single currency (U.S. dollars) and then notionally pooled. The bank extends overdraft credit to any participating ACE entity as needed, provided that the overall notionally-pooled balance of all accounts in each pool at the end
 
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of each day is at least zero. Actual cash balances are not physically converted and are not co-mingled between legal entities. ACE entities may incur overdraft balances as a means to address short-term timing mismatches, and any overdraft balances incurred under this program by an ACE entity would be guaranteed by ACE Limited (up to $150 million in the aggregate). The dedicated credit facility previously available to ACE Limited was cancelled in November 2007, following the completion of the renewed revolving credit facility discussed below, which was amended to allow same day draw downs for both programs.
ACE Limited 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. The ratings issued on our companies by these agencies are announced publicly and are available directly from the agencies. Our Internet site, www.acelimited.com, also contains some information about our ratings, which can be found under the Investor Information tab.
Financial strength ratings reflect the rating agencies’ opinions of a company’s claims paying ability. 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, interest, and preferred stock dividends.
It is possible that, in the future, one or more of the rating agencies may reduce our existing ratings. If one or more of our ratings were downgraded, we could incur higher borrowing costs and our ability to access the capital markets could be impacted. In addition, our insurance and reinsurance operations could be adversely impacted by a downgrade in our financial strength ratings, including a possible reduction in demand for our products in certain markets.

Capital Resources
Capital resources consist of funds deployed, or available to be deployed, to support our business operations. The following table summarizes the components of our capital resources at December 31, 2007 and 2006.

(in millions of U.S. dollars)	 	2007	 	 	 	2006	
Short-term debt	 	$	372	 	 	 	$	578	
Long-term debt	 	 	1,811	 	 	 	 	1,560	
Total debt	 	 	2,183	 	 	 	 	2,138	
Trust preferred securities	 	 	309	 	 	 	 	309	
Preferred Shares	 	 	557	 	 	 	 	557	
Ordinary shareholders’ equity	 	 	16,120	 	 	 	 	13,721	
Total shareholders’ equity	 	 	16,677	 	 	 	 	14,278	
Total capitalization	 	$	19,169	 	 	 	$	16,725	
Ratio of debt to total capitalization	 	 	11.4%	 	 	 	 	12.8%	
Ratio of debt plus trust preferred securities to total capitalization	 	 	13.0%	 	 	 	 	14.6%	
 
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.
 
Short-term Debt
Short-term debt at December 31, 2007, consisted of AUD $100 million ($87 million) of 7.81 percent senior notes due December 2008, $250 million in aggregate principal amount of unsecured senior notes due October 2008 (classified under long-term debt at December 31, 2006) and $35 million owed to brokers under a securities repurchase agreement. In April 2007, we repaid $500 million of indebtedness. During 2007, we executed a securities repurchase agreement with a counterparty. Under this repurchase agreement, we agreed to sell securities and repurchase them at a date in the future for a predetermined price.
 
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Long-term Debt
Our total long-term debt of $1.8 billion is described in detail in Note 8 to the Consolidated Financial Statements, under Item 8. In February 2007, we issued, at a small discount, $500 million of 5.7 percent senior notes due 2017. We used the net proceeds from this issuance together with available cash to repay $500 million of indebtedness which matured in April 2007 (classified as short-term debt at December 31, 2006).
In connection with our agreement to purchase Combined, in February 2008, we issued, at a slight discount, $300 million of 5.8 percent notes that mature in 2018. We have lender commitments for us to borrow $450 million in a five-year private transaction with a bank syndicate at a fixed rate of approximately 4.15 percent. The borrowing is contingent on the closing of the acquisition of Combined. We plan to use the net proceeds from both the bank loan and public issuance to pay a portion of the purchase price of Combined.
The following instruments have specific collateral triggers. In 1998, ACE US Holdings issued $250 million of unsecured senior notes that mature October 2008. In December 1999, ACE INA issued $300 million of unsecured subordinated notes that mature December 2009; we repaid $100 million of this outstanding amount during 2002. We have a $450 million credit default swap in place that has the economic effect of reducing our cost of borrowing associated with these two issuances. The minimum collateral in connection with the credit default swap is $158 million. The actual collateral can be higher depending on the credit quality of securities pledged.
Under these transactions, we would be required to provide collateral of $450 million if S&P downgraded our debt rating to BB+ or lower or downgraded ACE Bermuda’s financial strength rating to BBB- or lower. Although there can be no assurance, we believe it is unlikely that either of these two events will occur. In the event that we terminate either of the swaps prematurely, we would be liable for certain transaction costs. The counter-party in each swap is a highly rated major financial institution and management does not anticipate non-performance.
 
Trust Preferred Securities
The securities outstanding consist of $300 million of trust preferred securities due 2030, issued by a special purpose entity (a trust) that is wholly owned by us. The sole assets of the special purpose entities are debt instruments issued by one or more of our subsidiaries. The special purpose entity looks to payments on the debt instruments to make payments on the preferred securities. We have guaranteed the payments on these debt instruments. The trustees of the trust include one or more of our officers and at least one independent trustee, such as a trust company. Our officers serving as trustees of the trust do not receive any compensation or other remuneration for their services in such capacity. The full $309 million of outstanding trust preferred securities (calculated as $300 million as discussed above plus our equity share of the trust) is shown on our consolidated balance sheet as a liability. Additional information with respect to the trust preferred securities is contained in Note 8 to the Consolidated Financial Statements, under Item 8.
 
Ordinary Shares
Total shareholders’ equity increased $2.4 billion in 2007, primarily due to net income of $2.6 billion which was partially offset by dividends declared. Our ratios of debt to total capitalization and debt plus trust preferred securities to total capitalization have decreased due to the increase in shareholders’ equity and stable debt and trust preferred securities.
As part of our capital management program, in November 2001, our Board of Directors authorized the repurchase of any ACE issued debt or capital securities including Ordinary Shares, up to $250 million. At December 31, 2007, this authorization had not been utilized. We generally maintain shelf capacity at all times in order to allow capital market access for refinancing as well as for unforeseen capital needs. Our unlimited shelf registration expires in December 2008.
On January 12, 2007, and April 13, 2007, we paid dividends of 25 cents per ordinary share to shareholders of record on December 29, 2006, and March 30, 2007, respectively. On July 13, 2007, October 12, 2007, and January 11, 2008, we paid dividends of 27 cents per share to shareholders of record on June 29, 2007, September 30, 2007, and December 31, 2007, 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 Board of Directors, in arrears on March 1, June 1, September 1, and December 1 of each year. We paid dividends of $4.875 per preferred share on March 1, 2007, June 1, 2007, September 1, 2007, and
 
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December 1, 2007, to shareholders of record on February 28, 2007, May 31, 2007, August 31, 2007, and November 30, 2007,  respectively.

Contractual Obligations and Commitments
The table below shows our contractual obligations and commitments including our payments due by period at December 31, 2007.

 	 	Payments Due By Period	
(in millions of U.S. dollars)	 	Total	 	 	 	Less than 1
Year	 	 	 	1-3 Years	 	 	 	4-5 Years	 	 	 	After 5
Years	
Payment amounts determinable from the respective contracts	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Deposit liabilities	 	$	351	 	 	 	$	52	 	 	 	$	82	 	 	 	$	67	 	 	 	$	150	
Purchase obligations	 	 	380	 	 	 	 	58	 	 	 	 	175	 	 	 	 	103	 	 	 	 	44	
Limited partnerships – funding commitments	 	 	606	 	 	 	 	291	 	 	 	 	315	 	 	 	 	–	 	 	 	 	–	
Operating leases	 	 	339	 	 	 	 	61	 	 	 	 	105	 	 	 	 	76	 	 	 	 	97	
Short-term debt	 	 	372	 	 	 	 	372	 	 	 	 	–	 	 	 	 	–	 	 	 	 	–	
Long-term debt	 	 	1,811	 	 	 	 	–	 	 	 	 	400	 	 	 	 	–	 	 	 	 	1,411	
Trust preferred securities	 	 	309	 	 	 	 	–	 	 	 	 	–	 	 	 	 	–	 	 	 	 	309	
Interest on debt obligations	 	 	1,941	 	 	 	 	157	 	 	 	 	267	 	 	 	 	233	 	 	 	 	1,284	
Total obligations in which payment amounts are determinable from the respective contracts	 	 	6,109	 	 	 	 	991	 	 	 	 	1,344	 	 	 	 	479	 	 	 	 	3,295	
Payment amounts not determinable from the respective contracts	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Estimated gross loss payments under insurance and reinsurance contracts	 	 	37,112	 	 	 	 	9,037	 	 	 	 	10,107	 	 	 	 	5,519	 	 	 	 	12,449	
Estimated payments for future life and annuity policy benefits	 	 	2,263	 	 	 	 	120	 	 	 	 	265	 	 	 	 	248	 	 	 	 	1,630	
Total contractual obligations and commitments	 	$	45,484	 	 	 	$	10,148	 	 	 	$	11,716	 	 	 	$	6,246	 	 	 	$	17,374	
The above table excludes the following items:
Pension Obligations: Minimum funding requirements for our pension obligations are immaterial over the next year. Subsequent funding commitments are apt to vary due to many factors and are difficult to estimate at this time. Refer to Note 13 to the Consolidated Financial Statements, under Item 8, for more information.
Preferred Shares: Our Preferred Shares, issued in 2003, have no fixed repayment terms. We may redeem the Preferred Shares at any time after May 30, 2008, at a redemption value of $25 per depository share (each of which represent one-tenth of one Preferred Share) or at any time under certain limited circumstances. Refer to Note 10 to the Consolidated Financial Statements, under Item 8, for more information.
Liabilities for unrecognized tax benefits are recorded in accordance with issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 (FIN 48). The FIN 48 liability for unrecognized tax benefits was $157 million at December 31, 2007. We are unable to make a reasonably reliable estimate for the timing of cash settlement with respect to these liabilities. Refer to Note 7 to the Consolidated Financial Statements, under Item 8, for more information.
We have no other significant contractual obligations or commitments not reflected in the table above.
 
Deposit liabilities
Deposit liabilities include reinsurance deposit liabilities of $325 million and $311 million and contract holder deposit funds of $26 million and $24 million at December 31, 2007 and 2006, respectively. The reinsurance deposit liabilities arise from contracts we sold for which there is not a significant transfer of risk. At contract inception, the deposit liability is equal to net cash we received. An accretion rate is established based on actuarial estimates whereby the deposit liability is increased to the estimated amount payable over the term of the contract. The deposit accretion rate is the rate of return required to fund expected future payment obligations. We periodically reassess the estimated ultimate liability and related expected rate of return. Any resulting changes to the amount of the deposit liability are reflected as an adjustment to earnings to reflect the cumulative effect of the period the contract has been in force, and by an adjustment to the future accretion rate of the liability over the remaining estimated contract term.
 
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Additional information with respect to deposit liabilities is contained in Note 2 k) to the Consolidated Financial Statements, under Item 8.
 
Purchase obligations
We are party to enforceable and legally binding agreements to purchase certain services. Purchase obligations in the table primarily comprise audit fees and agreements with vendors to purchase system software administration and maintenance services.
 
Limited partnerships – funding commitments
In connection with our investments in limited partnerships, we have commitments that may require funding of up to $606 million over the next several years. The timing of the payment of these commitments is uncertain and will differ from our estimated timing in the table.
 
Operating lease commitments
We lease office space in most countries in which we operate under operating leases that expire at various dates through December 2033. We renew and enter into new leases in the ordinary course of business as required.
 
Estimated gross loss payments under insurance and reinsurance contracts
We are obligated to pay claims under insurance and reinsurance contracts for specified loss events covered under those contracts. Such loss payments represent our most significant future payment obligation as a P&C insurance and reinsurance company. In contrast to other contractual obligations, cash payments are not determinable from the terms specified within the contract. For example, we do not ultimately make a payment to our counterparty for many insurance and reinsurance contracts (i.e., when a loss event has not occurred) and if a payment is to be made, the amount and timing cannot be determined from the contract. In the table above, we estimate payments by period relating to our gross liability for unpaid losses and loss expenses included in the consolidated balance sheet at December 31, 2007, and do not take reinsurance recoverables into account. These estimated loss payments are inherently uncertain and the amount and timing of actual loss payments are likely to differ from these estimates and the differences could be material. Given the numerous factors and assumptions involved in both estimates of loss and loss expense reserves and related estimates as to the timing of future loss and loss expense payments in the table above, differences between actual and estimated loss payments will not necessarily indicate a commensurate change in ultimate loss estimates.
 
Estimated payments for future life and annuity policy benefits
We establish reserves for future policy benefits for life and annuity contracts including, but not limited to, guaranteed minimum death benefits (GMDBs) and GMIBs. The amounts in the table are gross of fees or premiums due from the underlying contracts. The liability for future policy benefits for life and annuity contracts presented in our balance sheet is discounted and, with respect to GMIB reinsurance, reflected net of fees or premiums due from the underlying contracts, and with respect to GMDB reinsurance, does not consider benefit payments related to future fees or premiums not recognized through the balance sheet date. Accordingly, the estimated amounts in the table exceed the liability for future policy benefits for life and annuity contracts presented in our balance sheet. Payment amounts related to these reserves must be estimated and are not determinable from the contract. Due to the uncertainty with respect to the timing and amount of these payments, actual results could materially differ from the estimates in the table.

Credit Facilities
As our Bermuda subsidiaries are not admitted insurers and reinsurers in the U.S., the terms of certain U.S. insurance and reinsurance contracts require them to provide LOCs to clients. In addition, ACE Global Markets is required to satisfy certain U.S. regulatory trust fund requirements which can be met by the issuance of LOCs. LOCs may also be used for general corporate purposes and for funds at Lloyd’s.
 
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The following table shows our credit facilities by credit line, usage, expiry date, and purpose at December 31, 2007.

(in millions of U.S. dollars)	 	Credit Line 1	 	 	 	Usage	 	 	 	Expiry Date	
Unsecured Liquidity Facilities	 	 	 	 	 	 	 	 	 	 	 	 	
ACE Limited 2	 	$	500	 	 	 	$	64	 	 	 	Nov. 2012	
Other 3	 	 	66	 	 	 	 	66	 	 	 	Various	
Unsecured Operational LOC Facilities	 	 	 	 	 	 	 	 	 	 	 	 	
ACE Limited	 	 	1,000	 	 	 	 	852	 	 	 	Nov. 2012	
Unsecured Capital Facilities	 	 	 	 	 	 	 	 	 	 	 	 	
ACE Limited 4	 	 	595	 	 	 	 	409	 	 	 	Dec. 2013	
Total	 	$	2,161	 	 	 	$	1,391	 	 	 	 	
(1) Certain facilities are guaranteed by operating subsidiaries and/or ACE Limited.
(2) May also be used for LOCs.
(3) These facilities are issued in the name of ACE European Group Limited, Lloyd’s Syndicate 2488, and Century Indemnity Reinsurance Company.
(4) Supports ACE Global Markets underwriting capacity for Lloyd’s Syndicate 2488.
In November 2007, we entered into a $500 million unsecured revolving credit facility expiring in November 2012. This facility is available for general corporate purposes and the issuance of LOCs and replaced the existing $600 million revolving credit facility. On the effective date of the new revolving credit facility, all outstanding LOCs issued under the replaced facility were deemed to have been issued under the new revolving credit facility and the replaced facility terminated.
In November 2007, we entered into a $1 billion unsecured operational LOC facility expiring in November 2012. This facility replaced two LOC facilities permitting up to $1.5 billion of LOCs. On the effective date of the new LOC facility, all outstanding LOCs issued under the replaced facilities were deemed to have been issued under the new LOC facility and the replaced facilities terminated.
In June 2007, Syndicate 2488 reduced the LOC balance supporting its funds at Lloyd’s in line with the requirements promulgated by Lloyd’s. The associated facility amount was also reduced to £300 million. In November 2007, we gained approval from our bank group to extend the term of the facility by one year to satisfy Syndicate 2488’s funding requirements through 2010. LOCs issued under this facility will expire no earlier than December 2013.
With the exception of the LOC facilities noted under “Other”, the facilities in the table above require that we maintain certain covenants, all of which have been met at December 31, 2007. These covenants include (but are not limited to):
(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 $9.6 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 an annual reset provision.	
(ii)	Maintenance of a maximum debt to total capitalization ratio of not greater than 0.35 to 1. Under this covenant, debt does not include trust preferred securities or mezzanine equity, except where the ratio of the sum of trust preferred securities and mezzanine equity to total capitalization is greater than 15 percent. In this circumstance, the amount greater than 15 percent would be included in the debt to total capitalization ratio.	
At December 31, 2007, (a) the minimum consolidated net worth requirement under the covenant described in (i) above was $10.2 billion and our actual consolidated net worth as calculated under that covenant was $16.1 billion and (b) our ratio of debt to total capitalization was 0.11 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 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 LOCs under such facility. A failure by ACE Limited (or any of its subsidiaries) to pay an obligation due for an amount exceeding $50 million would result in an event of default under all of the facilities described above.

Recent Accounting Pronouncements
Refer to Note 2 r) to the Consolidated Financial Statements, under Item 8, for a discussion of recent accounting pronouncements.
 
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 Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	

Market Sensitive Instruments and Risk Management
Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments. We are exposed to potential losses from various market risks including changes in interest rates, equity prices and foreign currency exchange rates. Further, through the writings of certain products such as credit derivatives (through our approximately 24 percent ownership of Assured Guaranty Ltd.) and GMIB and GMDB products, we are exposed to deterioration in the credit markets, decreases in interest rates, and declines in the equity markets. Our investment portfolio consists of both fixed income and equity securities, denominated in both U.S. dollars and foreign currencies, which are sensitive to changes in interest rates, equity prices, and foreign currency exchange rates.
The majority of our fixed income and all of our equity securities are classified as available for sale and, as such, changes in interest rates, equity prices, or foreign currency exchange rates will have an immediate effect on comprehensive income and shareholders’ equity but will not ordinarily have an immediate effect on net income. Nevertheless, changes in interest rates and equity prices affect consolidated net income when, and if, a security is sold or impaired. From time to time, we also use investment derivative instruments such as futures, options, swaps, and foreign currency forward contracts to manage the duration of our investment portfolio and foreign currency exposures and also to obtain exposure to a particular financial market. In addition, as part of our investing activity, we purchase “to be announced mortgage backed securities” (TBAs). These instruments are recognized as assets or liabilities in our Consolidated Financial Statements and are sensitive to changes in interest rates, foreign currency exchange rates, and equity security prices. Changes in the fair value of TBAs are included in net realized gains (losses) and therefore have an immediate effect on both our net income and shareholders’ equity. At December 31, 2007 and 2006, our notional exposure to investment derivative instruments was $15 billion.
We seek to mitigate market risk using a number of techniques, including maintaining and managing the assets and liabilities of our international operations consistent with the foreign currencies of the underlying insurance and reinsurance businesses, thereby limiting exchange rate risk to net assets denominated in foreign currencies.
The following is a discussion of our primary market risk exposures at December 31, 2007. Our policies to address these risks in 2007 were not materially different from 2006. We do not currently anticipate significant changes in our primary market risk exposures or in how those exposures are managed in future reporting periods based upon what is known or expected to be in effect in future reporting periods.

Interest rate risk – fixed income portfolio and debt obligations
Our fixed income portfolio and debt obligations have exposure to interest rate risk. Changes in investment values attributable to interest rate changes are mitigated by corresponding and partially offsetting changes in the economic value of our insurance reserves and debt obligations. We monitor this exposure through periodic reviews of our asset and liability positions.
The following table shows the impact on the market value of our fixed income portfolio of an increase in interest rates of 100 bps applied instantly across the yield curve (an immediate time horizon was used as this presents the worst case scenario) at December 31, 2007 and 2006.

(in millions of U.S. dollars)	 	2007	 	 	 	2006	
Fair value of fixed income portfolio	 	$	38,830	 	 	 	$	34,011	
Pre-tax impact of 100 bps increase in interest rates	 	$	1,281	 	 	 	$	1,062	
Percentage of total fixed income portfolio at fair value	 	 	3.3%	 	 	 	 	3.1%	
 
Changes in interest rates will have an immediate effect on comprehensive income and shareholders’ equity but will not ordinarily have an immediate effect on net income.
Although our debt, Preferred Shares, and trust preferred securities (collectively referred to as debt obligations) are reported at amortized value and not adjusted for fair value changes, changes in interest rates could have a material impact on their fair value, albeit there is no immediate impact on our Consolidated Financial Statements. The following table shows the impact on the market value of our debt obligations of a decrease in interest rates of 100 bps applied instantly across the yield curve (an immediate time horizon was used as this presents the worst case scenario) at December 31, 2007 and 2006.
 
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(in millions of U.S. dollars)	 	2007	 	 	 	2006	
Fair value of debt obligations	 	$	3,120	 	 	 	$	3,219	
Impact of 100 bps decrease in interest rates	 	$	236	 	 	 	$	257	
Percentage of total debt obligations at fair value	 	 	7.6%	 	 	 	 	8.0%	
 
Variations in market interest rates could produce significant changes in the timing of prepayments due to prepayment options available. For these reasons, actual results could differ from those reflected in the tables.

Equity price risk – equity portfolio
Our portfolio of equity securities, which we carry on our balance sheet at fair value, has exposure to price risk. This risk is defined as the potential loss in fair value resulting from adverse changes in stock prices. In addition, we attain exposure to the equity markets through the use of derivative instruments, which also have exposure to price risk. Our U.S. equity portfolio is correlated with the S&P 500 index and changes in that index would approximate the impact on our portfolio. Our international equity portfolio has exposure to a broad range of non-U.S. equity markets. The following table provides more information on our exposure to equity price risk at December 31, 2007 and 2006.

(millions of U.S. dollars)	 	2007	 	 	 	2006	
Fair value of equity securities	 	$	1,837	 	 	 	$	1,713	
Pre-tax impact of 10 percent decline in market prices for equity exposures	 	$	184	 	 	 	$	171	
 
Changes in the fair value of our equity portfolio are recorded as unrealized appreciation (depreciation) and are included as a separate component of accumulated other comprehensive income in shareholders’ equity.

Foreign currency exchange rate risk
Many of our non-U.S. companies maintain both assets and liabilities in local currencies. Therefore, foreign exchange rate risk is generally limited to net assets denominated in those foreign currencies. Foreign exchange rate risk is reviewed as part of our risk management process. Locally required capital levels are invested in home currencies in order to satisfy regulatory requirements and to support local insurance operations regardless of currency fluctuations. The principal currencies creating foreign exchange risk for us are the British pound sterling, the euro, and the Canadian dollar. The following table provides more information on our exposure to foreign exchange rate risk at December 31, 2007 and 2006.

(millions of U.S. dollars)	 	2007	 	 	 	2006	
Fair value of net assets denominated in foreign currencies	 	$	1,651	 	 	 	$	1,251	
Percentage of fair value of total net assets	 	 	9.9%	 	 	 	 	8.8%	
Pre-tax impact on equity of hypothetical 10 percent strengthening of the U.S. dollar	 	$	150	 	 	 	$	114	

Reinsurance of GMDB and GMIB guarantees
Our net income is directly impacted by changes in the reserves calculated in connection with the reinsurance of variable annuity guarantees, primarily GMDB and GMIB. These reserves are calculated in accordance with SOP 03-1 and changes in these reserves are reflected as life and annuity benefit expense, which is included in life underwriting income. In addition, our net income is directly impacted by the change in the fair value of the GMIB liability, which is classified as a derivative according to FAS 133. The fair value liability established for a GMIB reinsurance contract represents the difference between the fair value of the contract and the SOP 03-1 reserves. Changes in the fair value of the GMIB liability, net of associated changes in the calculated SOP 03-1 reserve, are reflected as realized gains or losses.
The SOP 03-1 reserve and fair value liability calculations are directly affected by market factors, the most significant of which are equity levels, interest rate levels, and implied equity volatilities. The table below shows the sensitivity, as of December 31, 2007, of the SOP 03-1 reserves and fair value liability associated with the variable annuity guarantee reinsurance portfolio. Note that the change in the fair value liability includes offsetting changes in the fair value of specific derivative instruments held to partially offset the risk in the variable annuity guarantee reinsurance portfolio. These derivatives do not receive hedge accounting treatment.
 
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(in millions of U.S. dollars)	 	10% Worldwide
Equity Decrease	 	 	 	Impact of 100
bp Decrease in
Interest Rates	 	 	 	Long-term
Equity Implied
Volatility Up 2%	
Increase in SOP 03-1 reserves / Reduction in Life underwriting income	 	$	52	 	 	 	$	12	 	 	 	$	–	
Increase in fair value liability	 	 	27	 	 	 	 	122	 	 	 	 	24	
Reduction in net income	 	$	79	 	 	 	$	134	 	 	 	$	24	
 
The table above demonstrates, for example, that a 10 percent decrease in worldwide equities would reduce our life underwriting income by $52 million and cause a net realized loss of $27 million, for a total reduction in net income of $79 million.
It should be noted that these sensitivities are not directly additive, because changes in one factor will affect the sensitivity to changes in other factors and also, that the sensitivities do not scale linearly and may be proportionally greater for larger movements in the market factors. The calculation of the SOP 03-1 reserve and fair value liability is based on internal models that include assumptions regarding future policyholder behavior, including withdrawal, annuitization, and asset allocation. These assumptions impact both the absolute level of the SOP 03-1 reserve and fair value liability as well as the sensitivities to changes in market factors shown above.
ACE views our variable annuity reinsurance business as having a similar risk profile to that of catastrophe reinsurance, with the probability of long-term economic loss relatively small. In the short run, adverse changes in market factors will have an impact on both life underwriting income and net income. When evaluating these risks, we expect to be compensated for taking both the risk of a cumulative long-term economic net loss, as well as the short-term accounting variations caused by these market movements. Therefore, we evaluate this business in terms of its long-term economic risk/reward.
The ultimate risk is a long-term underperformance of investment returns, which can be exacerbated by a long-term reduction in interest rates. In the short run, adverse market movements of the magnitude shown above do not translate immediately into a large increase in paid claims. In addition, while they do increase the probability of suffering long-term economic loss, the probability is still small. Following a market downturn, continued market underperformance over a period of five to seven years would eventually result in a higher level of paid claims as policyholders accessed their guarantees through death or annuitization. However, if market conditions improved following a downturn, SOP 03-1 reserves and fair value liability would fall reflecting a decreased likelihood of future claims, which would result in an increase in both life underwriting income and net income.
From inception (July 2000) to December 31, 2007, the variable annuity guarantee reinsurance portfolio has produced the following cumulative results, along with returns on equity in excess of 30 percent. Any increase in SOP 03-1 reserves and fair value liability should be taken in context of these results:
Net premiums earned: $786 million
Claims paid: $32 million
SOP 03-1 reserves held at December 31, 2007: $198 million
Fair value GMIB liability held at December 31, 2007: $157 million
Life underwriting income: $581 million
Net Income: $390 million
 
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 ITEM 8.	Financial Statements and Supplementary Data	
 
The financial statements and supplementary data required by Regulation S-X are included in this report on Form 10-K commencing on page F-1.

 ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	
 
There have been no changes in, or any disagreements with, accountants on accounting and financial disclosure within the two years ended December 31, 2007.

 ITEM 9A.	Controls and Procedures	
 
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Rule 13(a) -15(e) and Rule 15(d) -15(e) under the Securities Exchange Act of 1934 as of December 31, 2007. 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, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There has been no change in the Company’s internal controls over financial reporting during the Company’s quarter ended December 31, 2007, that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting. The Company’s management report on internal control over financial reporting is included on page F-3 and PricewaterhouseCoopers LLP’s audit report is included on page F-4.

 ITEM 9A(T).	Controls and Procedures	
 
Item not applicable.

 ITEM 9B.	Other Information	
 
There is no information required to be disclosed in a report on Form 8-K that has not been reported.
 
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 PART III

 ITEM 10.	Directors, Executive Officers and Corporate Governance	
 
Information pertaining to this item is incorporated by reference to the sections entitled “Election of Directors”, “Corporate Governance – Did our Officers and Directors Comply with Section 16(a) Beneficial Ownership Reporting in 2007?”, “Corporate Governance – How are Directors Nominated?”, and “Corporate Governance – The Committees of the Board – The Audit Committee” of the definitive proxy statement for the 2008 Annual General Meeting of Shareholders which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.
 
Code of Ethics
The Company has adopted a Code of Conduct, which sets forth standards by which all ACE employees, officers, and directors must abide as they work for the Company. The Company has posted this Code of Conduct on its Internet site (www.acelimited.com, under Investor Information / Corporate Governance / Code of Conduct). The Company intends to disclose on its Internet site any amendments to, or waivers from, its Code of Conduct that are required to be publicly disclosed pursuant to the rules of the SEC or the New York Stock Exchange.

 ITEM 11.	Executive Compensation	
 
This item is incorporated by reference to the sections entitled “Executive Compensation” of the definitive proxy statement for the 2008 Annual General Meeting of Shareholders which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.

 ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	
 
The following table presents securities authorized for issuance under equity compensation plans at December 31, 2007:

Plan Category	  	Number of securities to
be issued upon exercise
of outstanding options,
warrants, and rights	 	 	 	Weighted-average
exercise price of
outstanding
options, warrants,
and rights	 	 	 	Number of securities
remaining available for
future issuance under
equity compensation
plans (1)	
Equity compensation plans approved by security holders (2)	  	11,239,657	 	 	 	$	42.19	 	 	 	10,171,353	
Equity compensation plans not approved by security holders (3)	  	31,158	 	 	 	 	16.19	 	 	 	–	
Total	  	11,270,815	 	 	 	$	42.12	 	 	 	10,171,353	
 
(1) These totals include securities available for future issuance under the following plans:
i.	ACE Limited 2004 Long-Term Incentive Plan . (the “2004 LTIP”) A total of 15,000,000 Ordinary Shares of the Company are authorized to be issued pursuant to awards made as options, stock appreciation rights, stock units, performance shares, performance units, restricted stock, and restricted stock units. The maximum number of shares that may be delivered to participants and their beneficiaries under the 2004 LTIP shall be equal to the sum of: (i) 15,000,000 shares; and (ii) any shares that are represented by awards granted under the ACE Limited 1995 Long-Term Incentive Plan, the ACE Limited 1995 Outside Directors Plan, the ACE Limited 1998 Long-Term Incentive Plan, and the ACE Limited 1999 Replacement Long-Term Incentive Plan (the “Prior Plans”) that are forfeited, expired, or are canceled after the effective date of the 2004 LTIP of February 25, 2004, without delivery of shares or which result in the forfeiture of the shares back to the Company to the extent that such shares would have been added back to the reserve under the terms of the applicable Prior Plan. As of December 31, 2007, a total of 8,978,166 shares remain available for future issuance under this plan.	
ii.	ACE Limited 1998 Long-Term Incentive Plan . A total of 21,252,007 shares were authorized to be issued pursuant to awards made as options, stock appreciation rights, stock units, performance shares, performance units, restricted stock, and restricted stock units; the number of shares available for awards other than options and stock appreciation rights was 3,232,485 shares. This plan only remains in effect with respect to outstanding awards made pursuant to this plan. Future awards will be made pursuant to the 2004 LTIP.	
iii.	ACE Limited 1995 Long-Term Incentive Plan . Shares were authorized to be issued in an amount determined by a formula described in footnote (2) below pursuant to awards to be made as options, stock appreciation rights, and restricted stock. This plan only remains in effect with respect to outstanding awards made pursuant to this plan. Future awards will be made pursuant to the 2004 LTIP.	
 
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iv.	ACE Limited 1999 Replacement Long Term Incentive Plan. A total of 4,770,555 shares were authorized to be issued pursuant to awards to be made as options, stock appreciation rights, stock units, performance shares, performance units, restricted stock, and restricted stock units. This plan only remains in effect with respect to outstanding awards made pursuant to this plan.	
v.	ACE Limited 1995 Outside Directors Plan . Shares were authorized to be issued in an amount determined by a formula described in footnote (2) below pursuant to awards made as options, restricted stock, and unrestricted stock. This plan only remains in effect with respect to outstanding awards made pursuant to this plan. Future awards will be made pursuant to the 2004 LTIP.	
vi.	Employee Stock Purchase Plan . A total of 3,000,000 shares are authorized for purchase at a discount. As of December 31, 2007, 1,193,187 shares remain available for future issuance under this plan.	
 
(2) This plan category includes shares issuable pursuant to the following plans that authorize shares based on a formula:
i.	ACE Limited 1995 Long-Term Incentive Plan . The total number of shares available for awards under this plan in any fiscal year was five percent of the adjusted average of the outstanding Ordinary Shares of the Company, as that number is determined by the Company, to calculate fully diluted earnings per share for the preceding fiscal year, reduced by any shares of stock granted pursuant to awards under this plan and any shares of stock subject to any outstanding award under this plan. This plan only remains in effect with respect to outstanding awards made pursuant to this plan. Future awards will be made pursuant to the 2004 LTIP.	
ii.	ACE Limited 1995 Outside Directors Plan . The total number of shares available for awards under this plan in any fiscal year was 0.5 percent of the adjusted average of the outstanding Ordinary Shares of the Company, as that number was determined by the Company, to calculate fully diluted earnings per share for the preceding fiscal year, reduced by any shares of stock granted pursuant to awards under the Plan and any shares of stock subject to any outstanding award under the plan. This plan only remains in effect with respect to outstanding awards made pursuant to this plan. Future awards will be made pursuant to the 2004 LTIP.	
 
(3) This plan category consists of the following plan:
ACE Limited 1999 Replacement Stock Plan. This plan authorized awards to persons employed by the Company in conjunction with the Company’s acquisition of Capital Re Corporation as replacement for Capital Re Corporation awards. A total of 31,158 options with a weighted average exercise price of $16.19 are outstanding as replacement awards under this plan. This plan also permitted awards to employees or other persons providing services to the Company or its subsidiaries. A total of 25,000 options with a weighted average exercise price of $36.30 are outstanding as new awards made to employees of the Company or its subsidiaries under this plan. This plan only remains in effect with respect to outstanding awards made pursuant to this plan.
 
Additional information is incorporated by reference to the section entitled “Information About our Ordinary Share Ownership” of the definitive proxy statement for the 2008 Annual General Meeting of Shareholders which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.
 
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 ITEM 13.	Certain Relationships and Related Transactions and Director Independence	
 
This item is incorporated by reference to the sections entitled “Corporate Governance – What Is Our Related Party Transactions Approval Policy and What Procedures Do We Use to Implement It?”, “Corporate Governance – What Related Person Transactions Do We Have?”, and “Corporate Governance – Director Independence” of the definitive proxy statement for the 2008 Annual General Meeting of Shareholders which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.

 ITEM 14.	Principal Accounting Fees and Services	
 
This item is incorporated by reference to the section entitled “Ratification of Appointment of Independent Registered Public Accounting Firm – Independent Auditor Fee Information” and “Ratification of Appointment of Independent Registered Public Accounting Firm – Pre-Approval Policy of Audit and Non-Audit Services” of the definitive proxy statement for the 2008 Annual General Meeting of Shareholders which will be filed with the SEC not later than 120 days after the close of the fiscal year pursuant to regulation 14A.
 
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 PART IV

 ITEM 15.	Exhibits, Financial Statement Schedules	
 
(a) Financial Statements, Schedules, and Exhibits

1.	 	Consolidated Financial Statements	  	Page	
			
–	 	Management’s Responsibility for Financial Statements and Internal Control over Financial Reporting	  	F-3	
–	 	Report of Independent Registered Public Accounting Firm	  	F-4	
–	 	Consolidated Balance Sheets at December 31, 2007 and 2006	  	F-5	
–	 	Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 2007, 2006, and 2005	  	F-6	
–	 	Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2007, 2006 and 2005	  	F-7	
–	 	Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005	  	F-9	
–	 	Notes to Consolidated Financial Statements	  	F-10	
			
2.	 	Financial Statement Schedules	  	 	
			
–	 	Schedule I – Summary of Investments – Other Than Investments in Related Parties	  	F-69	
–	 	Schedule II – Condensed Financial Information of Registrant (Parent Company Only)	  	F-70	
–	 	Schedule IV – Supplemental Information Concerning Reinsurance	  	F-73	
–	 	Schedule VI – Supplementary Information Concerning Property and Casualty Operations	  	F-74	
	
Other schedules have been omitted as they are not applicable to ACE, or the required information has been included in the Consolidated Financial Statements and related notes.	
 
3. Exhibits

 	  	 	  	Incorporated by Reference	  	 	
Exhibit
Number	  	Exhibit Description	  	Form	  	Original
Number	  	Date Filed	  	SEC File
Reference
Number	  	Filed
Herewith	
							
3.1	  	Memorandum of Association of the Company	  	10-K	  	3.1	  	December 18, 1998	  	001-11778	  	 	
							
3.2	  	Articles of Association of the Company	  	10-K	  	3.2	  	December 18, 1998	  	001-11778	  	 	
							
3.3	  	Special Resolutions adopted January 22, 2002 increasing the number of authorized Ordinary Shares and Other Shares	  	10-K	  	3.3	  	March 18, 2002	  	001-11778	  	 	
							
3.4	  	Resolutions of a committee of the Board of Directors of ACE Limited establishing the terms of the 7.80 percent Cumulative Redeemable Preferred Shares, Series C, of ACE Limited	  	8-K	  	4.1	  	May 30, 2003	  	011-11778	  	 	
							
4.1	  	Memorandum of Association of the Company	  	10-K	  	3.1	  	December 18, 1998	  	001-11778	  	 	
							
4.2	  	Articles of Association of the Company	  	10-K	  	3.2	  	December 18, 1998	  	001-11778	  	 	
							
4.3	  	Special Resolutions adopted January 22, 2002 increasing the number of authorized Ordinary Shares and Other Shares	  	10-K	  	3.3	  	March 18, 2002	  	001-11778	  	 	
							
4.4	  	Resolutions of a committee of the Board of Directors of ACE Limited establishing the terms of the 7.80 percent Cumulative Redeemable Preferred Shares, Series C, of ACE Limited	  	8-K	  	4.1	  	May 30, 2003	  	001-11778	  	 	
 
87

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 	  	 	  	Incorporated by Reference	  	 	
Exhibit
Number	  	Exhibit Description	  	Form	  	Original
Number	  	Date Filed	  	SEC File
Reference
Number	  	Filed
Herewith	
4.5	  	Specimen certificate representing Ordinary Shares	  	10-K	  	4.3	  	March 18, 2002	  	001-11778	  	 	
							
4.6	  	Amended and Restated Rights Agreement between ACE Limited and Mellon Investor Services LLC, Rights Agent, dated December 20, 2001	  	10-K	  	10.59	  	March 18, 2002	  	001-11778	  	 	
							
4.7	  	Indenture, dated March 15, 2002, between ACE Limited and Bank One Trust Company, N.A.	  	8-K	  	4.1	  	March 22, 2002	  	001-11778	  	 	
							
4.8	  	Senior Indenture, dated August 1, 1999, among ACE INA Holdings, Inc., ACE Limited and Bank One, N.A. (formerly The First National Bank of Chicago), as trustee	  	S-1	  	4.5	  	August 12, 1999	  	333-78841	  	 	
							
4.9	  	Indenture, dated November 30, 1999, among ACE INA Holdings, Inc. and Bank One Trust Company, N.A., as trustee	  	10-K	  	10.38	  	March 29, 2000	  	001-11778	  	 	
							
4.10	  	Supplemental Indenture No. 1, dated December 6, 1999, among ACE INA Holdings, Inc. and Bank One Trust Company, N.A., as trustee	  	10-K	  	10.39	  	March 29, 2000	  	001-11778	  	 	
							
4.11	  	Supplemental Indenture No. 2 and waiver, dated February 16, 2000, among ACE INA Holdings, Inc. and Bank One Trust Company, N.A., as trustee	  	10-K	  	4.11	  	March 16, 2006	  	011-11778	  	 	
							
4.12	  	Supplemental Indenture No. 3, dated December 21, 2007, by and between ACE INA Holdings Inc., and The Bank of New York	  	 	  	 	  	 	  	 	  	X	
							
4.13	  	Indenture, dated December 1, 1999, among ACE INA Holdings, Inc., ACE Limited and Bank One Trust Company, National Association, as trustee	  	10-K	  	10.41	  	March 29, 2000	  	001-11778	  	 	
							
4.14	  	Indenture, dated October 27, 1998, between ACE US Holdings, Inc. and The Bank of New York, as successor trustee	  	10-K	  	10.37	  	December 18, 1998	  	011-11778	  	 	
							
4.15	  	Supplemental indenture and waiver, dated February 16, 2000, between ACE US Holdings, Inc. and The Bank of New York, as successor trustee	  	10-K	  	4.14	  	March 16, 2006	  	011-11778	  	 	
							
4.16	  	Supplemental indenture No. 2, dated June 1, 2003, between ACE US Holdings, Inc. and The Bank of New York, as successor trustee	  	10-K	  	4.15	  	March 16, 2006	  	011-11778	  	 	
							
4.17	  	Supplemental indenture No. 3, dated September 1, 2004, between ACE US Holdings, Inc. and The Bank of New York, as successor trustee	  	10-K	  	4.16	  	March 16, 2006	  	011-11778	  	 	
 
88

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 	  	 	  	Incorporated by Reference	  	 	
Exhibit
Number	  	Exhibit Description	  	Form	  	Original
Number	  	Date Filed	  	SEC File
Reference
Number	  	Filed
Herewith	
4.18	  	Supplemental indenture No. 4, dated December 21, 2007, made by and between ACE US Holdings, Inc., and The Bank of New York	  	 	  	 	  	 	  	 	  	X	
							
4.19	  	Amended and Restated Trust Agreement, dated March 31, 2000, among ACE INA Holdings, Inc., Bank One Trust Company, National Association, as property trustee, Bank One Delaware Inc., as Delaware trustee and the administrative trustees named therein	  	10-K	  	4.17	  	March 16, 2006	  	011-11778	  	 	
							
4.20	  	Common Securities Guarantee Agreement, dated March 31, 2000	  	10-K	  	4.18	  	March 16, 2006	  	011-11778	  	 	
							
4.21	  	Capital Securities Guarantee Agreement, dated March 31, 2000	  	10-K	  	4.19	  	March 16, 2006	  	011-11778	  	 	
							
10.1	  	Amendment dated January 30, 2008, amending the Information Technology Services Agreement, dated June 29, 1999, among ACE INA Holdings Inc. and International Business Machines Corporation	  	 	  	 	  	 	  	 	  	X	
							
10.2*	  	Second Amended and Restated Indemnification Agreement in the form executed between the Company and directors and/or officers	  	10-Q	  	10.1	  	August 7, 2007	  	011-11778	  	 	
							
10.3	  	Amendment and waiver to the Stock Purchase Agreement dated January 26, 2006, among Century Indemnity Company, ACE INA International Holdings, Ltd. and Randall & Quilter Investment Holdings Limited	  	10-K	  	10.5	  	March 16, 2006	  	001-11778	  	 	
							
10.4	  	Stock Purchase Agreement dated December 14, 2007, between ACE Limited and Aon Corporation	  	 	  	 	  	 	  	 	  	X	
							
10.5	  	Assurance of Discontinuance and Voluntary Compliance with the Office of the New York Attorney General, the Office of the Attorney General of the State of Illinois and the Attorney General of the State of Connecticut	  	8-K	  	10.1	  	April 28, 2006	  	001-11778	  	 	
							
10.6	  	Stipulation with the New York State Department of Insurance	  	8-K	  	10.2	  	April 28, 2006	  	001-11778	  	 	
							
10.7	  	Settlement Agreement dated May 9, 2007, between ACE Group Holdings, Inc., and certain of its subsidiaries, and the Pennsylvania Insurance Department and the Pennsylvania Office of the Attorney General.	  	8-K	  	10.1	  	May 14, 2007	  	001-11778	  	 	
							
10.8	  	Consulting Services Agreement by and between GTS Consulting, LLC and ACE American Insurance Company	  	10-Q	  	10.1	  	November 8, 2006	  	001-11778	  	 	
 
89

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 	  	 	  	Incorporated by Reference	  	 	
Exhibit
Number	  	Exhibit Description	  	Form	  	Original
Number	  	Date Filed	  	SEC File
Reference
Number	  	Filed
Herewith	
10.9	  	Amendment to the Consulting Services Agreement by and between GTS Consulting LLC and ACE American Insurance Company	  	10-Q	  	10.1	  	November 7, 2007	  	001-11778	  	 	
							
10.10	  	Seventh Amendment and Restatement Agreement dated November 17, 2006, relating to a letter of credit facility originally dated November 19, 1999, among ACE Limited, ACE Bermuda Insurance Ltd., ACE Tempest Reinsurance Ltd., Citigroup Global Markets Limited, and Barclays Capital as lead arrangers and ING Bank, as co-arranger, and Citibank International plc, as agent and security trustee and certain financial institutions	  	10-K	  	10.9	  	March 1, 2007	  	001-11778	  	 	
							
10.11	  	First amendment dated June 22, 2007, amending the Credit Agreement dated December 13, 2005, among ACE Australia Holdings PTY Limited, ACE Limited, various financial institutions and The Royal Bank of Scotland plc as agent	  	10-Q	  	10.2	  	August 7, 2007	  	001-11778	  	 	
							
10.12	  	Amendment and Restatement Agreement dated December 14, 2007, relating to the Credit Agreement originally dated December 13, 2005, and amended June 22, 2007, among ACE Australia Holdings PTY Limited, ACE Limited, and The Royal Bank of Scotland plc and HSBC Securities (USA) Inc. as lead arrangers and certain other financial institutions	  	 	  	 	  	 	  	 	  	X	
							
10.13	  	Amended and Restated Credit Agreement, dated December 14, 2007, amending the Credit Agreement originally dated December 13, 2005, and amended June 22, 2007, among ACE Australia Holdings PTY Limited, ACE Limited, and The Royal Bank of Scotland plc and HSBC Securities (USA) Inc. as lead arrangers and certain other financial institutions	  	 	  	 	  	 	  	 	  	X	
							
10.14	  	Credit Agreement for £100,000,000 dated December 13, 2005, among ACE European Holdings NO.2 Limited, ACE Limited, and The Royal Bank of Scotland plc and HSBC Securities (USA) Inc. as lead arrangers and certain other financial institutions	  	10-K	  	10.8	  	March 16, 2006	  	001-11778	  	 	
							
10.15	  	First amendment dated June 22, 2007, amending the Credit Agreement dated December 13, 2005, among ACE European Holdings NO.2 Limited, ACE Limited, ACE Limited, various financial institutions and The Royal Bank of Scotland plc as agent	  	10-Q	  	10.5	  	August 7, 2007	  	001-11778	  	 	
 
90

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 	 	  	 	  	Incorporated by Reference	  	 	
Exhibit
Number	 	  	Exhibit Description	  	Form	  	Original
Number	  	Date Filed	  	SEC File
Reference
Number	  	Filed
Herewith	
10.16	 	  	Amended and Restated Credit Agreement for $600,000,000 dated December 15, 2005, among ACE Limited, certain subsidiaries, various lenders and J.P. Morgan Securities and Barclays Capital as joint lead arrangers and joint bookrunners	  	10-K	  	10.9	  	March 16, 2006	  	001-11778	  	 	
							
10.17	 	  	First amendment dated June 22, 2007, amending the Amended and Restated Credit Agreement dated December 15, 2005, among ACE Limited, certain subsidiaries thereof, various lenders and JPMorgan Chase Bank, N.A., as Administrative Agent	  	10-Q	  	10.6	  	August 7, 2007	  	001-11778	  	 	
							
10.18	 	  	Second Amended and Restated Reimbursement Agreement for $1,000,000,000 Unsecured Letter of Credit Facility, dated as of November 8, 2007, among ACE Limited, certain subsidiaries, various lenders and Wachovia Capital Markets, LLC and Banc of America Securities LLC as joint lead arrangers and joint bookrunners	  	8-K	  	10.1	  	November 14, 2007	  	001-11778	  	 	
							
10.19	 	  	First amendment dated June 22, 2007, amending the unsecured Amended and Restated Reimbursement Agreement dated July 1, 2005, among ACE Limited, certain subsidiaries thereof, various lenders and Wachovia Bank, National Association, as administrative agent	  	10-Q	  	10.3	  	August 7, 2007	  	001-11778	  	 	
							
10.20	 	  	Second Amended and Restated Credit Agreement for $500,000,000 dated as of November 8, 2007, among ACE Limited, certain subsidiaries, various lenders and J.P. Morgan Securities Inc. and Barclays Capital as joint lead arrangers and joint bookrunners	  	8-K	  	10.2	  	November 14, 2007	  	001-11778	  	 	
							
10.21	 	  	First amendment dated June 22, 2007, amending the secured Amended and Restated Reimbursement Agreement dated July 1, 2005, among ACE Limited, certain subsidiaries thereof, various lenders and Wachovia Bank, National Association, as administrative agent	  	10-Q	  	10.4	  	August 7, 2007	  	001-11778	  	 	
							
10.22	*	  	Letter agreement, dated May 17, 2006, setting forth Brian Duperreault’s compensation arrangements.	  	10-Q	  	10.3	  	August 7, 2006	  	001-11778	  	 	
							
10.23	*	  	Employment Terms dated October 29, 2001, between ACE Limited and Evan Greenberg	  	10-K	  	10.64	  	March 27, 2003	  	001-11778	  	 	
							
10.24	*	  	Employment Terms dated November 2, 2001, between ACE Limited and Philip V. Bancroft	  	10-K	  	10.65	  	March 27, 2003	  	001-11778	  	 	
 
91

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 	 	  	 	  	Incorporated by Reference	  	 	
Exhibit
Number	 	  	Exhibit Description	  	Form	  	Original
Number	  	Date Filed	  	SEC File
Reference
Number	  	Filed
Herewith	
10.25	*	  	Executive Severance Agreement between ACE Limited and Philip Bancroft, effective January 2, 2002	  	10-Q	  	10.1	  	May 10, 2004	  	001-11778	  	 	
							
10.26	*	  	Employee note from Brian Dowd, dated May 28, 2002	  	10-K	  	10.36	  	March 16, 2005	  	001-11778	  	 	
							
10.27	*	  	Employment Terms dated February 25, 2005, between ACE Limited and Robert Cusumano	  	10-K	  	10.21	  	March 1, 2007	  	001-11778	  	 	
							
10.28	*	  	Employment Terms dated April 7, 2003, between ACE Limited and Paul Medini	  	10-K	  	10.22	  	March 1, 2007	  	001-11778	  	 	
							
10.29	*	  	Employment Terms dated April 10, 2006, between ACE and John Keogh	  	 	  	 	  	 	  	 	  	X	
							
10.30	*	  	Executive Severance Agreement between ACE and John Keogh	  	 	  	 	  	 	  	 	  	X	
							
10.31	*	  	ACE Limited Executive Severance Plan as adopted effective March 29, 2006	  	10-Q	  	10.1	  	May 5, 2006	  	001-11778	  	 	
							
10.32	*	  	Description of Executive Officer cash compensation for 2007	  	 	  	 	  	 	  	 	  	X	
							
10.33	*	  	Director compensation under the ACE Limited 2004 Long-Term Incentive Plan	  	10-K	  	10.25	  	March 1, 2007	  	001-11778	  	 	
							
10.34	*	  	ACE Limited Annual Performance Incentive Plan	  	S-1	  	10.13	  	January 21, 1993	  	33-57206	  	 	
							
10.35	*	  	ACE Limited Elective Deferred Compensation Plan as amended and restated effective January 1, 2005	  	10-K	  	10.24	  	March 16, 2006	  	001-11778	  	 	
							
10.36	*	  	ACE USA Officer Deferred Compensation Plan (as amended through January 1, 2001)	  	10-K	  	10.25	  	March 16, 2006	  	001-11778	  	 	
							
10.37	*	  	ACE Limited Supplemental Retirement Plan (as amended and restated effective July 1, 2001)	  	10-Q	  	10.1	  	November 14, 2001	  	001-11778	  	 	
							
10.38	*	  	Amendments to the ACE Limited Supplemental Retirement Plan and the ACE Limited Elective Deferred Compensation Plan	  	 	  	 	  	 	  	 	  	X	
							
10.39	*	  	Amendment to the ACE Limited Supplemental Retirement Plan	  	 	  	 	  	 	  	 	  	X	
							
10.40	*	  	ACE USA Supplemental Employee Retirement Savings Plan (as amended through the Second Amendment)	  	10-K	  	10.30	  	March 1, 2007	  	001-11778	  	 	
							
10.41	*	  	ACE USA Supplemental Employee Retirement Savings Plan (as amended through the Third Amendment)	  	10-K	  	10.31	  	March 1, 2007	  	001-11778	  	 	
							
10.42	*	  	The ACE Limited 1995 Outside Directors Plan (as amended through the Seventh Amendment)	  	10-Q	  	10.1	  	August 14, 2003	  	001-11778	  	 	
 
92

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 	 	  	 	  	Incorporated by Reference	  	 	
Exhibit
Number	 	  	Exhibit Description	  	Form	  	Original
Number	  	Date Filed	  	SEC File
Reference
Number	  	Filed
Herewith	
10.43	*	  	ACE Limited 1995 Long-Term Incentive Plan (as amended through the Third Amendment)	  	10-K	  	10.33	  	March 1, 2007	  	001-11778	  	 	
							
10.44	*	  	ACE Limited 1998 Long-Term Incentive Plan (as amended through the Fourth Amendment)	  	10-K	  	10.34	  	March 1, 2007	  	001-11778	  	 	
							
10.45	*	  	ACE Limited 1999 Replacement Long-Term Incentive Plan	  	10-Q	  	10.1	  	November 15, 1999	  	001-11778	  	 	
							
10.46	*	  	ACE Limited Rules of the Approved U.K. Stock Option Program	  	10-Q	  	10.2	  	February 13, 1998	  	001-11778	  	 	
							
10.47	*	  	ACE Limited 2004 Long-Term Incentive Plan (as amended through the Second Amendment)	  	10-K	  	10.37	  	March 1, 2007	  	001-11778	  	 	
							
10.48	*	  	Form of Restricted Stock Award Terms under the ACE Limited 2004 Long-Term Incentive Plan	  	8-K	  	10.2	  	September 13, 2004	  	001-11778	  	 	
							
10.49	*	  	Revised Form of Restricted Stock Award Terms under the ACE Limited 2004 Long-Term Incentive Plan.	  	10-Q	  	10.3	  	November 8, 2006	  	001-11778	  	 	
							
10.50	*	  	Form of Restricted Stock Unit Award Terms under the ACE Limited 2004 Long-Term Incentive Plan	  	8-K	  	10.3	  	September 13, 2004	  	001-11778	  	 	
							
10.51	*	  	Revised Form of Restricted Stock Unit Award Terms under the ACE Limited 2004 Long-Term Incentive Plan.	  	10-Q	  	10.4	  	November 8, 2006	  	001-11778	  	 	
							
10.52	*	  	Form of Incentive Stock Option Terms under the ACE Limited 2004 Long-Term Incentive Plan	  	8-K	  	10.4	  	September 13, 2004	  	001-11778	  	 	
							
10.53	*	  	Form of Non-Qualified Stock Option Terms under the ACE Limited 2004 Long-Term Incentive Plan	  	8-K	  	10.5	  	September 13, 2004	  	001-11778	  	 	
							
10.54	*	  	Form of Performance Based Restricted Stock Award Terms under the ACE Limited 2004 Long-Term Incentive Plan, as updated through May 4, 2006	  	10-Q	  	10.3	  	May 5, 2006	  	001-11778	  	 	
							
10.55 	*	  	Revised Form of Performance Based Restricted Stock Award Terms under the ACE Limited 2004 Long-Term Incentive Plan	  	10-Q	  	10.2	  	November 8, 2006	  	001-11778	  	 	
							
10.56 	*	  	Form of Restricted Stock Unit Award Terms (for outside directors) under the ACE Limited 2004 Long-Term Incentive Plan	  	10-Q	  	10.2	  	November 7, 2007	  	001-11778	  	 	
							
12.1	 	  	Ratio of earnings to fixed charges and preferred share dividends calculation	  	 	  	 	  	 	  	 	  	X	
							
21.1	 	  	Subsidiaries of the Company	  	 	  	 	  	 	  	 	  	X	
							
23.1	 	  	Consent of PricewaterhouseCoopers LLP	  	 	  	 	  	 	  	 	  	X	
 
93

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 	  	 	  	Incorporated by Reference	  	 	
Exhibit
Number	  	Exhibit Description	  	Form	  	Original
Number	  	Date Filed	  	SEC File
Reference
Number	  	Filed
Herewith	
31.1	  	Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002	  	 	  	 	  	 	  	 	  	X	
							
31.2	  	Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002	  	 	  	 	  	 	  	 	  	X	
							
32.1	  	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002	  	 	  	 	  	 	  	 	  	X	
							
32.2	  	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002	  	 	  	 	  	 	  	 	  	X	
* Management Contract or Compensation Plan
 
94

Table of Contents

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

 	 	 	 	ACE Limited	
					
 	 	 	 	 	 	By:	 	/ S /    P HILIP V. B ANCROFT        	
 	 	 	 	 	 	 	 	Philip V. Bancroft
Chief Financial Officer	
February 28, 2008
 
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	  	Title	  	Date	
			
/ S /    E VAN G. G REENBERG        

Evan G. Greenberg	  	Chairman, President, Chief Executive Officer; Director	  	February 28, 2008	
			
/ S /    P HILIP V. B ANCROFT        

Philip V. Bancroft	  	Chief Financial Officer
(Principal Financial Officer)	  	February 28, 2008	
			
/ S /    P AUL B. M EDINI        

Paul B. Medini	  	Chief Accounting Officer
(Principal Accounting Officer)	  	February 28, 2008	
			
/ S /    M ICHAEL G. A TIEH        

Michael G. Atieh	  	Director	  	February 28, 2008	
			
/ S /    M ARY A. C IRILLO        

Mary A. Cirillo	  	Director	  	February 28, 2008	
			
/ S /    B RUCE L. C ROCKETT        

Bruce L. Crockett	  	Director	  	February 28, 2008	
			
/ S /    R OBERT M. H ERNANDEZ        

Robert M. Hernandez	  	Director	  	February 28, 2008	
			
/ S /    J OHN A. K ROL         

John A. Krol	  	Director	  	February 28, 2008	
			
/ S /    P ETER M ENIKOFF        

Peter Menikoff	  	Director	  	February 28, 2008	
			
/ S /    L EO F. M ULLIN        

Leo F. Mullin	  	Director	  	February 28, 2008	
			
/ S /    T HOMAS J. N EFF        

Thomas J. Neff	  	Director	  	February 28, 2008	
			
/ S /    R OBERT R IPP        

Robert Ripp	  	Director	  	February 28, 2008	
			
/ S /    D ERMOT F. S MURFIT        

Dermot F. Smurfit	  	Director	  	February 28, 2008	
			
/ S /    G ARY M. S TUART        

Gary M. Stuart	  	Director	  	February 28, 2008	
 
95

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ACE LIMITED AND SUBSIDIARIES
 
CONSOLIDATED FINANCIAL STATEMENTS
 
DECEMBER 31, 2007
 
F-1

Table of Contents
 ACE Limited
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 	  	Page	
Management’s Responsibility for Financial Statements and Internal Control over Financial Reporting	  	F-3	
Report of Independent Registered Public Accounting Firm	  	F-4	
		
Consolidated Financial Statements	  	 	
Consolidated Balance Sheets	  	F-5	
Consolidated Statements of Operations and Comprehensive Income	  	F-6	
Consolidated Statements of Shareholders’ Equity	  	F-7	
Consolidated Statements of Cash Flows	  	F-9	
Notes to Consolidated Financial Statements	  	 	
			
Note 1.	 	General	  	F-10	
Note 2.	 	Significant accounting policies	  	F-10	
Note 3.	 	Investments	  	F-19	
Note 4.	 	Reinsurance	  	F-24	
Note 5.	 	Goodwill	  	F-27	
Note 6.	 	Unpaid losses and loss expenses	  	F-27	
Note 7.	 	Taxation	  	F-35	
Note 8.	 	Debt	  	F-37	
Note 9.	 	Commitments, contingencies, and guarantees	  	F-39	
Note 10.	 	Preferred shares	  	F-47	
Note 11.	 	Shareholders’ equity	  	F-47	
Note 12.	 	Share-based compensation	  	F-48	
Note 13.	 	Pension plans	  	F-52	
Note 14.	 	Fair value of financial instruments	  	F-53	
Note 15.	 	Other (income) expense	  	F-54	
Note 16.	 	Segment information	  	F-55	
Note 17.	 	Earnings per share	  	F-58	
Note 18.	 	Related party transactions	  	F-58	
Note 19.	 	Statutory financial information	  	F-59	
Note 20.	 	Information provided in connection with outstanding debt of subsidiaries	  	F-60	
Note 21.	 	Condensed unaudited quarterly financial data	  	F-67	
Note 22.	 	Subsequent event	  	F-68	
		
Financial Statement Schedules	  	 	
Schedule I – Summary of Investments – Other Than Investments in Related Parties	  	F-69	
Schedule II – Condensed Financial Information of Registrant	  	F-70	
Schedule IV – Supplemental Information Concerning Reinsurance	  	F-73	
Schedule VI – Supplementary Information Concerning Property and Casualty Operations	  	F-74	
 
F-2

Table of Contents
 MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS AND INTERNAL CONTROL OVER FINANCIAL REPORTING

Financial Statements
The consolidated financial statements of ACE Limited were prepared by management, who are responsible for their reliability and objectivity. The statements have been prepared in conformity with accounting principles generally accepted in the United States of America and, as such, include amounts based on informed estimates and judgments of management. Financial information elsewhere in this annual report is consistent with that in the consolidated financial statements.
The Board of Directors, operating through its Audit Committee, which is composed entirely of directors who are not officers or employees of the Company, provides oversight of the financial reporting process and safeguarding of assets against unauthorized acquisition, use or disposition. The Audit Committee annually recommends the appointment of an independent registered public accounting firm and submits its recommendation to the Board of Directors for approval.
The Audit Committee meets with management, the independent registered public accountants and the internal auditor; approves the overall scope of audit work and related fee arrangements; and reviews audit reports and findings. In addition, the independent registered public accountants and the internal auditor meet separately with the Audit Committee, without management representatives present, to discuss the results of their audits; the adequacy of the Company’s internal control; the quality of its financial reporting; and the safeguarding of assets against unauthorized acquisition, use or disposition.
The consolidated financial statements have been audited by an independent registered public accounting firm, PricewaterhouseCoopers LLP, who were given unrestricted access to all financial records and related data, including minutes of all meetings of the Board of Directors and committees of the Board. The Company believes that all representations made to our independent registered public accountants during their audits were valid and appropriate.

Internal Control Over Financial Reporting
The management of ACE Limited (ACE) is responsible for establishing and maintaining adequate internal control over financial reporting. Pursuant to the rules and regulations of the Securities and Exchange Commission, internal control over financial reporting is a process designed by, or under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
As of December 31, 2007, management has evaluated the effectiveness of ACE’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control – Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, we have concluded that ACE’s internal control over financial reporting was effective as of December 31, 2007.
PricewaterhouseCoopers LLP, the independent registered public accounting firm that audited the consolidated financial statements of ACE included in this Annual Report, has issued a report on the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2007. The report, which expresses an unqualified opinion on the effectiveness of ACE’s internal control over financial reporting as of December 31, 2007, is included in this Item under “Report of Independent Registered Public Accounting Firm” and follows this statement.

/ S /    E VAN G. G REENBERG

Evan G. Greenberg
Chairman and Chief Executive Officer	 	 	 	/ S /    P HILIP V. B ANCROFT

Philip V. Bancroft
Chief Financial Officer	
 
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Table of Contents
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors and Shareholders of ACE Limited:
 
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income, shareholders’ equity, and cash flows present fairly, in all material respects, the financial position of ACE Limited and its subsidiaries (the “Company”) at December 31, 2007 and December 31, 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15 (2) present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Responsibility for Financial Statements and Internal Control Over Financial Reporting appearing under Item 15 (1). Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
 
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Philadelphia, Pennsylvania
February 28, 2008
 
F-4

Table of Contents
 CONSOLIDATED BALANCE SHEETS
ACE Limited and Subsidiaries

December 31, 2007 and 2006
(in millions of U.S. dollars, except share and per share data)	 	December 31
2007	 	 	 	 	December 31
2006	 	
Assets	 	 	 	 	 	 	 	 	 	 	
Investments	 	 	 	 	 	 	 	 	 	 	
Fixed maturities available for sale, at fair value (amortized cost – $32,994 and $28,389) (includes hybrid financial instruments of $282 and $277)	 	$	33,184	 	 	 	 	$	28,540	 	
Fixed maturities held to maturity, at amortized cost (fair value – $3,015 and $3,015)	 	 	2,987	 	 	 	 	 	3,047	 	
Equity securities, at fair value (cost – $1,618 and $1,372)	 	 	1,837	 	 	 	 	 	1,713	 	
Short-term investments, at fair value and amortized cost	 	 	2,631	 	 	 	 	 	2,456	 	
Other investments (cost – $880 and $661)	 	 	1,140	 	 	 	 	 	845	 	
Total investments	 	 	41,779	 	 	 	 	 	36,601	 	
Cash	 	 	510	 	 	 	 	 	565	 	
Securities lending collateral	 	 	2,109	 	 	 	 	 	2,171	 	
Accrued investment income	 	 	416	 	 	 	 	 	352	 	
Insurance and reinsurance balances receivable	 	 	3,540	 	 	 	 	 	3,580	 	
Reinsurance recoverable	 	 	14,362	 	 	 	 	 	14,580	 	
Deferred policy acquisition costs	 	 	1,121	 	 	 	 	 	1,077	 	
Prepaid reinsurance premiums	 	 	1,600	 	 	 	 	 	1,586	 	
Goodwill	 	 	2,731	 	 	 	 	 	2,731	 	
Deferred tax assets	 	 	1,087	 	 	 	 	 	1,165	 	
Investments in partially-owned insurance companies (cost – $686 and $727)	 	 	773	 	 	 	 	 	789	 	
Other assets	 	 	2,062	 	 	 	 	 	1,938	 	
Total assets	 	$	72,090	 	 	 	 	$	67,135	 	
Liabilities	 	 	 	 	 	 	 	 	 	 	
Unpaid losses and loss expenses	 	$	37,112	 	 	 	 	$	35,517	 	
Unearned premiums	 	 	6,227	 	 	 	 	 	6,437	 	
Future policy benefits for life and annuity contracts	 	 	545	 	 	 	 	 	518	 	
Insurance and reinsurance balances payable	 	 	2,843	 	 	 	 	 	2,449	 	
Deposit liabilities	 	 	351	 	 	 	 	 	335	 	
Securities lending payable	 	 	2,109	 	 	 	 	 	2,171	 	
Payable for securities purchased	 	 	1,798	 	 	 	 	 	1,286	 	
Accounts payable, accrued expenses, and other liabilities	 	 	1,825	 	 	 	 	 	1,541	 	
Income taxes payable	 	 	111	 	 	 	 	 	156	 	
Short-term debt	 	 	372	 	 	 	 	 	578	 	
Long-term debt	 	 	1,811	 	 	 	 	 	1,560	 	
Trust preferred securities	 	 	309	 	 	 	 	 	309	 	
Total liabilities	 	 	55,413	 	 	 	 	 	52,857	 	
Commitments and contingencies	 	 	 	 	 	 	 	 	 	 	
Shareholders’ equity	 	 	 	 	 	 	 	 	 	 	
Preferred Shares ($1.00 par value, 2,300,000 shares authorized, issued, and outstanding)	 	 	2	 	 	 	 	 	2	 	
Ordinary Shares ($0.04 par value, 500,000,000 shares authorized;
329,704,531 and 326,455,468 shares issued and outstanding)	 	 	14	 	 	 	 	 	14	 	
Additional paid-in capital	 	 	6,812	 	 	 	 	 	6,640	 	
Retained earnings	 	 	9,080	 	 	 	 	 	6,906	 	
Deferred compensation obligation	 	 	3	 	 	 	 	 	4	 	
Accumulated other comprehensive income	 	 	769	 	 	 	 	 	716	 	
Ordinary Shares issued to employee trust	 	 	(3	)	 	 	 	 	(4	)	
Total shareholders’ equity	 	 	16,677	 	 	 	 	 	14,278	 	
Total liabilities and shareholders’ equity	 	$	72,090	 	 	 	 	$	67,135	 	
See accompanying notes to consolidated financial statements
 
F-5

Table of Contents
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
ACE Limited and Subsidiaries

For the years ended December 31, 2007, 2006, and 2005
(in millions of U.S. dollars, except per share data)	 	2007	 	 	 	 	2006	 	 	 	 	2005	 	
Revenues	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross premiums written	 	$	17,740	 	 	 	 	$	17,401	 	 	 	 	$	16,811	 	
Reinsurance premiums ceded	 	 	(5,761	)	 	 	 	 	(5,371	)	 	 	 	 	(5,019	)	
Net premiums written	 	 	11,979	 	 	 	 	 	12,030	 	 	 	 	 	11,792	 	
Change in unearned premiums	 	 	318	 	 	 	 	 	(205	)	 	 	 	 	(44	)	
Net premiums earned	 	 	12,297	 	 	 	 	 	11,825	 	 	 	 	 	11,748	 	
Net investment income	 	 	1,918	 	 	 	 	 	1,601	 	 	 	 	 	1,264	 	
Net realized gains (losses)	 	 	(61	)	 	 	 	 	(98	)	 	 	 	 	76	 	
Total revenues	 	 	14,154	 	 	 	 	 	13,328	 	 	 	 	 	13,088	 	
Expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Losses and loss expenses	 	 	7,351	 	 	 	 	 	7,070	 	 	 	 	 	8,571	 	
Life and annuity benefits	 	 	168	 	 	 	 	 	123	 	 	 	 	 	143	 	
Policy acquisition costs	 	 	1,771	 	 	 	 	 	1,715	 	 	 	 	 	1,663	 	
Administrative expenses	 	 	1,455	 	 	 	 	 	1,456	 	 	 	 	 	1,261	 	
Interest expense	 	 	175	 	 	 	 	 	176	 	 	 	 	 	174	 	
Other (income) expense	 	 	81	 	 	 	 	 	(35	)	 	 	 	 	(25	)	
Total expenses	 	 	11,001	 	 	 	 	 	10,505	 	 	 	 	 	11,787	 	
Income before income tax and cumulative effect of a change in accounting principle	 	 	3,153	 	 	 	 	 	2,823	 	 	 	 	 	1,301	 	
Income tax expense	 	 	575	 	 	 	 	 	522	 	 	 	 	 	273	 	
Income before cumulative effect of a change in accounting principle	 	 	2,578	 	 	 	 	 	2,301	 	 	 	 	 	1,028	 	
Cumulative effect of a change in accounting principle	 	 	–	 	 	 	 	 	4	 	 	 	 	 	–	 	
Net income	 	$	2,578	 	 	 	 	$	2,305	 	 	 	 	$	1,028	 	
Other comprehensive income (loss)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Unrealized appreciation (depreciation) arising during the period	 	 	(3	)	 	 	 	 	289	 	 	 	 	 	(251	)	
Reclassification adjustment for net realized (gains) losses included in net income	 	 	27	 	 	 	 	 	64	 	 	 	 	 	(135	)	
 	 	 	24	 	 	 	 	 	353	 	 	 	 	 	(386	)	
Change in:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cumulative translation adjustment	 	 	105	 	 	 	 	 	135	 	 	 	 	 	(139	)	
Pension liability adjustment	 	 	(4	)	 	 	 	 	20	 	 	 	 	 	8	 	
Other comprehensive income (loss), before income tax	 	 	125	 	 	 	 	 	508	 	 	 	 	 	(517	)	
Income tax (expense) benefit related to other comprehensive income items	 	 	(60	)	 	 	 	 	(113	)	 	 	 	 	115	 	
Other comprehensive income (loss)	 	 	65	 	 	 	 	 	395	 	 	 	 	 	(402	)	
Comprehensive income	 	$	2,643	 	 	 	 	$	2,700	 	 	 	 	$	626	 	
Basic earnings per share before cumulative effect of a change in accounting principle	 	$	7.79	 	 	 	 	$	7.01	 	 	 	 	$	3.36	 	
Cumulative effect of a change in accounting principle	 	 	–	 	 	 	 	 	0.01	 	 	 	 	 	–	 	
Basic earnings per share	 	$	7.79	 	 	 	 	$	7.02	 	 	 	 	$	3.36	 	
Diluted earnings per share before cumulative effect of a change in accounting principle	 	$	7.66	 	 	 	 	$	6.90	 	 	 	 	$	3.31	 	
Cumulative effect of a change in accounting principle	 	 	–	 	 	 	 	 	0.01	 	 	 	 	 	–	 	
Diluted earnings per share	 	$	7.66	 	 	 	 	$	6.91	 	 	 	 	$	3.31	 	
See accompanying notes to consolidated financial statements
 
F-6

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

For the years ended December 31, 2007, 2006, and 2005
(in millions of U.S. dollars)	 	2007	 	 	 	 	2006	 	 	 	 	2005	 	
Preferred Shares	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance – beginning and end of year	 	$	2	 	 	 	 	$	2	 	 	 	 	$	2	 	
Ordinary Shares	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance – beginning of year	 	 	14	 	 	 	 	 	13	 	 	 	 	 	12	 	
Shares issued	 	 	–	 	 	 	 	 	1	 	 	 	 	 	1	 	
Balance – end of year	 	 	14	 	 	 	 	 	14	 	 	 	 	 	13	 	
Additional paid-in capital	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance – beginning of year	 	 	6,640	 	 	 	 	 	6,569	 	 	 	 	 	4,905	 	
Net shares (redeemed) issued under employee share- based compensation plans	 	 	(17	)	 	 	 	 	(14	)	 	 	 	 	52	 	
Exercise of stock options	 	 	65	 	 	 	 	 	67	 	 	 	 	 	140	 	
Share-based compensation expense	 	 	100	 	 	 	 	 	88	 	 	 	 	 	–	 	
Tax benefit on share-based compensation expense	 	 	24	 	 	 	 	 	4	 	 	 	 	 	–	 	
Reclassification of unearned stock grant compensation	 	 	–	 	 	 	 	 	(69	)	 	 	 	 	–	 	
Cumulative effect of a change in accounting principle	 	 	–	 	 	 	 	 	(5	)	 	 	 	 	–	 	
Issuance of new shares	 	 	–	 	 	 	 	 	–	 	 	 	 	 	1,465	 	
Other	 	 	–	 	 	 	 	 	–	 	 	 	 	 	7	 	
Balance – end of year	 	 	6,812	 	 	 	 	 	6,640	 	 	 	 	 	6,569	 	
Unearned stock grant compensation	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance – beginning of year	 	 	–	 	 	 	 	 	(69	)	 	 	 	 	(57	)	
Reclassification of unearned stock grant compensation	 	 	–	 	 	 	 	 	69	 	 	 	 	 	–	 	
Net issuance of restricted stock under employee share-based compensation plans	 	 	–	 	 	 	 	 	–	 	 	 	 	 	(68	)	
Amortization	 	 	–	 	 	 	 	 	–	 	 	 	 	 	56	 	
Balance – end of year	 	 	–	 	 	 	 	 	–	 	 	 	 	 	(69	)	
Retained earnings	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance – beginning of year	 	 	6,906	 	 	 	 	 	4,965	 	 	 	 	 	4,249	 	
Effect of adoption of FIN 48	 	 	(22	)	 	 	 	 	–	 	 	 	 	 	–	 	
Effect of adoption of FAS 155	 	 	12	 	 	 	 	 	–	 	 	 	 	 	–	 	
Balance – beginning of year, adjusted for effect of adoption of new accounting principles	 	 	6,896	 	 	 	 	 	4,965	 	 	 	 	 	4,249	 	
Net income	 	 	2,578	 	 	 	 	 	2,305	 	 	 	 	 	1,028	 	
Dividends declared on Ordinary Shares	 	 	(349	)	 	 	 	 	(319	)	 	 	 	 	(267	)	
Dividends declared on Preferred Shares	 	 	(45	)	 	 	 	 	(45	)	 	 	 	 	(45	)	
Balance – end of year	 	 	9,080	 	 	 	 	 	6,906	 	 	 	 	 	4,965	 	
Deferred compensation obligation	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance – beginning of year	 	 	4	 	 	 	 	 	6	 	 	 	 	 	12	 	
Decrease to obligation	 	 	(1	)	 	 	 	 	(2	)	 	 	 	 	(6	)	
Balance – end of year	 	$	3	 	 	 	 	$	4	 	 	 	 	$	6	 	
See accompanying notes to consolidated financial statements
 
F-7

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

For the years ended December 31, 2007, 2006, and 2005
(in millions of U.S. dollars)	 	2007	 	 	 	 	2006	 	 	 	 	2005	 	
Accumulated other comprehensive income	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net unrealized appreciation (depreciation) on investments	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance – beginning of year	 	$	607	 	 	 	 	$	317	 	 	 	 	$	634	 	
Effect of adoption of FAS 155	 	 	(12	)	 	 	 	 	–	 	 	 	 	 	–	 	
Balance – beginning of year, adjusted for effect of adoption of new accounting principle	 	 	595	 	 	 	 	 	317	 	 	 	 	 	634	 	
Change in year, net of income tax (expense) benefit of $(23), $(63), and $69	 	 	1	 	 	 	 	 	290	 	 	 	 	 	(317	)	
Balance – end of year	 	 	596	 	 	 	 	 	607	 	 	 	 	 	317	 	
Cumulative translation adjustment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance – beginning of year	 	 	165	 	 	 	 	 	73	 	 	 	 	 	164	 	
Change in year, net of income tax (expense) benefit of $(39), $(43), and $48	 	 	66	 	 	 	 	 	92	 	 	 	 	 	(91	)	
Balance – end of year	 	 	231	 	 	 	 	 	165	 	 	 	 	 	73	 	
Pension liability adjustment	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance – beginning of year	 	 	(56	)	 	 	 	 	(58	)	 	 	 	 	(64	)	
Change in year, net of income tax benefit (expense) of $2, $(7), and $(2)	 	 	(2	)	 	 	 	 	13	 	 	 	 	 	6	 	
Minimum pension liability due to adoption of FAS 158, net of income tax (expense) benefit of $(25) in 2006	 	 	–	 	 	 	 	 	45	 	 	 	 	 	–	 	
Pension liability adjustment due to adoption of FAS 158, net of income tax (expense) benefit of $30 in 2006	 	 	–	 	 	 	 	 	(56	)	 	 	 	 	–	 	
Balance – end of year	 	 	(58	)	 	 	 	 	(56	)	 	 	 	 	(58	)	
Accumulated other comprehensive income	 	 	769	 	 	 	 	 	716	 	 	 	 	 	332	 	
Ordinary Shares issued to employee trust	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance – beginning of year	 	 	(4	)	 	 	 	 	(6	)	 	 	 	 	(12	)	
Decrease in Ordinary Shares	 	 	1	 	 	 	 	 	2	 	 	 	 	 	6	 	
Balance – end of year	 	 	(3	)	 	 	 	 	(4	)	 	 	 	 	(6	)	
Total shareholders’ equity	 	$	16,677	 	 	 	 	$	14,278	 	 	 	 	$	11,812	 	
See accompanying notes to consolidated financial statements
 
F-8

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

For the years ended December 31, 2007, 2006, and 2005
(in millions of U.S. dollars)	 	2007	 	 	 	 	2006	 	 	 	 	2005	 	
Cash flows from operating activities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	2,578	 	 	 	 	$	2,305	 	 	 	 	$	1,028	 	
Adjustments to reconcile net income to net cash flows from operating activities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net realized (gains) losses	 	 	61	 	 	 	 	 	98	 	 	 	 	 	(76	)	
Amortization of premium/discount on fixed maturities	 	 	(6	)	 	 	 	 	10	 	 	 	 	 	90	 	
Deferred income taxes	 	 	25	 	 	 	 	 	57	 	 	 	 	 	(15	)	
Unpaid losses and loss expenses	 	 	1,194	 	 	 	 	 	700	 	 	 	 	 	4,589	 	
Unearned premiums	 	 	(356	)	 	 	 	 	343	 	 	 	 	 	79	 	
Future policy benefits for life and annuity contracts	 	 	27	 	 	 	 	 	(3	)	 	 	 	 	12	 	
Insurance and reinsurance balances payable	 	 	298	 	 	 	 	 	41	 	 	 	 	 	103	 	
Accounts payable, accrued expenses, and other liabilities	 	 	242	 	 	 	 	 	66	 	 	 	 	 	19	 	
Income taxes payable	 	 	(72	)	 	 	 	 	(18	)	 	 	 	 	(46	)	
Insurance and reinsurance balances receivable	 	 	155	 	 	 	 	 	(226	)	 	 	 	 	(227	)	
Reinsurance recoverable	 	 	343	 	 	 	 	 	766	 	 	 	 	 	(1,367	)	
Deferred policy acquisition costs	 	 	(10	)	 	 	 	 	(114	)	 	 	 	 	(7	)	
Prepaid reinsurance premiums	 	 	35	 	 	 	 	 	(137	)	 	 	 	 	(46	)	
Other	 	 	187	 	 	 	 	 	217	 	 	 	 	 	172	 	
Net cash flows from operating activities	 	 	4,701	 	 	 	 	 	4,105	 	 	 	 	 	4,308	 	
Cash flows used for investing activities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Purchases of fixed maturities available for sale	 	 	(48,118	)	 	 	 	 	(41,195	)	 	 	 	 	(32,309	)	
Purchases of fixed maturities held to maturity	 	 	(324	)	 	 	 	 	(533	)	 	 	 	 	–	 	
Purchases of equity securities	 	 	(929	)	 	 	 	 	(841	)	 	 	 	 	(654	)	
Sales of fixed maturities available for sale	 	 	40,816	 	 	 	 	 	33,939	 	 	 	 	 	24,441	 	
Sales of equity securities	 	 	863	 	 	 	 	 	927	 	 	 	 	 	492	 	
Maturities and redemptions of fixed maturities available for sale	 	 	3,232	 	 	 	 	 	3,409	 	 	 	 	 	2,390	 	
Maturities and redemptions of fixed maturities held to maturity	 	 	365	 	 	 	 	 	543	 	 	 	 	 	174	 	
Net (payments made on) proceeds from the settlement of investment derivatives	 	 	(16	)	 	 	 	 	(40	)	 	 	 	 	12	 	
Sale of subsidiary (net of cash sold of $2 in 2006)	 	 	–	 	 	 	 	 	(2	)	 	 	 	 	7	 	
Other	 	 	(419	)	 	 	 	 	23	 	 	 	 	 	(146	)	
Net cash flows used for investing activities	 	 	(4,530	)	 	 	 	 	(3,770	)	 	 	 	 	(5,593	)	
Cash flows (used for) from financing activities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends paid on Ordinary Shares	 	 	(341	)	 	 	 	 	(312	)	 	 	 	 	(253	)	
Dividends paid on Preferred Shares	 	 	(45	)	 	 	 	 	(45	)	 	 	 	 	(45	)	
Net (repayment of) proceeds from short-term debt	 	 	(465	)	 	 	 	 	(300	)	 	 	 	 	(146	)	
Net proceeds from issuance of long-term debt	 	 	500	 	 	 	 	 	298	 	 	 	 	 	262	 	
Proceeds from exercise of options for Ordinary Shares	 	 	65	 	 	 	 	 	67	 	 	 	 	 	140	 	
Proceeds from Ordinary Shares issued under ESPP	 	 	9	 	 	 	 	 	8	 	 	 	 	 	8	 	
Tax benefit on share-based compensation expense	 	 	24	 	 	 	 	 	–	 	 	 	 	 	–	 	
Repayment of trust preferred securities	 	 	–	 	 	 	 	 	–	 	 	 	 	 	(103	)	
Net proceeds from issuance of Ordinary Shares	 	 	–	 	 	 	 	 	–	 	 	 	 	 	1,465	 	
Net cash flows (used for) from financing activities	 	 	(253	)	 	 	 	 	(284	)	 	 	 	 	1,328	 	
Effect of foreign currency rate changes on cash and cash equivalents	 	 	27	 	 	 	 	 	2	 	 	 	 	 	(29	)	
Net (decrease) increase in cash	 	 	(55	)	 	 	 	 	53	 	 	 	 	 	14	 	
Cash – beginning of year	 	 	565	 	 	 	 	 	512	 	 	 	 	 	498	 	
Cash – end of year	 	$	510	 	 	 	 	$	565	 	 	 	 	$	512	 	
Supplemental cash flow information	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Taxes paid	 	$	561	 	 	 	 	$	477	 	 	 	 	$	338	 	
Interest paid	 	$	177	 	 	 	 	$	186	 	 	 	 	$	167	 	
See accompanying notes to consolidated financial statements
 
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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACE Limited and Subsidiaries
 
1.  General
 
ACE Limited (ACE or the Company) is a holding company incorporated with limited liability under the Cayman Islands Companies Law and maintains its corporate 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 the following business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life Insurance and Reinsurance. These segments are described in Note 16.
On December 14, 2007, the Company entered into a stock purchase agreement with Aon Corporation, pursuant to which ACE has agreed to purchase all the outstanding shares of capital stock of Combined Insurance Company of America (Combined) and fourteen Combined subsidiaries for $2.4 billion in cash. Combined is a leading underwriter and distributor of specialty individual accident and supplemental health insurance products that are targeted to middle income consumers in the U.S., Europe, Canada, and Asia Pacific. The acquisition, which is subject to regulatory approvals and customary closing conditions, is expected to be completed during the second quarter of 2008. The purchase price for the transaction is subject to certain post-closing adjustments and ACE expects to finance the transaction by a combination of available cash and new private and public long-term debt. Refer to Note 22.
 
2.  Significant accounting policies
 
a) Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain items in the prior year financial statements have been reclassified to conform to the current year presentation.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Company’s principal estimates include:
• unpaid losses and loss expense reserves, including asbestos and environmental (A&E) reserves;
• reinsurance recoverable, including a provision for uncollectible reinsurance;
• impairments to the carrying value of the investment portfolio;
• the valuation of deferred tax assets;
• the valuation of derivative instruments related to guaranteed minimum income benefits (GMIB);
• the valuation of goodwill; and
• the assessment of risk transfer for certain structured insurance and reinsurance contracts.
While the amounts included in the consolidated financial statements reflect the Company’s best estimates and assumptions, these amounts could ultimately be materially different from the amounts currently recorded in the consolidated financial statements.
 
b) Premiums
Premiums are generally recognized as written upon inception of the policy. For multi-year policies for which premiums written are payable in annual installments, only the annual premium is included as written at policy inception due to the ability of the insured/reinsured to commute or cancel coverage within the term of the policy. The remaining annual premiums are included as written at each successive anniversary date within the multi-year term.
For property and casualty (P&C) insurance and reinsurance products, premiums written are primarily earned on a pro-rata basis over the terms of the policies to which they relate. Unearned premiums represent the portion of premiums written applicable to the unexpired portion of the policies in force. For retrospectively-rated policies, written premiums are adjusted to reflect expected ultimate premiums consistent with changes to reported losses, or other measures of exposure as stated in the policy, and earned over the coverage period of the policy. For retrospectively-rated multi-year policies, the amount of premiums recognized in the current period is computed, using a with-and-without method, as the difference between the ceding enterprise’s total contract costs before and after the experience under the contract as of the reporting date. Accordingly, for retrospectively-rated multi-year policies, additional premiums are generally written and earned when losses are incurred. Mandatory reinstatement premiums assessed on reinsurance policies are written and earned in the same period as the loss event that gives rise to the reinstatement premiums.
 
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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
Reinsurance premiums from traditional life and annuity policies with life contingencies are generally recognized as revenue when due from policyholders. Traditional life policies include those contracts with fixed and guaranteed premiums and benefits. Benefits and expenses are matched with such income to result in the recognition of profit over the life of the contracts.
The Company underwrites retroactive loss portfolio transfer (LPT) contracts in which insured loss events have occurred prior to the inception of the contract. These contracts are evaluated to determine whether they meet the established criteria for reinsurance accounting and, if so, at inception, written premiums are fully earned and corresponding losses and loss expenses recognized. The contracts can cause significant variances in gross premiums written, net premiums written, net premiums earned, and net incurred losses in the years in which they are written. Reinsurance contracts sold not meeting the established criteria for reinsurance accounting are recorded using the deposit method.
Reinsurance premiums assumed are based on information provided by ceding companies supplemented by the Company’s own estimates of premium for which ceding company reports have not yet been received. The information used in establishing these estimates is reviewed and subsequent adjustments are recorded in the period in which they are determined. These premiums are earned over the coverage terms of the related reinsurance contracts and can range from one to three years.
 
c) Policy acquisition costs
Policy acquisition costs consist of commissions, premium taxes, and underwriting and other costs that vary with, and are primarily related to, the production of premium. Acquisition costs are deferred and amortized over the period in which the related premiums are earned. Deferred policy acquisition costs are reviewed to determine if they are recoverable from future income, including investment income. If such costs are determined to be unrecoverable, they are expensed in the period this determination is made.
Advertising costs are expensed as incurred except for direct-response campaigns, principally related to personal accident (A&H) business produced by the Insurance – Overseas General segment, which are deferred and recognized over the expected future benefit period in accordance with Statement of Position 93-7, Reporting on Advertising Costs. For individual direct-response marketing campaigns that the Company can demonstrate have specifically resulted in incremental sales to customers and such sales have probable future economic benefits, incremental costs directly related to the marketing campaigns are capitalized. Deferred marketing costs are reviewed regularly for recoverability and amortized over the expected economic future benefit period. The expected future benefit period is evaluated periodically based on historical results and adjusted prospectively. The amount of deferred marketing costs reported in deferred policy acquisition costs was $282 million and $216 million at December 31, 2007 and 2006, respectively. The amortization expense for deferred marketing costs was $91 million, $52 million, and $66 million for the years ended December 31, 2007, 2006, and 2005, respectively.
 
d) Reinsurance
In the ordinary course of business, the Company’s insurance subsidiaries assume and cede reinsurance with other insurance companies. These agreements provide greater diversification of business and minimize the net loss potential arising from large risks. Ceded reinsurance contracts do not relieve the Company of its primary obligation to its policyholders.
For both ceded and assumed reinsurance, risk transfer requirements must be met in order to obtain reinsurance status for accounting purposes, principally resulting in the recognition of cash flows under the contract as premiums and losses. To meet risk transfer requirements, a reinsurance contract must include insurance risk, consisting of both underwriting and timing risk, and a reasonable possibility of a significant loss for the assuming entity. To assess risk transfer for certain contracts, the Company generally develops expected discounted cash flow analyses at contract inception. If risk transfer requirements are not met, a contract is accounted for using the deposit method. Deposit accounting requires that consideration received or paid be recorded in the balance sheet as opposed to premiums written or losses incurred in the statement of operations and any non-refundable fees earned based on the terms of the contract. Refer to Note 2 k).
Reinsurance recoverable includes the balances due from reinsurance companies for paid and unpaid losses and loss expenses that will be recovered from reinsurers, based on contracts in force, and is presented net of a provision for uncollectible reinsurance that has been determined based upon a review of the financial condition of the reinsurers and other factors. The method for determining the reinsurance recoverable on unpaid losses and loss expenses incurred but not reported (IBNR) involves actuarial estimates as well as a determination of the Company’s ability to cede unpaid losses and loss expenses under its existing reinsurance contracts. The provision for uncollectible reinsurance is based on an estimate of the amount of the reinsurance recoverable balance that the Company will ultimately be unable to recover due to reinsurer insolvency, a contractual dispute, or any other reason. The valuation of this provision includes several judgments including
 
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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
certain aspects of the allocation of reinsurance recoverable on IBNR claims by reinsurer and a default analysis to estimate uncollectible reinsurance. The primary components of the default analysis are reinsurance recoverable balances by reinsurer, net of collateral, and default factors used to determine the portion of a reinsurer’s balance deemed uncollectible. The definition of collateral for this purpose requires some judgment and is generally limited to assets held in an ACE-only beneficiary trust, letters of credit, and liabilities held by the Company with the same legal entity for which it believes there is a right of offset. The determination of the default factor is principally based on the financial strength rating of the reinsurer and a default factor applicable to the financial strength rating. Default factors require considerable judgment and are determined using the current financial strength rating, or rating equivalent, of each reinsurer as well as other key considerations and assumptions. The more significant considerations include, but are not necessarily limited to, the following:
•For reinsurers that maintain a financial strength rating from a major rating agency, and for which recoverable balances are considered representative of the larger population (i.e., default probabilities are consistent with similarly rated reinsurers and payment durations conform to averages), the financial rating is based on a published source and the default factor is based on published default statistics of a major rating agency applicable to the reinsurer’s particular rating class. When a recoverable is expected to be paid in a brief period of time by a highly rated reinsurer, such as certain property catastrophe claims, a default factor may not be applied;
•For balances recoverable from reinsurers that are both unrated by a major rating agency and for which management is unable to determine a credible rating equivalent based on a parent, affiliate, or peer company, the Company determines a rating equivalent based on an analysis of the reinsurer that considers an assessment of the creditworthiness of the particular entity, industry benchmarks, or other factors as considered appropriate. The Company then applies the applicable default factor for that rating class. For balances recoverable from unrated reinsurers for which the ceded reserve is below a certain threshold, the Company generally applies a default factor of 25 percent;
•For balances recoverable from reinsurers that are either insolvent or under regulatory supervision, the Company establishes a default factor and resulting provision for uncollectible reinsurance based on specific facts and circumstances surrounding each company. Upon initial notification of an insolvency, the Company generally recognizes expense for a substantial portion of all balances outstanding, net of collateral, through a combination of write-offs of recoverable balances and increases to the provision for uncollectible reinsurance. When regulatory action is taken on a reinsurer, the Company generally recognizes a default factor by estimating an expected recovery on all balances outstanding, net of collateral. When sufficient credible information becomes available, the Company adjusts the provision for uncollectible reinsurance by establishing a default factor pursuant to information received; and
•For other recoverables, management determines the provision for uncollectible reinsurance based on the specific facts and circumstances of that dispute.
The methods used to determine the reinsurance recoverable balance, and related provision for uncollectible reinsurance, are regularly reviewed and updated and any resulting adjustments are reflected in earnings in the period identified.
Prepaid reinsurance premiums represent the portion of premiums ceded to reinsurers applicable to the unexpired coverage terms of the reinsurance contracts in force.
The value of reinsurance business assumed of $137 million and $220 million at December 31, 2007 and 2006, respectively, included in Other assets in the accompanying consolidated balance sheets, represents the excess of estimated ultimate value of the liabilities assumed under retroactive reinsurance contracts over consideration received. The value of reinsurance business assumed is amortized and recorded to losses and loss expenses based on the payment pattern of the losses assumed. The unamortized value is reviewed regularly to determine if it is recoverable based upon the terms of the contract, estimated losses and loss expenses, and anticipated investment income. If such amounts are estimated to be unrecoverable, they are expensed in the period identified.
 
e) Investments
The Company’s fixed maturity investments are classified as either “available for sale” or “held to maturity”. The Company’s available for sale portfolio is reported at fair value, being the quoted market price of these securities provided by either independent pricing services or, when such prices are not available, by reference to broker or underwriter bid indications. The Company’s held to maturity portfolio includes securities for which the Company has the ability and intent to hold to maturity or redemption and is reported at amortized cost. Equity securities are classified as available for sale and are recorded at fair value based on quoted market prices. Short-term investments comprise securities due to mature within one year of the date of purchase. Short-term investments include certain cash and cash equivalents, which are part of investment portfolios under the management of external investment managers.
 
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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
Other investments is principally comprised of other direct equity investments, investment funds, limited partnerships, life insurance policies, and trading securities. Except for trading securities, other investments over which the Company cannot exercise significant influence are carried at fair value with changes in fair value recognized through accumulated other comprehensive income. For these investments, investment income and realized gains are recognized as related distributions are received. The fair value of investment funds is based on the net asset value as advised by the fund. Life insurance policies are carried at policy cash surrender value. Trading securities are recorded on a trade date basis and carried at fair value. Unrealized gains and losses on trading securities are reflected in Net investment income.
Investments in partially-owned insurance companies represent direct investments in which the Company has significant influence and, as such, meet the requirements for equity accounting. The Company reports its share of the net income or loss of the partially-owned insurance companies in Other (income) expense.
Realized gains or losses on sales of investments are determined on a first-in, first-out basis. Unrealized appreciation (depreciation) on investments is included as a separate component of accumulated other comprehensive income in shareholders’ equity. The Company regularly reviews its investments for possible impairment based on: i) certain indicators of an impairment, including the amount of time a security has been in a loss position, the magnitude of the loss position, and whether the security is rated below an investment grade level; ii) the period in which cost is expected to be recovered, if at all, based on various criteria including economic conditions, credit loss experience, and other issuer-specific developments; and iii) the Company’s ability and intent to hold the security to the expected recovery period. If there is a decline in a security’s net realizable value, a determination is made as to whether that decline is temporary or “other-than-temporary”. If it is believed that a decline in the value of a particular investment in the available for sale portfolio is temporary, the decline is recorded as an unrealized loss in shareholders’ equity. If it is believed that the decline is “other-than-temporary,” the Company writes down the book value of the investment and records a realized loss in the consolidated statement of operations. The new cost basis is then amortized up to the amount recoverable based on anticipated future cash flow through Net investment income.
The Company may sell invested assets subsequent to the balance sheet date which were considered either temporarily or “other-than-temporarily” impaired at the balance sheet date. Subsequent decisions on security sales could be made based on changes in liquidity needs (i.e., arising from a large insured loss such as a catastrophe), internal risk management considerations, the financial condition of the issuer or its industry, market conditions, and new investment opportunities. The dynamic nature of portfolio management may result in a subsequent decision to sell the security and realize the loss based upon new circumstances such as those related to the changes described above. The Company believes that subsequent decisions to sell such securities are consistent with the classification of the majority of the portfolio as available for sale.
The Company utilizes futures, options, swaps, and foreign currency forward contracts for the purpose of managing certain investment portfolio risk and exposures. Refer to Note 9 for additional discussion of the objectives and strategies employed. These instruments are derivatives and reported at fair value, generally using publicly quoted market prices, and recorded in the accompanying consolidated balance sheets in Accounts payable, accrued expenses, and other liabilities with changes in market value included in Net realized gains (losses) in the consolidated statements of operations. Collateral held by brokers equal to a percentage of the total value of open futures contracts is included in Short-term investments.
Net investment income includes interest and dividend income together with amortization of fixed maturity market premiums and discounts and is net of investment management and custody fees. For mortgage-backed securities, and any other holdings for which there is a prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any adjustments required due to the resultant change in effective yields and maturities are recognized prospectively. Prepayment fees or call premiums that are only payable to the Company when a security is called prior to its maturity are earned when received and reflected in Net investment income.
The Company engages in a securities lending program from which it generates net investment income from the lending of certain of its investments to other institutions for short periods of time. The market value of the loaned securities is monitored on a daily basis, with additional collateral obtained or refunded as the market value of the loaned securities changes. The Company’s policy is to require collateral consisting of fixed maturities and/or cash equal to 102 percent of the fair value of the loaned securities. The collateral is held by a third party custodian, and the Company has the right to access the collateral only in the event that the institution borrowing the Company’s securities is in default under the lending agreement. As a result of these restrictions, the Company considers its securities lending activities to be non-cash investing and financing activities. An indemnification agreement with the lending agent protects the Company in the event a borrower becomes insolvent or fails to return any of the securities on loan. The fair value of the securities on loan is included in fixed maturities and equity securities. The securities lending collateral is reported as a separate line in total assets with a corresponding liability related to the Company’s obligation to return the collateral plus interest.
 
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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
Similar to securities lending arrangements, securities sold under agreements to repurchase are accounted for as collateralized investments and borrowings and are recorded at the contractual repurchase amounts plus accrued interest. Assets to be repurchased are the same, or substantially the same, as the assets transferred and the transferor, through right of substitution, maintains the right and ability to redeem the collateral on short notice. The fair value of the underlying securities is included in fixed maturities and equity securities. In contrast to securities lending programs, the Company’s use of cash received is not restricted. The Company reports its obligation to return the cash as short-term debt.
 
f) Cash
Cash includes cash on hand and deposits with an original maturity of three months or less at time of purchase. Cash held by external money managers is included in Short-term investments.
 
g) Goodwill
Goodwill represents the excess of the cost of acquisitions over the fair value of net assets acquired and is not amortized. For purposes of annual impairment evaluation, goodwill is assigned to the applicable reporting unit of the acquired entities giving rise to the goodwill. Goodwill recorded in connection with investments in partially-owned insurance companies is recorded in Investments in partially-owned insurance companies and is also measured for impairment annually. Impairment tests are performed annually for each acquired entity giving rise to goodwill, or more frequently if circumstances indicate that a possible impairment has occurred. In the Company’s impairment tests, to estimate the fair value of a reporting unit, both an earnings model, that considers forecasted earnings and other financial ratios of the reporting unit as well as relevant financial data of comparable companies to the reporting unit such as the relationship of price to earnings for recent transactions and market valuations of publicly traded companies, and an analysis of the present value of estimated net cash flows are used.
 
h) Unpaid losses and loss expenses
A liability is established for the estimated unpaid losses and loss expenses of the Company under the terms of, and with respect to, its policies and agreements. These amounts include provision for both reported claims (case reserves) and IBNR claims. The methods of determining such estimates and establishing the resulting liability are reviewed regularly and any adjustments are reflected in operations in the period in which they become known. Future developments may result in losses and loss expenses materially greater or less than recorded amounts. Except for net loss and loss expenses reserves of $117 million, representing structured settlements for which the timing and amount of future claim payments are reliably determinable, the Company does not discount its P&C loss reserves.
Included in unpaid losses and loss expenses are liabilities for A&E claims and expenses. These unpaid losses and loss expenses are principally related to claims arising from remediation costs associated with hazardous waste sites and bodily-injury claims related to asbestos products and environmental hazards. The estimation of these liabilities is particularly sensitive to changes in the legal environment, including specific settlements that may be used as precedents to settle future claims. However, ACE does not anticipate future changes in laws and regulations in setting its A&E reserve levels.
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 premiums 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, unallocated loss adjustment expenses, 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; 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 arise from changes in estimates of earned premiums from prior accident years. Except for foreign currency revaluation, which is disclosed separately, these items are included in current year losses.
 
i) Future policy benefits for life and annuity contracts
The development of assumed life and annuity policy reserves requires management to make estimates and assumptions regarding mortality, morbidity, lapse, expense, and investment experience. Such estimates are primarily based on historical experience and information provided by ceding companies. Actual results could differ materially from these estimates. Management monitors actual experience, and where circumstances warrant, will revise its assumptions and the related reserve estimates. These revisions are recorded in the period they are determined.
 
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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
j) Assumed 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 (GMDB), 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). Pursuant to SOP 03-1, liabilities for the GMDBs are based on cumulative assessments or premiums to date multiplied by a benefit ratio that is determined by estimating the present value of benefit payments and related adjustment expenses divided by the present value of cumulative assessment or expected fees during the contract period. In the event the Company was to anticipate an ultimate loss on the business over the in-force period of the underlying annuities, an additional liability would be established to recognize such losses.
Under reinsurance programs covering living benefit guarantees, the Company assumes the risk of 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 Financial Accounting Standard (FAS) No. 133, Accounting for Derivative Instruments and Hedging Activities (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 realized loss for other changes in fair value during a given period due to adverse changes in the capital markets (i.e., declining interest rates and/or declining equity markets) even when the Company continues to expect the business to be profitable. Management believes this presentation provides the most meaningful disclosure of changes in the underlying risk within the GMIB reinsurance programs for a given reporting period. Refer to Note 4 c).
 
k) Deposit assets and liabilities
Deposit assets arise from ceded reinsurance contracts purchased by the Company that do not transfer significant underwriting or timing risk. Under deposit accounting, consideration received or paid, excluding non-refundable fees, is recorded as a deposit asset or liability in the balance sheet as opposed to ceded premiums and losses in the statement of operations. Interest income on deposits, representing the consideration received or to be received in excess of cash payments related to the deposit contract, is earned based on an effective yield calculation. The calculation of the effective yield is based on the amount and timing of actual cash flows as of the balance sheet date and the estimated amount and timing of future cash flows. The effective yield is recalculated periodically to reflect revised estimates of cash flows. When a change in the actual or estimated cash flows occurs, the resulting change to the carrying amount of the deposit asset is reported as income or expense. Deposit assets of $131 million and $160 million at December 31, 2007 and 2006, respectively, are reflected in Other assets in the balance sheets and the accretion of deposit assets related to interest pursuant to the effective yield calculation is reflected in Net investment income in the statement of operations.
Non-refundable fees are earned based on the terms of the contract considering facts and circumstances specific to each contract. Non-refundable fees paid but unearned are reflected in Other assets in the balance sheet and earned fees are reflected in Other (income) expense in the statement of operations.
Deposit liabilities include reinsurance deposit liabilities of $325 million and $311 million and contract holder deposit funds of $26 million and $24 million at December 31, 2007 and 2006, respectively. The reinsurance deposit liabilities arise from contracts sold by the Company for which there is not a significant transfer of risk. At contract inception, the deposit
 
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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
liability is equal to net cash received by the Company. An accretion rate is established based on actuarial estimates whereby the deposit liability is increased to the estimated amount payable over the term of the contract. The deposit accretion rate is the rate of return required to fund expected future payment obligations. The Company periodically reassesses the estimated ultimate liability and related expected rate of return. Any resulting changes to the amount of the deposit liability are reflected as an adjustment to earnings to reflect the cumulative effect of the period the contract has been in force, and by an adjustment to the future accretion rate of the liability over the remaining estimated contract term.
The contract holder deposit funds represent a liability for investment contracts sold that do not meet the definition of an insurance contract under FAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments . The investment contracts are sold with a guaranteed rate of return. The proceeds are then invested with the intent of realizing a greater return than is called for in the investment contracts.
 
l) Translation of foreign currencies
Financial statements of the Company’s foreign divisions are valued in foreign currencies, referred to as the functional currency. Under FAS No. 52, Foreign Currency Translation , functional currency assets and liabilities are translated into the reporting currency, U.S. dollars, using period end rates of exchange and the related translation adjustments are recorded as a separate component of accumulated other comprehensive income. Functional statement of operations amounts expressed in functional currencies are translated using average exchange rates. Gains and losses resulting from foreign currency transactions are recorded in Net realized gains (losses).
 
m) Income taxes
Income taxes have been provided for in accordance with the provisions of FAS No. 109, Accounting for Income Taxes (FAS 109), for those operations which are subject to income taxes. Refer to Note 7. Deferred tax assets and liabilities result from temporary differences between the amounts recorded in the consolidated financial statements and the tax basis of the Company’s assets and liabilities. Such temporary differences are primarily due to the tax basis discount on unpaid losses and loss expenses, unearned premiums reserves, foreign tax credits, deferred policy acquisition costs, net unrealized appreciation on investments, and un-remitted foreign earnings. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance against deferred tax assets is recorded if it is more likely than not that all, or some portion, of the benefits related to deferred tax assets will not be realized.
 
n) Earnings per share
Basic earnings per share is calculated using the weighted-average shares outstanding. All potentially dilutive securities including unvested restricted stock, stock options, warrants, and convertible securities are excluded from the basic earnings per share calculation. In calculating diluted earnings per share, the weighted-average shares outstanding is increased to include all potentially dilutive securities. The incremental shares from assumed conversions are not included in computing diluted loss per share amounts as these shares are considered anti-dilutive. Basic and diluted earnings per share are calculated by dividing net income available to ordinary shareholders by the applicable weighted-average number of shares outstanding during the year.
 
o) Cash flow information
Purchases and sales or maturities of short-term investments are recorded net for purposes of the statements of cash flows and are included with fixed maturities.
 
p) Derivatives
The Company recognizes all derivatives as either assets or liabilities in the consolidated balance sheets which are measured at the fair value of the instrument. The Company participates in derivative instruments in two principal ways as follows:
(i) To sell protection to customers as an insurance or reinsurance contract that meets the definition of a derivative under FAS 133. For 2007 and 2006, the reinsurance of GMIBs was the Company’s primary product falling into this category. Refer to Note 2 j) above for a description of this product and related accounting treatment; and
(ii) To mitigate financial risks, principally arising from investment holdings, products sold, or assets and liabilities held in foreign currencies. For these instruments, changes in assets or liabilities measured at fair value are recorded as realized gains or losses in the consolidated statement of operations.
The Company did not designate any derivatives as accounting hedges during 2007, 2006, or 2005.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
q) Share-based compensation
Effective January 1, 2006, the Company accounts for share-based compensation plans in accordance with FAS No. 123 (Revised), Share-Based Payment (FAS 123R). 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. Prior to the adoption of FAS 123R, the Company accounted for its share-based compensation plans in accordance with Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees (APB 25). In accordance with APB 25, the Company did not recognize compensation expense for employee stock options in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying Ordinary Shares on the date of the grant. In addition, the Company did not recognize expenses related to its employee stock purchase plan (ESPP). Upon adopting FAS 123R on January 1, 2006, the Company began recognizing expenses related to employee stock options and its ESPP. For additional details relating to share-based compensation and the cumulative effect of the change in accounting principle, refer to Note 12.
 
r) New accounting pronouncements
Adopted in 2007
Accounting for uncertainty in income taxes
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in tax positions by prescribing a financial statement recognition threshold and measurement attribute for uncertain tax positions taken or expected to be taken in a tax return. Further, FIN 48 expands the required disclosures associated with such uncertain tax positions. The Company adopted FIN 48 as of January 1, 2007, and the cumulative effect of adoption resulted in a reduction to retained earnings of $22 million. For additional information regarding the adoption of FIN 48, refer to Note 7.
 
Accounting for certain hybrid financial instruments
In February 2006, the FASB issued FAS No. 155, Accounting for Certain Hybrid Financial Instruments – an amendment of FASB Statements No. 133 and 140 (FAS 155). FAS 155 permits fair value re-measurement of an entire hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; establishes a requirement to evaluate interests in securitized financial assets for either freestanding derivatives or embedded derivatives requiring bifurcation; narrows the scope exemption applicable to interest-only strips and principal-only strips from FAS 133; and clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives. In December 2006, the FASB issued implementation guidance, Statement 133 Implementation Issue B40 Embedded Derivatives: Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets (DIG B40), which limits the circumstances in which prepayment risk within a securitized interest would be considered an embedded derivative. To facilitate transition, securitized interests issued before June 30, 2007, containing insignificant embedded derivatives are not subject to paragraph 13(b).
ACE adopted FAS 155, as amended for the FASB implementation guidance DIG B40, as of January 1, 2007. The adoption of FAS 155 did not have a material impact on the Company’s financial condition or results of operations. Upon adopting FAS 155 on January 1, 2007, the Company elected to apply the option provided in FAS 155 related to hybrid financial instruments to $277 million of convertible bond investments within ACE’s available for sale portfolio. Since the convertible bonds were previously carried at fair market value, the election did not have an effect on shareholders’ equity. However, the election resulted in a reduction of accumulated other comprehensive income and an increase in retained earnings of $12 million as of January 1, 2007. The $12 million of net unrealized gains is comprised of securities with unrealized gains of $14 million and unrealized losses of $2 million.
 
Accounting by insurance enterprises for deferred acquisition costs in connection with modifications or exchanges of insurance contracts
In September 2005, the Accounting Standards Executive Committee issued Statement of Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts (SOP 05-1). SOP 05-1 provides guidance on accounting by insurance enterprises for deferred acquisition costs on internal replacements of insurance and investment contracts. SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights, or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement, or rider to a contract, or by the election of a feature or coverage within a contract. SOP 05-1 is effective for internal replacements occurring in fiscal years beginning after December 15, 2006. The adoption of SOP 05-1 effective January 1, 2007, did not have a material impact on the Company’s financial condition or results of operations.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
To be adopted after 2007
Fair value measurements
In September 2006, the FASB issued FAS No. 157, Fair Value Measurements (FAS 157). FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. FAS 157 focuses on how to measure fair value and establishes a three-level hierarchy for both measurement and disclosure purposes. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. Under FAS 157, fair value measurements would be separately disclosed by level within the fair value hierarchy. FAS 157 does not expand the use of fair value measurement to any new circumstances. The Company does not expect the adoption of FAS 157 to have a material impact on its financial condition or results of operations.
 
Fair value option
In February 2007, the FASB issued FAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (FAS 159). FAS 159 permits an entity to irrevocably elect fair value on a contract-by-contract basis as the initial and subsequent measurement attribute for many financial assets and liabilities and certain other items including insurance contracts. FAS 159 is effective for fiscal years beginning after November 15, 2007. At the time of adoption, the effect of the first re-measurement to fair value would be a cumulative effect adjustment to the opening balance of retained earnings. Subsequent to adoption, changes in fair value related to financial assets or liabilities for which the fair value option is exercised, would be recognized in earnings and any upfront costs expensed. Consequently, while there would be no impact to the Company’s book value, volatility due to changes in the value of the investment portfolio would be recorded in realized gains (losses) in the consolidated statement of operations. The Company may elect the fair value option for certain of its available for sale securities. Given that these securities are already reported at fair value, the Company does not expect the adoption of FAS 159 to have a material impact on its financial condition although it could have a material effect on the results of operations in periods subsequent to adoption, if elected.
 
Income tax benefits of dividends on share-based payment awards
In October 2006, the FASB issued Emerging Issues Task Force (EITF) Issue No. 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (EITF 06-11). EITF 06-11 provides guidance on the treatment of realized income tax benefits arising from dividend payments to employees holding equity shares, non-vested equity share units, and outstanding equity share options. EITF 06-11 shall be applied prospectively to the income tax benefits of dividends on equity-classified employee share-based payment awards that are declared in fiscal years beginning after December 15, 2007. The Company is currently evaluating the impact, if any, of adopting EITF 06-11. The Company does not expect the adoption of EITF 06-11 to have a material impact on the Company’s financial condition or results of operations.
 
Business combinations
In December 2007, the FASB issued FAS 141 (Revised), Business Combinations (FAS 141R). FAS 141R provides a definition of the “acquirer” in a business combination, broadens the application of the acquisition method to all business combinations where one entity obtains control over one or more businesses, and establishes principles and requirements for how an acquirer recognizes and measures the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the “acquiree”; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and discloses information to enable users to evaluate the nature and financial effects of the business combination. FAS 141R shall be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company does not expect the adoption of FAS 141R to have a material impact on the Company’s financial condition or results of operations.
 
Noncontrolling interests
In December 2007, the FASB issued FAS 160, Noncontrolling Interests in Consolidated Financial Statements – an Amendment of ARB No. 51 (FAS 160). FAS 160 established accounting and reporting standards that require that ownership interests in subsidiaries held by parties other than the parent be presented in the consolidated statement of shareholders’ equity separately from the parent’s equity; the consolidated net income attributable to the parent and noncontrolling interest be presented on face of the consolidated statements of operations; changes in a parent’s ownership interest while the parent retains controlling financial interest in its subsidiary be accounted for consistently; and sufficient disclosure that identifies and distinguishes between the interests of the parent and noncontrolling owners. FAS 160 is effective for fiscal years, and interim
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
periods within those fiscal years, beginning on or after December 15, 2008. The Company does not expect the adoption of FAS 160 to have a material impact on the Company’s financial condition or results of operations.
 
 3. Investments
 
a) Fixed maturities
The fair values and amortized costs of and the gross unrealized appreciation (depreciation) related to fixed maturities at December 31, 2007 and 2006, are as follows:

 	 	2007	 	2006	
(in millions of
U.S. dollars)	 	Amortized
Cost	 	 	 	Gross
Unrealized
Appreciation	 	 	 	Gross
Unrealized
Depreciation	 	 	 	 	Fair Value	 	 	 	Amortized
Cost	 	 	 	Gross
Unrealized
Appreciation	 	 	 	Gross
Unrealized
Depreciation	 	 	 	 	Fair Value	
Available for sale	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
U.S. Treasury and agency	 	$	2,020	 	 	 	$	56	 	 	 	$	(3	)	 	 	 	$	2,073	 	 	 	$	2,513	 	 	 	$	18	 	 	 	$	(7	)	 	 	 	$	2,524	
Foreign	 	 	7,418	 	 	 	 	109	 	 	 	 	(98	)	 	 	 	 	7,429	 	 	 	 	6,406	 	 	 	 	47	 	 	 	 	(50	)	 	 	 	 	6,403	
Corporate securities	 	 	9,669	 	 	 	 	130	 	 	 	 	(138	)	 	 	 	 	9,661	 	 	 	 	8,757	 	 	 	 	111	 	 	 	 	(25	)	 	 	 	 	8,843	
Mortgage-backed securities	 	 	12,680	 	 	 	 	160	 	 	 	 	(29	)	 	 	 	 	12,811	 	 	 	 	10,331	 	 	 	 	67	 	 	 	 	(14	)	 	 	 	 	10,384	
States, municipalities, and political subdivisions	 	 	1,207	 	 	 	 	10	 	 	 	 	(7	)	 	 	 	 	1,210	 	 	 	 	382	 	 	 	 	6	 	 	 	 	(2	)	 	 	 	 	386	
 	 	$	32,994	 	 	 	$	465	 	 	 	$	(275	)	 	 	 	$	33,184	 	 	 	$	28,389	 	 	 	$	249	 	 	 	$	(98	)	 	 	 	$	28,540	
Held to maturity	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
U.S. Treasury and agency	 	$	868	 	 	 	$	24	 	 	 	$	–	 	 	 	 	$	892	 	 	 	$	1,015	 	 	 	$	–	 	 	 	$	(10	)	 	 	 	$	1,005	
Foreign	 	 	63	 	 	 	 	–	 	 	 	 	–	 	 	 	 	 	63	 	 	 	 	55	 	 	 	 	–	 	 	 	 	(1	)	 	 	 	 	54	
Corporate securities	 	 	505	 	 	 	 	3	 	 	 	 	(4	)	 	 	 	 	504	 	 	 	 	577	 	 	 	 	2	 	 	 	 	(8	)	 	 	 	 	571	
Mortgage-backed securities	 	 	921	 	 	 	 	4	 	 	 	 	(3	)	 	 	 	 	922	 	 	 	 	976	 	 	 	 	–	 	 	 	 	(14	)	 	 	 	 	962	
States, municipalities, and political subdivisions	 	 	630	 	 	 	 	4	 	 	 	 	–	 	 	 	 	 	634	 	 	 	 	424	 	 	 	 	1	 	 	 	 	(2	)	 	 	 	 	423	
 	 	$	2,987	 	 	 	$	35	 	 	 	$	(7	)	 	 	 	$	3,015	 	 	 	$	3,047	 	 	 	$	3	 	 	 	$	(35	)	 	 	 	$	3,015	
 
Mortgage-backed securities issued by U.S. government agencies are combined with all other to be announced mortgage derivatives held (refer to Note 9 a) (iii)) and are included in the category, “Mortgage-backed securities”. Approximately 58 percent of the total mortgage-backed securities at December 31, 2007 and 2006, are represented by investments in U.S. government agency bonds. The remainder of the mortgage exposure consists of collateralized mortgage obligations and non-government mortgage-backed securities, the majority of which provide a planned structure for principal and interest payments and carry a rating of AAA by the major credit rating agencies.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
Fixed maturities at December 31, 2007 and 2006, by contractual maturity, are shown below. Expected maturities could differ from contractual maturities because borrowers may have the right to call or prepay obligations, with or without call or prepayment penalties.

 	 	2007	 	 	 	2006	
(in millions of U.S. dollars)	 	Fair Value	 	 	 	Amortized Cost	 	 	 	Fair Value	 	 	 	Amortized Cost	
Available for sale; maturity period	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Due in 1 year or less	 	$	1,192	 	 	 	$	1,176	 	 	 	$	985	 	 	 	$	987	
Due after 1 year through 5 years	 	 	8,970	 	 	 	 	8,867	 	 	 	 	8,743	 	 	 	 	8,714	
Due after 5 years through 10 years	 	 	6,643	 	 	 	 	6,635	 	 	 	 	6,020	 	 	 	 	5,969	
Due after 10 years	 	 	3,568	 	 	 	 	3,636	 	 	 	 	2,408	 	 	 	 	2,388	
 	 	 	20,373	 	 	 	 	20,314	 	 	 	 	18,156	 	 	 	 	18,058	
Mortgage-backed securities	 	 	12,811	 	 	 	 	12,680	 	 	 	 	10,384	 	 	 	 	10,331	
 	 	$	33,184	 	 	 	$	32,994	 	 	 	$	28,540	 	 	 	$	28,389	
Held to maturity; maturity period	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Due in 1 year or less	 	$	322	 	 	 	$	321	 	 	 	$	197	 	 	 	$	198	
Due after 1 year through 5 years	 	 	1,325	 	 	 	 	1,309	 	 	 	 	1,310	 	 	 	 	1,323	
Due after 5 years through 10 years	 	 	376	 	 	 	 	367	 	 	 	 	477	 	 	 	 	481	
Due after 10 years	 	 	70	 	 	 	 	69	 	 	 	 	69	 	 	 	 	69	
 	 	 	2,093	 	 	 	 	2,066	 	 	 	 	2,053	 	 	 	 	2,071	
Mortgage-backed securities	 	 	922	 	 	 	 	921	 	 	 	 	962	 	 	 	 	976	
 	 	$	3,015	 	 	 	$	2,987	 	 	 	$	3,015	 	 	 	$	3,047	
 
b) Equity securities
The gross unrealized appreciation (depreciation) on equity securities at December 31, 2007 and 2006, is as follows:

(in millions of U.S. dollars)	 	2007	 	 	 	 	2006	 	
Equity securities – cost	 	$	1,618	 	 	 	 	$	1,372	 	
Gross unrealized appreciation	 	 	311	 	 	 	 	 	349	 	
Gross unrealized depreciation	 	 	(92	)	 	 	 	 	(8	)	
Equity securities – fair value	 	$	1,837	 	 	 	 	$	1,713	 	
 
c) Other investments
Other investments over which the Company cannot exercise significant influence are carried at fair value with changes in fair value reflected in other comprehensive income. Partially-owned investment companies over which the Company has significant influence are carried under the equity method of accounting. Life insurance policies are carried at policy cash surrender value. Trading securities are carried at fair value with changes in fair value reflected in net income. At December 31, 2007, trading securities included $54 million of equity securities and $5 million of fixed maturities, compared with $50 million and $13 million, respectively, at December 31, 2006. The Company maintains rabbi trusts, the holdings of which include all of these life insurance policies and trading securities. Refer to Note 11 e).
 
Other investments at December 31, 2007 and 2006, are as follows:

 	 	2007	 	 	 	2006	
(in millions of U.S. dollars)	 	Fair Value	 	 	 	Cost	 	 	 	Fair Value	 	 	 	Cost	
Investment funds	 	$	347	 	 	 	$	227	 	 	 	$	308	 	 	 	$	220	
Limited partnerships	 	 	482	 	 	 	 	427	 	 	 	 	215	 	 	 	 	187	
Partially-owned investment companies	 	 	61	 	 	 	 	71	 	 	 	 	44	 	 	 	 	48	
Life insurance policies	 	 	88	 	 	 	 	88	 	 	 	 	82	 	 	 	 	82	
Trading securities	 	 	59	 	 	 	 	49	 	 	 	 	63	 	 	 	 	57	
Other	 	 	103	 	 	 	 	18	 	 	 	 	133	 	 	 	 	67	
Total	 	$	1,140	 	 	 	$	880	 	 	 	$	845	 	 	 	$	661	
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
d) Investments in partially-owned insurance companies
Investments in partially-owned insurance companies at December 31, 2007 and 2006, are comprised of the following:

 	 	2007	 	2006	
Company
(in millions of U.S. dollars)	 	Carrying Value	 	 	 	Ownership
Percentage	 	 	 	Carrying Value	 	 	 	Ownership
Percentage	
Freisenbruch-Meyer	 	$	9	 	 	 	40.0%	 	 	 	$	7	 	 	 	40.0%	
Intrepid Re Holdings Limited	 	 	80	 	 	 	38.5%	 	 	 	 	77	 	 	 	38.5%	
Assured Guaranty Ltd.	 	 	392	 	 	 	23.9%	 	 	 	 	469	 	 	 	28.4%	
Huatai Insurance Company	 	 	192	 	 	 	22.1%	 	 	 	 	151	 	 	 	22.1%	
Rain and Hail Insurance Services, Inc.	 	 	81	 	 	 	20.2%	 	 	 	 	65	 	 	 	20.2%	
Huatai Life Insurance Company	 	 	15	 	 	 	20.0%	 	 	 	 	16	 	 	 	20.0%	
Island Heritage	 	 	4	 	 	 	11.0%	 	 	 	 	4	 	 	 	11.0%	
Total	 	$	773	 	 	 	 	 	 	 	$	789	 	 	 	 	
 
Using a quoted market price, the fair value of the Company’s investment in Assured Guaranty Ltd. was $508 million and $510 million at December 31, 2007 and 2006, respectively.
 
e) Gross unrealized loss
As of December 31, 2007, there were 5,094 fixed maturities out of a total of 14,475 fixed maturities in an unrealized loss position. The largest single unrealized loss in the fixed maturities was $3.7 million. There were 470 equity securities out of a total of 1,180 equity securities in an unrealized loss position. The largest single unrealized loss in the equity securities was $5.2 million. There were no securities that had been in a loss position for the previous nine consecutive months with a market value of less than 80 percent of amortized cost, or cost for equity securities. Most of the fixed maturities in an unrealized loss position were investment grade securities for which fair value declined due to increases in market interest rates from the date of purchase.
The following tables summarize, for all securities in an unrealized loss position at December 31, 2007 and 2006 (including securities on loan), the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position.

 	 	0 – 12 Months	 	Over 12 Months	 	Total	 	
December 31, 2007
(in millions of U.S. dollars)	 	Fair Value	 	 	 	Gross
Unrealized Loss	 	 	 	 	Fair Value	 	 	 	Gross
Unrealized Loss	 	 	 	 	Fair Value	 	 	 	Gross
Unrealized Loss	 	
U.S. Treasury and agency	 	$	193	 	 	 	$	(2.5	)	 	 	 	$	31	 	 	 	$	(0.1	)	 	 	 	$	224	 	 	 	$	(2.6	)	
Foreign	 	 	3,435	 	 	 	 	(97.3	)	 	 	 	 	135	 	 	 	 	(0.9	)	 	 	 	 	3,570	 	 	 	 	(98.2	)	
Corporate securities	 	 	3,951	 	 	 	 	(138.5	)	 	 	 	 	235	 	 	 	 	(3.6	)	 	 	 	 	4,186	 	 	 	 	(142.1	)	
Mortgage-backed securities	 	 	2,967	 	 	 	 	(29.8	)	 	 	 	 	139	 	 	 	 	(1.7	)	 	 	 	 	3,106	 	 	 	 	(31.5	)	
States, municipalities, and political subdivisions	 	 	569	 	 	 	 	(7.1	)	 	 	 	 	16	 	 	 	 	(0.2	)	 	 	 	 	585	 	 	 	 	(7.3	)	
Total fixed maturities	 	 	11,115	 	 	 	 	(275.2	)	 	 	 	 	556	 	 	 	 	(6.5	)	 	 	 	 	11,671	 	 	 	 	(281.7	)	
Equities	 	 	589	 	 	 	 	(92.5	)	 	 	 	 	–	 	 	 	 	–	 	 	 	 	 	589	 	 	 	 	(92.5	)	
Other investments	 	 	101	 	 	 	 	(16.3	)	 	 	 	 	–	 	 	 	 	–	 	 	 	 	 	101	 	 	 	 	(16.3	)	
Total	 	$	11,805	 	 	 	$	(384.0	)	 	 	 	$	556	 	 	 	$	(6.5	)	 	 	 	$	12,361	 	 	 	$	(390.5	)	
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
Included in the “0 – 12 Months” and “Over 12 Months” aging categories at December 31, 2007, are fixed maturities held to maturity with combined fair values of $361 million and $318 million, respectively. The associated gross unrealized losses included in the “0 – 12 Months” and “Over 12 Months” aging categories are $3 million and $4 million, respectively.

 	 	0 – 12 Months	 	Over 12 Months	 	Total	 	
December 31, 2006
(in millions of U.S. dollars)	 	Fair Value	 	 	 	Gross
Unrealized Loss	 	 	 	 	Fair Value	 	 	 	Gross
Unrealized Loss	 	 	 	 	Fair Value	 	 	 	Gross
Unrealized Loss	 	
U.S. Treasury and agency	 	$	1,647	 	 	 	$	(12.8	)	 	 	 	$	320	 	 	 	$	(4.3	)	 	 	 	$	1,967	 	 	 	$	(17.1	)	
Foreign	 	 	4,289	 	 	 	 	(50.0	)	 	 	 	 	67	 	 	 	 	(0.8	)	 	 	 	 	4,356	 	 	 	 	(50.8	)	
Corporate securities	 	 	3,863	 	 	 	 	(26.2	)	 	 	 	 	410	 	 	 	 	(6.9	)	 	 	 	 	4,273	 	 	 	 	(33.1	)	
Mortgage-backed securities	 	 	3,817	 	 	 	 	(15.7	)	 	 	 	 	840	 	 	 	 	(12.7	)	 	 	 	 	4,657	 	 	 	 	(28.4	)	
States, municipalities, and political subdivisions	 	 	525	 	 	 	 	(2.7	)	 	 	 	 	31	 	 	 	 	(0.7	)	 	 	 	 	556	 	 	 	 	(3.4	)	
Total fixed maturities	 	 	14,141	 	 	 	 	(107.4	)	 	 	 	 	1,668	 	 	 	 	(25.4	)	 	 	 	 	15,809	 	 	 	 	(132.8	)	
Equities	 	 	210	 	 	 	 	(8.1	)	 	 	 	 	–	 	 	 	 	–	 	 	 	 	 	210	 	 	 	 	(8.1	)	
Other investments	 	 	8	 	 	 	 	(2.1	)	 	 	 	 	–	 	 	 	 	–	 	 	 	 	 	8	 	 	 	 	(2.1	)	
Total	 	$	14,359	 	 	 	$	(117.6	)	 	 	 	$	1,668	 	 	 	$	(25.4	)	 	 	 	$	16,027	 	 	 	$	(143.0	)	
 
Included in the “0 – 12 Months” and “Over 12 Months” aging categories at December 31, 2006, are fixed maturities held to maturity with combined fair values of $1.2 billion and $1.6 billion, respectively. The associated gross unrealized losses included in the “0 – 12 Months” and “Over 12 Months” aging categories were $11 million and $24 million, respectively.
Each quarter, the Company reviews all of its securities in an unrealized loss position (impaired securities), including fixed maturity securities, securities on loan, equity securities, and other investments, to determine whether the impairment is “other-than-temporary”. Initially, the Company identifies those impaired securities to be specifically evaluated for a potential “other-than-temporary” impairment (OTTI). In this process, the following is considered by type of security:

Fixed maturities and equity securities, including securities on loan
A security that meets any of the following criteria is evaluated for a potential OTTI:
• securities that have been in a loss position for the previous eleven consecutive months;
• those securities that have been in a loss position for the previous nine consecutive months and market value is less than 80 percent of amortized cost, or cost for equity securities;
• those securities that are rated below investment grade by at least one major rating agency; or
• those securities subject to EITF 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets , with contractual cash flows including asset-backed securities, whenever there is an adverse change in the amount or timing of cash flows or indications of a change in credit.
The Company evaluates all other fixed maturity and equity securities for a potential OTTI when the unrealized loss at the balance sheet date exceeds a certain scope, based on both a percentage (i.e., market value is less than 80 percent of amortized cost, or cost for equity securities) and aggregate dollar decline, and/or certain indicators of an OTTI are present including:
• a significant economic event has occurred that is expected to adversely affect the industry in which the issuer participates;
• recent issuer-specific news that is likely to have an adverse affect on operating results and cash flows; or
• a missed or late interest or principal payment related to any debt issuance.
For those securities identified as having a potential OTTI based on the above criteria, the Company estimates a reasonable period of time in which market value is expected to recover to a level in excess of cost, if at all. For fixed maturity securities, factors considered include:
• the degree to which any appearance of impairment is attributable to an overall change in market conditions such as interest rates rather than changes in the individual factual circumstances and risk profile of the issuer;
• the performance of the relevant industry sector;
• the nature of collateral or other credit support;
• whether an issuer is current in making principal and interest payments on the debt securities in question;
• the issuer’s financial condition and the Company’s assessment (using available market information) of its ability to make future scheduled principal and interest payments on a timely basis; and
• current financial strength or debt rating, analysis, and guidance provided by rating agencies and analysts.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
For equity securities, factors considered include:
• whether the decline appears to be related to general market or industry conditions or is issuer-specific; and
• the financial condition and near-term prospects of the issuer, including specific events that may influence the issuer’s operations.
Securities will be assessed to have an OTTI if cost is not expected to be recovered or the Company does not have the ability and specific intent to hold the security until its expected recovery. The Company typically makes this latter assessment when such intent is considered inconsistent with management’s investment objectives, such as maximizing total return.

Other investments
With respect to other investments that are not traded in a public market, such as venture capital investments funds, the portfolio managers, as well as the Company’s internal valuation committee, consider a variety of factors in determining whether or not the investment should be evaluated for OTTI. Indicators of impairment include:
• the fund has reported losses for two consecutive fiscal years;
• a significant economic event has occurred that is expected to adversely affect an industry for which the fund has significant exposure to; and
• recent issuer-specific news that is expected to adversely affect a significant holding in the fund.
For those investments identified as having a possible OTTI, the Company determines a reasonable period of time in which market value is expected to recover to a level in excess of cost, if at all. Factors considered include:
• recent trends in financial performance and future expectations of financial performance based on the underlying assets held in the portfolio and market conditions affecting those assets;
• an analysis of whether fundamental deterioration has occurred; and
• the fund’s most recent financing event.
These investments will be assessed to have an OTTI if cost is not expected to be recovered or it is concluded that the Company does not have the ability and specific intent to hold the security until its expected recovery.
 
f) Net realized gains (losses) and change in net unrealized appreciation (depreciation) on investments
Net realized gains (losses) and the change in net unrealized appreciation (depreciation) on investments for the years ended December 31, 2007, 2006, and 2005, are as follows:

(in millions of U.S. dollars)	 	2007	 	 	 	 	2006	 	 	 	 	2005	 	
Fixed maturities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross realized gains	 	$	257	 	 	 	 	$	131	 	 	 	 	$	152	 	
Gross realized losses	 	 	(232	)	 	 	 	 	(153	)	 	 	 	 	(129	)	
Other-than-temporary impairments	 	 	(123	)	 	 	 	 	(198	)	 	 	 	 	(68	)	
 	 	 	(98	)	 	 	 	 	(220	)	 	 	 	 	(45	)	
Equity securities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross realized gains	 	 	200	 	 	 	 	 	182	 	 	 	 	 	122	 	
Gross realized losses	 	 	(22	)	 	 	 	 	(9	)	 	 	 	 	(30	)	
Other-than-temporary impairments	 	 	(16	)	 	 	 	 	(10	)	 	 	 	 	(16	)	
 	 	 	162	 	 	 	 	 	163	 	 	 	 	 	76	 	
Other investments gains (losses)	 	 	39	 	 	 	 	 	34	 	 	 	 	 	8	 	
Write-down of other investments	 	 	(2	)	 	 	 	 	(6	)	 	 	 	 	(4	)	
Foreign currency gains (losses)	 	 	4	 	 	 	 	 	(13	)	 	 	 	 	–	 	
Futures, option contracts, and swaps	 	 	(19	)	 	 	 	 	(18	)	 	 	 	 	12	 	
Fair value adjustment on insurance derivatives	 	 	(147	)	 	 	 	 	(15	)	 	 	 	 	29	 	
Sale of certain run-off reinsurance subsidiaries	 	 	–	 	 	 	 	 	(23	)	 	 	 	 	–	 	
Net realized gains (losses)	 	 	(61	)	 	 	 	 	(98	)	 	 	 	 	76	 	
Change in net unrealized appreciation (depreciation) on investments	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed maturities available for sale	 	 	51	 	 	 	 	 	139	 	 	 	 	 	(457	)	
Fixed maturities held to maturity	 	 	(3	)	 	 	 	 	(5	)	 	 	 	 	10	 	
Equity securities	 	 	(122	)	 	 	 	 	114	 	 	 	 	 	23	 	
Other investments	 	 	73	 	 	 	 	 	101	 	 	 	 	 	21	 	
Investments in partially-owned insurance companies	 	 	25	 	 	 	 	 	4	 	 	 	 	 	17	 	
Income tax (expense) benefit	 	 	(23	)	 	 	 	 	(63	)	 	 	 	 	69	 	
Change in net unrealized appreciation (depreciation) on investments	 	 	1	 	 	 	 	 	290	 	 	 	 	 	(317	)	
Total net realized gains (losses) and change in net unrealized appreciation (depreciation) on investments	 	$	(60	)	 	 	 	$	192	 	 	 	 	$	(241	)	
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
g) Net investment income
Net investment income for the years ended December 31, 2007, 2006, and 2005, was derived from the following sources:

(in millions of U.S. dollars)	 	2007	 	 	 	 	2006	 	 	 	 	2005	 	
Fixed maturities	 	$	1,773	 	 	 	 	$	1,463	 	 	 	 	$	1,170	 	
Short-term investments	 	 	130	 	 	 	 	 	119	 	 	 	 	 	86	 	
Equity securities	 	 	68	 	 	 	 	 	57	 	 	 	 	 	50	 	
Other	 	 	25	 	 	 	 	 	26	 	 	 	 	 	22	 	
Gross investment income	 	 	1,996	 	 	 	 	 	1,665	 	 	 	 	 	1,328	 	
Investment expenses	 	 	(78	)	 	 	 	 	(64	)	 	 	 	 	(64	)	
Net investment income	 	$	1,918	 	 	 	 	$	1,601	 	 	 	 	$	1,264	 	
 
h) Restricted assets
The Company is required to maintain assets on deposit with various regulatory authorities to support its insurance and reinsurance operations. These requirements are generally promulgated in the statutory regulations of the individual jurisdictions. The assets on deposit are available to settle insurance and reinsurance liabilities. The Company also utilizes trust funds in certain large transactions where the trust funds are set up for the benefit of the ceding companies and generally take the place of letter of credit (LOC) requirements. The Company also has investments in segregated portfolios primarily to provide collateral or guarantees for LOCs and debt instruments described in Notes 8 and 9. At December 31, 2007, restricted assets of $8.3 billion are included in fixed maturities and short-term investments. The remaining balance is included in equity securities and cash. The components of the fair value of the restricted assets at December 31, 2007 and 2006, are as follows:

(in millions of U.S. dollars)	 	2007	 	 	 	2006	
Deposits with U.S. regulatory authorities	 	$	1,068	 	 	 	$	999	
Deposits with non-U.S. regulatory authorities	 	 	2,101	 	 	 	 	1,968	
Assets used for collateral or guarantees	 	 	1,116	 	 	 	 	1,045	
Trust funds	 	 	4,349	 	 	 	 	3,008	
 	 	$	8,634	 	 	 	$	7,020	
 
 4. 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 consolidated statements of operations are net of reinsurance. Direct, assumed, and ceded premiums for the years ended December 31, 2007, 2006, and 2005, are as follows:

(in millions of U.S. dollars)	 	2007	 	 	 	 	2006	 	 	 	 	2005	 	
Premiums written	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Direct	 	$	14,464	 	 	 	 	$	13,892	 	 	 	 	$	13,240	 	
Assumed	 	 	3,276	 	 	 	 	 	3,509	 	 	 	 	 	3,571	 	
Ceded	 	 	(5,761	)	 	 	 	 	(5,371	)	 	 	 	 	(5,019	)	
Net	 	$	11,979	 	 	 	 	$	12,030	 	 	 	 	$	11,792	 	
Premiums earned	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Direct	 	$	14,673	 	 	 	 	$	13,562	 	 	 	 	$	13,106	 	
Assumed	 	 	3,458	 	 	 	 	 	3,461	 	 	 	 	 	3,654	 	
Ceded	 	 	(5,834	)	 	 	 	 	(5,198	)	 	 	 	 	(5,012	)	
Net	 	$	12,297	 	 	 	 	$	11,825	 	 	 	 	$	11,748	 	
 
F-24

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
For the years ended December 31, 2007, 2006, and 2005, the Company recorded reinsurance recoveries on losses and loss expenses incurred of $3.5 billion, $2.8 billion, and $4.7 billion, respectively.
 
b) Reinsurance recoverable on ceded reinsurance
The composition of the Company’s reinsurance recoverable at December 31, 2007 and 2006, is as follows:

(in millions of U.S. dollars)	 	2007	 	 	 	 	2006	 	
Reinsurance recoverable on unpaid losses and loss expenses	 	$	13,990	 	 	 	 	$	13,903	 	
Provision for uncollectible reinsurance on unpaid losses and loss expenses	 	 	(470	)	 	 	 	 	(394	)	
Reinsurance recoverable on unpaid losses and loss expenses, net of a provision for uncollectible reinsurance	 	 	13,520	 	 	 	 	 	13,509	 	
Reinsurance recoverable on paid losses and loss expenses	 	 	1,050	 	 	 	 	 	1,316	 	
Provision for uncollectible reinsurance on paid losses and loss expenses	 	 	(216	)	 	 	 	 	(255	)	
Reinsurance recoverable on future policy benefits	 	 	8	 	 	 	 	 	10	 	
Net reinsurance recoverable	 	$	14,362	 	 	 	 	$	14,580	 	
 
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.
The following table shows a breakdown of the Company’s reinsurance recoverable on paid losses and loss expenses at December 31, 2007 and 2006.

 	 	2007	 	 	 	2006	
Category
(in millions of U.S. dollars)	 	Recoverable
Amount	 	 	 	Provision	 	 	 	% of
Recoverable
Amount	 	 	 	Recoverable
Amount	 	 	 	Provision	 	 	 	% of
Recoverable
Amount	
General collections	 	$	789	 	 	 	41	 	 	 	5.2%	 	 	 	$	932	 	 	 	$	53	 	 	 	5.7%	
Other	 	 	261	 	 	 	175	 	 	 	67%	 	 	 	 	384	 	 	 	 	202	 	 	 	52.6%	
Total	 	$	1,050	 	 	 	216	 	 	 	20.6%	 	 	 	$	1,316	 	 	 	$	255	 	 	 	19.4%	
 
General collections balances represent amounts in the process of collection in the normal course of business, for which the Company has no indication of dispute or credit-related issues.
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 multi-beneficiary trusts and parental guarantees.
The following tables provide a listing, at December 31, 2007, of the Company’s largest reinsurers with the first category representing the top 10 reinsurers and the second category representing the remaining reinsurers with balances greater than $20 million. The third category includes amounts due from approximately 1,400 companies, each having balances of less than $20 million. The provision for uncollectible reinsurance for these three categories is principally based on an analysis of the credit quality of the reinsurer and collateral balances. The next category, mandatory pools and government agencies, includes amounts backed by certain state and federal agencies. In certain states, insurance companies are required by law to participate in these pools. The fifth category, structured settlements, includes annuities purchased from life insurance companies to settle claims. Since the Company retains the ultimate liability in the event that the life company fails to pay, it reflects the amount as a liability and a recoverable for GAAP purposes. The next category, captives, includes companies established and owned by the Company’s insurance clients to assume a significant portion of their direct insurance risk from the Company (they are structured to allow clients to self-insure a portion of their insurance risk). It is generally the Company’s policy to obtain collateral equal to expected losses; where appropriate, exceptions are granted but only with review and approval at a senior officer level. The final category, other, includes amounts recoverable that are in dispute or are from companies that are in supervision, rehabilitation, or liquidation. The Company establishes its provision for uncollectible reinsurance in this category based on a case by case analysis of individual situations including credit and collateral analysis and consideration of the Company’s collection experience in similar situations.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries

Breakdown of Reinsurance Recoverable
(in millions of U.S. dollars)	 	2007	 	 	 	Provision	 	 	 	% of Gross	
Categories	 	 	 	 	 	 	 	 	 	 	 	 	
Top 10 reinsurers	 	$	7,627	 	 	 	$	99	 	 	 	1.3%	
Other reinsurers balances greater than $20 million	 	 	3,375	 	 	 	 	170	 	 	 	5.0%	
Other reinsurers balances less than $20 million	 	 	728	 	 	 	 	83	 	 	 	11.4%	
Mandatory pools and government agencies	 	 	562	 	 	 	 	3	 	 	 	0.5%	
Structured settlements	 	 	551	 	 	 	 	16	 	 	 	2.9%	
Captives	 	 	1,507	 	 	 	 	21	 	 	 	1.4%	
Other	 	 	698	 	 	 	 	294	 	 	 	42.1%	
Total	 	$	15,048	 	 	 	$	686	 	 	 	4.6%	

			
Top 10 Reinsurers (net of collateral)	
American International Group	  	Hannover Group	
Berkshire Hathaway Insurance Group	  	Lloyd’s of London	
Chubb Insurance Group	  	Munich Re Group	
Equitas	  	Swiss Re Group	
Everest Re Group	  	XL Capital Group	

					
Other Reinsurers Balances Greater Than $20 million (net of collateral)	
AGRI General Ins Co	  	Dow Chemical Co	  	Platinum Underwriters	
AIOI Insurance Group	  	Dukes Place Holdings	  	PMA Capital Corporation	
Allianz	  	Electric Insurance Company	  	Power Corp Of Canada	
Allied World Assurance Group	  	Enstar Group Ltd	  	Renaissance Re Holdings Ltd	
Allstate Group	  	Fairfax Financial	  	Royal & Sun Alliance Insurance Group	
Arch Capital	  	Federal Crop Insurance Corp	  	SCOR Group	
Aspen Insurance Holdings Ltd.	  	FM Global Group	  	Sompo Japan Group	
AVIVA Plc	  	Globale Rueckversicherungs-ag (Globale Re)	  	Tawa UK Ltd.	
AXA	  	Hartford Insurance Group	  	Toa Reinsurance Company	
Brit Insurance Holdings Plc	  	Independence Blue Cross Group	  	Travelers Companies Inc	
CIGNA	  	IRB – Brasil Resseguros S.A. Group	  	Trenwick Group	
CNA Insurance Companies	  	Liberty Mutual Insurance Companies	  	White Mountains Insurance Group	
Dominion Insurance Co Ltd.	  	Millea Holdings	  	WR Berkley Corp	
 	  	Partner Re	  	Zurich Financial Services Group	
 
c) Assumed reinsurance programs involving minimum benefit guarantees under annuity contracts
The presentation of income and expenses relating to GMDB and GMIB reinsurance for the years ended December 31, 2007, 2006, and 2005, is as follows:

(in millions of U.S. dollars)	 	2007	 	 	 	 	2006	 	 	 	 	2005	
GMDB	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	 	$	125	 	 	 	 	$	104	 	 	 	 	$	71	
Life and annuity benefits expense	 	$	49	 	 	 	 	$	45	 	 	 	 	$	34	
GMIB	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net premiums earned	 	$	107	 	 	 	 	$	95	 	 	 	 	$	86	
Life and annuity benefits expense	 	$	27	 	 	 	 	$	(1	)	 	 	 	$	4	
Realized gains (losses)	 	$	(185	)	 	 	 	$	–	 	 	 	 	$	18	
Fair value components	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gain (loss) recognized in income	 	$	(105	)	 	 	 	$	96	 	 	 	 	$	100	
Net cash received (disbursed)	 	$	107	 	 	 	 	$	95	 	 	 	 	$	85	
Net decrease (increase) in liability	 	$	(212	)	 	 	 	$	1	 	 	 	 	$	15	
 
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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
At December 31, 2007, reported liabilities for GMDB and GMIB reinsurance were $137 million and $225 million, respectively, compared with $97 million and $13 million, respectively, at December 31, 2006. The reported liability for GMIB reinsurance in 2007 and 2006 includes a fair value adjustment of $157 and ($28) million, respectively. 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 equity markets, changes in credit markets and, for GMIB reinsurance, changes in the allocation of the investments underlying annuitant’s account value and assumptions regarding future policyholder behavior. 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 December 31, 2007, the Company’s net amount at risk from its GMDB and GMIB reinsurance programs was $1.5 billion and $14 million, respectively, compared with $776 million and $10 million, respectively, at December 31, 2006. 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.
 
 5. Goodwill
 
The following table details goodwill by reporting segment at December 31, 2007 and 2006.

(in millions of U.S. dollars)	 	2007	 	 	 	2006	
Insurance – North American	 	$	1,192	 	 	 	$	1,192	
Insurance – Overseas General	 	 	1,174	 	 	 	 	1,174	
Global Reinsurance	 	 	365	 	 	 	 	365	
 	 	$	2,731	 	 	 	$	2,731	
 
 6. Unpaid losses and loss expenses
 
Property and casualty
The Company establishes reserves for the estimated unpaid ultimate liability for losses and loss expenses under the terms of its policies and agreements. These reserves include estimates for both claims that have been reported and for IBNR, and include estimates of expenses associated with processing and settling these claims. The process of establishing reserves for P&C claims can be complex and is subject to considerable variability as it requires the use of informed estimates and judgments. The Company’s estimates and judgments may be revised as additional experience and other data become available and are reviewed, as new or improved methodologies are developed, or as current laws change. The Company continually evaluates its estimates of reserves in light of developing information and in light of discussions and negotiations with its insureds. While the Company believes that its reserves for unpaid losses and loss expenses at December 31, 2007, are adequate, new information or trends may lead to future developments in ultimate losses and loss expenses significantly greater or less than the reserves provided. Any such revisions could result in future changes in estimates of losses or reinsurance recoverable, and would be reflected in the Company’s results of operations in the period in which the estimates are changed.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
The reconciliation of unpaid losses and loss expenses for the years ended December 31, 2007, 2006, and 2005, is as follows:

(in millions of U.S. dollars)	 	2007	 	 	 	 	2006	 	 	 	 	2005	 	
Gross unpaid losses and loss expenses – beginning of year	 	$	35,517	 	 	 	 	$	35,055	 	 	 	 	$	31,483	 	
Reinsurance recoverable on unpaid losses	 	 	(13,509	)	 	 	 	 	(14,597	)	 	 	 	 	(13,966	)	
Net unpaid losses and loss expenses – beginning of year	 	 	22,008	 	 	 	 	 	20,458	 	 	 	 	 	17,517	 	
Sale of certain run-off reinsurance subsidiaries	 	 	–	 	 	 	 	 	(472	)	 	 	 	 	–	 	
Total	 	 	22,008	 	 	 	 	 	19,986	 	 	 	 	 	17,517	 	
Net losses and loss expenses incurred in respect of losses occurring in:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Current year	 	 	7,568	 	 	 	 	 	7,082	 	 	 	 	 	8,485	 	
Prior year	 	 	(217	)	 	 	 	 	(12	)	 	 	 	 	86	 	
Total	 	 	7,351	 	 	 	 	 	7,070	 	 	 	 	 	8,571	 	
Net losses and loss expenses paid in respect of losses occurring in:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Current year	 	 	1,975	 	 	 	 	 	1,748	 	 	 	 	 	2,076	 	
Prior year	 	 	3,959	 	 	 	 	 	3,711	 	 	 	 	 	3,293	 	
Total	 	 	5,934	 	 	 	 	 	5,459	 	 	 	 	 	5,369	 	
Foreign currency revaluation and other	 	 	167	 	 	 	 	 	411	 	 	 	 	 	(261	)	
Net unpaid losses and loss expenses – end of year	 	 	23,592	 	 	 	 	 	22,008	 	 	 	 	 	20,458	 	
Reinsurance recoverable on unpaid losses	 	 	13,520	 	 	 	 	 	13,509	 	 	 	 	 	14,597	 	
Gross unpaid losses and loss expenses – end of year	 	$	37,112	 	 	 	 	$	35,517	 	 	 	 	$	35,055	 	
 
Net losses and loss expenses incurred include $217 million and $12 million of net favorable prior period development in 2007 and 2006, respectively and $86 million of net adverse prior period development in 2005.
Insurance – North American incurred net adverse prior period development of $9 million in 2007, representing 0.1 percent of the segment’s net unpaid loss and loss expense reserves at December 31, 2006. The net prior period development in 2007 was the net result of several underlying favorable and adverse movements, driven by the following principal changes:
• Net adverse development of $39 million on long-tail business including:
• Adverse development of $21 million due to an adjustment made in 2006 relating to IBNR reserves on commuted ceded reinsurance contracts, identified and resolved during 2007;
• Adverse development of $33 million on two related specialty claims from a run-off financial guaranty program affecting accident year 2000 due to adverse judicial rulings rendered during the 2007 calendar year;
• Adverse development on the estimates of future allocated claims expense on two separate portfolios of workers’ compensation insurance totaling $28 million. This change in estimate affected the national accounts workers’ compensation business (principally accident years 2002–2004) and a run-off portfolio of workers’ compensation servicing carrier business (covering accident years 1996 and prior). For the national accounts business, the change was principally in the high deductible portfolio. Based on analyses completed during 2007, ACE USA has increased the tail factor for allocated loss adjustment expenses (ALAE) as well as the ratios of ALAE to loss used in its projection methodologies. Small movements in these assumptions produce a leveraged increase in the loss estimates across a number of accident years;
• Adverse development on the estimates of ultimate loss on a collection of run-off professional liability and medical programs totaling $20 million. These increases were the direct result of a review of all open claims that was completed during 2007. This claims review identified a number of cases where adverse change in facts and circumstances led to a significant deviation from the estimates of ultimate claim value;
• Favorable development in the estimate of ultimate loss and ALAE of $18 million in the surety business. This improvement was heavily concentrated in the 2005 and 2006 accident years. In the 2007 calendar year, the level of late reported claims and development on known claims for this portfolio was significantly below historical levels for this line of business resulting in a reduction in all loss projection methods;
• Favorable development on the national accounts casualty business, primarily general liability, of $21 million for the 2002-2004 accident years. Development on these portfolios continues to be favorable relative to the original assumptions used to price the products. Actual paid and incurred loss activity in 2007 has been lower than assumed in ACE USA’s prior projections and estimates have been modified accordingly; and
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
• Favorable development of $25 million on the foreign casualty portfolio for the 2004 and prior accident years. This is partly due to an adjustment for a reserve established in 2006 for a single large claim, but also due to low levels of reported and paid loss activity on foreign captive business. This particular line has net exposure on a per occurrence basis excess of high deductibles/self-insured retentions and an aggregate basis excess of an aggregate attachment point. Expected loss emergence patterns used in the 2006 review projected higher loss development for the 2004 and prior accident years than emerged during 2007 prompting a reduction in the projection of ultimate losses.
• Net favorable development of $30 million on short-tail business including:
• Adverse development totaling $115 million relating to increases in estimates of loss for the 2005 storms primarily in the ACE Westchester Specialty Group (ACE Westchester) operation but also some modest development in the offshore energy business. This development was due primarily to a relatively small number of losses on excess policies with large exposed limits. These losses reached settlement during 2007 for amounts in excess of the case reserves prompting adjustments to projections of ultimate losses. The claims handling associated with the 2005 hurricanes has involved complex and unique causation and coverage issues. These issues continue to be present and may have a further material adverse impact on financial results;
• Favorable development of $33 million on ACE Westchester crop/hail business. This was the direct effect of recording the final settlement of the 2006 pool year from the bordereau received during the 2007 calendar year;
• Favorable development of $52 million in workers’ compensation business due to the absence of multi-claimant events such as industrial accidents for the 2006 accident year. The majority of the exposure for these perils falls under the national accounts high deductible line of business. The Company evaluates this exposure annually after the accident year has closed allowing for the late identification of significant losses. The review in 2007 of potential 2006 accident year losses has led to a decrease in the estimate of the required provision for these claims;
• Favorable development in the estimates of ultimate losses for first party lines including property and auto physical damage in the ACE Canada operations totaling $18 million, affecting primarily the 2006 accident year. Incurred loss development during calendar year 2007 on the 2006 accident year was lower than historical averages which formed the basis for the prior projections. Given the relatively short reporting pattern for this business, the actual loss emergence was assigned credibility and the ultimate loss estimates revised accordingly;
• Favorable development in the estimates of ultimate loss of $19 million on the Canadian A&H portfolio. There is limited historical experience for this product line. Losses were originally recorded using an expected loss ratio method. Actual loss emergence in calendar year 2007 has proven to be more favorable than prior projections. Given the relatively short reporting pattern for this business, the actual loss emergence was assigned credibility and the ultimate loss estimates revised accordingly; and
• Favorable development in the estimates of ultimate loss of $28 million on short tail, non-catastrophe losses in the ACE Westchester property and inland marine product lines. Attritional incurred loss activity on the 2005 and 2006 accident years in the 2007 calendar year was lower than historical averages which formed the basis for prior projections.
Insurance – North American incurred net adverse prior period development of $65 million in 2006, representing 0.5 percent of the segment’s net unpaid loss and loss expense reserves at December 31, 2005. The net prior period development in 2006 was the net result of several underlying favorable and adverse movements, driven by the following principal changes:
• Net adverse development of $60 million on long-tail business including:
• Adverse development of $57 million on a small number of run-off portfolios in the U.S. with predominantly middle market workers’ compensation exposures from accident years 1996 and prior. In 2006, the selected tail factors were lengthened due to an increasing trend observed in industry statistics published in 2006, and a modest deterioration in claims experience related to the medical cost component of individual claims that emerged since the prior study;
• Adverse development of $42 million on the ACE Bermuda D&O book from report years 2000-2002 driven by case estimate increases on large claims following significant events in the mediation process during 2006, including increased plaintiff demands, settlement conferences, and court proceedings;
• Favorable development of $29 million on the ACE Bermuda excess liability book driven by the settlement of a single claim in 2006 from the 1991 report year on terms more favorable than the assumptions used to establish the reserve. The reserve was released following receipt of the ruling’s terms in 2006; and
• Favorable development of $13 million on large national account workers’ compensation business written by ACE USA. ACE USA observed reported claims frequency in 2006 lower than anticipated.
• Net adverse development of $5 million on short-tail business including:
• Adverse development of $182 million related to property claims arising from 2005 catastrophes. The majority of this increase is related to property losses from Hurricane Katrina. The nature and extent of Hurricane Katrina resulted in some
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
claims that increased over previously reported damage estimates. Factors leading to these increases included demand surge and some impact to previously unimpaired layers of excess coverage;
• Favorable development on ACE Westchester’s crop/hail business of $60 million due to recording of the final settlement of the 2005 crop results. In line with normal practice for this type of business, ACE did not receive final loss reports for the 2005 year until 2006. Therefore, the prior period movements were direct results of the loss amounts within the initial and final loss reports issued during the first and second quarters of 2006 being lower than preliminary estimates;
• Favorable development of $51 million on ACE USA’s workers’ compensation short-tail catastrophe and industrial accident exposure arising from 2004 and 2005 accident years, due to favorable trends in reported loss development. For the 2004 and 2005 accident years, claims arising from industrial or travel accidents trended favorably in 2006 relative to how earlier accident years had developed at the same period of maturity; and
• Net favorable development of $46 million related to the 2004 and 2005 accident years. This favorable activity was primarily in the aerospace and surety lines of business. Both of these businesses are relatively new, in that as recently as 2002, premium volume was minimal and these businesses have grown significantly since then. During 2006, we concluded the loss experience had become sufficiently credible, due to the degree of elapsed time, to begin considering loss based projection methods which resulted in favorable prior loss development of $14 million and $18 million, respectively.
Insurance – North American experienced $103 million of net adverse prior period development in 2005, representing 0.9 percent of the segment’s net unpaid loss and loss expense reserves at December 31, 2004.
Insurance – Overseas General experienced net favorable prior period development of $192 million in 2007, representing 3.2 percent of the segment’s net unpaid loss and loss expense reserves at December 31, 2006. The net prior period development for 2007 was the net result of several underlying favorable and adverse movements, driven by the following principal changes:
• Net favorable development of $53 million on long-tail lines of business including:
• Net favorable development of $33 million in the 2006 and prior accident years for Insurance – Overseas General long-tail lines, primarily casualty and financial lines. This favorable prior period development was in response to the annual review of long-tail lines completed during the year. There was $23 million of net favorable development for Insurance – Overseas General on the 2003-2005 accident years driven by reductions in loss development method indications and greater credibility being assigned to Bornhuetter-Ferguson projections versus expected loss ratio methods. This shift in credibility weighting between reserving methods is common practice and allows for greater recognition of actual loss emergence as accident years mature;
• Net favorable development of $20 million as a result of an update of the detailed annual evaluation of the excess exposures in Insurance – Overseas General which comprised strengthening of $89 million in accident years 2003 and prior and $45 million in accident year 2006 and a release of $154 million in accident years 2004 and 2005; and
• Adverse development of $11 million in ACE Global Markets’ long-tail professional lines, primarily in years of account 1999-2003. This adverse prior period development was largely in response to claims department recommendations on three accounts based on updated information received during the course of claim settlement in calendar year 2007.
• Net favorable development of $139 million on short-tail lines of business including:
• Favorable development of $84 million on short-tail property and fire lines primarily in the 2006 accident year in ACE International. The favorable development during the past year was due in large part to shifting credibility away from Bornhuetter-Ferguson methods and relying more heavily on loss development patterns as case incurred loss became a more accurate predictor of ultimate loss. This shift in credibility tended to reduce indicated ultimate losses since, with hindsight, the initial expected loss ratios have proven to be conservative;
• Favorable development of $13 million on 2005 hurricane losses in ACE Global Markets. This adjustment was due to the fact that after 24 months of development, it was concluded that there would be no new reported claims;
• Favorable development of $30 million on specialty A&H primarily in the 2005 and 2006 accident years in ACE Europe. This favorable prior period development followed the completion of the regular reserve review and was driven by better than expected loss experience relative to prior reserving assumptions. The favorable experience arose in direct marketing A&H businesses across several countries with no particular underlying claim or loss emergence trend identifiable;
• Favorable development of $28 million on specialty marine, primarily in the 2005 and 2006 accident years in both ACE International and ACE Global Markets. This favorable prior period development was largely in response to claims department recommendations on several large claims based on updated information received during claim settlement in calendar year 2007; and
• Adverse development of $9 million on specialty consumer lines, primarily in accident year 2006. This adverse development was primarily driven by further deterioration of ACE International’s homeowner’s warranty business in Norway. The
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
indicated ultimate loss was revised upwards in 2007 in response to several key claim metrics underlying the reserve estimate: number of reopened claims, loss adjustment expenses, and frequency and severity of late reported claims.
Insurance – Overseas General experienced net favorable prior period development of $72 million in 2006, representing 1.3 percent of the segment’s net unpaid loss and loss expense reserves at December 31, 2005. The net prior period development for 2006 was the net result of several underlying favorable and adverse movements, driven by the following principal changes:
• Net adverse development of $20 million on long-tail lines of business including:
• Adverse development of $29 million on the ACE Global Markets’ professional lines portfolio. In 2006, ACE Global Markets continued to experience greater than expected reported loss activity related to years of account 2003 and prior, largely from claims related to corporate failures, allegations of management misconduct, and accounting irregularities. As a result, Insurance – Overseas General has increased the expected ultimate loss ratios for these years in response to updated claim and legal information received in 2006 on specific cases;
• Adverse development of $14 million on asbestos liabilities, excluding a provision for uncollectible reinsurance, resulting from the completion of the annual analysis of international A&E exposures by a joint legal and actuarial team during the fourth quarter of 2006; and
• Net favorable development of $23 million on ACE International’s non-A&E exposures from the 2002-2004 accident years. This movement was driven by continued favorable loss emergence, most notably on the U.K. casualty and Asia Pacific financial lines portfolios, as a result of favorable severity trends in 2006.
• Net favorable development of $92 million on short-tail lines of business including:
• Net favorable development of $111 million on short-tail property and fire lines, mainly related to accident years 2004 and 2005. The favorable development in 2006 was driven by lower than anticipated frequency and severity of late reported property claims that emerged during 2006, and favorable development and settlement of several previously reported large losses.
• Net adverse development of $19 million on other short-tail business including aviation, A&H, marine, consumer lines, and political risk. Most of the adverse development was driven by higher than expected loss activity in 2006 at ACE Global Markets, primarily on accident years 2002 and prior.
Insurance – Overseas General experienced $5 million of net adverse development in 2005, representing 0.1 percent of the segment’s net unpaid loss and loss expense reserves at December 31, 2004.
Global Reinsurance experienced net favorable prior period development of $34 million in 2007, representing 1.3 percent of the segment’s net unpaid loss and loss expense reserves at December 31, 2006. The net prior period development recorded in 2007 was the net result of several underlying favorable and adverse movements. The largest adverse movement was related to long-tail lines of business for ACE Tempest Re USA of $13 million mainly as a result of higher than expected claims reported over the last few quarters primarily in the treaty years 2000-2005 for casualty and workers’ compensation business on several accounts. Favorable movements of $47 million largely related to claim closings on short-tail property and other short-tail lines of business primarily from treaty years 2005 and prior were recorded in 2007.
Global Reinsurance experienced net favorable prior period development of $5 million in 2006, representing 0.2 percent of the segment’s net unpaid loss and loss expense reserves at December 31, 2005. The net prior period development in 2006 was the net result of several underlying favorable and adverse movements. The largest adverse movement was related to catastrophes from the 2005 accident year of $29 million as a result of increased loss reports from cedants. Favorable movements largely related to property business from accident years prior to 2005 and a number of small movements on different specialty portfolios.
Global Reinsurance experienced $22 million of net favorable prior period development in 2005, representing 1.4 percent of the segment’s net unpaid loss and loss expense reserves at December 31, 2004.
 
Asbestos and environmental and other run-off liabilities
Included in the liabilities for losses and loss expenses are amounts for A&E. These A&E liabilities principally relate to claims arising from bodily-injury claims related to asbestos products and remediation costs associated with hazardous waste sites. The estimation of these liabilities is particularly sensitive to future changes in the legal, social and economic environment. The Company has not assumed any such future changes in setting the value of A&E reserves, which include provisions for both reported and IBNR claims.
The Company’s exposure to A&E claims principally arises out of liabilities acquired when it 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 the acquisition of the P&C business of CIGNA, the Pennsylvania Insurance Commis-
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
sioner 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, predominantly all A&E and certain other liabilities of INA were allocated to Century and extinguished, as a matter of Pennsylvania law, as liabilities of INA. As part of the Restructuring, most A&E liabilities of various U.S. affiliates of INA were reinsured to Century, and Century and certain other run-off companies having A&E and other liabilities were contributed to Brandywine Holdings Corporation (Brandywine Holdings). As part of the 1999 acquisition of the P&C business of CIGNA, the Company acquired Brandywine Holdings and its various subsidiaries. Refer to the “Brandywine Run-Off Entities” section below for additional information.
The table below presents a roll forward of consolidated A&E loss reserves, allocated and unallocated loss expense reserves for A&E exposures and the provision for uncollectible reinsurance, for the year ended December 31, 2007.

 	 	Asbestos	 	Environmental	 	Total	 	
(in millions of U.S. dollars)	 	Gross	 	 	 	 	Net	 	 	 	 	Gross	 	 	 	 	Net	 	 	 	 	Gross	 	 	 	 	Net	 	
Balance at December 31, 2006	 	$	3,221	 	 	 	 	$	1,611	 	 	 	 	$	489	 	 	 	 	$	433	 	 	 	 	$	3,710	 	 	 	 	$	2,044	 	
Incurred activity	 	 	–	 	 	 	 	 	(6	)	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	(6	)	
Payment activity	 	 	(284	)	 	 	 	 	(115	)	 	 	 	 	(71	)	 	 	 	 	(40	)	 	 	 	 	(355	)	 	 	 	 	(155	)	
Foreign currency revaluation	 	 	5	 	 	 	 	 	2	 	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	5	 	 	 	 	 	2	 	
Balance at December 31, 2007	 	$	2,942	 	 	 	 	$	1,492	 	 	 	 	$	418	 	 	 	 	$	393	 	 	 	 	$	3,360	 	 	 	 	$	1,885	 	
 
The A&E net loss reserves including allocated and unallocated loss expense reserves and provision for uncollectible reinsurance at December 31, 2007, of $1.885 billion shown in the above table are comprised of $1.323 billion in reserves held by Brandywine run-off companies, $224 million of reserves held by Westchester Specialty, $169 million of reserves held by ACE Bermuda, $148 million of reserves held by Insurance – Overseas General, and $21 million of reserves held by active ACE USA companies.
Net figures in the above table reflect third-party reinsurance other than reinsurance provided by National Indemnity Company (NICO) under three aggregate excess of loss contracts described below (collectively, the NICO contracts). The NICO contracts are excluded as they cover non-A&E liabilities as well as A&E liabilities. The split of coverage provided under the NICO contracts for A&E liabilities as compared to non-A&E liabilities is entirely dependant on the timing of the payment of the related claims. The Company’s ability to make an estimate of this split is not practicable. The Company believes, instead, that the A&E discussion is best provided excluding the NICO contracts, while separately discussing the NICO contracts in relation to the total subject business, both A&E and non-A&E, covered by those contracts. With certain exceptions, the NICO contracts provide coverage for the net A&E incurred losses and allocated loss expenses within the limits of coverage and above ACE’s retention levels. These exceptions include losses arising from certain operations of Insurance – Overseas General and participations by ACE Bermuda as a co-reinsurer or retrocessionaire in the NICO contracts.
 
Brandywine run-off – impact of NICO contracts on ACE’s run-off liabilities
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 allocated 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 contract (the Brandywine NICO Agreement) flow to the other Brandywine companies and to the ACE INA insurance subsidiaries through agreements between those companies and Century. The Brandywine NICO Agreement was exhausted on an incurred basis in the fourth quarter of 2002.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
The following table presents a roll forward of net loss reserves, allocated and unallocated loss adjustment expense reserves, and provision for uncollectible reinsurance in respect of Brandywine operations only, including the impact of the Brandywine NICO Agreement. The table below presents Brandywine incurred activity for the period ended December 31, 2007.

 	 	Brandywine	 	 	 	 	NICO
Coverage (3)	 	 	 	 	Net of NICO
Coverage	 	
(in millions of U.S. dollars)	 	A&E (1)	 	 	 	 	Other (2)	 	 	 	 	Total	 	 	 	 			 	 	 			
Balance at December 31, 2006	 	$	1,503	 	 	 	 	$	1,101	 	 	 	 	$	2,604	 	 	 	 	$	1,811	 	 	 	 	$	793	 	
Incurred activity	 	 	(8	)	 	 	 	 	33	 	 	 	 	 	25	 	 	 	 	 	–	 	 	 	 	 	25	 	
Payment activity	 	 	(172	)	 	 	 	 	(94	)	 	 	 	 	(266	)	 	 	 	 	(214	)	 	 	 	 	(52	)	
Balance at December 31, 2007	 	$	1,323	 	 	 	 	$	1,040	 	 	 	 	$	2,363	 	 	 	 	$	1,597	 	 	 	 	$	766	 	
(1) The balance at December 31, 2006, has been reduced by $25 million of provision for uncollectible reinsurance as this balance was unrelated to A&E exposures.
(2) Other consists primarily of workers’ compensation, non-A&E general liability losses, and provision for uncollectible reinsurance on non-A&E business.
(3) The balance at December 31, 2006, has been adjusted by $104 million to reflect a change in reporting to an incurred basis from a cash-received basis.
 
The Brandywine A&E incurred benefit of $8 million was a result of a recovery recorded on a casualty clash reinsurance cover. The Brandywine Other incurred loss of $33 million is principally comprised of a reclassification of bad debt charges of $26 million from the active company run-off operations to Brandywine.
 
Reserve reviews
During 2007, the Company conducted a review of its consolidated A&E liabilities as of June 30, 2007. As a result of the internal review, the Company concluded that its net loss reserves for the Brandywine operations, including A&E, were adequate and, therefore, no change to the carried reserve was required. An internal review was also conducted during 2006 for the consolidated A&E liabilities as of June 30, 2006. For that review, the Company concluded that its net loss reserves for the Brandywine operations, including A&E, were adequate and, therefore, no change to the carried net reserve was required, while the gross loss reserves increased by approximately $210 million.
In 2006, a team of external actuaries performed an evaluation as to the adequacy of the reserves of Century. This 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 results of the external review were addressed with the Pennsylvania Insurance Department and no changes to statutory-basis loss reserves were deemed necessary. The Company’s A&E reserves are not discounted and do not reflect any anticipated future changes in the legal, social, or economic environment, or any benefit from future legislative reforms.
 
Westchester Specialty – impact of NICO contracts on ACE’s run-off liabilities
As part of the acquisition of Westchester Specialty in 1998, NICO provided a 75 percent pro-rata share of $1 billion of reinsurance protection on losses and loss adjustment expenses incurred on or before December 31, 1996, in excess of a retention of $721 million (the 1998 NICO Agreement). NICO has also provided an 85 percent pro-rata share of $150 million of reinsurance protection on losses and allocated loss adjustment expenses incurred on or before December 31, 1992, in excess of a retention of $755 million (the 1992 NICO Agreement). At December 31, 2007, the remaining unused incurred limit under the 1998 NICO Agreement was $488 million which is available only for losses and loss adjustment expenses. The 1992 NICO Agreement is exhausted on an incurred basis.
The following table presents a roll forward of net loss reserves, allocated and unallocated loss adjustment expense reserves, and provision for uncollectible reinsurance in respect of 1996 and prior Westchester Specialty operations that are the subject business of the NICO covers. The table below presents incurred activity for the period ended December 31, 2007.

 	 	Westchester Specialty	 	 	 	 	NICO
Coverage (3)	 	 	 	 	Net of NICO
Coverage	
(in millions of U.S. dollars)	 	A&E (1)	 	 	 	Other (2)	 	 	 	 	Total	 	 	 	 			 	 	 		
Balance at December 31, 2006	 	$	221	 	 	 	$	147	 	 	 	 	$	368	 	 	 	 	$	327	 	 	 	 	$	41	
Incurred activity	 	 	–	 	 	 	 	2	 	 	 	 	 	2	 	 	 	 	 	–	 	 	 	 	 	2	
Payment activity	 	 	3	 	 	 	 	(29	)	 	 	 	 	(26	)	 	 	 	 	(29	)	 	 	 	 	3	
Balance at December 31, 2007	 	$	224	 	 	 	$	120	 	 	 	 	$	344	 	 	 	 	$	298	 	 	 	 	$	46	
(1) The balance at December 31, 2006, has been reduced by $50 million of reinsurance recoverable as this balance was unrelated to A&E exposures.
(2) Other consists primarily of non-A&E general liability and products liability losses.
(3) The balance at December 31, 2006, has been adjusted by $19 million to reflect a change in reporting to an incurred basis from a cash-received basis.
 
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ACE Limited and Subsidiaries
 
Brandywine run-off entities
In addition to housing a significant portion of the 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 (a Pennsylvania insurer), and Century International Reinsurance Company Ltd. (a Bermuda insurer (CIRC)). All of the Brandywine companies are direct or indirect subsidiaries of Brandywine Holdings.
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 2007, 2006, and 2005, no such 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, an ACE INA insurance subsidiary provided reinsurance 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, 2007, was $25 million and approximately $321 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 upon consolidation. To estimate ACE’s remaining claim exposure under the Aggregate Excess of Loss Agreement on a GAAP basis, the Company adjusts the statutory cession to exclude the discount embedded in statutory loss reserves and adjusts the statutory provision for uncollectible reinsurance to a GAAP basis amount. At December 31, 2007, approximately $572 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 $228 million. At December 31, 2006, the remaining limit of coverage under the agreement was $255 million. While we believe ACE has no legal obligation to fund losses above the Aggregate Excess of Loss Agreement limit of coverage, ACE’s consolidated results would nevertheless continue to include any losses above the limit of coverage for so long as the Brandywine 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, 2007, the aggregate reinsurance balances ceded by the active ACE companies to Century were approximately $1.5 billion. At December 31, 2007, Century’s carried gross reserves (including reserves ceded by the active ACE companies to Century) were $3.5 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. A substantial portion of the liabilities ceded to Century by its affiliates have in turn been ceded by Century to NICO and, as of December 31, 2007, approximately $1.6 billion of cover remains on a paid basis. Should Century’s loss reserves experience adverse development in the future and should Century be placed into rehabilitation or liquidation, the reinsurance recoverables due from Century to its affiliates would be payable only after the payment in full of certain expenses and liabilities, including administrative expenses and direct policy liabilities. Thus, the intercompany reinsurance recoverables would be at risk to the extent of the shortage of assets
 
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ACE Limited and Subsidiaries
 
remaining to pay these recoverables. As of December 31, 2007, losses ceded by Century to the active ACE companies and other amounts owed to Century by the active ACE companies were approximately $523 million in the aggregate.
 
 7. Taxation
 
Under current Cayman Islands law, ACE Limited is not required to pay any taxes on its income or capital gains. If a Cayman Islands law were to be enacted that would impose taxes on income or capital gains, ACE Limited has received an undertaking from the Governor in Cabinet that would exempt it from such taxation until January 2026. Under current Bermuda law, ACE Limited and its Bermuda subsidiaries are not required to pay any taxes on its income or capital gains. If a Bermuda law were to be enacted that would impose taxes on income or capital gains, ACE Limited and the Bermuda subsidiaries have received an undertaking from the Minister of Finance in Bermuda that would exempt such companies from Bermudian taxation 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 Internal Revenue Service (IRS) whereby the amount of tax due on this business is calculated by Lloyd’s and remitted directly to the IRS. These amounts are then charged to the accounts of the Names/Corporate Members in proportion to their participation in the relevant syndicates. 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 Group 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 Group Holdings pay a dividend to the Company, withholding taxes would apply. Currently, however, no withholding taxes are accrued with respect to such un-remitted earnings as management has no intention of remitting these earnings. 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 income taxation other than as stated above. There can be no assurance that there will not be changes in applicable laws, regulations, or treaties which might require the Company to change the way it operates or become subject to taxation.
The income tax provision for the years ended December 31, 2007, 2006, and 2005, is as follows:

(in millions of U.S. dollars)	 	2007	 	 	 	2006	 	 	 	2005	 	
Current tax expense	 	$	550	 	 	 	$	465	 	 	 	$	288	 	
Deferred tax expense (benefit)	 	 	25	 	 	 	 	57	 	 	 	 	(15	)	
Provision for income taxes	 	$	575	 	 	 	$	522	 	 	 	$	273	 	
 
The weighted-average expected tax provision has been calculated using pre-tax accounting income (loss) in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate. A reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted-average tax rate for the years ended December 31, 2007, 2006, and 2005, is provided below.

(in millions of U.S. dollars)	 	2007	 	 	 	 	2006	 	 	 	 	2005	 	
Expected tax provision at weighted-average rate	 	$	599	 	 	 	 	$	484	 	 	 	 	$	322	 	
Permanent differences:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Tax-exempt interest and DRD, net of proration	 	 	(18	)	 	 	 	 	(8	)	 	 	 	 	(7	)	
Net withholding taxes	 	 	18	 	 	 	 	 	21	 	 	 	 	 	12	 	
Other	 	 	(25	)	 	 	 	 	32	 	 	 	 	 	12	 	
Fines and penalties	 	 	1	 	 	 	 	 	18	 	 	 	 	 	–	 	
Sale of run-off reinsurance subsidiaries	 	 	–	 	 	 	 	 	(25	)	 	 	 	 	–	 	
Goodwill	 	 	–	 	 	 	 	 	–	 	 	 	 	 	3	 	
American Jobs Creation Act	 	 	–	 	 	 	 	 	–	 	 	 	 	 	(69	)	
Total provision for income taxes	 	$	575	 	 	 	 	$	522	 	 	 	 	$	273	 	
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
The components of the net deferred tax assets as of December 31, 2007 and 2006, are as follows:

(in millions of U.S. dollars)	 	2007	 	 	 	2006	
Deferred tax assets	 	 	 	 	 	 	 	 	
Loss reserve discount	 	$	754	 	 	 	$	751	
Unearned premiums reserve	 	 	132	 	 	 	 	137	
Foreign tax credits	 	 	703	 	 	 	 	672	
Investments	 	 	117	 	 	 	 	133	
Provision for uncollectible balances	 	 	134	 	 	 	 	106	
Loss carry-forwards	 	 	45	 	 	 	 	24	
Other, net	 	 	–	 	 	 	 	34	
Total deferred tax assets	 	 	1,885	 	 	 	 	1,857	
Deferred tax liabilities	 	 	 	 	 	 	 	 	
Deferred policy acquisition costs	 	 	111	 	 	 	 	98	
Unrealized appreciation on investments	 	 	153	 	 	 	 	129	
Un-remitted foreign earnings	 	 	483	 	 	 	 	430	
Other, net	 	 	10	 	 	 	 	–	
Total deferred tax liabilities	 	 	757	 	 	 	 	657	
Valuation allowance	 	 	41	 	 	 	 	35	
Net deferred tax assets	 	$	1,087	 	 	 	$	1,165	
 
The valuation allowance of $41 million at December 31, 2007, and $35 million at December 31, 2006, reflects management’s assessment, based on available information, that it is more likely than not that a portion of the deferred tax assets 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 allowance are made when there is a change in management’s assessment of the amount of deferred tax assets that are realizable.
At December 31, 2007, the Company has a U.S. capital loss carry-forward of $124 million which, if unutilized, will expire in the year 2011 and a foreign tax credit carry-forward in the amount of $99 million which, if unutilized, will expire in the years 2011-2016.
The Company adopted the provisions of FIN 48 on January 1, 2007. As a result of the adoption of FIN 48, the Company recognized a reduction to opening retained earnings of $22 million. This cumulative effect of adopting FIN 48 is comprised of a $20 million increase in the liability for unrecognized tax benefits and a $2 million after-tax adjustment to interest payable. The Company’s total unrecognized tax benefit as of the adoption date was $196 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits for 2007 is as follows:

(in millions of U.S. dollars)	 	 	 	
Balance at January 1, 2007	 	$	196	 	
Additions based on tax positions related to the current year	 	 	1	 	
Reductions for tax positions of prior years	 	 	(40	)	
Balance at December 31, 2007	 	$	157	 	
 
The reduction for tax positions taken in prior years primarily results from a change in the tax regulations during the three months ended March 31, 2007.
Included in the balance at December 31, 2007, is $1 million of unrecognized tax benefits for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, an unfavorable resolution of these temporary items would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. Consequently, the total amount of unrecognized tax benefits as of December 31, 2007, that would affect the effective tax rate, if recognized, is $112 million. The total amount of unrecognized tax benefits as of December 31, 2007, that would reduce goodwill if recognized prior to the adoption of FAS 141R is $44 million.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
The Company recognizes accruals for interest and penalties, if any, related to unrecognized tax benefits in income tax expense. As of December 31, 2007, the Company has recorded $8 million in liabilities for tax-related interest in its consolidated balance sheet.
The IRS has completed examinations of the Company’s federal tax returns for taxable years through 2001. The outcome of the examinations did not have a material effect on the Company’s financial condition or results of operations. The IRS completed its field examination of the Company’s federal tax returns for 2002, 2003, and 2004 during the three months ended September 30, 2007, and has proposed several adjustments principally involving transfer pricing and other insurance-related tax deductions. The Company subsequently filed a written protest with the IRS indicating the Company’s intent to appeal several of the proposed adjustments and anticipates that the case will be referred to the IRS Appeals Division during the first quarter of 2008. While it is reasonably possible that a significant increase or decrease in the Company’s unrecognized tax benefits could occur in the next twelve months, given the uncertainty regarding the timing and possible outcomes of the appeals process, a current estimate of the range of reasonably possible changes cannot be made. The Company expects the IRS to commence its field examination for tax years 2005 and later during the first quarter of 2008. With few exceptions, the Company’s significant U.K. subsidiaries remain subject to examination for tax years 2006 and later.
 
 8. Debt
 
The following table outlines the Company’s debt as of December 31, 2007 and 2006.

(in millions of U.S. dollars)	 	2007	 	 	 	2006	
Short-term debt	 	 	 	 	 	 	 	 	
Australia Holdings due 2008	 	$	87	 	 	 	$	78	
ACE US Holdings senior notes due 2008	 	 	250	 	 	 	 	–	
Reverse repurchase agreement	 	 	35	 	 	 	 	–	
ACE Limited senior notes due 2007	 	 	–	 	 	 	 	500	
 	 	$	372	 	 	 	$	578	
Long-term debt	 	 	 	 	 	 	 	 	
ACE INA subordinated notes due 2009	 	$	201	 	 	 	$	202	
ACE European Holdings due 2010	 	 	199	 	 	 	 	197	
ACE INA senior notes due 2014	 	 	499	 	 	 	 	499	
ACE INA senior notes due 2017	 	 	500	 	 	 	 	–	
ACE INA debentures due 2029	 	 	100	 	 	 	 	100	
ACE INA senior notes due 2036	 	 	298	 	 	 	 	298	
Other	 	 	14	 	 	 	 	14	
ACE US Holdings senior notes due 2008	 	 	–	 	 	 	 	250	
 	 	$	1,811	 	 	 	$	1,560	
Trust preferred securities	 	 	 	 	 	 	 	 	
ACE INA capital securities due 2030	 	$	309	 	 	 	$	309	
 
a) Short-term debt
As described below, at December 31, 2007, short-term debt consisted of an $87 million, 7.8 percent note due December 2008, $250 million in aggregate principal amount of unsecured senior notes maturing in October 2008, and $35 million owed to brokers under a securities repurchase agreement. The Company’s commercial paper programs that used revolving credit facilities as back-up facilities and provided for up to $600 million in commercial paper issuance for each of ACE Limited and ACE INA Holdings, Inc. were cancelled during the fourth quarter of 2007.
In December 2005, Australia Holdings PTY Ltd. entered into an AUD $100 million ($87 million) syndicated unsecured two-year term loan agreement due December 2007. In December 2007, this term loan agreement was renewed with essentially the same terms for a further 12 months and therefore expires in December 2008. The obligation of the borrower under the loan agreement is guaranteed by ACE Limited.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
During the year, the Company executed a securities repurchase agreement with a counterparty. Under this repurchase agreement, the Company agreed to sell securities and repurchase them at a date in the future for a predetermined price. At December 31, 2007, short-term debt consisted of $35 million of amounts owed to brokers under the securities repurchase transaction .
 
b) ACE US Holdings senior notes
In 1998, ACE US Holdings issued $250 million in aggregate principal amount of unsecured senior notes maturing in October 2008. The senior notes are callable subject to certain call premiums. Simultaneously, the Company entered into a notional $250 million swap transaction that has the economic effect of reducing the cost of debt to the consolidated group, excluding fees and expenses, to 6.47 percent for ten years. This rate may increase by up to 0.50 percent depending on certain financial ratios of ACE US Holdings. The minimum collateral in connection with the swap transaction is $88 million. The actual collateral can be higher depending on the credit quality of securities pledged. In the event that the Company terminates the swap prematurely, the Company would also be liable for certain transaction costs. The swap counterparty is a highly-rated major financial institution and the Company does not anticipate non-performance.
 
c) ACE INA subordinated notes
In 1999, ACE INA issued $300 million of 11.2 percent unsecured subordinated notes maturing in December 2009. The subordinated notes are callable subject to certain call premiums. Simultaneously, the Company entered into a notional $300 million swap transaction that has the economic effect of reducing the cost of debt to the consolidated group, excluding fees and expenses, to 8.41 percent for ten years. During 2002, the Company repaid $100 million of these notes and swaps, and incurred debt prepayment expenses of $25 million ($17 million, after-tax). The minimum collateral in connection with the swap transaction is $70 million. In the event that the Company terminates the swap prematurely, the Company would be liable for certain transaction costs. The swap counterparty is a highly-rated major financial institution and the Company does not anticipate non-performance.
 
d) ACE European Holdings notes
In December 2005, ACE European Holdings No. 2 Ltd. entered into a £100 million ($199 million) syndicated five-year term loan agreement due December 2010. The loan agreement is unsecured and repayable on maturity. The interest rate on the loan is 5.25 percent. The obligation of the borrower under the loan agreement is guaranteed by ACE Limited.
 
e) ACE INA notes and debentures
In June 2004, ACE INA issued $500 million of 5.875 percent notes due June 2014. These notes are redeemable at any time at ACE INA’s option subject to a “make-whole” premium plus 0.20 percent. The notes are also redeemable at par plus accrued and unpaid interest in the event of certain changes in tax law. The notes do not have the benefit of any sinking fund. These senior unsecured notes are guaranteed on a senior basis by the Company and they rank equally with all of the Company’s other senior obligations. They also contain a customary limitation on lien provisions as well as customary events of default provisions which, if breached, could result in the accelerated maturity of such senior debt.
In February 2007, ACE INA issued $500 million of 5.7 percent notes due February 2017. These notes are redeemable at any time at ACE INA’s option subject to a “make-whole” premium plus 0.20 percent. The notes are also redeemable at par plus accrued and unpaid interest in the event of certain changes in tax law. These notes do not have the benefit of any sinking fund. These senior unsecured notes are guaranteed on a senior basis by the Company and they rank equally with all of the Company’s other senior obligations. They also contain a customary limitation on lien provisions as well as customary events of default provisions which, if breached, could result in the accelerated maturity of such senior debt.
In 1999, ACE INA issued $100 million of 8.875 percent debentures due August 2029. Subject to certain exceptions, the debentures are not redeemable before maturity and do not have the benefit of any sinking fund. These unsecured debentures are guaranteed on a senior basis by the Company and they rank equally with all of ACE INA’s other senior indebtedness.
In May 2006, ACE INA issued $300 million of 6.7 percent notes due May, 2036. These notes are redeemable at any time at ACE INA’s option subject to a “make-whole” premium plus 0.20 percent. The notes are also redeemable at par plus accrued and unpaid interest in the event of certain changes in tax law. These notes do not have the benefit of any sinking fund. These senior unsecured notes are guaranteed on a senior basis by the Company and they rank equally with all of the Company’s other senior obligations. They also contain a customary limitation on lien provisions as well as customary events of default provisions which, if breached, could result in the accelerated maturity of such senior debt.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
f) ACE Limited senior notes
In March 2002, ACE Limited issued $500 million of 6.0 percent notes due April 2007. These senior unsecured notes were repaid by the Company in April 2007.
 
g) ACE INA capital securities
In 2000, ACE Capital Trust II, a Delaware statutory business trust, publicly issued $300 million of 9.7 percent Capital Securities (the Capital Securities). At the same time, ACE INA purchased $9.2 million of common securities of ACE Capital Trust II.
The Capital Securities mature in April 2030. Distributions on the Capital Securities are payable semi-annually. ACE Capital Trust II may defer these payments for up to ten consecutive semi-annual periods (but no later than April 1, 2030). Any deferred payments would accrue interest semi-annually on a compounded basis if ACE INA defers interest on the Subordinated Debentures due 2030 (as defined below).
The sole assets of ACE Capital Trust II consist of $309 million principal amount of 9.7 percent Junior Subordinated Deferrable Interest Debentures (the Subordinated Debentures due 2030) issued by ACE INA. The Subordinated Debentures due 2030 mature in April 2030. Interest on the Subordinated Debentures due 2030 is payable semi-annually. ACE INA may defer such interest payments (but no later than April 1, 2030), with such deferred payments accruing interest compounded semi-annually. ACE INA may redeem the Subordinated Debentures due 2030 in the event certain changes in tax or investment company law occur at a redemption price equal to accrued and unpaid interest to the redemption date plus the greater of (i) 100 percent of the principal amount thereof, or (ii) the sum of the present value of scheduled payments of principal and interest on the debentures from the redemption date to April 1, 2030. The Capital Securities and the ACE Capital Trust II Common Securities will be redeemed upon repayment of the Subordinated Debentures due 2030.
The Company has guaranteed, on a subordinated basis, ACE INA’s obligations under the Subordinated Debentures due 2030, and distributions and other payments due on the Capital Securities. These guarantees, when taken together with the Company’s obligations under expense agreements entered into with ACE Capital Trust II, provide a full and unconditional guarantee of amounts due on the Capital Securities.
 
h) Other long-term debt
In August 2005, due to favorable low-interest terms, ACE American borrowed $10 million from the Pennsylvania Industrial Development Authority (PIDA) at a rate of 2.75 percent due September 2020. The proceeds from PIDA were restricted for purposes of defraying construction costs on a new office building. Principal and interest are payable on a monthly basis. The current balance outstanding is $9 million.
In addition, in 1999, ACE American assumed a CIGNA loan of $8 million borrowed from the City of Philadelphia under the Urban Development Action Grant with an imputed rate of 7.1 percent due December 2019. The current amount outstanding is $5 million.
 
 9. Commitments, contingencies, and guarantees
 
a) Derivative instruments
The Company maintains positions in derivative instruments such as futures, options, swaps, and foreign currency forward contracts for which the primary purposes are to manage duration and foreign currency exposure, yield enhancement, to obtain an exposure to a particular financial market, or to limit equity and interest rate exposure in the GMDB and GMIB block of business. In addition, the Company also purchases to be announced mortgage-backed securities as part of its investing activities. The Company records changes in market value of these instruments as realized gains (losses) in the consolidated statements of operations. None of the derivatives are used as hedges for accounting purposes.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
The following table outlines the notional values of certain derivative instruments at December 31, 2007 and 2006.

(in millions of U.S. dollars)	 	2007	 	 	 	2006	
Foreign exchange forward contracts	 	$	1,104	 	 	 	$	970	
Future contracts on money market instruments	 	 	9,520	 	 	 	 	8,619	
Future contracts on notes and bonds	 	 	998	 	 	 	 	738	
Interest rate swaps	 	 	850	 	 	 	 	2,270	
Credit default swaps	 	 	420	 	 	 	 	–	
Options on money market instruments	 	 	758	 	 	 	 	559	
Options on notes and bond futures	 	 	1,099	 	 	 	 	50	
Options on equity market futures	 	 	1,050	 	 	 	 	1,050	
Options on interest rate swaps	 	 	–	 	 	 	 	2,000	
Total notional value of derivatives	 	$	15,799	 	 	 	$	16,256	
 
Derivatives on money market instruments have a duration of approximately 3 months regardless of the maturity date of the derivative.
 
(i) Foreign currency exposure management
 
The Company uses foreign currency forward contracts (forwards) to minimize the effect of fluctuating foreign currencies. The forwards purchased are not specifically identifiable against cash, any single security, or groups of securities denominated in those currencies and, therefore, do not qualify as hedges for financial reporting purposes. All realized and unrealized contract gains and losses are reflected in Net realized gains (losses) in the consolidated statements of operations. At December 31, 2007, the contractual amount of the forwards was $1.103 billion, the fair value of the underlying foreign currencies was $1.104 billion, and the fair value of the forwards was $1 million. At December 31, 2006, the contractual amount of the forwards was $968 million, the fair value of the underlying foreign currencies was $970 million, and the fair value of the forwards was $2 million.
 
(ii) Duration management and market exposure
 
Futures
Exchange traded bond and note futures contracts may be used in fixed maturity portfolios as substitutes for ownership of the bonds and notes without significantly increasing the risk in the portfolio. Investments in futures contracts may be made only to the extent that there are assets under management not otherwise committed.
Futures contracts give the holder the right and obligation to participate in market movements, determined by the index or underlying security on which the futures contract is based. Settlement is made daily in cash by an amount equal to the change in value of the futures contract times a multiplier that scales the size of the contract. At December 31, 2007 and 2006, the contract notional amounts of $10.5 billion and $9.4 billion, respectively, with market values of $18 million and $(3) million, respectively, reflect the net extent of involvement the Company had in bond and note futures. The fair value of these exchange traded contracts is based on the closing value on the respective exchanges.
 
Interest rate swaps
An interest rate swap is a contract between two counterparties in which interest payments are made based on a notional principal amount, which itself is never paid or received. At December 31, 2007 and 2006, the notional principal amounts were $850 million and $2.3 billion, respectively, and the market values were $6 million and $4 million, respectively. Under the terms of an interest rate swap, one counterparty makes interest payments based on a fixed interest rate and the other counterparty’s payments are based on a floating rate. Interest rate swap contracts are used in the portfolio as protection against unexpected shifts in interest rates, which would affect the fair value of the fixed maturity portfolio. By using swaps in the portfolio, the overall duration or interest rate sensitivity of the portfolio can be reduced.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
Credit default swaps
A credit default swap is a bilateral contract under which two counterparties agree to isolate and separately trade the credit risk of at least one third-party reference entity. At December 31, 2007, the notional principal amount was $420 million and the market value was $5 million. Under a credit default swap agreement, a protection buyer pays a periodic fee to a protection seller in exchange for a contingent payment by the seller upon a credit event (such as a default or failure to pay) related to the reference entity. When a credit event is triggered, the protection seller either takes delivery of the assets for the principal amount or pays the protection buyer the difference between the fair value of assets and the principal amount. The Company buys credit default swaps to mitigate global credit risk exposure from time to time.
 
Options
Option contracts may be used in the portfolio as protection against unexpected shifts in interest rates, which would thereby affect the duration of the fixed maturity portfolio. By using options in the portfolio, the overall interest rate sensitivity of the portfolio can be reduced. Option contracts may also be used as an alternative to futures contracts in the Company’s synthetic equity strategy as described above. Another use for option contracts may be to limit exposure to a severe equity market decline, which would cause an increase in expected claims and therefore reserves for GMDB and GMIB reinsurance business. An option contract conveys to the holder the right, but not the obligation, to purchase or sell a specified amount or value of an underlying security at a fixed price. The price of an option is influenced by the underlying security, expected volatility, time to expiration, and supply and demand.
For long option positions, the maximum loss is the premium paid for the option. The maximum credit exposure is represented by the fair value of the options held. For short option positions, the potential loss is the same as having taken a position in the underlying security. Short call options are backed in the portfolio with the underlying, or highly correlated, securities and short put options are backed by uncommitted cash for the in-the-money portion. The long options had a maximum loss of $70 million as of December 31, 2007 and 2006, of which $0.1 million has already been recognized as realized losses. The long options had a maximum credit exposure of $70 million as of December 31, 2007, and $48 million as of December 31, 2006. The Company holds a notional amount of $2.9 billion and a market value of $63 million at December 31, 2007. At December 31, 2006, the notional amount was $1.7 billion and the market value was $48 million. The majority of the option positions held at December 31, 2007 and 2006, have short-term expiration dates. In addition, the Company held option positions on interest rate swaps totaling $2 billion, and a market value of $0.8 million at December 31, 2006. All options except those on interest rate swaps are exchange traded based on closing values on the relevant exchange.
The credit risk associated with the above derivative financial instruments relates to the potential for non-performance by counterparties. Although non-performance is not anticipated, in order to minimize the risk of loss, management monitors the creditworthiness of its counterparties. The performance of exchange traded instruments is guaranteed by the exchange on which they trade. For non-exchange traded instruments, the counterparties are principally banks which must meet certain criteria according to the Company’s investment guidelines. These counterparties are required to have a minimum credit rating of AA- by Standard and Poor’s or Aa3 by Moody’s. In addition, certain contracts require that collateral be posted once pre-determined thresholds are breached as a result of market movements.
 
(iii) To be announced mortgage-backed securities (TBA)
 
By acquiring a TBA, the Company makes a commitment to purchase a future issuance of mortgage-backed securities. For the period between purchase of the TBA and issuance of the underlying security, the Company’s position is accounted for as a derivative in the consolidated financial statements. At December 31, 2007 and 2006, the Company had TBA’s with market values of $1.4 billion and $1 billion, respectively, and corresponding par amounts of $1.4 billion and $1.1 billion, respectively.
 
(iv) Convertible security investment
 
A convertible bond is a debt instrument that can be converted into a predetermined amount of the issuer’s equity at certain times prior to the bond’s maturity. The convertible option is an embedded derivative which is marked-to-market with changes in fair value recognized in Net realized gains (losses). The debt host instrument is classified in the investment portfolio as available for sale. Effective January 1, 2007, the Company adopted FAS 155 and, consequently, changes in the fair value of the host instrument are recognized in Net realized gains (losses). The Company purchases convertible bonds for their total return and not specifically for the conversion feature.
 
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b) Concentrations of credit risk
The investment portfolio is managed following prudent standards of diversification. Specific provisions limit the allowable holdings of a single issue and issuer. The Company believes that there are no significant concentrations of credit risk associated with its investments. The Company’s three largest exposures by issuer as of December 31, 2007, were General Electric Company, Citigroup Inc., and Morgan Stanley. The Company’s largest exposure by industry as of December 31, 2007, was financial services.
The Company markets its insurance and reinsurance worldwide primarily through insurance and reinsurance brokers. The Company assumes a degree of credit risk associated with brokers with whom it transacts business. During the year ended December 31, 2007, approximately 17 percent of the Company’s gross premiums written were generated from or placed by Marsh, Inc. and its affiliates and 11 percent by AON Corporation and its affiliates. Both of these entities are large, well established companies and there are no indications that either of them is financially troubled. No other broker and no one insured or reinsured accounted for more than ten percent of gross premiums written in the three years ended December 31, 2007, 2006, or 2005.
 
c) Other investments
The Company invests in limited partnerships with a carrying value of $528 million included in Other investments. In connection with these investments, the Company has commitments that may require funding of up to $606 million over the next several years.
 
d) Credit facilities
In November 2007, the Company entered into a $500 million unsecured revolving credit facility expiring in November 2012. This facility is available for general corporate purposes and the issuance of LOCs and replaced the existing $600 million revolving credit facility. On the effective date of the new revolving credit facility, all outstanding LOCs issued under the replaced facility were deemed to have been issued under the new revolving credit facility and the replaced facility terminated. At December 31, 2007, the outstanding LOCs issued under the renewed facility were $64 million. There were no other drawings or LOCs issued under this facility. This facility requires that the Company and/or certain of its subsidiaries continue to maintain certain covenants, including a minimum consolidated net worth covenant and a maximum leverage covenant, which have been met at December 31, 2007.
In March 2007, the Company renewed its $50 million, 364 day credit facility. This facility was available to cover short-term aggregate net debit positions across the notional cash pooling accounts of the Company held with a bank provider. This facility was cancelled in November 2007, following the completion of the renewed revolving credit facility discussed above which was amended to allow same day draw downs if needed.
 
e) Letters of credit
In November 2007, the Company entered into a $1 billion unsecured operational LOC facility expiring in November 2012. This facility replaced two LOC facilities permitting up to $1.5 billion of LOCs. On the effective date of the new LOC facility, all outstanding LOCs issued under the replaced facilities were deemed to have been issued under the new LOC facility and the replaced facilities terminated. At December 31, 2007, $852 million of this facility was utilized.
In November 2006, to satisfy funding requirements of the Company’s Lloyd’s of London (Lloyd’s) Syndicate 2488 through 2009, the Company renewed its syndicated, uncollateralized LOC facility in the amount of £380 million ($754 million). In June 2007, Syndicate 2488 reduced the LOC balance supporting its funds at Lloyd’s in line with the requirements promulgated by Lloyd’s. The facility amount was also reduced to £300 million ($595 million). In November 2007, the Company gained approval from its bank group to extend the term of the facility by one year, to satisfy Syndicate 2488’s funding requirements through 2010. LOCs issued under this facility will expire no earlier than December 2013. At December 31, 2007, £206 million ($409 million) of this facility was utilized.
These facilities require that the Company and/or certain of its subsidiaries continue to maintain certain covenants, including a minimum consolidated net worth covenant and a maximum leverage covenant, which have been met at December 31, 2007.
 
f) 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. In addition to claims litigation,
 
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the Company and its subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from, or directly relate to, claims on insurance policies. This category of business litigation typically involves, amongst other things, 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
Beginning in 2004, ACE and its subsidiaries and affiliates received numerous subpoenas, interrogatories, and civil investigative demands in connection with certain investigations of insurance industry practices. These inquiries have been issued by a number of attorneys general, state departments of insurance, and other authorities, including the New York Attorney General (NYAG), the Pennsylvania Department of Insurance, and the Securities and Exchange Commission (SEC). These inquiries seek information concerning underwriting practices and non-traditional or loss mitigation insurance products. To the extent they are ongoing, ACE is cooperating and will continue to cooperate with such inquiries. ACE conducted its own investigation that encompassed the subjects raised by the NYAG and the other state and federal regulatory authorities. The investigation was conducted by a team from the firm of Debevoise & Plimpton LLP headed by former United States Attorney Mary Jo White and operated under and at the direction of the Audit Committee of the Board of Directors. ACE’s internal investigations pertaining to underwriting practices and non-traditional or loss mitigation insurance products are complete.
 
(iii) Settlement agreements
On April 25, 2006, ACE reached a settlement with the Attorneys General of New York, Illinois, and Connecticut and the New York Insurance Department pursuant to which ACE received from these authorities an Assurance of Discontinuance (AOD). Under the AOD, these regulators agreed not to file certain litigation against ACE relating to their investigation of certain business practices, and ACE agreed to pay $80 million ($66 million after tax) without admitting any liability, and to adopt certain business reforms. Of that $80 million, $40 million was paid to the three settling Attorneys General as a penalty. The remaining $40 million was placed in a fund allocated for distribution to eligible policyholders who execute a release of certain claims they may have against ACE. Approximately $39 million of this $40 million has been distributed to such policyholders. Under the AOD, ACE first may use the sums remaining to settle these or similar types of policyholder claims, and then shall use any sums remaining after such settlements to provide additional amounts to those policyholders who initially executed the release. ACE has used the remaining sums to settle similar policyholder claims. A total of $80 million was recorded in administrative expenses in the quarter ended March 31, 2006.
On May 9, 2007, ACE and the Pennsylvania Insurance Department (Department) and the Pennsylvania Office of Attorney General (OAG) entered into a settlement agreement. This settlement agreement resolves the issues raised by the Department and the OAG arising from their investigation of ACE’s underwriting practices and contingent commission payments. As a result of this settlement agreement, ACE made a $9 million payment to the Department and agreed to comply with the business practice guidelines that ACE established in 2004 to assure ongoing antitrust compliance in its operations.
On October 24, 2007, ACE entered into a settlement agreement with the Attorneys General of Florida, Hawaii, Maryland, Massachusetts, Michigan, Oregon, Texas, West Virginia, and the District of Columbia, and the Florida Department of Financial Services and Office of Insurance Regulation. The agreement resolves investigations of ACE’s underwriting practices and contingent commission payments. Under the agreement, ACE paid $4.5 million without admitting any liability, and agreed to keep in place certain business reforms already in effect.
 
(iv) Business practice-related litigation
ACE, ACE INA Holdings, Inc., and ACE USA, Inc., along with a number of other insurers and brokers, were named in a series of federal putative nationwide class actions brought by insurance policyholders. The Judicial Panel on Multidistrict Litigation (JPML) consolidated these cases in the District of New Jersey. On August 1, 2005, plaintiffs in the New Jersey consolidated proceedings filed two consolidated amended complaints – one concerning commercial insurance and the other concerning employee benefit plans. The employee benefit plans litigation against ACE has been dismissed.
In the commercial insurance complaint, the plaintiffs named ACE, 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 certain brokers and insurers, including certain ACE entities, 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 acted as intermediaries
 
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between the broker and insurer. Plaintiffs also allege that broker defendants tied the purchase of primary insurance to the placement of such coverage with reinsurance carriers through the broker defendants’ reinsurance broker subsidiaries. The complaint asserts the following causes of action against ACE: Federal Racketeer Influenced and Corrupt Organizations Act (RICO), federal antitrust law, state antitrust law, aiding and abetting breach of fiduciary duty, and unjust enrichment.
On November 29, 2005, ACE and other property and casualty insurer defendants filed motions to dismiss the commercial insurance complaint. On February 13, 2006, plaintiffs filed motions to certify a class in the commercial insurance case (this motion has been fully briefed and is pending). On October 3, 2006, the Court ruled on defendants’ motions and held that the McCarran Ferguson Act did not apply as a defense to the allegations, but the Court also held that plaintiffs had not adequately alleged an antitrust conspiracy or a RICO enterprise and directed plaintiffs to submit supplemental pleadings. Plaintiffs filed their supplemental pleadings on October 25, 2006. On November 30, 2006, defendants filed a renewed motion to dismiss. On April 5, 2007, the Court granted defendants’ renewed motion and dismissed the consolidated complaint without prejudice for failure to state a claim under either the Sherman Act or the RICO statutes. The Court permitted plaintiffs one final opportunity to re-plead and an amended complaint was filed on May 22, 2007. The amended complaint purported to add several new ACE defendants: ACE Group Holdings, Inc., ACE US Holdings, Inc., Westchester Fire Insurance Company, INA Corporation, INA Financial Corporation, INA Holdings Corporation, ACE Property and Casualty Insurance Company, and Pacific Employers Insurance Company. Plaintiffs also added a new antitrust claim against Marsh, ACE, and other insurers based on the same allegations as the other claims but limited to excess casualty insurance. On June 21, 2007, defendants moved to dismiss the amended complaint and moved to strike the new parties that plaintiffs attempted to add to that complaint. The Court granted defendants’ motions to dismiss and dismissed plaintiffs’ antitrust and RICO claims with prejudice on August 31, 2007, and September 28, 2007, respectively. By order dated September 28, 2007, the Court declined to exercise supplemental jurisdiction over plaintiffs’ state law claims and dismissed those claims without prejudice. On October 10, 2007, plaintiffs filed a Notice of Appeal of the antitrust and RICO rulings to the United States Court of Appeals for the Third Circuit. Plaintiffs filed their opening brief with the Third Circuit Court of Appeals on February 19, 2008. Defendants’ brief is currently due on March 20, 2008.
In New Cingular Wireless Headquarters LLC et al. v. Marsh & McLennan Companies, Inc. et al. (Case No. 06-5120; United States District Court for the District of New Jersey), a non-class-action lawsuit filed in the Northern District of Georgia on April 4, 2006, but later transferred to the District of New Jersey for coordination with the consolidated cases described above, the plaintiffs named the following entities: ACE Ltd., ACE American Ins. Co., ACE USA, Inc., ACE Bermuda Ins. Co. Ltd., Illinois Union Ins. Co., Pacific Employers Ins. Co., and Lloyd’s of London Syndicate 2488 AGM, along with a number of other insurers and brokers. The plaintiffs are insurance policyholders who allege that the defendants conspired to increase premiums and allocate customers through the use of “B” quotes and contingent commissions. The plaintiffs assert the following causes of action against ACE: RICO, federal antitrust law, inducement to breach of fiduciary duty, unjust enrichment, and fraud. All proceedings in this action are stayed pending a ruling by the Court on certain motions in the employee benefits litigation referenced above (in which ACE is not a party). Most of the defendants in this action and the other consolidated actions in the District of New Jersey have asked the Court to continue the stay until the United States Court of Appeals for the Third Circuit rules on plaintiffs’ appeal of the August 31, 2007, and September 28, 2007, antitrust and RICO rulings.
ACE, ACE INA Holdings, Inc., ACE USA, Inc., and ACE American Insurance Co., along with a number of other insurers and brokers, have been named in Avery Dennison Corp. v. Marsh & McLennan Companies, Inc. et al. (Case No. 07-00757) (filed February 13, 2007, in the District of New Jersey). The allegations in this case are also similar to the allegations in the consolidated federal actions identified above. On April 3, 2007, the court issued an order consolidating this case with the consolidated federal actions identified above. As addressed in the preceding paragraph, all proceedings in this action are currently stayed.
ACE USA, Inc., along with a number of other insurers and Marsh, has been named as a defendant in Henley Management Co., Inc. et al v. Marsh, Inc. et al. (Case No. 07-2389) (filed May 27, 2007, in the District of New Jersey). The allegations in this case are similar to the allegations in the consolidated federal actions identified above. On July 11, 2007, the Court issued an order consolidating this case with the consolidated federal actions. As addressed in the preceding two paragraphs, all proceedings in this action are currently stayed.
Lloyd’s of London Syndicate 2488 AGM, along with a number of other Lloyd’s of London Syndicates and various brokers, has been named as a defendant in two actions: Lincoln Adventures LLC et al. v. Those Certain Underwriters at Lloyd’s, London Members of Syndicates 0033 et al. (Case No. 07-60991) (filed July 13, 2007, in the Southern District of Florida), and Supreme Auto Transport LLC et al. v. Certain Underwriters of Lloyd’s of London, et al. (Case No. 07-6703) (filed July 25, 2007, in the Southern District of New York). The allegations in these putative class-action lawsuits are similar to the allegations in the consolidated federal actions identified above, although these lawsuits focus on alleged conduct within the London
 
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insurance market. On December 11, 2007, the JPML transferred both of these lawsuits to the above-referenced multidistrict litigation in the District of New Jersey for coordination. As addressed in the preceding paragraphs, all proceedings in these actions are currently stayed.
ACE American Insurance Co., ACE Bermuda Insurance Ltd., and Westchester Surplus Lines Insurance Co., along with a number of other insurers and brokers, have recently been named in Sears, Roebuck & Co. et al. v. Marsh & McLennan Companies, Inc. et al. (Case No. 07-2535) (filed October 12, 2007, in the Northern District of Georgia). The allegations in this case are similar to the allegations in the consolidated federal actions identified above. On November 19, 2007, the JPML transferred this lawsuit to the above-referenced multidistrict litigation in the District of New Jersey for coordination. As addressed in the preceding paragraphs, all proceedings in this action are currently stayed.
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 in this case are similar to the allegations in the federal class actions identified above. The Van Emden case has been stayed pending resolution of the consolidated proceedings in the District of New Jersey or until further order of the Court.
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 in this case are also similar to the allegations in the federal class actions identified above. The trial court originally stayed the Office Depot case pending resolution of the consolidated proceedings in the District of New Jersey. The Florida Court of Appeals then remanded the case to the trial court with instructions to reconsider whether a stay should be granted. On February 23, 2007, the trial court declined to grant another stay and ordered the defendants to respond to the complaint within the next twenty days. On March 15, 2007, defendants filed a motion to dismiss the complaint. On September 24, 2007, the court denied defendants’ motion to dismiss. Defendants answered the complaint on October 31, 2007. Discovery is ongoing.
ACE, ACE American Insurance Co., ACE Property & Casualty Insurance Co., Insurance Company of North America, and Westchester Fire Insurance Co., along with a number of other insurance companies and Marsh, have been named in a state court lawsuit filed by the Ohio Attorney General: State of Ohio, ex. rel. Marc E. Dann, Attorney General v. American Int’l Group, Inc. et al. (Case No. 07-633857) (filed August 24, 2007, in the Court of Common Pleas in Cuyahoga County, Ohio). The allegations in this case are similar to the allegations in the federal actions identified above. ACE filed a motion to dismiss the complaint on November 16, 2007. The Ohio Attorney General filed a response on December 21, 2007, and ACE replied on January 11, 2008. Oral argument on defendants’ motions to dismiss is scheduled for March 31, 2008. Discovery is currently stayed pending the earlier of May 2008 or a ruling on defendants’ motions to dismiss.
ACE was named in four putative securities class action suits following the filing of a civil suit against Marsh by the NYAG on October 14, 2004. The suits were consolidated by the JPML in the Eastern District of Pennsylvania. The Court has appointed as lead plaintiffs Sheet Metal Workers’ National Pension Fund and Alaska Ironworkers Pension Trust. Lead plaintiffs filed a consolidated amended complaint on September 30, 2005, naming ACE, Evan G. Greenberg, Brian Duperreault, and Philip V. Bancroft as defendants. Plaintiffs allege that ACE’s public statements and securities filings should have revealed that insurers, including certain ACE entities, and brokers allegedly conspired to increase premiums and allocate customers through the use of “B” quotes and contingent commissions and that ACE’s revenues and earnings were inflated by these practices. Plaintiffs assert claims solely under Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act), Rule 10(b)-5 promulgated thereunder, and Section 20(a) of the Securities Act (control person liability).
On October 28, 2005, ACE and the individual defendants filed a motion to dismiss the consolidated securities actions. Defendants argued that plaintiffs had not adequately alleged any actionable misrepresentations under the securities laws, and that defendants could not be held liable for any failures to disclose information. Defendants also argued that the individual defendants could not be held liable for statements they did not make; that plaintiffs had not adequately pled defendants’ knowledge of any misstatements; and that plaintiffs had not adequately pled loss causation. Plaintiffs have filed a response and the motion remains pending.
ACE has been named as a defendant in a derivative suit filed in Delaware Chancery Court by shareholders of Marsh seeking 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 breached their fiduciary duty to and thereby damaged Marsh and Marsh, Inc. by participating in a bid rigging scheme and obtaining “kickbacks” in the form of contingent commissions, and that ACE knowingly participated in the alleged scheme. The case is currently stayed.
 
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ACE, ACE USA, Inc., ACE INA Holdings, Inc., and Evan G. Greenberg, as a former officer and director of AIG and current officer and director of ACE, have been named in one or both of two derivative cases brought by certain shareholders of AIG. One of the derivative cases was filed in Delaware Chancery Court, and the other was filed in federal court in the Southern District of New York. The allegations against ACE concern the alleged bid rigging and contingent commission scheme as similarly alleged in the federal commercial insurance cases. Plaintiffs assert the following causes of action against ACE: breach of fiduciary duty, aiding and abetting breaches of fiduciary duties, unjust enrichment, conspiracy, and fraud. AIG appointed a Special Litigation Committee (SLC) to investigate these derivative cases. On June 13, 2007, in the AIG derivative case pending in Delaware Chancery Court, the SLC filed an amended complaint against certain defendants and a motion to terminate certain defendants. Neither ACE nor Evan G. Greenberg was named in either the amended complaint or the motion to terminate. The shareholder plaintiffs have taken the position that their complaint is still operative and proper against ACE, Evan G. Greenberg, and certain other defendants who were not named in the SLC’s amended complaint or motion to terminate. On July 6, 2007, ACE and Evan G. Greenberg each moved to dismiss the shareholders plaintiffs’ complaint. A new complaint was filed on September 28, 2007. ACE and Evan G. Greenberg each moved to dismiss the shareholder plaintiffs’ amended complaint on November 30, 2007. On February 12, 2008, the Delaware Chancery Court ordered defendants to coordinate certain portions of the briefing on their respective motions to dismiss and then re-file the motions to dismiss. Discovery in the Delaware action is stayed pending resolution of the claims against AIG in a pending securities fraud lawsuit (in which ACE is not a party). The New York action is stayed pending resolution of the Delaware action.
In all of the above-referenced lawsuits, plaintiffs seek compensatory and in some cases special 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.
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.
 
g) Lease commitments
The Company and its subsidiaries lease office space in the countries in which they operate under operating leases which expire at various dates through December 2033. The Company renews and enters into new leases in the ordinary course of business as required. Total rent expense with respect to these operating leases for each of the years ended December 31, 2007 and 2006, was $72 million and $84 million for the year ended December 31, 2005. Future minimum lease payments under the leases are expected to be as follows:

(in millions of U.S. dollars)	 	 	
Year ending December 31	 	 	 	
2008	 	$	61	
2009	 	 	57	
2010	 	 	48	
2011	 	 	42	
2012	 	 	34	
Later years	 	 	97	
Total minimum future lease commitments	 	$	339	
 
h) Acquisition of business entities
Pursuant to the restructuring order that created Brandywine, the active ACE INA insurance subsidiaries are obligated to provide reinsurance coverage to Century Indemnity in the amount of $800 million under an aggregate excess of loss reinsurance agreement if the capital and surplus of Century Indemnity falls below $25 million or if Century Indemnity lacks liquid assets with which to pay claims as they become due. Refer to Note 6 for additional disclosure.
 
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i) Sale of certain run-off reinsurance subsidiaries
On July 3, 2006, the Company completed the sale of ACE American Reinsurance Company (ACE American Re), Brandywine Reinsurance Company (UK) Ltd (BRUK), and Brandywine Reinsurance Company S.A.-N.V. to Randall & Quilter Investment Holdings Limited (R&Q). Subsequent to the sale, the Company maintains the following obligations related to the three companies:
• In connection with the sale, a subsidiary of the Company issued an aggregate reinsurance agreement to ACE American Re providing 70 percent coverage of up to $50 million in losses above net undiscounted reserves of $346 million, including the provision for uncollectible reinsurance, held by ACE American Re on July 3, 2006. The coverage is payable only if, and to the extent, ACE American Re surplus falls below $25 million at the time losses covered by this agreement become due and payable;
• Prior to the sale, the Company entered into a claims servicing agreement with a third party vendor that covers several Brandywine entities including ACE American Re. In connection with the sale, ACE agreed to retain this obligation for a specified period and the Company will continue to pay fees arising from the servicing of ACE American Re claims. Accordingly, at December 31, 2007, the Company has a liability of $25 million related to this obligation;
• Prior to the sale of BRUK, the Company guaranteed certain insurance policies issued by BRUK (the BRUK Guarantee). Subsequent to the sale, the BRUK Guarantee remains in force. As part of the transaction, R&Q has agreed to indemnify the Company in the event the Company is required to make payment under the BRUK Guarantee; however, the Company has not been relieved of its obligation to perform under the BRUK Guarantee. At December 31, 2007, the unpaid loss and loss expense reserves covered by the BRUK Guarantee were approximately $28 million.
 
 10. Preferred Shares
 
In 2003, the Company sold 20 million depositary shares in a public offering, each representing one-tenth of one of its 7.8 percent Cumulative Redeemable Preferred Shares, for $25 per depositary share. Underwriters exercised their over-allotment option which resulted in the issuance of an additional three million depositary shares. Net proceeds from the sale of the Preferred Shares were $557 million.
The shares have an annual dividend rate of 7.8 percent with the first quarterly dividend paid on September 1, 2003. The shares are not convertible into or exchangeable for the Company’s Ordinary Shares. The Company may redeem these shares at any time after May 30, 2008, at a redemption value of $25 per depositary share or at any time under certain limited circumstances. At December 31, 2007, the Company had not redeemed any shares.
 
 11. Shareholders’ equity
 
a) Shares issued and outstanding
Following is a table of changes in Ordinary Shares issued and outstanding for the years ended December 31, 2007, 2006, and 2005:

 	 	2007	 	 	 	 	2006	 	 	 	 	2005	 	
Opening balance	 	326,455,468	 	 	 	 	323,322,586	 	 	 	 	284,478,525	 	
Shares issued, net	 	1,213,663	 	 	 	 	947,373	 	 	 	 	33,899,576	 	
Exercise of stock options	 	1,830,004	 	 	 	 	1,982,560	 	 	 	 	4,727,981	 	
Shares issued under Employee Stock Purchase Plan	 	205,396	 	 	 	 	202,949	 	 	 	 	216,504	 	
Ending balance	 	329,704,531	 	 	 	 	326,455,468	 	 	 	 	323,322,586	 	
Ordinary Shares issued to employee trust	 	 	 	 	 	 	 	 	 	 	 	 	 	
Opening balance	 	(166,425	)	 	 	 	(221,675	)	 	 	 	(462,175	)	
Shares redeemed	 	49,194	 	 	 	 	55,250	 	 	 	 	240,500	 	
Ending balance	 	(117,231	)	 	 	 	(166,425	)	 	 	 	(221,675	)	
 
In October 2005, the Company completed a public offering of 32.91 million Ordinary Shares (which included the over-allotment option of 4.29 million Ordinary Shares) at a price per share of $45.58, for total gross proceeds of approximately $1.5 billion.
 
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Ordinary Shares issued to employee trust are the shares issued by the Company to a rabbi trust for deferred compensation obligations as discussed in Note 11 e) below.
 
b) ACE Limited securities repurchase authorization
In November 2001, the Board of Directors authorized the repurchase of any ACE issued debt or capital securities, including ACE’s Ordinary Shares, up to an aggregate total of $250 million. These purchases may take place from time to time in the open market or in private purchase transactions. At December 31, 2007, this authorization had not been utilized.
 
c) General restrictions
The holders of the Ordinary Shares are entitled to receive dividends and are allowed one vote per share provided that, if the controlled shares of any shareholder constitute ten percent or more of the outstanding Ordinary Shares of the Company, only a fraction of the vote will be allowed so as not to exceed ten percent. Generally, the Company’s directors have absolute discretion to decline to register any transfer of shares. All transfers are subject to the restriction that they may not increase to ten percent or higher the proportion of issued Ordinary Shares owned by any shareholder.
 
d) Dividends declared
Dividends declared on Ordinary Shares amounted to $1.06, $0.98, and $0.90 per Ordinary Share for the years ended December 31, 2007, 2006, and 2005, respectively. Dividends declared on Preferred Shares amounted to $45 million for each of the years ended December 31, 2007, 2006, and 2005.
 
e) Deferred compensation obligation
The Company maintains rabbi trusts for deferred compensation plans principally for employees and former directors. The shares issued by the Company to the rabbi trusts in connection with deferrals of share compensation are classified in shareholders’ equity and accounted for at historical cost in a manner similar to treasury stock. These shares are recorded in Ordinary Shares issued to employee trust and the obligations are recorded in Deferred compensation obligation. Changes in the fair value of the shares underlying the obligations are recorded in Accounts payable, accrued expenses, and other liabilities and the related expense or income is recorded in Administrative expenses.
The rabbi trust also holds other assets, such as fixed maturities, equity securities, and life insurance policies. These assets of the rabbi trust are consolidated with those of the Company and reflected in Other investments. Except for life insurance policies which are reflected at cash surrender value, these assets are classified as trading securities and reported at fair value with changes in fair value reflected in Net investment income. Except for obligations related to life insurance policies which are reflected at cash surrender value, the related deferred compensation obligation is carried at fair value and reflected in Accounts payable, accrued expenses, and other liabilities with changes reflected as a corresponding increase or decrease to Other (income) expense.
 
 12. Share-based compensation
 
The Company has share-based compensation plans which currently provide for awards of stock options, restricted stock, and restricted stock units to its employees and members of the Board of Directors. The Company accounts for its share-based compensation plans in accordance with FAS 123R, which was adopted by the Company effective January 1, 2006. FAS 123R requires all companies to measure and record compensation cost for all share-based payment awards (including employee stock options) at grant-date fair value. Prior to the adoption of FAS 123R, the Company accounted for its share-based compensation plans in accordance with APB 25. In accordance with APB 25, the Company did not recognize compensation expense for employee stock options in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying Ordinary Shares on the date of the grant. In addition, the Company did not recognize expenses related to its ESPP. Upon adopting FAS 123R on January 1, 2006, the Company began recognizing expenses related to employee stock options and its ESPP. FAS 123R also requires that the excess tax benefits of deductions resulting from share-based compensation expense be classified as cash flows from financing activities. Prior to the adoption of FAS 123R, the Company presented all tax benefits of deductions resulting from share-based compensation expense as operating cash flows.
In adopting FAS 123R, the Company applied the modified prospective method. Under this method, beginning on January 1, 2006, the Company recognizes compensation expense 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 had
 
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ACE Limited and Subsidiaries
 
not been provided as of January 1, 2006 (i.e., unvested awards). Unvested awards are expensed consistent with the valuation used in previous disclosures of the pro forma effect of FAS 123. The Company used the Black-Scholes option-pricing model to measure the pro forma effect of FAS 123 and to determine the fair value of share compensation under FAS 123R.
The Company principally issues restricted stock grants and stock options on a graded vesting schedule. Prior to the adoption of FAS 123R, the Company recognized compensation cost for restricted stock grants with only service conditions that have a graded vesting schedule on a straight-line basis over the requisite service period for each separately vesting portion of the award as if the award was, in-substance, multiple awards. Upon adopting FAS 123R, the Company recognizes compensation costs for both restricted stock grants and stock options on this basis. Further, prior to the adoption of FAS 123R, forfeitures were recognized as they occurred. Upon adopting FAS 123R, an estimate of future forfeitures is incorporated into the determination of compensation cost for both restricted stock grants and stock options. At January 1, 2006, the cumulative effect of this change in accounting principle was $4 million, net of income tax. This effect related to the recognition of expected forfeitures on restricted stock grants that had not vested as of January 1, 2006.
The following table outlines the Company’s net income available to holders of Ordinary Shares and basic and diluted earnings per share for the year ended December 31, 2005, had the compensation cost been determined in accordance with the fair value method recommended in FAS 123. The reported and pro forma net income and basic and diluted earnings per share for the years ended December 31, 2007 and 2006, are the same since share-based compensation expense is calculated under the provisions of FAS 123R. The amounts for the years ended December 31, 2007 and 2006, are included in the table below only to provide the detail for a comparative presentation to the year ended December 31, 2005.

(in millions of U.S. dollars, except per share data)	 	2007	 	 	 	2006	 	 	 	2005	
Net income available to holders of Ordinary Shares:	 	 	 	 	 	 	 	 	 	 	 	 	 	
As reported	 	$	2,533	 	 	 	$	2,260	 	 	 	$	983	
Add: Share-based compensation expense included in reported net income, net of income tax	 	 	77	 	 	 	 	68	 	 	 	 	46	
Deduct: Compensation expense, net of income tax	 	 	77	 	 	 	 	68	 	 	 	 	61	
Pro forma net income	 	$	2,533	 	 	 	$	2,260	 	 	 	$	968	
Basic earnings per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	
As reported	 	$	7.79	 	 	 	$	7.02	 	 	 	$	3.36	
Pro forma	 	$	7.79	 	 	 	$	7.02	 	 	 	$	3.31	
Diluted earnings per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	
As reported	 	$	7.66	 	 	 	$	6.91	 	 	 	$	3.31	
Pro forma	 	$	7.66	 	 	 	$	6.91	 	 	 	$	3.26	
 
The application of FAS 123R resulted in incremental share-based compensation expense for the cost of stock options and shares issued under the ESPP of $23 million ($21 million after tax or $0.06 per basic and diluted share) and $20 million ($18 million after tax or $0.05 per basic and diluted share) for the years ended December 31, 2007 and 2006, respectively, that would not have otherwise been recognized. Prior to the adoption of FAS 123R, share-based compensation expense for restricted stock was recognized in net income. For the years ended December 31, 2007 and 2006, the expense for the restricted stock was $77 million ($57 million after tax) and $65 million ($49 million after tax), respectively.
During 2004, the Company established the ACE Limited 2004 Long-Term Incentive Plan (the 2004 LTIP). Once the 2004 LTIP was approved by shareholders, it became effective February 25, 2004. It will continue in effect until terminated by the Board. This plan replaced the ACE Limited 1995 Long-Term Incentive Plan, the ACE Limited 1995 Outside Directors Plan, the ACE Limited 1998 Long-Term Incentive Plan, and the ACE Limited 1999 Replacement Long-Term Incentive Plan (the Prior Plans) except as to outstanding awards. Under the 2004 LTIP, a total of 15,000,000 Ordinary Shares of the Company are authorized to be issued pursuant to awards made as stock options, stock appreciation rights, performance shares, performance units, restricted stock, and restricted stock units. The maximum number of shares that may be delivered to participants and their beneficiaries under the 2004 LTIP shall be equal to the sum of: (i) 15,000,000 shares; and (ii) any shares that are represented by awards granted under the Prior Plans that are forfeited, expired, or are canceled after the effective date of the 2004 LTIP, without delivery of shares or which result in the forfeiture of the shares back to the Company to the extent that such shares would have been added back to the reserve under the terms of the applicable Prior Plan. As of December 31, 2007, a total of 8,978,166 shares remain available for future issuance under this plan.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
The Second Amendment to the ACE Limited ESPP was approved by shareholders on May 18, 2006. This amendment increased the number of Ordinary Shares available for issuance under the ESPP by 1,500,000 shares to 3,000,000 Ordinary Shares. As of December 31, 2007, a total of 1,193,187 Ordinary Shares remain available for issuance under the ESPP.
 
Stock options
The Company’s 2004 LTIP provides for grants of both incentive and non-qualified stock options principally at an option price per share of 100 percent of the fair market value of the Company’s Ordinary Shares on the date of grant.
Stock options are generally granted with a 3-year vesting period and a 10-year term. The stock options vest in equal annual installments over the respective vesting period, which is also the requisite service period. Included in the beginning of year balance are 5-year cliff vest options of 100,000, 150,000, 125,000, and 150,000 issued, respectively, in 2002, 2003, 2004, and 2006. There were 5,200 5-year cliff vest options granted in August 2007.
Included in the Company’s share-based compensation expense in the year ended December 31, 2007, is the cost related to the unvested portion of the 2004-2007 stock option grants. The fair value of the stock options was estimated on the date of grant using the Black-Scholes option-pricing model that uses the assumptions noted in the following table. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The expected life (estimated period of time from grant to exercise date) was estimated using the historical exercise behavior of employees. For 2005 and prior options, expected volatility was based on historical volatility for a period equal to the stock option’s expected life, ending on the date of grant, and calculated on a monthly basis. For 2007 and 2006 options, expected volatility was calculated as a blend of (a) historical volatility based on daily closing prices over a period equal to the expected life assumption, (b) long-term historical volatility based on daily closing prices over the period from ACE’s initial public trading date through the most recent quarter, and (c) implied volatility derived from ACE’s publicly traded options.
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 years indicated:

 	 	2007	 	 	 	2006	 	 	 	2005	
Dividend yield	 	1.78%	 	 	 	1.64%	 	 	 	1.89%	
Expected volatility	 	27.43%	 	 	 	31.29%	 	 	 	22.36%	
Risk-free interest rate	 	4.51%	 	 	 	4.60%	 	 	 	3.88%	
Forfeiture rate	 	7.5%	 	 	 	7.50%	 	 	 	5.00%	
Expected life	 	5.6 years	 	 	 	6 years	 	 	 	4 years	
 
The following table shows changes in the Company’s stock options for the years ended December 31, 2007, 2006, and 2005:

 	 	Number of
Options	 	 	 	 	Weighted
Average
Exercise Price	
Options outstanding, December 31, 2004	 	16,237,718	 	 	 	 	$	33.83	
Granted	 	1,606,001	 	 	 	 	$	44.43	
Exercised	 	(4,727,981	)	 	 	 	$	47.85	
Forfeited	 	(471,977	)	 	 	 	$	39.70	
Options outstanding, December 31, 2005	 	12,643,761	 	 	 	 	$	36.53	
Granted	 	1,505,215	 	 	 	 	$	56.29	
Exercised	 	(1,982,560	)	 	 	 	$	33.69	
Forfeited	 	(413,895	)	 	 	 	$	39.71	
Options outstanding, December 31, 2006	 	11,752,521	 	 	 	 	$	39.43	
Granted	 	1,549,091	 	 	 	 	$	56.17	
Exercised	 	(1,830,004	)	 	 	 	$	35.73	
Forfeited	 	(200,793	)	 	 	 	$	51.66	
Options outstanding, December 31, 2007	 	11,270,815	 	 	 	 	$	42.12	
Options exercisable, December 31, 2007	 	8,127,808	 	 	 	 	$	38.04	
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
The weighted-average remaining contractual term was 5.3 years for the stock options outstanding and 4.34 years for the stock options exercisable at December 31, 2007. The total intrinsic value was approximately $221 million for stock options outstanding and $193 million for stock options exercisable at December 31, 2007. The weighted-average fair value for the stock options granted for the year ended December 31, 2007 was $15.76. The total intrinsic value for stock options exercised during the years ended December 31, 2007 and 2006, was approximately $44 million and $43 million, respectively.
The amount of cash received during the year ended December 31, 2007, from the exercise of stock options was $65 million.
 
Restricted stock
The Company’s 2004 LTIP also provides for grants of restricted stock. The Company generally grants restricted stock with a 4-year vesting period, based on a graded vesting schedule. The restricted stock is granted at market close price on the date of grant. Included in the Company’s share-based compensation expense in the year ended December 31, 2007, is a portion of the cost related to the unvested restricted stock granted in the years 2003 to 2007.
The following table shows changes in the Company’s restricted stock for the years ended December 31, 2007, 2006, and 2005:

 	 	Number of
Restricted Stock	 	 	 	 	Weighted
Average Grant-
Date Fair Value	
Unvested restricted stock, December 31, 2004	 	2,871,164	 	 	 	 	$	37.85	
Granted	 	1,785,589	 	 	 	 	$	44.45	
Vested and issued	 	(943,246	)	 	 	 	$	37.24	
Forfeited	 	(224,839	)	 	 	 	$	39.95	
Unvested restricted stock, December 31, 2005	 	3,488,668	 	 	 	 	$	41.26	
Granted	 	1,632,504	 	 	 	 	$	56.05	
Vested and issued	 	(1,181,249	)	 	 	 	$	40.20	
Forfeited	 	(360,734	)	 	 	 	$	44.04	
Unvested restricted stock, December 31, 2006	 	3,579,189	 	 	 	 	$	48.07	
Granted	 	1,818,716	 	 	 	 	$	56.45	
Vested and issued	 	(1,345,412	)	 	 	 	$	44.48	
Forfeited	 	(230,786	)	 	 	 	$	51.57	
Unvested restricted stock, December 31, 2007	 	3,821,707	 	 	 	 	$	53.12	
 
Under the provisions of FAS 123R, the recognition of deferred compensation, a contra-equity account representing the amount of unrecognized restricted stock expense that is reduced as expense is recognized, at the date restricted stock is granted is no longer permitted. Therefore, upon adoption of FAS 123R, the amount of deferred compensation that had been reflected in Unearned stock grant compensation was reclassified to Additional paid-in capital in the Company’s consolidated balance sheet.
 
Restricted stock units
The Company’s 2004 LTIP also provides for grants of other awards, including restricted stock units. The Company generally grants restricted stock units with a 4-year vesting period, based on a graded vesting schedule. Each restricted stock unit represents the Company’s obligation to deliver to the holder one share of Ordinary Shares upon vesting. During 2007, the Company awarded 108,870 restricted stock units to officers of the Company and its subsidiaries with a weighted-average grant date fair value of $56.29. During 2006, 83,370 restricted stock units, with a weighted-average grant date fair value of $56.36, were awarded to officers of the Company and its subsidiaries. During 2005, 80,550 restricted stock units, with a weighted-average grant date fair value of $44.59, were awarded to officers of the Company and its subsidiaries.
 
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ACE Limited and Subsidiaries
 
The Company also grants restricted stock units with a 1-year vesting period to non-management directors. Delivery of Ordinary Shares on account of these restricted stock units to non-management directors is deferred until six months after the date of the non-management directors’ termination from the Board. During 2007, 29,676 restricted stock units were awarded to non-management directors. These units will vest in May 2008. During 2006, 23,092 restricted stock units were awarded to non-management directors. These units vested in May 2007. During 2005, 26,186 restricted stock units were awarded to non-management directors. These units vested in May 2006.
 
ESPP
The ESPP gives participating employees the right to purchase Ordinary Shares through payroll deductions during consecutive “Subscription Periods.” Annual purchases by participants are limited to the number of whole shares that can be purchased by an amount equal to ten percent of the participant’s compensation or $25,000, whichever is less. The ESPP has two six-month Subscription Periods, the first of which runs between January 1 and June 30 and the second of which runs between July 1 and December 31 of each year. The amounts that have been collected from participants during a Subscription Period are used on the “Exercise Date” to purchase full shares of Ordinary Shares. An Exercise Date is generally the last trading day of a Subscription Period. The number of shares purchased is equal to the total amount, as of the Exercise Date, that has been collected from the participants through payroll deductions for that Subscription Period, divided by the “Purchase Price”, rounded down to the next full share. Effective for the second Subscription Period of 2007, the Purchase Price is 85 percent of the fair market value of an Ordinary Share on the Exercise Date. Prior to the second Subscription Period of 2007, the Purchase Price was calculated as the lower of (i) 85 percent of the fair market value of an Ordinary Share on the first day of the Subscription Period, or (ii) 85 percent of the fair market value of an Ordinary Share on the Exercise Date. Participants may withdraw from an offering before the exercise date and obtain a refund of the amounts withheld through payroll deductions. Pursuant to the provisions of the ESPP, during 2007, 2006, and 2005, employees paid $9.7 million, $8.3 million, and $7.8 million, respectively, to purchase 205,396 shares, 202,949 shares, and 216,504 shares, respectively.
The fair value of the offering of the Subscription Period ended June 30, 2007, was calculated using the Black-Scholes option-pricing model that used the following assumptions: a dividend yield of 1.66%, risk-free interest rate of 4.5%, expected volatility of 19%, and an expected life of 6 months. The risk-free interest rate is based on the U.S. Treasury yield curve. Expected volatility was based on an average of historical and implied volatility. The weighted-average fair value of the Company’s ESPP rights was $12.55 for the June 30, 2007, ESPP offering.
As of December 31, 2007, unrecognized compensation expense related to the unvested portion of the Company’s employee share-based awards was approximately $117 million and is expected to be recognized over a weighted-average period of approximately 1.96 years.
The Company generally issues shares for the exercise of stock options, for restricted stock, and for shares under the ESPP from un-issued reserved shares.
 
 13. Pension plans
 
The Company provides pension benefits to eligible employees and their dependents through various defined contribution plans and defined benefit plans sponsored by the Company. The defined contribution plans include a capital accumulation plan (401(k)) in the United States. The defined benefit plans consist of various plans offered in certain jurisdictions outside of the United States and Bermuda.
 
Defined contribution plans (including 401(k))
Under these plans, employees’ contributions may be supplemented by ACE matching contributions based on the level of employee contribution. These contributions are invested at the election of each employee in one or more of several investment portfolios offered by a third party investment advisor. In addition, the Company may provide additional matching contributions, depending on its annual financial performance. Expenses for these plans totaled $76 million, $74 million, and $67 million for the years ended December 31, 2007, 2006, and 2005, respectively.
 
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ACE Limited and Subsidiaries
 
Defined benefit plans
The Company maintains non-contributory defined benefit plans that cover certain employees, principally located in Europe and Asia. The Company does not provide any such plans to U.S.-based employees. The Company accounts for pension benefits using the accrual method, consistent with the requirements of FAS No. 87, Employers’ Accounting for Pensions. 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 using actuarial models in calculating the pension expense and liability for each plan. The Company uses December 31 as the measurement date for its defined benefit pension plans.
In September 2006, the FASB issued FAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R) (FAS 158). FAS 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan as an asset or liability in its balance sheet and to recognize changes in funded status through comprehensive income in the year in which the changes occur. The Company funds the plans at the amount required by local tax and legal requirements.
The Company adopted the recognition provisions of FAS 158 as of December 31, 2006. Upon adoption of FAS 158, the Company derecognized the additional minimum pension liability and the related intangible asset through a net benefit to shareholders’ equity. The initial impact of the adoption of FAS 158 due to unrecognized prior service costs and net actuarial gains or losses of $11 million is recognized by the Company as a component of accumulated other comprehensive income in shareholders’ equity. The accrued pension liability of $85 million at December 31, 2007, and $97 million at December 31, 2006, is included in Accounts payable, accrued expenses, and other liabilities.
The defined benefit pension plan contribution for 2008 is expected to be $21 million. The estimated net actuarial loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net benefit costs over the next year is $4 million.
Benefit payments were approximately $16 million and $12 million for 2007 and 2006, respectively. Expected future payments are as follows:

Year ending December 31
(in millions of U.S. dollars)	 	 	
2008	 	$	19	
2009	 	 	18	
2010	 	 	19	
2011	 	 	21	
2012	 	 	23	
2013-2017	 	 	114	
 
 14. Fair value of financial instruments
 
In the normal course of business, the Company invests in various financial assets, incurs various financial liabilities, and enters into agreements involving derivative securities. Fair values are disclosed for all financial instruments, for which it is practicable to estimate fair value, whether or not such values are recognized in the consolidated balance sheets. Fair values of financial instruments are based on quoted market prices where available. Fair values of financial instruments for which quoted market prices are not available are based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rates and the estimated amounts and timing of future cash flows. In such instances, the derived fair value estimates cannot be substantiated by comparison to independent markets and are not necessarily indicative of the amounts that would be realized in a current market exchange. Certain financial instruments, particularly insurance contracts, are excluded from fair value disclosure requirements.
The following methods and assumptions were used by the Company in estimating the fair value of financial assets and liabilities:
(i) Fair values of fixed maturities with active markets are based on quoted market prices. For fixed maturities that trade in less active markets, fair values are obtained from independent pricing services. Fair values of fixed maturities are principally a function of current interest rates. Care should be used in evaluating the significance of these estimated market values which can fluctuate based on such factors as interest rates, inflation, monetary policy, and general economic conditions.
(ii) Fair values of equity securities with active markets are based on quoted market prices. For other equity securities, fair values are based on external market valuations.
 
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ACE Limited and Subsidiaries
 
(iii) The carrying value of short-term investments approximates fair value due to the short maturities of these investments.
(iv) Fair values for other investments, principally other direct equity investments, investment funds, and limited partnerships are based on the net asset value or financial statements provided by the investment manager.
(v) Fair values for investments in partially-owned insurance companies are based on the financial statements provided by those companies used for equity accounting and for equity securities with active markets are based on quoted market prices.
(vi) Where practical, fair values for short-term debt, long-term debt, and trust preferred securities are estimated using discounted cash flow calculations based upon the Company’s incremental borrowing rates for similar types of borrowings with maturities consistent with those remaining for the debt being valued.
(vii) For investment derivative instruments, including futures, options, and swaps, the Company is generally able to obtain quoted market prices to determine fair value.
(viii) The fair value of GMIB reinsurance is estimated using an internal valuation model. Inputs to the model include a number of factors such as valuation date yield curve, volatility assumptions, asset class correlations, allocation of investments underlying annuitant account value, and policyholder behavior assumptions. This model and the related assumptions are regularly re-evaluated by management and enhanced, as appropriate, based upon improvements in modeling techniques and availability of more timely market information, such as market conditions and demographics of in-force annuities.
The carrying values and fair values of financial instruments at December 31, 2007 and 2006, were as follows:

 	 	2007	 	2006	
(in millions of U.S. dollars)	 	Fair Value	 	 	 	Carrying Amount	 	 	 	Fair Value	 	 	 	Carrying Amount	
Financial assets:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Fixed maturities available for sale	 	$	33,184	 	 	 	$	33,184	 	 	 	$	28,540	 	 	 	$	28,540	
Fixed maturities held to maturity	 	 	3,015	 	 	 	 	2,987	 	 	 	 	3,015	 	 	 	 	3,047	
Equity securities	 	 	1,837	 	 	 	 	1,837	 	 	 	 	1,713	 	 	 	 	1,713	
Short-term investments	 	 	2,631	 	 	 	 	2,631	 	 	 	 	2,456	 	 	 	 	2,456	
Other investments	 	 	1,140	 	 	 	 	1,140	 	 	 	 	845	 	 	 	 	845	
Investments in partially-owned insurance companies	 	 	889	 	 	 	 	773	 	 	 	 	830	 	 	 	 	789	
Investment derivative instruments	 	 	10	 	 	 	 	10	 	 	 	 	9	 	 	 	 	9	
Other derivative instruments	 	 	94	 	 	 	 	94	 	 	 	 	70	 	 	 	 	70	
Financial liabilities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Short-term debt	 	 	378	 	 	 	 	372	 	 	 	 	579	 	 	 	 	578	
Long-term debt	 	 	1,862	 	 	 	 	1,811	 	 	 	 	1,645	 	 	 	 	1,560	
Trust preferred securities	 	 	387	 	 	 	 	309	 	 	 	 	409	 	 	 	 	309	
Guaranteed minimum income benefits	 	 	225	 	 	 	 	225	 	 	 	 	13	 	 	 	 	13	
 
 15. Other (income) expense
 
The following table details the components of Other (income) expense as reflected in the consolidated statements of operations for the years ended December 31, 2007, 2006, and 2005.

(in millions of U.S. dollars)	 	2007	 	 	 	2006	 	 	 	 	2005	 	
Equity in net (income) loss of partially-owned companies	 	$	39	 	 	 	$	(60	)	 	 	 	$	(60	)	
Minority interest expense	 	 	7	 	 	 	 	8	 	 	 	 	 	16	 	
Federal excise tax	 	 	18	 	 	 	 	10	 	 	 	 	 	7	 	
Other	 	 	17	 	 	 	 	7	 	 	 	 	 	12	 	
Other (income) expense	 	$	81	 	 	 	$	(35	)	 	 	 	$	(25	)	
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
In 2007, 2006, and 2005, equity in net (income) loss of partially-owned companies includes $68 million, $(57) million, and $(68) million, respectively, of (income) loss related to Assured Guaranty Ltd. Certain excise taxes incurred as a result of capital management initiatives are included in Other (income) expense. As these are considered capital transactions, they are excluded from underwriting results.
 
 16. Segment information
 
The Company operates through the following business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life Insurance and Reinsurance. These segments distribute their products through various forms of brokers, agencies, and direct marketing programs. Additionally, Insurance – North American has formed internet distribution channels for some of its products. Global Reinsurance, Insurance – North American, and Life Insurance and Reinsurance have established relationships with reinsurance intermediaries.
The Insurance – North American segment comprises the P&C operation in the U.S., Canada, and Bermuda. This segment includes the operations of ACE USA (including ACE Canada), ACE Westchester, ACE Bermuda, and various run-off operations. ACE USA provides a broad array of P&C, A&H, and risk management products and services to a diverse group of commercial and non-commercial enterprises and consumers. ACE Westchester specializes in the wholesale distribution of excess, surplus, and specialty P&C products. ACE Bermuda provides commercial insurance products on an excess basis to a global client base, covering risks that are generally low in frequency and high in severity. The run-off operations include Brandywine Holdings Corporation (Brandywine), Commercial Insurance Services, residual market workers’ compensation business, pools and syndicates not attributable to a single business group, and other 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 (excluding its life insurance business) and the wholesale insurance operations of ACE Global Markets, our London-based excess and surplus lines business that includes Lloyd’s Syndicate 2488. ACE International, our ACE INA network of indigenous retail insurance operations, maintains a presence in every major insurance market in the world and is organized geographically along product lines that provide dedicated underwriting focus to customers. ACE Global Markets offers an extensive product range through its unique parallel distribution of products via ACE European Group Limited (AEGL) and Lloyd’s Syndicate 2488. ACE provides funds at Lloyd’s to support underwriting by Syndicate 2488 which is managed by ACE Underwriting Agencies Limited. AEGL, our London-based, FSA-U.K. regulated company, underwrites U.K. and Continental Europe insurance and reinsurance business. The reinsurance operation of ACE Global Markets is included in the Global Reinsurance segment. The Insurance – Overseas General segment has four regions of operations: the ACE European Group (which is comprised of ACE Europe and ACE Global Markets branded business), ACE Asia Pacific, ACE Far East, and ACE Latin America. 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, specialty personal lines, consumer lines products, and A&H (principally accident and supplemental health).
The Global Reinsurance segment represents ACE’s reinsurance operations comprising ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re Europe, and ACE Tempest Re Canada. These divisions provide a broad range of property catastrophe, casualty, and property reinsurance coverages to a diverse array of primary P&C companies.
The Life Insurance and Reinsurance segment includes the operations of ACE Tempest Life Re (ACE Life Re) and ACE International Life. ACE Life Re provides reinsurance coverage to other life insurance companies as well as marketing traditional life reinsurance products and services for the individual life business. ACE International Life provides traditional life insurance protection, investments and savings products to individuals in several countries including Thailand, Vietnam, Taiwan, China, Egypt, the United Arab Emirates, and various Latin American countries.
Corporate and Other (Corporate) includes ACE Limited and ACE INA Holdings, Inc. and intercompany eliminations. In addition, Corporate includes the Company’s proportionate share of Assured Guaranty Ltd.’s earnings reflected in Other (income) expense. Included in Losses and loss expenses 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 recoverable, 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 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. As such, the effect of the related loss reserve development on net income is reported within Corporate.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
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 years ended December 31, 2007, 2006, and 2005.
 
Statement of Operations by Segment

For the year ended
December 31, 2007
(in millions of U.S. dollars)	 	Insurance –
North
American	 	 	 	Insurance –
Overseas
General	 	 	 	 	Global
Reinsurance	 	 	 	Life Insurance
and
Reinsurance	 	 	 	 	Corporate and
Other	 	 	 	 	ACE
Consolidated	 	
Gross premiums written	 	$	9,840	 	 	 	$	6,291	 	 	 	 	$	1,218	 	 	 	$	391	 	 	 	 	$	–	 	 	 	 	$	17,740	 	
Net premiums written	 	 	5,833	 	 	 	 	4,568	 	 	 	 	 	1,197	 	 	 	 	381	 	 	 	 	 	–	 	 	 	 	 	11,979	 	
Net premiums earned	 	 	6,007	 	 	 	 	4,623	 	 	 	 	 	1,299	 	 	 	 	368	 	 	 	 	 	–	 	 	 	 	 	12,297	 	
Losses and loss expenses	 	 	4,269	 	 	 	 	2,420	 	 	 	 	 	664	 	 	 	 	–	 	 	 	 	 	(2	)	 	 	 	 	7,351	 	
Life and annuity benefits	 	 	–	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	168	 	 	 	 	 	–	 	 	 	 	 	168	 	
Policy acquisition costs	 	 	515	 	 	 	 	963	 	 	 	 	 	248	 	 	 	 	45	 	 	 	 	 	–	 	 	 	 	 	1,771	 	
Administrative expenses	 	 	530	 	 	 	 	669	 	 	 	 	 	64	 	 	 	 	50	 	 	 	 	 	142	 	 	 	 	 	1,455	 	
Underwriting income (loss)	 	 	693	 	 	 	 	571	 	 	 	 	 	323	 	 	 	 	105	 	 	 	 	 	(140	)	 	 	 	 	1,552	 	
Net investment income	 	 	1,034	 	 	 	 	450	 	 	 	 	 	274	 	 	 	 	55	 	 	 	 	 	105	 	 	 	 	 	1,918	 	
Net realized gains (losses)	 	 	125	 	 	 	 	(69	)	 	 	 	 	21	 	 	 	 	(164	)	 	 	 	 	26	 	 	 	 	 	(61	)	
Interest expense	 	 	–	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	–	 	 	 	 	 	175	 	 	 	 	 	175	 	
Other (income) expense	 	 	11	 	 	 	 	(20	)	 	 	 	 	4	 	 	 	 	1	 	 	 	 	 	85	 	 	 	 	 	81	 	
Income tax expense (benefit)	 	 	468	 	 	 	 	183	 	 	 	 	 	32	 	 	 	 	(8	)	 	 	 	 	(100	)	 	 	 	 	575	 	
Net income (loss)	 	$	1,373	 	 	 	$	789	 	 	 	 	$	582	 	 	 	$	3	 	 	 	 	$	(169	)	 	 	 	$	2,578	 	
 
Statement of Operations by Segment

For the year ended
December 31, 2006
(in millions of U.S. dollars)	 	Insurance –
North
American	 	 	 	 	Insurance –
Overseas
General	 	 	 	 	Global
Reinsurance	 	 	 	Life Insurance
and
Reinsurance	 	 	 	 	Corporate and
Other	 	 	 	 	ACE
Consolidated	 	
Gross premiums written	 	$	9,663	 	 	 	 	$	5,897	 	 	 	 	$	1,567	 	 	 	$	274	 	 	 	 	$	–	 	 	 	 	$	17,401	 	
Net premiums written	 	 	5,940	 	 	 	 	 	4,266	 	 	 	 	 	1,550	 	 	 	 	274	 	 	 	 	 	–	 	 	 	 	 	12,030	 	
Net premiums earned	 	 	5,719	 	 	 	 	 	4,321	 	 	 	 	 	1,511	 	 	 	 	274	 	 	 	 	 	–	 	 	 	 	 	11,825	 	
Losses and loss expenses	 	 	4,026	 	 	 	 	 	2,259	 	 	 	 	 	784	 	 	 	 	–	 	 	 	 	 	1	 	 	 	 	 	7,070	 	
Life and annuity benefits	 	 	–	 	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	123	 	 	 	 	 	–	 	 	 	 	 	123	 	
Policy acquisition costs	 	 	530	 	 	 	 	 	856	 	 	 	 	 	303	 	 	 	 	26	 	 	 	 	 	–	 	 	 	 	 	1,715	 	
Administrative expenses	 	 	502	 	 	 	 	 	609	 	 	 	 	 	62	 	 	 	 	35	 	 	 	 	 	248	 	 	 	 	 	1,456	 	
Underwriting income (loss)	 	 	661	 	 	 	 	 	597	 	 	 	 	 	362	 	 	 	 	90	 	 	 	 	 	(249	)	 	 	 	 	1,461	 	
Net investment income	 	 	876	 	 	 	 	 	370	 	 	 	 	 	221	 	 	 	 	42	 	 	 	 	 	92	 	 	 	 	 	1,601	 	
Net realized gains (losses)	 	 	(83	)	 	 	 	 	(16	)	 	 	 	 	10	 	 	 	 	(36	)	 	 	 	 	27	 	 	 	 	 	(98	)	
Interest expense	 	 	–	 	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	–	 	 	 	 	 	176	 	 	 	 	 	176	 	
Other (income) expense	 	 	(2	)	 	 	 	 	10	 	 	 	 	 	8	 	 	 	 	–	 	 	 	 	 	(51	)	 	 	 	 	(35	)	
Income tax expense (benefit)	 	 	352	 	 	 	 	 	206	 	 	 	 	 	38	 	 	 	 	(6	)	 	 	 	 	(68	)	 	 	 	 	522	 	
Cumulative effect of a change in accounting principle	 	 	–	 	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	–	 	 	 	 	 	4	 	 	 	 	 	4	 	
Net income (loss)	 	$	1,104	 	 	 	 	$	735	 	 	 	 	$	547	 	 	 	$	102	 	 	 	 	$	(183	)	 	 	 	$	2,305	 	
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
Statement of Operations by Segment

For the year ended
December 31, 2005
(in millions of U.S. dollars)	 	Insurance –
North
American	 	 	 	Insurance –
Overseas
General	 	 	 	Global
Reinsurance	 	 	 	 	Life Insurance
and
Reinsurance	 	 	 	 	Corporate and
Other	 	 	 	 	ACE
Consolidated	 	
Gross premiums written	 	$	9,189	 	 	 	$	5,775	 	 	 	$	1,599	 	 	 	 	$	248	 	 	 	 	$	–	 	 	 	 	$	16,811	 	
Net premiums written	 	 	5,803	 	 	 	 	4,195	 	 	 	 	1,546	 	 	 	 	 	248	 	 	 	 	 	–	 	 	 	 	 	11,792	 	
Net premiums earned	 	 	5,730	 	 	 	 	4,239	 	 	 	 	1,531	 	 	 	 	 	248	 	 	 	 	 	–	 	 	 	 	 	11,748	 	
Losses and loss expenses	 	 	4,577	 	 	 	 	2,583	 	 	 	 	1,402	 	 	 	 	 	–	 	 	 	 	 	9	 	 	 	 	 	8,571	 	
Life and annuity benefits	 	 	–	 	 	 	 	–	 	 	 	 	–	 	 	 	 	 	143	 	 	 	 	 	–	 	 	 	 	 	143	 	
Policy acquisition costs	 	 	503	 	 	 	 	836	 	 	 	 	300	 	 	 	 	 	24	 	 	 	 	 	–	 	 	 	 	 	1,663	 	
Administrative expenses	 	 	427	 	 	 	 	566	 	 	 	 	60	 	 	 	 	 	19	 	 	 	 	 	189	 	 	 	 	 	1,261	 	
Underwriting income (loss)	 	 	223	 	 	 	 	254	 	 	 	 	(231	)	 	 	 	 	62	 	 	 	 	 	(198	)	 	 	 	 	110	 	
Net investment income	 	 	698	 	 	 	 	319	 	 	 	 	173	 	 	 	 	 	36	 	 	 	 	 	38	 	 	 	 	 	1,264	 	
Net realized gains (losses)	 	 	15	 	 	 	 	51	 	 	 	 	(4	)	 	 	 	 	19	 	 	 	 	 	(5	)	 	 	 	 	76	 	
Interest expense	 	 	–	 	 	 	 	–	 	 	 	 	3	 	 	 	 	 	–	 	 	 	 	 	171	 	 	 	 	 	174	 	
Other (income) expense	 	 	18	 	 	 	 	16	 	 	 	 	11	 	 	 	 	 	–	 	 	 	 	 	(70	)	 	 	 	 	(25	)	
Income tax expense (benefit)	 	 	235	 	 	 	 	107	 	 	 	 	11	 	 	 	 	 	(2	)	 	 	 	 	(78	)	 	 	 	 	273	 	
Net income (loss)	 	$	683	 	 	 	$	501	 	 	 	$	(87	)	 	 	 	$	119	 	 	 	 	$	(188	)	 	 	 	$	1,028	 	
 
Underwriting assets are reviewed in total by management for purposes of decision-making. The Company does not allocate assets to its segments.
 
The following tables summarize the net premiums earned of each segment by product offering for the years ended December 31, 2007, 2006, and 2005.

Year ended December 31, 2007
(in millions of U.S. dollars)	 	Property &
All Other	 	 	 	Casualty	 	 	 	Life, Accident &
Health	 	 	 	ACE
Consolidated	
Insurance – North American	 	$	1,462	 	 	 	$	4,298	 	 	 	$	247	 	 	 	$	6,007	
Insurance – Overseas General	 	 	1,697	 	 	 	 	1,495	 	 	 	 	1,431	 	 	 	 	4,623	
Global Reinsurance	 	 	628	 	 	 	 	671	 	 	 	 	–	 	 	 	 	1,299	
Life Insurance and Reinsurance	 	 	–	 	 	 	 	–	 	 	 	 	368	 	 	 	 	368	
 	 	$	3,787	 	 	 	$	6,464	 	 	 	$	2,046	 	 	 	$	12,297	
								
Year ended December 31, 2006	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Insurance – North American	 	$	1,289	 	 	 	$	4,228	 	 	 	$	202	 	 	 	$	5,719	
Insurance – Overseas General	 	 	1,617	 	 	 	 	1,479	 	 	 	 	1,225	 	 	 	 	4,321	
Global Reinsurance	 	 	712	 	 	 	 	799	 	 	 	 	–	 	 	 	 	1,511	
Life Insurance and Reinsurance	 	 	–	 	 	 	 	–	 	 	 	 	274	 	 	 	 	274	
 	 	$	3,618	 	 	 	$	6,506	 	 	 	$	1,701	 	 	 	$	11,825	
								
Year ended December 31, 2005	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Insurance – North American	 	$	1,249	 	 	 	$	4,299	 	 	 	$	182	 	 	 	$	5,730	
Insurance – Overseas General	 	 	1,609	 	 	 	 	1,570	 	 	 	 	1,060	 	 	 	 	4,239	
Global Reinsurance	 	 	702	 	 	 	 	829	 	 	 	 	–	 	 	 	 	1,531	
Life Insurance and Reinsurance	 	 	–	 	 	 	 	–	 	 	 	 	248	 	 	 	 	248	
 	 	$	3,560	 	 	 	$	6,698	 	 	 	$	1,490	 	 	 	$	11,748	
 
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ACE Limited and Subsidiaries
 
The following table summarizes the Company’s gross premiums written by geographic region. Allocations have been made on the basis of location of risk.

Year Ended	 	North America	 	 	 	Europe	 	 	 	Asia
Pacific/Far East	 	 	 	Latin America	
2007	 	58%	 	 	 	26%	 	 	 	11%	 	 	 	5%	
2006	 	63%	 	 	 	24%	 	 	 	9%	 	 	 	4%	
2005	 	61%	 	 	 	25%	 	 	 	10%	 	 	 	4%	
 
 17. Earnings per share
 
The following table sets forth the computation of basic and diluted earnings per share for the years ended December 31, 2007, 2006, and 2005.

(in millions of U.S. dollars, except share and per share data)	 	2007	 	 	 	 	2006	 	 	 	 	2005	 	
Numerator:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income before cumulative effect of a change in accounting principle	 	$	2,578	 	 	 	 	$	2,301	 	 	 	 	$	1,028	 	
Dividends on Preferred Shares	 	 	(45	)	 	 	 	 	(45	)	 	 	 	 	(45	)	
Net income available to holders of Ordinary Shares before cumulative effect of a change in accounting principle	 	 	2,533	 	 	 	 	 	2,256	 	 	 	 	 	983	 	
Cumulative effect of a change in accounting principle	 	 	–	 	 	 	 	 	4	 	 	 	 	 	–	 	
Net income available to holders of Ordinary Shares	 	$	2,533	 	 	 	 	$	2,260	 	 	 	 	$	983	 	
Denominator:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Denominator for basic earnings per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Weighted-average shares outstanding	 	 	324,938,327	 	 	 	 	 	321,768,672	 	 	 	 	 	292,401,343	 	
Denominator for diluted earnings per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Share-based compensation plans	 	 	5,509,394	 	 	 	 	 	5,463,350	 	 	 	 	 	4,898,540	 	
Adjusted weighted average shares outstanding and assumed conversions	 	 	330,447,721	 	 	 	 	 	327,232,022	 	 	 	 	 	297,299,883	 	
Basic earnings per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings per share before cumulative effect of a change in accounting principle	 	$	7.79	 	 	 	 	$	7.01	 	 	 	 	$	3.36	 	
Cumulative effect of a change in accounting principle	 	 	–	 	 	 	 	 	0.01	 	 	 	 	 	–	 	
Earnings per share	 	$	7.79	 	 	 	 	$	7.02	 	 	 	 	$	3.36	 	
Diluted earnings per share:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Earnings per share before cumulative effect of a change in accounting principle	 	$	7.66	 	 	 	 	$	6.90	 	 	 	 	$	3.31	 	
Cumulative effect of a change in accounting principle	 	 	–	 	 	 	 	 	0.01	 	 	 	 	 	–	 	
Earnings per share	 	$	7.66	 	 	 	 	$	6.91	 	 	 	 	$	3.31	 	
 
Excluded from adjusted weighted average shares outstanding and assumed conversions is the impact of securities that would have been anti-dilutive during the respective years. For the years ended December 31, 2007, 2006, and 2005, the potential anti-dilutive share conversions were 233,326, 319,397, and 129,902, respectively.
 
 18. Related party transactions
 
The ACE Foundation – Bermuda is an unconsolidated not-for-profit organization whose primary purpose is to fund charitable causes in Bermuda. The Trustees are principally comprised of ACE management. The Company maintains a non-interest bearing demand note receivable from the ACE Foundation – Bermuda, the balance of which was $34 million and $37 million, at December 31, 2007 and 2006, respectively. The receivable is included in Other assets in the accompanying consolidated balance sheets. The borrower has used the related proceeds to finance investments in Bermuda real estate, some of which have been rented to ACE employees at rates established by independent, professional real estate appraisers. The borrower
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
uses income from the investments to both repay the note and to fund charitable activities. Accordingly, the Company reports the demand note at the lower of its principal value or the fair value of assets held by the borrower to repay the loan, including the real estate properties.
 
 19. Statutory financial information
 
The Company’s insurance and reinsurance subsidiaries are subject to insurance laws and regulations in the jurisdictions in which they operate. These regulations include restrictions that limit the amount of dividends or other distributions, such as loans or cash advances, available to shareholders without prior approval of the insurance regulatory authorities.
There are no statutory restrictions on the payment of dividends from retained earnings by any of the Bermuda subsidiaries as the minimum statutory capital and surplus requirements are satisfied by the share capital and additional paid-in capital of each of the Bermuda subsidiaries.
The Company’s U.S. subsidiaries file financial statements prepared in accordance with statutory accounting practices prescribed or permitted by insurance regulators.
Statutory accounting differs from GAAP in the reporting of certain reinsurance contracts, investments, subsidiaries, acquisition expenses, fixed assets, deferred income taxes, and certain other items. The statutory capital and surplus of the U.S. subsidiaries met regulatory requirements for 2007, 2006, and 2005. The amount of dividends available to be paid in 2008, without prior approval from the state insurance departments, totals $691 million.
The combined statutory capital and surplus and statutory net income of the Bermuda and U.S. subsidiaries as of and for the years ended December 31, 2007, 2006, and 2005, are as follows:

 	 	Bermuda Subsidiaries	 	U.S. Subsidiaries	
(in millions of U.S. dollars)	 	2007	 	 	 	2006	 	 	 	2005	 	 	 	2007	 	 	 	2006	 	 	 	2005	
Statutory capital and surplus	 	$	8,799	 	 	 	$	7,605	 	 	 	$	6,486	 	 	 	$	5,321	 	 	 	$	4,431	 	 	 	$	3,374	
Statutory net income	 	$	1,288	 	 	 	$	1,527	 	 	 	$	670	 	 	 	$	873	 	 	 	$	724	 	 	 	$	412	
 
As permitted by the Restructuring discussed previously in Note 6, certain of the Company’s U.S. subsidiaries discount certain A&E liabilities, which increased statutory capital and surplus by approximately $140 million, $157 million, and $255 million as of December 31, 2007, 2006, and 2005, respectively.
The Company’s international subsidiaries prepare statutory financial statements based on local laws and regulations. Some jurisdictions impose complex regulatory requirements on insurance companies while other jurisdictions impose fewer requirements. In some countries, the Company must obtain licenses issued by governmental authorities to conduct local insurance business. These licenses may be subject to reserves and minimum capital and solvency tests. Jurisdictions may impose fines, censure, and/or criminal sanctions for violation of regulatory requirements.
 
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ACE Limited and Subsidiaries
 
 20. Information provided in connection with outstanding debt of subsidiaries
 
The following tables present condensed consolidating financial information at December 31, 2007 and 2006, and for the years ended December 31, 2007, 2006, and 2005 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.
 
Condensed Consolidating Balance Sheet at December 31, 2007

(in millions of U.S. dollars)	 	ACE Limited
(Parent Co.
Guarantor)	 	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)	 	 	 	Other ACE
Limited
Subsidiaries and
Eliminations (1)	 	 	 	 	Consolidating
Adjustments (2)	 	 	 	 	ACE Limited
Consolidated	
Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Investments	 	$	62	 	 	 	$	20,671	 	 	 	$	21,046	 	 	 	 	$	–	 	 	 	 	$	41,779	
Cash	 	 	–	 	 	 	 	310	 	 	 	 	251	 	 	 	 	 	(51	)	 	 	 	 	510	
Insurance and reinsurance balances receivable	 	 	–	 	 	 	 	2,961	 	 	 	 	579	 	 	 	 	 	–	 	 	 	 	 	3,540	
Reinsurance recoverable	 	 	–	 	 	 	 	16,742	 	 	 	 	(2,380	)	 	 	 	 	–	 	 	 	 	 	14,362	
Goodwill	 	 	–	 	 	 	 	2,254	 	 	 	 	477	 	 	 	 	 	–	 	 	 	 	 	2,731	
Investments in subsidiaries	 	 	16,669	 	 	 	 	–	 	 	 	 	–	 	 	 	 	 	(16,669	)	 	 	 	 	–	
Due from (to) subsidiaries and affiliates, net	 	 	174	 	 	 	 	45	 	 	 	 	(45	)	 	 	 	 	(174	)	 	 	 	 	–	
Other assets	 	 	14	 	 	 	 	6,346	 	 	 	 	2,808	 	 	 	 	 	–	 	 	 	 	 	9,168	
Total assets	 	$	16,919	 	 	 	$	49,329	 	 	 	$	22,736	 	 	 	 	$	(16,894	)	 	 	 	$	72,090	
Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Unpaid losses and loss expenses	 	$	–	 	 	 	$	28,984	 	 	 	$	8,128	 	 	 	 	$	–	 	 	 	 	$	37,112	
Unearned premiums	 	 	–	 	 	 	 	4,930	 	 	 	 	1,297	 	 	 	 	 	–	 	 	 	 	 	6,227	
Future policy benefits for life and annuity contracts	 	 	–	 	 	 	 	–	 	 	 	 	545	 	 	 	 	 	–	 	 	 	 	 	545	
Short-term debt	 	 	51	 	 	 	 	87	 	 	 	 	285	 	 	 	 	 	(51	)	 	 	 	 	372	
Long-term debt	 	 	–	 	 	 	 	1,811	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	1,811	
Trust preferred securities	 	 	–	 	 	 	 	309	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	309	
Other liabilities	 	 	191	 	 	 	 	6,199	 	 	 	 	2,647	 	 	 	 	 	–	 	 	 	 	 	9,037	
Total liabilities	 	 	242	 	 	 	 	42,320	 	 	 	 	12,902	 	 	 	 	 	(51	)	 	 	 	 	55,413	
Total shareholders’ equity	 	 	16,677	 	 	 	 	7,009	 	 	 	 	9,834	 	 	 	 	 	(16,843	)	 	 	 	 	16,677	
Total liabilities and shareholders’ equity	 	$	16,919	 	 	 	$	49,329	 	 	 	$	22,736	 	 	 	 	$	(16,894	)	 	 	 	$	72,090	
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
Condensed Consolidating Balance Sheet at December 31, 2006

(in millions of U.S. dollars)	 	ACE Limited
(Parent Co.
Guarantor)	 	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)	 	 	 	Other ACE
Limited
Subsidiaries and
Eliminations (1)	 	 	 	 	Consolidating
Adjustments (2)	 	 	 	 	ACE Limited
Consolidated	
Assets	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Investments	 	$	69	 	 	 	$	18,926	 	 	 	$	17,606	 	 	 	 	$	–	 	 	 	 	$	36,601	
Cash	 	 	13	 	 	 	 	213	 	 	 	 	339	 	 	 	 	 	–	 	 	 	 	 	565	
Insurance and reinsurance balances receivable	 	 	–	 	 	 	 	2,843	 	 	 	 	737	 	 	 	 	 	–	 	 	 	 	 	3,580	
Reinsurance recoverable	 	 	–	 	 	 	 	15,188	 	 	 	 	(608	)	 	 	 	 	–	 	 	 	 	 	14,580	
Goodwill	 	 	–	 	 	 	 	2,254	 	 	 	 	477	 	 	 	 	 	–	 	 	 	 	 	2,731	
Investments in subsidiaries	 	 	14,157	 	 	 	 	–	 	 	 	 	–	 	 	 	 	 	(14,157	)	 	 	 	 	–	
Due from (to) subsidiaries and affiliates, net	 	 	714	 	 	 	 	–	 	 	 	 	–	 	 	 	 	 	(714	)	 	 	 	 	–	
Other assets	 	 	26	 	 	 	 	6,245	 	 	 	 	2,807	 	 	 	 	 	–	 	 	 	 	 	9,078	
Total assets	 	$	14,979	 	 	 	$	45,669	 	 	 	$	21,358	 	 	 	 	$	(14,871	)	 	 	 	$	67,135	
Liabilities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Unpaid losses and loss expenses	 	$	–	 	 	 	$	26,864	 	 	 	$	8,653	 	 	 	 	$	–	 	 	 	 	$	35,517	
Unearned premiums	 	 	–	 	 	 	 	5,001	 	 	 	 	1,436	 	 	 	 	 	–	 	 	 	 	 	6,437	
Future policy benefits for life and annuity contracts	 	 	–	 	 	 	 	–	 	 	 	 	518	 	 	 	 	 	–	 	 	 	 	 	518	
Due to subsidiaries and affiliates, net	 	 	–	 	 	 	 	467	 	 	 	 	(467	)	 	 	 	 	–	 	 	 	 	 	–	
Short-term debt	 	 	500	 	 	 	 	78	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	578	
Long-term debt	 	 	–	 	 	 	 	1,310	 	 	 	 	250	 	 	 	 	 	–	 	 	 	 	 	1,560	
Trust preferred securities	 	 	–	 	 	 	 	309	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	309	
Other liabilities	 	 	201	 	 	 	 	5,589	 	 	 	 	2,148	 	 	 	 	 	–	 	 	 	 	 	7,938	
Total liabilities	 	 	701	 	 	 	 	39,618	 	 	 	 	12,538	 	 	 	 	 	–	 	 	 	 	 	52,857	
Total shareholders’ equity	 	 	14,278	 	 	 	 	6,051	 	 	 	 	8,820	 	 	 	 	 	(14,871	)	 	 	 	 	14,278	
Total liabilities and shareholders’ equity	 	$	14,979	 	 	 	$	45,669	 	 	 	$	21,358	 	 	 	 	$	(14,871	)	 	 	 	$	67,135	
( 1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
Condensed Consolidating Statement of Operations

For the year ended December 31, 2007
(in millions of U.S. dollars)	 	ACE Limited
(Parent Co.
Guarantor)	 	 	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)	 	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	 	 	Consolidating
Adjustments (2)	 	 	 	 	ACE Limited
Consolidated	 	
Net premiums written	 	$	–	 	 	 	 	$	7,033	 	 	 	$	4,946	 	 	 	 	$	–	 	 	 	 	$	11,979	 	
Net premiums earned	 	 	–	 	 	 	 	 	7,193	 	 	 	 	5,104	 	 	 	 	 	–	 	 	 	 	 	12,297	 	
Net investment income	 	 	14	 	 	 	 	 	935	 	 	 	 	969	 	 	 	 	 	–	 	 	 	 	 	1,918	 	
Equity in earnings of subsidiaries	 	 	2,633	 	 	 	 	 	–	 	 	 	 	–	 	 	 	 	 	(2,633	)	 	 	 	 	–	 	
Net realized gains (losses)	 	 	21	 	 	 	 	 	–	 	 	 	 	(82	)	 	 	 	 	–	 	 	 	 	 	(61	)	
Losses and loss expenses	 	 	–	 	 	 	 	 	4,724	 	 	 	 	2,627	 	 	 	 	 	–	 	 	 	 	 	7,351	 	
Life and annuity benefits	 	 	–	 	 	 	 	 	43	 	 	 	 	125	 	 	 	 	 	–	 	 	 	 	 	168	 	
Policy acquisition costs and administrative expenses	 	 	87	 	 	 	 	 	1,835	 	 	 	 	1,324	 	 	 	 	 	(20	)	 	 	 	 	3,226	 	
Interest expense (income)	 	 	(10	)	 	 	 	 	165	 	 	 	 	12	 	 	 	 	 	8	 	 	 	 	 	175	 	
Other (income) expense	 	 	10	 	 	 	 	 	14	 	 	 	 	57	 	 	 	 	 	–	 	 	 	 	 	81	 	
Income tax expense	 	 	3	 	 	 	 	 	462	 	 	 	 	110	 	 	 	 	 	–	 	 	 	 	 	575	 	
Net income	 	$	2,578	 	 	 	 	$	885	 	 	 	$	1,736	 	 	 	 	$	(2,621	)	 	 	 	$	2,578	 	
 
Condensed Consolidating Statement of Operations

For the year ended December 31, 2006
(in millions of U.S. dollars)	 	ACE Limited
(Parent Co.
Guarantor)	 	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)	 	 	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations (1)	 	 	 	 	Consolidating
Adjustments (2)	 	 	 	 	ACE Limited
Consolidated	 	
Net premiums written	 	$	–	 	 	 	$	6,609	 	 	 	 	$	5,421	 	 	 	 	$	–	 	 	 	 	$	12,030	 	
Net premiums earned	 	 	–	 	 	 	 	6,630	 	 	 	 	 	5,195	 	 	 	 	 	–	 	 	 	 	 	11,825	 	
Net investment income	 	 	6	 	 	 	 	805	 	 	 	 	 	790	 	 	 	 	 	–	 	 	 	 	 	1,601	 	
Equity in earnings of subsidiaries	 	 	2,412	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	(2,412	)	 	 	 	 	–	 	
Net realized gains (losses)	 	 	11	 	 	 	 	(58	)	 	 	 	 	(51	)	 	 	 	 	–	 	 	 	 	 	(98	)	
Losses and loss expenses	 	 	–	 	 	 	 	4,199	 	 	 	 	 	2,871	 	 	 	 	 	–	 	 	 	 	 	7,070	 	
Life and annuity benefits	 	 	–	 	 	 	 	14	 	 	 	 	 	109	 	 	 	 	 	–	 	 	 	 	 	123	 	
Policy acquisition costs and administrative expenses	 	 	115	 	 	 	 	1,812	 	 	 	 	 	1,281	 	 	 	 	 	(37	)	 	 	 	 	3,171	 	
Interest expense (income)	 	 	–	 	 	 	 	156	 	 	 	 	 	(1	)	 	 	 	 	21	 	 	 	 	 	176	 	
Other (income) expense	 	 	2	 	 	 	 	14	 	 	 	 	 	(51	)	 	 	 	 	–	 	 	 	 	 	(35	)	
Income tax expense	 	 	8	 	 	 	 	425	 	 	 	 	 	89	 	 	 	 	 	–	 	 	 	 	 	522	 	
Cumulative effect of a change in accounting principle	 	 	1	 	 	 	 	2	 	 	 	 	 	1	 	 	 	 	 	–	 	 	 	 	 	4	 	
Net income	 	$	2,305	 	 	 	$	759	 	 	 	 	$	1,637	 	 	 	 	$	(2,396	)	 	 	 	$	2,305	 	
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
 
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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
Condensed Consolidating Statement of Operations

For the year ended December 31, 2005
(in millions of U.S. dollars)	 	ACE Limited
(Parent Co.
Guarantor)	 	 	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)	 	 	 	Other ACE
Limited
Subsidiaries and
Eliminations (1)	 	 	 	 	Consolidating
Adjustments (2)	 	 	 	 	ACE Limited
Consolidated	 	
Net premiums written	 	$	–	 	 	 	 	$	6,893	 	 	 	$	4,899	 	 	 	 	$	–	 	 	 	 	$	11,792	 	
Net premiums earned	 	 	–	 	 	 	 	 	6,903	 	 	 	 	4,845	 	 	 	 	 	–	 	 	 	 	 	11,748	 	
Net investment income	 	 	6	 	 	 	 	 	649	 	 	 	 	609	 	 	 	 	 	–	 	 	 	 	 	1,264	 	
Equity in earnings of subsidiaries	 	 	1,180	 	 	 	 	 	–	 	 	 	 	–	 	 	 	 	 	(1,180	)	 	 	 	 	–	 	
Net realized gains (losses)	 	 	(6	)	 	 	 	 	30	 	 	 	 	52	 	 	 	 	 	–	 	 	 	 	 	76	 	
Losses and loss expenses	 	 	–	 	 	 	 	 	4,751	 	 	 	 	3,820	 	 	 	 	 	–	 	 	 	 	 	8,571	 	
Life and annuity benefits	 	 	–	 	 	 	 	 	5	 	 	 	 	138	 	 	 	 	 	–	 	 	 	 	 	143	 	
Policy acquisition costs and administrative expenses	 	 	135	 	 	 	 	 	1,647	 	 	 	 	1,181	 	 	 	 	 	(39	)	 	 	 	 	2,924	 	
Interest expense	 	 	16	 	 	 	 	 	137	 	 	 	 	17	 	 	 	 	 	4	 	 	 	 	 	174	 	
Other (income) expense	 	 	–	 	 	 	 	 	10	 	 	 	 	(35	)	 	 	 	 	–	 	 	 	 	 	(25	)	
Income tax expense (benefit)	 	 	1	 	 	 	 	 	303	 	 	 	 	(31	)	 	 	 	 	–	 	 	 	 	 	273	 	
Net income	 	$	1,028	 	 	 	 	$	729	 	 	 	$	416	 	 	 	 	$	(1,145	)	 	 	 	$	1,028	 	
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
(2) Includes ACE Limited parent company eliminations.
 
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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
Condensed Consolidating Statement of Cash Flows

For the year ended December 31, 2007
(in millions of U.S. dollars)	 	ACE Limited
(Parent Co.
Guarantor)	 	 	 	 	ACE INA
Holdings, Inc,
(Subsidiary
Issuer)	 	 	 	 	Other ACE
Limited
Subsidiaries and
Eliminations (1)	 	 	 	 	ACE Limited
Consolidated	 	
Net cash flows from operating activities	 	$	241	 	 	 	 	$	1,612	 	 	 	 	$	2,848	 	 	 	 	$	4,701	 	
Cash flows from (used for) investing activities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Purchases of fixed maturities available for sale	 	 	–	 	 	 	 	 	(18,092	)	 	 	 	 	(30,026	)	 	 	 	 	(48,118	)	
Purchases of fixed maturities held to maturity	 	 	–	 	 	 	 	 	(319	)	 	 	 	 	(5	)	 	 	 	 	(324	)	
Purchases of equity securities	 	 	–	 	 	 	 	 	(603	)	 	 	 	 	(326	)	 	 	 	 	(929	)	
Sales of fixed maturities available for sale	 	 	3	 	 	 	 	 	15,127	 	 	 	 	 	25,686	 	 	 	 	 	40,816	 	
Sales of equity securities	 	 	–	 	 	 	 	 	456	 	 	 	 	 	407	 	 	 	 	 	863	 	
Maturities and redemptions of fixed maturities available for sale	 	 	–	 	 	 	 	 	1,764	 	 	 	 	 	1,468	 	 	 	 	 	3,232	 	
Maturities and redemptions of fixed maturities held to maturity	 	 	–	 	 	 	 	 	256	 	 	 	 	 	109	 	 	 	 	 	365	 	
Net proceeds from (payments made on) the settlement of investment derivatives	 	 	14	 	 	 	 	 	–	 	 	 	 	 	(30	)	 	 	 	 	(16	)	
Advances (to) from affiliates	 	 	496	 	 	 	 	 	–	 	 	 	 	 	(496	)	 	 	 	 	–	 	
Other	 	 	(6	)	 	 	 	 	(166	)	 	 	 	 	(247	)	 	 	 	 	(419	)	
Net cash flows from (used for) investing activities	 	 	507	 	 	 	 	 	(1,577	)	 	 	 	 	(3,460	)	 	 	 	 	(4,530	)	
Cash flows from (used for) financing activities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends paid on Ordinary Shares	 	 	(341	)	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	(341	)	
Dividends paid on Preferred Shares	 	 	(45	)	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	(45	)	
Net repayment of short-term debt	 	 	(449	)	 	 	 	 	–	 	 	 	 	 	(16	)	 	 	 	 	(465	)	
Net proceeds from issuance of long-term debt	 	 	–	 	 	 	 	 	500	 	 	 	 	 	–	 	 	 	 	 	500	 	
Proceeds from exercise of options for Ordinary Shares	 	 	65	 	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	65	 	
Proceeds from Ordinary Shares issued under ESPP	 	 	9	 	 	 	 	 	 	 	 	 	 	 	–	 	 	 	 	 	9	 	
Advances (to) from affiliates	 	 	–	 	 	 	 	 	(483	)	 	 	 	 	483	 	 	 	 	 	–	 	
Tax benefit on share-based compensation expense	 	 	–	 	 	 	 	 	21	 	 	 	 	 	3	 	 	 	 	 	24	 	
Net cash flows from (used for) financing activities	 	 	(761	)	 	 	 	 	38	 	 	 	 	 	470	 	 	 	 	 	(253	)	
Effect of foreign currency rate changes on cash and cash equivalents	 	 	–	 	 	 	 	 	24	 	 	 	 	 	3	 	 	 	 	 	27	 	
Net (decrease) increase in cash	 	 	(13	)	 	 	 	 	97	 	 	 	 	 	(139	)	 	 	 	 	(55	)	
Cash – beginning of year	 	 	13	 	 	 	 	 	213	 	 	 	 	 	339	 	 	 	 	 	565	 	
Cash – end of year	 	$	–	 	 	 	 	$	310	 	 	 	 	$	200	 	 	 	 	$	510	 	
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
 
F-64

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

For the year ended December 31, 2006
(in millions of U.S. dollars)	 	ACE Limited
(Parent Co.
Guarantor)	 	 	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)	 	 	 	 	Other ACE
Limited
Subsidiaries and
Eliminations (1)	 	 	 	 	ACE Limited
Consolidated	 	
Net cash flows from operating activities	 	$	502	 	 	 	 	$	2,033	 	 	 	 	$	1,570	 	 	 	 	$	4,105	 	
Cash flows used for investing activities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Purchases of fixed maturities available for sale	 	 	–	 	 	 	 	 	(13,159	)	 	 	 	 	(28,036	)	 	 	 	 	(41,195	)	
Purchases of fixed maturities held to maturity	 	 	–	 	 	 	 	 	(474	)	 	 	 	 	(59	)	 	 	 	 	(533	)	
Purchases of equity securities	 	 	–	 	 	 	 	 	(508	)	 	 	 	 	(333	)	 	 	 	 	(841	)	
Sales of fixed maturities available for sale	 	 	12	 	 	 	 	 	9,279	 	 	 	 	 	24,648	 	 	 	 	 	33,939	 	
Sales of equity securities	 	 	–	 	 	 	 	 	427	 	 	 	 	 	500	 	 	 	 	 	927	 	
Maturities and redemptions of fixed maturities available for sale	 	 	–	 	 	 	 	 	1,836	 	 	 	 	 	1,573	 	 	 	 	 	3,409	 	
Maturities and redemptions of fixed maturities held to maturity	 	 	–	 	 	 	 	 	445	 	 	 	 	 	98	 	 	 	 	 	543	 	
Net proceeds from (payments made on) the settlement of investment derivatives	 	 	11	 	 	 	 	 	–	 	 	 	 	 	(51	)	 	 	 	 	(40	)	
Capitalization of subsidiaries	 	 	(15	)	 	 	 	 	–	 	 	 	 	 	15	 	 	 	 	 	–	 	
Advances (to) from affiliates	 	 	(237	)	 	 	 	 	–	 	 	 	 	 	237	 	 	 	 	 	–	 	
Sale of subsidiary (net of cash sold of $2)	 	 	–	 	 	 	 	 	(2	)	 	 	 	 	–	 	 	 	 	 	(2	)	
Other	 	 	2	 	 	 	 	 	(134	)	 	 	 	 	155	 	 	 	 	 	23	 	
Net cash flows used for investing activities	 	 	(227	)	 	 	 	 	(2,290	)	 	 	 	 	(1,253	)	 	 	 	 	(3,770	)	
Cash flows from (used for) financing activities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends paid on Ordinary Shares	 	 	(312	)	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	(312	)	
Dividends paid on Preferred Shares	 	 	(45	)	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	(45	)	
Repayment of short-term debt	 	 	–	 	 	 	 	 	(300	)	 	 	 	 	–	 	 	 	 	 	(300	)	
Net proceeds from issuance of long-term debt	 	 	–	 	 	 	 	 	298	 	 	 	 	 	–	 	 	 	 	 	298	 	
Proceeds from exercise of options for Ordinary Shares	 	 	67	 	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	67	 	
Proceeds from Ordinary Shares issued under ESPP	 	 	8	 	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	8	 	
Advances (to) from affiliates	 	 	–	 	 	 	 	 	194	 	 	 	 	 	(194	)	 	 	 	 	–	 	
Net cash flows from (used for) financing activities	 	 	(282	)	 	 	 	 	192	 	 	 	 	 	(194	)	 	 	 	 	(284	)	
Effect of foreign currency rate changes on cash and cash equivalents	 	 	–	 	 	 	 	 	2	 	 	 	 	 	–	 	 	 	 	 	2	 	
Net increase (decrease) in cash	 	 	(7	)	 	 	 	 	(63	)	 	 	 	 	123	 	 	 	 	 	53	 	
Cash – beginning of year	 	 	20	 	 	 	 	 	276	 	 	 	 	 	216	 	 	 	 	 	512	 	
Cash – end of year	 	$	13	 	 	 	 	$	213	 	 	 	 	$	339	 	 	 	 	$	565	 	
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
 
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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
Condensed Consolidating Statement of Cash Flows

For the year ended December 31, 2005
(in millions of U.S. dollars)	 	ACE Limited
(Parent Co.
Guarantor)	 	 	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)	 	 	 	 	Other ACE
Limited
Subsidiaries and
Eliminations (1)	 	 	 	 	ACE Limited
Consolidated	 	
Net cash flows from operating activities	 	$	497	 	 	 	 	$	2,631	 	 	 	 	$	1,180	 	 	 	 	$	4,308	 	
Cash flows used for investing activities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Purchases of fixed maturities available for sale	 	 	–	 	 	 	 	 	(14,767	)	 	 	 	 	(17,542	)	 	 	 	 	(32,309	)	
Purchases of equity securities	 	 	–	 	 	 	 	 	(353	)	 	 	 	 	(301	)	 	 	 	 	(654	)	
Sales of fixed maturities available for sale	 	 	22	 	 	 	 	 	10,279	 	 	 	 	 	14,140	 	 	 	 	 	24,441	 	
Sales of equity securities	 	 	–	 	 	 	 	 	279	 	 	 	 	 	213	 	 	 	 	 	492	 	
Maturities and redemptions of fixed maturities available for sale	 	 	–	 	 	 	 	 	1,361	 	 	 	 	 	1,029	 	 	 	 	 	2,390	 	
Maturities and redemptions of fixed maturities held to maturity	 	 	–	 	 	 	 	 	138	 	 	 	 	 	36	 	 	 	 	 	174	 	
Net proceeds from (payments made on) the settlement of investment derivatives	 	 	(5	)	 	 	 	 	–	 	 	 	 	 	17	 	 	 	 	 	12	 	
Capitalization of subsidiaries	 	 	(1,279	)	 	 	 	 	125	 	 	 	 	 	1,154	 	 	 	 	 	–	 	
Advances (to) from affiliates subsidiaries	 	 	(503	)	 	 	 	 	–	 	 	 	 	 	503	 	 	 	 	 	–	 	
Sale of subsidiary (net of cash sold of $Nil)	 	 	–	 	 	 	 	 	–	 	 	 	 	 	7	 	 	 	 	 	7	 	
Other	 	 	(33	)	 	 	 	 	(28	)	 	 	 	 	(85	)	 	 	 	 	(146	)	
Net cash flows used for investing activities	 	 	(1,798	)	 	 	 	 	(2,966	)	 	 	 	 	(829	)	 	 	 	 	(5,593	)	
Cash flows from (used for) financing activities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends paid on Ordinary Shares	 	 	(253	)	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	(253	)	
Dividends paid on Preferred Shares	 	 	(45	)	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	(45	)	
Repayment of short-term debt	 	 	–	 	 	 	 	 	–	 	 	 	 	 	(146	)	 	 	 	 	(146	)	
Net proceeds from issuance of long-term debt	 	 	–	 	 	 	 	 	262	 	 	 	 	 	–	 	 	 	 	 	262	 	
Proceeds from exercise of options for Ordinary Shares	 	 	140	 	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	140	 	
Proceeds from Ordinary Shares issued under ESPP	 	 	8	 	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	8	 	
Repayment of trust preferred securities	 	 	–	 	 	 	 	 	(103	)	 	 	 	 	–	 	 	 	 	 	(103	)	
Net proceeds from issuance of Ordinary Shares	 	 	1,465	 	 	 	 	 	–	 	 	 	 	 	–	 	 	 	 	 	1,465	 	
Advances (to) from affiliates	 	 	–	 	 	 	 	 	247	 	 	 	 	 	(247	)	 	 	 	 	–	 	
Net cash flows from (used for) financing activities	 	 	1,315	 	 	 	 	 	406	 	 	 	 	 	(393	)	 	 	 	 	1,328	 	
Effect of foreign currency rate changes on cash and cash equivalents	 	 	–	 	 	 	 	 	(21	)	 	 	 	 	(8	)	 	 	 	 	(29	)	
Net increase (decrease) in cash	 	 	14	 	 	 	 	 	50	 	 	 	 	 	(50	)	 	 	 	 	14	 	
Cash – beginning of year	 	 	6	 	 	 	 	 	226	 	 	 	 	 	266	 	 	 	 	 	498	 	
Cash – end of year	 	$	20	 	 	 	 	$	276	 	 	 	 	$	216	 	 	 	 	$	512	 	
(1) Includes all other subsidiaries of ACE Limited and intercompany eliminations.
 
F-66

Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
 21. Condensed unaudited quarterly financial data

(in millions of U.S. dollars, except per share data)	 	Quarter Ended
March 31,
2007	 	 	 	Quarter Ended
June 30,
2007	 	 	 	 	Quarter Ended
September 30,
2007	 	 	 	Quarter Ended
December 31,
2007	 	
Net premiums earned	 	$	3,082	 	 	 	$	3,008	 	 	 	 	$	3,150	 	 	 	$	3,057	 	
Net investment income	 	 	451	 	 	 	 	471	 	 	 	 	 	492	 	 	 	 	504	 	
Net realized gains (losses)	 	 	16	 	 	 	 	(11	)	 	 	 	 	—  	 	 	 	 	(66	)	
Total revenues	 	$	3,549	 	 	 	$	3,468	 	 	 	 	$	3,642	 	 	 	$	3,495	 	
Losses and loss expenses	 	$	1,860	 	 	 	$	1,793	 	 	 	 	$	1,910	 	 	 	$	1,788	 	
Life and annuity benefits	 	$	36	 	 	 	$	33	 	 	 	 	$	39	 	 	 	$	60	 	
Net income	 	$	701	 	 	 	$	649	 	 	 	 	$	656	 	 	 	$	572	 	
Basic earnings per share	 	$	2.13	 	 	 	$	1.96	 	 	 	 	$	1.98	 	 	 	$	1.72	 	
Diluted earnings per share	 	$	2.10	 	 	 	$	1.93	 	 	 	 	$	1.95	 	 	 	$	1.69	 	

(in millions of U.S. dollars, except per share data)	 	Quarter Ended
March 31,
2006	 	 	 	Quarter Ended
June 30,
2006	 	 	 	 	Quarter Ended
September 30,
2006	 	 	 	 	Quarter Ended
December 31,
2006	
Net premiums earned	 	$	2,805	 	 	 	$	2,906	 	 	 	 	$	3,088	 	 	 	 	$	3,026	
Net investment income	 	 	369	 	 	 	 	390	 	 	 	 	 	414	 	 	 	 	 	428	
Net realized gains (losses)	 	 	7	 	 	 	 	(7	)	 	 	 	 	(113	)	 	 	 	 	15	
Total revenues	 	$	3,181	 	 	 	$	3,289	 	 	 	 	$	3,389	 	 	 	 	$	3,469	
Losses and loss expenses	 	$	1,680	 	 	 	$	1,748	 	 	 	 	$	1,818	 	 	 	 	$	1,824	
Life and annuity benefits	 	$	28	 	 	 	$	34	 	 	 	 	$	29	 	 	 	 	$	32	
Income before cumulative effect of a change in accounting principle	 	$	485	 	 	 	$	573	 	 	 	 	$	578	 	 	 	 	$	665	
Net income	 	$	489	 	 	 	$	573	 	 	 	 	$	578	 	 	 	 	$	665	
Basic earnings per share before cumulative effect of a change in accounting principle	 	$	1.48	 	 	 	$	1.75	 	 	 	 	$	1.76	 	 	 	 	$	2.03	
Basic earnings per share	 	$	1.49	 	 	 	$	1.75	 	 	 	 	$	1.76	 	 	 	 	$	2.03	
Diluted earnings per share before cumulative effect of a change in accounting principle	 	$	1.45	 	 	 	$	1.72	 	 	 	 	$	1.73	 	 	 	 	$	1.99	
Diluted earnings per share	 	$	1.46	 	 	 	$	1.72	 	 	 	 	$	1.73	 	 	 	 	$	1.99	
 
F-67

Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACE Limited and Subsidiaries
 
 22. Subsequent event
 
In February 2008, ACE INA issued $300 million of 5.8 percent senior notes due March 2018. These notes are redeemable at any time at ACE INA’s option subject to a “make-whole” premium plus 0.35 percent. The notes are also redeemable at par plus accrued and unpaid interest in the event of certain changes in tax law. These notes do not have the benefit of any sinking fund. These senior unsecured notes are guaranteed on a senior basis by the Company and they rank equally with all of the Company’s other senior obligations. They also contain a customary limitation on lien provisions as well as customary events of default provisions which, if breached, could result in the accelerated maturity of such senior debt.
 
F-68

Table of Contents
 SCHEDULE I
ACE Limited and Subsidiaries
 
SUMMARY OF INVESTMENTS – OTHER THAN INVESTMENTS IN RELATED PARTIES

December 31, 2007
(in millions of U.S. dollars)	 	Cost or
Amortized Cost	 	 	 	Fair Value	 	 	 	Amount at
which shown in
the
balance sheet	
Fixed maturities available for sale:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Bonds:	 	 	 	 	 	 	 	 	 	 	 	 	 	
U.S. Treasury and agency	 	$	2,020	 	 	 	$	2,073	 	 	 	$	2,073	
Foreign	 	 	7,418	 	 	 	 	7,429	 	 	 	 	7,429	
Corporate securities	 	 	9,669	 	 	 	 	9,661	 	 	 	 	9,661	
Mortgage-backed securities	 	 	12,680	 	 	 	 	12,811	 	 	 	 	12,811	
States, municipalities, and political subdivisions	 	 	1,207	 	 	 	 	1,210	 	 	 	 	1,210	
Total fixed maturities	 	 	32,994	 	 	 	 	33,184	 	 	 	 	33,184	
Fixed maturities held to maturity:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Bonds:	 	 	 	 	 	 	 	 	 	 	 	 	 	
U.S. Treasury and agency	 	 	868	 	 	 	 	892	 	 	 	 	868	
Foreign	 	 	63	 	 	 	 	63	 	 	 	 	63	
Corporate securities	 	 	505	 	 	 	 	504	 	 	 	 	505	
Mortgage-backed securities	 	 	921	 	 	 	 	922	 	 	 	 	921	
States, municipalities, and political subdivisions	 	 	630	 	 	 	 	634	 	 	 	 	630	
Total fixed maturities	 	 	2,987	 	 	 	 	3,015	 	 	 	 	2,987	
Equity securities:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Common stock:	 	 	 	 	 	 	 	 	 	 	 	 	 	
Public utilities	 	 	48	 	 	 	 	59	 	 	 	 	59	
Banks, trust, and insurance companies	 	 	238	 	 	 	 	235	 	 	 	 	235	
Industrial, miscellaneous, and all other	 	 	1,332	 	 	 	 	1,543	 	 	 	 	1,543	
Total equity securities	 	 	1,618	 	 	 	 	1,837	 	 	 	 	1,837	
Short-term investments	 	 	2,631	 	 	 	 	2,631	 	 	 	 	2,631	
Other investments	 	 	880	 	 	 	 	1,140	 	 	 	 	1,140	
Total investments – other than investments in related parties	 	$	41,110	 	 	 	$	41,807	 	 	 	$	41,779	
 
F-69

Table of Contents
 SCHEDULE II
ACE Limited and Subsidiaries
 
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
BALANCE SHEETS (Parent Company Only)

December 31, 2007 and 2006
(in millions of U.S. dollars)	 	2007	 	 	 	 	2006	 	
Assets	 	 	 	 	 	 	 	 	 	 	
Investments in subsidiaries and affiliates on equity basis	 	$	16,669	 	 	 	 	$	14,157	 	
Short-term investments	 	 	3	 	 	 	 	 	6	 	
Other investments, at cost	 	 	59	 	 	 	 	 	63	 	
Total investments	 	 	16,731	 	 	 	 	 	14,226	 	
Cash	 	 	–	 	 	 	 	 	13	 	
Other assets	 	 	14	 	 	 	 	 	26	 	
Due from subsidiaries and affiliates, net	 	 	174	 	 	 	 	 	714	 	
Total assets	 	$	16,919	 	 	 	 	$	14,979	 	
Liabilities	 	 	 	 	 	 	 	 	 	 	
Accounts payable, accrued expenses, and other liabilities	 	$	102	 	 	 	 	$	120	 	
Dividends payable	 	 	89	 	 	 	 	 	81	 	
Short-term debt	 	 	51	 	 	 	 	 	500	 	
Total liabilities	 	 	242	 	 	 	 	 	701	 	
Shareholders’ equity	 	 	 	 	 	 	 	 	 	 	
Preferred Shares	 	 	2	 	 	 	 	 	2	 	
Ordinary Shares	 	 	14	 	 	 	 	 	14	 	
Additional paid-in capital	 	 	6,812	 	 	 	 	 	6,640	 	
Retained earnings	 	 	9,080	 	 	 	 	 	6,906	 	
Deferred compensation obligation	 	 	3	 	 	 	 	 	4	 	
Accumulated other comprehensive income	 	 	769	 	 	 	 	 	716	 	
Ordinary Shares issued to employee trust	 	 	(3	)	 	 	 	 	(4	)	
Total shareholders’ equity	 	 	16,677	 	 	 	 	 	14,278	 	
Total liabilities and shareholders’ equity	 	$	16,919	 	 	 	 	$	14,979	 	
 
F-70

Table of Contents
SCHEDULE II (continued)
ACE Limited and Subsidiaries
 
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
STATEMENTS OF OPERATIONS (Parent Company Only)

For the years ended December 31, 2007, 2006, and 2005
(in millions of U.S. dollars)	 	2007	 	 	 	 	2006	 	 	 	2005	 	
Revenues	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Investment income, including intercompany interest income (expense)	 	$	22	 	 	 	 	$	27	 	 	 	$	11	 	
Equity in net income of subsidiaries and affiliates	 	 	2,633	 	 	 	 	 	2,412	 	 	 	 	1,180	 	
Net realized gains (losses)	 	 	21	 	 	 	 	 	11	 	 	 	 	(6	)	
 	 	 	2,676	 	 	 	 	 	2,450	 	 	 	 	1,185	 	
Expenses	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Administrative and other expenses	 	 	100	 	 	 	 	 	124	 	 	 	 	136	 	
Interest expense (income)	 	 	(2	)	 	 	 	 	21	 	 	 	 	21	 	
 	 	 	98	 	 	 	 	 	145	 	 	 	 	157	 	
Net income	 	$	2,578	 	 	 	 	$	2,305	 	 	 	$	1,028	 	
 
F-71

Table of Contents
SCHEDULE II (continued)
ACE Limited and Subsidiaries
 
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
 
STATEMENTS OF CASH FLOWS (Parent Company Only)

For the years ended December 31, 2007, 2006, and 2005
(in millions of U.S. dollars)	 	2007	 	 	 	 	2006	 	 	 	 	2005	 	
Cash flows from operating activities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income	 	$	2,578	 	 	 	 	$	2,305	 	 	 	 	$	1,028	 	
Adjustments to reconcile net income to net cash flows from for operating
activities:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Equity in net income of subsidiaries and affiliates	 	 	(2,633	)	 	 	 	 	(2,412	)	 	 	 	 	(1,180	)	
Dividends received from subsidiaries	 	 	168	 	 	 	 	 	616	 	 	 	 	 	580	 	
Net realized (gains) losses	 	 	(21	)	 	 	 	 	(11	)	 	 	 	 	6	 	
Amounts due to subsidiaries and affiliates, net	 	 	90	 	 	 	 	 	(8	)	 	 	 	 	41	 	
Accounts payable, accrued expenses, and other liabilities	 	 	4	 	 	 	 	 	(18	)	 	 	 	 	9	 	
Accrued interest on advances from affiliate	 	 	7	 	 	 	 	 	(4	)	 	 	 	 	(7	)	
Other	 	 	48	 	 	 	 	 	34	 	 	 	 	 	20	 	
Net cash flows from operating activities	 	 	241	 	 	 	 	 	502	 	 	 	 	 	497	 	
Cash flows from (used for) investing activities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Sales of fixed maturities available for sale	 	 	3	 	 	 	 	 	12	 	 	 	 	 	22	 	
Net proceeds from (payments made on) the settlement of investment derivatives	 	 	14	 	 	 	 	 	11	 	 	 	 	 	(5	)	
Capitalization of subsidiaries	 	 	–	 	 	 	 	 	(15	)	 	 	 	 	(1,279	)	
Advances (to) from affiliates	 	 	496	 	 	 	 	 	(237	)	 	 	 	 	(503	)	
Other	 	 	(6	)	 	 	 	 	2	 	 	 	 	 	(33	)	
Net cash flows from (used for) investing activities	 	 	507	 	 	 	 	 	(227	)	 	 	 	 	(1,798	)	
Cash flows (used for) from financing activities	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends paid on Ordinary Shares	 	 	(341	)	 	 	 	 	(312	)	 	 	 	 	(253	)	
Dividends paid on Preferred Shares	 	 	(45	)	 	 	 	 	(45	)	 	 	 	 	(45	)	
Net repayment of short-term debt	 	 	(449	)	 	 	 	 	–	 	 	 	 	 	–	 	
Proceeds from exercise of options for Ordinary Shares	 	 	65	 	 	 	 	 	67	 	 	 	 	 	140	 	
Proceeds from Ordinary Shares issued under ESPP	 	 	9	 	 	 	 	 	8	 	 	 	 	 	8	 	
Net proceeds from issuance of Ordinary Shares	 	 	–	 	 	 	 	 	–	 	 	 	 	 	1,465	 	
Net cash flows (used for) from financing activities	 	 	(761	)	 	 	 	 	(282	)	 	 	 	 	1,315	 	
Net (decrease) increase in cash	 	 	(13	)	 	 	 	 	(7	)	 	 	 	 	14	 	
Cash – beginning of year	 	 	13	 	 	 	 	 	20	 	 	 	 	 	6	 	
Cash – end of year	 	$	–	 	 	 	 	$	13	 	 	 	 	$	20	 	
 
F-72

Table of Contents
 SCHEDULE IV
ACE Limited and Subsidiaries
 
SUPPLEMENTAL INFORMATION CONCERNING REINSURANCE
 
Premiums Earned

For the years ended December 31, 2007, 2006, and 2005
(in millions of U.S. dollars)	 	Direct
Amount	 	 	 	Ceded To
Other
Companies	 	 	 	Assumed
From Other
Companies	 	 	 	Net Amount	 	 	 	Percentage of
Amount
Assumed to
Net	
2007	 	$	14,673	 	 	 	$	5,834	 	 	 	$	3,458	 	 	 	$	12,297	 	 	 	28%	
2006	 	$	13,562	 	 	 	$	5,198	 	 	 	$	3,461	 	 	 	$	11,825	 	 	 	29%	
2005	 	$	13,106	 	 	 	$	5,012	 	 	 	$	3,654	 	 	 	$	11,748	 	 	 	31%	
 
F-73

Table of Contents
 SCHEDULE VI
ACE Limited and Subsidiaries
 
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY AND CASUALTY OPERATIONS

As of and for the years ended December 31, 2007, 2006, and 2005
(in millions of U.S. dollars)	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
 	 	Deferred
Policy
Acquisition
Costs	 	 	 	Net Reserves
for Unpaid
Losses
and Loss
Expenses	 	 	 	Unearned
Premiums	 	 	 	Net
Premiums
Earned	 	 	 	Net
Investment
Income	 	 	 	Net Losses and Loss
Expenses
Incurred Related to	 	 	 	 	Amortization
of Deferred
Policy
Acquisition
Costs	 	 	 	Net Paid
Losses
and Loss
Expenses	 	 	 	Net
Premiums
Written	
 	 		 		 		 		 		 		 		 		 		 		 	Current Year	 	 	 	Prior
Year	 	 		 		 		 		 		 		
2007	 	$	1,109	 	 	 	$	23,592	 	 	 	$	6,215	 	 	 	$	11,929	 	 	 	$	1,863	 	 	 	$	7,568	 	 	 	$	(217	)	 	 	 	$	1,726	 	 	 	$	5,934	 	 	 	$	11,598	
2006	 	$	1,074	 	 	 	$	22,008	 	 	 	$	6,434	 	 	 	$	11,551	 	 	 	$	1,559	 	 	 	$	7,082	 	 	 	$	(12	)	 	 	 	$	1,689	 	 	 	$	5,459	 	 	 	$	11,756	
2005	 	$	926	 	 	 	$	20,458	 	 	 	$	5,880	 	 	 	$	11,500	 	 	 	$	1,228	 	 	 	$	8,485	 	 	 	$	86	 	 	 	 	$	1,639	 	 	 	$	5,369	 	 	 	$	11,544	
 
F-74

Exhibit 4.12
SUPPLEMENTAL INDENTURE NUMBER 3
Dated as of December 21, 2007
to
INDENTURE
Dated as of November 30, 1999
between
ACE INA HOLDINGS INC.,
as Issuer
and
THE BANK OF NEW YORK,
as Successor Trustee

SUPPLEMENTAL INDENTURE NUMBER 3
This SUPPLEMENTAL INDENTURE NUMBER 3, dated as of December 21, 2007, is made by and between ACE INA Holdings Inc., a Delaware corporation (the “Company”), and THE BANK OF NEW YORK, as successor trustee under the indenture referred to below (the “Trustee”).
 
WITNESSETH:
WHEREAS, the Company has heretofore executed and delivered to Bank One Trust Company, NA, as trustee, an Indenture, dated as of November 30, 1999, as amended by Supplemental Indenture Number 1 dated December 6, 1999 and Supplemental Indenture Number 2 and Waiver dated as of February 16, 2000 (as so amended, the “Indenture”) providing for the issuance of an aggregate principal amount of up to $300,000,000 of 11.20% Subordinated Notes due 2009 (the “Securities”);
WHEREAS, Bank One Trust Company, NA has transferred all or substantially all of its corporate trust business or assets to The Bank of New York and, pursuant to Section 7.09 of the Indenture, The Bank of New York has become the successor trustee;
WHEREAS, Section 104 of the aforementioned Supplemental Indenture No. 1 requires the Company to provide certain consolidated financial statements and other financial information to the Trustee and the Holders;
WHEREAS, Section 10.5 of the Indenture requires the Company to preserve the corporate existence of the Company and of each of its subsidiaries;
WHEREAS, the Company has requested, and the Trustee is prepared to agree, to amend Section 104 of Supplemental Indenture No. 1 and Section 10.5 of the Indenture as provided below (the “Amendment”);
WHEREAS, Holders of a majority in principal amount of the Securities have consented in writing to the Amendment; and
WHEREAS, pursuant to Section 9.2 of the Indenture, the Trustee and the Company are authorized to execute and deliver this Supplemental Indenture Number 3.
NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Trustee mutually covenant and agree for the equal and ratable benefit of the Securityholders as follows:
1. Amendments .

(a) Section 104 of Supplemental Indenture No.1 is hereby amended by deleting Section 104 in its entirety and replacing it with the following:
At any time while any Notes are Outstanding:
(a) within 120 days after the end of each fiscal year, the Company shall provide to the Trustee and Holders a Consolidated balance sheet of the Company and its Subsidiaries as of the end of such fiscal year and the related Consolidated statements of income, stockholders’ equity and cash flow of the Company and its Subsidiaries for such fiscal year, setting forth in each case in comparative form the Consolidated figures for the previous fiscal year, all in reasonable detail and accompanied by (i) a report thereon of independent certified public accountants of recognized national standing selected by the Company stating that such Consolidated financial statements fairly present the Consolidated financial position of the Company and its Subsidiaries as of the date indicated and their results of operations and cash flows for the periods indicated in conformity with GAAP (except as otherwise stated therein) and that the examination by such accountants in connection with such Consolidated financial statements has been made in accordance with generally accepted auditing standards and (ii) a management’s discussion and analysis of financial condition and results of operations substantially as would be required to be included in an annual report on Form 10-K if the Company were subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act; provided that, the Company’s obligations under this Section 4.02(a) shall be fully satisfied of the foregoing obligation if ACE Limited has filed with the Securities and Exchange Commission on or before such 120 th day its Annual Report on Form 10-K for such fiscal year containing an audited condensed consolidated balance sheet and statements of operations and cash flows for the Company in the footnotes to the financial statements of ACE Limited contained therein, and the Company shall have given notice of the public availability thereof to the Trustee on or before such 120 th day.
(b) within 45 days after the end of each fiscal quarter (other than the last fiscal quarter of any fiscal year) the Company shall provide to the Trustee and Holders an unaudited Consolidated balance sheet of the Company and its Subsidiaries as of the end of such quarter and the related unaudited Consolidated statements of income, stockholders’ equity and cash flow for such quarter and the portion of the fiscal year ended at the end of such quarter, setting forth in each case in comparative form the Consolidated figures for the corresponding periods of the prior fiscal year, all in reasonable detail and certified by the Company’s chief financial officer as fairly presenting the Consolidated financial condition of the Company and its Subsidiaries as of the dates indicated, and their Consolidated results of operations and cash flows for the periods indicated, in conformity with GAAP, subject to normal year-end adjustments and the absence of footnotes; provided that, the Company’s obligations under this Section 4.02(b) shall be fully satisfied of the foregoing obligation if ACE Limited has filed with the Securities and Exchange Commission on or before such 45 th day its Quarterly Report on Form 10-Q for such fiscal quarter containing an unaudited
 
2

condensed consolidated balance sheet and statements of operations and cash flows for the Company in the footnotes to the financial statements of ACE Limited contained therein, and the Company shall have given notice of the public availability thereof to the Trustee on or before such 45 th day; and
(c) the Company shall furnish to the Holders and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
(b) Section 10.5 of the Indenture is hereby amended by deleting Section 10.5 in its entirety and replacing it with the following:
Section 10.5 Corporate Existence.
Subject to Article 8, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect its respective corporate existence and that of each of its Subsidiaries and their respective rights (charter and statutory) and franchises; provided, however , that the foregoing shall not obligate the Company or any of its Subsidiaries to preserve its corporate existence (in the case of a Subsidiary of the Company only) or any such right or franchise if the Company or any such Subsidiary shall determine that the preservation thereof is no longer desirable in the conduct of its business or the business of such Subsidiary and that the loss thereof is not disadvantageous in any material respect to any Holder.
2. Ratification of Indenture; Supplemental Indentures Part of Indenture . Except as expressly amended hereby, the Indenture is in all respects ratified and confirmed and all the terms, conditions and provisions thereof shall remain in full force and effect. This Supplemental Indenture Number 3 shall form a part of the Indenture for all purposes, and every Securityholder heretofore or hereafter authenticated and delivered shall be bound hereby.
3. Indemnity . The Company shall indemnify the Trustee and its officers, directors, employees and agents against any and all loss, liability or expense (including reasonable attorneys’ fees and expenses) incurred by or in connection with the execution and delivery of this Supplemental Indenture Number 3 and the performance of their duties hereunder.
4. Defined Terms . Capitalized terms used herein without definition shall have the respective terms assigned such terms in the Indenture.
5. Governing Law . THIS SUPPLEMENTAL INDENTURE NUMBER 3 SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO THE CHOICE OF LAW PROVISIONS THEREOF THAT WOULD REQUIRE THE APPLICATION OF ANY OTHER LAWS).
 
3

6. Trustee Makes No Representation . The Trustee makes no representation as to the validity or sufficiency of this Supplemental Indenture Number 3.
7. Counterparts . The parties may sign any number of copies of this Supplemental Indenture Number 4. Each signed copy shall be an original, but all of them together represent the same agreement.
8. Effect of Headings . The Section headings herein are for convenience only and shall not effect the construction thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture Number 3 to be duly executed as of the date first above written.

ACE INA HOLDINGS INC.	
		
By:	 	 	
	 	Name:
Title:	 	Ken Koreyva
Treasurer	

THE BANK OF NEW YORK,
            as Trustee	
		
By:	 	 	
	 	Name:
Title:	 		
 
4

Exhibit 4.18
SUPPLEMENTAL INDENTURE NUMBER 4
Dated as of December 21, 2007
to
INDENTURE
Dated as of October 27, 1998
between
ACE US HOLDINGS, INC.,
as Issuer
and
THE BANK OF NEW YORK,
as Successor Trustee

SUPPLEMENTAL INDENTURE NUMBER 4
This SUPPLEMENTAL INDENTURE NUMBER 4, dated as of December 21, 2007, is made by and between ACE US Holdings, Inc., a Delaware corporation (the “Company”), and THE BANK OF NEW YORK, as successor trustee under the indenture referred to below (the “Trustee”).
WITNESSETH:
WHEREAS, the Company has heretofore executed and delivered to the United States Trust Company of New York, as trustee, an Indenture, dated as of October 27, 1998, as amended by a Supplemental Indenture Number 1 and Waiver dated February 16, 2000, Supplemental Indenture Number 2 dated as of June 1, 2003 and Supplemental Indenture Number 3 dated as of September 1, 2004 (as so amended, the “Indenture”) providing for the issuance of an aggregate principal amount of up to $250,000,000 of Credit Sensitive Senior Notes due 2008 (the “Securities”);
WHEREAS, United States Trust Company of New York has transferred all or substantially all of its corporate trust business or assets to The Bank of New York and, pursuant to Section 7.09 of the Indenture, The Bank of New York has become the successor trustee;
WHEREAS, Section 4.02 of the Indenture requires the Company to provide certain consolidated financial statements and other financial information to the Trustee and the Holders;
WHEREAS, the Company has requested, and the Trustee is prepared to agree, to amend Section 4.02 of the Indenture as provided below (the “Amendment”);
WHEREAS, Holders of a majority in principal amount of the Securities have consented in writing to the Amendment; and
WHEREAS, pursuant to Section 9.02 of the Indenture, the Trustee and the Company are authorized to execute and deliver this Supplemental Indenture Number 4.
NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company and the Trustee mutually covenant and agree for the equal and ratable benefit of the Securityholders as follows:
1. Amendment of Section 4.02 of the Indenture .
(a) Section 1.01 of the Indenture is hereby amended by deleting the definition of “IndebtednessTotal Capital Ratio” in its entirety and replacing it with the following::

“Indebtedness/Total Capital Ratio” means, as of any date, the quotient expressed as a percentage of (i) Balance Sheet Indebtedness divided by (ii) the sum of Funded Indebtedness plus Consolidated Net Worth, in each case determined on a Consolidated basis in accordance with GAAP provided that if Westchester Fire Insurance Company (“WFIC”) and Westchester Surplus Lines Insurance Company (“WSLIC”) account for not less than 90% of the combined stockholder’s equity of all of the subsidiaries of the Company as of the end of any fiscal period for which the calculation of the Company’s Indebtedness/Total Capital Ratio is required to be calculated, the Company’s Indebtedness/Total Capital Ratio shall equal the quotient expressed as a percentage of (i) Indebtedness that would be reflected on the face of a Consolidated balance sheet of the Company and the Restricted Subsidiaries under GAAP divided by (ii) the combined total surplus as regards to policyholders of WFIC and WSLIC set forth in the statutory financial statements of WFIC and WSLIC filed with the insurance regulatory authority of each of such entity’s state of domicile for such fiscal period divided .
(b) A new Section 1.05 is hereby added which shall provide as follows:
SECTION 1.05. Use of Statutory Financial Statements . Notwithstanding anything herein contained to the contrary, in the event WFIC and WSLIC account for not less than 90% of the combined stockholder’s equity of all of the subsidiaries of the Company as of the end of any fiscal period for which the calculation of any amounts are required based upon the Company’s Consolidated financial statements (other than the Company’s Indebtedness/Total Capital Ratio), such amounts shall be computed with respect to such fiscal period combining the unconsolidated financial statements of the Company and the statutory financial statements of WFIC and WSLIC filed with the insurance regulatory authority of each of such entity’s state of domicile for such fiscal period. Notwithstanding anything herein contained to the contrary, such combined financial information need not comply with GAAP.
(c) Section 4.02 of the Indenture is hereby amended by deleting Section 4.02 in its entirety and replacing it with the following:
(a) Within 120 days after the end of each fiscal year, the Company shall provide to the Trustee and Securityholders a Consolidated balance sheet of the Company and the Restricted Subsidiaries as of the end of such fiscal year and the related Consolidated statements of income, stockholders’ equity and cash flow of the Company and the Restricted Subsidiaries for such fiscal year, setting forth in each case in comparative form the Consolidated figures for the previous fiscal year, all in reasonable detail and accompanied by (i) a report thereon of independent certified public accountants of recognized national standing selected by the Company stating that such Consolidated financial statements fairly present the Consolidated financial position of the Company and the Restricted Subsidiaries as of the date indicated and their results of operations and cash flows for the periods indicated in conformity with GAAP (except as otherwise stated therein) and that the examination by such accountants in connection with such
 
2

Consolidated financial statements has been made in accordance with generally accepted auditing standards and (ii) a management’s discussion and analysis of financial condition and results of operations substantially as would be required to be included in an annual report on Form 10-K if the Company were subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act; provided that if WFIC and WSLIC account for not less than 90% of the combined stockholder’s equity of all of the subsidiaries of the Company as of the end of any fiscal year, the Company may provide to the Trustee and Securityholders in full satisfaction of its obligations under this Section 4.02(a) with respect to such fiscal year the annual audited statutory financial statements of WFIC and WSLIC filed with the insurance regulatory authority of each of such entity’s state of domicile;
(b) within 45 days after the end of each fiscal quarter (other than the last fiscal quarter of any fiscal year) the Company shall provide to the Trustee and Securityholders an unaudited Consolidated balance sheet of the Company and the Restricted Subsidiaries as of the end of such quarter and the related unaudited Consolidated statements of income, stockholders’ equity and cash flow for such quarter and the portion of the fiscal year ended at the end of such quarter, setting forth in each case in comparative form the Consolidated figures for the corresponding periods of the prior fiscal year, all in reasonable detail and certified by the Company’s chief financial officer as fairly presenting the Consolidated financial condition of the Company and the Restricted Subsidiaries as of the dates indicated, and their Consolidated results of operations and cash flows for the periods indicated, in conformity with GAAP, subject to normal year-end adjustments and the absence of footnotes; provided that if WFIC and WSLIC account for not less than 90% of the combined stockholder’s equity of all of the subsidiaries of the Company as of the end of any fiscal quarter, the Company may provide to the Trustee and Securityholders in full satisfaction of its obligations under this Section 4.02(a) with respect to such fiscal quarter the quarterly unaudited statutory financial statements of WFIC and WSLIC filed with the insurance regulatory authority of each of such entity’s state of domicile;
(c) the Company and the Subsidiary Guarantors shall furnish to the Holders and prospective investors, upon their request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act;
(d) the Company shall deliver to the Trustee, the Calculation Agent and the Securityholders, no later than (i) in the case of the first three fiscal quarters of each year, the 45th day following the last day of such fiscal quarters and (ii) in the case of the last fiscal quarter of each year, the 120 th day following the last day of such fiscal quarter, a certificate signed by two Officers of the Company (the “Quarterly Certificate”) in the form attached hereto as Exhibit D setting forth the following information: (i) the calculation of the Company’s Indebtedness/Total Capital Ratio as of the last day of such preceding fiscal quarter, measured in accordance with GAAP on a Consolidated basis,
 
3

(ii) the current S&P Rating or Moody’s Rating for each ACE USA Insurance Group as of the date of such Quarterly Certificate, and (iii) based upon the calculation and rating set forth respectively in (i) and (ii) above, the applicable interest rate in effect for the next Pricing Period; and
(e) if, following delivery of a Quarterly Certificate during any fiscal quarter pursuant to Section 4.02(d) and before the last day of such fiscal quarter, any ACE USA Insurance Group is notified of any change in its S&P Rating or Moody’s Rating, the Company shall deliver to the Trustee, the Calculation Agent and the Securityholders a certificate signed by two Officers of the Company notifying the Trustee of such change in the S&P Rating or Moody’s Rating for such ACE USA Insurance Group (the “Ratings Certificate”), which certificate shall be in the form of Exhibit E attached hereto and shall be delivered within 3 days of such ACE USA Insurance Group being notified by S&P or Moody’s of the same. Such Ratings Certificate shall set forth the applicable interest rate in effect for the next Pricing Period taking into account such change in the S&P Rating or Moody’s Rating.
2. Ratification of Indenture; Supplemental Indentures Part of Indenture . Except as expressly amended hereby, the Indenture is in all respects ratified and confirmed and all the terms, conditions and provisions thereof shall remain in full force and effect. This Supplemental Indenture Number 4 shall form a part of the Indenture for all purposes, and every Securityholder heretofore or hereafter authenticated and delivered shall be bound hereby.
3. Indemnity . The Company shall indemnify the Trustee and its officers, directors, employees and agents against any and all loss, liability or expense (including reasonable attorneys’ fees and expenses) incurred by or in connection with the execution and delivery of this Supplemental Indenture Number 4 and the performance of their duties hereunder.
4. Defined Terms . Capitalized terms used herein without definition shall have the respective terms assigned such terms in the Indenture.
5. Governing Law . THIS SUPPLEMENTAL INDENTURE NUMBER 4 SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO THE CHOICE OF LAW PROVISIONS THEREOF THAT WOULD REQUIRE THE APPLICATION OF ANY OTHER LAWS).
6. Trustee Makes No Representation . The Trustee makes no representation as to the validity or sufficiency of this Supplemental Indenture Number 4.
7. Counterparts . The parties may sign any number of copies of this Supplemental Indenture Number 4. Each signed copy shall be an original, but all of them together represent the same agreement.
 
4

8. Effect of Headings . The Section headings herein are for convenience only and shall not effect the construction thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture Number 4 to be duly executed as of the date first above written.

ACE US HOLDINGS, INC.	
		
By:	 	 	
	 	Name: Ken Koreyva
Title: Treasurer	
	
THE BANK OF NEW YORK,
as Trustee	
		
By:	 	 	
	 	Name:
Title:	
 
5

Exhibit 10.1

Amendment # 12 to the Information Technology Services Agreement

ACE INA Holdings Inc., a corporation having a place of business at 1601 Chestnut Street, Two Liberty Place, Philadelphia, Pennsylvania 19101 (“ACE”), and International Business Machines Corporation (“IBM”), a corporation having its headquarters at Route 100, Somers, New York 10589, agree that the following terms and conditions amend and/or supplement the Information Technology Services Agreement (“Agreement”), dated June 29, 1999, between ACE and IBM and are designated Amendment #12 (“Amendment #12”). This Amendment # 12 changes the section(s) of the Agreement as indicated below. Unless modified herein, all other terms defined in the Agreement and any previous Amendments shall have the same meanings when used in this Amendment #12. All terms and conditions of the Agreement and its subsequent Amendments not otherwise specifically amended or supplemented herein remain unchanged and in full force and effect.
Unless otherwise stated within this Amendment, this Amendment #12 shall be effective as of January 1, 2008 (“Amendment #12 Effective Date”).
PRELIMINARY STATEMENT
ACE and IBM have agreed to amend certain Schedules of the Agreement through various Letters during calendar year 2006. This Amendment incorporates the changes agreed upon in Letters 0497, 0498, 0499, 0501, 0502, 0503, 0504, 0506, 0510, 0517, 0511, 0514, 0520, 0521, 0522, 0524, 0525, 0526, 0532, 0533, 0534, 0535, and 0537.
 
1.	Contract Documents affected by this Amendment:	
 
 	•	 	Information Technology Services Agreement	
 
 	•	 	Schedule A	
 
 	•	 	Schedule B	
 
 	•	 	Schedule C	
 
 	•	 	Schedule D	
 
 	•	 	Schedule E	
 
 	•	 	Schedule J	
 
 	•	 	Schedule J Supplement	
 
 	•	 	Schedule K-2	
 
 	•	 	Schedule O	
 
 	•	 	Schedule V	
 
2.	Information Technology Services Agreement	
 
 	a.	The Agreement dated June 29, 1999, as amended, is further amended as follows:	
 
 	i.	Schedule V is removed from Section 2.3;	
 
 	ii.	Section 3.1 is deleted in its entirety and replaced with the following;	
This Agreement shall come into full force and effect upon the Commencement Date and continues until 12:00 midnight, ET, on December 31, 2014, unless this Agreement is terminated as provided herein or extended as provided in Sections 3.2 or 20.5 , in which case the Term shall end at 12:00 midnight on the effective date of such termination or the date to which this Agreement is extended.
 
 	iii.	Section 6.1 (a) is deleted in its entirety and replaced with the following;	
(a) Service Facilities. The Services shall be provided at or from (i) the data centers and other service locations owned or leased by ACE and set forth on Schedule O, (ii) those IBM Facilities, in use at the effective date of Amendment 11, (iii) any other service location as may be agreed upon by IBM and ACE in writing.

ACE / IBM Confidential 	 	Page 1 of 6	
Amendment #12 FINAL IBM	 	Amendment #12	

Subject to ACE’s advance written consent, IBM may provide any part of the Services with personnel from non-US locations provided that IBM presents a transition plan to ACE in advance for ACE’s review and consent. IBM will use good faith efforts to remedy any reasonable ACE concerns with the transition plan prior to implementation. ACE agrees that it shall not unreasonably withhold, condition or delay its consent. IBM agrees to be responsible for any additional incremental costs incurred by ACE as a result of IBM’s transition of part of the Services to a non-US location.
 
 	iv.	The first sentence of Section 11.11(a) is deleted in its entirety and replaced with the following:	
Not more than once every two years during the Term and to be effective no sooner than January 1, 2010, ACE may, subject to this Section 11.11, engage the services of a mutually agreeable independent third party (a “Benchmarker”) to compare the Services by Tower against the standard of well-managed operations performing similar services under similar conditions, prices, terms and environments (“Benchmarking”).
 
 	v.	Pursuant to Letter #0517, dated October 5, 2006, effective July 1, 2005, Section 15.6 is deleted in its entirety and replaced with the following:	
Each Party represents and warrants that it shall perform its responsibilities under this Agreement in a manner that does not infringe, or constitute an infringement or misappropriation of, any U.S. patent, copyright, trademark or similar proprietary rights conferred by contract or by common law or by the law of the U.S. or any state therein of any third party, or, for responsibilities performed in countries other than the United States, of any patent, copyright, trademark or similar proprietary rights conferred by contract or by common law or by law in such countries; provided , however, that the performing Party shall not have any obligation or liability to the extent any infringement or misappropriation is caused by (i) modifications or misuse made by the other Party or its subcontractors without the knowledge or approval of the performing Party, (ii) the other Party’s combination of the performing Party’s work product or Materials with items not furnished or specified by the performing Party or contemplated by this Agreement, (iii) a breach of this Agreement by the other Party, or (iv) Third Party Software, except to the extent that such infringement or misappropriation arises from the failure of the performing Party to obtain the necessary licenses or Required Consents or to abide by the limitations of the applicable Third Party Software licenses. In addition, IBM represents and warrants that it will use commercially reasonable efforts to obtain intellectual property indemnification for ACE pursuant to any agreements that IBM enters into after the Commencement Date in connection with providing the Services with respect to Third Party Software, from the suppliers of such Software, that is comparable to the intellectual property indemnification provided by IBM to ACE under this Agreement, and will use reasonable efforts to notify ACE of all failures to obtain such indemnification.
 
 	vi.	The address of ACE in Section 16.1 (d) is deleted and replaced with the following:	
ACE INA HOLDINGS, INC.
436 Walnut Street
Philadelphia, Pennsylvania 19106
Attention: General Counsel
 
 	vii.	Pursuant to Letter #0517, dated October 5, 2006, effective July 1, 2005, Section 17.1(f) is deleted in its entirety and replaced with the following:	

ACE / IBM Confidential 	 	Page 2 of 6	
Amendment #12 FINAL IBM	 	Amendment #12	

Infringement or alleged infringement of a patent, trade secret, copyright or other proprietary rights conferred by contract, common law or by the law of the U.S. or any state therein or other country in which IBM performs its responsibilities under this Agreement in contravention of IBM’s representations and warranties in Sections 15.5 and 15.6 provided that IBM shall have no obligation with respect to any Losses to the extent the same arises out of or in connection with ACE’s modification or misuse of Equipment, systems, programs or products, or ACE’s combination, operation or use with devices, data, Equipment, systems, programs or products not furnished by IBM or its subcontractors or agents; provided further that if such a claim is made or appears likely to be made, ACE agrees to permit IBM to obtain the right for ACE to continue to use such Equipment, system, program or product, or to modify it or replace it with one that is at least functionally equivalent;
 
 	viii.	Pursuant to Letter #0517, dated October 5, 2006, effective July 1, 2005, Section 17.2(e) is deleted in its entirety and replaced with the following:	
Infringement or alleged infringement of a patent, trade secret, copyright or other proprietary rights conferred by contract, common law or by the law of the U.S. or any state therein or other country in which IBM performs its responsibilities under this Agreement with respect to materials provided by ACE or contravention of ACE’s representations and warranties in Sections 15.5 and 15.6 provided that ACE shall have no obligation with respect to any Losses to the extent the same arises out of or in connection with IBM’s modification or misuse of Equipment, systems, programs or products, or IBM’s combination, operation or use with devices, data, Equipment, systems, programs or products not furnished by ACE or its subcontractors or agents; provided further that if such a claim is made or appears likely to be made, IBM agrees to permit ACE to obtain the right for IBM to continue to use such Equipment, system, program or product, or to modify it or replace it with one that is at least functionally equivalent;
 
 	ix.	Section 20.3 is deleted in its entirety and replaced with the following	
ACE may terminate the Agreement for convenience and without cause to be effective at any time after December 31, 2009, by giving IBM at least one hundred eighty (180) days prior written notice designating the termination date, or, beginning July 1, 2002, with respect to any or all individual Towers. On the effective date of termination, ACE shall pay to IBM a Termination Charge calculated in accordance with Schedule J . In the event that a purported termination for cause by ACE under Section 20.1 is determined by a competent authority not to be properly a termination for cause, then such termination by ACE shall be deemed to be a termination for convenience under this Section 20.3 . Any Termination Charges associated with New Services agreed upon by the Parties under the auspices of separate statements of work will be specified in each statement of work.
 
 	x.	The address of ACE in Section 21.4 is deleted and replaced with the following:	
ACE INA HOLDINGS, INC.
436 Walnut Street
Philadelphia, Pennsylvania 19106
Attention: General Counsel, and
 
3.	Schedule A, “Application Software”	
 
 	a.	Schedule A is deleted in its entirety and replaced by the revised Schedule A attached to this Amendment #12. The revised Schedule A incorporates changes to the list of Applications and support personnel.	
 
4.	Schedule B, “System Software”	
 
 	a.	Schedule B is deleted in its entirety and replaced by the revised Schedule B attached to this Amendment #12. The revised Schedule B incorporates changes agreed upon in Letter #0506, dated May 24, 2006 and as further agreed by the Parties.	

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Amendment #12 FINAL IBM	 	Amendment #12	

 	b.	Schedule B-1 is added pursuant to the agreement between the Parties documented in Section 8.0.i. of Schedule J with respect to certain BMC Software.	
 
5.	Schedule C, “Key Personnel”	
 
 	a.	Schedule C is deleted in its entirety and replaced by the revised Schedule C attached to this Amendment #12. The revised Schedule C incorporates changes made by IBM notified to ACE in Letter #0526, dated March 30, 2007.	
 
6.	Schedule D, “Subcontractors”	
 
 	a.	Schedule D is deleted in its entirety and replaced by the revised Schedule D attached to this Amendment #12. The revised Schedule D is effective May 10, 2006. The revised Schedule D incorporates changes agreed upon in Letter #0522, dated December 19, 2006 and the inclusion of Broadridge Financial Solutions.	
 
7.	Schedule E, “Services and Support Responsibilities”	
 
 	a.	Schedule E is deleted in its entirety and replaced by the revised Schedule E attached to this Amendment #12. The revised Schedule E incorporates the following changes:	
 
 	i.	TLP Voice IMACD Services were terminated effective March 1, 2006, as agreed upon in Letter #0497, dated February 28, 2006;	
 
 	ii.	Additional WAN-Broadband Services were added and changes were made to WAN-Broadband Services pursuant to Letter #514, dated December 19, 2006;	
 
 	iii.	Additional Distributed Computing Services were added for WSUS Services in Part 6-A;	
 
 	iv.	Midrange (iSeries) Server Services were terminated effective November 30, 2006 pursuant to Letter #0520, dated December 11, 2006;	
 
 	v.	Section 5 of Part 7-G was deleted in its entirety as the Call Accounting Service was terminated by ACE effective February 1, 2007; and	
 
 	vi.	All references to “Blackberry” devices were changed to “mobile hand held” devices pursuant to ACE’s request.	
 
8.	Schedule J, “Charges”	
 
 	a.	Schedule J is deleted in its entirety and replaced by the revised Schedule J attached to this Amendment #12. The revised Schedule J incorporates the following changes:	
 
 	i.	The definition of “RRC Floor” was updated;	
 
 	ii.	While Section 5.3.a was modified effective June 1, 2007 pursuant to Letter #0525, dated March 1, 2007, it has been removed;	
 
 	iii.	Section 5.3.e.4. was modified to include a term that travel time and expenses associated with disaster recovery tests are ACE’s financial responsibility.	
 
 	iv.	Section 5.3.f. was added effective June 1, 2007 pursuant to Letter #0525, dated March 1, 2007;	
 
 	v.	Section 5.4 was removed effective November 30, 2006 pursuant to Letter #0520, dated December 11, 2006;	
 
 	vi.	Section 5.7.a. was modified to add additional provisions regarding the provision of Additional Distributed Computing Services for WSUS Services;	
 
 	vii.	Section 5.7.d.4. was modified to include a term that travel time and expenses associated with disaster recovery tests are ACE’s financial responsibility;	
 
 	viii.	The first paragraph of Section 5.8 is deleted in its entirety;	
 
 	ix.	Section 5.8.i.5. was deleted, effective February 1, 2007, pursuant to Letter #537, dated December 21, 2007;	
 
 	x.	Section 5.8.n. was deleted in its entirety as the Services were terminated effective March 1, 2006, as agreed upon in Letter #0497, dated February 28, 2006;	
 
 	xi.	Section 5.9.a was modified to incorporate changes for the inclusion of US Tier 1, US Tier 2, and US Tier 3 AMS resources;	
 
 	xii.	Section 5.9.a.5 was modified to correct an error;	
 
 	xiii.	Section 5.9.a.10 was modified to account for IBM’s agreement to be financially responsible for Charges related to transition between IBM Personnel requested by ACE related to this Amendment #12;	

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Amendment #12 FINAL IBM	 	Amendment #12	

 	xiv.	Section 5.9.b. was modified for the inclusion of US Tier 1, US Tier 2, and US Tier 3 AMS Resources;	
 
 	xv.	Variable Charges for Workstation Support Services were modified effective January 1, 2007 pursuant to Letter #0524, dated May 29, 2007;	
 
 	xvi.	Section 7.3.b. was modified to change the minimum to 60% of the 2008 Baseline;	
 
 	xvii.	Section 8.0.d. was modified to update the Mainframe model that was upgraded;	
 
 	xviii.	Sections 8.0.g. through 8.0.j. were added;	
 
 	xix.	Section 9 was updated with new Termination Charges; and	
 
 	xx.	The last sentence of Section 10 was deleted.	
 
 	b.	Amendment #12, “Schedule J Supplement: The Schedule J Supplement is deleted in its entirety and replaced by the revised Schedule J Supplement attached to this Amendment #12. The revised Schedule J Supplement incorporates the following changes:	
 
 	i.	Changes to the PBX and PBX Adjunct Equipment at the ACE Site in Houston, TX, pursuant to Letter #501, dated May 3, 2006. The credit provided in Letter #501 will cease and be incorporated into the Charges as of the Amendment #12 Effective Date;	
 
 	ii.	Termination of the PBX and PBX Adjunct Equipment at the ACE Site in Minnetonka, MN, effective April 30, 2006 pursuant to Letter #502, dated May 3, 2006. The credit provided in Letter #502 will cease and be incorporated into the Charges as of the Amendment #12 Effective Date;	
 
 	iii.	Termination of the PBX and PBX Adjunct Equipment at the ACE Site in Washington, D.C., effective May 30, 2006 pursuant to Letter #503, dated May 3, 2006. The credit provided in Letter #503 will cease and be incorporated into the Charges as of the Amendment #12 Effective Date;	
 
 	iv.	Changes to the PBX and PBX Adjunct Equipment at the ACE Site in San Diego, CA, pursuant to Letter #504, dated May 3, 2006. The credit provided in Letter #504 will cease and be incorporated into the Charges as of the Amendment #12 Effective Date;	
 
 	v.	Termination of the Midrange (iSeries) Server Services effective November 30, 2006 pursuant to Letter #0520, dated December 11, 2006. The credit provided in Letter #520 will cease and be incorporated into the Charges as of the Amendment #12 Effective Date;	
 
 	vi.	Mainframe Charges were amended effective June 1, 2007 pursuant to Letter #0525, dated March 1, 2007;	
 
 	vii.	Termination of Call Accounting Services, effective February 1, 2007 pursuant to Letter #537, dated December 21, 2007. A one-time credit was provided in Letter #537 and the Charges are removed as of the Amendment #12 Effective Date;	
 
 	viii.	Workstation Support Charges were modified effective January 1, 2007 pursuant to Letter #0524, dated May 29, 2007;	
 
 	ix.	Termination of the PBX and PBX Adjunct Equipment at the ACE Site in Boston, MA, effective July 30, 2007 pursuant to Letter #532, dated November 29, 2007. The credit provided in Letter #532 will cease and be incorporated into the Charges as of the Amendment #12 Effective Date	
 
 	x.	Termination of the PBX and PBX Adjunct Equipment at the ACE Site in Southfield, MI, effective November 30, 2007 pursuant to Letter #533, dated November 29, 2007. The credit provided in Letter #533 will cease and be incorporated into the Charges as of the Amendment #12 Effective Date; and	
 
 	xi.	Termination of the PBX and PBX Adjunct Equipment at the ACE Site in Overland Park, KS, effective December 31, 2007 pursuant to Letter #534, dated December 18, 2007. The credit provided in Letter #534 will be incorporated into the Charges as of the Amendment #12 Effective Date; and	
 
 	xii.	Changes to the Mainframe Charges and Mainframe DR Charges, effective December 15, 2007, pursuant to Letter #535, dated November 29, 2007.	
 
 	c.	Table J-3: Table J-2 is deleted in its entirety and replaced by the revised Table J-2 attached to this Amendment #12. The revised Table J-2 incorporates the following changes:	
 
 	i.	Termination of the PBX and PBX Adjunct Equipment at the ACE Site at TLP in Philadelphia, PA, pursuant to Letter #499, dated February 28, 2006;	
 
 	ii.	Changes to the PBX and PBX Adjunct Equipment at the ACE Site at Houston, TX, pursuant to Letter #501, dated May 3, 2006;	

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Amendment #12 FINAL IBM	 	Amendment #12	

 	iii.	Changes to the PBX and PBX Adjunct Equipment at the ACE Site at Minnetonka, MN, pursuant to Letter #502, dated May 3, 2006;	
 
 	iv.	Changes to the PBX and PBX Adjunct Equipment at the ACE Site at Washington, D.C, pursuant to Letter #503, dated May 3, 2006;	
 
 	v.	Changes to the PBX and PBX Adjunct Equipment at the ACE Site at San Diego, CA, pursuant to Letter #504, dated May 3, 2006;	
 
 	vi.	Changes to the PBX and PBX Adjunct Equipment at the ACE Site at Boston, MA, pursuant to Letter #533, dated November 29, 2007;	
 
 	vii.	Changes to the PBX and PBX Adjunct Equipment at the ACE Site at Southfield, MI, pursuant to Letter #534, dated November 29, 2007; and	
 
 	viii.	Changes to the PBX and PBX Adjunct Equipment at the ACE Site at Overland Park, KS, pursuant to Letter #535, dated December 18, 2007.	
 
 	d.	Table J-9: Table J-9 is deleted in its entirety and replaced by the revised Table J-9 attached to this Amendment #12. The revised Table J-9 incorporates changes agreed upon in Letter #0514, dated December 19, 2006.	
 
 	e.	Exhibit J-B: Exhibit J-B is deleted in its entirety and replaced by the revised Exhibit J-B attached to this Amendment #12. The revised Exhibit J-B incorporates changes agreed upon in Letter #0514, dated December 19, 2006.	
 
9.	Schedule K-2, “Workstation Standards”	
 
 	a.	Schedule K-2 is deleted in its entirety and replaced by the revised Schedule K-2 attached to this Amendment #12. The revised Schedule K-2 is effective June 30, 2006. The revised Schedule K-2 incorporates changes agreed upon in Letter #0511, dated October 24, 2006.	
 
10.	Schedule O, “ACE Sites”	
 
 	a.	Schedule O is deleted in its entirety and replaced by the revised Schedule O, dated February 28, 2006, attached to this Amendment #12 and is effective March 7, 2006 pursuant to Letter #0498, dated February 28, 2006. Schedule O is further amended and replaced with the revised Schedule O, dated December 14, 2006, attached to this Amendment #12 pursuant to Letter #0521, dated December 14, 2006.	
 
11.	Schedule V, “Services Provided From Non-US Locations”	
 
 	a.	While Schedule V was added to the Agreement effective August 15, 2006 as agreed upon in Letter #0510, dated August 3, 2006, the Parties agree that Schedule V and Letter  #0510 are removed from the Agreement as of the Amendment #12 Effective Date.	
THE PARTIES ACKNOWLEDGE THAT THEY HAVE READ THIS AMENDMENT #12, UNDERSTAND IT, AND AGREE TO BE BOUND BY ITS TERMS AND CONDITIONS. FURTHER, THE PARTIES AGREE THAT THE COMPLETE AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES RELATING TO THIS SUBJECT SHALL CONSIST OF 1) THE AMENDMENTS, 2) THE SCHEDULES, AND 3) THE AGREEMENT, DATED JUNE 29, 1999, AS AMENDED. THIS STATEMENT OF AMENDMENT #12 SUPERCEDES ALL PROPOSALS OR OTHER PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER DESCRIBED IN THIS AMENDMENT #12.

Accepted by:	 		 	Accepted by:	
			
International Business Machines Corporation	 		 	ACE INA Holdings Inc.	
					
By:	 	 	 		 	By:	 	 	
	 	Authorized Signature	 		 		 	Authorized Signature	
				
Ray Hoppenjans	 		 		 	William M. Siegle	
Name (Type or Print)                                    Date	 		 		 	Name (Type or Print)                                     Date	

ACE / IBM Confidential 	 	Page 6 of 6	
Amendment #12 FINAL IBM	 	Amendment #12	

Exhibit 10.4
EXECUTION COPY
PRIVILEGED AND CONFIDENTIAL
STOCK PURCHASE AGREEMENT
BETWEEN
AON CORPORATION
AND
ACE LIMITED
Dated as of December 14, 2007

TABLE OF CONTENTS

 	  	 	  	Page	
ARTICLE I
DEFINITIONS	
			
Section 1.1	  	Definitions	  	1	
Section 1.2	  	Interpretation	  	10	
	
ARTICLE II
PURCHASE AND SALE	
			
Section 2.1	  	Purchase and Sale of the Shares	  	10	
	
ARTICLE III
PURCHASE PRICE	
			
Section 3.1	  	Purchase Price	  	10	
	
ARTICLE IV
CLOSING	
			
Section 4.1	  	Closing Date	  	11	
Section 4.2	  	Payment on the Closing Date	  	11	
Section 4.3	  	Buyer’s Additional Closing Date Deliveries	  	11	
Section 4.4	  	Aon’s Closing Date Deliveries	  	12	
Section 4.5	  	Determination of the Net Worth Adjustment Amount	  	13	
	
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF AON	
			
Section 5.1	  	Organization of the Company and the Subsidiaries	  	14	
Section 5.2	  	Capital Structure of the Company and the Subsidiaries	  	14	
Section 5.3	  	Subsidiaries and Investments	  	14	
Section 5.4	  	Authority of Aon; Conflicts	  	15	
Section 5.5	  	Financial Statements	  	16	
Section 5.6	  	Operations Since Balance Sheet Date	  	16	
Section 5.7	  	Taxes	  	18	
Section 5.8	  	Governmental Permits	  	19	
Section 5.9	  	Real Property	  	19	
Section 5.10	  	Personal Property Leases	  	19	
Section 5.11	  	Intellectual Property and Computer Hardware	  	19	
Section 5.12	  	Title to Tangible Property	  	20	
Section 5.13	  	No Violation, Litigation or Regulatory Action	  	21	
Section 5.14	  	Contracts	  	21	
Section 5.15	  	Status of Contracts	  	23	
Section 5.16	  	ERISA	  	23	

					
Section 5.17	  	Environmental Matters	  	24	
Section 5.18	  	Employee Relations and Agreements	  	25	
Section 5.19	  	No Undisclosed Liabilities	  	26	
Section 5.20	  	Sufficiency of Assets	  	26	
Section 5.21	  	Insurance	  	26	
Section 5.22	  	Regulatory Filings	  	26	
Section 5.23	  	Insurance Contracts	  	27	
Section 5.24	  	Reinsurance Agreements	  	28	
Section 5.25	  	Producers	  	28	
Section 5.26	  	Guaranty Fund Assessments	  	28	
Section 5.27	  	Insurance Permits	  	28	
Section 5.28	  	Rating Agencies	  	28	
Section 5.29	  	Reserves	  	29	
Section 5.30	  	Financial and Market-Conduct Examinations	  	29	
Section 5.31	  	Portfolio Investments	  	29	
Section 5.32	  	No Brokers	  	29	
Section 5.33	  	Sterling Agreement	  	29	
	
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF BUYER	
			
Section 6.1	  	Organization of Buyer	  	29	
Section 6.2	  	Authority of Buyer; Conflicts	  	30	
Section 6.3	  	No Violation, Litigation or Regulatory Action.	  	31	
Section 6.4	  	Investment Intent; Information	  	31	
Section 6.5	  	Financial Ability	  	31	
Section 6.6	  	No Brokers	  	31	
	
ARTICLE VII
ACTION PRIOR TO THE CLOSING DATE	
			
Section 7.1	  	Access to Information	  	32	
Section 7.2	  	Notification	  	33	
Section 7.3	  	Consents of Third Parties; Governmental Approvals	  	33	
Section 7.4	  	Operations Prior to the Closing Date	  	35	
Section 7.5	  	Termination of Certain Intercompany Indebtedness	  	37	
Section 7.6	  	Special Dividend	  	37	
Section 7.7	  	Vendor Contracts	  	38	
Section 7.8	  	No Solicitation; No Waiver of Confidentiality Provisions	  	38	
Section 7.9	  	Financial Statements	  	39	
Section 7.10	  	Olympic Agreements	  	39	
Section 7.11	  	Sterling Transition Services Agreement	  	39	
	
ARTICLE VIII
ADDITIONAL AGREEMENTS	
			
Section 8.1	  	Tax Matters	  	39	
 
ii

					
Section 8.2	  	Employee Matters	  	45	
Section 8.3	  	Securities Law Legends	  	49	
Section 8.4	  	Insurance; Risk of Loss	  	49	
Section 8.5	  	Release of Guaranties	  	50	
Section 8.6	  	Noncompetition and Nonsolicitation	  	50	
Section 8.7	  	Use of Names	  	51	
Section 8.8	  	Post-Closing Restructuring	  	52	
	
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER	
			
Section 9.1	  	No Misrepresentation or Breach of Covenants and Warranties	  	52	
Section 9.2	  	HSR Act and EU Merger Controls	  	52	
Section 9.3	  	Necessary Governmental Approvals	  	52	
Section 9.4	  	No Restraint	  	53	
Section 9.5	  	No Material Adverse Effect	  	53	
Section 9.6	  	FIRPTA Certificate	  	53	
	
ARTICLE X
CONDITIONS PRECEDENT TO OBLIGATIONS OF AON	
			
Section 10.1	  	No Misrepresentation or Breach of Covenants and Warranties	  	53	
Section 10.2	  	HSR Act and EU Merger Controls	  	53	
Section 10.3	  	Necessary Governmental Approvals	  	54	
Section 10.4	  	No Restraint	  	54	
	
ARTICLE XI
INDEMNIFICATION	
			
Section 11.1	  	Indemnification by Aon	  	54	
Section 11.2	  	Indemnification by Buyer	  	55	
Section 11.3	  	Notice of Claims	  	57	
Section 11.4	  	Determination of Amount	  	57	
Section 11.5	  	Third Person Claims	  	57	
Section 11.6	  	Limitations	  	59	
Section 11.7	  	Mitigation	  	59	
	
ARTICLE XII
TERMINATION	
			
Section 12.1	  	Termination	  	59	
Section 12.2	  	Notice of Termination	  	60	
Section 12.3	  	Effect of Termination	  	60	
Section 12.4	  	Specific Performance	  	60	
	
ARTICLE XIII
GENERAL PROVISIONS	
			
Section 13.1	  	Survival of Representations and Warranties	  	61	
 
iii

					
Section 13.2	  	Confidential Nature of Information	  	61	
Section 13.3	  	No Public Announcement	  	61	
Section 13.4	  	Notices	  	61	
Section 13.5	  	Successors and Assigns	  	62	
Section 13.6	  	Access to Records after Closing	  	62	
Section 13.7	  	Entire Agreement; Amendments	  	63	
Section 13.8	  	Interpretation	  	63	
Section 13.9	  	Waivers	  	63	
Section 13.10	  	Expenses	  	64	
Section 13.11	  	Partial Invalidity	  	64	
Section 13.12	  	Execution in Counterparts	  	64	
Section 13.13	  	Further Assurances	  	64	
Section 13.14	  	Disclaimer of Warranties	  	64	
Section 13.15	  	Governing Law; Submission to Jurisdiction	  	65	
Section 13.16	  	Waiver of Jury Trial	  	65	
 
iv

			
List of Annexes	
		
A	  	Subsidiaries	
	
List of Exhibits	
		
A	  	Glenview Sublease	
B-1	  	Aon Transition Services Agreement	
B-2	  	Sterling Transition Services Agreement	
C	  	FIRPTA Certificate	
	
List of Schedules	
		
5.1	  	Organization	
5.2	  	Capital Structure	
5.3	  	Subsidiaries and Investments	
5.4	  	No Conflicts of Aon	
5.5	  	Financial Statements; Exceptions	
5.6	  	Operations Since Balance Sheet Date	
5.7	  	Taxes	
5.8	  	Governmental Permits	
5.9	  	Real Property	
5.10	  	Personal Property Leases	
5.11(a)	  	List of Intellectual Property	
5.11(b)	  	Software	
5.11(c)	  	Right, Title and Interest in Copyrights, Patent Rights and Trademarks	
5.11(d)	  	Registrations of Copyrights, Patent Rights, Trademarks and Software	
5.11(e)	  	Infringement of Copyrights, Patent Rights and Trademarks	
5.11(f)	  	Challenge to Copyrights, Patent Rights and Trademarks	
5.13	  	Violation, Litigation or Regulatory Action of the Company and the Subsidiaries	
5.14	  	Contracts	
5.15	  	Status of Contracts	
5.16(a)	  	Welfare Plans and Pension Plans	
5.16(b)	  	Other Material Employee Benefits	
5.16(c)	  	International Employee Benefit Plans	
5.17	  	Environmental Matters	
5.18	  	Employee Relations and Agreements	
5.19	  	No Undisclosed Liabilities	
5.20	  	Sufficiency of Assets	
5.23	  	Insurance Contracts	
5.24	  	Reinsurance Agreements	
5.25	  	Producers	
5.28	  	Rating Agencies	
5.31	  	Portfolio Investments	
6.2(b)(ii)	  	No Conflicts of Buyer	
7.3(a)	  	Consent of Third Party	
7.4	  	Operations Prior to Closing Date	

			
7.5(b)	  	Intercompany Indebtedness	
7.6	  	Special Dividend	
7.7	  	Vendor Contracts	
8.2(c)	  	Assumed Plan Liabilities and Assumed International Plans	
8.2(e)	  	Individual Employment Contracts	
8.8	  	Post-Closing Restructuring	
9.3	  	Necessary Governmental Approvals of Seller	
10.3	  	Necessary Governmental Approvals of Buyer	
 
2

STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT , dated as of December 14, 2007, by and between Aon Corporation, a Delaware corporation (“ Aon ”), and ACE Limited, a Cayman Islands company (“ Buyer ”).
PRELIMINARY STATEMENT:
WHEREAS, Aon is the owner of all of the outstanding shares of capital stock of Combined Insurance Company of America, an Illinois corporation (the “ Company ”);
WHEREAS, the Company is the direct or indirect owner of 100% of the issued and outstanding capital stock or similar equity interests of each of those entities set forth in Annex A (except as otherwise set forth therein) (each, a “ Subsidiary ” and collectively, the “ Subsidiaries ”); and
WHEREAS, Aon desires to sell to Buyer, and Buyer desires to purchase from Aon, all of the issued and outstanding capital stock of the Company (the “ Shares ”), all on the terms and subject to the conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, it is hereby agreed between Buyer and Aon as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions . In this Agreement, the following terms have the meanings specified or referred to in this Section 1.1 and shall be equally applicable to both the singular and plural forms.
“ Accounting Firm ” has the meaning specified in Section 4.5(b) .
“ Acquired Business ” has the meaning specified in Section 8.6(d) .
“ Administrative Authority ” means any foreign, federal, state, local or other governmental authority, regulatory body or stock exchange or listing authority, including any applicable department of insurance.
“ Affiliate ” means, with respect to any Person, any other Person which, at the time of determination, directly or indirectly Controls, is Controlled by or is under Common Control with such Person.
“ After-Tax Basis ” means that, in determining the amount of the payment necessary to indemnify any party against, or reimburse any party for, Losses, the amount of such Losses shall be determined net of any Tax benefit actually realized by the Indemnified Party (or any Affiliate thereof) as the result of sustaining or paying such Losses (including as the result of facts or circumstances due to which the Indemnified Party sustained or paid such Losses). Such Tax benefits shall be computed using reasonable assumptions.

“ Agreed Accounting Principles ” means the accounting principles, practices and methodologies applied in the preparation of the Balance Sheet; provided , however , that Buyer and Aon acknowledge and agree that Closing Date Net Worth shall be calculated (i) using currency exchange rates for translation purposes in effect on the date of this Agreement (as reported in The Wall Street Journal ), (ii) so that the amount for unrealized investment gains or losses shall be deemed to equal the amount as of the end of the month immediately preceding the date of this Agreement and (iii) not to include or reflect any matter for which Aon is obligated to indemnify the Buyer Group Members under this Agreement, regardless of whether such matter would be required to be included or reflected by GAAP.
“ Agreement ” means this Stock Purchase Agreement.
“ Allocation Schedule ” has the meaning specified in Section 8.1(e) .
“ Aon ” has the meaning specified in the first paragraph of this Agreement.
“ Aon Options ” has the meaning specified in Section 8.1(g) .
“ Aon Stock-Based Awards ” has the meaning specified in Section 8.1(g) .
“ Aon Transition Services Agreement ” means the Transition Services Agreement in the form attached hereto as Exhibit B-1 .
“ Aon’s Accountants ” has the meaning specified in Section 4.5(b) .
“ Aon’s DC Plans ” has the meaning specified in Section 8.2(c) .
“ Assumed International Plans ” has the meaning specified in Section 8.2(c) .
“ Assumed Plan Liabilities ” has the meaning specified in Section 8.2(c) .
“ Balance Sheet ” means the unaudited consolidated balance sheet of the Company and the Subsidiaries as of December 31, 2006 included in Schedule 5.5 .
“ Balance Sheet Date ” means June 30, 2007.
“ Base Purchase Price ” has the meaning specified in Section 3.1 .
“ Business Agreements ” has the meaning specified in Section 5.15 .
“ Buyer ” has the meaning specified in the first paragraph of this Agreement.
“ Buyer Ancillary Agreements ” means all agreements, instruments and documents being or to be executed and delivered by Buyer or an Affiliate of Buyer (including the Company and the Subsidiaries on or after the Closing Date) under this Agreement or in connection herewith.
 
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“ Buyer Group Member ” means (i) Buyer and its Affiliates (which, for purposes of Article XI , shall include the Company and the Subsidiaries), (ii) their respective directors, officers and employees and (iii) the successors and assigns of the foregoing.
“ Buyer Plans ” has the meaning specified in Section 8.2(h) .
“ Buyer’s DC Plans ” has the meaning specified in Section 8.2(c) .
“ Change of Control ” means a transaction pursuant to which Control of Aon (including by ownership of more than 50% of the voting equity securities of Aon) or ownership of more than 50% of the consolidated assets of Aon is acquired, directly or indirectly, by a Person not already an Affiliate of Aon as of the Closing Date through (x) a tender or exchange offer, merger, consolidation, share exchange or other business combination, (y) a sale of securities, recapitalization, liquidation or dissolution or (z) a sale of assets.
“ Claim Notice ” has the meaning specified in Section 11.3 .
“ Closing ” means the closing of the transfer of the Shares from Aon to Buyer in exchange for the Preliminary Purchase Price.
“ Closing Date ” has the meaning specified in Section 4.1 .
“ Closing Date Net Worth ” means Net Worth as of the close of business on the day before the Closing Date, after giving effect to (i) any cash dividends to Aon and (ii) the transactions contemplated by Sections 7.5 and 7.6 .
“ COBRA ” has the meaning specified in Section 8.2(l) .
“ Code ” means the Internal Revenue Code of 1986.
“ Company ” has the meaning specified in the first recital of this Agreement.
“ Company Employment Agreement ” has the meaning specified in Section 5.18(e) .
“ Company Plan ” has the meaning specified in Section 5.16(a) .
“ Compensation Deduction ” has the meaning specified in Section 8.1(g) .
“ Competition Law ” means any Requirements of Law that provide for merger control or are designed or intended to prohibit, restrict or regulate actions having the purpose or effect of monopolization, lessening of competition or restraint of trade.
“ Computer Hardware ” means any computer hardware, equipment and peripherals of any kind and of any platform, including desktop and laptop personal computers, related hubs, routers, switches and modems, handheld computerized devices, mid-range and mainframe computers, process control and distributed control systems, except telephone and voicemail systems, and network telecommunications equipment.
 
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“ Confidentiality Agreement ” means that certain letter agreement dated September 4, 2007 between Buyer and Aon.
“ Control ” means, as to any Person, the ownership of more than 50% of the voting equity securities of such Person. The terms “Controlled by” and “under Common Control with” shall have correlative meanings.
“ Copyrights ” means United States and foreign registered copyrights, and pending applications to register the same.
“ Court Order ” means any judgment, order, award or decree of any foreign, federal, state, local or other court or tribunal and any award in any arbitration proceeding.
“ Encumbrance ” means any lien, adverse claim, charge, security interest, mortgage, pledge, easement, conditional sale or other title retention agreement, defect in title or other restrictions of a similar kind.
“ Environmental Laws ” means all federal, state, local and foreign statutes, regulations, ordinances and other provisions having the force or effect of law, in each case concerning worker health and safety and pollution or protection of the environment.
“ Environmental Matter ” means any matter relating to (i) the Release or threatened Release of a Hazardous Material or (ii) violations of or liabilities arising under applicable Environmental Laws.
“ ERISA ” means the Employee Retirement Income Security Act of 1974.
“ ERISA Affiliate ” means any trade or business (whether or not incorporated) which would be considered a single employer with the Company pursuant to Section 414(b) or (c) of the Code and the regulations promulgated under those Sections.
“ Estimated Closing Date Net Worth ” means Aon’s good faith estimate of the Closing Date Net Worth.
“ Estimated Net Worth Adjustment Amount ” means the Estimated Closing Date Net Worth minus $1,174,000,000.
“ Excluded Taxes ” has the meaning specified in Section 8.1(a) .
“ Exempt Business Activities ” means any business activities of the type conducted by Aon or any Affiliate of Aon (other than the Company and the Subsidiaries as of the date of this Agreement) and any business activities incidental thereto.
“ Expenses ” means any and all reasonable out-of-pocket expenses actually incurred in connection with defending or asserting any claim, action, suit or proceeding incident to any matter indemnified against hereunder (including reasonable fees and disbursements of legal counsel).
 
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“ Financial Statements ” has the meaning specified in Section 5.5 .
“ Forms ” has the meaning specified in Section 8.1(e) .
“ GAAP ” means United States generally accepted accounting principles, consistently applied.
“ Glenview Sublease ” means the Sublease Agreement in the form of Exhibit A attached hereto.
“ Governmental Permits ” has the meaning specified in Section 5.8 .
“ Guaranties ” has the meaning specified in Section 8.5 .
“ Hazardous Materials ” means any waste, pollutant, contaminant, toxic substance, special waste or hazardous substance regulated by any Environmental Law, including, for purposes of this Agreement, petroleum or petroleum wastes.
“ HSR Act ” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
“ Indemnified Party ” has the meaning specified in Section 11.3 .
“ Indemnitor ” has the meaning specified in Section 11.3 .
“ Insurance Contracts ” has the meaning specified in Section 5.23(a) .
“ Intellectual Property ” means Copyrights, Patent Rights, Trademarks and Trade Secrets.
“ International Benefit Plan ” has the meaning specified in Section 5.16(c) .
“ Knowledge of Aon ” means, as to a particular matter, the current actual knowledge of the following persons: Aon’s Senior Vice President/Treasurer and each of Douglas R. Wendt, James P. Zils, Des Bosnic, Clive Robinson, Steven E. Lippai, James L. Coleman and David A. Goldberg and with respect to tax matters, Aon’s Vice President/Tax.
“ Leased Real Property ” has the meaning specified in Section 5.9 .
“ Losses ” means any and all out-of-pocket losses, costs, settlement payments, awards, judgments, fines, penalties, damages, expenses (including reasonable attorneys’ fees), disbursements, deficiencies or other charges.
“ Material Adverse Effect ” means a material adverse effect on the business, assets, results of operations or financial condition of the Company and the Subsidiaries taken as a whole, other than any such effect resulting or arising from, in whole or in part, (i) general economic or political conditions or any conditions generally affecting any segment of the industries in which the Company or the Subsidiaries operate, (ii) any change in Requirements of Law, GAAP or SAP, or any interpretation of any of the foregoing except to the extent disproportionately affecting the Company and the Subsidiaries, (iii) the execution of this
 
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Agreement, the public announcement hereof or the consummation of the transactions contemplated hereby (including required compliance with the terms of this Agreement), (iv) any change in currency exchange rates, interest rates or the financial or securities markets generally, (v) any action taken by (or at the request of) Buyer or any of its Affiliates, (vi) changes caused by acts of terrorism or war (whether or not declared) occurring after the date of this Agreement and (vii) any effect that is cured by Aon prior to the Closing.
“ MEC ” has the meaning specified in Section 5.7 .
“ Multiemployer Plan ” means a “multiemployer plan,” as defined in Section 4001(a)(3) of ERISA.
“ Net Worth ” means an amount equal to (i) the value of the assets of the Company and the Subsidiaries, taken as a whole, determined in accordance with the Agreed Accounting Principles minus (ii) the value of the liabilities of the Company and the Subsidiaries, taken as a whole, determined in accordance with the Agreed Accounting Principles, in each case, as of the date of determination.
“ Net Worth Adjustment Amount ” means the Closing Date Net Worth minus $1,174,000,000.
“ Net Worth Adjustment Report ” has the meaning specified in Section 4.5(a) .
“ Net Worth Adjustment Report Finalization Date ” means the date which is 60 days after the date on which the Net Worth Adjustment Report is delivered by Buyer to Aon; provided , however , that if Aon or Aon’s Accountant delivers a notice of exception within such 60-day period, and if any change to the Net Worth Adjustment Report is agreed to by Buyer and Aon in accordance with Section 4.5 , then the date on which Buyer and Aon agree in writing to such change shall be the Net Worth Adjustment Report Finalization Date; provided , further , that if Aon and Buyer cannot agree upon the Net Worth Adjustment Amount, then the date on which the Accounting Firm delivers its decision with respect to such dispute in accordance with Section 4.5 shall be the Net Worth Adjustment Report Finalization Date.
“ Owned Real Property ” has the meaning specified in Section 5.9 .
“ Owned Real Property Permitted Exceptions ” means (i) Permitted Encumbrances, (ii) all leases, licenses and occupancy and/or use agreements affecting the Owned Real Property (or any portion thereof) whether or not recorded against the Owned Real Property; (iii) all matters and exceptions set forth in any title reports made available to Buyer; (iv) Encumbrances with respect to the Owned Real Property created by or resulting from the acts or omissions of Buyer or any of its Affiliates, employees, officers, directors, agents, representatives, contractors, invitees or licensees; (v) Encumbrances created by any of the documents to be executed in connection with the Closing or under this Agreement whether prior to, at or after the Closing; (vi) all matters shown on or referenced in any surveys made available to Buyer; (vii) local, county, state and federal laws, ordinances or governmental regulations, including building and zoning laws, ordinances and regulations now or hereafter in effect relating to the Owned Real Property; and (viii) any and all service contracts and agreements affecting the Owned Real Property as of the date hereof, and any and all service contracts and agreements entered into after the date of this Agreement in accordance with the provisions of this Agreement, in each case, to the extent in effect as of the Closing.
 
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“ Patent Rights ” means United States and foreign patents, patent applications, continuations, continuations-in-part, divisions or reissues.
“ Pension Plan ” means any pension plan, as defined in Section 3(2) of ERISA, applied without regard to the exceptions from coverage contained in Section 4(b)(4) or 4(b)(5) thereof.
“ Permitted Encumbrances ” means (i) liens for Taxes and other governmental charges and assessments which are not yet due and payable, (ii) liens of landlords and liens of carriers, warehousemen, mechanics and materialmen and other like liens arising in the ordinary course of business for sums not yet due and payable, (iii) Encumbrances identified on the Schedules to this Agreement, (iv) other Encumbrances or imperfections on property which are not material in amount or do not materially detract from the value of or materially impair the existing use of the property affected by such Encumbrance or imperfection, (v) Encumbrances imposed by the Securities Act of 1933 or any applicable state securities law and (vi) Encumbrances that are set forth on the Balance Sheet or Statutory Statements.
“ Person ” means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization or Administrative Authority.
“ Potential Transaction ” has the meaning specified in Section 7.8(a) .
“ Preliminary Purchase Price ” has the meaning specified in Section 4.2(a) .
“ Proceeding ” has the meaning specified in Section 8.1(c) .
“ Producers ” has the meaning specified in Section 5.25 .
“ Purchase Price ” has the meaning specified in Section 3.1 .
“ Regulatory Agreement ” has the meaning specified in Section 5.13(e) .
“ Reinsurance Agreement ” has the meaning specified in Section 5.24 .
“ Release ” means the release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration of a Hazardous Material into the environment.
“ Requirements of Law ” means any foreign, federal, state and local laws, statutes, regulations, rules, codes or ordinances enacted, adopted, issued or promulgated by any Administrative Authority.
“ Reserved Consolidated Taxes ” has the meaning specified in Section 8.1(a) .
 
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“ Reserved Taxes ” has the meaning specified in Section 8.1(a) .
“ Restricted Business ” means the underwriting of supplemental accident & health and life insurance products as conducted by the Company and the Subsidiaries as of the date hereof or the immediately preceding 12 month period.
“ Retained Names and Marks ” has the meaning specified in Section 8.7(a) .
“ SAP ” means the statutory or regulatory accounting principles and practices prescribed or permitted by applicable U.S. or foreign insurance or other regulatory authorities for purposes of financial reporting.
“ Section 338(h)(10) Election ” has the meaning set forth in Section 8.1(e) .
“ Section 338 Taxes ” means Taxes imposed by any taxing jurisdiction with respect to which a Section 338(h)(10) Election is expressly made in accordance with paragraph (e) of Section 8.1 , to the extent such Taxes are imposed as a result of such Section 338(h)(10) Election.
“ Seller Ancillary Agreements ” means all agreements, instruments and documents being or to be executed and delivered by Aon under this Agreement or in connection herewith.
“ Seller Group Member ” means (i) Aon and its Affiliates, (ii) the directors, officers and employees of Aon and its Affiliates and (iii) the successors and assigns of the foregoing.
“ Shares ” has the meaning specified in the third recital of this Agreement.
“ Software ” means computer software programs and related documentation and materials, whether in source code, object code or human readable form; provided , however , that Software does not include software that is available generally through retail stores, distribution networks or is otherwise subject to “shrink-wrap” or “click-through” license agreements, including any software pre-installed in the ordinary course of business as a standard part of hardware purchased by the Company or any Subsidiary.
“ Special Dividend ” has the meaning specified in Section 7.6 .
“ Specified Representations and Warranties ” means the representations and warranties in Sections 5.4(b) , 5.6 , 5.11(a) , 5.11(b) , 5.16(b) (other than the second sentence thereof) and 5.20 .
“ Standard & Poor’s ” has the meaning specified in Section 5.28 .
“ Statutory Statements ” has the meaning specified in Section 5.22(a) .
“ Sterling ” means Sterling Life Insurance Company, an Illinois corporation.
 
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“ Sterling Agreement ” means that certain Stock Purchase Agreement, dated as of December 14, 2007, relating to the sale of all of the issued and outstanding shares of capital stock of Sterling.
“ Sterling Transition Services Agreement ” means the Transition Services Agreement in the form attached hereto as Exhibit B-2 .
“ Straddle Period ” means any taxable year or period beginning before and ending after the Closing Date.
“ Subsidiary ” and “ Subsidiaries ” each have the meaning specified in the second recital of this Agreement.
“ Tax ” (and, with correlative meaning, “ Taxes ”) means any federal, state, local or foreign income, gross receipts, premium, property, sales, use, license, excise, franchise, employment, payroll, withholding, alternative or add-on minimum, ad valorem, value added, transfer or excise tax, or any other tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or penalty, imposed by any governmental authority.
“ Tax Package ” has the meaning set forth in Section 8.1(b) .
“ Tax Return ” means any return, report or similar statement required to be filed with respect to any Tax (including any attached schedules), including any information return, claim for refund, amended return or declaration of estimated Tax.
“ Termination Date ” has the meaning set forth in Section 12.1(e) .
“ Third Party Consent ” has the meaning specified in Section 7.3(a) .
“ Trade Secrets ” means confidential ideas, trade secrets, know-how, concepts, methods, processes, formulae, reports, data, customer lists, mailing lists, business plans, or other proprietary information that provides the owner with a competitive advantage.
“ Trademarks ” means registered United States federal, state and foreign trademarks, service marks and trade names, and pending applications to register the foregoing.
“ Transferred Employees ” has the meaning specified in Section 8.2(a) .
“ Underwriting Companies ” means Combined Insurance Company of America, Combined Insurance Company of Europe Limited, Combined Life Assurance Company of Europe Limited, Combined Life Insurance Company of Australia Limited and Combined Life Insurance Company of New York.
“ Vendor Contracts ” means the contracts set forth on Schedule 7.7 between Aon or one of its Affiliates and two of Aon’s vendors.
 
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“ Welfare Plan ” means any welfare plan, as defined in Section 3(1) of ERISA, applied without regard to the exceptions from coverage contained in Sections 4(b)(4) or 4(b)(5) thereof.
Section 1.2 Interpretation . For purposes of this Agreement: (i) the words “include,” “includes” and “including” shall be deemed to be followed by the words “without limitation;” (ii) the word “or” is not exclusive; (iii) the words “herein”, “hereof”, “hereby”, “hereto” and “hereunder” refer to this Agreement as a whole, including all Annexes, Exhibits and Schedules attached to this Agreement; and (iv) any rules of construction relating to interpretation against the drafter of an agreement shall not apply to this Agreement and are expressly waived by the parties hereto. Unless the context otherwise requires, references herein: (i) to Articles, Sections, Annexes, Exhibits and Schedules mean the Articles and Sections of, and the Annexes, Exhibits and Schedules attached to, this Agreement; (ii) to an agreement, instrument or other document means such agreement, instrument or other document as amended, supplemented and modified from time to time to the extent permitted by the provisions thereof and by this Agreement; and (iii) to a statute means such statute as amended from time to time and includes any successor legislation thereto and any regulations promulgated thereunder, in each case through the date of this Agreement. The Annexes, Exhibits and Schedules referred to herein shall be construed with and as an integral part of this Agreement to the same extent as if they were set forth verbatim herein. Titles to Articles and headings of Sections are inserted for convenience of reference only and shall not be deemed a part of or to affect the meaning or interpretation of this Agreement. Unless expressly indicated to the contrary, all dollar amounts are expressed in United States funds, and all amounts payable hereunder shall be paid in United States funds.
ARTICLE II
PURCHASE AND SALE
Section 2.1 Purchase and Sale of the Shares . Upon the terms and subject to the conditions of this Agreement, on the Closing Date, Aon shall sell, transfer, assign, convey and deliver to Buyer, and Buyer shall purchase and accept from Aon the Shares free and clear of all Encumbrances, except for any restrictions on transfer which arise under the Securities Act of 1933 and any comparable securities laws.
ARTICLE III
PURCHASE PRICE
Section 3.1 Purchase Price . The purchase price for the Shares shall be equal to $2,400,000,000 (Two Billion Four Hundred Million Dollars) (the “ Base Purchase Price ”), plus (or, if a negative amount, minus the absolute value of) the Net Worth Adjustment Amount (the Base Purchase Price, as adjusted by the Net Worth Adjustment Amount, the “ Purchase Price ”). The Purchase Price shall be paid pursuant to Article IV .
 
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ARTICLE IV
CLOSING
Section 4.1 Closing Date . The Closing shall be consummated on a date and at a time agreed upon by Buyer and Aon, but in no event later than the fifth (5 th ) business day after the date on which the last unsatisfied or unwaived condition set forth in Articles IX and X (other than any such condition to be fulfilled at the Closing) has been satisfied or waived, at the offices of Sidley Austin LLP, One South Dearborn Street, Chicago, Illinois, or at such other time and place as shall be agreed upon by Buyer and Aon. The time and date on which the Closing is actually held is referred to herein as the “ Closing Date .”
Section 4.2 Payment on the Closing Date . (a) Subject to fulfillment or waiver (where permissible) of the conditions set forth in Article IX , at the Closing, Buyer shall pay to Aon an amount equal to the Base Purchase Price, plus (or, if a negative amount, minus the absolute value of) the Estimated Net Worth Adjustment Amount (the “ Preliminary Purchase Price ”), by wire transfer of immediately available funds to the bank account or accounts specified by Aon in accordance with paragraph (b) hereof.
(b) Not less than three (3) business days prior to the Closing Date, Aon shall prepare and deliver to Buyer (i) Aon’s calculation (with reasonable detail) of the Estimated Net Worth Adjustment Amount, (ii) the amount of the Preliminary Purchase Price and (iii) the wire transfer instructions for Aon.
Section 4.3 Buyer’s Additional Closing Date Deliveries . Subject to fulfillment or waiver (where permissible) of the conditions set forth in Article IX , at the Closing Buyer shall deliver to Aon, in addition to the Preliminary Purchase Price, all of the following:
(a) Certificate of the secretary or an assistant secretary of Buyer, dated the Closing Date, in form and substance reasonably satisfactory to Aon, as to: (i) the Certificate of Incorporation of Buyer; (ii) the By-Laws of Buyer; (iii) the resolutions of the Board of Directors of Buyer authorizing the execution and performance of this Agreement, any Buyer Ancillary Agreement and the transactions contemplated hereby and thereby; and (iv) incumbency and signatures of the officers of Buyer executing this Agreement and any Buyer Ancillary Agreement;
(b) The Aon Transition Services Agreement, duly executed by the Company and if not previously executed, the Sterling Transition Services Agreement duly executed by the Company;
(c) The certificate contemplated by Section 10.1 , duly executed by a duly authorized officer of Buyer; and
(d) All consents, waivers and approvals that are obtained by Buyer with respect to the consummation of the transactions contemplated by this Agreement pursuant to Articles IX and X .
 
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Section 4.4 Aon’s Closing Date Deliveries . Subject to fulfillment or waiver (where permissible) of the conditions set forth in Article X , at the Closing Aon shall deliver (or cause to be delivered) to Buyer all of the following:
(a) Certificate of the secretary or an assistant secretary of Aon, dated the Closing Date, in form and substance reasonably satisfactory to Buyer, as to: (i) the Certificate of Incorporation of Aon; (ii) the By-Laws of Aon; (iii) the resolutions of the Board of Directors of Aon authorizing the execution and performance of this Agreement, the Seller Ancillary Agreements and the transactions contemplated hereby and thereby; and (iv) the incumbency and signatures of the officers of Aon executing this Agreement and each Seller Ancillary Agreement;
(b) Stock certificates representing all of the Shares, duly executed in blank or accompanied by duly executed instruments of transfer;
(c) Stock certificates representing all of the outstanding shares of capital stock of each of the Subsidiaries registered in the names set forth on Annex A ;
(d) The Glenview Sublease, duly executed by each of Aon and the Company;
(e) The Aon Transition Services Agreement, duly executed by Aon and if not previously executed, the Sterling Transition Services Agreement duly executed by Aon;
(f) All consents, waivers and approvals that are obtained by Aon with respect to the consummation of the transactions contemplated by this Agreement pursuant to Articles IX and X ;
(g) The certificates contemplated by Sections 9.1 and 9.6 , duly executed by a duly authorized officer of Aon;
(h) The Seller Ancillary Agreements, duly executed by Aon and/or one or more of its Affiliates as specified therein;
(i) Certificates as to the good standing or comparable status (to the extent jurisdictions recognize such concept) of the Company and each Subsidiary (other than the Underwriting Companies) from the respective jurisdictions of their incorporation or domicile to the extent such jurisdictions deliver such documentation in the ordinary course, dated as of a date not earlier than 7 days (or in the case of foreign Subsidiaries, 21 days) prior to the Closing Date;
(j) Certificates obtained from the respective departments of insurance (or comparable governmental entity) of the jurisdiction or domicile of each of the Underwriting Companies evidencing the continued existence and licensure (to the extent jurisdictions recognize such concept) of each Underwriting Company as an insurance company to the extent such jurisdictions deliver such documentation in the ordinary course, dated as of the date not earlier than 7 days (or in the case of foreign Underwriting Companies, 21 days) prior to the Closing Date;
 
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(k) Evidence of the termination and full satisfaction and discharge of any liabilities and obligations under of each of the agreements giving rise to any indebtedness identified in Schedule 7.5(b) ; and
(l) The written resignations of the directors of the Company and the Subsidiaries specified in writing by Buyer.
Section 4.5 Determination of the Net Worth Adjustment Amount . (a) On or before 60 days following the Closing Date, Buyer shall prepare and deliver to Aon a report (the “ Net Worth Adjustment Report ”) setting forth in reasonable detail and with appropriate documentation Buyer’s computation of Closing Date Net Worth.
(b) After delivery of the Net Worth Adjustment Report to Aon, Aon and/or a firm of independent public accountants designated by Aon (“ Aon’s Accountants ”) will be entitled to reasonable access during normal business hours to the relevant records and working papers of Buyer and its accountants to aid in their review of the Net Worth Adjustment Report. The Net Worth Adjustment Report will be deemed to be accepted by and shall be conclusive for purposes of determining the Net Worth Adjustment Amount except to the extent, if any, that Aon or Aon’s Accountants shall have delivered within 60 days after the date on which the Net Worth Adjustment Report is delivered to Aon, a written notice to Buyer specifying in reasonable detail the nature and extent of any such exceptions (it being understood that any portion of the Net Worth Adjustment Amount that is not disputed shall be paid promptly). If a change proposed by Aon is disputed by Buyer, then Aon and Buyer shall negotiate in good faith to resolve such dispute. If, after a period of 20 days following the date on which Aon gives Buyer notice of any such proposed change, any such proposed change still remains disputed, then Buyer and Aon shall together choose an independent firm of public accountants of nationally-recognized standing (the “ Accounting Firm ”) to resolve any remaining disputes. The Accounting Firm shall act as an arbitrator to determine, based solely on presentations by Buyer and Aon, and not by independent review, only those issues still in dispute with respect to the Net Worth Adjustment Amount. The decision of the Accounting Firm shall be final and binding and shall be in accordance with the provisions of this Section 4.5 . All of the fees and expenses of the Accounting Firm shall be borne by Buyer and Aon in the same proportion that the aggregate amount of the disputed items submitted to the Accounting Firm that are unsuccessfully disputed by Buyer and Aon, respectively (as finally determined by the Accounting Firm), bears to the total amount of items submitted to the Accounting Firm.
(c) Within five (5) business days following the applicable Net Worth Adjustment Report Finalization Date, Aon and Buyer shall pay the following amounts as applicable:
(i) if the Estimated Closing Date Net Worth exceeds the Closing Date Net Worth, as calculated in accordance with this Section 4.5 , Aon shall pay to Buyer the difference thereof by wire transfer of immediately available funds to an account specified in writing to Aon by Buyer; and
(ii) if the Closing Date Net Worth, as calculated in accordance with this Section 4.5 , exceeds the Estimated Closing Date Net Worth, Buyer shall pay to Aon the difference thereof by wire transfer of immediately available funds to an account or accounts specified in writing to Buyer by Aon.
 
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Any payment required to be made pursuant to this Section 4.5(c) shall be made together with interest thereon from the Closing Date to the date of payment at the rate of interest per annum equal to thirty (30) day LIBOR in effect on the Closing Date as reported in The Wall Street Journal .
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF AON
As an inducement to Buyer to enter into this Agreement and to consummate the transactions contemplated hereby, Aon represents and warrants to Buyer as follows:
Section 5.1 Organization of the Company and the Subsidiaries . Each of the Company and the Subsidiaries has been duly formed and is validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation. Each of the Company and the Subsidiaries is duly qualified to transact business and is in good standing in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities makes such qualification necessary, except where the failure to be so qualified or in good standing, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. Each of the Company and the Subsidiaries has full corporate (or other organizational) power and authority to own or lease and operate its assets and to carry on its business in the manner that it was conducted immediately prior to the date of this Agreement. Except as set forth in Schedule 5.1 , Aon has made available to Buyer prior to the execution of this Agreement true, correct and complete copies of the certificate of incorporation and by-laws (or comparable organizational documents) for the Company and each Subsidiary.
Section 5.2 Capital Structure of the Company and the Subsidiaries . The authorized capital stock of the Company consists of 28,338,567 shares of common stock, par value $1.00 per share, of which 28,338,567 shares are issued and outstanding, all of which are owned by Aon free and clear of all Encumbrances. No shares of any other class or series of capital stock of the Company are authorized, issued or outstanding. All of the outstanding shares of capital stock or other equity interests of the Company and each Subsidiary are validly issued, fully paid and non-assessable and free of preemptive rights. The name, jurisdiction of incorporation and the record owner thereof of each of the Subsidiaries is as set forth in Annex A . All shares of capital stock or other equity interests of each of the Subsidiaries is owned as set forth in Annex A , in each case free and clear of all Encumbrances. Except for this Agreement and except as set forth in Schedule 5.2 , there are no agreements, arrangements, options, warrants, rights or commitments of any character relating to the issuance, sale, purchase, redemption or voting of any shares of capital stock of, or other equity interests in, the Company or any of the Subsidiaries.
Section 5.3 Subsidiaries and Investments . Except for the Subsidiaries and as set forth in Schedule 5.3 , neither the Company nor any Subsidiary, directly or indirectly, owns or has the right to acquire any outstanding voting securities or other equity interests in any corporation, partnership, joint venture or other entity, other than investment assets owned or held in the ordinary course of business.
 
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Section 5.4 Authority of Aon; Conflicts . (a) Aon has been duly incorporated and is validly existing and in good standing under the laws of the State of Delaware. Aon has full power and authority to execute, deliver and perform this Agreement and each of the Seller Ancillary Agreements. The execution, delivery and performance of this Agreement and the Seller Ancillary Agreements by Aon have been duly authorized and approved by Aon’s board of directors and do not require any further authorization or consent of Aon or its stockholders. This Agreement has been duly authorized, executed and delivered by Aon and (assuming the valid authorization, execution and delivery by Buyer) is the legal, valid and binding obligation of Aon enforceable in accordance with its terms, and each of the Seller Ancillary Agreements has been duly authorized by Aon and upon execution and delivery by Aon will be (assuming the valid authorization, execution and delivery by each of the other parties thereto) a legal, valid and binding obligation of Aon enforceable in accordance with its terms, in each case subject to bankruptcy, insolvency, reorganization, moratorium and similar laws of general application relating to or affecting creditors’ rights and to general equity principles.
(b) Except as set forth in Schedule 5.4 , neither the execution and delivery by Aon of this Agreement or any of the Seller Ancillary Agreements or the consummation by Aon of any of the transactions contemplated hereby or thereby nor compliance by Aon with or fulfillment by Aon of the terms, conditions and provisions hereof or thereof will:
(i) except as may result from any facts or circumstances relating to Buyer, result in a violation or breach of the terms, conditions or provisions of, or constitute a default, an event of default or an event creating rights of acceleration, termination or cancellation or a loss of rights under, or result in the creation or imposition of any Encumbrance upon Aon, any of the Shares or any of the assets of Aon, the Company or any Subsidiary, under (1) the certificate of incorporation or by-laws (or similar organizational documents) of Aon, the Company or any Subsidiary, (2) any of the Business Agreements, (3) any note, instrument, mortgage, lease, franchise or financial obligation to which Aon is a party or by which Aon is bound, (4) any Court Order to which Aon, the Company or any Subsidiary is a party or by which Aon, the Company or any Subsidiary is bound or (5) assuming that all necessary consents, approvals, authorizations and other actions described in Section 5.4(b)(ii) have been obtained, all filings and notifications described in Schedule 5.4 have been made and any applicable waiting period has expired or been terminated, any Requirements of Law affecting Aon, the Company or any Subsidiary, other than, in the case of clauses (2), (3), (4) and (5) above, any such violations, breaches, defaults, rights, loss of rights or Encumbrances that, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect or would not prevent the consummation of any of the transactions contemplated hereby; or
(ii) require the approval, consent, authorization or act of, or the making by Aon, the Company or any Subsidiary of any declaration, filing or registration with, any Administrative Authority except (1) in connection, or in compliance, with the provisions of the HSR Act or similar Competition Laws in foreign jurisdictions, (2) acquisition of control statement filings and preacquisition statements required under applicable state insurance holding company system laws and regulations and any other insurance regulatory approvals, consents,
 
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filings or notices required by any applicable insurance Requirements of Law, (3) such filings as may be required in connection with the Taxes described in Section 8.1 and (4) such approvals, consents, authorizations, declarations, filings or registrations the failure of which to be obtained or made would not reasonably be expected to have a Material Adverse Effect or would not prevent the consummation of any of the transactions contemplated hereby.
Section 5.5 Financial Statements . Schedule 5.5 contains (a) the unaudited consolidated balance sheet of the Company and the Subsidiaries as of December 31, 2006 and the related unaudited consolidated statements of income and cash flows of the Company and the Subsidiaries for the year then ended and (b) the unaudited consolidated balance sheet of the Company and the Subsidiaries as of the Balance Sheet Date and the related statements of income and cash flows for the six (6) months then ended (collectively, the “ Financial Statements ”). Except as set forth therein and except as set forth in Schedule 5.5 , the Financial Statements have been prepared in conformity, in all material respects, with GAAP (except that the Financial Statements do not contain footnotes), and such Financial Statements present fairly in accordance with GAAP, in all material respects, the financial position and results of operations of the Company and the Subsidiaries, as of their respective dates and for the respective periods covered thereby, subject, in the case of the financial statements referred to in clause (b), to normal year-end adjustments.
Section 5.6 Operations Since Balance Sheet Date . Except as set forth in Schedule 5.6 , from the Balance Sheet Date through the date hereof, there has been no Material Adverse Effect. Except as set forth in Schedule 5.6 , from the Balance Sheet Date through the date hereof, the Company and the Subsidiaries have conducted their businesses in all material respects in the ordinary course of business consistent with past practice. Without limiting the generality of the foregoing, from the Balance Sheet Date through the date hereof, except as set forth in Schedule 5.6 , neither the Company nor any Subsidiary has:
(a) sold, leased (as lessor), transferred or otherwise disposed of (other than any transfers to any Affiliate of the Company or such Subsidiary), or mortgaged or pledged, or imposed or suffered to be imposed any Encumbrance on, any of the assets reflected on the Balance Sheet or any assets acquired by the Company or such Subsidiary after the Balance Sheet Date, except for (i) assets sold or otherwise disposed of in the ordinary course of business consistent with past practice and (ii) Permitted Encumbrances;
(b) (i) made any investments other than in accordance with the investment policies of the Company and the Subsidiaries as then in effect, (ii) made any amendments to its investment policies or (iii) realized gains or losses on the investment portfolio of the Company and the Subsidiaries, in the case of clauses (i), (ii) or (iii) other than in the ordinary course of business consistent with the past practice of the Company and the Subsidiaries;
(c) cancelled any debts owed to or claims held by it (including the settlement of any claims or litigation) other than in the ordinary course of business consistent with past practice;
(d) created, incurred or assumed, or agreed to create, incur or assume, any indebtedness for borrowed money (other than money borrowed or advances from any of its Affiliates) or entered into, as lessee, any capitalized lease obligations (as defined in Statement of Financial Accounting Standards No. 13);
 
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(e) made any material change in the cash compensation of their employees (excluding any arrangements that do not involve payments by the Company or the Subsidiaries after the Closing), other than changes made in accordance with normal compensation practices or pursuant to existing contractual commitments and consistent with past compensation practices;
(f) except as set forth in Schedule 5.18 , instituted any material increase in any benefit provided under any profit-sharing, bonus, incentive, deferred compensation, insurance, pension, retirement, medical, hospital, disability, welfare or other benefits made available to employees of the Company or such Subsidiary other than in the ordinary course of business (excluding any arrangements that do not involve payments by the Company or the Subsidiaries after the Closing);
(g) acquired (by merger, consolidation, acquisition of stock or assets or otherwise) any Person or assets comprising a business or made any investment, either by purchase of stock or other securities or contribution to capital, that is material to the Company and the Subsidiaries taken as a whole;
(h) made, or agreed to make, any distribution or other disposition of assets (including cash or cash equivalents) to Aon or any of its Affiliates;
(i) (1) entered into any employment or severance agreement, other than for new employees in the ordinary course of business, (2) increased the benefits payable in the aggregate under severance or termination pay plans or policies, other than as required by Requirements of Law, (3) adopted any new or amended any bonus, profit sharing, compensation, stock option, pension, retirement, deferred compensation, employment or other employee benefit plan or policy for the benefit of any director, officer or employee, other than (A) for new employees in the ordinary course of business, (B) as required by Requirements of Law, (C) amendments to bonus, profit sharing, compensation, stock option, pension, retirement, deferred compensation and employee benefit plans or policies which are applicable to all or a portion of the Company and the Subsidiaries and which do not in the aggregate increase amounts otherwise payable under such plans or policies and (D) any change generally applicable to Aon employees or any change in the ordinary course consistent with past compensation practices, (4) increased the compensation or benefits of any director or executive officer, other than in the ordinary course of business and other than pursuant to Requirements of Law or Company Employment Agreements or (5) waived or amended the terms of any non-competition or non-solicitation agreement with any employee;
(j) made any change in or revoked any tax election or method of accounting for Tax purposes or entered into or amended any Tax sharing agreement or Tax indemnity;
(k) made any change in any of the material accounting principles, practices, methods or policies (including but not limited to any reserving methods, practices or policies), except as may be required as a result of a change in Requirements of Law, GAAP or SAP; or
 
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(l) made any change in their charters or by-laws or issued any capital stock (or securities exchangeable, convertible or exercisable for capital stock).
Section 5.7 Taxes . Except as set forth in Schedule 5.7 : (i) each of the Company and the Subsidiaries has filed all material Tax Returns required to have been filed by the Company or such Subsidiary on or before the date hereof; (ii) all Taxes shown to be due on the Tax Returns referred to in clause (i) have been timely paid; (iii) neither the Company nor any of the Subsidiaries has waived in writing any statute of limitations in respect of Taxes of the Company or such Subsidiary which waiver is currently in effect; (iv) neither the Internal Revenue Service nor any other Tax authority is now asserting, or, to the Knowledge of Aon, threatening to assert any issues in connection with the examination of the Tax Returns referred to in clause (i); (v) all deficiencies asserted or assessments made as a result of any examination of the Tax Returns referred to in clause (i) by a taxing authority have been paid in full; (vi) there are no liens for Taxes upon the assets of the Company or any of the Subsidiaries except liens constituting Permitted Encumbrances; (vii) all Tax sharing arrangements and Tax indemnity arrangements relating to the Company (other than this Agreement) will terminate on or prior to the Closing Date and neither the Company nor any of the Subsidiaries will have any liability thereunder on or after the Closing Date; (viii) all material Taxes which the Company or any Subsidiary is required by law to withhold or to collect for payment have been duly withheld and collected and have been paid to the appropriate governmental authority or have been accrued, reserved against and entered on the books of the Company or such Subsidiary; (ix) neither the Company nor any Subsidiary will, as a result of this Agreement, make or become obligated to make any “parachute payment” as defined in Section 280G of the Code; (x) Buyer will not be required to deduct or withhold any consideration or amount paid to Aon pursuant to Section 1445(a) of the Code in connection with this Agreement; (xi) the Company and the Subsidiaries have filed Tax Returns in each jurisdiction in which they are required to file a Tax Return and no claim has been asserted by any taxing authority that the Company or any of the Subsidiaries should have filed a Tax Return in any jurisdiction where the Company and the Subsidiaries have not filed a Tax Return; (xii) neither the Company nor any of the Subsidiaries has engaged in or been a party to or was a material adviser to any “listed transaction” or “reportable transaction” as defined in the Treasury Regulations Section 1.6011-4 or any corresponding provision of state, local or foreign tax law; (xiii) each insurance policy issued or sold before the Closing by the Company or a Subsidiary qualified at issuance, and at all times since, as a life insurance contract under the Code, including under Sections 101(f) and 7702 of the Code, if applicable to such policy; (xiv) the Company and the Subsidiaries have complied in all material respects with all relevant requirements of the Code and applicable state Tax laws relating to the insurance policies and contracts it issued or sold, including reporting and disclosure requirements; (xv) each life insurance policy which is a modified endowment contract under Section 7702A of the Code (a “ MEC ”) has been marketed as such at all relevant times or the policyholders otherwise have been notified of such MEC status; and (xvi) each of the Company and the domestic Subsidiaries is and will be on the Closing Date a member of the selling consolidated group (within the meaning of Section 338(h) of the Code) of which Aon is the common parent. Notwithstanding anything to the contrary in this Agreement, nothing in this Section 5.7 shall cause Aon to be liable for any Taxes for which Aon is not expressly liable pursuant to Section 8.1 .
 
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Section 5.8 Governmental Permits . Except as set forth in Schedule 5.8 , the Company and the Subsidiaries own, hold or possess all licenses, franchises, permits, privileges, immunities, approvals and other authorizations from an Administrative Authority that are necessary to entitle them to own or lease, operate and use their assets and to carry on and conduct their business substantially as conducted immediately prior to the date of this Agreement (herein collectively called “ Governmental Permits ”), except for such Governmental Permits as to which the failure to so own, hold or possess would not reasonably be expected to have a Material Adverse Effect. The Company and the Subsidiaries have complied in all material respects with all terms and conditions of the Governmental Permits. To the Knowledge of Aon, there are no pending or threatened suits, proceedings or investigations with respect to the revocation, cancellation, suspension or non-renewal of any Governmental Permit.
Section 5.9 Real Property . Schedule 5.9 contains a list of: (i) each parcel of real property owned by the Company or a Subsidiary (the “ Owned Real Property ”); (ii) each option held by the Company or a Subsidiary to acquire any real property; and (iii) each lease or similar agreement under which the Company or any of the Subsidiaries is lessee of, or holds or operates, any real property owned by any third Person in excess of 4,000 square feet (the “ Leased Real Property ”). The Company or a Subsidiary, as applicable, owns fee simple title to the Owned Real Property, subject only to the Owned Real Property Permitted Exceptions. With respect to each parcel of Owned Real Property, since January 1, 2005, the Company or Subsidiary, as the case may be, that owns such Owned Real Property has not received any written notice with respect to: (1) any claimed or actual violation, in any material respect, of any zoning, subdivision, building or health law, ordinance or rule that has not heretofore been corrected or dismissed; (2) any claim, advice or acknowledgment that such parcel of Owned Real Property is intended to be acquired by condemnation, eminent domain or similar process; or (3) any claim or attempt to take or retake such parcel of Owned Real Property pursuant to quiet title action, action for rescission or reversion or similar action whereby any Person is seeking ownership of such parcel of Owned Real Property.
Section 5.10 Personal Property Leases . Schedule 5.10 contains, as of the date of this Agreement, a list of each lease or other agreement or right under which the Company or any of the Subsidiaries is lessee of, or holds or operates, any machinery, equipment, vehicle or other tangible personal property owned by a third Person, except those which are terminable by the Company or such Subsidiary without penalty on 90 days’ or less notice or which provide for annual rental payments of less than $250,000.
Section 5.11 Intellectual Property and Computer Hardware . (a)  Schedule 5.11(a) contains a list of all Copyrights, Patent Rights and Trademarks owned by or licensed (and, if licensed, from whom if identification of the licensor is readily ascertainable from existing listings of licensed Copyrights, Patent Rights and Trademarks) to the Company or the Subsidiaries which are material to the conduct of their business, as currently conducted.
(b) Schedule 5.11(b) contains a list of all Software owned by or licensed (and, if licensed, from whom if identification of the licensor is readily ascertainable from existing listings of Software licenses) to the Company or the Subsidiaries which is material to the conduct of their business, as currently conducted.
 
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(c) Except as set forth in Schedule 5.11(c) , to the Knowledge of Aon, the Company and the Subsidiaries either: (i) own the entire right, title and interest in and to the Copyrights, Patent Rights, Trademarks and Software listed in Schedules 5.11(a) and 5.11(b) , free and clear of all Encumbrances; or (ii) have a valid contractual right or license to use the same in the conduct of their business for an annual license fee that does not exceed $175,000.
(d) Except as set forth in Schedule 5.11(d) , to the Knowledge of Aon: (i) all registrations for Copyrights, Patent Rights and Trademarks identified in Schedule 5.11(a) are valid and in force, and all applications to register any unregistered Copyrights, Patent Rights and Trademarks so identified are pending and in good standing, all without challenge of any kind; (ii) the Copyrights, Patent Rights and Trademarks (other than with respect to pending applications) owned by the Company and the Subsidiaries are valid and in force; and (iii) the Company and the Subsidiaries have the right to bring actions for infringement or unauthorized use of the Copyrights, Patent Rights, Trademarks and Software owned by the Company and the Subsidiaries.
(e) Except as set forth in Schedule 5.11(e) , (i) to the Knowledge of Aon, no infringement by the Company or any of the Subsidiaries of any Copyrights, Patent Rights and Trademarks of any other Person has occurred or resulted in any way from the conduct of their business between January 1, 2005 and the date hereof and (ii) no written notice of a claim of any infringement of any Intellectual Property of any other Person has been received by the Company or the Subsidiaries in respect of the conduct of their business between January 1, 2005 and the date hereof.
(f) Except as set forth in Schedule 5.11(f) , as of the date hereof, no proceedings are pending or, to the Knowledge of Aon, threatened against the Company or the Subsidiaries which challenge the validity or ownership of any Copyright, Patent Right, or Trademark described in Schedule 5.11(a) .
(g) Subsequent to the Closing and except as otherwise permitted hereunder or as provided under a Buyer Ancillary Agreement or Seller Ancillary Agreement or as otherwise may be contained in backup media maintained in the ordinary course of business, neither Aon nor its Affiliates will have access to computer or other electronic data primarily relating to the businesses conducted by the Company and the Subsidiaries.
(h) All Computer Hardware owned or operated by the Company and the Subsidiaries is, in the aggregate, in good working order and condition. The Company and the Subsidiaries maintain Computer Hardware back-up and recovery capabilities reasonably designed to ensure that a system problem does not impact customer facing capabilities or revenue streams. The Company and the Subsidiaries maintain reasonable Computer Hardware and network security controls intended to safeguard each component of the Computer Hardware against the risk of business disruption arising from virus attacks, unauthorized activities of any employee or contractor, hackers or any other Person.
Section 5.12 Title to Tangible Property . Except for assets disposed of in the ordinary course of business, the Company and the Subsidiaries have good and marketable title to each item of equipment and other tangible personal property reflected on the Balance Sheet as owned by the Company and the Subsidiaries, free and clear of all Encumbrances, except for Permitted Encumbrances.
 
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Section 5.13 No Violation, Litigation or Regulatory Action . Except as set forth in Schedule 5.13 :
(a) the Company and the Subsidiaries have complied with all applicable Requirements of Law and Court Orders, other than those instances of noncompliance which, individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect;
(b) as of the date hereof, (i) there are no actions, suits, proceedings or investigations pending or, to the Knowledge of Aon, threatened against the Company or any of the Subsidiaries which, individually or in the aggregate, are reasonably expected to have a Material Adverse Effect and (ii) without limiting the generality of the foregoing, neither the Company nor any Subsidiary has received any notice from any Administrative Authority since January 1, 2006 alleging any violation of any Requirements of Law or Court Orders which would reasonably be expected to have a Material Adverse Effect;
(c) as of the date hereof, there is no action, suit, proceeding or investigation pending or, to the Knowledge of Aon, threatened that questions the legality of the transactions contemplated by this Agreement or any of the Seller Ancillary Agreements;
(d) the Company and the Subsidiaries have collected, maintained, processed, transmitted and used data, at all times, in all material respects in accordance with the applicable Requirements of Law, including those affecting or relating to privacy and data protection, and the privacy rights of individuals to which the data pertain; and
(e) neither the Company nor any of the Subsidiaries is subject to any outstanding judgment, award, order, injunction or decree or is a party to any written agreement, consent agreement or memorandum of understanding with, or is a party to any commitment letter or similar undertaking to, or is subject to any order or directive by, or is a recipient of any supervisory letter from or has adopted any resolutions at the request of, any Administrative Authority that restricts in any material respect the conduct of its business as currently conducted (each, a “ Regulatory Agreement ”), nor has the Company or any of its Subsidiaries been advised in writing or, to the Knowledge of Aon, verbally since January 1, 2006 by any Administrative Authority that it is considering issuing or requesting any such Regulatory Agreement.
None of the representations and warranties contained in Sections 5.13(a) or 5.13(b) shall be deemed to relate to Tax matters (which are governed by Section 5.7 ), ERISA and employee benefits matters (which are governed by Section 5.16 ) or Environmental Matters (which are governed by Section 5.17 ).
Section 5.14 Contracts . Except as set forth in Schedule 5.14 or any other Schedule hereto, as of the date of this Agreement, neither the Company nor any of the Subsidiaries is a party to or bound by:
(a) any contract for the purchase by the Company or such Subsidiary of supplies or equipment or services which the Company or such Subsidiary reasonably anticipates will involve the annual payment of more than $500,000 or $2,000,000 in the aggregate after the date hereof;
 
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(b) any contract for the sale by the Company or such Subsidiary of any services or products of their business which involved gross written premium and fees in fiscal 2006 of, or which is reasonably anticipated to involve in the year ending December 31, 2007, more than $2,000,000;
(c) any loan agreements, promissory notes, indentures, bonds, security agreements, guarantees or obligations for borrowed money or other instruments involving indebtedness (excluding intercompany (i.e., solely between one or more of the Company or any Subsidiary) indebtedness and non-trade accounts);
(d) any partnership, joint venture or other similar agreement or arrangement with any entity other than the Company or one of the Subsidiaries;
(e) any agreement containing any covenant or provision prohibiting the Company or such Subsidiary from engaging in any line or type of business, in each case excluding agreements that would not bind the Companies or the Subsidiaries following the Closing;
(f) any reinsurance, retrocessional or similar agreement;
(g) any agreement with Aon or any Affiliate of Aon (other than the Company or a Subsidiary) that (i) contains obligations that extend beyond the Closing and (ii) is not terminable by Buyer or its Affiliates after the Closing upon not greater than 30 days’ notice and without payment or penalty;
(h) any agreement for the employment of any individual (excluding agents) on a full-time, part-time, consulting, or other basis providing annual compensation in excess of $175,000 or providing severance benefits;
(i) any agreement under which any of the Company or a Subsidiary has advanced or loaned any amount to any of its directors, officers, and employees outside the ordinary course of business;
(j) any agreement providing for (A) the acquisition of any interest in another entity (whether by purchase of assets, purchase of stock, merger, consolidation, recapitalization, share exchange or otherwise) or (B) the sale or other divestiture of any part of the business of the Company or a Subsidiary (whether by sale of assets, sale of stock, merger, consolidation, recapitalization, share exchange or otherwise), other than, in the case of clause (A) or (B), this Agreement and agreements relating to the acquisition or disposition of investment assets in the ordinary course;
 
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(k) any agreement relating to the maintenance and/or development of and/or consulting services with respect to Software that involves the payment of $175,000 or more in any calendar year (commencing with 2008); or
(l) any agreement relating to maintenance with respect to the Computer Hardware that involves the payment of $175,000 or more in any calendar year (commencing with 2008).
Section 5.15 Status of Contracts . Except as set forth in Schedule 5.15 or in any other Schedule hereto, (i) each of the leases, contracts, licenses and other agreements listed in Schedules 5.9 , 5.10 , 5.11(c) , 5.14 and 5.18 (collectively, the “ Business Agreements ”) is in full force and effect and is a legal, valid and binding contract or agreement of the Company or the Subsidiary party thereto, and, to the Knowledge of Aon, the other parties thereto, (ii) there is no material default or breach by the Company or the Subsidiary party thereto, or, to the Knowledge of Aon, any other party, in the timely performance of any obligation to be performed or paid thereunder or any other material provision thereof, and (iii) to the Knowledge of Aon, no event has occurred which with notice or lapse of time would constitute a material breach or default, or permit termination, modification, or acceleration thereunder, except in each case where such failures to be legal, valid and binding and in full force and effect and defaults and breaches would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Except as set forth in Schedule 5.15(b) , no consent is required from any Person under any Business Agreements in order to consummate the transactions contemplated by this Agreement. Except as set forth in Schedule 5.15(c) , no Business Agreement contains any provision that would allow the other party or parties thereto to terminate such Business Agreement or change any of the terms thereof as a result of the transactions contemplated hereby. Aon has made available to Buyer a true and correct copy of each Business Agreement.
Section 5.16 ERISA . (a)  Welfare Plans and Pension Plans . Each Welfare Plan and Pension Plan in which employees of the Company or a Subsidiary located in the U.S. participate is listed in Schedule 5.16 (a)  (each, a “ Company Plan ”), and Aon has made available to Buyer either a true and correct copy of each such plan or a summary plan description used in connection with such plan. With respect to each Welfare Plan and Pension Plan in which employees of the Company or a Subsidiary participate, (i) such plan has been maintained and operated in material compliance with the applicable requirements of the Code, ERISA, the regulations issued thereunder and any other Requirements of Law and (ii) as of the date hereof, no litigation or asserted claims against the Company exist with respect to any such plan (other than claims for benefits in the normal course of business) which would reasonably be expected to result in a material liability to the Company or any Subsidiary. The Company and the Subsidiaries do not have, and have never had, any obligation to contribute to any Multiemployer Plan or union-sponsored welfare fund with respect to its employees located in the U.S. None of the Company, the Subsidiaries or any of their ERISA Affiliates has incurred or would reasonably be expected to incur any material liability under or pursuant to Title IV of ERISA with respect to its employees located in the U.S. Each Company Plan and each Company Employment Agreement that is subject to Section 409A of the Code has been operated in compliance, in all material respects, with Section 409A of the Code.
 
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(b) Other Material Employee Benefits . Any material employee benefits for employees located in the United States (other than those provided through the Welfare Plans and Pension Plans listed in Schedule 5.16(a) ) which are in effect on the Closing Date and as to which the Company or a Subsidiary has or may have in the future any liability (other than regular wages or salary), such as any bonus, incentive or annual profit sharing programs, any fringe benefits described in Section 132 of the Code, any educational assistance plans under Section 127 of the Code and any dependent care assistance plans under Section 129 of the Code, are listed in Schedule 5.16(b) , and any written description of any such employee benefit has been made available to Buyer by Aon. Each such plan or program (i) has been maintained and operated in material compliance with the applicable requirements of the Code, ERISA, the regulations issued thereunder and any other Requirements of Law and (ii) as of the date hereof, no litigation or asserted claims against the Company exist with respect to any such plan or program (other than claims for benefits in the normal course of business) which would reasonably be expected to result in a material liability to the Company or any Subsidiary. Schedule 5.16(b) identifies each such material employee benefit that is sponsored or maintained by the Company or a Subsidiary for employees in the United States.
(c) International Employee Benefit Plans . Each Welfare Plan providing post-retirement medical benefits in which employees of the Company employed at locations outside of the United States participate, each funded Pension Plan in which employees of the Company employed at locations outside of the United States participate and each other material Pension Plan (excluding Pension Plans mandated by Requirements of Law) in which employees of the Company employed at locations outside of the United States participate is listed in Schedule 5.16(c) (each, an “ International Benefit Plan ”), and Aon has made available to Buyer a true and correct copy of each such plan. Each International Benefit Plan (i) has been maintained and operated in material compliance with the applicable Requirements of Law and (ii) as of the date hereof, no litigation or asserted claims against the Company exist with respect to any such International Benefit Plan (other than claims for benefits in the normal course of business) which would reasonably be expected to result in a material liability to the Company or any Subsidiary.
Section 5.17 Environmental Matters . Except as set forth in Schedule 5.17 ,
(a) the Company and the Subsidiaries are in compliance in all material respects with applicable Environmental Laws;
(b) neither the Company nor any of the Subsidiaries is subject to any judicial or administrative proceedings, orders, judgments, decrees or settlements alleging or addressing a violation of or liability under any Environmental Law, which proceedings, orders, judgments, decrees or settlements would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;
(c) since January 1, 2004, neither the Company nor any of the Subsidiaries has received any written notice or claim to the effect that it is in violation of any applicable Environmental Law or is or may be liable to any Person (including any Administrative Authority) as a result of the Release of a Hazardous Material, in either case which notice or claim would reasonably be expected to have a Material Adverse Effect;
 
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(d) Aon has made available to Buyer copies of all environmental reports, studies, assessments and sampling data (other than routine environmental data or correspondence generated on a day-to-day basis) in its possession prepared since January 1, 2005 and relating to the Owned Real Property or Leased Real Property; and
(e) neither the Company nor any Subsidiary has Released any Hazardous Materials on any Owned Real Property or Leased Real Property that, to the Knowledge of Aon, is subject to environmental investigation or remediation or is reasonably likely to result in a claim against any of the Company or any of the Subsidiaries, which Release would reasonably be expected to have a Material Adverse Effect.
The representations and warranties set forth in this Section 5.17 are Aon’s sole and exclusive representations regarding Environmental Matters.
Section 5.18 Employee Relations and Agreements . (a)  Schedule 5.18 contains a true and complete listing of each employee of the Company and the Subsidiaries whose base compensation exceeded $175,000 during the twelve months ended December 31, 2006, along with their base compensation during such period. Since the Balance Sheet Date, except as disclosed on Schedule 5.18 or as has occurred in the ordinary course of business and consistent as to timing and amount with past practices, neither the Company nor any Subsidiary has: (i) materially increased the cash compensation payable or to become payable to or for the benefit of any of its employees; (ii) provided any of its employees with materially increased security or tenure of employment; (iii) materially increased the amount payable to any of its employees upon the termination of such persons’ employment; or (iv) materially increased, augmented or improved benefits granted to or for the benefit of its employees under any bonus, profit sharing, pension, retirement, deferred compensation, insurance or other direct or indirect benefit plan or arrangement.
(b) Except as set forth in Schedule 5.18 , neither the Company nor any of the Subsidiaries is a party to any labor contract or collective bargaining agreement.
(c) Except as set forth in Schedule 5.18 , no union or similar organization represents employees of the Company or the Subsidiaries and, to the Knowledge of Aon, as of the date hereof, no such organization is attempting to organize such employees.
(d) Except as set forth in Schedule 5.18 , the consummation of the transactions contemplated by this Agreement will not, either alone or in combination with any other event, (i) entitle any director, officer or employee of any of the Company or a Subsidiary to severance pay, unemployment compensation or any other payment, except as expressly provided in this Agreement or (ii) accelerate the time of payment or vesting, or increase the amount of any compensation or benefits due any director, officer or employee of any of the Company or a Subsidiary (excluding, in the case of clause (i) or (ii), any agreements or arrangements that do not involve payments or obligations by the Company or the Subsidiaries).
(e) Schedule 5.18 sets forth all individual employment, termination, retention, severance or other similar contracts or agreements with any current or former employee of the Company under which the Company or the Subsidiaries will have obligations following the Closing (each a “ Company Employment Agreement ”).
 
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Section 5.19 No Undisclosed Liabilities . Except for (i) liabilities and obligations set forth in Schedule 5.19 or reflected on the Balance Sheet, the Financial Statements or the Statutory Statements, (ii) liabilities and obligations incurred since the Balance Sheet Date in the ordinary course of business consistent with past practice of the Company and the Subsidiaries (including policyholder benefits or other insurance policy liabilities), (iii) liabilities and obligations not required by GAAP or SAP to be reflected in the Balance Sheet, the Financial Statements or the Statutory Statements and (iv) liabilities and obligations which would not reasonably be expected to have a Material Adverse Effect, as of the date hereof neither the Company nor any of the Subsidiaries had any liability, whether contingent, accrued or otherwise, required by GAAP or SAP, as applicable and as in effect on the date hereof, to be reflected on a balance sheet.
Section 5.20 Sufficiency of Assets . Except as set forth in Schedule 5.20 , to the Knowledge of Aon, the assets and properties of the Company and the Subsidiaries constitute all of the assets and properties reasonably necessary to operate the business of the Company and the Subsidiaries as heretofore conducted by the Company and the Subsidiaries, other than (i) assets that, individually and in the aggregate, are not material to such business and (ii) assets and properties being provided pursuant to the Aon Transition Services Agreement. Nothing in this Section 5.20 constitutes a representation or warranty with respect to title or the condition of any assets or properties (whether real or personal, tangible or intangible, owned, leased or held under license), any and all representations or warranties with respect to which are set forth in other sections of this Article V .
Section 5.21 Insurance . Aon currently maintains policies covering the Company and the Subsidiaries in respect of fire and extended coverage and casualty, liability and other forms of insurance in such amounts and against such risks and losses, and including such levels of self-insured retention, as are in its judgment prudent and shall use reasonable efforts to keep such insurance or comparable insurance in full force and effect through the Closing Date.
Section 5.22 Regulatory Filings . (a) Aon has heretofore made available for inspection by Buyer (i) each annual or quarterly statement filed with or submitted to any insurance regulatory authorities by any of the Underwriting Companies required to make such filings since December 31, 2005 (collectively, the “ Statutory Statements ”) and (ii) any material reports of examination of any of the Underwriting Companies required to make such a report, issued by any insurance regulatory authority, in any case, since December 31, 2005. Each of the Underwriting Companies has filed or submitted on a timely basis all Statutory Statements required to be filed with or submitted to the applicable Administrative Authorities in its respective state of domicile and of any state where it is licensed or from which it has received a Governmental Permit. The Statutory Statements present fairly in accordance with SAP, in all material respects, the financial conditions and results of operations of the Underwriting Companies as of and for the periods therein specified (except as may be indicated therein or in the notes, exhibits or schedules thereto). No material deficiencies have been asserted in writing by any Administrative Authority with respect to any Statutory Statement which has not been cured, waived or otherwise resolved to the material satisfaction of such Administrative Authority.
 
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(b) The reserves and other liability amounts established or reflected on each Statutory Statement, including reserve and other liability amounts in respect of insurance policies (i) were determined in accordance with U.S. generally accepted actuarial standards applied on a consistent basis for the periods presented and based on reasonable actuarial assumptions and (ii) are in compliance in all material respects with the requirements of applicable Requirements of Law.
(c) To the Knowledge of Aon, the Company and the Subsidiaries maintain internal accounting controls which provide reasonable assurance that (i) transactions are executed with management’s authorization, (ii) transactions are recorded as necessary to permit preparation of the financial and statutory statements of the Company and the Subsidiaries and to maintain accountability for the Company’s and the Subsidiaries’ consolidated assets, (iii) access to the Company’s and the Subsidiaries’ assets is permitted only in accordance with management’s authorization and (iv) the reporting of the Company’s and the Subsidiaries’ assets is compared with existing assets at regular intervals.
Section 5.23 Insurance Contracts . (a) Except as set forth in Schedule 5.23 , all insurance policy forms issued by the Underwriting Companies (“ Insurance Contracts ”) are, to the extent required by Requirements of Law, on forms approved by all applicable Administrative Authorities or filed with and not objected to by such Administrative Authorities within the period provided by Requirements of Law for objection, subject to such exceptions as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Except as indicated in Schedule 5.23 , all such forms comply in all material respects with Requirements of Law. All premium rates of the Underwriting Companies (including rates with respect to Insurance Contracts) that are required to be filed with or approved by any insurance regulatory authorities have been so filed or approved and the premiums charged conform thereto, and such premiums comply with all applicable anti-discrimination laws, federal or state, and all applicable insurance laws, except for any failure to be so filed or approved or to so comply would not, individually or in the aggregate, be reasonably expected to have a Material Adverse Effect.
(b) Except as set forth in Schedule 5.23 or except where the failure to do so would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, the Underwriting Companies have marketed, sold and issued the Insurance Contracts in compliance with all Requirements of Law relating to (i) suitability of sales and replacement of policies, (ii) the disclosure of the nature of insurance products as policies of insurance, (iii) the use of unfair methods of competition and deceptive acts or practices relating to the advertising, sales and marketing of insurance, annuities or guaranteed investment contracts, (iv) all applicable disclosure, filing and other requirements with respect to any variation in premiums or other charges resulting from the time at which such premiums or charges are paid and (v) all applicable requirements regulating the underwriting, rating, non-renewal, cancellation or replacement of insurance policies.
 
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Section 5.24 Reinsurance Agreements . Schedule 5.24 sets forth a complete and accurate list of all reinsurance agreements to which each of the Underwriting Companies is a party (collectively, the “ Reinsurance Agreements ”), copies of which have been made available to Buyer. No Underwriting Company is in default as to any provision of any such Reinsurance Agreement except for defaults which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. Except as set forth in Schedule 5.24 , each Underwriting Company was entitled to take credit in its most recent Statutory Statement in accordance with SAP for that portion of any such Reinsurance Agreement as to which credit was taken in such statements. The transactions contemplated by this Agreement shall not affect the obligations (if any) of the other parties to the Reinsurance Agreements to make payments to the Underwriting Company party thereto.
Section 5.25 Producers . Except as set forth in Schedule 5.25 , since January 1, 2005, to the Knowledge of Aon, each Person performing the duties of insurance producer, agency, agent, managing general agent, wholesaler, broker or solicitor for the Underwriting Companies (collectively, “ Producers ”) was duly licensed and appointed as an insurance producer, managing general agent, broker or solicitor, as applicable (for the type of business written, sold, or produced by such Producer at the time such Producer wrote, sold, or produced business or performed such other act for or on behalf of the Underwriting Companies that may require a producer’s, solicitor’s, broker’s or other insurance license), as may be required by any Requirements of Law, in each case, with such exceptions as would not, individually or in the aggregate, reasonably be likely to have a Material Adverse Effect.
Section 5.26 Guaranty Fund Assessments . The Underwriting Companies have (a) timely paid all guaranty association assessments that are due, or claimed or asserted by any state guaranty association or by any insurance regulatory authority to be due and (b) provided for all such assessments in the Statutory Statements to the extent necessary to be in conformity with SAP.
Section 5.27 Insurance Permits . Each of the Underwriting Companies has all insurance licenses the use and exercise of which are necessary for the conduct of their respective insurance businesses as now conducted, other than such insurance licenses the absence of which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. The business of each of the Underwriting Companies is being conducted in compliance, in all material respects, with all such insurance licenses. All such insurance licenses are in full force and effect, and there is no proceeding or investigation pending or, to the Knowledge of Aon, threatened with respect to the cancellation, suspension or non-renewal of such insurance licenses which, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect.
Section 5.28 Rating Agencies . Between January 1, 2006 and the date of this Agreement, no rating agency has imposed conditions (financial or otherwise) on retaining any currently held financial strength or claims-paying ability rating assigned to any Underwriting Company which is rated as of the date of this Agreement or indicated in writing that it is considering the downgrade of any rating assigned to any such Underwriting Company (other than any surveillance or review arising out of the transactions contemplated by this Agreement or the Sterling Agreement). Each such Underwriting Company has as of the date of this
 
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Agreement the A.M. Best Company Inc., Standard & Poor’s Rating Service, a division of McGraw Hill Companies, Inc. (“ Standard & Poor’s ”), and/or Moody’s Investors Service, Inc. respective rating set forth in Schedule 5.28 .
Section 5.29 Reserves . Since January 1, 2005, no applicable department of insurance has alleged in writing that the reserves carried on the Statutory Statements by any of the Underwriting Companies for future insurance policy benefits, losses and claims (including claims litigation) are not in compliance with applicable statutory requirements.
Section 5.30 Financial and Market-Conduct Examinations . Aon has made available to Buyer true, correct and complete copies of the reports (or the most recent drafts thereof, to the extent any final reports are not available) reflecting the results of any financial examinations or market-conduct examinations of any of the Underwriting Companies conducted by any Administrative Authority since January 1, 2005.
Section 5.31 Portfolio Investments . All admitted assets included in the investment portfolios of each of the Underwriting Companies as of the date of this Agreement comply in all material respects with the applicable insurance laws and regulations of the state of domicile to which such Underwriting Company is subject relating thereto. Except as set forth in Schedule 5.31 , as of December 31, 2006, none of the investments included in the investment portfolios of the Underwriting Companies is in default in the payment of principal or interest or dividends. Except as set forth in Schedule 5.31 , neither the Company nor any Subsidiary is a party to any derivative transaction which, pursuant to its terms and without any additional investment decision on the part of the Company or any Subsidiary, could result in an additional payment by the Company or a Subsidiary.
Section 5.32 No Brokers . Except for the services of Aon Capital Markets, LLC, Merrill Lynch & Co., Inc. and Credit Suisse Securities (USA) LLC, none of the Company, any Subsidiary or any Person acting on their behalf has paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement. Aon is solely responsible for any payment, fee or commission that may be due to Aon Capital Markets, LLC, Merrill Lynch & Co., Inc. and Credit Suisse Securities (USA) LLC in connection with the transactions contemplated hereby.
Section 5.33 Sterling Agreement . The Sterling Agreement contains no obligations or otherwise gives rise to any liability (whether contingent or otherwise) of the Company or its Subsidiaries.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF BUYER
As an inducement to Aon to enter into this Agreement and to consummate the transactions contemplated hereby, Buyer hereby represents and warrants to Aon as follows:
Section 6.1 Organization of Buyer . Buyer has been duly incorporated and is validly existing and in good standing as an exempted company under the laws of the Cayman Islands.
 
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Section 6.2 Authority of Buyer; Conflicts . (a) Buyer has the corporate power and authority to execute, deliver and perform this Agreement and each of the Buyer Ancillary Agreements. The execution, delivery and performance of this Agreement and the Buyer Ancillary Agreements by Buyer have been duly authorized and approved by Buyer’s board of directors and do not require any further authorization or consent of Buyer or its shareholders. This Agreement has been duly authorized, executed and delivered by Buyer and (assuming the valid authorization, execution and delivery of this Agreement by Aon) is the legal, valid and binding agreement of Buyer enforceable in accordance with its terms, and each of the Buyer Ancillary Agreements has been duly authorized by Buyer and upon execution and delivery by Buyer will be (assuming the valid authorization, execution and delivery by the other party or parties thereto) a legal, valid and binding obligation of Buyer enforceable in accordance with its terms, in each case subject to bankruptcy, insolvency, reorganization, moratorium and similar laws of general application relating to or affecting creditors’ rights and to general equity principles.
(b) Neither the execution and delivery by Buyer of this Agreement or any of the Buyer Ancillary Agreements or the consummation by Buyer of any of the transactions contemplated hereby or thereby nor compliance by Buyer with or fulfillment by Buyer of the terms, conditions and provisions hereof or thereof will:
(i) result in a violation or breach of the terms, conditions or provisions of, or constitute a default, an event of default or an event creating rights of acceleration, termination or cancellation or a loss of rights under (1) the Memorandum of Association or Articles of Association of Buyer, (2) any note, instrument, mortgage, lease, franchise or financial obligation to which Buyer is a party or any of its properties is subject or by which Buyer is bound, (3) any Court Order to which Buyer is a party or by which it is bound or (4) assuming that all necessary consents, approvals, authorizations and other actions described in Section 6.2(b)(ii) have been obtained, all filings and notifications described in Section 6.2(b)(ii) have been made and any applicable waiting period has expired or been terminated, any Requirements of Law affecting Buyer, other than, in the case of clauses (2), (3) and (4) above, any such violations, breaches, defaults, rights or loss of rights (A) which are based on any facts or circumstances relating to Aon, the Company or the Subsidiaries or (B) that would not materially impair the ability of Buyer to perform its obligations hereunder or prevent the consummation of any of the transactions contemplated hereby, or
(ii) require the approval, consent, authorization or act of, or the making by Buyer of any declaration, filing or registration with, any Administrative Authority, except for (1) in connection, or in compliance, with the provisions of the HSR Act or similar competition Requirements of Law in foreign jurisdictions, (2) acquisition of control statement filings and preacquisition statements required under applicable state insurance holding company system laws and regulations and any other insurance regulatory approvals, consents, filings or notices required by any applicable insurance Requirements of Law, (3) such filings as may be required in connection with the Taxes described in Section 8.1(a)(v) and (4) such approvals, consents, authorizations, declarations, filings or registrations the failure of which to be obtained or made would not materially impair the ability of Buyer to perform its obligations hereunder or prevent the consummation of any of the transactions contemplated hereby.
 
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Section 6.3 No Violation, Litigation or Regulatory Action .
(a) Buyer has complied with all applicable Requirements of Law and Court Orders, other than those instances of noncompliance which would not reasonably be expected to materially impair the ability of Buyer to perform its obligations hereunder or prevent the consummation of any of the transactions contemplated hereby;
(b) as of the date hereof, there is no action, suit, proceeding or investigation pending or, to the knowledge of Buyer, threatened against Buyer or its subsidiaries which are reasonably expected to materially impair the ability of Buyer to perform its obligations hereunder or prevent the consummation of any of the transactions contemplated hereby; and
(c) as of the date hereof, there is no action, suit, proceeding or investigation pending or, to the knowledge of Buyer, threatened that questions the legality of the transactions contemplated by this Agreement or any of the Buyer Ancillary Agreements.
Section 6.4 Investment Intent; Information . (a) Buyer is acquiring the Shares as an investment for its own account and not with a view to the distribution thereof. Buyer shall not sell, transfer, assign, pledge or hypothecate any of the Shares in the absence of registration under, or pursuant to an applicable exemption from, federal and applicable state securities laws.
(b) Buyer acknowledges that it has been furnished with such documents, materials and information as Buyer deems necessary or appropriate for evaluating the purchase of the Shares. Buyer confirms that it has made such further investigation of the Company and the Subsidiaries as was deemed appropriate to evaluate the merits and risks of this purchase. Buyer further acknowledges that it has had the opportunity to ask questions of, and receive answers from, the directors and officers of the Company, the Subsidiaries, Aon and Persons acting on the Company’s, the Subsidiaries’ and Aon’s behalf concerning the terms and conditions of the purchase of the Shares.
Section 6.5 Financial Ability . Buyer has the financial ability to consummate the transactions contemplated by this Agreement.
Section 6.6 No Brokers . Except for the services of Goldman, Sachs & Co. and except for fees payable in connection with any financing transactions in which Buyer may engage in connection with the transactions contemplated by this Agreement, neither Buyer nor any Person acting on its behalf has paid or become obligated to pay any fee or commission to any broker, finder or intermediary for or on account of the transactions contemplated by this Agreement. Buyer is solely responsible for any payment, fee or commission that may be due to Goldman, Sachs & Co. in connection with the transactions contemplated hereby or in connection with any such financing.
ARTICLE VII
ACTION PRIOR TO THE CLOSING DATE
The respective parties hereto covenant and agree to take the following actions between the date hereof and the Closing Date:
 
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Section 7.1 Access to Information . (a) Aon shall and shall cause the Company and the Subsidiaries to afford to the officers, employees and authorized representatives of Buyer (including independent public accountants, attorneys and investment bankers) reasonable access during normal business hours, upon reasonable advance notice, to the offices, properties, employees and business and financial records (including computer files, retrieval programs and similar documentation) of the Company and the Subsidiaries to the extent Buyer shall reasonably deem necessary in order to be able to operate the Company and the Subsidiaries after the Closing and shall furnish or cause to be furnished to Buyer or its authorized representatives such additional information concerning the Company and the Subsidiaries as shall be reasonably requested; provided , however , that: (i) Aon, the Company and the Subsidiaries shall not be required to violate any Requirements of Law, Court Order or obligation of confidentiality to which Aon, the Company or any Subsidiary is subject or to waive any privilege which any of them may possess in discharging their obligations pursuant to this Section 7.1 ; (ii) Aon, the Company and the Subsidiaries shall not be required to furnish or otherwise make available to Buyer customer-specific data or competitively sensitive information; and (iii) Buyer shall not, without the prior written consent of Aon, contact or communicate with any vendor, customer, employee, independent contractor or other business partner of the Company and the Subsidiaries with respect to or in connection with the transactions contemplated by this Agreement. Buyer agrees that: (A) such investigation shall be conducted in such a manner as not to interfere unreasonably with the operations of Aon, the Company and the Subsidiaries; (B) all requests by Buyer for access or availability pursuant to this Section 7.1 shall be submitted or directed exclusively to an individual to be designated by Aon; and (C) Aon, the Company and the Subsidiaries shall not be required to provide any books and records or reports based thereon that they do not maintain or prepare in the ordinary course of their business. Notwithstanding the foregoing, the obligations of Aon pursuant to this Section 7.1 shall be subject to the right of Aon to determine, in its discretion, the appropriate timing of the disclosure of information it deems proprietary commercial information or privileged information. The parties shall act at all times in accordance with the terms and provisions of the Confidentiality Agreement.
(b) Prior to the Closing Date, Aon shall, and shall cause the Company and the Subsidiaries to, reasonably cooperate with Buyer with respect to transition matters, including to: (i) provide reasonable access to the employees of the Company and the Subsidiaries in respect of transition planning; (ii) designate certain of their employees to serve as members of a joint Aon/Buyer transition team and cause such individuals to devote reasonable time to transition matters (it being agreed that Aon (including the Company and the Subsidiaries) shall not be required to appoint more than 20 employees to such team); (iii) devote reasonable office accommodations and related facilities for a continuing presence of transition team members on the premises of the Company and the Subsidiaries; (iv) promptly provide the Buyer with copies of all correspondence or written communication among Aon or any of the Company or any Subsidiary, on the one hand, and A.M. Best Company Inc., Standard & Poor’s or Moody’s Investors Service, Inc., on the other, which relates to the business of the Company or any of the Subsidiaries; and (v) make reasonably available officers of the Company and the Subsidiaries to assist the Buyer and its investment bankers in connection with any “due diligence” meetings conducted in connection with any financing transactions entered into by the Buyer in connection with the transactions contemplated by this Agreement.
 
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Section 7.2 Notification . Each of Buyer and Aon shall promptly notify the other of any action, suit or proceeding that shall be instituted or threatened against such party to restrain, prohibit or otherwise challenge the legality of any transaction contemplated by this Agreement. Each party hereto shall promptly notify the other of any lawsuit, claim, proceeding or investigation that may be threatened, brought, asserted or commenced against the Company, any Subsidiary, Aon or Buyer, as the case may be, that would have been listed in Schedule 5.13 or Schedule 6.3 , as the case may be, if such lawsuit, claim, proceeding or investigation had arisen prior to the date hereof. If a party fails to notify the other party under this Section 7.2 , (i) such non-breaching party shall only be entitled to seek indemnification for breach of this Section 7.2 if and to the extent such non-breaching party is otherwise entitled to indemnification pursuant to Section 11.1(a)(i) or 11.2(a)(i) , as the case may be, for breach of a representation and warranty and the limits (if any) set forth in Section 11.1(a) or 11.2(a) , as the case may be, shall apply to any such indemnification and (ii) a failure to comply with this Section 7.2 shall not cause the failure of any condition set forth in Article IX or X to be satisfied unless the underlying change, event or development would independently result in the failure of a condition set forth in Article IX or X to be satisfied.
Section 7.3 Consents of Third Parties; Governmental Approvals . (a) Aon and Buyer will act diligently and reasonably in attempting to secure, before the Closing Date, the consent, approval or waiver, in form and substance reasonably satisfactory to the other party, required to be obtained from any party (other than an Administrative Authority) to consummate the transactions contemplated by this Agreement; provided , however , that such action shall not include any requirement of Aon, the Company, any Subsidiary or any of their respective Affiliates to expend money (other than reasonable fees and expenses of external advisors), commence or participate in any litigation or offer or grant any accommodation (financial or otherwise) to any third party. In the event that Aon, despite acting diligently and reasonably in attempting to secure, before the Closing Date, the consent set forth on Schedule 7.3(a) (the “ Third Party Consent ”) is unable to obtain such Third Party Consent, Aon shall indemnify and hold harmless each Buyer Group Member from and against any and all Losses and Expenses incurred by such Buyer Group Member in connection with or arising from the failure to obtain the Third Party Consent (it being understood that the failure to obtain such Third Party Consent shall not be subject to the limitations set forth in Section 11.1(a) ).
(b) During the period prior to the Closing Date, Buyer shall act diligently and reasonably, and Aon, upon the request of Buyer, shall use its reasonable efforts to cooperate with Buyer, in attempting to secure any consents and approvals of any Administrative Authority required to be obtained by Buyer in order to permit the consummation of the transactions contemplated by this Agreement in the most expeditious manner practicable, including approvals and consents from state departments of insurance or similar foreign departments (including the U.K. Financial Services Authority) having or asserting jurisdiction over any of the Underwriting Companies, or to otherwise satisfy the conditions set forth in Sections 9.3 and 10.3 . In connection therewith, Buyer shall use its reasonable best efforts to make all such filings no later than 20 business days after the date hereof. Aon shall, and shall cause the Company and the Subsidiaries to, furnish to Buyer such necessary information and reasonable assistance as Buyer may reasonably request in connection with its preparation of necessary filings or submissions to any Administrative Authority. Prior to filing any materials or documents with any Administrative Authority, Buyer shall afford Aon a reasonable opportunity (no less than three (3) business days) to review and comment on such materials or documents.
 
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(c) Buyer and Aon shall use their reasonable best efforts to file not more than 20 business days after the date hereof (i) with the Federal Trade Commission and the Antitrust Division of the Department of Justice the notifications and other information required to be filed under the HSR Act and (ii) with any other Administrative Authorities the notifications and other information required to be filed under other Competition Laws with respect to the transactions contemplated hereby. Each party warrants that all such filings by it will be, as of the date filed, true and accurate in all material respects and in material compliance with the requirements of the HSR Act or such other Competition Laws. Each of Buyer and Aon agrees to file any additional information requested by such Administrative Authorities agencies under the HSR Act or such other Competition Laws, to make available to the other such information as each of them may reasonably request relative to its business, assets and properties as may be required of each of them to file such additional information and to take all other actions necessary to cause the expiration or termination of the applicable waiting periods under the HSR Act or such other Competition Laws as soon as practicable after the date hereof.
(d) Each of Buyer and Aon shall (i) permit the other to review in advance any proposed communication by such party to any Administrative Authority relating to the subject matter of this Agreement, (ii) promptly notify the other party of any communication it or any of its Affiliates receives from any Administrative Authority relating to such matters and (iii) provide to the other copies of all correspondence, filings or communications between it (or its advisors) and any such Administrative Authority relating to this Agreement or any of the matters described in this Section 7.3(d) ; provided that such correspondence does not contain or reveal confidential information of Buyer, the Company, any Subsidiary or any of their respective Affiliates. Neither Buyer nor Aon shall agree to participate in any meeting with any Administrative Authority (including via telephone or conference call) in respect of any filings, investigation or other inquiry unless it consults with the other in advance (to the extent it has reasonable notice thereof and the opportunity to so consult) and, to the extent permitted by such Administrative Authority, gives the other the opportunity to attend and participate at such meeting.
(e) In furtherance and not in limitation of the foregoing, Buyer shall use its reasonable best efforts to take any and all steps necessary to avoid or eliminate impediments or objections, if any, that may be asserted with respect to the transactions contemplated by this Agreement under any antitrust, competition or trade regulatory Requirements of Law of any Administrative Authority so as to enable the parties hereto to close the transactions contemplated hereby as promptly as practicable, including using its reasonable best efforts to defend through litigation on the merits any claim asserted in court by any party in order to avoid entry of, or to have vacated or terminated, any decree, order or judgment (whether temporary, preliminary or permanent) that would prevent the consummation of the Closing. Notwithstanding the foregoing, in no event shall Buyer be obligated to (i) accept any condition or requirement imposed by an Administrative Authority relating to the acquisition, ownership or operation of the Company and the Subsidiaries by Buyer which, either alone or together with all such other conditions or requirements, materially and adversely affects the benefits, taken as a whole, which Buyer would otherwise receive from the transactions contemplated by this Agreement had all
 
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such conditions and requirements not been imposed or (ii) agree to hold separate or otherwise sell, divest or dispose of (A) any of its assets, properties or businesses or (B) the assets, properties or businesses to be acquired by it pursuant to this Agreement if such actions would materially and adversely affect the benefits, taken as a whole, which Buyer would otherwise receive from the transactions contemplated by this Agreement.
Section 7.4 Operations Prior to the Closing Date . (a) Except as set forth in Schedule 7.4 , except as contemplated by this Agreement or except with the written approval of Buyer (which Buyer agrees shall not be unreasonably withheld or delayed), Aon shall use its reasonable efforts to cause the Company and the Subsidiaries to operate and carry on their business in the ordinary course and substantially as operated immediately prior to the date of this Agreement. Consistent with the foregoing, Aon shall cause the Company and the Subsidiaries to use their reasonable efforts consistent with good business practice to preserve the goodwill of the suppliers, contractors, licensors, employees, customers, distributors and others having business relations with the Company and the Subsidiaries.
(b) Notwithstanding Section 7.4(a) , except as set forth in Schedule 7.4 , except as contemplated by this Agreement or except with the written approval of Buyer (which Buyer agrees shall not be unreasonably withheld or delayed), Aon shall not permit the Company and the Subsidiaries to:
(i) make any material change in their business or their operations, except such changes as may be required to comply with any applicable Requirements of Law;
(ii) make any investments other than in accordance with the investment policies of the Company and the Subsidiaries as of the date of this Agreement, or make any material amendments to such investment policies;
(iii) realize gains or losses in investment securities other than in the ordinary course of business consistent with past practices of the Company and the Subsidiaries;
(iv) make any capital expenditure or enter into any contract or commitment therefor, other than in the ordinary course of business, in excess of $1,000,000;
(v) acquire (by merger, consolidation, acquisition of stock or assets or otherwise) any Person or assets comprising a business or make any investment, either by purchase of stock or other securities or contribution to capital, that is material to the Company and the Subsidiaries taken as a whole;
(vi) enter into any contract for the purchase of real property;
(vii) cancel any debts owed to or claims held by them (including the settlement of any claims or litigation) other than in the ordinary course of business consistent with past practice or in accordance with Section 7.5 ;
(viii) sell, lease (as lessor), transfer or otherwise dispose of (other than any transfers to any of its Affiliates), or mortgage or pledge, or impose or suffer to be imposed any Encumbrance on, any of their assets, other than in the ordinary course of business consistent with past practice and other than Permitted Encumbrances;
 
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(ix) create, incur or assume, or agree to create, incur or assume, any indebtedness for borrowed money or enter into, as lessee, any capitalized lease obligations (as defined in Statement of Financial Accounting Standards No. 13) other than any indebtedness that is subject to Section 7.5 ;
(x) except as contemplated by Sections 7.5 and 7.6 below, make, or agree to make, any distribution or other disposition of assets (including cash or cash equivalents) to Aon or any of its Affiliates or otherwise declare or pay any dividend on its capital stock;
(xi) enter into any new agreement or arrangement between the Company or a Subsidiary, on the one hand, and Aon or any of its Affiliates (other than the Company and the Subsidiaries), on the other hand;
(xii) enter into any agreement with a third party providing for the acceleration, payment, performance, consent or other consequence as a result of a change in control of any of the Company and the Subsidiaries involving any payment by the Company or the Subsidiaries;
(xiii) (1) enter into any employment or severance agreement, other than for new employees in the ordinary course of business, (2) increase the benefits payable in the aggregate under severance or termination pay plans or policies in effect on the date hereof, other than as required by Law, (3) adopt any new or amend any existing bonus, profit sharing, compensation, stock option, pension, retirement, deferred compensation, employment or other employee benefit plan or policy for the benefit of any director, officer or employee, other than (A) for new employees in the ordinary course of business, (B) as required by Requirements of Law, (C) amendments to bonus, profit sharing, compensation, stock option, pension, retirement, deferred compensation, employment or other employee benefit plans or policies which are applicable to all or a portion of the Company and the Subsidiaries and which do not in the aggregate increase amounts otherwise payable under such plans or policies and (D) any change generally applicable to Aon employees or any change in the ordinary course consistent with past compensation practices, (4) increase the compensation or benefits of any director or executive officer, other than in the ordinary course of business and other than pursuant to Requirements of Law or Company Employment Agreement or (5) waive or amend the terms of any noncompetition or nonsolicitation agreement with any employee;
(xiv) change any of the material accounting principles, practices, methods or policies (including but not limited to any reserving methods, practices or policies or the classification or computation of current or deferred tax assets or liabilities on the Balance Sheet), except as may be required as a result of a change in Requirements of Law, GAAP or SAP (with Aon providing the Buyer with prompt, prior written notice of any such change);
(xv) make, change or revoke any Tax election or method of accounting for Tax purposes or enter into or amend any Tax sharing agreement or Tax indemnity if such action would increase the amount of Taxes for which Buyer would be liable pursuant to this Agreement;
 
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(xvi) make any change in their charters or by-laws or issue any capital stock (or securities exchangeable, convertible or exercisable for or rights to acquire capital stock);
(xvii) adopt a plan of complete or partial liquidation or resolutions providing for the complete or partial liquidation, dissolution, amalgamation, consolidation, restructuring, recapitalization or other reorganization, other than any transactions in connection with facilitating the restructuring contemplated by Section 8.8 ; or
(xviii) agree in writing or otherwise to take any of the actions described above in clauses (i) through (xvii) of this Section 7.4 .
Section 7.5 Termination of Certain Intercompany Indebtedness . (a) At or prior to the Closing, Aon shall release, cancel, terminate or otherwise settle in the most tax-efficient manner all intercompany indebtedness and non-trade accounts (other than ordinary course trade payables and receivables and federal income Tax payables) owed by the Company and the Subsidiaries to Aon or any of its Affiliates (other than the Company and the Subsidiaries) as of the Closing Date, and Aon shall cause the Company and the Subsidiaries to release, cancel, terminate or otherwise settle in the most tax-efficient manner all intercompany indebtedness and non-trade accounts (other than ordinary course trade payables and receivables) owed by Aon or any of its Affiliates (other than the Company and the Subsidiaries) to the Company and the Subsidiaries as of the Closing Date; provided , however , that any intercompany indebtedness and non-trade accounts involving the Underwriting Companies shall be settled (i) in cash or (ii) by a dividend of any intercompany note reflecting amounts owing from Aon to the Company.
(b) Aon shall deliver to Buyer documentation evidencing the release, cancellation, termination or settlement of the intercompany indebtedness and non-trade accounts referred to in Section 7.5(a) and the termination of the agreements between Aon or any of its Affiliates (other than the Company or a Subsidiary), on the one hand, and any of the Company or a Subsidiary, on the other hand, listed on Schedule 7.5(b) . Aon agrees to inform Buyer no later than 10 days prior to the anticipated Closing Date of the estimated aggregate amount of the outstanding balances of the intercompany indebtedness and non-trade accounts as of the Closing Date. In the event that any agreements or intercompany account (other than ordinary course trade payables and receivables and federal income Tax payables) which this Section 7.5 requires be terminated or settled at or before the Closing is inadvertently not terminated or settled, such agreement or intercompany account shall be settled after the Closing in the ordinary course of business.
Section 7.6 Special Dividend . Prior to the Closing, Aon shall be entitled to cause the Company to declare and pay a special dividend to Aon consisting of (i) cash, (ii) the non-cash financial assets set forth in Schedule 7.6 and (iii) all of the issued and outstanding shares of capital stock of Sterling or the proceeds from the sale of all of the issued and outstanding shares of capital stock of Sterling pursuant to the Sterling Agreement (the “ Special Dividend ”). Buyer agrees that it will cooperate and provide Aon with reasonable assistance to obtain any required regulatory approvals in connection with the declaration and payment of the Special Dividend.
 
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Section 7.7 Vendor Contracts . (a) Aon and Buyer shall use commercially reasonable efforts (i) to cause the Vendor Contracts to be replaced, at or prior to Closing, with separate contracts that are reasonably acceptable to Aon and Buyer and (ii) to cooperate and provide each other with reasonable assistance in effecting such separation of such Vendor Contracts prior to the Closing and for a period of three (3) months following the Closing.
(b) If the parties are not able to effect the separation of the Vendor Contracts prior to the Closing, then, until such Vendor Contracts are separated or such Vendor Contracts expire in accordance with their respective terms, to the extent permissible under Requirements of Law and under the terms of such Vendor Contracts, each of the parties hereto agrees to (i) use commercially reasonable efforts to perform the obligations under such Vendor Contracts applicable to it and its Affiliates; (ii) promptly reimburse the other party hereto for any expenses incurred by such party or its Affiliates; (iii) hold in trust for the benefit of the other party, and to promptly forward to the other party, any monies or other benefits received pursuant to such Vendor Contracts allocable to the other party (or its Affiliates); and (iv) endeavor to institute alternative arrangements intended to put the parties in substantially the same economic position as if such Vendor Contracts were separated; provided , however , that if the parties are not able to effect the separation of the Vendor Contracts within three (3) months after the Closing, then Aon and its Affiliates shall have no further obligation to Buyer or its Affiliates with respect thereto and may freely terminate the Vendor Contracts or any portion thereof. Buyer shall be solely responsible for replacing each Vendor Contracts to the extent it is not separated or transitioned hereunder.
(c) If following the Closing, the Company or any Subsidiary terminates any Vendor Contract and Aon or any of its Affiliates incurs any liability or incremental cost or expense to the vendor under the applicable Vendor Contract by reason thereof, Buyer shall reimburse Aon or such Affiliate for such liability, cost or expense.
Section 7.8 No Solicitation; No Waiver of Confidentiality Provisions . (a) Aon agrees that, during the period commencing on the date hereof through the earlier to occur of the Closing or the termination of this Agreement, that it will not, and it will use its reasonable best efforts to cause each of its Affiliates and its and their directors, officers and representatives not to, directly or indirectly, knowingly initiate, solicit, encourage, discuss, negotiate or respond affirmatively to any inquiries, proposals or offers (whether initiated by them or otherwise) with respect to (i) any transaction, however structured, resulting in or relating to the acquisition of any equity interests of the Company or any Subsidiary or any interest therein by a third party or (ii) the acquisition of all or a material portion of the assets and properties of the Company or any Subsidiary (each, a “ Potential Transaction ”) from any Person or provide information to any Person in connection with a Potential Transaction. Aon shall terminate any existing discussions with respect to a Potential Transaction. Notwithstanding the foregoing, nothing contained in this Section 7.8 shall in any manner apply to or be construed to limit Aon regarding any actions involving the sale of all of the issued and outstanding shares of capital stock of Sterling.
 
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(b) From the date of this Agreement through the Closing, Aon shall not waive any confidentiality provisions of any agreements entered into with respect to a possible transaction involving the Company or any Subsidiary. On or before the Closing Date, Aon shall request the other parities to any such confidentiality provisions or agreements to return or destroy any information provided thereunder.
Section 7.9 Financial Statements . (a) From and after the date hereof until the earlier to occur of the Closing or the termination of this Agreement, Aon shall deliver to Buyer copies of any annual or quarterly statements of each of the Underwriting Companies filed with the applicable insurance regulatory authority of its jurisdiction of domicile promptly, but in no event later than ten (10) business days after, such statements are filed with the applicable regulatory authority.
(b) On or prior to the Closing Date, Aon shall deliver to Buyer unaudited consolidated balance sheets of the Company and the Subsidiaries as of December 31, 2007 and the related consolidated statements of income and cash flows for the year then ended.
Section 7.10 Olympic Agreements . Prior to the Closing, Aon shall cause the Administrative Services Agreement, effective January 1, 1999, as amended, between Olympic Health Management Systems, Inc. and the Company to be amended so that the term of such agreement (Section 5.1 thereof) is extended until two years from the date of this Agreement and Section 5.2 thereof (which allows for termination upon not less than six months notice) is deleted; and no other amendments thereof shall be made. Prior to the Closing, Aon shall cause the Joint Marketing Agreement, effective May 15, 2006, between the Company and Olympic Health Management Services, Inc. to be amended so that Section 8.1 thereof is deleted and replaced with a provision providing for a term of two years from the date of this Agreement; and no other amendments thereof shall be made.
Section 7.11 Sterling Transition Services Agreement . Prior to the Closing, Aon shall be entitled to cause the Company to enter into the Sterling Transition Services Agreement.
ARTICLE VIII
ADDITIONAL AGREEMENTS
Section 8.1 Tax Matters . (a)  Liability for Taxes . (i) Aon shall be liable for and pay, and pursuant to Article XI (and subject to the provisions thereof but not subject to the limitations in Section 11.1(a) ) agrees to indemnify and hold harmless each Buyer Group Member, the Company and the Subsidiaries against, any and all Taxes (A) imposed on the Company or any Subsidiary pursuant to Treasury Regulation Section 1.1502-6 or similar provision of state or local law as a result of the Company or any Subsidiary having been a member of the Aon consolidated group, (B) imposed on the Company, any Subsidiary, or any Buyer Group Member as a result of the restructuring described in Section 8.8 of this Agreement, (C) imposed on the Company or any Subsidiary, or for which the Company or any Subsidiary may otherwise be liable, for any taxable year or period that ends on or before the Closing Date and, with respect to any Straddle Period, the portion of such Straddle Period ending on and including the Closing Date, including Section 338 Taxes and any Taxes imposed on the transactions contemplated by the Sterling Agreement or (D) imposed on the Company or any
 
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Subsidiary as a result of any breach of warranty or misrepresentation under Section 5.7 but only for and to the extent attributable to any taxable year or period that ends on or before the Closing Date and, with respect to any Straddle Period, the portion of such Straddle Period ending on and including the Closing Date; provided , however , that Aon shall not be liable for or pay, and shall not indemnify or hold harmless any Buyer Group Member from and against (I) any Taxes shown as a liability or reserve on the Net Worth Adjustment Report and taken into account in the calculation of the Closing Date Net Worth (“ Reserved Taxes ”); (II) any Taxes (other than any Section 338 Taxes) that result from any actual or deemed election under Section 338 of the Code or any similar provisions of state, local or foreign law as a result of the purchase of the Shares or the deemed purchase of shares of any of the Subsidiaries or that result from Buyer, any Affiliate of Buyer, the Company or any Subsidiary engaging in any activity or transaction that would cause the transactions contemplated by this Agreement to be treated as a purchase or sale of assets of the Company or any Subsidiary for federal, state or local Tax purposes and (III) any Taxes imposed on the Company or any Subsidiary or for which the Company or any Subsidiary may otherwise be liable as a result of transactions occurring on the Closing Date that are properly allocable (based on, among other relevant factors, factors set forth in Treasury Regulation § 1.1502-76(b)(1)(ii)(B)) to the portion of the Closing Date after the Closing and would not have been otherwise included as part of the Section 338 Taxes (the Taxes described in this proviso being referred to as “ Excluded Taxes ”); provided , further , that Aon’s liability for any withholding or employment Taxes relating to any taxable year or period ending on or before the Closing Date or the portion of any Straddle Period ending on and including the Closing Date shall be governed solely by the provisions of Section 5.7 (determined without regard to the last sentence thereof), including the applicable limitations of Article XI , and shall not be governed by this Section 8.1 . Except as otherwise provided in this Section 8.1 , Aon shall be entitled to any refund of (or credit for) Taxes allocable to any taxable year or period that ends on or before the Closing Date and, with respect to any Straddle Period, the portion of such Straddle Period ending on and including the Closing Date. For the avoidance of doubt, no provision in this Agreement shall be read to require Buyer to pay over any amount of Taxes to Aon that has been reflected as a receivable (or netted against a Tax liability) in the Net Worth Adjustment Report or to require Buyer to indemnify Aon for any Taxes that would be treated as Section 338 Taxes as well as being treated under another provision of this Section 8.1 .
(ii) Buyer shall be liable for and pay, and pursuant to Article XI (and subject to the provisions thereof but not subject to the limitations in Section 11.2((a) ) shall indemnify and hold harmless each Seller Group Member from and against, (A) any and all Taxes imposed on the Company or any Subsidiary or for which the Company or any Subsidiary may otherwise be liable for any taxable year or period that begins after the Closing Date and, with respect to any Straddle Period, the portion of such Straddle Period beginning after the Closing Date and (B) Excluded Taxes. Except as otherwise provided herein, Buyer shall be entitled to any refund of (or credit for) Taxes described in clauses (A) and (B). Buyer shall pay Aon (in the case of any Reserved Taxes that are required to be paid by Aon on behalf of the consolidated group of corporations, combined group of corporations, affiliated group of corporations or unitary group of corporations (or other similar group) of which the Company and its relevant Subsidiaries are members (“ Reserved Consolidated Taxes ”)) or the relevant taxing authority (in the case of all other Reserved Taxes) all Reserved Taxes in accordance with past practice (but, in the case of Reserved Consolidated Taxes, in no event later than five (5) business days following the Net Worth Adjustment Report Finalization Date). For the avoidance of doubt, Buyer shall pay Aon the full amount accrued for Reserved Consolidated Taxes (regardless of any actual Tax liability).
 
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(iii) For purposes of Sections 8.1(a)(i) and 8.1(a)(ii) , whenever it is necessary to determine the liability for Taxes of the Company or a Subsidiary for a Straddle Period, the determination of such Taxes for the portion of the Straddle Period ending on and including, and the portion of the Straddle Period beginning after, the Closing Date shall be determined by assuming that the Straddle Period consisted of two taxable years or periods, one which ended at the close of the Closing Date and the other which began at the beginning of the day following the Closing Date, and items of income, gain, deduction, loss or credit of the Company for the Straddle Period shall be allocated between such two taxable years or periods on a “closing of the books basis” by assuming that the books of the Company or such Subsidiary were closed at the close of the Closing Date; provided , however , that (I) transactions occurring on the Closing Date that are properly allocable (based on, among other relevant factors, factors set forth in Treasury Regulation Section 1.1502-76(b)(1)(ii)(B)) to the portion of the Closing Date after the Closing shall be allocated to the taxable year or period that is deemed to begin at the beginning of the day following the Closing Date and (II) exemptions, allowances or deductions that are calculated on an annual basis, such as the deduction for depreciation, shall be apportioned between such two taxable years or periods on a daily basis.
(iv) If, as a result of any action, suit, investigation, audit, claim, assessment or amended Tax Return, there is any change after the Closing Date in an item of income, gain, loss, deduction, credit or amount of Tax that results in an increase in a Tax liability for which Aon would otherwise be liable pursuant to Section 8.1(a)(i) , and such change is reasonably expected to result in a decrease in the Tax liability of the Company, any Subsidiary, Buyer or any Affiliate or successor thereof for any taxable year or period beginning after the Closing Date or for the portion of any Straddle Period beginning after the Closing Date, Aon shall not be liable under Section 8.1(a)(i) with respect to such increase to the extent of the present value (using a discount rate equal to the then “Federal Mid-Term Rate,” as that term is defined in Section 1274(d) of the Code) of such decrease (and, to the extent such increase in Tax liability is paid to a taxing authority by Aon or any Affiliate thereof, Buyer shall pay Aon an amount equal to the present value of such decrease).
(v) Notwithstanding anything herein to the contrary, Aon and Buyer shall be equally responsible for and shall each pay 50% of all real property transfer or gains Tax, sales Tax, use Tax, stamp Tax, stock transfer Tax, or other similar Tax imposed on the transactions contemplated by this Agreement (except the restructuring described in Section 8.8 , which Taxes, if any, shall be the responsibility of Aon).
(b) Tax Returns . (i) Aon shall timely file or cause to be timely filed when due (taking into account all extensions properly obtained) all Tax Returns required to be filed with respect to the Company and the Subsidiaries for taxable years or periods ending on or prior to the Closing Date, and Aon shall remit, or cause to be remitted, any Taxes due in respect of such Tax Returns, and Buyer shall timely file or cause to be timely filed when due (taking into account all extensions properly obtained) all other Tax Returns that are required to be filed by or with respect to the Company and the Subsidiaries, and Buyer shall remit, or cause to be remitted, any Taxes due in respect of such Tax Returns. With respect to Tax Returns to be filed by Buyer
 
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pursuant to the preceding sentence that relate to any Straddle Period (I) such Tax Returns shall be filed in a manner consistent with past practice and no position shall be taken, election made or method adopted that is inconsistent with positions taken, elections made or methods used in prior periods in filing such Tax Returns (including any such position, election or method which would have the effect of accelerating income to periods for which Aon is liable or deferring deductions to periods for which Buyer is liable) and (II) such Tax Returns shall be submitted to Aon not later than 30 days prior to the due date for filing such Tax Returns (or, if such due date is within 45 days following the Closing Date, as promptly as practicable following the Closing Date) for review and approval by Aon, which approval may not be unreasonably withheld. Aon or Buyer shall pay the other party for the Taxes for which Aon or Buyer, respectively, is liable pursuant to Section 8.1(a) but which are payable with any Tax Return to be filed by the other party pursuant to this Section 8.1(b) upon the written request of the party entitled to payment, setting forth in detail the computation of the amount owed by Aon or Buyer, as the case may be, but in no event earlier than 10 business days prior to the due date for paying such Taxes, without regard to the aggregate indemnification limitations set forth in Sections 11.1(a) and 11.2(a) .
(ii) None of Buyer or any Affiliate of Buyer shall (or shall cause or permit the Company or any Subsidiary to) amend, refile or otherwise modify (or grant an extension of any statute of limitation with respect to) any Tax Return relating in whole or in part to the Company or any Subsidiary with respect to any taxable year or period ending on or before the Closing Date (or with respect to any Straddle Period) without the prior written consent of Aon, which consent may not be unreasonably withheld.
(iii) Buyer shall promptly cause the Company and each Subsidiary to prepare and provide to Aon a package of Tax information materials, including schedules and work papers (the “ Tax Package ”), required by Aon to enable Aon to prepare and file all Tax Returns required to be prepared and filed by it pursuant to Section 8.1(b)(i) . The Tax Package shall be completed in accordance with past practice, including past practice as to providing such information and as to the method of computation of separate taxable income or other relevant measure of income of the Company and the Subsidiaries. Buyer shall cause the Tax Package to be delivered to Aon within 75 days after the Closing Date.
(c) Contest Provisions . After the Closing Date, in the case of any audit, examination, claim or other proceeding (“ Proceeding ”) with respect to Taxes for which Aon is or may be liable or entitled to a refund pursuant to this Agreement, Buyer shall promptly inform Aon of such Proceeding, and shall afford Aon, at Aon’s expense, the opportunity to control the conduct of such Proceedings and initiate any claim for refund, file any amended return or take any other action which Aon deems appropriate with respect to such Taxes; provided , however , that if Aon chooses to control such Proceeding and such Proceeding is reasonably expected to affect Taxes for which Buyer is liable, Buyer shall be entitled to participate at its expense. Buyer shall execute or cause to be executed powers of attorney or other documents necessary to enable Aon to take all actions desired by Aon with respect to such Proceeding to the extent such Proceeding may affect the amount of taxes for which Aon is liable or entitled to a refund pursuant to this Agreement. Any Proceeding with respect to Taxes for a period which includes but does not end on the Closing Date shall be controlled by Buyer, but Aon shall be entitled to participate at its expense. Notwithstanding any provision of this Section 8.1 to the contrary, Aon shall not settle any Proceeding, initiate any claim for refund or file any amended Tax Return
 
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without the prior written consent of Buyer, which consent shall not be unreasonably withheld, if, as result of such Proceeding, claim for refund or amended Tax Return, the Taxes payable by Buyer or the Company for a taxable period for which Aon is not obligated to indemnify Buyer or the company pursuant to this Section 8.1 would likely be increased. Notwithstanding any provision of this Section 8.1 to the contrary, Buyer shall not settle any Proceeding, initiate any claim for refund or file any amended return without the prior written consent of Aon, which consent shall not be unreasonably withheld if, as a result of such Proceeding, claim for refund or amended Tax Return, the Taxes for which Aon is obligated to indemnify Buyer or the company pursuant to this Section 8.1 would likely be increased.
(d) Assistance and Cooperation . After the Closing Date, Aon and Buyer shall (and shall cause their respective Affiliates to):
(i) assist the other parties in preparing any Tax Returns which such other party is responsible for preparing and filing in accordance with Section 8.1(b) ;
(ii) cooperate fully in preparing for any audits of, or disputes with taxing authorities regarding, any Tax Returns of the Company and the Subsidiaries;
(iii) make available to the others and to any taxing authority as reasonably requested all information, records, and documents relating to Taxes of the Company and the Subsidiaries;
(iv) provide timely notice to the others in writing of any pending or threatened Tax audits or assessments of the Company and the Subsidiaries for taxable periods for which the other may have a liability under this Section 8.1 ;
(v) furnish the others with copies of all correspondence received from any taxing authority in connection with any Tax audit or information request with respect to any such taxable period;
(vi) timely sign and deliver such certificates or forms as may be necessary or appropriate to establish an exemption from (or otherwise reduce), or file Tax Returns or other reports with respect to, Taxes described in Section 8.1(a)(v) (relating to sales, transfer and similar Taxes); and
(vii) timely provide to the others powers of attorney or similar authorizations necessary to carry out the purposes of this Section 8.1 .
(e) Election Under Section 338(h)(10) . (i) Each of Aon and Buyer shall cause an authorized person to make a joint election under Section 338(h)(10) of the Code and a similar election under any applicable state, local or foreign income tax law for each domestic Company and Subsidiary treated as a corporation for U.S. federal income tax purposes (collectively, the “ Section 338(h)(10) Elections ”). To facilitate such election, Aon shall deliver to Buyer on the Closing Date an Internal Revenue Service Form 8023 and, within 60 days after the Closing Date (but in no event after the date which is 60 days prior to the due date) Aon shall deliver any similar form under applicable state, local or foreign income tax law (collectively, the “ Forms ”) with respect to the Section 338(h)(10) Elections, which Forms shall have been duly
 
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executed by an authorized person. Aon and Buyer shall cooperate in the preparation of any information to be included in the Forms or attachments thereto. Buyer shall (1) cause the Forms to be duly executed by an authorized person for Buyer, (2) subject to the following paragraph, prepare and attach any schedules required to be attached, and (3) provide a copy of the executed Forms and schedules to Aon within 120 days after the Closing Date or such later date reasonably agreed by Aon and Buyer. Within 150 days after the Closing Date or such later date reasonably agreed to by Aon and Buyer in writing (but in no event after the date that is 60 days prior to the due date), Aon shall review and provide any comments on the Forms to Buyer. Buyer shall consider any such comments received from Aon and shall make any agreed changes to the Forms prior to filing the Forms with the relevant taxing authorities. Buyer shall duly and timely file the Forms as prescribed by Treasury Regulation §1.338(h)(10)-1 or the corresponding provisions of applicable state, local or foreign income tax Law, and deliver evidence of such filings to Aon. If any changes are required in these forms as a result of information which is first available after these forms are prepared, the parties will promptly agree on such changes.
(ii) Within 60 days following the final determination of the Net Worth Adjustment Amount pursuant to Section 4.5 , Buyer shall prepare and deliver to Aon a schedule (the “ Allocation Schedule ”) allocating the Aggregate Deemed Sales Price, as defined in Treasury Regulation Section 1.338-4, for the assets of the Company and each Subsidiary for which a Section 338(h)(10) Election will be made, among the assets of the Company and each such Subsidiary. The Allocation Schedule shall be reasonable and shall be prepared in accordance with Section 338(h)(10) of the Code and the Treasury Regulations thereunder. Aon agrees to review such Allocation Schedule and provide written notice to Buyer of any disputes within 30 days after the date on which the Allocation Schedule is delivered to Aon. The Allocation Schedule shall be deemed to be accepted by and shall be conclusive and binding on Aon and Buyer in the event Aon does not timely provide written notice to Buyer. If a change proposed by Aon is disputed by Buyer, then Aon and Buyer shall negotiate in good faith to resolve such dispute. If, after a period of 20 days following the date on which Aon gives Buyer notice of any such proposed change, any such proposed change still remains disputed, then Buyer and Aon shall together choose an Accounting Firm to resolve any remaining disputes. The Accounting Firm shall act as an arbitrator to determine, based solely on presentations by Buyer and Aon, and not by independent review, only those issues still in dispute with respect to the Allocation Schedule. The decision of the Accounting Firm shall be final and binding. All of the fees and expenses of the Accounting Firm shall be equally paid by Buyer, on the one hand, and Aon, on the other hand. Buyer and Aon each agrees that promptly upon receiving the final and binding Allocation Schedule it shall return an executed copy thereof to the other party. Each of Buyer and Aon agrees to file all federal, state, local and foreign Tax Returns in accordance with the Allocation Schedule.
(f) Elections under Section 338 for International Subsidiaries . Aon and Buyer agree to work together to determine whether Buyer shall be entitled to make an election under Section 338 of the Code or under any applicable similar provision of state or foreign law with respect to any of the Subsidiaries that is not a domestic corporation for U.S. Federal income tax purposes and that Buyer may choose to make the election without agreement of Aon if Buyer agrees to pay any incremental Taxes on Aon resulting from such election.
 
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(g) Options; Restricted Stock .
(i) Options . In the event that subsequent to the Closing Date any current or former employee of the Company or a Subsidiary exercises options to purchase stock of Aon which options were received by such employee in connection with the performance of services for the Company, such Subsidiary or an Affiliate of the Company or such Subsidiary, as the case may be, and are outstanding on the Closing Date (the “ Aon Options ”), Aon and Buyer agree and acknowledge that they shall report the exercise of the Aon Options in accordance with clause (iii) below. Buyer shall (or shall cause its Affiliates to) immediately inform Aon of any event that results in the forfeiture of any Aon Options by any person holding such options.
(ii) Stock-Based Awards . In the event that subsequent to the Closing Date any current or former employee of the Company or a Subsidiary becomes vested (in whole or in part) in any restricted stock units or performance share units of Aon which (A) were received by such employee in connection with the performance of services for the Company, such Subsidiary or an Affiliate of the Company or such Subsidiary, as the case may be, and (B) with respect to which an effective election under Section 83(b) of the Code was not made (the “ Aon Stock-Based Awards ”), Aon and Buyer agree and acknowledge that they shall report the vesting of the Aon Stock-Based Awards in accordance with clause (iii) below.
(iii) Compensation Expense; Employment Taxes; Reimbursement . Upon the exercise of the Aon Options or the vesting of the Aon Stock-Based Awards, as applicable, the Company or a Subsidiary, as applicable, shall, if and only if Aon has determined that Aon cannot claim the deduction, (A) claim the compensation expense deduction associated with such exercise or vesting measured by the fair market value of Aon stock at the time of such exercise (less the exercise price) or vesting (the “ Compensation Deduction ”), (B) pay all employment and withholding Taxes resulting from such exercise or vesting and (C) file all Tax Returns related to the payment of such employment and withholding Taxes. The Company or such Subsidiary shall pay Aon an amount equal to the tax benefit realized by Buyer or any of its Affiliates (determined on an After-Tax Basis) as a result of such Compensation Deduction less the after-tax cost to Buyer of any employment Taxes required to be paid on the exercise or vesting of the Aon Option or Aon Stock-Based Awards within 60 days of the date the Tax benefits are realized by the Company or such Subsidiary from the Compensation Deduction.
(h) Buyer shall not cause or permit the Company or Subsidiaries to carry back any loss, credit or other allowance to a Tax period (or any portion thereof) ending on or prior to the Closing Date without Aon’s prior written consent (which consent may not be unreasonably withheld). In the event that Buyer, the Company or a Subsidiary is required to carry back any amount to a Tax period ending on or prior to the Closing Date, Aon will pay to Buyer the amount of any refund (or reduction in Taxes) obtained by Aon as a result of such carry back.
(i) All amounts paid as an indemnity by one party to the other under this Agreement will be treated, to the extent permitted under applicable law, as adjustments to the Purchase Price for all Tax purposes.
Section 8.2 Employee Matters . (a)  Continued Employment . As of the Closing Date, Buyer agrees to, or to cause an Affiliate of Buyer to, continue to employ as a successor employer all of the employees of the Company and the Subsidiaries (including all such employees who have rights of employment in accordance with the established practices or
 
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policies of the Company and the Subsidiaries on return from any vacation, leave or other authorized absence) (collectively, the “ Transferred Employees ”). For a period of at least one year following the Closing Date, each Transferred Employee shall be entitled to receive while in the employment of Buyer or its Affiliates at least the same salary or hourly wages as were provided to such employee by the Company and the Subsidiaries, immediately prior to the Closing Date. For the period from the Closing Date through the last day of the calendar year in which the Closing Date occurs, the Buyer shall, or shall cause an Affiliate of Buyer to, continue to maintain for the benefit of the Transferred Employees while in the employment of Buyer or its Affiliates the bonus program in which such Transferred Employees participated as employees of the Company or a Subsidiary immediately prior to the Closing Date. Notwithstanding any provision herein to the contrary, neither Buyer nor any of its Affiliates (including the Company and the Subsidiaries) shall be obligated to continue to employ any Transferred Employee for any specific period of time following the Closing Date, subject to applicable law.
(b) Buyer Benefit Plans . Through the end of the calendar year during which the Closing Date occurs, Buyer shall provide, or shall cause the Company and the Subsidiaries to provide, employee benefits (including, for the avoidance of doubt, retirement, welfare and fringe benefits) to Transferred Employees that provide at least substantially comparable aggregate value to those benefits provided under the Company Plans in effect immediately prior to the Closing Date.
(c) Company Plans and International Plans . (i) Except as set forth in Schedule 8.2(c) , as provided for in the Closing Date Net Worth or as otherwise specifically provided in this Section 8.2 (collectively, the “ Assumed Plan Liabilities ”), neither Buyer nor any of its Affiliates shall assume any obligations under or liabilities with respect to, and it shall not receive any right or interest in the assets of, any Company Plans. Buyer shall assume (or cause the Company and the Subsidiaries to assume) the Assumed Plan Liabilities. Effective as of the Closing Date, except as otherwise specifically provided in this Agreement, all Transferred Employees will cease any participation in, and any benefit accrual under, all Company Plans; provided , however , that if Buyer does not sponsor a retiree medical plan for pre-age 65 or post-age 65 retirees, then otherwise eligible Transferred Employees may apply for coverage on or before December 31, 2008 under Aon’s U.S. retiree medical plan and will be granted age and service credit for their employment with the Buyer or its Affiliates for eligibility purposes. Buyer will have no responsibility in connection with the administration or funding of any Aon-sponsored retiree medical plan.
(ii) As of the Closing Date, Buyer shall assume (or will cause the Company and the Subsidiaries to continue) the International Benefit Plans set forth in Schedule 8.2(c) (collectively, the “ Assumed International Plans ”), including assuming or retaining, as applicable, all liabilities and obligations for benefits payable under the Assumed International Plans. Except for assets specifically relating to such Assumed International Plans, no portion of the assets of any trust or other fund maintained by Aon for the purpose of paying benefits under the Assumed International Plans will be transferred to Buyer, the Company or the Subsidiaries.
(iii) Buyer currently maintains one or more qualified defined contribution plans (“ Buyer’s DC Plans ”) that contain or will contain all provisions necessary for
 
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the acceptance of direct rollovers (in the form of cash and notes relating to plan participant loans) of “eligible rollover distributions” as defined in the Code and applicable Requirements of Law that Transferred Employees are eligible to receive from Aon’s defined contribution plans (“ Aon’s DC Plans ”) without adversely affecting the qualified status of Aon’s DC Plans; provided , however , that Buyer’s DC Plan will not be required to accept the rollover of any amount attributable to a form of contribution that is not otherwise available under Buyer’s DC Plan. Buyer’s DC Plans will contain provisions to permit any such direct rollover to include the promissory note or notes representing any plan loans outstanding to the Transferred Employee under Aon’s DC Plans on the date of the direct rollover, and Buyer, the Company and Aon will cooperate with each other to enable such direct rollovers to occur before such loans become defaulted. Aon agrees not to place any such loans in default for at least 90 days following the Closing Date.
(d) Layoff Benefits . Notwithstanding any of the foregoing to the contrary, following the Closing Date, Buyer agrees to, or to cause its Affiliates to, provide severance benefits to any Transferred Employee who is laid off during the one-year period beginning on the Closing Date in an amount that is at least equal to the layoff benefits that would have been paid to such employee pursuant to the terms of the Company Plans as in effect immediately prior to the Closing Date, to be calculated, however, on the basis of the employee’s base salary and service at the time of the layoff; provided , however , that if an individual is entitled to a severance or layoff benefit under a Company Employment Agreement, the individual will not be entitled to a layoff benefit under this paragraph (d).
(e) Individual Employment Contracts . Except as set forth on Schedule 8.2(e) , effective as of the Closing Date, Buyer shall assume, or cause an Affiliate to continue to be obligated under or assume the Company’s and the Subsidiaries’ obligations under all individual employment, termination, retention, severance or other similar contracts or agreements with any current or former employee of the Company and the Subsidiaries and all of the obligations as the employer under such contracts and agreements, as set forth in Schedule 5.18 .
(f) Welfare Benefits . Except as otherwise expressly provided herein, Aon or one of its Affiliates shall retain responsibility under the Company Plans that are Welfare Plans in which the Transferred Employees participate with respect to all amounts that are payable by reason of, or in connection with, any and all welfare benefit claims made by the Transferred Employees and their eligible dependents but only to the extent the claims were incurred prior to the Closing Date. However, Buyer shall reimburse Aon or one of its Affiliates promptly for any payments of welfare benefits, properly made by Aon or one of its Affiliates in accordance with the terms of the applicable welfare plan maintained by Buyer or one of its Affiliates, to eligible Transferred Employees and their eligible dependents on or after the Closing Date with respect to claims incurred after the Closing Date upon receipt of periodic billings for such amounts. Buyer and its Affiliates shall be responsible for all other welfare benefit claims made by the Transferred Employees and their eligible dependents to the extent such claims were incurred on or after the Closing Date.
(g) Credit for Service . To the extent that service is relevant for purposes of eligibility and vesting (but not for purposes of defined benefit pension benefit accruals) under any retirement plan, employee benefit plan, program or arrangement established or maintained
 
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by Buyer or any of its Affiliates for the benefit of the Transferred Employees, following the Closing Date such plan, program or arrangement shall credit such Transferred Employees for service earned on and prior to the Closing Date with the Company, the Subsidiaries, any of their respective Affiliates or any of their respective predecessors (but only to the extent Aon credited such service) in addition to service earned with Buyer or any of Buyer’s Affiliates after the Closing Date.
(h) Preexisting Conditions; Coordination . Following the Closing Date, Buyer shall, or shall cause its Affiliates to, waive limitations on eligibility, enrollment and benefits relating to any preexisting medical conditions of the Transferred Employees and their eligible dependents to the same extent as any other new employee of Buyer. Following the Closing Date, Buyer shall recognize, or shall cause its Affiliates to also recognize, for purposes of annual deductible and out of pocket limits under its health and dental plans (the “ Buyer Plans ”), deductible and out of pocket expenses paid by Transferred Employees and their respective dependents under health and dental Company Plans in the calendar year in which the Closing Date occurs to the extent the Transferred Employees participate in any such Buyer Plans in such same calendar year.
(i) Vacations . Buyer shall, or shall cause its Affiliates to, continue a vacation program for the benefit of the Transferred Employees through at least the end of the calendar year in which the Closing occurs that is at least as favorable as the vacation program of the Company and the Subsidiaries in effect immediately prior to the Closing Date. Buyer shall, or shall cause its Affiliates to, recognize and provide all accrued but unused vacation of each Transferred Employee as of the Closing Date. Neither Aon nor its Affiliates shall have any obligation or liability to pay or provide any vacation payments claimed on or after the Closing Date.
(j) Bonuses . Buyer shall, or shall cause its Affiliates to, assume the bonus programs for Transferred Employees in existence as of the Closing Date and shall pay to the Transferred Employees the bonuses they earn under such programs with respect to the bonus determination period that includes the Closing Date, it being understood that bonus amounts shall be fully accrued with respect to all periods through the Closing Date (and including the Closing) in the calculation of Closing Date Net Worth.
(k) Healthcare Flexible Spending Account Program . Buyer shall, or shall cause its Affiliates to, establish or maintain a Healthcare Flexible Spending Account program for each Transferred Employee who, in the portion of the calendar year on or prior to the Closing Date, contributed to the Healthcare Flexible Spending Account program of Aon. The beginning balance as of the Closing Date in Buyer’s Healthcare Flexible Spending Account program shall be the unused portion of the balance in Aon’s Healthcare Flexible Spending Account program, and Aon shall transfer to Buyer an amount, in cash, equal to such balance.
(l) COBRA . Following the Closing Date, Buyer shall, or shall cause an Affiliate to, provide continuation health care coverage to all Transferred Employees and their qualified beneficiaries, regardless of when a “qualifying event” occurs, in accordance with the continuation health care coverage requirements of Section 4980B of the Code and Title I, Subtitle B, Part 6 of ERISA (“ COBRA ”) with respect to claims incurred at any time on or after the Closing Date. Aon or one of its Affiliates shall provide COBRA coverage for former employees of the Company and the Subsidiaries who do not become Transferred Employees.
 
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(m) WARN . Buyer shall be responsible for all liabilities or obligations under the Worker Adjustment and Retraining Notification Act and similar state and local rules, statutes and ordinances resulting from the Closing or from Buyer’s, the Company’s or a Subsidiary’s actions following the Closing.
(n) Workers’ Compensation Liabilities . As of the Closing Date, Buyer will cause the Company and the Subsidiaries to assume (or reimburse Aon for) all liabilities and obligations relating to compensation and benefits under any state workers’ compensation or similar law payable following the Closing Date to or with respect to any employee or former employee of the Company or any of the Subsidiaries who was employed by the Company or the Subsidiaries on the date the claim arose or the incident on which the claim is based occurred.
Section 8.3 Securities Law Legends . Buyer agrees and understands that the Shares have not been, and will not be, registered under the Securities Act or the securities laws of any state or other Administrative Authority and that the Shares may be sold or disposed of only in one or more transactions (i) registered under the Securities Act, applicable state securities laws and/or the laws of any other applicable Administrative Authority or (ii) as to which an exemption from the registration requirements of the Securities Act, applicable state securities laws and/or the laws of any other applicable Administrative Authority is available. Buyer acknowledges and agrees that no person has any right to require Aon or the Company to cause the registration of any of the Shares. The certificates representing the Shares shall contain a legend similar to the following and other legends necessary or appropriate under applicable state securities laws or the laws of any other Administrative Authority:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE “ACT”) OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS A REGISTRATION STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE SECURITIES LAWS WITH RESPECT TO SUCH SHARES IS EFFECTIVE OR UNLESS THE COMPANY IS IN RECEIPT OF AN OPINION OF COUNSEL SATISFACTORY TO IT TO THE EFFECT THAT SUCH SHARES MAY BE SOLD WITHOUT REGISTRATION UNDER THE ACT AND SUCH LAWS.
Section 8.4 Insurance; Risk of Loss . Aon will cause the Company and the Subsidiaries to keep insurance policies currently maintained by the Company or the Subsidiaries covering their business, assets and current or former employees, as the case may be, or suitable replacements therefor, in full force and effect through the close of business on the Closing Date. From and after the Closing Date, Buyer shall be solely responsible for all insurance coverage and related risk of loss based on claims pending as of the Closing Date and claims made after the Closing Date, without regard to when the event giving rise to any such claim occurred, with respect to the Company, the Subsidiaries and their business, assets and current or former employees. To the extent that after the Closing any party hereto requires any information
 
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regarding claim data, payroll or other information in order to make filing with insurance carriers or self insurance regulators from another party hereto, such other party will promptly supply such information.
Section 8.5 Release of Guaranties . Buyer shall use all reasonable efforts to cause Aon and its Affiliates to be fully released, as of the Closing Date or as promptly as practicable after the Closing Date, in respect of all obligations under any guaranties, letters of credit, letters of comfort, bid bonds or performance or surety bonds or cash or other collateral obtained or given by Aon or its Affiliates relating to any parcel of Leased Real Property or any other contractual commitment of the Company and the Subsidiaries (collectively, the “ Guaranties ”). If Buyer is unable to effect such a substitution and release with respect to any Guaranty, Buyer shall indemnify each Seller Group Member against any and all Loss or Expense arising from such Guaranty. Without limiting the foregoing, after the Closing Date, Buyer will not, and will not permit any of its Affiliates to, renew, extend, amend or supplement any contract, lease or other obligation that is covered by a Guaranty without providing Aon with evidence reasonably satisfactory to them that the Guaranty has been released. Any cash or other collateral posted by Aon or its Affiliates in respect of any Guaranty shall be delivered to Aon.
Section 8.6 Noncompetition and Nonsolicitation . (a) For a period of two years following the Closing, Aon shall not, and shall cause its Affiliates not to, solicit any employees of Buyer or any of its Affiliates identified to Aon as part of the transactions contemplated by this Agreement to leave the employ of Buyer or its Affiliates or violate the terms of their contracts, or any employment arrangements, with the Company or any Subsidiary; provided , however , that Aon or any of its Affiliates may solicit any Transferred Employees who are discharged by the Company or a Subsidiary, and, provided , further , that nothing in this Section 8.6(a) shall prohibit Aon or any of its Affiliates from employing any Transferred Employee who (i) initiates discussions regarding such employment without any direct or indirect solicitation, (ii) seeks employment in response to any general advertisement or other similar method and not in response to any direct or indirect solicitation efforts or (iii) whose employment has been terminated prior to commencement of employment discussions.
(b) For a period of two years following the Closing, Buyer shall not, and shall cause its Affiliates (including the Company and the Subsidiaries) not to solicit any employees of Aon or its Affiliates identified to Buyer as part of the transactions contemplated by this Agreement to leave the employ of Aon or its Affiliates, as applicable, or violate the terms of their contracts, or any employment arrangements, with Aon or its Affiliates, as applicable; provided , however , that Buyer or any of its Affiliates may solicit any such employees who are discharged by Aon or its Affiliates, as applicable; provided , further , that nothing in this Section 8.6(b) shall prohibit Buyer or any of its Affiliates from employing any such employee who (i) initiates discussions regarding such employment without any direct or indirect solicitation, (ii) seeks employment in response to any general advertisement or other similar method and not in response to any direct or indirect solicitation efforts or (iii) whose employment has been terminated prior to commencement of employment discussions.
(c) As a separate and independent covenant, for a period of two (2) years following the Closing, Aon shall not, and shall cause its Affiliates not to, engage in a Restricted Business anywhere in the world; provided , however , that, for the purposes of this Section 8.6 , (x)
 
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ownership of securities having no more than five percent of the outstanding voting power of any Person whose capital stock or equity is listed on any national or international securities exchange or quotation system and (y) ownership of not more than 25% of any private equity fund or alternative investment vehicle in which Aon or its Affiliates is a passive investor shall not be deemed to be a violation of this Section 8.6 .
(d) Notwithstanding the provisions of this Section 8.6 and without implicitly agreeing that the following activities would be subject to the provisions of Section 8.6(c) , nothing in this Agreement or in the Seller Ancillary Agreements shall preclude, prohibit or restrict Aon or any of its Affiliates from: (i) engaging in or owning an interest in any entity that engages in any Exempt Business Activities; (ii) acquiring, and following such acquisition, actively engaging in any business that has a subsidiary, division, group, franchise or segment that is engaged in any Restricted Business (an “ Acquired Business ”), so long as for the most recent fiscal year ending prior to the date of such purchase, the gross written premiums or revenues of such business derived from a Restricted Business were less than 33-1/3% of the total consolidated gross written premiums or revenues of such business; or (iii) engaging in a Change of Control or, if the acquiring Person has a subsidiary, division, group, franchise or segment that is engaged in a Restricted Business at the time of the Change of Control, thereafter engaging in the Restricted Business. Nothing in this Section 8.6 shall require Aon or any of its Affiliates to divest or dispose of all or any portion of an Acquired Business to the extent engaging in Exempt Business Activities.
Section 8.7 Use of Names . (a) Aon is not conveying ownership rights or granting Buyer or its Affiliates (including the Company and the Subsidiaries after the Closing) a license to use any of the tradenames, service marks or trademarks of Aon or any Affiliate of Aon (other than the trademarks and service marks included in the Intellectual Property identified in Schedule 5.11(a) ) (collectively, the “ Retained Names and Marks ”) and, after the Closing, Buyer and its Affiliates (including the Company and the Subsidiaries after the Closing) shall not use in any manner the names or marks of Aon or any Affiliate of Aon or any word that is similar in sound or appearance to such names or marks, except as provided in this Section 8.7 .
(b) Following the Closing, Buyer shall (and shall cause the Company and the Subsidiaries to) cease promptly, but in no event later than 120 days after the Closing Date, using (i) any advertising or promotional materials and (ii) any stationery, business cards, business forms and other similar items, in each case that contain anywhere thereon any of the Retained Names and Marks; provided , however , that Buyer shall (and shall cause the Company and the Subsidiaries to), when using items referred to in clause (ii) in the context of entering into or conducting contractual relationships, make reasonably clear to all other applicable parties that Buyer and the Company and the Subsidiaries, rather than Aon or any Affiliate of Aon is the party entering into or conducting the contractual relationship; provided , further , that Buyer shall (and shall cause the Company to) ensure that personnel of the Company and the Subsidiaries using such items shall not, and shall have no authority to, hold themselves out as officers, employees or agents of Aon or any Affiliate of Aon; provided , further , that Buyer shall not be obligated to pay Aon for the use of the Retained Names and Marks as contemplated by this Section 8.7 . With respect to all materials used after the Closing which state or suggest or imply any affiliation with Aon or any of the Affiliates of Aon, Buyer shall indemnify and hold harmless the Seller Group Members from and against all Losses which arise out of, relate to or result from the inclusion of such statements, suggestions or implications in such materials.
 
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Section 8.8 Post-Closing Restructuring . On the Closing Date, if requested by Aon to facilitate the Special Dividend and subject to obtaining any required regulatory approvals in connection therewith, Buyer shall, immediately following the Closing, cause the Company to distribute to Buyer all of the capital stock of each of the Subsidiaries set forth on Schedule 8.8 . For the avoidance of doubt, Buyer acknowledges and agrees that any portion of the Special Dividend not paid to Aon as contemplated by Section 7.6 shall be taken into account for purposes of the calculation of the Closing Date Net Worth.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER
The obligations of Buyer under this Agreement shall, at the option of Buyer (to the extent permissible under applicable law), be subject to the satisfaction, on or prior to the Closing Date, of the following conditions:
Section 9.1 No Misrepresentation or Breach of Covenants and Warranties . There shall not have been any material breach by Aon in the performance of any of its covenants and agreements required by this Agreement to have been performed or complied with by Aon at or prior to the Closing which shall not have been remedied or cured; the representations and warranties of Aon contained in this Agreement (disregarding any qualification as to materiality or Material Adverse Effect) shall have been true and correct on the date hereof and shall be true and correct on the Closing Date as though made on the Closing Date (except to the extent that they expressly relate to an earlier date), except, in each case, for (i) changes therein specifically permitted by this Agreement or resulting from any transaction expressly consented to in writing by Buyer or any transaction permitted by this Agreement and (ii) breaches of representations and warranties which would not reasonably be expected to have a Material Adverse Effect; and there shall have been delivered to Buyer a certificate to such effect, dated the Closing Date, signed on behalf of Aon by a duly authorized officer of Aon.
Section 9.2 HSR Act and EU Merger Controls . The waiting period (and any extensions thereof) under the HSR Act shall have expired or been terminated. To the extent applicable, the European Commission shall have issued a decision under Article 6(1)(b) or 8(1) or 8(2) of Council Regulation (EC) No. 139/2004 of the Council of the European Union (or shall be deemed to have done so under Article 10(6) thereof) declaring the transactions contemplated by this Agreement compatible with the EC Common Market.
Section 9.3 Necessary Governmental Approvals . All approvals and actions of or by all Administrative Authorities (including any approvals or consents from state departments of insurance or similar foreign departments having or asserting jurisdiction over any of the Underwriting Companies) set forth in Schedule 9.3 shall have been obtained or taken place and shall be in effect on the Closing Date; provided , however , that in connection with obtaining the foregoing, no condition or requirement (excluding conditions or requirements imposed by an insurance regulatory Administrative Authority pursuant to Requirements of Law and conditions or requirements relating to circumstances of Buyer and its Affiliates) shall have been imposed
 
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by one or more Administrative Authorities relating to the acquisition, ownership or operation of the Company and the Subsidiaries by Buyer which, either alone or together with all such other conditions or requirements, would reasonably be expected to materially and adversely affect the benefits, taken as a whole, which the Buyer would otherwise receive from the transactions contemplated by this Agreement.
Section 9.4 No Restraint . (a) No statute, rule or regulation shall have been enacted, entered, promulgated or enforced by any Administrative Authority which prohibits, restricts or makes illegal the consummation of the Closing or any material transaction contemplated hereby.
(b) No judgment, decree, injunction or restraining order shall have been issued by any court of competent jurisdiction and be in effect which restrains or prohibits any material transaction contemplated hereby nor shall there be pending any suit, action, investigation, inquiry or other proceeding instituted by any Administrative Authority which would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
Section 9.5 No Material Adverse Effect . Since the date of this Agreement, there shall not have occurred any Material Adverse Effect or any event or circumstance that would reasonably be expected to have a Material Adverse Effect.
Section 9.6 FIRPTA Certificate . Aon shall have delivered to Buyer a certificate of non-foreign status, in the form attached hereto as Exhibit C .
ARTICLE X
CONDITIONS PRECEDENT TO OBLIGATIONS OF AON
The obligations of Aon under this Agreement shall, at the option of Aon (to the extent permissible under applicable law), be subject to the satisfaction, on or prior to the Closing Date, of the following conditions:
Section 10.1 No Misrepresentation or Breach of Covenants and Warranties . There shall not have been any breach by Buyer in the performance of any of its covenants and agreements herein which shall not have been remedied or cured, other than breaches which would not reasonably be expected to have a material adverse effect on Buyer’s ability to consummate the transactions contemplated hereby; the representations and warranties of Buyer contained in this Agreement shall be true and correct on the Closing Date as though made on the Closing Date, except for (i) changes therein specifically permitted by this Agreement or resulting from any transaction expressly consented to in writing by Aon or any transaction contemplated by this Agreement and (ii) breaches of representations and warranties which would not reasonably be expected to have a material adverse effect on Buyer’s ability to consummate the transactions contemplated hereby; and there shall have been delivered to Aon a certificate to such effect, dated the Closing Date, signed on behalf of Buyer by a duly authorized officer of Buyer.
Section 10.2 HSR Act and EU Merger Controls . The waiting period (and any extensions thereof) under the HSR Act shall have expired or been terminated. To the extent applicable, the European Commission shall have issued a decision under Article 6(1)(b) or 8(1)
 
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or 8(2) of Council Regulation (EC) No. 139/2004 of the Council of the European Union (or shall be deemed to have done so under Article 10(6) thereof) declaring the transactions contemplated by this Agreement compatible with the EC Common Market.
Section 10.3 Necessary Governmental Approvals . All approvals and actions of or by all Administrative Authorities (including any approvals or consents from state departments of insurance or similar foreign departments having or asserting jurisdiction over any of the Underwriting Companies) set forth in Schedule 10.3 or as to which the failure to have been obtained or taken place would reasonably be expected to have a Material Adverse Effect shall have been obtained or taken place and shall be in effect on the Closing Date.
Section 10.4 No Restraint . (a) No statute, rule or regulation shall have been enacted, entered, promulgated or enforced by any Administrative Authority which prohibits, restricts or makes illegal the consummation of the Closing or any material transaction contemplated hereby.
(b) No judgment, decree, injunction or restraining order shall have been issued by any court of competent jurisdiction and be in effect which restrains or prohibits any material transaction contemplated hereby not shall there be pending any suit, action, investigation, inquiry or other proceeding instituted by any Administrative Authority which would, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
ARTICLE XI
INDEMNIFICATION
Section 11.1 Indemnification by Aon . (a) From and after the Closing, Aon agrees to indemnify and hold harmless each Buyer Group Member from and against any and all Losses and Expenses incurred by such Buyer Group Member in connection with or arising from:
(i) any breach of any warranty or the inaccuracy of any representation of Aon contained in this Agreement (in each case (other than with respect to the Specified Representations and Warranties) interpreted without giving effect to any limitation contained therein as to “material,” “material respects” or “Material Adverse Effect”) or in any certificate delivered by Aon in connection herewith;
(ii) any breach by Aon of, or failure by Aon to perform, any of its pre-Closing covenants or obligations contained in this Agreement; and
(iii) any breach by Aon of, or failure by Aon to perform, any of its post-Closing covenants or obligations contained in this Agreement;
provided , however , that Aon shall be required to indemnify and hold harmless under Section 11.1(a)(i) or 11.1(a)(ii) with respect to Losses and Expenses incurred by Buyer Group Members only to the extent that:
(x) the amount of Loss and Expense suffered by Buyer Group Members related to each individual claim exceeds $50,000 (it being understood that such $50,000 shall be a deductible for which Aon shall bear no indemnification responsibility),
 
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provided , that individual claims based upon the same act, event, omission or set of facts shall be deemed a single individual claim for purposes of this Section 11.1(a)(x) ;
(y) the aggregate amount of such Losses and Expenses (other than Losses and Expenses excluded by clause (x) above) exceeds one and one-half percent (1.5%) of the Purchase Price (it being understood that such amount shall be a deductible for which Aon shall bear no indemnification responsibility); and
(z) the aggregate amount required to be paid by Aon pursuant to clauses (i) and (ii) of this Section 11.1(a) shall not exceed fifteen percent (15%) of the Purchase Price.
(b) The indemnification provided for in Section 11.1(a) shall terminate one (1) year after the Closing Date (and no claims shall be made by any Buyer Group Member under Section 11.1(a) thereafter), except that the indemnification by Aon shall continue as to:
(i) the representations contained in the first and third sentences of Section 5.1 and Sections 5.2 and 5.4(a) , which shall survive for ten years;
(ii) the representations contained in Sections 5.7 and 5.16 , which shall survive until 30 days after the expiration of the relevant statutory period of limitations applicable to the underlying claim, giving effect to any waiver, mitigation or extension thereof;
(iii) the covenants of Aon set forth in Sections 8.1 and 8.2 , which shall survive until 30 days after the expiration of the relevant statutory period of limitations applicable to the underlying claim, giving effect to any waiver, mitigation or extension thereof;
(iv) the covenants of Aon which by their terms extend beyond one (1) year, which shall survive until expiring in accordance with their respective terms; and
(v) any Losses or Expenses of which any Buyer Group Member has validly given a Claim Notice to Aon in accordance with the requirements of Section 11.3 on or prior to the date such indemnification would otherwise terminate in accordance with this Section 11.1 , as to which the obligation of Aon shall continue solely with respect to the specific matters in such Claim Notice until the liability of Aon shall have been determined pursuant to this Article XI , and Aon shall have reimbursed all Buyer Group Members for the full amount of such Losses and Expenses that are payable with respect to such Claim Notice in accordance with this Article XI .
Section 11.2 Indemnification by Buyer . (a) From and after the Closing, Buyer agrees to indemnify and hold harmless each Seller Group Member from and against any and all Losses and Expenses incurred by such Seller Group Member in connection with or arising from:
(i) any breach of any warranty or the inaccuracy of any representation of Buyer contained in this Agreement;
(ii) any breach by Buyer of, or failure by Buyer to perform, any of its pre-Closing covenants and obligations contained in this Agreement;
 
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(iii) any breach by Buyer of, or failure by Buyer to perform, any of its post-Closing covenants and obligations contained in this Agreement; and
(iv) the operation of the Company, the Subsidiaries and the business of the Company and the Subsidiaries after the Closing (other than any matter for which Aon is required to provide indemnification pursuant to Section 11.1 );
provided , however , that Buyer shall be required to indemnify and hold harmless under Section 11.2(a)(i) or 11.2(a)(ii) with respect to Losses and Expenses incurred by Seller Group Members only to the extent that:
(x) the amount of Loss and Expense suffered by Seller Group Members related to each individual claim exceeds $50,000 (it being understood that such $50,000 shall be a deductible for which Buyer shall bear no indemnification responsibility), provided , that individual claims based upon the same act, event, omission or set of facts shall be deemed a single individual claim for purposes of this Section 11.2(a)(x) ;
(y) the aggregate amount of such Losses and Expenses (other than Losses and Expenses excluded by clause (x) above) exceeds one and one-half percent (1.5%) of the Purchase Price (it being understood that such amount shall be a deductible for which Buyer shall bear no indemnification responsibility); and
(z) the aggregate amount required to be paid by Buyer pursuant to clauses (i) and (ii) of this Section 11.2(a) shall not exceed fifteen percent (15%) of the Purchase Price.
(b) The indemnification provided for in Section 11.2(a) shall terminate one (1) year after the Closing Date (and no claims shall be made by any Seller Group Member under Section 11.2(a) thereafter), except that the indemnification by Buyer shall continue as to:
(i) the covenants of Buyer set forth in Sections 8.1 , 8.2 , 8.4 , 8.5 , 8.7 , 8.8 and 11.2(a)(iv) , which shall survive until the expiration of the relevant statutory period of limitations applicable to the underlying claim, giving effect to any waiver, mitigation or extension thereof;
(ii) the covenants of Buyer which by their terms extend beyond one (1) year, which shall survive until expiring in accordance with their respective terms; and
(iii) any Losses or Expenses of which any Seller Group Member has validly given a Claim Notice to Buyer in accordance with the requirements of Section 11.3 on or prior to the date such indemnification would otherwise terminate in accordance with this Section 11.2 , as to which the obligation of Buyer shall continue solely with respect to the specific matters in such Claim Notice until the liability of Buyer shall have been determined pursuant to this Article XI , and Buyer shall have reimbursed all Seller Group Members for the full amount of such Losses and Expenses that are payable with respect to such Claim Notice in accordance with this Article XI .
 
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Section 11.3 Notice of Claims . Any Buyer Group Member or Seller Group Member seeking indemnification hereunder (the “ Indemnified Party ”) shall give promptly to the party obligated to provide indemnification to such Indemnified Party (the “ Indemnitor ”) a notice (a “ Claim Notice ”) describing in reasonable detail the facts giving rise to the claim for indemnification hereunder and shall include in such Claim Notice (if then known) the amount or the method of computation of the amount of such claim, and a reference to the provision of this Agreement or any other agreement, document or instrument executed hereunder or in connection herewith upon which such claim is based; provided , however , that a Claim Notice in respect of any action at law or suit in equity by or against a third Person as to which indemnification will be sought shall be given promptly after the action or suit is commenced.
Section 11.4 Determination of Amount . (a) In calculating any Loss or Expense, such amounts shall be calculated on an After-Tax Basis and shall be net of any third-party insurance, indemnification or other proceeds which have been recovered by the Indemnified Party under any insurance policy or other contract, agreement or undertaking in connection with the facts giving rise to the right of indemnification. The Indemnified Party shall use commercially reasonable efforts to recover third-party insurance, indemnification or other proceeds that may be recoverable.
(b) After the giving of any Claim Notice pursuant to Section 11.3 , the amount of indemnification to which an Indemnified Party shall be entitled under this Article XI shall be determined: (i) by the written agreement between the Indemnified Party and the Indemnitor; (ii) by a final judgment or decree of any court of competent jurisdiction; or (iii) by any other means to which the Indemnified Party and the Indemnitor shall agree. The judgment or decree of a court shall be deemed final when the time for appeal, if any, shall have expired and no appeal shall have been taken or when all appeals taken shall have been finally determined. The Indemnified Party shall have the burden of proof in establishing the amount of Losses and Expenses suffered by it.
Section 11.5 Third Person Claims . (a) Any party seeking indemnification provided for under this Agreement in respect of, arising out of or involving a claim or demand made by any third Person against the Indemnified Party shall notify the Indemnitor in writing, and in reasonable detail, of the third Person claim within 10 days after receipt by such Indemnified Party of written notice of the third Person claim. Thereafter, the Indemnified Party shall deliver to the Indemnitor, within five (5) business days after the Indemnified Party’s receipt thereof, copies of all notices and documents (including court papers) received by the Indemnitor relating to the third Person claim. Notwithstanding the foregoing, should a party be physically served with a complaint with regard to a third Person claim, the Indemnified Party shall notify the Indemnitor with a copy of the complaint within five (5) business days after receipt thereof and shall deliver to the Indemnitor within seven (7) business days after the receipt of such complaint copies of notices and documents (including court papers) received by the Indemnified Party relating to the third Person claim. The failure to give notice as provided in this Section 11.5 shall not relieve the Indemnitor of its obligations hereunder except to the extent it shall have been prejudiced by such failure.
(b) If any legal proceeding shall be threatened or instituted or any claim or demand shall be asserted by any Person in respect of which payment may be sought by one party
 
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hereto from the other party under the provisions of this Article XI , the Indemnified Party shall promptly cause written notice of the assertion of any such claim of which it has knowledge which is covered by this indemnity to be forwarded to the Indemnitor. Any notice of a claim by reason of any of the representations, warranties or covenants contained in this Agreement shall refer to the provision of this Agreement or any other agreement, document or instrument executed hereunder or in connection herewith upon which such claim is based and describe in reasonable detail, the facts giving rise to an alleged basis for the claim and the amount of the liability asserted against the Indemnitor by reason of the claim. In the event of the initiation of any legal proceeding against the Indemnified Party by a third Person, the Indemnitor shall have the sole and absolute right after the receipt of notice, at its option and at its own expense, to be represented by counsel of its choice and to control, defend against, negotiate, settle or otherwise deal with any proceeding, claim, or demand which relates to any loss, liability or damage indemnified against hereunder; provided , however , that the Indemnified Party may participate in any such proceeding with counsel of its choice and at its expense. Each of the parties hereto agrees to cooperate fully with the other party in connection with the defense, negotiation or settlement of any such legal proceeding, claim or demand and to make available to the other party all witnesses, pertinent records, materials and information in such party’s possession or under such party’s control relating thereto as is reasonably required by the other party. To the extent the Indemnitor elects not to defend such proceeding, claim or demand, and the Indemnified Party defends against or otherwise deals with any such proceeding, claim or demand, the Indemnified Party may retain counsel, at the expense of the Indemnitor, and control the defense of such proceeding; provided , however , that the Indemnitor shall be obligated pursuant to this Section 11.5 to pay for only one firm of counsel for all Indemnified Parties. Neither the Indemnitor nor the Indemnified Party may settle any such proceeding which settlement obligates the other party to pay money, to perform obligations or to admit liability without the consent of the other party, such consent not to be unreasonably withheld. Furthermore, the Indemnitor may not, without the prior written consent of the Indemnified Party (such consent not to be unreasonably withheld), settle any such proceeding or compromise or consent to the entry of judgment in any pending or threatened action, suit or proceeding in respect of which any Indemnified Party is or would reasonably be expected to be a party and indemnity was or would reasonably be expected to be sought hereunder by such Indemnified Party, unless such settlement, compromise or consent (i) includes an unconditional release of such Indemnified Party from all liability on claims that are the subject matter of such action, suit or proceedings and (ii) does not include a statement as to or an admission of fault, culpability or failure to act by or on behalf of any Indemnified Party. If the Indemnified Party shall refuse to consent to the settlement of any third Person claim, so long as only money damages are involved and there is no admission of liability or wrongdoing with respect to the Indemnified Party, the liability of the Indemnitor in respect of such third Person claim shall not exceed the amount for which the third Person claim could have been settled plus the amount of expenses incurred by the Indemnified Party prior to the time of and in connection with the proposed settlement to which it is entitled to indemnification. After any final judgment or award shall have been rendered by a court, arbitration board or administrative agency of competent jurisdiction and the time in which to appeal therefrom has expired, or a settlement shall have been consummated, or the Indemnified Party and the Indemnitor shall arrive at a mutually binding agreement with respect to each separate matter alleged to be indemnified by the Indemnitor hereunder, the Indemnified Party shall forward to the Indemnitor notice of any sums due and owing by it with respect to such matter and the Indemnitor shall pay all of the sums so owing to the Indemnified Party by wire transfer, certified or bank cashier’s check within 30 days after the date of such notice.
 
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(c) To the extent of any inconsistency between this Section 11.5 and Section 8.1(c) (relating to Tax contests), the provisions of Section 8.1(c) shall control with respect to Tax contests.
Section 11.6 Limitations . (a) In any case where an Indemnified Party recovers from third Persons any amount in respect of a matter with respect to which an Indemnitor has indemnified it pursuant to this Article XI , such Indemnified Party shall promptly pay over to the Indemnitor the amount so recovered (after deducting therefrom the full amount of the expenses incurred by it in procuring such recovery), but not in excess of the sum of (i) any amount previously so paid by the Indemnitor to or on behalf of the Indemnified Party in respect of such matter and (ii) any amount expended by the Indemnitor in pursuing or defending any claim arising out of such matter.
(b) In no event shall any party be liable for any special, incidental, consequential (including loss of revenues or profits), exemplary or punitive damages or diminution of value or any damages based on any type of multiple, whether arising under any legal or equitable theory or arising under or in connection with this Agreement, all of which are hereby excluded by agreement of the parties regardless of whether or not any party to this Agreement has been advised of the possibility of such damages.
(c) Aon shall not be required to indemnify and hold harmless any Buyer Group Member pursuant to Section 11.1(a) to the extent the matter in question was included in the computation of the Net Worth Adjustment Amount pursuant to Section 4.5 .
(d) Except for remedies that cannot be waived as a matter of law and injunctive and provisional relief (including specific performance), if the Closing occurs, this Article XI shall be the exclusive remedy for breaches of this Agreement (including any covenant, obligation, representation or warranty contained in this Agreement or in any certificate delivered pursuant to this Agreement) or otherwise in respect of the sale of the Shares contemplated hereby. Anything herein to the contrary notwithstanding, no breach of any representation, warranty, covenant or agreement contained herein shall give rise to any right on the part of Aon or Buyer, after the consummation of the purchase and sale of the Shares contemplated by this Agreement, to rescind this Agreement or any of the transactions contemplated hereby.
Section 11.7 Mitigation . Each of the parties agrees to take all reasonable steps to mitigate their respective Losses and Expenses upon and after becoming aware of any event or condition which could reasonably be expected to give rise to any Losses and Expenses that are indemnifiable hereunder.
ARTICLE XII
TERMINATION
Section 12.1 Termination . Anything contained in this Agreement to the contrary notwithstanding, this Agreement may be terminated at any time prior to the Closing Date:
(a) by the mutual consent of Buyer and Aon;
 
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(b) by Buyer if Aon shall have breached any of its representations, warranties, covenants or agreements contained in this Agreement, which would give rise to the failure of a condition set forth in Article IX , which breach cannot be cured by the Termination Date as the same may be extended pursuant to Section 12.1(e) or which has not been cured within 60 days of notice thereof by Buyer;
(c) by Aon if Buyer shall have breached any of its representations, warranties, covenants or agreements contained in this Agreement which would give rise to the failure of a condition set forth in Article X which breach cannot be cured by the Termination Date as the same may be extended pursuant to Section 12.1(e) or which has not been cured within 60 days of notice thereof by Aon;
(d) by Buyer or Aon if any court of competent jurisdiction in the United States or other United States Administrative Authority shall have issued a final and non-appealable order, decree or ruling permanently restraining, enjoining or otherwise prohibiting the consummation of any material transaction contemplated hereby; or
(e) by Buyer or Aon if the Closing shall not have occurred on or before July 31, 2008 (the “ Termination Date ”) (or such later date as may be agreed in writing to by Buyer and Aon); provided , however , that either Buyer or Aon may by written notice to the other delivered on or before July 31, 2008 extend the Termination Date until any date prior to September 30, 2008 if the failure of the Closing to have occurred on or before July 31, 2008 shall have resulted from the failure of the condition set forth in Sections 9.2 or 9.3 or Sections 10.2 or 10.3 ; provided , further , that the right to terminate this Agreement pursuant to this Section 12.1(e) shall not be available to any party whose failure to fulfill any of its obligations contained in this Agreement has been the cause of, or resulted in, the failure of the Closing to have occurred on or prior to the aforesaid date.
Section 12.2 Notice of Termination . Any party desiring to terminate this Agreement pursuant to Section 12.1 shall give written notice of such termination to the other party to this Agreement and shall include in reasonable detail the grounds for such termination.
Section 12.3 Effect of Termination . If this Agreement shall be terminated pursuant to this Article XII , all further obligations of the parties under this Agreement (other than Sections 13.2 and 13.10 ) shall be terminated without further liability of any party to the other; provided , however , that nothing herein shall relieve any party from liability for its willful breach of this Agreement.
Section 12.4 Specific Performance . The parties agree that irreparable damage would occur in the event that any of the terms or provisions of this Agreement related to the closing of the transactions contemplated hereby were not performed in accordance with their specific wording or were otherwise breached. It is accordingly agreed that, notwithstanding anything to the contrary contained in this Agreement, each of the parties hereto shall be entitled to an injunction or injunctions to prevent such breaches of this Agreement and to enforce specifically the terms and provisions hereof in any court of the United States of America or any state having jurisdiction, such remedy being in addition to any other remedy to which any party may be entitled at law or in equity.
 
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ARTICLE XIII
GENERAL PROVISIONS
Section 13.1 Survival of Representations and Warranties . All representations and warranties contained in this Agreement shall survive the consummation of the transactions contemplated by this Agreement through the period during which claims for indemnification may be made for such representations and warranties pursuant to Article XI (at which time such representations and warranties shall terminate).
Section 13.2 Confidential Nature of Information . Each party hereto agrees that all documents, materials and other information which it shall have obtained regarding the other parties during the course of the negotiations leading to the consummation of the transactions contemplated hereby (whether obtained before or after the date of this Agreement), the investigation provided for herein and the preparation of this Agreement and other related documents shall be held in confidence pursuant to the Confidentiality Agreement, which Confidentiality Agreement shall terminate at Closing.
Section 13.3 No Public Announcement . Through the Closing Date, neither Buyer nor Aon shall make any press release or other public announcement primarily concerning the transactions contemplated by this Agreement without giving the other a reasonable opportunity to review and comment on such disclosure in advance of its release; provided , however , that the foregoing shall not preclude communications or disclosures (i) necessary to implement the provisions of this Agreement or to comply with Securities and Exchange Commission disclosure obligations or the rules of any stock exchange or (ii) with public stockholders and/or analysts in the ordinary course of business for a transaction of the type contemplated by this Agreement.
Section 13.4 Notices . All notices or other communications required or permitted hereunder shall be in writing and shall be deemed given or delivered when delivered personally, by facsimile or when sent by registered or certified mail (postage prepaid, return receipt requested) or by an internationally recognized overnight courier service addressed as follows:
If to Buyer, to:
ACE Limited
ACE Global Headquarters
17 Woodbourne Avenue
Hamilton HM 08 Bermuda
Attention: General Counsel
Facsimile: (441) 296-7799
with a copy (which shall not constitute notice) to:
Mayer Brown LLP
71 South Wacker Drive
Chicago, Illinois 60606
 
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Attention: Edward S. Best
Facsimile: (312) 701-7711
If to Aon, to:
Aon Corporation
Aon Center
200 East Randolph Street
Chicago, Illinois 60601
Attention: Richard E. Barry
Facsimile: (312) 381-6165
with a copy (which shall not constitute notice) to:
Sidley Austin LLP
One South Dearborn Street
Chicago, Illinois 60603
Attention: Frederick C. Lowinger
                 Gary D. Gerstman
Facsimile: (312) 853-7036
or to such other address as such party may indicate by a notice delivered to the other party hereto.
Section 13.5 Successors and Assigns . This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns; provided , however , that neither party to this Agreement may assign its rights or delegate its obligations under this Agreement without the express prior written consent of the other party to this Agreement; provided , further , that, notwithstanding the foregoing, subject to applicable regulatory approvals, Buyer may, without the prior written consent of Aon, assign to one or more of its wholly owned subsidiaries all or a portion of its rights under this Agreement, provided that (1) no such assignment shall relieve Buyer of its obligations under this Agreement, (2) each wholly owned subsidiary of Buyer to which such rights have been assigned shall not further assign, sublicense or transfer (directly or indirectly, by operation of law or otherwise) such rights to any Person other than another wholly owned subsidiary of Buyer and (3) any such assignment(s) shall not delay the Closing.
Section 13.6 Access to Records after Closing . (a) For a period of six (6) years after the Closing Date, Aon and its representatives shall have reasonable access to all of the books and records of the Company and the Subsidiaries to the extent that such access may reasonably be required by Aon in connection with matters relating to or affected by the operations of the Company and the Subsidiaries prior to the Closing Date. Such access shall be afforded by Buyer upon receipt of reasonable advance notice and during normal business hours. Aon shall be solely responsible for any costs or expenses incurred by it pursuant to this Section 13.6(a) . If Buyer, the Company or the Subsidiaries shall desire to dispose of any of such books and records prior to the expiration of such six-year period, Buyer shall, prior to such disposition, give Aon a reasonable opportunity, at Aon’s expense, to segregate and remove such books and records as Aon may select.
 
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(b) For a period of six (6) years after the Closing Date, Buyer and its representatives shall have reasonable access to all of the books and records relating to the Company and the Subsidiaries which Aon may retain after the Closing Date. Such access shall be afforded by Aon upon receipt of reasonable advance notice and during normal business hours. Buyer shall be solely responsible for any costs and expenses incurred by it pursuant to this Section 13.6(b) . If Aon shall desire to dispose of any of such books and records prior to the expiration of such six-year period, Aon shall, prior to such disposition, give Buyer a reasonable opportunity, at Buyer’s expense, to segregate and remove such books and records as Buyer may select.
Section 13.7 Entire Agreement; Amendments . This Agreement, the Exhibits and Schedules referred to herein, the documents delivered pursuant hereto and the Confidentiality Agreement contain the entire understanding of the parties hereto with regard to the subject matter contained herein or therein, and supersede all other prior representations, warranties, agreements, understandings or letters of intent between or among any of the parties hereto. This Agreement shall not be amended, modified or supplemented except by a written instrument signed by an authorized representative of each of the parties hereto.
Section 13.8 Interpretation . Disclosure of any fact or item in any Schedule hereto referenced by a particular section in this Agreement shall be deemed to have been disclosed with respect to every other section in this Agreement only to the extent such disclosure is reasonably clear on its face that it would apply to such other section. Neither the specification of any dollar amount in any representation or warranty contained in this Agreement nor the inclusion of any specific item in any Schedule hereto is intended to imply that such amount, or higher or lower amounts, or the item so included or other items, are or are not material, and no party shall use the fact of the setting forth of any such amount or the inclusion of any such item in any dispute or controversy between the parties as to whether any obligation, item or matter not described herein or included in any Schedule is or is not material for purposes of this Agreement. Unless this Agreement specifically provides otherwise, neither the specification of any item or matter in any representation or warranty contained in this Agreement nor the inclusion of any specific item in any Schedule hereto is intended to imply that such item or matter, or other items or matters, are or are not in the ordinary course of business, and no party shall use the fact of the setting forth or the inclusion of any such item or matter in any dispute or controversy between the parties as to whether any obligation, item or matter not described herein or included in any Schedule is or is not in the ordinary course of business for purposes of this Agreement. To the extent that Aon becomes aware of any material error in any Schedule prior to the Closing, Aon shall promptly notify the Buyer of the error.
Section 13.9 Waivers . Any term or provision of this Agreement may be waived, or the time for its performance may be extended, by the party or parties entitled to the benefit thereof. Any such waiver shall be validly and sufficiently authorized for the purposes of this Agreement if, as to any party, it is authorized in writing by an authorized representative of such party. The failure of any party hereto to enforce at any time any provision of this Agreement shall not be construed to be a waiver of such provision, nor in any way to affect the validity of this
 
63

Agreement or any part hereof or the right of any party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall be held to constitute a waiver of any other or subsequent breach.
Section 13.10 Expenses . Except as expressly set forth herein, each party hereto will pay all costs and expenses incident to its negotiation and preparation of this Agreement and to its performance and compliance with all agreements and conditions contained herein on its part to be performed or complied with, including the fees, expenses and disbursements of its counsel, independent public accountants and other advisors.
Section 13.11 Partial Invalidity . Wherever possible, each provision hereof shall be interpreted in such manner as to be effective and valid under applicable law, but in case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such provision shall be ineffective to the extent, but only to the extent, of such invalidity, illegality or unenforceability without invalidating the remainder of such invalid, illegal or unenforceable provision or provisions or any other provisions hereof, unless such a construction would be unreasonable.
Section 13.12 Execution in Counterparts . This Agreement may be executed in counterparts, each of which shall be considered an original instrument, but all of which shall be considered one and the same agreement, and shall become binding when one or more counterparts have been signed by each of the parties hereto and delivered to the other party.
Section 13.13 Further Assurances . Upon the terms and subject to the conditions herein, each of the parties hereto agrees to use its reasonable best efforts to take or cause to be taken all action, to do or cause to be done, and to assist and cooperate with the other party in doing, all things necessary, proper or advisable under applicable Requirements of Law to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement, including: (i) the satisfaction of the conditions precedent to the obligations of any of the parties hereto; (ii) the defending of any lawsuits or other legal proceedings, whether judicial or administrative, challenging this Agreement or the performance of the obligations hereunder; and (iii) the execution and delivery of such instruments, and the taking of such other actions, as the other party hereto may reasonably require in order to carry out the intent of this Agreement.
Section 13.14 Disclaimer of Warranties . Aon makes no representations or warranties with respect to any projections, forecasts or forward-looking information provided to Buyer. There is no assurance that any projected or forecasted results will be achieved. EXCEPT AS TO THOSE MATTERS EXPRESSLY COVERED BY THE REPRESENTATIONS AND WARRANTIES IN THIS AGREEMENT, AON IS SELLING THE SHARES (AND THE BUSINESS AND ASSETS OF THE COMPANY AND THE SUBSIDIARIES REPRESENTED THEREBY) ON AN “AS IS, WHERE IS” BASIS AND AON DISCLAIMS ALL OTHER WARRANTIES, REPRESENTATIONS AND GUARANTEES WHETHER EXPRESS OR IMPLIED. AON MAKES NO REPRESENTATION OR WARRANTY AS TO MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE AND NO IMPLIED WARRANTIES WHATSOEVER. Buyer acknowledges that neither Aon nor any of its representatives or Affiliates or any other Person has made any representation or warranty,
 
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express or implied, as to the accuracy or completeness of any memoranda, charts or summaries heretofore made available by Aon or its representatives or Affiliates to Buyer or any other information which is not included in this Agreement or the Schedules hereto, and none of Aon, nor any of its representatives or its Affiliates or any other Person will have or be subject to any liability to Buyer, any Affiliate of Buyer or any other Person resulting from the distribution of any such information to, or use of any such information by, Buyer, any Affiliate of Buyer or any of their agents, consultants, accountants, counsel or other representatives. Notwithstanding anything to the contrary in this Agreement, Buyer acknowledges and agrees that Aon makes no representation or warranty with respect to, and nothing contained in this Agreement, or in any other agreement, document or instrument to be delivered in connection with the transactions contemplated hereby, is intended or shall be construed to be a representation or warranty (express or implied) of Aon, for any purpose under this Agreement or any other agreement, document or instrument to be delivered in connection with the transactions contemplated hereby, with respect to (a) the adequacy or sufficiency of any of the reserves of the Underwriting Companies or (b) the effect of the adequacy or sufficiency of reserves of the Underwriting Companies on any “line item” or asset, liability or equity amount. Buyer acknowledges and agrees that it is not entitled to rely upon any representations or warranties or other statements of fact or opinion, other than the representations and warranties expressly set forth in this Agreement.
Section 13.15 Governing Law; Submission to Jurisdiction . This Agreement shall be governed by and construed in accordance with the internal laws (as opposed to the conflicts of law provisions) of the State of New York. By the execution and delivery of this Agreement, Buyer and Aon submit to the personal jurisdiction of any state or federal court in the State of New York in any suit or proceeding arising out of or relating to this Agreement.
Section 13.16 Waiver of Jury Trial . Each of Buyer and Aon hereby expressly waives any right to trial by jury in any dispute, whether sounding in contract, tort or otherwise, between Buyer and Aon arising out of or related to the transactions contemplated by this Agreement or any of the Seller Ancillary Agreements or Buyer Ancillary Agreements, or any other instrument or document executed or delivered in connection herewith or therewith. Either Buyer or Aon may file an original counterpart or a copy of this Agreement with any court as written evidence of the consent of the parties to the waiver of their right to trial by jury.
[Remainder of page intentionally left blank; signature page follows.]
 
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written.

AON CORPORATION	
		
By:	 	 	
Name:	 		
Title:	 		
	
ACE LIMITED	
		
By:	 	 	
Name:	 		
Title:	 		
Signature Page to Stock Purchase Agreement

Annex A
Subsidiaries

Name of Subsidiary	  	Jurisdiction of
Incorporation	  	Record Owner of Capital Stock
of Subsidiary	
			
Combined Life Assurance Company of Europe, Ltd.	  	Ireland	  	Combined Insurance Company of America	
			
Combined International Services, Ltd.	  	United Kingdom	  	Combined Insurance Company of America	
			
Combined Insurance Company of Europe, Ltd.	  	Ireland	  	Combined Insurance Company of America	
			
Combined Seguros Mexico, S.A. de C.V.	  	Mexico	  	Combined Insurance Company of America (99%)
Aon Corporation (1%)	
			
Combined Life Insurance Company of Australia, Ltd.	  	Australia	  	Combined Insurance Company of America	
			
Combined Life Insurance Company of New York	  	New York	  	Combined Insurance Company of America	
			
Combined Insurance Company of New Zealand Limited	  	New Zealand	  	Combined Insurance Company of America (99%)
Aon Corporation (1%)	
			
Combined Insurance (Thailand) Limited	  	Thailand	  	S.E.O.S. Limited (75%)
Olympic Health Management Services, Inc. (25%)	
			
Employee Benefit Communications, Inc.	  	Florida	  	Combined Insurance Company of America	
			
C.I.C.A. Superannuation Nominees Pty. Ltd.	  	Australia	  	Combined Insurance Company of America (99%)
Aon Special Risk Resources, Inc. (1%)	
			
Superannuation Fund (CICNZ) Limited	  	New Zealand	  	Combined Insurance Company of America (99%)
Aon Corporation (1%)	
			
VOL Properties Corporation	  	Delaware	  	Combined Insurance Company of America	
			
S.E.O.S. Limited	  	Thailand	  	Chiewchanvit Company Limited (51%)
Combined Insurance Company of America (49%)	
			
Chiewchanvit Company Limited	  	Thailand	  	7 Thai Individual Shareholders (51%)
Combined Insurance Company of America (49%)	

Exhibit 10.12

	 	CLIFFORD CHANCE LLP	
CONFORMED COPY
AMENDMENT AND RESTATEMENT AGREEMENT
dated 14 December 2007
for
ACE AUSTRALIA HOLDINGS PTY LIMITED
as Original Borrower
with
ACE LIMITED
as Guarantor
arranged by
THE ROYAL BANK OF SCOTLAND PLC
and
HSBC SECURITIES (USA) INC.
with
THE ROYAL BANK OF SCOTLAND PLC
as Agent

RELATING TO A
CREDIT AGREEMENT DATED 13 DECEMBER 2005
AS AMENDED ON 22 JUNE 2007

 

CONTENTS

Clause	 	 	  	Page	
1.	 	Definitions And Interpretation	  	1	
			
2.	 	Conditions Precedent	  	2	
			
3.	 	Transfer Of Commitment	  	2	
			
4.	 	Amendment And Restatement	  	4	
			
5.	 	Extension Fee	  	4	
			
6.	 	Representations	  	4	
			
7.	 	Continuity And Further Assurance	  	5	
			
8.	 	Fees, Costs And Expenses	  	5	
			
9.	 	Miscellaneous	  	6	
			
10.	 	Governing Law	  	6	

Schedule 1	 	C ONDITIONS P RECEDENT	  	7	
			
Schedule 2	 	R ESTATED A GREEMENT	  	9	
 
- 1 -

THIS AGREEMENT is dated 14 December 2007 and made between:
 
(1)	ACE AUSTRALIA HOLDINGS PTY LIMITED (ACN 116 987 618) as borrower (the “ Original Borrower ”);	
 
(2)	ACE LIMITED as guarantor (the “ Guarantor ”);	
 
(3)	THE ROYAL BANK OF SCOTLAND PLC and HSBC SECURITIES (USA) INC. as mandated lead arrangers (the “ Lead Arrangers ”);	
 
(4)	THE ROYAL BANK OF SCOTLAND PLC as agent for the Banks (the “ Agent ”);	
 
(5)	THE BANKS (as defined in the Original Credit Agreement); and	
 
(6)	CITIBANK, N.A., SYDNEY BRANCH (Australian Business Number 34 072 814 058) as the new bank (the “ New Bank ”).	
RECITALS:
 
(A)	The Banks made a facility available to the Original Borrower pursuant to the Original Credit Agreement (as defined below).	
 
(B)	National Australia Bank Limited wishes to transfer the whole of its Commitment to the New Bank.	
 
(C)	The parties hereto have agreed to amend the Original Credit Agreement as set out below.	
IT IS AGREED as follows:
 
1.	DEFINITIONS AND INTERPRETATION	
 
1.1	Definitions	
In this Agreement:
“ Effective Date ” means 19 December 2007.
“ Exiting Bank ” means National Australia Bank Limited.
“ Original Credit Agreement ” means the A$100,000,000 credit agreement dated 13 December 2005 (as amended on 22 June 2007) between the Original Borrower, the Guarantor, the Lead Arrangers, the Agent and the Banks.
“ Restated Agreement ” means the Original Credit Agreement, as amended and restated by this Agreement, the terms of which are set out in Schedule 2 ( Restated Agreement ).
 
1.2	Incorporation of defined terms	
 
 	(a)	Unless a contrary indication appears, a term defined in the Original Credit Agreement has the same meaning in this Agreement.	
 
 	(b)	The principles of construction set out in the Original Credit Agreement shall have effect as if set out in this Agreement.	
 
- 1 -

1.3	Clauses	
In this Agreement any reference to a “Clause” or a “Schedule” is, unless the context otherwise requires, a reference to a Clause or a Schedule to this Agreement.
 
1.4	Third party rights	
A person who is not a party to this Agreement has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce or to enjoy the benefit of any term of this Agreement.
 
1.5	Designation	
Each of the Original Borrower and the Agent designates this Agreement as a Finance Document.
 
2.	CONDITIONS PRECEDENT	
The provisions of Clause 3 ( Transfer of Commitment ) and Clause 4 ( Amendment and Restatement ) shall automatically be effective as of the Effective Date provided that not later than two (2) Business Days before the Effective Date, the Agent has received each of the documents listed in Schedule 1 ( Conditions Precedent ) in a form and substance satisfactory to it. The Agent shall notify the Obligors, the Banks and the New Bank promptly upon being so satisfied.
 
3.	TRANSFER OF COMMITMENT	
 
3.1	Transfer by novation	
 
 	(a)	On the Effective Date (whether or not a Default is continuing), the Exiting Bank shall transfer by novation all of its Commitment, rights and obligations under the Finance Documents to the New Bank, so that:	
 
 	(i)	the Exiting Bank shall cease to be a Bank under the Restated Agreement and its Commitment shall be reduced to zero;	
 
 	(ii)	the New Bank shall become a Bank under the Restated Agreement with a Commitment of A$16,000,000; and	
 
 	(iii)	Schedule 1 ( The Banks ) of the Restated Agreement shall be amended by the deletion of “National Australia Bank Limited” and its replacement by “Citibank, N.A., Sydney Branch”.	
 
 	(b)	The transfer by novation set out in Clause 3.1 ( Transfer by novation ) shall take effect on the Effective Date so that:	
 
 	(i)	to the extent that in Clause 3.1 ( Transfer by novation ) the Exiting Bank seeks to transfer by novation its rights, benefits and obligations under the Finance Documents, each of the Obligors and the Exiting Bank shall be released from further obligations towards one another under the Finance Documents and their respective rights against one another under the Finance Documents shall be cancelled (being the “ Discharged Rights and Obligations ”);	
 
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 	(ii)	each of the Obligors and the New Bank shall assume obligations towards one another and/or acquire rights against one another which differ from the Discharged Rights and Obligations only insofar as that Obligor and the New Bank have assumed and/or acquired the same in place of that Obligor and the Exiting Bank;	
 
 	(iii)	the Agent, the Lead Arrangers, the New Bank and the Banks (other than the Exiting Bank) shall acquire the same rights and assume the same obligations between themselves as they would have acquired and assumed had the New Bank been a Bank with the rights and/or obligations acquired or assumed by it as a result of the transfer and to that extent the Agent, the Lead Arrangers and the Banks (including the Exiting Bank) shall each be released from further obligations to each other under the Finance Documents; and	
 
 	(iv)	the New Bank shall become a party to the Restated Agreement as a “Bank”.	
 
 	(c)	Any amounts payable to the Banks by the Obligors pursuant to any Finance Document on or before the Effective Date (including, without limitation, all interest, fees and commission payable on the Effective Date) in respect of any period ending on or prior to the Effective Date shall be for the account of the Banks (including, for the avoidance of doubt, the Exiting Bank), and the New Bank shall not have any interest in, or any rights in respect of, any such amount.	
 
3.2	Limitation of responsibility of Existing Banks	
 
 	(a)	The New Bank confirms to each Bank (including, for the purposes of paragraph (i) and (ii) only, the Exiting Bank) and the other Finance Parties that it:	
 
 	(i)	has received a copy of the Original Credit Agreement together with such other information as it has required in connection with this transaction;	
 
 	(ii)	has made (and shall continue to make) its own independent investigation and assessment of the financial condition and affairs of each Obligor and its related entities in connection with its participation in this Agreement and the Restated Agreement and has not relied exclusively on any information provided to it by any Bank in connection with any Finance Document; and	
 
 	(iii)	will continue to make its own independent appraisal of the creditworthiness of each Obligor and its related entities whilst any amount is or may be outstanding under the Finance Documents or any Commitment is in force.	
 
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 	(b)	Unless expressly agreed to the contrary, the Banks (including, for the avoidance of doubt, the Exiting Bank) make no representation or warranty and assume no responsibility to the New Bank for:	
 
 	(i)	the legality, validity, effectiveness, adequacy or enforceability of the Finance Documents or any other documents;	
 
 	(ii)	the financial condition of any Obligor;	
 
 	(iii)	the performance and observance by any Obligor of its obligations under the Finance Documents or any other documents; or	
 
 	(iv)	the accuracy of any statements (whether written or oral) made in or in connection with the Finance Documents or any other document,	
and any representations or warranties implied by law are excluded.
 
 	(c)	Nothing in any Finance Document obliges any Bank to:	
 
 	(i)	accept a re-transfer from the New Bank of any of the rights and obligations transferred by novation under this Agreement; or	
 
 	(ii)	support any losses directly or indirectly incurred by the New Bank by reason of the non-performance by any Obligor of its obligations under the Finance Documents or otherwise.	
 
3.3	Administrative Details	
The New Bank confirms that it has delivered to the Agent its Facility Office details and address, fax number and attention details for the purposes of Clause 33 ( Notices ) of the Restated Agreement.
 
4 .	AMENDMENT AND RESTATEMENT	
With effect from the Effective Date, the Original Credit Agreement shall be amended and restated so that it shall be read and construed for all purposes as set out in Schedule 2 ( Restated Agreement ).
 
5.	EXTENSION FEE	
The Original Borrower agrees to pay within three (3) Business Days of the Effective Date of this Agreement an extension fee (the “ Extension Fee ”) to each Bank (excluding the Exiting Bank) equal to 0.075 per cent. of such Bank’s Commitment as at the Effective Date.
 
6.	REPRESENTATIONS	
The Original Borrower is deemed to make:
 
 	(a)	on the date of this Agreement, each representation set out in Clause 13 ( Borrower Representations ) of the Original Credit Agreement and the Guarantor is deemed to make each representation set out in Clause 14	
 
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 	( Guarantor Representations) of the Original Credit Agreement in respect of it and of the Original Borrower (by reference to the facts and circumstances then existing); and	
 
 	(b)	on the Effective Date, each representation set out in Clause 13 ( Borrower Representations ) of the Restated Agreement and the Guarantor is deemed to make each representation set out in Clause 14 ( Guarantor Representations) of the Restated Agreement in respect of it and of the Original Borrower (by reference to the facts and circumstances then existing), in each case, as if all references therein to “this Agreement” and the “Finance Documents” included a reference to this Agreement.	
 
7.	CONTINUITY AND FURTHER ASSURANCE	
 
7.1	Continuing obligations	
The provisions of the Original Credit Agreement and the other Finance Documents shall, save as amended by this Agreement, continue in full force and effect.
 
7.2	Further assurance	
Each Obligor shall, at the request of the Agent and at its own expense, do all such acts and things necessary or desirable to give effect to the amendments effected or to be effected pursuant to this Agreement.
 
8.	FEES, COSTS AND EXPENSES	
 
8.1	Transaction expenses	
The Original Borrower shall promptly on demand pay the Agent and the Lead Arrangers the amount of all reasonable and documented costs and expenses (including reasonable and documented legal fees of a single counsel for the Agent and the Lead Arrangers in each relevant jurisdiction) incurred by any of them in connection with the negotiation, preparation, printing and execution of this Agreement and any other documents referred to in this Agreement.
 
8.2	Enforcement costs	
The Original Borrower shall, within three (3) Business Days of demand, pay to each Finance Party the amount of all reasonable and documented costs and expenses (including reasonable and documented legal fees of a single counsel for the Agent and the Finance Parties in each relevant jurisdiction) incurred by that Finance Party in connection with the enforcement of, or the preservation of any rights under, this Agreement.
 
8.3	Stamp taxes	
The Original Borrower shall pay and, within three (3) Business Days of demand, indemnify each Finance Party against any cost, loss or liability that Finance Party incurs in relation to all stamp duty, registration and other similar Taxes payable in respect of this Agreement.
 
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9.	MISCELLANEOUS	
 
9.1	Incorporation of terms	
The provisions of Clause 33 ( Notices ), Clause 32 ( Remedies and Waivers, Partial Invalidity ) and Clause 37 ( Jurisdiction ) of the Original Credit Agreement shall be incorporated into this Agreement as if set out in full in this Agreement and as if references in those clauses to “this Agreement” or “the Finance Documents” are references to this Agreement.
 
9.2	Counterparts	
This Agreement may be executed in any number of counterparts, and this has the same effect as if the signatures on the counterparts were on a single copy of this Agreement.
 
10.	GOVERNING LAW	
This Agreement is governed by English law.
This Agreement has been entered into on the date stated at the beginning of this Agreement.
 
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SCHEDULE 1
C ONDITIONS P RECEDENT
 
1.	Obligors	
 
 	(a)	A copy of the constitutional documents of each Obligor or a certificate of an authorised signatory of each relevant Obligor certifying that the constitutional documents previously delivered to the Agent for the purposes of the Original Credit Agreement have not been amended and remain in full force and effect.	
 
 	(b)	A copy of a resolution of the board of directors of each Obligor:	
 
 	(i)	approving the terms of, and the transactions contemplated by, this Agreement and resolving that it execute this Agreement; and	
 
 	(ii)	authorising a specified person or persons to execute this Agreement on its behalf.	
 
 	(c)	A specimen of the signature of each person authorised by the resolution referred to in paragraph (b) above.	
 
 	(d)	A certificate of the Guarantor (signed by an officer of the Guarantor) confirming that borrowing or guaranteeing, as appropriate, the Facility would not cause any borrowing, guaranteeing or similar limit binding on any Obligor to be exceeded.	
 
 	(e)	A certificate of an authorised signatory of the relevant Obligor certifying that each copy document relating to it specified in this Schedule 1 is correct, complete and in full force and effect as at a date no earlier than the date of this Agreement.	
 
2.	Legal Opinions	
 
 	(a)	A legal opinion of Clifford Chance LLP, legal advisers to the Agent in England, substantially in the form distributed to the Banks prior to signing this Agreement.	
 
 	(b)	A legal opinion of DLA Phillips Fox, legal advisors to the Original Borrower in Australia, substantially in the form distributed to the Banks prior to signing this Agreement.	
 
 	(c)	A legal opinion of Maples and Calder, legal advisors to the Guarantor in the Cayman Islands, substantially in the form distributed to the Banks prior to signing this Agreement.	
 
3.	Other documents and evidence	
 
 	(a)	A copy of any other authorisation or other document, opinion or assurance (including any APRA authorisation) which the Agent considers to be	
 
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 	necessary or desirable (if it has notified the Guarantor accordingly) in connection with the entry into and performance of the transaction contemplated by this Agreement or for the validity and enforceability of this Agreement.	
 
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SCHEDULE 2
R ESTATED A GREEMENT
 
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SIGNATURES
The Original Borrower

ACE AUSTRALIA HOLDINGS PTY LIMITED	 		  		  		
				
EXECUTED by ACE AUSTRALIA	 	)	  		  		
HOLDINGS PTY LIMITED in	 	)	  		  		
accordance with section 127(1) of the	 	)	  		  		
Corporations Act 2001 (Cwlth) by	 	)	  		  		
authority of its directors:	 	)	  		  		
	 	)	  		  		
STEVEN CROUCH	 	)	  	ASHLEY MULLINS	  		
Signature of director	 	)	  	Signature of company secretary*	  		
	 	)	  	*  delete whichever is not applicable	  		
	 	)	  		  		
	 	)	  		  		
STEVE CROUCH	 	)	  	Ashley Mullins	  		
Name of director (block letters)	 	)	  	Name of company secretary* (block letters)	  		
	 		  	*  delete whichever is not applicable	  		

The Guarantor	 		 		 		 		
					
ACE LIMITED	 		 		 		 		
						
By:	 	ROBERT CUSUMANO	 		 	By:	 	PAUL MEDINI	 		

									
The Lead Arrangers	 		 		 		
	
THE ROYAL BANK OF SCOTLAND PLC	
					
By:	 	DAVID BATTLEY	 		 		 		
	
HSBC SECURITIES (USA) INC.	
					
By:	 	DANIEL G. SERRAO	 		 		 		
				
The Agent	 		 		 		
	
THE ROYAL BANK OF SCOTLAND PLC	
					
By:	 	DAVID BATTLEY	 		 		 		
				
The Banks	 		 		 		
				
HSBC BANK AUSTRALIA LIMITED	 		 		 		
					
By:	 	N. LEE	 		 	By:	 	THOMAS MCKAY	
	
THE ROYAL BANK OF SCOTLAND PLC, AUSTRALIA BRANCH	
					
By:	 	ALAN HAMES	 		 		 		
	
ABN AMRO BANK N.V., AUSTRALIAN BRANCH	
					
By:	 	TREVOR WATSON	 		 	By:	 	ERIN MCKENZIE	
	
BARCLAYS BANK PLC AUSTRALIAN BRANCH	
					
By:	 	CLIFF BAYLIS	 		 		 		
				
The Exiting Bank	 		 		 		
	
NATIONAL AUSTRALIA BANK LIMITED	
					
By:	 	CLINTON M. JOHNSON	 		 		 		

									
The New Bank	 		 		 		
				
CITIBANK, N.A., SYDNEY BRANCH	 		 		 		
					
By:	 	MARIA OLIVER	 		 	By:	 	GLENN PHILLIPS	

Exhibit 10.13

	 	LIMITED LIABILITY PARTNERSHIP	
ACE AUSTRALIA HOLDINGS PTY LIMITED
as Original Borrower
ACE LIMITED
as Guarantor
THE ROYAL BANK OF SCOTLAND plc
and
HSBC SECURITIES (USA) INC.
as Lead Arrangers
THE ROYAL BANK OF SCOTLAND plc
as Agent
and
OTHERS

A$100,000,000
CREDIT AGREEMENT

CONTENTS

Clause	 	 	  	Page	
1.	 	Definitions And Interpretation	  	1	
			
2.	 	The Facility	  	17	
			
3.	 	Utilisation Of The Facility	  	18	
			
4.	 	Repayment	  	19	
			
5.	 	Prepayment And Cancellation	  	19	
			
6.	 	Interest	  	20	
			
7.	 	Interest Periods	  	20	
			
8.	 	Taxes	  	20	
			
9.	 	Tax Receipts	  	21	
			
10.	 	Increased Costs	  	22	
			
11.	 	Illegality	  	24	
			
12.	 	Mitigation	  	24	
			
13.	 	Borrower Representations	  	24	
			
14.	 	Guarantor Representations	  	28	
			
15.	 	Affirmative Covenants	  	34	
			
16.	 	Negative Covenants	  	37	
			
17.	 	Information Covenants	  	41	
			
18.	 	Financial Covenants	  	45	
			
19.	 	Events Of Default	  	46	
			
20.	 	Fees	  	49	
			
21.	 	Costs And Expenses	  	49	
			
22.	 	Default Interest And Break Costs	  	50	
			
23.	 	Indemnities	  	51	
			
24.	 	Currency Of Account And Payment	  	52	
			
25.	 	Payments	  	52	
			
26.	 	Set-Off	  	54	
			
27.	 	Sharing	  	54	
			
28.	 	The Agent, The Lead Arrangers And The Banks	  	55	
			
29.	 	Assignments And Transfers	  	61	
			
30.	 	Calculations And Evidence Of Debt	  	67	
			
31.	 	Guarantee And Indemnity	  	68	

					
32.	 	Remedies And Waivers, Partial Invalidity	  	70	
			
33.	 	Notices	  	71	
			
34.	 	Counterparts	  	72	
			
35.	 	Amendments	  	73	
			
36.	 	Governing Law	  	73	
			
37.	 	Jurisdiction	  	73	

Schedule 1	 	T HE B ANKS	  	75	
			
Schedule 2	 	C ONDITIONS P RECEDENT	  	76	
		
Part I Conditions Precedent To Initial Utilisation	  	76	
		
Part II Conditions Precedent Required To Be Delivered By A Borrower Transferee	  	77	
			
Schedule 3	 	U TILISATION R EQUEST	  	79	
			
Schedule 4	 	M ARGIN S CHEDULE	  	80	
			
Schedule 5	 	M ANDATORY C OST F ORMULAE	  	82	
			
Schedule 6	 	F ORM O F B ORROWER T RANSFER C ERTIFICATE	  	84	
			
Schedule 7	 	F ORM O F T RANSFER C ERTIFICATE	  	86	
			
Schedule 8	 	F ORM O F C ONFIDENTIALITY U NDERTAKING	  	89	
			
Schedule 9	 	F ORM O F C OMPLIANCE C ERTIFICATE	  	92	
			
Schedule 10	 	E XISTING L IENS	  	93	

THIS AGREEMENT dated 13 December 2005, as amended on 22 June 2007 and as amended and restated on 19 December 2007, is made between:
 
(1)	ACE AUSTRALIA HOLDINGS PTY LIMITED ACN 116 987 618 as borrower (the “ Original Borrower ”);	
 
(2)	ACE LIMITED as guarantor (the “ Guarantor ”);	
 
(3)	THE ROYAL BANK OF SCOTLAND plc and HSBC SECURITIES (USA) INC. as mandated lead arrangers of the Facility (the “ Lead Arrangers ”);	
 
(4)	THE ROYAL BANK OF SCOTLAND plc as agent for the Banks (the “ Agent ”); and	
 
(5)	THE BANKS as defined below.	
IT IS AGREED as follows:
 
1.	DEFINITIONS AND INTERPRETATION	
 
1.1	Definitions	
In this Agreement:
“ ACE INA ” means ACE INA Holdings, Inc.
“ Additional Borrower ” means ACE Limited or one of its Subsidiaries at any time after it has become a borrower in accordance with Clause 29.3 ( Novation by Original Borrower ).
“ Adjusted Consolidated Debt ” means, at any time, an amount equal to (a) the then outstanding Consolidated Debt of the Guarantor and its Subsidiaries plus (b) to the extent exceeding an amount equal to 15 per cent. of Total Capitalisation, the then issued and outstanding amount of Preferred Securities (other than any Mandatorily Convertible Preferred Securities).
“ Affected Bank ” means any Bank that:
 
 	(a)	has made, or given notice to an Obligor that an event or circumstance has occurred that may give rise to, a demand for compensation under Clause 8.1 ( Tax Gross-up ) or Clause 10 ( Increased Costs ), or	
 
 	(b)	has given notice to an Obligor (which notice has not been withdrawn) of any event or circumstance of a type described in Clause 11 ( Illegality ),	
but only for so long as the event or the circumstance giving rise to such demand or notice is continuing.
“ Affiliate ” means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person. For the purposes of this definition, the term “control” (including the terms “controlling”, “controlled by” and “under common control with”) of a Person means the possession, direct or indirect, of the power to vote 5 per cent. or
 
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more of the Voting Interests of such Person or to direct or cause the direction of the management and policies of such Person, whether through the ownership of Voting Interests, by contract or otherwise.
“ Approved Investment ” means any Investment that was made by the Guarantor or any of its Subsidiaries pursuant to investment guidelines set forth by the board of directors of the Guarantor which are consistent with past practices.
“ APRA ” means the Australian Prudential Regulation Authority.
“ Authorised Signatory ” means, in relation to an Obligor, any person who is duly authorised (in such manner as may be reasonably acceptable to the Agent) and in respect of whom the Agent has received a certificate signed by a director or another Authorised Signatory of such Obligor setting out the name and signature of such person and confirming such person’s authority to act.
“ Availability Period ” means the period from the Commencement Date to 31 December 2005.
“ Bank ” means any financial institution:
 
 	(a)	named in Schedule 1 ( The Banks ); or	
 
 	(b)	which has become a party hereto in accordance with Clause 29.5 ( Assignments and Transfers by Banks ), Clause 29.6 ( Assignments by Banks ) or Clause 29.7 ( Transfers by Banks ),	
and which has not ceased to be a party hereto in accordance with the terms hereof.
“ Base Amount ” shall have the meaning given to that term in sub-clause 18.2.2 of Clause 18.2 ( Consolidated Net Worth ).
“ Borrower ” means the Original Borrower unless it has ceased to be a Borrower in accordance with Clause 29.3 ( Novation by Original Borrower ) or the Additional Borrower.
“ Borrower Transferee ” means a Person to which the Original Borrower is required to transfer by novation all or part of the Original Borrower’s rights, benefits and obligations under the Finance Documents in accordance with Clause 29.3 ( Novation by Original Borrower ).
“ Borrower Transfer Certificate ” means a certificate substantially in the form set out in Schedule 6 ( Form of Borrower Transfer Certificate ) signed by the Original Borrower and the Borrower Transferee under which:
 
 	(a)	the Original Borrower seeks to procure the transfer to the Borrower Transferee of all or a part of the Original Borrower’s rights, benefits and obligations under the Finance Documents upon and subject to the terms and conditions set out in Clause 29.4 ( Transfer by Original Borrower ); and	
 
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 	(b)	such Borrower Transferee undertakes to perform the obligations it will assume as a result of delivery of such certificate to the Agent contemplated in Clause 29.4 ( Transfer by Original Borrower ).	
“ Business Day ” means a day (other than a Saturday or Sunday) on which banks generally are open for business in London and Sydney.
“ Capitalised Leases ” means all leases that have been or should be, in accordance with GAAP, recorded as capitalised leases.
“ Change of Control ” means the occurrence of any of the following: (a) any Person or two or more Persons acting in concert shall have acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934), directly or indirectly, of Voting Interests of the Guarantor (or other securities convertible into such Voting Interests) representing 30 per cent. or more of the combined voting power of all Voting Interests of the Guarantor or (b) a majority of the board of directors of the Guarantor shall not be Continuing Members.
“ Commencement Date ” means the date of this Agreement.
“ Commitment ” means, in relation to a Bank at any time and save as otherwise provided herein, the amount set opposite its name under the heading “ Commitment ” in Schedule 1 (The Banks) or in relation to any Bank not party to this Agreement on the date hereof, the amount of any Commitment transferred to it under this Agreement.
“ Compliance Certificate ” means a certificate substantially in the form set out in Schedule 9 ( Form of Compliance Certificate ).
“ Consolidated ” refers to the consolidation of accounts in accordance with GAAP.
“ Consolidated Debt ” means at any date the Debt of the Guarantor and its Consolidated Subsidiaries, determined on a Consolidated basis as of such date.
“ Consolidated Net Income ” means, for any period, the net income of the Guarantor and its Consolidated Subsidiaries, determined on a Consolidated basis for such period.
“ Consolidated Net Worth ” means at any date the Consolidated stockholder’s equity of the Guarantor and its Consolidated Subsidiaries determined as of such date, provided that such determination for the purposes of Clause 18.1 ( Adjusted Consolidated Debt to Total Capitalisation Ratio ), Clause 18.2 ( Consolidated Net Worth ) and Clause 16.1 ( Liens ) shall be made without giving effect to adjustments pursuant to Statement No. 115 of the Financial Accounting Standards Board of the United States of America.
“ Consolidated Subsidiary ” means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of the Guarantor in its consolidated financial statements if such statements were prepared as of such date.
 
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“ Contingent Obligation ” means, with respect to any Person, any obligation or arrangement of such Person to guarantee or indemnify or intended to guarantee or indemnify any Debt, leases, dividends or other payment obligations (“ primary obligations ”) of any other Person (the “ primary obligor ”) in any manner, whether directly or indirectly, including, without limitation:
 
 	(a)	the direct or indirect guarantee, endorsement (other than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of the obligation of a primary obligor;	
 
 	(b)	the obligation to make take-or-pay or similar payments, if required, regardless of non-performance by any other party or parties to an agreement; or	
 
 	(c)	any obligation of such Person, whether or not contingent:	
 
 	(i)	to purchase any such primary obligation or any property constituting direct or indirect security therefor;	
 
 	(ii)	to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor;	
 
 	(iii)	to purchase property, assets, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation; or	
 
 	(iv)	otherwise to assure or hold harmless the holder of such primary obligation against loss in respect thereof,	
provided, however, that Contingent Obligations shall not include any obligations of any such Person arising under insurance contracts entered into in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made (or, if less, the maximum amount of such primary obligation for which such Person may be liable pursuant to the terms of the instrument evidencing such Contingent Obligation) or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such person is required to perform thereunder), as determined by such Person in good faith.
“ Continuing Member ” means a member of the Board of Directors of the Guarantor who either (i) was a member of the Guarantor’s Board of Directors on the date of execution and delivery of this Agreement by the Guarantor and has been such continuously thereafter or (ii) became a member of such Board of Directors after such date and whose election or nomination for election was approved by a vote of the majority of the Continuing Members then members of the Guarantor’s Board of Directors.
 
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“ Corporations Act (Australia) ” means the Corporations Act 2001 of Australia.
“ Debenture ” means debt securities issued by the Guarantor or ACE INA to a Special Purpose Trust in exchange for proceeds of Preferred Securities and common securities of such Special Purpose Trust.
“ Debt ” of any Person means, without duplication for purposes of calculating financial ratios:
 
 	(a)	all indebtedness of such Person for borrowed money;	
 
 	(b)	all obligations of such Person for the deferred purchase price of property or services (other than trade payables incurred in the ordinary course of such Person’s business);	
 
 	(c)	all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments;	
 
 	(d)	all obligations of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property);	
 
 	(e)	all obligations of such Person as lessee under Capitalised Leases (excluding imputed interest);	
 
 	(f)	all obligations of such Person under acceptance, letter of credit or similar facilities;	
 
 	(g)	all obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any Equity Interests (except for obligations to pay for Equity Interests within customary settlement periods) in such Person or any other Person or any warrants, rights or options to acquire such capital stock (excluding payments under a contract for the forward sale of ordinary shares of such Person issued in a public offering), valued, in the case of Redeemable Preferred Interests, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends;	
 
 	(h)	all Contingent Obligations of such Person in respect of Debt (of the types described above) of any other Person; and	
 
 	(i)	all indebtedness and other payment obligations referred to in paragraphs (a) through (h) above of another Person secured by (or for which the holder of such Debt has an existing right, contingent or otherwise, to be secured by) any Lien on property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such indebtedness or other payment obligations,	
 
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provided, however, that the amount of any Debt of such Person under paragraph (i) above shall, if such Person has not assumed or otherwise become liable for such Debt, be limited to the lesser of the principal amount of such Debt or the fair market value of all property of such Person securing such Debt; provided further that “ Debt ” shall not include obligations in respect of insurance or reinsurance contracts entered into in the ordinary course of business or any obligation of such Person (1) to purchase securities (or other property) which arises out of or in connection with the sale of the same or substantially similar securities (or other property) or (2) to return collateral consisting of securities arising out of or in connection with the loan of the same or substantially similar securities, provided further that, solely for the purposes of Clause 18.1 ( Adjusted Consolidated Debt to Total Capitalisation Ratio ) and Clause 18.1 ( Consolidated Net Worth ) and the definitions of “Adjusted Consolidated Debt” and “Total Capitalisation”, “ Debt ” shall not include (x) any contingent obligations of any Person under or in connection with acceptance, letter of credit or similar facilities or (y) obligations of the Guarantor or ACE INA under any Debentures or under any subordinated guarantee or any Preferred Securities or obligations of a Special Purpose Trust under any Preferred Securities.
“ Default ” means an Event of Default or a Potential Event of Default.
“ Environmental Action ” means any action, suit, demand, demand letter, claim, notice of non-compliance or violation, notice of liability or potential liability, investigation, proceeding, consent order or consent agreement relating in any way to any Environmental Law, any Environmental Permit or Hazardous Material or arising from alleged injury or threat to health, safety or the environment, including, without limitation, (a) by any governmental or regulatory authority for enforcement, cleanup, removal, response, remedial or other actions or damages and (b) by any governmental or regulatory authority or third party for damages, contribution, indemnification, cost recovery, compensation or injunctive relief.
“ Environmental Law ” means any federal, state, local or foreign statute, law, ordinance, rule, regulation, code, order, writ, judgment, injunction, decree or judicial or agency interpretation, policy or guidance relating to pollution or protection of the environment, health, safety or natural resources, including, without limitation, those relating to the use, handling, transportation, treatment, storage, disposal, release or discharge of Hazardous Materials.
“ Environmental Permit ” means any permit, approval, identification number, license or other authorisation required under any Environmental Law.
“ Equity Interests ” means, with respect to any Person, shares of capital stock of (or other ownership or profit interests in) such Person, warrants, options or other rights for the purchase or other acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, securities convertible into or
 
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exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or other acquisition from such Person of such shares (or such other interests), and other ownership or profit interests in such Person (including, without limitation, partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are authorised or otherwise existing on any date of determination.
“ ERISA (U.S.) ” means the United States Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder.
“ ERISA Affiliate ” means any person that for purposes of Title IV of ERISA (U.S.) is a member of the controlled group of any Obligor or under common control of any Obligor, within the meaning of section 414 of the Internal Revenue Code (U.S.) or Section 4001 of ERISA (U.S.).
“ Event of Default ” means any circumstance described as such in Clause 19 ( Events of Default ).
“ Facility ” means the term loan facility in an aggregate amount of the Total Commitments made available to the Borrower under this Agreement, to the extent not cancelled, reduced or transferred under this Agreement.
“ Facility Office ” means, in relation to the Agent, the office identified with its signature below or such other office as it may select by notice and, in relation to any Bank, the office notified by it to the Agent in writing prior to the date hereof (or, in the case of a Transferee, at the end of the Transfer Certificate to which it is a party as Transferee) or such other office as it may from time to time select by notice to the Agent.
“ Finance Documents ” means:
 
 	(a)	this Agreement;	
 
 	(b)	any fee letter or letters dated on or about the date of this Agreement between the Agent and the Guarantor setting out any of the fees referred to in Clause 20 ( Fees );	
 
 	(c)	the amendment and restatement agreement dated 14 December 2007, amending and restating this Agreement; and	
 
 	(d)	any other document designated as such by the Agent and an Obligor.	
“ Finance Parties ” means the Agent, the Lead Arrangers and the Banks.
“ Fiscal Year ” means a fiscal year of the Guarantor and its Consolidated Subsidiaries ending on 31 December in any calendar year.
 
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“ Fixed Rate ” means the interest rate agreed by the Banks and the Borrower in writing.
“ GAAP ” has the meaning specified in Clause 1.7 ( Accounting Terms and Determinations ).
“ Group ” means the Guarantor and its Subsidiaries from time to time.
“ Hazardous Materials ” means (a) petroleum or petroleum products, by-products or breakdown products, radioactive materials, asbestos-containing materials, polychlorinated biphenyls and radon gas and (b) any other chemicals, materials or substances designated, classified or regulated as hazardous or toxic or as a pollutant or contaminant under any Environmental Law.
“ Hedge Agreements ” means interest rate swap, cap or collar agreements, interest rate future or option contracts, currency swap agreements, currency future or option contracts and other hedging agreements.
“ Insurance Act (Australia) ” means the Insurance Act 1973 of the Commonwealth of Australia.
“ Interest Period ” means, in relation to a Loan, each period determined in accordance with Clause 7 ( Interest Periods ) and in relation to an Unpaid Sum, each period determined in accordance with Clause 22.1 ( Default Interest and Break Costs ).
“ Internal Revenue Code (U.S.) ” means the United States Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder.
“ Investment ” in any Person means any loan or advance to such Person, any purchase or other acquisition of any Equity Interests or Debt or the assets comprising a division or business unit or a substantial part or all of the business of such Person, any capital contribution to such Person or any other direct or indirect investment in such Person, including, without limitation, any acquisition by way of a merger or consolidation and any arrangement pursuant to which the investor incurs Debt of the types referred to in paragraph (h) or (j) of the definition of “ Debt ” in respect of such Person; provided, however, that any purchase by any Obligor or any Subsidiary of any catastrophe-linked instruments which are (x) issued for the purpose of transferring traditional reinsurance risk to the capital markets and (y) purchased by such Obligor or any Subsidiary in accordance with its customary reinsurance underwriting procedures, or the entry by any Obligor or any Subsidiary into swap transactions relating to such instruments in accordance with such procedures, shall be deemed to be the entry by such Person into a reinsurance contract and shall not be deemed to be an Investment by such Person. In this definition, “ Obligor ” means any of the Borrower and the Guarantor.
“ Lien ” means any lien, security interest or other charge or encumbrance of any kind, or any other type of preferential arrangement, including, without limitation, the lien or retained security title of a conditional vendor and any easement, right of way or other encumbrance on title to real property.
 
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“ Loan ” means the loan made or to be made under the Facility or the principal amount outstanding for the time being of that loan.
“ Majority Banks ” means, save as otherwise provided herein:
 
 	(a)	whilst the Loan is not outstanding, a Bank or Banks whose Commitments amount (or, if each Bank’s Commitment has been reduced to zero, did immediately before such reduction to zero, amount) in aggregate to fifty per cent. or more of the Total Commitments; and	
 
 	(b)	whilst the Loan is outstanding, a Bank or Banks to whom in aggregate more than fifty per cent. of the outstanding Loan is owed.	
“ Mandatorily Convertible Preferred Securities ” means units comprised of (i) Preferred Securities or preferred shares of the Guarantor and (ii) a contract for the sale of ordinary shares of the Guarantor.
“ Mandatory Cost “ means the percentage rate per annum calculated by the Agent in accordance with Schedule 5 ( Mandatory Cost Formulae ).
“ Margin ” means the rate per annum determined from time to time in accordance with Schedule 4 ( Margin Schedule ).
“ Margin Stock ” has the meaning specified in Regulation U.
“ Material Adverse Change ” means any material adverse change in the business financial condition, operations or properties of the Guarantor and its Subsidiaries taken as a whole.
“ Material Adverse Effect ” means a material adverse effect on (a) the business, condition, operations or properties of the Guarantor and its Subsidiaries, taken as a whole, (b) the rights and remedies of the Agent or any Bank under any Finance Document or (c) the ability of the Obligors, taken as a whole, to perform their obligations under the Finance Documents.
“ Material Financial Obligation ” means a principal amount of Debt and/or payment obligations in respect of any Hedge Agreement of the Guarantor and/or one or more of its Subsidiaries arising in one or more related or unrelated transactions exceeding in the aggregate US$50,000,000 or its equivalent.
“ Material Subsidiary ” means:
 
 	(a)	any Subsidiary of the Guarantor that has more than US$10,000,000 or its equivalent in assets or that had more than US$10,000,000 or its equivalent of revenue during the most recent period of four fiscal quarters for which financial statements are available; and	
 
 	(b)	any Subsidiary that is the direct or indirect parent company of any Subsidiary that qualified as a “Material Subsidiary” under paragraph (a) above.	
 
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“ Maturity Date ” means the date which is thirty-six (36) months from the Utilisation Date.
“ Minimum Amount ” shall have the meaning given to that term in sub-clause 18.2.2 of Clause 18.2 ( Consolidated Net Worth ).
“ Moody’s ” means Moody’s Investors Services, Inc.
“ Multiemployer Plan ” means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA (U.S.), to which any Obligor or any ERISA Affiliate is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions.
“ Net Proceeds ” means, with respect to any issuance of Equity Interests by any Person, the amount of cash received by such Person in connection with such transaction after deducting therefrom the aggregate, without duplication, of the following amounts to the extent properly attributable to such transaction:
 
 	(a)	reasonable brokerage commissions, attorney’s fees, financial advisory fees, accounting fees, underwriting fees, investment banking fees, and other similar commissions, and reasonable fees and expenses and disbursements of any of the foregoing, in each case to the extent paid or payable by such Person;	
 
 	(b)	reasonable printing and related expenses of filing and recording or registration fees or charges or similar fees or charges paid by such Person; and	
 
 	(c)	taxes paid or payable by such Person to any governmental authority or regulatory body as a result of such transaction.	
“ Non-consenting Bank ” means any Bank that does not approve a consent, waiver or amendment to a Finance Document requested by an Obligor or the Agent that requires the approval of all Banks under Clause 35.2 ( Amendments Requiring the Consent of all the Banks ) when such consent, waiver or amendment is approved by the Bank or Banks (a) whose Commitment amount in aggregate amount to two-thirds or more of the Total Commitments, or (b) whilst the Loan is outstanding, to whom in aggregate more than two-thirds of the outstanding Loan is owed.
“ Obligors ” means the Borrower and the Guarantor.
“Original Borrower Group” means the Original Borrower together with any subsidiary of the Original Borrower, including any general insurer that is a subsidiary of the Original Borrower, where subsidiary has the meaning given in section 4 of the Insurance Act (Australia).
“ PBGC ” means the Pension Benefit Guarantee Corporation (or any successor).
“ Pension Plan ” means a “pension plan”, as such term is defined in section 3(2) of ERISA (U.S.), which is subject to title IV of ERISA (U.S.) (other than any “multiemployer plan” as such term is defined in section 4001(a)(3) of ERISA (U.S.)),
 
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and to which any Obligor or any ERISA (U.S.) Affiliate may have any liability, including any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA (U.S.) at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA (U.S.).
“ Permitted Liens ” means such of the following as to which no enforcement, collection, execution, levy or foreclosure proceeding shall have been commenced or which are being contested in good faith by appropriate proceedings:
 
 	(a)	Liens for taxes, assessments and governmental charges or levies not yet due and payable;	
 
 	(b)	Liens imposed by law, such as materialsmen’s, mechanics’, carriers’, workmen’s and repairmen’s Liens and other similar Liens arising in the ordinary course of business securing obligations that are not overdue for a period of more than 90 days;	
 
 	(c)	pledges or deposits to secure obligations under workers’ compensation laws or similar legislation or to secure public or statutory obligations; and	
 
 	(d)	easements, rights of way and other encumbrances on title to real property that do not render title to the property encumbered thereby unmarketable or materially adversely affect the use of such property for its present purposes.	
“ Person ” means an individual, a company, a corporation, a partnership, an association, a trust or any other entity or organisation, including a government or political subdivision or an agency or instrumentality thereof.
“ Potential Event of Default ” means any event which would constitute an Event of Default but for the requirement that notice be given or time elapse or both.
“ Preferred Interests ” means, with respect to any Person, Equity Interests issued by such Person that are entitled to a preference or priority over any other Equity Interests issued by such Person upon any distribution of such Person’s property and assets, whether by dividend or upon liquidation.
“ Preferred Securities ” means:
 
 	(a)	preferred securities issued by a Special Purpose Trust which shall provide, among other things, that dividends shall be payable only out of proceeds of interest payments on the applicable Debentures; or	
 
 	(b)	other instruments that are treated in whole or in part as equity by either or both of Moody’s and S&P (or any successor to either Moody’s or S&P) while being treated as debt for tax purposes.	
 
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“ Proportion ” means, in relation to a Bank the proportion borne by its Commitment to the Total Commitments (or, if the Total Commitments are then zero, by its Commitment to the Total Commitments immediately prior to their reduction to zero).
“ Redeemable ” means, with respect to any Equity Interest, any Debt or any other right or obligation, any such Equity Interest, Debt, right or obligation that:
 
 	(a)	the issuer has undertaken to redeem at a fixed or determinable date or dates, whether by operation of a sinking fund or otherwise, or upon the occurrence of a condition not solely within the control of the issuer; or	
 
 	(b)	is redeemable at the option of the holder.	
“ Reference Banks ” means Barclays Bank PLC, HSBC Bank Australia Limited and The Royal Bank of Scotland plc.
“ Regulation U ” means Regulation U of the Board of Directors of the Federal Reserve System, as in effect from time to time.
“ Representations ” means each of the representations set out in Clause 14 ( Representations ).
“ Responsible Officer ” means the Chairman, Chief Executive Officer, President, Chief Financial Officer, Chief Accounting Officer, Treasurer or General Counsel of the Borrower, the Guarantor or any Original Borrower Group company.
“ S&P ” means Standard & Poor’s Rating Services, a division of The McGraw-Hill Companies, Inc.
“ Securitisation Transaction ” means any sale, assignment or other transfer by the Guarantor or any Subsidiary of any accounts receivable, premium finance loan receivables, lease receivables or other payment obligations owing to the Guarantor or such Subsidiary or any interest in any of the foregoing, together in each case with any collections and other proceeds thereof, any collection or deposit accounts related thereto, and any collateral, guarantees or other property or claims in favour of the Guarantor or such Subsidiary supporting or securing payment by the obligor thereon of, or otherwise related to, any such receivables.
“ Significant Subsidiary ” means a Subsidiary of the Guarantor that is a “significant subsidiary” of the Guarantor under Regulation S-X promulgated by the U.S. Securities and Exchange Commission.
“ Solvent ” and “ Solvency ” mean, with respect to any Person on a particular date, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including, without limitation, contingent liabilities, of such Person, (b) the present fair saleable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay such
 
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debts and liabilities as they mature, (d) such Person is able to pay its debts as and when they become due and payable, and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person’s property would constitute an unreasonably small capita. The amount of contingent liabilities at any time shall be computed as the amount that, in the light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability.
“ Special Purpose Trust ” means a special purpose business trust established by the Guarantor of which the Guarantor or ACE INA will hold all the common securities, which will be the issuer of Preferred Securities, and which will loan to the Guarantor or ACE INA (such loan being evidenced by Debentures) the net proceeds of the issuance and sale of the Preferred Securities and common securities of such Special Purpose Trust.
“ Subsidiary ” of any Person means, except where used in the definition of “Original Borrower Group”, any corporation, partnership, joint venture, limited liability company, trust or estate of which (or in which) more than 50 per cent. of (a) the issued and outstanding capital stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (b) the interest in the capital or profits of such partnership, joint venture or limited liability company or (c) the beneficial interest in such trust or estate is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more of its other Subsidiaries or by one or more of such Person’s other Subsidiaries.
“ Total Capitalisation ” means, at any time, an amount (without duplication) equal to:
 
 	(a)	the then outstanding Consolidated Debt of the Guarantor and its Subsidiaries	
plus
 
 	(b)	Consolidated stockholders’ equity of the Guarantor and its Subsidiaries	
plus (without duplication)
 
 	(c)	the then issued and outstanding amount of Preferred Securities (including Mandatorily Convertible Preferred Securities) and (without duplication) Debentures.	
“ Total Commitments ” means the aggregate of the Banks’ Commitments being A$100,000,000 at the Commencement Date.
 
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“ Transfer Certificate ” means a certificate substantially in the form set out in Schedule 7 ( Form of Transfer Certificate ) signed by a Bank and a Transferee under which:
 
 	(a)	such Bank seeks to procure the transfer to such Transferee of all or a part of such Bank’s rights, benefits and obligations under the Finance Documents upon and subject to the terms and conditions set out in Clause 29.5 ( Assignments and Transfers by Banks ); and	
 
 	(b)	such Transferee undertakes to perform the obligations it will assume as a result of delivery of such certificate to the Agent as contemplated in Clause 29.7 ( Transfers by Banks ).	
“ Transfer Date ” means, in relation to any Transfer Certificate, the date for the making of the transfer as specified in such Transfer Certificate.
“ Transferee ” means a person to which a Bank seeks to transfer by novation all or part of such Bank’s rights, benefits and obligations under the Finance Documents.
“ Unpaid Sum ” means the unpaid balance of any of the sums referred to in Clause 22.1 ( Default Interest ).
“ U.S. ” and “ United States ” means the United States of America
“ U.S. Person ” means any Person:
 
 	(a)	organised under the laws of the United States or any jurisdiction within the United States (including foreign branches thereof); or	
 
 	(b)	located in the United States.	
“ Utilisation ” means the utilisation of the Facility pursuant to Clause 3 ( Utilisation of the Facility ).
“ Utilisation Date ” means the date on which the Utilisation occurs.
“ Utilisation Request ” means a notice substantially in the form set out in Schedule 3 ( Utilisation Request ).
“ Voting Interests ” means shares of capital stock issued by a corporation, or equivalent Equity Interest in any other Person, the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even if the right so to vote has been suspended by the happening of such a contingency.
“ Welfare Plan ” means a welfare plan, as defined in Section 3(1) of ERISA (U.S.), that is maintained for employees of any Obligor or in respect of which any Obligor could have liability.
 
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“ Wholly-Owned Consolidated Subsidiary ” means any Consolidated Subsidiary all of the shares of capital stock or other ownership interests of which (except directors’ qualifying shares) are at the time directly or indirectly owned by the Guarantor.
“ Withdrawal Liability ” has the meaning specified in Part I of Subtitle E of Title IV of ERISA (U.S.).
 
1.2	Interpretation	
Any reference in this Agreement to:
the “ Agent ”, any “ Obligor ” or any “ Bank ” shall be construed so as to include its and any subsequent successors and permitted transferees in accordance with their respective interests;
“ continuing ”, in the context of an Event of Default shall be construed as a reference to an Event of Default which has not been remedied or waived in accordance with the terms hereof and in relation to a Potential Event of Default, one which has not been remedied within the relevant grace period or waived in accordance with the terms hereof;
a “ holding company ” of a company or corporation shall be construed as a reference to any company or corporation of which the first-mentioned company or corporation is a Subsidiary;
a “ law ” shall be construed as any law (including common or customary law), statute, constitution, decree, judgment, treaty, regulation, directive, bye-law, order or any other legislative measure of any government, supranational, local government, statutory or regulatory body or court;
a “ month ” is a reference to a period starting on one day in a calendar month and ending on the numerically corresponding day in the next succeeding calendar month save that, where any such period would otherwise end on a day which is not a Business Day, it shall end on the next succeeding Business Day, unless that day falls in the calendar month succeeding that in which it would otherwise have ended, in which case it shall end on the immediately preceding Business Day, provided that , if a period starts on the last Business Day in a calendar month or if there is no numerically corresponding day in the month in which that period ends, that period shall end on the last Business Day in that later month (and references to “ months ” shall be construed accordingly);
a Bank’s “ participation ”, in relation to the Loan, shall be construed as a reference to the rights and obligations of such Bank in relation to the Loan as are expressly set out in this Agreement;
a “ successor ” shall be construed so as to include an assignee or successor in title of such party and any person who under the laws of its jurisdiction of incorporation or domicile has assumed the rights and obligations of such party under this Agreement or to which, under such laws, such rights and obligations have been transferred;
 
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“ tax ” shall be construed so as to include any tax, levy, impost, duty or other charge of a similar nature (including any penalty or interest payable in connection with any failure to pay or any delay in paying any of the same);
“ VAT ” shall be construed as a reference to value added tax, goods and services tax or any similar tax which may be imposed in place thereof from time to time;
the “ winding-up ”, “ dissolution ” or “ administration ” of a company or corporation shall be construed so as to include any equivalent or analogous proceedings under the law of the jurisdiction in which such company or corporation is incorporated or any jurisdiction in which such company or corporation carries on business including the seeking of liquidation, winding-up, reorganisation, dissolution, administration, arrangement, adjustment, protection or relief of debtors;
compliance by the Original Borrower Group with the new prudential requirements includes compliance by the Original Borrower Group as a whole and compliance by any individual member of the Original Borrower Group; and
the new prudential requirements commencing to having effect in relation to the Original Borrower Group includes the new prudential requirements commencing to have effect in relation to the Original Borrower Group as a whole and in relation to any individual member of the Original Borrower Group.
 
1.3	Currency Symbols	
 
 	1.3.1	“ A$ ” and “ Australian dollars ” denote lawful currency of Australia for the time being.	
 
 	1.3.2	“ US$ ” denotes the lawful currency of the United States for the time being.	
 
 	1.3.3	“ £ ” denotes the lawful currency of the United Kingdom for the time being.	
 
1.4	Agreements and Statutes	
Any reference in this Agreement to:
 
 	1.4.1	this Agreement or any other agreement or document shall be construed as a reference to this Agreement or, as the case may be, such other agreement or document as the same may have been, or may from time to time be, amended, varied, novated or supplemented; and	
 
 	1.4.2	a statute or treaty shall be construed as a reference to such statute or treaty as the same may have been, or may from time to time be, amended or, in the case of a statute, re-enacted.	
 
1.5	Headings	
Clause and Schedule headings are for ease of reference only.
 
1.6	Time	
Any reference in this Agreement to a time of day shall, unless a contrary indication appears, be a reference to London time.
 
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1.7	Accounting Terms and Determinations	
Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time (“ GAAP ”), and accounting practices and financial reference periods applied consistent (except for changes concurred in by the Guarantor’s independent public accountants) with the most recent audited consolidated financial statements of the Guarantor and its Consolidated Subsidiaries delivered to the Banks; provided that , if the Guarantor notifies the Agent that the Guarantor wishes to amend any covenant in Clause 16 ( Negative Covenants ), 17 ( Information Covenants ) or 18 ( Financial Covenants ) to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Agent notifies the Guarantor that the Majority Banks wish to amend Clause 16 ( Negative Covenants ), 17 ( Information Covenants ) or 18 ( Financial Covenants ) for such purpose), then the Guarantor’s compliance with such covenant shall be determined on the basis of generally accepted accounting principles in effect immediately before the relevant change in generally accepted account principals became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Guarantor and the Majority Banks.
 
1.8	Third party rights	
A person who is not a party to this Agreement has no right under the Contracts (Rights of Third Parties) Act 1999 to enforce any term of this Agreement.
 
2.	THE FACILITY	
 
2.1	Grant of the Facility	
Subject to the terms of this Agreement, the Banks make available to the Borrower an Australian dollar term loan facility in an aggregate amount equal to the Total Commitments.
 
2.2	Purpose and Application	
The Borrower shall apply all amounts borrowed by it under the Facility towards its general corporate purposes.
 
2.3	Conditions Precedent	
Save as the Banks may otherwise agree, the Borrower may not deliver any Utilisation Request unless the Agent has confirmed to the Banks that it has received all of the documents and other evidence listed in Part I of Schedule 2 ( Conditions Precedent ) and that each is, in form and substance, satisfactory to the Agent.
 
2.4	Several Obligations	
The obligations of each Bank are several and the failure by a Bank to perform its obligations hereunder shall not affect the obligations of any Obligor towards any other party hereto nor shall any other party be liable for the failure by such Bank to perform its obligations hereunder.
 
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2.5	Several Rights	
The rights of each Finance Party are several and any debt arising hereunder at any time from an Obligor to any Finance Party shall be a separate and independent debt. Each such party shall be entitled to protect and enforce its individual rights arising out of this Agreement independently of any other party (so that it shall not be necessary for any party hereto to be joined as an additional party in any proceedings for this purpose).
 
3.	UTILISATION OF THE FACILITY	
 
3.1	Delivery of a Utilisation Request	
The Borrower may utilise the Facility by delivery to the Agent of the duly completed Utilisation Request.
 
3.2	Utilisation Conditions for the Facility	
 
 	3.2.1	Save as otherwise provided herein, the Utilisation Request is irrevocable and will not be regarded as having been duly completed unless:	
 
 	(a)	no later than 10.00 a.m. three Business Days before the proposed Utilisation Date, the Agent has received a duly completed Utilisation Request from the Borrower;	
 
 	(b)	the proposed Utilisation Date is a Business Day falling within the Availability Period;	
 
 	(c)	on and as of the proposed Utilisation Date:	
 
 	(i)	no Default is continuing or would result from the proposed Loan; and	
 
 	(ii)	the Representations are true in all material respects; and	
 
 	(d)	the currency and amount of the Utilisation comply with Clause 3.4 ( Currency and Amount ).	
 
 	3.2.2	The Banks will not be obliged to satisfy the Utilisation Request unless the Fixed Rate has been agreed hereunder.	
 
3.3	Request for Loan	
Only one Loan may be requested hereunder.
 
3.4	Currency and amount	
 
 	3.4.1	The currency specified in a Utilisation Request must be Australian dollars.	
 
 	3.4.2	The amount of the proposed Loan must be for the amount of the Total Commitments.	
 
3.5	Cancellation of Commitments	
On the expiry of the Availability Period the Total Commitments, if undrawn, and each Bank’s Commitment shall be reduced to zero.
 
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4.	REPAYMENT	
The Borrower shall repay the Loan made to it in full on the Maturity Date.
 
5.	PREPAYMENT AND CANCELLATION	
 
5.1	Voluntary cancellation	
The Borrower may at any time prior to Utilisation, if it gives the Agent not less than 3 Business Days’ (or such shorter period as the Agent may agree) prior written notice, cancel the whole or any part (being a minimum amount and integral multiple of A$5,000,000) of the Total Commitments.
 
5.2	Voluntary prepayment of the Loan	
The Borrower may at any time, if it gives the Agent not less than 3 Business Days’ (or such shorter period as the Agent may agree) prior written notice, prepay the whole or any part of the Loan (but, if in part, being an amount that reduces the amount of the Loan by a minimum amount and integral multiple of A$5,000,000).
 
5.3	Restrictions	
 
 	5.3.1	Any notice of cancellation or prepayment given by any Party under this Clause 5 ( Prepayment and Cancellation) shall be irrevocable and, unless a contrary indication appears in this Agreement, shall specify the date or dates upon which the relevant cancellation or prepayment is to be made and the amount of that cancellation or prepayment.	
 
 	5.3.2	Any prepayment under this Agreement shall be made together with accrued interest on the amount prepaid and, subject to payment of any break costs pursuant to Clause 22.4 ( Break Costs ) or refund of any break gains pursuant to Clause 22.5 ( Break Gains ), without premium or penalty.	
 
 	5.3.3	The Borrower may not reborrow any part of the Facility which is prepaid.	
 
 	5.3.4	The Borrower shall not repay or prepay all or any part of the Loan except at the times and in the manner expressly provided for in this Agreement.	
 
 	5.3.5	No amount of the Facility cancelled under this Agreement may be subsequently reinstated.	
 
5.4	Right of repayment and cancellation in relation to a single Bank	
 
 	5.4.1	If:	
 
 	(a)	any sum payable to any Bank by an Obligor is required to be increased pursuant to Clause 8.1 ( Tax Gross-up ); or	
 
 	(b)	any Bank claims indemnification pursuant to Clause 8.2 ( Tax Indemnity ) or Clause 10.1 ( Increased Costs ),	
the Borrower may, whilst the circumstance giving rise to the requirement for indemnification continues:
 
 	(c)	give the Agent notice of cancellation of the Commitment of that Bank and its intention to procure the repayment of that Bank’s participation in the Loan; or	
 
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 	(d)	give the Agent notice requiring that Bank to transfer its Commitment to one or more other financial institutions.	
 
 	5.4.2	On receipt of a notice referred to in Clause 5.4.1 above, the Commitment of that Bank shall immediately be reduced to zero.	
 
 	5.4.3	On the last day of each Interest Period which ends after the Borrower has given notice under Clause 5.4.1(c) above (or, if earlier, the date specified by the Borrower in that notice), the Borrower shall repay that Bank’s participation in the Loan.	
 
6.	INTEREST	
 
6.1	Calculation of interest	
The rate of interest on the Loan is the percentage rate per annum which is the aggregate of:
 
 	6.1.1	the Fixed Rate;	
 
 	6.1.2	the applicable Margin; and	
 
 	6.1.3	the applicable Mandatory Cost, if any.	
 
6.2	Payment of interest	
On the last day of each Interest Period the Borrower shall pay accrued interest on the Loan.
 
7.	INTEREST PERIODS	
 
7.1	The duration of each Interest Period shall, save as otherwise provided herein, be 6 months with the first Interest Period commencing on the Utilisation Date.	
 
7.2	An Interest Period for the Loan shall not extend beyond the Maturity Date.	
 
7.3	If an Interest Period would otherwise end on a day which is not a Business Day, that Interest Period will instead end on the next Business Day in that calendar month (if there is one) or the preceding Business Day (if there is not).	
 
8.	TAXES	
 
8.1	Tax Gross-up	
All payments to be made by an Obligor to any Finance Party hereunder shall be made free and clear of and without deduction for or on account of tax unless such Obligor is required to make such a payment subject to the deduction or withholding of tax, in which case the sum payable by such Obligor (in respect of which such deduction or withholding is required to be made) shall be increased to the extent necessary to ensure that such Finance Party receives a sum net of any deduction or withholding equal to the sum which it would have received had no such deduction or withholding been made or required to be made.
 
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8.2	Tax Indemnity	
Without prejudice to Clause 8.1 ( Tax Gross-up ), if any Finance Party is required to make any payment of or on account of tax on or in relation to any sum received or receivable hereunder (including any sum deemed for purposes of tax to be received or receivable by such Finance Party whether or not actually received or receivable) or if any liability in respect of any such payment is asserted, imposed, levied or assessed against any Finance Party, the Borrower shall, upon demand of the Agent, promptly indemnify the Finance Party which suffers a loss or liability as a result against such payment or liability, together with any interest, penalties, costs and expenses payable or incurred in connection therewith, provided that this Clause 8.2 ( Tax Indemnity ) shall not apply to:
 
 	8.2.1	any tax imposed on and calculated by reference to the net income actually received or receivable by such Finance Party by the jurisdiction in which such Finance Party is incorporated; or	
 
 	8.2.2	any tax imposed on and calculated by reference to the net income of the Facility Office of such Finance Party actually received or receivable by such Finance Party by the jurisdiction in which its Facility Office is located.	
 
8.3	Claims by Banks	
A Bank intending to make a claim pursuant to Clause 8.2 ( Tax Indemnity ) shall notify the Agent of the event giving rise to the claim, whereupon the Agent shall notify the Guarantor thereof.
 
9.	TAX RECEIPTS	
 
9.1	Notification of Requirement to Deduct Tax	
If, at any time, an Obligor is required by law to make any deduction or withholding from any sum payable by it hereunder (or if thereafter there is any change in the rates at which or the manner in which such deductions or withholdings are calculated), such Obligor shall promptly, upon becoming aware of the same, notify the Agent.
 
9.2	Evidence of Payment of Tax	
If an Obligor makes any payment hereunder in respect of which it is required to make any deduction or withholding, it shall pay the full amount required to be deducted or withheld to the relevant taxation or other authority within the time allowed for such payment under applicable law and shall deliver to the Agent for each Bank, within thirty days after it has made such payment to the applicable authority, an original receipt (or a certified copy thereof) issued by such authority evidencing the payment to such authority of all amounts so required to be deducted or withheld in respect of that Bank’s share of such payment.
 
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9.3	Tax Credit Payment	
If an additional payment is made under Clause 8 ( Taxes ) by an Obligor for the benefit of any Finance Party and such Finance Party, in its sole discretion, determines that it has obtained (and has derived full use and benefit from) a credit against, a relief or remission for, or repayment of, any tax, then, if and to the extent that such Finance Party, in its sole opinion, determines that:
 
 	9.3.1	such credit, relief, remission or repayment is in respect of or calculated with reference to the additional payment made pursuant to Clause 8 ( Taxes) ; and	
 
 	9.3.2	its tax affairs for its tax year in respect of which such credit, relief, remission or repayment was obtained have been finally settled,	
such Finance Party shall, to the extent that it can do so without prejudice to the retention of the amount of such credit, relief, remission or repayment, pay to such Obligor such amount as such Finance Party shall, in its sole opinion, determine to be the amount which will leave such Finance Party (after such payment) in no worse after-tax position than it would have been in had the additional payment in question not been required to be made by such Obligor.
 
9.4	Tax Credit Clawback	
If any Finance Party makes any payment to an Obligor pursuant to Clause 9.3 ( Tax Credit Payment ) and such Finance Party subsequently determines, in its sole opinion, that the credit, relief, remission or repayment in respect of which such payment was made was not available or has been withdrawn or that it was unable to use such credit, relief, remission or repayment in full, the Obligor shall reimburse such Finance Party such amount as such Finance Party determines, in its sole opinion, is necessary to place it in the same after-tax position as it would have been in if such credit, relief, remission or repayment had been obtained and fully used and retained by such Finance Party.
 
9.5	Tax and Other Affairs	
No provision of this Agreement shall interfere with the right of any Finance Party to arrange its tax or any other affairs in whatever manner it thinks fit, oblige any Finance Party to claim any credit, relief, remission or repayment in respect of any payment under Clause 8.1 ( Tax Gross-up ) in priority to any other credit, relief, remission or repayment available to it nor oblige any Finance Party to disclose any information relating to its tax or other affairs or any computations in respect thereof.
 
10.	INCREASED COSTS	
 
10.1	Increased Costs	
If, by reason of (a) any change in law or in its interpretation or administration and/or (b) compliance with any request or requirement relating to the maintenance of capital or any other request from or requirement of any central bank or other fiscal, monetary or other authority (being a request or requirement with which banks are accustomed to comply), in each case occurring after the date of this Agreement:
 
 	10.1.1	a Bank or any holding company of such Bank is unable to obtain the rate of return on its capital which it would have been able to obtain but for such Bank’s entering into or assuming or maintaining a commitment, issuing or performing its obligations under this Agreement;	
 
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 	10.1.2	a Bank or any holding company of such Bank incurs a cost as a result of such Bank’s entering into or assuming or maintaining a commitment, issuing or performing its obligations under this Agreement; or	
 
 	10.1.3	there is any increase in the cost to a Bank or any holding company of such Bank of funding or maintaining such Bank’s share of any Unpaid Sum or the Loan,	
then the Borrower shall, from time to time on demand of the Agent, promptly pay to the Agent for the account of that Bank amounts sufficient to indemnify that Bank or to enable that Bank to indemnify its holding company from and against, as the case may be, (a) such reduction in the rate of return of capital, (b) such cost or (c) such increased cost.
 
10.2	Increased Costs Claims	
A Bank intending to make a claim pursuant to Clause 10.1 ( Increased Costs ) shall notify the Agent as soon as reasonably practicable of the event giving rise to such claim and the amount of such claim and the basis for calculation of such amount in reasonable detail whereupon the Agent shall notify the Borrower thereof. Prior to making any such claim, such Bank will use reasonable commercial efforts available to it (and not, in such Bank’s good faith judgment, otherwise disadvantageous to such Bank) to mitigate or avoid any obligation by the Borrower to pay any amount pursuant to 10.1 ( Increased Costs ). If any Bank has made a claim pursuant to 10.1 ( Increased Costs ) and thereafter the event or circumstance giving rise to such claim ceases to exist, such Bank shall promptly so notify the Borrower and the Agent. Without limiting the foregoing, each Bank will designate a different lending office if such designation will avoid (or reduce the cost to the Borrower of) any claim pursuant to 10.1 ( Increased Costs ) and such designation will not, in such Bank’s good faith judgment, be otherwise disadvantageous to such Bank.
 
10.3	Exclusions	
Notwithstanding the foregoing provisions of this Clause 10 ( Increased Costs ), no Bank shall be entitled to make any claim under this Clause 10 ( Increased Costs ) in respect of:
 
 	10.3.1	any cost, increased cost or liability as referred to in Clause 10.1 ( Increased Costs ) to the extent the same is compensated by the Mandatory Costs; or	
 
 	10.3.2	any cost, increased cost or liability compensated by (or the recovery of which is precluded under) Clause 8 ( Taxes ).	
Without limiting the foregoing, if any Bank fails to notify the Borrower of any event or circumstance that will entitle such Bank to compensation pursuant to this Clause 10
 
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( Increased Costs ) within 120 days after such Bank obtains actual knowledge of such event or circumstance, then such Bank shall not be entitled to compensation from the Borrower for any amount arising prior to the date which is 120 days before the date on which such Bank notifies the Borrower of such event or circumstance.
 
11.	ILLEGALITY	
If, at any time, it is or will become unlawful or prohibited pursuant to any request from or requirement of any central bank or other fiscal, monetary or other authority (being a request or requirement with which banks are accustomed to comply) for a Bank to fund, issue, participate in or allow to remain outstanding all or part of its share of the outstanding Loan, then that Bank shall, promptly after becoming aware of the same, deliver to the Borrower through the Agent a notice to that effect and:
 
 	11.1.1	such Bank shall not thereafter be obliged to participate in the Facility and the amount of its Commitment shall be immediately reduced to zero; and	
 
 	11.1.2	if the Agent on behalf of such Bank so requires, the Borrower shall on such date as the Agent shall have specified ensure that the liabilities of such Bank under or in respect of the outstanding Loan are reduced to zero.	
 
12.	MITIGATION	
If, in respect of any Bank, circumstances arise which would or would upon the giving of notice result in:
 
 	12.1.1	an increase in any sum payable to it or for its account pursuant to Clause 8.1 ( Tax Gross-up ); or	
 
 	12.1.2	a claim for indemnification pursuant to Clause 8.2 ( Tax Indemnity ) or Clause 10.1 ( Increased Costs ),	
then, without in any way limiting, reducing or otherwise qualifying the rights of such Bank or the obligations of the Obligors under any of the Clauses referred to in sub-clauses 12.1.1 and 12.1.2, such Bank shall promptly upon becoming aware of such circumstances notify the Agent thereof and at the request of the Borrower transfer all of its rights and obligations under this Agreement to a bank or financial institution identified by the Borrower as willing to enter into such a transfer for a purchase price equal to the outstanding principal amount owed to such Bank hereunder plus all accrued interest, fees and other amounts accrued to that Bank hereunder.
 
13.	BORROWER REPRESENTATIONS	
The Borrower represents and warrants on the date of this Agreement as follows:
 
13.1	Corporate Existence and Power	
The Borrower and each of its Material Subsidiaries:
 
 	13.1.1	is duly organised or formed, validly existing and, to the extent such concept applies, in good standing under the laws of the jurisdiction of its incorporation	
 
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 	or formation, except, in the case of any Material Subsidiary (other than a Material Subsidiary which is an Obligor), where the failure to do so would not be reasonably likely to have a Material Adverse Effect;	
 
 	13.1.2	is duly qualified or licensed and, to the extent such concept applies, in good standing as a foreign corporation or other entity in each other jurisdiction in which it owns or leases property or in which the conduct of its business requires it to so qualify or be licensed except where the failure to so qualify or be licensed would not be reasonably likely to have a Material Adverse Effect; and	
 
 	13.1.3	has all requisite power and authority (including, without limitation, all licences, permits and other approvals from any governmental authority or regulatory body such as APRA) to own or lease and operate its properties and to carry on its business as now conducted and as proposed to be conducted, except where the failure to have any license, permit or other approval would not be reasonably likely to have a Material Adverse Effect.	
All of the outstanding Equity Interests in the Borrower have been validly issued and are fully paid.
 
13.2	Corporate Authorisation	
The execution, delivery and performance by the Borrower of this Agreement are within the Borrower’s corporate powers, have been duly authorised by all necessary corporate action, and do not:
 
 	13.2.1	contravene the Borrower’s constitutional documents;	
 
 	13.2.2	violate any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award, except where such violation would not be reasonably likely to have a Material Adverse Effect;	
 
 	13.2.3	conflict with or result in the breach of, or constitute a default under, any contract, loan agreement, indenture, mortgage, deed of trust, lease or other instrument binding on or affecting the Borrower, any of its Subsidiaries or any of their properties except where such conflict, breach or default would not be reasonably likely to have a Material Adverse Effect; or	
 
 	13.2.4	except for Liens created under the Finance Documents, result in or require the creation or imposition of any Lien upon or with respect to any of the properties of the Borrower or any of its Subsidiaries.	
 
13.3	Governmental Authorisation	
No authorisation or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body (including APRA) or any other third party is required for:
 
 	13.3.1	the due execution, delivery, recordation, filing or performance by the Borrower of this Agreement; or	
 
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 	13.3.2	the exercise by the Agent or any Bank of its rights under this Agreement,	
except for the authorisations, approvals, actions, notices and filings which have been duly obtained, taken, given or made and are in full force and effect, subject to bankruptcy, insolvency and similar laws of general application relating to creditor’s rights and to general principles of equity.
 
13.4	Binding Effect	
This Agreement has been duly executed and delivered by the Borrower. This Agreement is the legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms, subject to bankruptcy, insolvency and similar laws of general application relating to creditors’ rights and to general principles of equity.
 
13.5	Litigation	
There is no action, suit, investigation, litigation or proceeding affecting the Borrower or any of its Subsidiaries, including any Environmental Action, pending or, to the Borrower’s knowledge, threatened before any court, governmental agency or arbitrator that:
 
 	13.5.1	would be reasonably likely to have a Material Adverse Effect; or	
 
 	13.5.2	would reasonably be expected to affect the legality, validity or enforceability of any Finance Document or the transactions contemplated by the Finance Documents.	
 
13.6	Written Information	
 
 	13.6.1	No written information exhibit or report furnished by or on behalf of the Borrower to the Agent or any Bank in connection with the negotiation and syndication of this Agreement contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements made therein not misleading as at the date it was dated (or if not dated, so delivered).	
 
 	13.6.2	The Borrower is, individually and together with its Subsidiaries, Solvent.	
 
 	13.6.3	In the ordinary course of its business, the Borrower reviews the effect of Environmental Laws on the operations and properties of the Borrower and its Subsidiaries, in the course of which it identifies and evaluates associated liabilities and costs (including, without limitation, any capital or operating expenditures required for clean-up or closure of properties presently or previously owned, any capital or operating expenditures required to achieve or maintain compliance with environmental protection standards imposed by law or as a condition of any license, permit or contract, any related constraints on operating activities, including any periodic or permanent shutdown of any	
 
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 	facility or reduction in the level of or change in the nature of operations conducted thereat, and any actual or potential liabilities to third parties and any related costs and expenses). On the basis of this review, the Borrower has reasonably concluded that such associated liabilities and costs, including the costs of compliance with Environmental Laws, are unlikely to have a Material Adverse Effect. The operations and properties of the Borrower and each of its Subsidiaries comply in all material respects with all applicable Environmental Laws and Environmental Permits, except for non-compliances which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; Hazardous Materials have not been released, discharged or disposed of on any property currently or formerly owned or operated by the Borrower or any of its Subsidiaries that would reasonably be expected to have a Material Adverse Effect; and there are no Environmental Actions pending or threatened against the Borrower or its Subsidiaries, and no circumstances exist that could be reasonably likely to form the basis of any such Environmental Action, which (in either case), individually or in the aggregate with all other such pending or threatened actions and circumstances, would reasonably be expected to have a Material Adverse Effect.	
 
13.7	Taxes	
The Borrower and each of its Subsidiaries has filed, has caused to be filed or has been included in all material federal tax returns and all other material tax returns (including any stamp, registration or similar tax to be paid on or in relation to this Agreement) required to be filed and has paid all taxes shown thereon to be due, together with applicable interest and penalties, except to the extent contested in good faith and by appropriate proceedings (in which case adequate reserves have been established therefor in accordance with Australian GAAP).
 
13.8	Compliance with Laws	
The Borrower and its Subsidiaries are in compliance, in all material respects, with all applicable laws, ordinances, rules, regulations, guidelines and other requirements of governmental authorities and regulatory bodies (including APRA) except where the necessity of compliance therewith is contested in good faith by appropriate proceedings and any reserves required under generally accepted accounting principles with respect thereto have been established and except where any such failure could not reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Borrower and its Consolidated Subsidiaries, considered as a whole.
 
13.9	Governing law and enforcement	
 
 	13.9.1	The choice of English law as the governing law of this Agreement will be recognised and enforced in its jurisdiction of incorporation.	
 
 	13.9.2	Any judgment obtained in England in relation to this Agreement will be recognised and enforced in its jurisdiction of incorporation.	
 
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13.10	Validity and Admissibility in Evidence	
All acts, conditions and things required to be done, fulfilled and performed in order:
 
 	13.10.1	to enable the Borrower lawfully to enter into, exercise its rights under and perform and comply with the obligations expressed to be assumed by it in this Agreement;	
 
 	13.10.2	to ensure that the obligations expressed to be assumed by it in this Agreement are legal, valid, binding and enforceable; and	
 
 	13.10.3	to make this Agreement admissible in evidence in its jurisdiction of incorporation,	
have been done, fulfilled and performed (subject to any exception contained in the legal opinions provided as conditions precedent).
 
13.11	Claims Pari Passu	
Under the laws of its jurisdiction of incorporation in force at the date of this Agreement, the claims of the Finance Parties against the Borrower under this Agreement will rank at least pari passu with the claims of all its other unsecured and unsubordinated creditors save those claims which are preferred solely by any bankruptcy, insolvency, liquidation or other similar laws of general application or are mandatorily preferred by law applying to insurance companies generally.
 
13.12	No Winding up	
The Borrower has not taken any corporate action nor have any other steps been taken or legal proceedings been started or (to the best of its knowledge and belief) threatened against the Borrower for its winding up, dissolution, administration or re organisation (whether by voluntary arrangement, scheme of arrangement or otherwise) or for the appointment of a liquidator receiver, administrator, administrative receiver, conservator, compulsory manager, custodian, trustee or similar officer of it or of any or all of its assets or revenues.
 
13.13	No Event of Default	
No Event of Default in respect of the Borrower has occurred and is continuing.
 
14.	GUARANTOR REPRESENTATIONS	
The Guarantor in respect of itself and of the Borrower represents and warrants on the date of this Agreement and, in respect of the Guarantor and any Borrower Transferee, on the date of any transfer pursuant to Clause 29.4 ( Transfer by Original Borrower ) as follows:
 
14.1	Corporate Existence and Power	
Each Obligor and each of its Material Subsidiaries:
 
 	14.1.1	is duly organised or formed, validly existing and, to the extent such concept applies, in good standing under the laws of the jurisdiction of its incorporation or formation, except, in the case of any Material Subsidiary (other than a Material Subsidiary which is an Obligor), where the failure to do so would not be reasonably likely to have a Material Adverse Effect;	
 
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 	14.1.2	is duly qualified or licensed and in good standing as a foreign corporation or other entity in each other jurisdiction in which it owns or leases property or in which the conduct of its business requires it to so qualify or be licensed except where the failure to so qualify or be licensed would not be reasonably likely to have a Material Adverse Effect; and	
 
 	14.1.3	has all requisite power and authority (including, without limitation, all licences, permits and other approvals from any governmental authority or regulatory body such as APRA) to own or lease and operate its properties and to carry on its business as now conducted and as proposed to be conducted, except where the failure to have any license, permit or other approval would not be reasonably likely to have a Material Adverse Effect.	
All of the outstanding Equity Interests in each Obligor (other than the Guarantor) have been validly issued, are fully paid and non-assessable and (except for any Preferred Securities issued after the Commencement Date) are owned, directly or indirectly, by the Guarantor free and clear of all Liens.
 
14.2	Corporate Authorisation	
The execution, delivery and performance by each Obligor of each Finance Document to which it is or is to be a party and the consummation of the transactions contemplated by the Finance Documents, are within such Obligor’s corporate powers, have been duly authorised by all necessary corporate action, and do not:
 
 	14.2.1	contravene such Obligor’s constitutional documents;	
 
 	14.2.2	violate any law, rule, regulation, order, writ, judgement, injunction, decree, determination or award, except where such violation would not be reasonably likely to have a Material Adverse Effect;	
 
 	14.2.3	conflict with or result in the breach of, or constitute a default under, any contract, loan agreement, indenture, mortgage, deed of trust, lease or other instrument binding on or affecting any Obligor, any of its Subsidiaries or any of their properties, except where such conflict, breach or default would not be reasonably likely to have a Material Adverse Effect; or	
 
 	14.2.4	except for the Liens created under the Finance Documents, result in or require the creation or imposition of any Lien upon or with respect to any of the properties of any Obligor or any of its Subsidiaries.	
 
14.3	Governmental Authorisation	
No authorisation or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body (including APRA) or any other third party is required for:
 
 	14.3.1	the due execution, delivery, recordation, filing or performance by an Obligor of any Finance Document to which it is or is to be a party or the other transactions contemplated by the Finance Documents; or	
 
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 	14.3.2	the exercise by the Agent or any Bank of its rights under the Finance Documents,	
except for the authorisations, approvals, actions, notices and filings which have been duly obtained, taken, given or made and are in full force and effect, subject to bankruptcy, insolvency and similar laws of general application relating to creditors’ rights and to general principles of equity.
 
14.4	Binding Effect	
This Agreement has been, and each other Finance Document when delivered hereunder will have been, duly executed and delivered by each Obligor party thereto. This Agreement is, and each other Finance Document when delivered hereunder will be, the legal, valid and binding obligation of each Obligor party thereto, enforceable against such Obligor in accordance with its terms, subject to bankruptcy, insolvency and similar laws of general application relating to creditors’ rights and to general principles of equity.
 
14.5	Litigation	
There is no action, suit, investigation, litigation or proceeding affecting any Obligor or any of its Subsidiaries, including any Environmental Action, pending or, to such Obligor’s knowledge, threatened before any court, governmental agency or arbitrator that:
 
 	14.5.1	would be reasonably likely to have a Material Adverse Effect; or	
 
 	14.5.2	would reasonably be expected to affect the legality, validity or enforceability of any Finance Document or the transactions contemplated by the Finance Documents.	
 
14.6	Financial Information Guarantor	
The Consolidated balance sheet of the Guarantor and its Subsidiaries as at 31 December 2006, and the related Consolidated statements of income and of cash flows of the Guarantor and its Subsidiaries for the fiscal year then ended, accompanied by an unqualified opinion of PricewaterhouseCoopers LLP, independent public accountants, and the Consolidated balance sheet of the Guarantor and its Subsidiaries as at 30 September 2007, and the related Consolidated statements of income and cash flows of the Guarantor and its Subsidiaries for the nine months then ended, duly certified by the Chief Financial Officer of the Guarantor, copies of which have been furnished to each Bank, fairly present, subject, in the case of said balance sheet as at 30 September 2007, and said statements of income and cash flows for the nine months then ended, to year-end audit adjustments, the Consolidated financial condition of the Guarantor and its Subsidiaries as at such dates and the Consolidated results of operations of the Guarantor and its Subsidiaries for the periods ended on such dates, all in accordance
 
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with GAAP applied on a consistent basis (subject, in the case of 30 September 2007 balance sheet and statements of income and cash flows, to the absence of footnotes). Since 31 December 2006 there has been no Material Adverse Change.
 
14.7	Written Information	
 
 	14.7.1	No written information exhibit or report furnished by or on behalf of any Obligor to the Agent or any Bank in connection with the negotiation and syndication of the Finance Documents or pursuant to the terms of the Finance Documents contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements made therein not misleading as at the date it was dated (or if not dated, so delivered).	
 
 	14.7.2	Margin Stock constitutes less than 25 per cent. of the value of those assets of any Obligor which are subject to any limitation on sale, pledge or other disposition hereunder.	
 
 	14.7.3	Neither any Obligor nor any of its Subsidiaries is an “investment company”, or an “affiliated person” of, or “promoter” or “principal underwriter” for, an “investment company”, as such terms are defined in the Investment Company Act of 1940, as amended. Neither the making of the Loan, nor the application of the proceeds or repayment thereof by any Obligor, nor the consummation of the other transactions contemplated by the Finance Documents, will violate any provision of such Act or any rule, regulation or order of the Securities and Exchange Commission thereunder.	
 
 	14.7.4	Each Obligor is, individually and together with its Subsidiaries, Solvent.	
 
 	14.7.5	Except to the extent that any and all events and conditions under clauses (a) through (e) below of this Clause 14.7.5 in the aggregate are not reasonably expected to have a Material Adverse Effect:	
 
 	(a)	neither any Obligor nor any ERISA Affiliate has incurred or is reasonably expected to incur any Withdrawal Liability to any Multiemployer Plan;	
 
 	(b)	with respect to each scheme or arrangement mandated by a government other than the United States (a “ Foreign Government Scheme or Arrangement ”) and with respect to each employee benefit plan that is not subject to United States law maintained or contributed to by any Obligor or with respect to which any Subsidiary of any Obligor may have liability under applicable local law (a “ Foreign Plan ”):	
 
 	(i)	any employer and employee contributions required by law or by the terms of any Foreign Government Scheme or Arrangement or any Foreign Plan have been made, or, if applicable, accrued, in accordance with normal accounting practices;	
 
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 	(ii)	the fair market value of the assets of each funded Foreign Plan, the liability of each insurer for any Foreign Plan funded through insurance or the book reserve established for any Foreign Plan, together with any accrued contributions, is sufficient to procure or provide for the accrued benefit obligations, as of the date hereof, with respect to all current and former participants in such Foreign Plan according to the actuarial assumptions and valuations most recently used to account for such obligations in accordance with applicable generally accepted accounting principles; and	
 
 	(iii)	each Foreign Plan required to be registered has been registered and has been maintained in good standing with applicable regulatory authorities;	
 
 	(c)	during the twelve-consecutive-month period to the date of the execution and delivery of this Agreement and prior to the Utilisation Request hereunder, no steps have been taken to terminate any Pension Plan, no contribution failure has occurred with respect to any Pension Plan sufficient to give rise to a lien under section 302(f) of ERISA (U.S.) and no minimum funding waiver has been applied for or is in effect with respect to any Pension Plan. No condition exists or event or transaction has occurred or is reasonably expected to occur with respect to any Pension Plan which could result in any Obligor or any ERISA (U.S.) Affiliate incurring any material liability, fine or penalty;	
 
 	(d)	each Pension Plan is in compliance in all respects with the applicable provisions of ERISA (U.S.), the Internal Revenue Code (U.S.) and other federal or state laws; and	
 
 	(e)	no assets of any Obligor are or are deemed under applicable law to be “plan assets” within the meaning of United States Department of Labor Regulation 2510-101.	
 
 	14.7.6	In the ordinary course of its business, each Obligor reviews the effect of Environmental Laws on the operations and properties of such Obligor and its Subsidiaries, in the course of which it identifies and evaluates associated liabilities and costs (including, without limitation, any capital or operating expenditures required for clean-up or closure of properties presently or previously owned, any capital or operating expenditures required to achieve or maintain compliance with environmental protection standards imposed by law or as a condition of any license, permit or contract, any related constraints on operating activities, including any periodic or permanent shutdown of any facility or reduction in the level of or change in the nature of operations conducted thereat, and any actual or potential liabilities to third parties and any related costs and expenses). On the basis of this review, each Obligor has reasonably concluded that such associated liabilities and costs, including the costs of compliance with Environmental Laws, are unlikely to have a Material	
 
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 	Adverse Effect. The operations and properties of each Obligor and each of its Subsidiaries comply in all material respects with all applicable Environmental Laws and Environmental Permits, except for non-compliances which would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect; Hazardous Materials have not been released, discharged or disposed of on any property currently or formerly owned or operated by any Obligor or any of its Subsidiaries that would reasonably be expected to have a Material Adverse Effect; and there are no Environmental Actions pending or threatened against any Obligor or its Subsidiaries, and no circumstances exist that could be reasonably likely to form the basis of any such Environmental Action, which (in either case), individually or in the aggregate with all other such pending or threatened actions and circumstances, would reasonably be expected to have a Material Adverse Effect.	
 
14.8	Taxes	
Each Obligor and each of its Subsidiaries has filed, has caused to be filed or has been included in all material federal tax returns and all other material tax returns (including any stamp, registration or similar tax to be paid on or in relation to the Finance Documents to which it is a party) required to be filed and has paid all taxes shown thereon to be due, together with applicable interest and penalties, except to the extent contested in good faith and by appropriate proceedings (in which case adequate reserves have been established therefore in accordance with GAAP).
 
14.9	Compliance with Laws	
Each Obligor and its Subsidiaries are in compliance, in all material respects, with all applicable laws, ordinances, rules, regulations, guidelines and other requirements of governmental authorities and regulatory bodies (including APRA) except where the necessity of compliance therewith is contested in good faith by appropriate proceedings and any reserves required under generally accepted accounting principles with respect thereto have been established and except where any such failure could not reasonably be expected to materially adversely affect the business, consolidated financial position or consolidated results of operations of the Guarantor and its Consolidated Subsidiaries, considered as a whole.
 
14.10	Governing law and enforcement	
 
 	14.10.1	The choice of English law as the governing law of the Finance Documents will be recognised and enforced in its jurisdiction of incorporation.	
 
 	14.10.2	Any judgment obtained in England in relation to a Finance Document will be recognised and enforced in its jurisdiction of incorporation.	
 
14.11	Validity and Admissibility in Evidence	
All acts, conditions and things required to be done, fulfilled and performed in order:
 
 	14.11.1	to enable each Obligor lawfully to enter into, exercise its rights under and perform and comply with the obligations expressed to be assumed by it in the Finance Documents to which it is a party;	
 
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 	14.11.2	to ensure that the obligations expressed to be assumed by it in the Finance Documents to which it is a party are legal, valid, binding and enforceable; and	
 
 	14.11.3	to make the Finance Documents to which it is a party admissible in evidence in its jurisdiction of incorporation,	
have been done, fulfilled and performed (subject to any exception contained in the legal opinions provided as conditions precedent).
 
14.12	Claims Pari Passu	
Under the laws of its jurisdiction of incorporation in force at the date of this Agreement, the claims of the Finance Parties against each Obligor under this Agreement will rank at least pari passu with the claims of all its other unsecured and unsubordinated creditors save those claims which are preferred solely by any bankruptcy, insolvency, liquidation or other similar laws of general application or are mandatorily preferred by law applying to insurance companies generally.
 
14.13	No Winding-up	
No Obligor has taken any corporate action nor have any other steps been taken or legal proceedings been started or (to the best of its knowledge and belief) threatened against any Obligor for its winding-up, dissolution, administration or re-organisation (whether by voluntary arrangement, scheme of arrangement or otherwise) or for the appointment of a liquidator, receiver, administrator, administrative receiver, conservator, compulsory manager, custodian, trustee or similar officer of it or of any or all of its assets or revenues.
 
14.14	No Event of Default	
No Event of Default has occurred and is continuing.
 
15.	AFFIRMATIVE COVENANTS	
So long as the Loan or any other obligation of any Obligor under any Finance Document shall remain unpaid, each Obligor will:
 
15.1	Compliance with laws	
Comply and cause each of its Subsidiaries to comply with all applicable laws, rules, regulations and orders, such compliance to include without limitation, compliance with the prudential requirements of APRA, Environmental Laws, Environmental Permits, ERISA (U.S.) and the Racketeer Influenced and Corrupt Organizations Chapter of the Organized Crime Control Act of 1970, except where the failure to do so, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect.
 
15.2	Payment of Taxes	
Pay and discharge, and cause each of its Subsidiaries to pay and discharge, before the same shall become delinquent, all material taxes, assessments and governmental charges or levies imposed upon it or upon its property; provided, however , that neither any Obligor nor any of its Subsidiaries shall be required to pay or discharge any such tax, assessment, charge or levy that is being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained.
 
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15.3	Maintenance of Insurance	
Maintain, and cause each of its Material Subsidiaries to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Guarantor or such Material Subsidiary operates (it being understood that the foregoing shall not apply to maintenance of reinsurance or similar matters which shall be solely within the reasonable business judgment of the Guarantor and its Subsidiaries).
 
15.4	Preservation of Corporate Existence	
Preserve and maintain, and cause each of its Material Subsidiaries to preserve and maintain, its existence, legal structure, legal name, rights (charter and statutory), permits, licenses, approvals, privileges and franchises; provided, however , that:
 
 	15.4.1	the Guarantor and its Subsidiaries may consummate any merger or amalgamation or consolidation permitted under Clause 16.3 ( Mergers );	
 
 	15.4.2	no Subsidiary (other than an Obligor) shall be required to preserve and maintain its existence, legal structure, legal names or other rights (charter and statutory) if the management of a direct or indirect parent of such Subsidiary has determined that such action is not disadvantageous in any material respect to the Guarantor, such parent or the Banks; and	
 
 	15.4.3	neither the Guarantor nor any of its Subsidiaries shall be required to preserve any right, permit, license, approval, privilege or franchise if the management of the Guarantor or such Subsidiary shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Guarantor or such Subsidiary, as the case may be, and that the loss thereof is not disadvantageous in any material respect to the Guarantor, such Subsidiary or the Banks.	
 
15.5	Visitation Rights	
At any reasonable time and from time to time upon not less than three Business Days prior notice, permit the Agent (upon request made by the Agent or any Bank), or any agents or representatives thereof, at the expense (so long as no Default has occurred and is continuing) of the Agent or such Bank, as the case may be, to examine and make copies of and abstracts from the records and books of account of, and visit the properties of, the Guarantor and any of its Subsidiaries, and to discuss the affairs, finances and accounts of the Guarantor and any of its Subsidiaries with any of their officers or directors and with, so long as a representative of the Guarantor is present, their independent certified public accountants; provided that neither the Guarantor nor any of its Subsidiaries shall be required to disclose any information that it reasonably determines is entitled to the protection of attorney-client privilege.
 
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15.6	Keeping of Books	
Keep, and cause each of its Subsidiaries to keep, proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets and business of the Guarantor and each such Subsidiary sufficient to permit the preparation of financial statements in accordance with GAAP.
 
15.7	Maintenance of Properties	
Maintain and preserve, and cause each of its Subsidiaries to maintain and preserve, all of its properties that are used or useful in the conduct of its business in good working order and condition, ordinary wear and tear excepted, except where the failure to do so would not reasonably be expected to result in a Material Adverse Effect.
 
15.8	Transactions with Affiliates	
Conduct, and cause each of its Subsidiaries to conduct, all transactions otherwise permitted under the Finance Documents with any of their Affiliates (other than any such transactions between Obligors or wholly owned Subsidiaries of Obligors) on terms that are fair and reasonable and no less favourable than it would obtain in a comparable arm’s-length transaction with a Person not an Affiliate.
 
15.9	Pari Passu Ranking	
Ensure that at all times the claims of the Banks and the Agent against it under the Finance Documents will rank at least pari passu with the claims of all its other unsecured and unsubordinated creditors, except for claims which are preferred by any bankruptcy, insolvency, liquidation or other similar laws of general application or are mandatorily preferred by law applying to insurance companies generally.
 
15.10	“Know your customer” checks	
 
 	15.10.1	If:	
 
 	(a)	the introduction of or any change in (or in the interpretation, administration or application of) any law or regulation made after the date of this Agreement;	
 
 	(b)	any change in the status of an Obligor or the composition of the shareholders of an Obligor after the date of this Agreement; or	
 
 	(c)	a proposed assignment or transfer by a Bank of any of its rights and/or obligations under this Agreement to a party that is not a Bank prior to such assignment or transfer,	
obliges the Agent or any Bank (or, in the case of paragraph (c) above, any prospective new Bank) to comply with “know your customer” or similar identification procedures in circumstances where the necessary information is not already available to it, each Obligor shall promptly upon the request of the Agent or any Bank supply, or procure the supply of, such documentation and other evidence as is reasonably requested by the Agent (for itself or on behalf of any Bank) or any Bank (for itself or, in the case of the event described in paragraph (c) above, on behalf of any prospective new Bank) in order for the
 
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Agent, such Bank or, in the case of the event described in paragraph (c) above, any prospective new Bank to carry out and be satisfied with the results of all necessary “know your customer” or other similar checks under all applicable laws and regulations pursuant to the transactions contemplated in the Finance Documents.
 
 	15.10.2	Each Bank shall promptly upon the request of the Agent supply, or procure the supply of, such documentation and other evidence as is reasonably requested by the Agent (for itself) in order for the Agent to carry out and be satisfied with the results of all necessary “know your customer” or other similar checks under all applicable laws and regulations pursuant to the transactions contemplated in the Finance Documents.	
 
 	15.10.3	If any Obligor assigns or transfers all or any of its rights, benefits and obligations under the Finance Documents pursuant to Clause 29.2 ( No Assignments and Transfers by the Obligors ) or Clause 29.3 ( Novation by Original Borrower ) and the accession of such new Obligor obliges the Agent or any Bank to comply with “know your customer” or similar identification procedures in circumstances where the necessary information is not already available to it, the Guarantor shall promptly upon the request of the Agent or any Bank supply, or procure the supply of, such documentation and other evidence as is reasonably requested by the Agent (for itself or on behalf of any Bank) in order for the Agent or such Bank or any prospective new Bank to carry out and be satisfied with the results of all necessary “know your customer” or other similar checks under all applicable laws and regulations pursuant to the accession of such new Obligor to this Agreement.	
 
16.	NEGATIVE COVENANTS	
So long as the Loan or any other obligation of any Obligors under any Finance Document shall remain unpaid, each of the Obligors will not, at any time:
 
16.1	Liens	
Create, incur, assume or suffer to exist, or permit any of its Subsidiaries to create, incur, assume or suffer to exist, any Lien on or with respect to any of its properties of any character (including, without limitation, accounts) whether now owned or hereafter acquired, or assign or permit any of its Subsidiaries to assign, any accounts or other right to receive income, except:
 
 	16.1.1	Permitted Liens;	
 
 	16.1.2	Liens described in Schedule 10 hereto;	
 
 	16.1.3	purchase money Liens upon any property acquired or held by the Guarantor or any of its Subsidiaries in the ordinary course of business to secure the purchase price of such property or to secure Debt incurred solely for the purpose of financing the acquisition, construction or improvement of any property to be subject to such Liens, or Liens existing on any property at the	
 
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 	time of acquisition or within 180 days following such acquisition (other than any such Liens created in contemplation of such acquisition that do not secure the purchase price), or extensions, renewals or replacements of any of the foregoing for the same or a lesser amount; provided, however , that no such Lien shall extend to or cover any property other than the property being acquired, constructed or improved, and no such extension, renewal or replacement shall extend to or cover any property not theretofore subject to the Lien being extended, renewed or replaced;	
 
 	16.1.4	Liens arising in connection with Capitalised Leases; provided that no such Lien shall extend to or cover any assets other than the assets subject to such Capitalised Leases;	
 
 	16.1.5	(a) any Lien existing on any asset of any Person at the time such Person becomes a Subsidiary and not created in contemplation of such event, (b) any Lien on any asset of any Person existing at the time such Person is merged or consolidated with or into the Guarantor or any of it Subsidiaries in accordance with Clause 16.3 ( Mergers ) and not created in contemplation of such event; and (c) any Lien existing on any asset prior to the acquisition thereof by the Guarantor or any of its Subsidiaries and not created in contemplation of such acquisition;	
 
 	16.1.6	Liens securing obligations under credit default swap transactions determined by reference to, or Contingent Obligations in respect of, Debt issued by the Guarantor or one of its Subsidiaries; such Debt not to exceed an aggregate principal amount of US$550,000,000 or its equivalent;	
 
 	16.1.7	Liens arising in the ordinary course of its business which:	
 
 	(a)	do not secure Debt; and	
 
 	(b)	do not in the aggregate materially detract from the value of its assets or materially impair the use thereof in the operation of its business;	
 
 	16.1.8	Liens on cash and Approved Investments securing Hedge Agreements arising in the ordinary course of business;	
 
 	16.1.9	other Liens securing Debt or other obligations outstanding in an aggregate principal or face amount not to exceed at any time 5 per cent. of Consolidated Net Worth;	
 
 	16.1.10	Liens consisting of deposits made by the Guarantor or any insurance Subsidiary with any insurance regulatory authority or other statutory Liens or Liens or claims imposed or required by applicable insurance law or regulation against the assets of the Guarantor or any insurance Subsidiary, in each case in favour of policyholders of the Guarantor or such insurance Subsidiary or an insurance regulatory authority and in the ordinary course of the Guarantor’s or such insurance Subsidiary’s business;	
 
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 	16.1.11	Liens on Investments and cash balances of the Guarantor or any insurance Subsidiary (other than capital stock of any Subsidiary) securing obligations of the Guarantor or any insurance Subsidiary in respect of:	
 
 	(a)	letters of credit obtained in the ordinary course of business; and/or	
 
 	(b)	trust arrangements formed in the ordinary course of business for the benefit of cedents to secure reinsurance recoverables owed to them by the Guarantor or any insurance Subsidiary;	
 
 	16.1.12	the replacement, extension or renewal of any Lien permitted by clause 16.1.2 or 16.1.6 above upon or in the same property theretofore subject thereto or the replacement, extension or renewal (without increase in the amount (other than in respect of fees, expenses and premiums, if any) or change in any direct or contingent obligor) of the Debt secured thereby;	
 
 	16.1.13	Liens securing obligations owed by any Obligor to any other Obligor or owed by any Subsidiary of the Guarantor (other than an Obligor) to the Guarantor or any other Subsidiary;	
 
 	16.1.14	Liens incurred in the ordinary course of business in favour of financial intermediaries and clearing agents pending clearance of payments for investment or in the nature of set-off, banker’s lien or similar rights as to deposit accounts or other funds;	
 
 	16.1.15	judgment or judicial attachment Liens, provided that the enforcement of such Liens is effectively stayed;	
 
 	16.1.16	Liens arising in connection with Securitisation Transactions; provided that the aggregate principal amount of the investment or claim held at any time by all purchasers, assignees or other transferees of (or of interests in) receivables and other rights to payment in all Securitisation Transactions (together with the aggregate principal amount of any other obligations secured by such Liens) shall not exceed US$750,000,000 or its equivalent;	
 
 	16.1.17	Liens on securities arising out of repurchase agreements with a term of not more than three months entered into with “Lenders” (as such term is defined in the JPMorgan Credit Agreement as defined below) or their Affiliates or with securities dealers of recognised standing; provided that the aggregate amount of all assets of the Guarantor and its Subsidiaries subject to such agreements shall not at any time exceed US$1,000,000,000 or its equivalent. For purposes of this clause 16.1.17, “JPMorgan Credit Agreement” shall mean the Second Amended and Restated Credit Agreement dated as of 8 November 2007 among the Guarantor, ACE Bermuda Insurance Ltd, ACE Tempest Reinsurance Ltd, and ACE INA Holdings Inc., as borrowers, various financial institutions, and JPMorgan Chase Bank, N.A., as Agent, as amended, modified, supplemented or restated from time to time; and	
 
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 	16.1.18	Liens securing up to an aggregate amount of US$200,000,000 or its equivalent of obligations of the Guarantor or any wholly owned Subsidiary, arising out of catastrophe bond financing.	
 
16.2	Change in Nature of Business	
Make any material change in the nature of the business of the Guarantor and its Material Subsidiaries, taken as a whole, as carried on at the date hereof.
 
16.3	Mergers	
Merge into or amalgamate or consolidate with any Person or permit any Person to merge into it, or permit any of its Subsidiaries to do so, except that:
 
 	16.3.1	any Subsidiary of the Guarantor may merge into or amalgamate or consolidate with any other Subsidiary of the Guarantor, provided that , in the case of any such merger, amalgamation or consolidation, the Person formed by such merger, amalgamation or consolidation shall be a wholly owned Subsidiary of the Guarantor, provided further that , in the case of any such merger, amalgamation or consolidation to which the Borrower is a party, the Person formed by such merger, amalgamation or consolidation shall be the Borrower;	
 
 	16.3.2	any Subsidiary of any Borrower may merge into or amalgamate or consolidate with any other Person or permit any other Person to merge into, amalgamate or consolidate with it; provided that the Person surviving such merger, amalgamation or consolidation shall be a wholly owned Subsidiary of the Guarantor;	
 
 	16.3.3	in connection with any sale or other disposition permitted under Clause 16.4 ( Sales of Assets ), any Subsidiary of the Guarantor may merge into or amalgamate or consolidate with any other Person or permit any other Person to merge into or amalgamate or consolidate with it; and	
 
 	16.3.4	the Guarantor or the Borrower may merge into or amalgamate or consolidate with any other Person; provided that , in the case of any such merger, amalgamation or consolidation, the Person formed by such merger, amalgamation or consolidation shall be the Guarantor or the Borrower, as the case may be;	
provided, however, that in each case, immediately after giving effect thereto, no event shall occur and be continuing that constitutes a Default.
 
16.4	Sales of Assets	
Sell, lease, transfer or otherwise dispose of, or permit any other Obligor to sell, lease, transfer or otherwise dispose of, all or substantially all of its assets (excluding sales of investment securities in the ordinary course of business).
 
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16.5	[Intentionally deleted.]	
 
16.6	Accounting Changes	
Make or permit, or permit any of its Subsidiaries to make or permit, any change in accounting policies or reporting practices, except as permitted by GAAP.
 
17.	INFORMATION COVENANTS	
So long as the Loan or any other obligation of any Obligor under any Finance Document shall remain unpaid, the Guarantor will furnish to the Agent and the Banks:
 
17.1	Default notice	
As soon as possible and in any event within five days after the occurrence of each Default or any event, development or occurrence reasonably likely to have a Material Adverse Effect continuing on the date of such statement, a statement of a Responsible Officer of the Guarantor setting forth details of such Default, event, development or occurrence and the action that the Guarantor or the applicable Subsidiary has taken and proposes to take with respect thereto.
 
17.2	Annual Financials	
 
 	17.2.1	As soon as available and in any event within 90 days after the end of each Fiscal Year (or, if earlier, within five Business Days after such date as the Guarantor is required to file its annual report on Form 10-K for such Fiscal Year with the Securities and Exchange Commission), a copy of the annual Consolidated audit report for such year for the Guarantor and its Subsidiaries, including therein a Consolidated balance sheet of the Guarantor and its Subsidiaries as of the end of such Fiscal Year and Consolidated statements of income and cash flows of the Guarantor and its Subsidiaries for such Fiscal Year, all reported on in a manner reasonably acceptable to the Securities and Exchange Commission in each case and accompanied by an opinion of PricewaterhouseCoopers LLP or other independent public accountants of recognised standing reasonably acceptable to the Majority Banks, together with (i) a Compliance Certificate of the Chief Financial Officer, Chief Accounting Officer or Chief Compliance Officer of the Guarantor stating that no Default has occurred and is continuing, or if a Default has occurred and is continuing, a statement as to the nature thereof and the action that the Guarantor has taken a proposes to take with respect thereto, and (ii) a schedule in form reasonably satisfactory to the Agent of the computations used by the Guarantor in determining, as of the end of such Fiscal Year, compliance with the covenants contained in Section 17 ( Financial Covenants ).	
 
 	17.2.2	As soon as available and in any event within 120 days after the end of each Fiscal Year, a copy of the annual audited Consolidated financial report for such year for the Borrower and its Subsidiaries, including therein a Consolidated balance sheet of the Borrower and its Subsidiaries as of the end of such Fiscal Year and a Consolidated statement of income and a Consolidated statement of cash flows of such the Borrower and its Subsidiaries	
 
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 	for such Fiscal Year, all in reasonable detail and prepared in accordance with the Corporations Act (Australia) and Australian GAAP, in each case accompanied by an opinion of PricewaterhouseCoopers LLP or other independent public accountants of recognised standing acceptable to the Majority Banks.	
 
17.3	Quarterly financials	
As soon as available and in any event within 45 days after the end of each of the first three quarters of each Fiscal Year (or, if earlier, within five Business Days after such date as the Guarantor is required to file its quarterly report on Form 10-Q for such fiscal quarter with the Securities and Exchange Commission), Consolidated balance sheets of the Guarantor and its Subsidiaries as of the end of such quarter and Consolidated statements of income and a Consolidated statement of cash flows of the Guarantor and its Subsidiaries for the period commencing at the end of the previous fiscal quarter and ending with the end of such fiscal quarter and Consolidated statements of income and a Consolidated statement of cash flows of the Guarantor and its Subsidiaries for the period commencing at the end of the previous Fiscal Year and ending with the end of such quarter, setting forth in each case in comparative form the corresponding figures for the corresponding date or period of the preceding Fiscal year, all in reasonable detail and duly certified (subject to the absence of footnotes and normal year-end audit adjustments) by the Chief Financial Officer, Chief Accounting Officer or Chief Compliance Officer of the Guarantor as having been prepared in accordance with GAAP, together with (i) a Compliance Certificate of said officer stating that no Default has occurred and is continuing or, if a Default has occurred and its continuing, a statement as to the nature thereof and the action that the Guarantor has taken and proposes to take with respect thereto and (ii) a schedule in form reasonably satisfactory to the Agent of the computations used by the Guarantor in determining compliance with the covenants contained in Clause 18 ( Financial Covenants ).
 
17.4	Litigation	
Promptly after the commencement thereof, notice of all actions, suits, investigations, litigation and proceedings before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, affecting any or any of its Subsidiaries of the type described in Clause 13.5 ( Litigation ).
 
17.5	Securities Reports	
Promptly after the sending or filing thereof, copies of all proxy statements, financial statements and reports that the Guarantor sends to its stockholders generally, copies of all regular, periodic and special reports, and all registration statements, that any Obligor or any of its Subsidiaries files with the Securities and Exchange Commission or any governmental authority that may be substituted therefor, or with any national securities exchange.
 
17.6	Regulatory Notices	
Promptly after any Responsible Officer of the Guarantor obtains knowledge thereof:
 
 	17.6.1	a copy of any notice from the Bermuda Minister of Finance or the Registrar of Companies or any other person of the revocation, the suspension or the placing of any restriction or condition on the registration as an insurer of any Obligor under the Bermuda Insurance Act 1978 (and related regulations) or of the institution of any proceeding or investigation which could result in any such revocation, suspension or placing of such a restriction or condition;	
 
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 	17.6.2	copies of any correspondence by, to or concerning any Obligor relating to an investigation conducted by the Bermuda Minister of Finance, whether pursuant to Section 132 of the Bermuda Companies Act 1981 (and related regulations) or otherwise; and	
 
 	17.6.3	a copy of any notice of or requesting or otherwise relating to the winding-up or any similar proceeding of or with respect to any Obligor.	
 
17.7	APRA	
Promptly after the Borrower or any Original Borrower Group company receives or sends it, or any Responsible Officer of the Borrower, the Guarantor or any Original Borrower Group company obtains knowledge thereof, a copy of:
 
 	17.7.1	any notice, direction or other communication between APRA and the Borrower or any Original Borrower Group company under or in connection with Part V of the Insurance Act (Australia); and	
 
 	17.7.2	any notice, direction, ruling, regulation, prudential standard, guidance note or other instrument or prudential requirement of APRA which is not publicly available and which could directly or indirectly inhibit, restrict or prevent the Borrower or any Original Borrower Group company from complying with its obligations under or in connection with the Finance Documents.	
 
17.8	Other Information	
From time to time such additional information regarding the financial position, results of operations or business of any Obligor or any of its Subsidiaries as the Agent, at the request of any Bank, may reasonably request from time to time except where the furnishing of such information is restricted or prohibited by applicable law or regulation including, but not limited to, a certificate of compliance in relation to compliance with:
 
 	17.8.1	all current regulatory requirements applicable to any Obligor or any of its Subsidiaries (such as the prudential requirements under the Insurance Act (Australia) and rulings, regulations, prudential standards guidance notices and other instruments under it); and	
 
 	17.8.2	any directions given by any governmental authority or regulatory body (such as APRA).	
 
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17.9	ERISA (U.S.)	
 
 	17.9.1	ERISA Events . Promptly and in any event within 10 days after any Obligor or any ERISA Affiliate institutes any steps to terminate any Pension Plan or becomes aware of the institution of any steps or any threat by the PBGC to terminate any Pension Plan, or the failure to make a required contribution to any Pension Plan if such failure is sufficient to give rise to a lien under section 302(f) of ERISA (U.S.), or the taking of any action with respect to a Pension Plan which could reasonably be expected to result in the requirement that any Obligor or any ERISA Affiliate furnish a bond or other security to the PBGC or such Pension Plan, or the occurrence of any event with respect to any Pension Plan which could reasonably be expected to result in any Obligor or any ERISA Affiliate incurring any material liability, fine or penalty, or any material increase in the contingent liability of any Obligor or any ERISA Affiliate with respect to any post-retirement Welfare Plan benefit, notice thereof and copies of all documentation relating thereto.	
 
 	17.9.2	Plan Annual Reports . Promptly upon request of any Agent or any Bank, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Pension Plan.	
 
 	17.9.3	Multiemployer Plan Notices . Promptly and in any event within 15 Business Days after receipt thereof by any Obligor or any ERISA Affiliate from the sponsor of a Multiemployer Plan, copies of each notice concerning:	
 
 	(a)	the imposition of Withdrawal Liability by any such Multiemployer Plan;	
 
 	(b)	the reorganisation or termination, within the meaning of Title IV of ERISA (U.S.), of any such Multiemployer Plan; or	
 
 	(c)	the amount of liability incurred, or that may be incurred, by such Obligor or any ERISA Affiliate in connection with any event described in clause (a) or (b); provided, however, that such notice and documentation shall not be required to be provided (except at the specific request of any Agent or any Bank, in which case such notice and documentation shall be promptly provided following such request) if such condition or event is not reasonably expected to result in any Obligor or any ERISA Affiliate incurring any material liability, fine, or penalty.	
 
17.10	Delivery of Information	
Information required to be delivered pursuant to Clauses 17.2, 17.3 and 17.5 shall be deemed to have been delivered on the date on which the Guarantor provides notice to the Agent that such information has been posted on the Guarantor’s website on the Internet at the website address listed on the signature pages hereof, at www.sec.gov or at another website identified in such notice and accessible by the Banks without charge; provided that (x) such notice may be included in a certificate delivered pursuant to Clauses 17.2.1 or 17.3 and (y), the Guarantor shall deliver paper copies of the information referred to in Clauses 17.2, 17.3 and 17.5 to any Bank which requests such delivery.
 
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18.	FINANCIAL COVENANTS	
 
18.1	Adjusted Consolidated Debt to Total Capitalisation Ratio	
The Guarantor shall maintain at all times a ratio of Adjusted Consolidated Debt to Total Capitalisation of not more than 0.35 to 1.
 
18.2	Consolidated Net Worth	
 
 	18.2.1	The Guarantor shall maintain at all times Consolidated Net Worth in an amount not less than the Minimum Amount.	
 
 	18.2.2	For the purposes of Clause 18.2.1:	
 
 	(a)	“ Base Amount ” shall be US$9,570,000,000 as at 31 December 2006, and shall be reset on the earlier of:	
 
 	(i)	the date of delivery of the financial statements for any Fiscal Year pursuant to Clause 17.2 (beginning with the financial statements for the Fiscal Year ending 31 December 2007); and	
 
 	(ii)	30 March of each year (beginning 30 March 2008),	
in an amount equal to the greater of (x) 70 per cent. of the Consolidated Net Worth as of the last day of the immediately preceding Fiscal Year and (y) the Minimum Amount in effect as of the last day of the immediately preceding Fiscal Year; and
 
 	(b)	“ Minimum Amount ” is an amount equal to the sum of:	
 
 	(i)	the then current Base Amount;	
plus
 
 	(ii)	25 per cent. of Consolidated Net Income for each completed fiscal quarter of the Guarantor for which such Consolidated Net Income is positive and that ends after the date on which the then current Base Amount become effective and on or before the last day of the then current Fiscal Year;	
plus
 
 	(iii)	50 per cent. of any increase in Consolidated Net Worth during such period attributable to the issuance of ordinary or preferred shares.	
 
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19.	EVENTS OF DEFAULT	
Each event described in Clauses 19.1 ( Failure to Pay ) to 19.12 ( Finance Documents ) which shall occur and be continuing will constitute an Event of Default for the purposes of this Agreement.
 
19.1	Failure to Pay	
Any Obligor shall fail to make any payment of interest on the Loan or of any other amount payable by such Obligor under any Finance Document, within five Business Days after the same becomes due and payable.
 
19.2	Misrepresentation	
Any representation or warranty made by any Obligor (or any of its officers) under or in connection with any Finance Document shall prove to have been incorrect in any material respect when made.
 
19.3	Specific Covenants	
Any Obligor shall fail to perform or observe any term, covenant or agreement contained in Clause 15.4 ( Preservation of Corporate Existence ), (solely with respect to the existence of the Guarantor), Clause 16 ( Negative Covenants ), Clause 17.1 ( Default Notice ), Clause 18 ( Financial Covenants ) or Clause 29.3 ( Novation by Original Borrower ).
 
19.4	Other Obligations	
 
 	19.4.1	Any Obligor shall fail to perform or observe any term, covenant or agreement contained in Clause 15.5 ( Visitation Rights ) if such failure shall remain unremedied for five Business Days after written notice thereof shall have been given to such Obligor by the Agent or any Bank; or	
 
 	19.4.2	any Obligor shall fail to perform or observe any other term, covenant or agreement contained in any Finance Document on its part to be performed or observed if such failure shall remain unremedied for 30 days after the earlier of the date on which (i) a Responsible Officer becomes aware of such failure or (ii) written notice thereof shall have been given to such Obligor by any Agent or any Bank.	
 
19.5	Cross-default	
The Guarantor or any of its Subsidiaries shall fail to pay any Material Financial Obligation (but excluding Debt outstanding hereunder) of the Guarantor or such Subsidiary (as the case may be), when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Material Financial Obligation; or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Material Financial Obligation and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Material Financial Obligation or otherwise to cause, or to permit the holder thereof to
 
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cause, such Material Financial Obligation to mature; or any such Material Financial Obligation shall be declared to be due and payable or required to be prepaid or redeemed (other than by a regularly scheduled required prepayment or redemption), purchased or defeased, or an offer to prepay, redeem, purchase or defease such Material Financial Obligation shall be required to be made, in each case prior to the stated maturity thereof.
 
19.6	Insolvency	
Any Obligor or any Significant Subsidiary shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against any Obligor or any Significant Subsidiary seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganisation, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it) that is being diligently contested by it in good faith, either such proceeding shall remain undismissed or unstayed for a period of 60 days or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or any substantial part of its property) shall occur; or any Obligor or any Significant Subsidiary shall take any corporate action to authorise any of the actions set forth above in this Clause 19.6.
 
19.7	Failure to comply with judgment	
Any final judgment or order for the payment of money in excess of US$100,000,000 or its equivalent shall be rendered against any Obligor or any of its Subsidiaries and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect.
 
19.8	Binding and enforceable	
Any provision in Clause 31 ( Guarantee and Indemnity ) of this Agreement shall for any reason cease to be valid and binding on or enforceable against the Guarantor (other than as a result of a transaction permitted hereunder), or the Guarantor shall so state in writing.
 
19.9	Change of Control	
A Change of Control shall occur.
 
19.10	ERISA (U.S.)	
 
 	19.10.1	Any Obligor or any ERISA Affiliate shall incur or shall be reasonably expected to incur liability in excess of US$25,000,000 or its equivalent in the aggregate with respect to any Pension Plan or any Multiemployer Plan in connection with the occurrence of any of the following events or existence of any of the following conditions:	
 
 	(a)	institution of any steps by any Obligor, any ERISA Affiliate or any other Person, including, without limitation, the PBGC to terminate a Pension Plan if as a result of such termination an Obligor or any ERISA Affiliate would reasonably expect to be required to make a contribution to such Pension Plan, or would reasonably be expected to incur a liability or obligation; or	
 
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 	(b)	a contribution failure occurs with respect to any Pension Plan sufficient to give rise to a lien under section 302(f) of ERISA (U.S.); or	
 
 	(c)	any condition shall exist or event shall occur with respect to a Pension Plan that is reasonably expected to result in any Obligor or any ERISA Affiliate being required to furnish a bond or security to the PBGC or such Pension Plan, or incurring a liability or obligation in excess of US$25,000,000; or	
 
 	19.10.2	any Obligor or any ERISA Affiliate shall have been notified by the sponsor of a Multiemployer Plan that it has incurred Withdrawal Liability or a default, within the meaning of Section 4219(c)(5) of ERISA (U.S.), has occurred with respect to such Multiemployer Plan which, in each case, could reasonably be expected to cause any Obligor or any ERISA Affiliate to incur a payment obligation in excess of US$25,000,000 or its equivalent.	
 
19.11	Ownership of the Borrower	
The Borrower ceases to be a Wholly Owned Consolidated Subsidiary of the Guarantor.
 
19.12	Finance Documents	
Any provision of any Finance Document is repudiated by any Obligor, without the written consent of the Agent and the Majority Banks.
 
19.13	Acceleration and Cancellation	
Upon the occurrence of an Event of Default at any time thereafter while that Event of Default is continuing, the Agent shall at the request or may with the consent of the Majority Banks by notice to the Borrower take either or both of the following actions:
 
 	19.13.1	cancel the Facility whereupon the Facility shall immediately be cancelled; and	
 
 	19.13.2	declare that all or part of the Loan, together with accrued interest, and all other amounts accrued or outstanding under the Finance Documents be immediately due and payable, whereupon they shall become immediately due and payable.	
 
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20.	FEES	
 
20.1	Arrangement Fees	
On the Commencement Date, the Guarantor shall pay to the Lead Arrangers the fees specified in the letter dated on or about the date of this Agreement from the Lead Arrangers to the Guarantor at the times and in the amounts specified in such letter.
 
20.2	Agency Fee	
The Guarantor shall pay to the Agent for its own account the agency fee specified in the letter dated on or about the date of this Agreement from the Agent to the Guarantor at the times and in the amounts specified in such letter.
 
21.	COSTS AND EXPENSES	
 
21.1	Transaction Expenses	
The Guarantor shall, from time to time within thirty days of demand of the Agent, reimburse the Agent and the Lead Arrangers for all reasonable and documented costs and expenses (including reasonable and documented legal fees of a single counsel for the Agent and the Lead Arrangers in each relevant jurisdiction) together with any VAT thereon incurred by them in connection with the negotiation, preparation, printing, execution and syndication of the Finance Documents, any other document referred to in the Finance Documents and the completion of the transactions therein contemplated.
 
21.2	Preservation and Enforcement of Rights	
The Borrower shall, from time to time on demand of the Agent, reimburse the Finance Parties for all reasonable and documented costs and expenses (including reasonable and documented legal fees of a single counsel for the Finance Parties in each relevant jurisdiction) properly incurred on a full indemnity basis together with any VAT thereon incurred in or in connection with the preservation and/or enforcement of any of the rights of the Finance Parties under the Finance Documents and any document referred to in the Finance Documents (including, without limitation, any costs and expenses relating to any investigation as to whether or not an Event of Default has occurred or any steps necessary or desirable in connection with any proposal for remedying or otherwise resolving a Default); provided that the Borrower shall only reimburse the costs and expenses of a single counsel for the Finance Parties in each relevant jurisdiction unless, and to the extent that, such counsel reasonably determines that a conflict requires the engagement of additional counsel.
 
21.3	Stamp Taxes	
The Borrower shall pay all stamp, registration and other taxes to which the Finance Documents, any document related to the Finance Documents or any judgment given in connection therewith is or at any time may be subject and to which it is a party and shall, from time to time on demand of the Agent, indemnify the Finance Parties against any liabilities, costs, claims and expenses resulting from any failure to pay or any delay in paying any such tax.
 
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21.4	Amendment Costs	
If an Obligor requests any amendment, waiver or consent to any Finance Document then the Borrower shall, within thirty days of demand by the Agent reimburse the Agent for all reasonable and documented costs and expenses (including reasonable and documented legal fees of a single counsel for the Agent in each relevant jurisdiction) together with any VAT thereon incurred by the Agent in responding to or complying with such request.
 
21.5	Banks’ Liabilities for Costs	
If the Guarantor fails to perform any of its obligations under this Clause 21 each Bank shall, in its Proportion, indemnify each of the Agent and the Lead Arrangers against any loss incurred by any of them as a result of such failure.
 
22.	DEFAULT INTEREST AND BREAK COSTS	
 
22.1	Default Interest	
If any sum due and payable by an Obligor hereunder is not paid on the due date therefor in accordance with Clause 25 ( Payments ) or if any sum due and payable by an Obligor under any judgment of any court in connection herewith is not paid on the date of such judgment, the period beginning on such due date or, as the case may be, the date of such judgment and ending on the date upon which the obligation of such Obligor to pay such sum is discharged shall be divided into successive periods, each of which (other than the first) shall start on the last day of the preceding such period and the duration of each of which shall (except as otherwise provided in this Clause 22) be selected by the Agent.
 
22.2	Default Interest Rate	
An Unpaid Sum shall bear interest during each Interest Period in respect thereof at the rate per annum which is the one per cent. higher than the rate which would have been payable if the overdue amount had, during the period of non-payment, constituted the Loan in the currency of the overdue amount for successive Interest Periods, each of duration selected by the Agent (acting reasonably).
 
22.3	Payment of Default Interest	
Any interest which shall have accrued under Clause 22.1 ( Default Interest ) in respect of an Unpaid Sum shall be due and payable and shall be paid by the relevant Obligor, together with any Mandatory Costs in respect thereof on the last day of each Interest Period in respect thereof or on such other dates as the Agent may specify by notice to the relevant Obligor.
 
22.4	Break Costs	
If any Bank or the Agent on its behalf receives or recovers all or any part of an Unpaid Sum or the Loan otherwise than on the last day of a Interest Period relating thereto, the Borrower shall pay to the Agent on demand for the account of such Bank an amount equal to the amount (if any) by which:
 
 	22.4.1	the additional interest which would have been payable on the amount so received or recovered had it been received or recovered on the last day of that Interest Period	
 
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exceeds
 
 	22.4.2	the amount of interest which in the opinion of the Agent (acting reasonably) would have been payable to the Agent on the last day of that Interest Period in respect of a deposit in the currency of the amount so received or recovered equal to the amount so received or recovered placed by it with a prime bank in London for a period starting on the first Business Day following the date of such receipt or recovery and ending on the last day of that Interest Period.	
 
22.5	Break Gains	
If:
 
 	22.5.1	any Bank or the Agent on its behalf receives or recovers all or any part of the Loan otherwise than on the last day of an Interest Period relating thereto; and	
 
 	22.5.2	the amount calculated under sub-clause 22.4.2 of Clause 22.4 ( Break Costs ) in respect of that Loan exceeds the corresponding amount calculated under sub-clause 22.4.1 of Clause 22.4 ( Break Costs ) in respect that Loan,	
the Agent shall pay to the Borrower for the account of the Borrower an amount equal to the amount (if any).
 
23.	INDEMNITIES	
 
23.1	Borrower’s Indemnity	
The Borrower undertakes to indemnify:
 
 	23.1.1	each Finance Party against any reasonable cost, claim, loss, expense (including legal fees) or liability together with any VAT thereon, whether or not reasonably foreseeable, which it may sustain or incur as a consequence of the occurrence of any Event of Default or any default by an Obligor in the performance of any of the obligations expressed to be assumed by it in the Finance Documents;	
 
 	23.1.2	the Agent against any reasonable cost or loss it may suffer or incur as a result of its entering into, or performing, any foreign exchange contract for the purposes of Clause 25 ( Payments ); and	
 
 	23.1.3	each Bank against any reasonable cost or loss it may suffer under Clause 21.5 ( Banks’ Liabilities for Costs ) or Clause 28.5 ( Indemnification ).	
 
23.2	Currency Indemnity	
If any sum (a “ Sum ”) due from an Obligor under the Finance Documents or any order or judgment given or made in relation thereto has to be converted from the currency (the “ First Currency ”) in which such Sum is payable into another currency (the “ Second Currency ”) for the purpose of:
 
 	23.2.1	making or filing a claim or proof against such Obligor;	
 
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 	23.2.2	obtaining an order or judgment in any court or other tribunal; or	
 
 	23.2.3	enforcing any order or judgment given or made in relation thereto,	
that Obligor shall indemnify each person to whom such Sum is due from and against any loss suffered or incurred as a result of any discrepancy between (a) the rate of exchange used for such purpose to convert such Sum from the First Currency into the Second Currency and (b) the rate or rates of exchange available to such person at its prevailing spot rate at the time of receipt of such Sum.
 
24.	CURRENCY OF ACCOUNT AND PAYMENT	
 
24.1	Currency of Account	
Australian dollars is the currency of account and payment for each and every sum at any time due from an Obligor hereunder, provided that :
 
 	24.1.1	each sum falling due by an Obligor hereunder in relation to any demand made under the Loan or in relation to any reimbursement of the Banks pursuant to a demand made under the Loan shall be made in the currency of the demand;	
 
 	24.1.2	each payment of interest shall be made in the currency in which the sum in respect of which such interest is payable is denominated;	
 
 	24.1.3	each payment in respect of costs and expenses shall be made in the currency in which the same were incurred;	
 
 	24.1.4	each payment pursuant to Clause 8.2 ( Tax Indemnity ) or Clause 10.1 ( Increased Costs ) shall be made in the currency specified by the party claiming thereunder; and	
 
 	24.1.5	any amount expressed to be payable in a currency other than Australian dollars shall be paid in that other currency.	
 
25.	PAYMENTS	
 
25.1	Payments to the Agent	
On each date on which this Agreement requires an amount to be paid by an Obligor, such Obligor shall make the same available to the Agent for value on the due date at such time and in such funds and to such account with such bank as the Agent shall specify from time to time upon reasonable advance notice to such Obligor.
 
25.2	Payments by the Agent	
Save as otherwise provided herein, each payment received by the Agent pursuant to Clause 25.1 ( Payments to the Agent ) shall be made available by the Agent to the person entitled to receive such payment in accordance with this Agreement (in the case of a
 
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Bank, for the account of its Facility Office) for value the same day by transfer to such account of such person with such bank in the principal financial centre of the country of the currency of such payment as such person shall have previously notified to the Agent.
 
25.3	No Set-off	
All payments required to be made by an Obligor hereunder shall be calculated without reference to any set-off or counterclaim and shall be made free and clear of and without any deduction for or on account of any set-off or counterclaim.
 
25.4	Clawback	
Where a sum is to be paid hereunder to the Agent for the account of another person, the Agent shall not be obliged to make the same available to that other person or to enter into or perform any exchange contract in connection therewith until it has been able to establish to its satisfaction that it has actually received such sum, but if it does so and it proves to be the case that it had not actually received such sum, then the person to whom such sum or the proceeds of such exchange contract was so made available shall on request refund the same to the Agent together with an amount sufficient to indemnify the Agent against any cost or loss it may have suffered or incurred by reason of its having paid out such sum or the proceeds of such exchange contract prior to its having received such sum.
 
25.5	Partial Payments	
If an Event of Default exists and a payment is made by an Obligor hereunder and the Agent receives an amount less than the due amount of such payment the Agent may apply the amount received towards the obligations of that Obligor under this Agreement in the following order:
 
 	25.5.1	first, in or towards payment of any unpaid costs and expenses of each of the Agent and the Lead Arrangers;	
 
 	25.5.2	second , in or towards payment pro rata of any accrued interest, commission or fees payable to any Bank hereunder due but unpaid;	
 
 	25.5.3	third , in or towards payment pro rata of the outstanding Loan due but unpaid; and	
 
 	25.5.4	fourth , in or towards payment pro rata of any other sum due but unpaid.	
 
25.6	Variation of Partial Payments	
The order of partial payments set out in Clause 25.5 ( Partial Payments ) shall override any appropriation made by the Obligors to which the partial payment relates but the order set out in sub-clauses 25.5.2, 25.5.3 and 25.5.4 of Clause 25.5 ( Partial Payments ) may be varied if agreed by all the Banks.
 
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26.	SET-OFF	
 
26.1	Contractual Set-off	
Each Obligor authorises each Bank at any time after an Event of Default has occurred which is continuing to apply any credit balance to which such Obligor is entitled on any account of such Obligor with such Bank in satisfaction of any sum due and payable from such Obligor to such Bank hereunder (whether by way of collateralisation or otherwise) but unpaid. For this purpose, each Bank is authorised to purchase with the moneys standing to the credit of any such account such other currencies as may be necessary to effect such application.
 
26.2	Set-off not Mandatory	
No Bank shall be obliged to exercise any right given to it by Clause 26.1 ( Contractual Set-off ).
 
27.	SHARING	
 
27.1	Payments to Banks	
If a Bank (a “ Recovering Bank ”) applies any receipt or recovery from an Obligor to a payment due under this Agreement and such amount is received or recovered other than in accordance with Clause 25 ( Payments ), then such Recovering Bank shall:
 
 	27.1.1	notify the Agent of such receipt or recovery;	
 
 	27.1.2	at the request of the Agent, promptly pay to the Agent an amount (the “ Sharing Payment ”) equal to such receipt or recovery less any amount which the Agent determines may be retained by such Recovering Bank as its share of any payment to be made in accordance with Clause 25.5 ( Partial Payments ).	
 
27.2	Redistribution of Payments	
The Agent shall treat the Sharing Payment as if it had been paid by the relevant Obligor and distribute it between the Finance Parties (other than the Recovering Bank) in accordance with Clause 25.5 ( Partial Payments ).
 
27.3	Recovering Bank’s Rights	
The Recovering Bank will be subrogated to the rights of the parties which have shared in a redistribution pursuant to Clause 27.2 (Redistribution of Payments) in respect of the Sharing Payment (and the relevant Obligor shall be liable to the Recovering Bank in an amount equal to the Sharing Payment) in place of any corresponding liability to the parties which have shared in the redistribution.
 
27.4	Repayable Recoveries	
If any part of the Sharing Payment received or recovered by a Recovering Bank becomes repayable and is repaid by such Recovering Bank, then:
 
 	27.4.1	each party which has received a share of such Sharing Payment pursuant to Clause 27.2 ( Redistribution of Payments ) shall, upon request of the Agent, pay to the Agent for account of such Recovering Bank an amount equal to its share of such Sharing Payment; and	
 
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 	27.4.2	such Recovering Bank’s rights of subrogation in respect of any reimbursement shall be cancelled and the relevant Obligor will be liable to the reimbursing party for the amount so reimbursed.	
 
27.5	Exception	
This Clause 27 shall not apply if the Recovering Bank would not, after making any payment pursuant hereto, have a valid and enforceable claim against the relevant Obligor.
 
27.6	Recoveries Through Legal Proceedings	
If any Bank intends to commence any action in any court it shall give prior notice to the Agent and the other Banks. If any Bank shall commence any action in any court to enforce its rights hereunder and, as a result thereof or in connection therewith, receives any amount, then such Bank shall not be required to share any portion of such amount with any Bank which has the legal right to, but does not, join in such action or commence and diligently prosecute a separate action to enforce its rights in another court.
 
28.	THE AGENT, THE LEAD ARRANGERS AND THE BANKS	
 
28.1	Appointment of the Agent	
The Lead Arrangers and each of the Banks hereby appoints the Agent to act as its agent in connection herewith and authorises the Agent to exercise such rights, powers, authorities and discretions as are specifically delegated to the Agent by the terms hereof together with all such rights, powers, authorities and discretions as are reasonably incidental thereto.
 
28.2	Agent’s Discretions	
The Agent may:
 
 	28.2.1	assume, unless it has, in its capacity as agent for the Banks, received notice to the contrary from any other party hereto, that (a) any representation made or deemed to be made by an Obligor in connection with the Finance Documents is true, (b) no Event of Default or Potential Event of Default has occurred, (c) no Obligor is in breach of or default under its obligations under the Finance Documents and (d) any right, power, authority or discretion vested therein upon the Majority Banks, the Banks or any other person or group of persons has not been exercised;	
 
 	28.2.2	assume that the Facility Office of each Bank is that notified to it by such Bank in writing prior to the date hereof (or, in the case of a Transferee, at the end of the Transfer Certificate to which it is a party as Transferee) until it has received from such Bank a notice designating some other office of such Bank to replace its Facility Office and act upon any such notice until the same is superseded by a further such notice;	
 
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 	28.2.3	engage and pay for the advice or services of any lawyers, accountants, surveyors or other experts whose advice or services may to it seem necessary, expedient or desirable and rely upon any advice so obtained;	
 
 	28.2.4	rely as to any matters of fact which might reasonably be expected to be within the knowledge of an Obligor upon a certificate signed by or on behalf of such Obligor;	
 
 	28.2.5	rely upon any communication or document believed by it to be genuine;	
 
 	28.2.6	refrain from exercising any right, power or discretion vested in it as agent hereunder unless and until instructed by the Majority Banks as to whether or not such right, power or discretion is to be exercised and, if it is to be exercised, as to the manner in which it should be exercised;	
 
 	28.2.7	refrain from acting in accordance with any instructions of the Majority Banks to begin any legal action or proceeding arising out of or in connection with the Finance Documents until it shall have received such security as it may require (whether by way of payment in advance or otherwise) for all costs, claims, losses, expenses (including legal fees) and liabilities together with any VAT thereon which it will or may expend or incur in complying with such instructions; and	
 
 	28.2.8	assume (unless it has specific notice to the contrary) that any notice or request made by the Guarantor is made on behalf of both Obligors.	
 
28.3	Agent’s Obligations	
The Agent shall:
 
 	28.3.1	promptly inform each Bank of the contents of any notice or document received by it in its capacity as Agent from an Obligor under the Finance Documents;	
 
 	28.3.2	promptly notify each Bank of the occurrence of any Event of Default or any default by an Obligor in the due performance of or compliance with its obligations under the Finance Documents of which the Agent has notice from any other party hereto;	
 
 	28.3.3	save as otherwise provided herein, act as agent under the Finance Documents in accordance with any instructions given to it by an Majority Banks, which instructions shall be binding on the Lead Arrangers and the Banks; and	
 
 	28.3.4	if so instructed by the Majority Banks, refrain from exercising any right, power or discretion vested in it as agent under the Finance Documents.	
The Agent’s duties under the Finance Documents are solely mechanical and administrative in nature.
 
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28.4	Excluded Obligations	
Notwithstanding anything to the contrary expressed or implied herein, neither the Agent nor the Lead Arrangers shall:
 
 	28.4.1	be bound to enquire as to (a) whether or not any representation made or deemed to be made by an Obligor in connection with the Finance Documents is true, (b) the occurrence or otherwise of any Default, (c) the performance by an Obligor of its obligations under the Finance Documents or (d) any breach of or default by an Obligor of or under its obligations under the Finance Documents;	
 
 	28.4.2	be bound to account to any Bank for any sum or the profit element of any sum received by it for its own account;	
 
 	28.4.3	be bound to disclose to any other person any information relating to any member of the Group if (a) such person, on providing such information, expressly stated to the Agent or, as the case may be, the Lead Arrangers, that such information was confidential or (b) such disclosure would or might in its opinion constitute a breach of any law or be otherwise actionable at the suit of any person;	
 
 	28.4.4	be under any obligations other than those for which express provision is made herein; or	
 
 	28.4.5	be or be deemed to be a fiduciary for any other party hereto.	
 
28.5	Indemnification	
Each Bank shall, in its Proportion, from time to time on demand by the Agent, indemnify the Agent against any and all costs, claims, losses, expenses (including legal fees) and liabilities together with any VAT thereon which the Agent may incur, otherwise than by reason of its own gross negligence or wilful misconduct, in acting in its capacity as agent hereunder (other than any which have been reimbursed by the Borrower pursuant to Clause 23.1 ( Borrower’s Indemnity )).
 
28.6	Exclusion of Liabilities	
 
 	28.6.1	Except in the case of gross negligence or wilful default, neither the Agent nor the Lead Arrangers accept any responsibility:	
 
 	(a)	for the adequacy, accuracy and/or completeness of any information supplied by the Agent or the Lead Arrangers, by an Obligor or by any other person in connection with the Finance Documents or any other agreement, arrangement or document entered into, made or executed in anticipation of, pursuant to or in connection with the Finance Documents;	
 
 	(b)	for the legality, validity, effectiveness, adequacy or enforceability of the Finance Documents or any other agreement, arrangement or document entered into, made or executed in anticipation of, pursuant to or in connection with the Finance Documents; or	
 
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 	(c)	for the exercise of, or the failure to exercise, any judgement, discretion or power given to any of them by or in connection with the Finance Documents or any other agreement, arrangement or document entered into, made or executed in anticipation of, pursuant to or in connection with the Finance Documents.	
Accordingly, neither the Agent nor the Lead Arrangers shall be under any liability (whether in negligence or otherwise) in respect of such matters, save in the case of gross negligence or wilful misconduct.
 
 	28.6.2	Nothing in this Agreement shall oblige the Agent or the Lead Arrangers to carry out any “know your customer” or other checks in relation to any person on behalf of any Bank and each Bank confirms to the Agent and the Lead Arrangers that it is solely responsible for any such checks it is required to carry out and that it may not rely on any statement in relation to such checks made by the Agent or the Lead Arrangers.	
 
28.7	No Actions	
Each of the Banks agree that it will not assert or seek to assert against any director, officer or employee of the Agent or the Lead Arrangers any claim it might have against any of them in respect of the matters referred to in Clause 28.6 ( Exclusion of Liabilities ).
 
28.8	Business with the Group	
The Agent and the Lead Arrangers may accept deposits from, lend money to and generally engage in any kind of banking or other business with any member of the Group.
 
28.9	Resignation	
The Agent may resign its appointment hereunder at any time without assigning any reason therefor by giving not less than thirty days’ prior notice to that effect to each of the other parties hereto, provided that no such resignation shall be effective until a successor for the Agent is appointed in accordance with the succeeding provisions of this Clause 28.
 
28.10	Removal of Agent	
The Majority Banks may remove the Agent from its role as agent hereunder after consultation with the Guarantor by giving notice to that effect to each of the other parties hereto. Such removal shall take effect only when a successor to the Agent is appointed in accordance with the terms hereof.
 
28.11	Successor Agent	
If the Agent gives notice of its resignation pursuant to Clause 28.9 ( Resignation ) or it is removed pursuant to Clause 28.10 ( Removal of Agent ) then any reputable and experienced bank or other financial institution may be appointed as a successor to the
 
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Agent by the Majority Banks (after consultation with the Guarantor if the successor is a Bank or otherwise with the Guarantor’s prior written consent) during the period of such notice (with the co-operation of the Agent), subject to such entity executing and delivering a confidentiality undertaking substantially in the form set out in Schedule 8 ( Form of Confidentiality Undertaking ) but, if no such successor is so appointed, the Agent may appoint such a successor itself.
 
28.12	Rights and Obligations	
If a successor to the Agent is appointed under the provisions of Clause 28.11 ( Successor Agent ), then (a) the retiring Agent shall be discharged from any further obligation hereunder but shall remain entitled to the benefit of the provisions of this Clause 28 and (b) its successor and each of the other parties hereto shall have the same rights and obligations amongst themselves as they would have had if such successor had been a party hereto.
 
28.13	Own Responsibility	
It is understood and agreed by each Bank that at all times it has itself been, and will continue to be, solely responsible for making its own independent appraisal of and investigation into all risks arising under or in connection with this Agreement including, but not limited to:
 
 	28.13.1	the financial condition, creditworthiness, condition, affairs, status and nature of each member of the Group;	
 
 	28.13.2	the legality, validity, effectiveness, adequacy and enforceability of the Finance Documents and any other agreement, arrangement or document entered into, made or executed in anticipation of, pursuant to or in connection with the Finance Documents;	
 
 	28.13.3	whether such Bank has recourse, and the nature and extent of that recourse, against an Obligor or any other person or any of its assets under or in connection with the Finance Documents, the transactions therein contemplated or any other agreement, arrangement or document entered into, made or executed in anticipation of, pursuant to or in connection with the Finance Documents; and	
 
 	28.13.4	the adequacy, accuracy and/or completeness of any information provided by the Agent or the Lead Arrangers, an Obligor or by any other person in connection with the Finance Documents, the transactions contemplated therein or any other agreement, arrangement or document entered into, made or executed in anticipation of, pursuant to or in connection with the Finance Documents.	
Accordingly, each Bank acknowledges to the Agent and the Lead Arrangers that it has not relied on and will not hereafter rely on the Agent and the Lead Arrangers or either of them in respect of any of these matters.
 
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28.14	Agency Division Separate	
In acting as agent hereunder for the Banks, the Agent shall be regarded as acting through its agency division which shall be treated as a separate entity from any other of its divisions or departments and, notwithstanding the foregoing provisions of this Clause 28, any information received by some other division or department of the Agent may be treated as confidential and shall not be regarded as having been given to the Agent’s agency division.
 
28.15	Powers and Discretions	
The Agent shall have all the powers and discretions conferred upon trustees by the Trustee Act 1925 (to the extent not inconsistent herewith) and by way of supplement it is expressly declared as follows:
 
 	28.15.1	the Agent shall be at liberty to place any of the Finance Documents and any other instruments, documents or deeds delivered to it pursuant thereto or in connection therewith for the time being in its possession in any safe deposit, safe or receptacle selected by the Agent or with any bank, any Guarantor whose business includes undertaking the safe custody of documents or any firm of lawyers of good repute;	
 
 	28.15.2	the Agent may, whenever it thinks fit, delegate by power of attorney or otherwise to any person or persons or fluctuating body of persons all or any of the rights, trusts, powers, authorities and discretions vested in it by any of the Finance Documents and such delegation may be made upon such terms and subject to such conditions (including the power to sub-delegate) and subject to such regulations as the Agent may think fit and the Agent shall not be bound to supervise, or be in any way responsible for any loss incurred by reason of any misconduct or default on the part of, any such delegate (or sub-delegate);	
 
 	28.15.3	notwithstanding anything else herein contained, the Agent may refrain from doing anything which would or might in its opinion be contrary to any law of any jurisdiction or any directive or regulation of any agency of any state or which would or might otherwise render it liable to any person and may do anything which is, in its opinion, necessary to comply with any such law, directive or regulation;	
 
 	28.15.4	save in the case of gross negligence or wilful misconduct, the Agent and every attorney, agent, delegate, sub-delegate and any other person appointed by any of them under any of the Finance Documents may indemnify itself or himself out of the security held by the Agent against all liabilities, costs, fees, charges, losses and expenses incurred by any of them in relation to or arising out of the taking or holding of any of the security constituted by, or any of the benefits provided by, any of the Finance Documents, in the exercise or purported exercise of the rights, trusts, powers and discretions vested in any of them or in respect of any other matter or thing done or omitted to be done in any way relating to any of the Finance Documents or pursuant to any law or regulation; and	
 
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 	28.15.5	without prejudice to the provisions of any of the Finance Documents, the Agent shall not be under any obligation to insure any property or to require any other person to maintain any such insurance and shall not be responsible for any loss which may be suffered by any person as a result of the lack of or inadequacy or insufficiency of any such insurance.	
 
28.16	Liability	
The Agent shall not be liable for any failure:
 
 	28.16.1	to require the deposit with it of any deed or document certifying, representing or constituting the title of the Obligors to any of the property mortgaged, charged, assigned or otherwise encumbered by or pursuant to any of the Finance Documents;	
 
 	28.16.2	to obtain any licence, consent or other authority for the execution, delivery, validity, legality, adequacy, performance, enforceability or admissibility in evidence of any of the Finance Documents;	
 
 	28.16.3	to register or notify any deed or document mentioned at sub-clause 28.16.1 in accordance with the provisions of any of the documents of title of the Obligors;	
 
 	28.16.4	to effect or procure registration of or otherwise protect any of the security created by any of the Finance Documents by registering the same under any applicable registration laws in any territory or otherwise by registering any notice, caution or other entry prescribed by or pursuant to the provisions of the said Act or laws;	
 
 	28.16.5	to take or to require the Obligors to take any steps to render the security without limitation, any floating charge) created or purported to be created by or pursuant to any of the Finance Documents effective or to secure the creation of any ancillary charge under the laws of any jurisdiction; or	
 
 	28.16.6	to require any further assurances in relation to any of the Finance Documents.	
 
29.	ASSIGNMENTS AND TRANSFERS	
 
29.1	Binding Agreement	
The Finance Documents shall be binding upon and enure to the benefit of each party hereto and its or any subsequent successors and Transferees.
 
29.2	No Assignments and Transfers by the Obligors	
Subject to Clause 29.3 ( Novation by Original Borrower ), no Obligor shall be entitled to assign or transfer all or any of its rights, benefits and obligations under the Finance Documents without the prior written consent of all the Banks.
 
29.3	Novation by Original Borrower	
 
 	29.3.1	If:	
 
 	(a)	APRA makes new prudential standards as foreshadowed in its Discussion Papers entitled, “Prudential supervision of corporate groups involving authorised general insurers” dated 16 May 2005 and “Consolidated Group Reporting for General Insurers” dated 31 August 2007 and in its Response Paper “Prudential Supervision of General Insurance Groups” dated 4 October 2006 (“ new prudential requirements ”); and	
 
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 	(b)	the treatment of the Facility under those new prudential requirements would, when the new prudential requirements commence to have effect in relation to the Original Borrower Group, result in the Original Borrower Group failing to comply with the new prudential requirements,	
then as soon as is possible, but not later than the date when the Original Borrower Group is required to comply with the new prudential requirements, the Original Borrower will transfer in accordance with Clause 29.4 ( Transfer by Original Borrower ) to a Subsidiary of the Guarantor (acceptable to the Banks) or to the Guarantor such rights, benefits and obligations under the Finance Documents as may be necessary to meet the new prudential requirements and the Guarantor will either (a) assume all such rights, benefits and obligations of the Original Borrower under the Finance Documents or (b) (as the case may be) cause that Subsidiary of the Guarantor to assume all such rights, benefits and obligations of the Original Borrower under the Finance Documents.
 
 	29.3.2	As between the Original Borrower, the Borrower Transferee and the Guarantor:	
 
 	(a)	the Original Borrower shall become liable to the Borrower Transferee in respect of the obligations transferred by the Original Borrower to the Borrower Transferee in accordance with sub-clause 29.3.1 of Clause 29.3 ( Novation by Original Borrower ); and	
 
 	(b)	the Original Borrower and the Guarantor must internally restructure, or if the rights, benefits and obligations under the Finance Documents of the Original Borrower are transferred to a Subsidiary of the Guarantor, the Guarantor must procure that the Subsidiary of the Guarantor internally restructures the obligations arising from such transfer as between the Original Borrower and the Guarantor or the Subsidiary of the Guarantor, as the case requires, so that the Original Borrower and the Subsidiaries of the Borrower meet the consolidated capital adequacy requirements prescribed by APRA, which restructure may include conversion of the obligations to Tier 1 Capital and Tier 2 Capital as described and as defined in prudential standards issued by APRA from time to time.	
 
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For the avoidance of doubt this sub-clause 29.3.2 does not impact upon the Banks who will have the same rights against the Borrower Transferee as they would have had against the Original Borrower and the reference in paragraph (b) to an internal restructuring does not affect the rights of the Banks hereunder.
 
29.4	Transfer by Original Borrower	
 
 	29.4.1	If the Original Borrower is required to transfer any of its rights, benefits and/or obligations under the Finance Documents as contemplated in Clause 29.3 ( Novation by Original Borrower ), then such transfer will be effected by the delivery to the Agent of a duly completed Borrower Transfer Certificate executed by the Original Borrower and the relevant Borrower Transferee in which event, subject to the conditions set out in sub-clause 29.4.1 and sub-clause 29.4.3 of Clause 29.4 ( Transfer by the Original Borrower ) on the transfer date specified in such Borrower Transfer Certificate:	
 
 	(a)	each of the Finance Parties and the Original Borrower shall be released from further obligations towards one another under the Finance Documents and their respective rights against one another shall be cancelled (such rights and obligations being referred to in this Clause 29.4 as “ Original Borrower discharged rights and obligations ”);	
 
 	(b)	each of the Finance Parties and the Borrower Transferee party thereto shall assume obligations towards one another and/or acquire rights against one another which are the same as the Original Borrower discharged rights and obligations;	
 
 	(c)	the Finance Parties shall acquire the same rights and benefits and assume the same obligations between themselves as they would have acquired and assumed had such Borrower Transferee been the original party hereto as the Original Borrower; and	
 
 	(d)	such Borrower Transferee shall become a party hereto as the “ Borrower ”.	
 
 	29.4.2	A transfer to a Subsidiary of the Guarantor under this Clause 29.4 will only be effective (and the Original Borrower will only have complied with its obligations under Clause 29.3) if:	
 
 	(a)	the Banks approve of the jurisdiction of incorporation of the Borrower Transferee;	
 
 	(b)	no Default is continuing or would result from the transfer;	
 
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 	(c)	the Agent has performed all its “know your customer” or other checks relating to the Borrower Transferee that it is required to carry out in relation to such assignment; and	
 
 	(d)	the Agent has received all the documents and other evidence listed in Part II of Schedule 2 ( Conditions Precedent ) in relation to the Borrower Transferee each in a form and substance satisfactory to the Agent.	
 
 	29.4.3	A transfer to the Guarantor under this Clause 29.4 will only be effective (and the Original Borrower will only have complied with its obligation under Clause 29.3) if no Default is continuing or would result from the transfer.	
 
29.5	Assignments and Transfers by Banks	
Subject to Clause 29.8 ( Conditions of assignment or transfer ) and obtaining the prior written consent of the Borrower (such consent not to be unreasonably withheld or delayed), any Bank may, at any time, assign all or any of its rights and benefits under the Finance Documents or transfer in accordance with Clause 29.7 ( Transfers by Banks ) all or any of its rights, benefits and obligations under the Finance Documents to a bank or financial institution or to a trust fund or other entity which is regularly engaged in or established for the purpose of making, purchasing or investing in loans, securities or other financial assets, provided that :
 
 	29.5.1	the Borrower’s consent is not required if such assignment or transfer is:	
 
 	(a)	to any subsidiary, holding company or Affiliate of such Bank; or	
 
 	(b)	to any other Bank;	
 
 	29.5.2	no assignment shall be effective until the performance by the Agent of all “know your customer” or other checks relating to any person that it is required to carry out in relation to such assignment to a new Bank has been completed. The Agent shall promptly notify the Banks and the new Bank of the completion of such “know your customer” checks; and	
 
 	29.5.3	the Agent shall only be obliged to execute a Transfer Certificate delivered to it by any Bank and a Transferee once it is satisfied it has complied with all necessary “know your customer” or similar other checks under all applicable laws and regulations in relation to the transfer to such Transferee.	
 
29.6	Assignments by Banks	
If any Bank assigns all or any of its rights and benefits under the Finance Documents in accordance with Clause 29.5 ( Assignments and Transfers by Banks ), then, unless and until the assignee has delivered a notice to the Agent confirming in favour of the Agent, the Lead Arrangers and the Banks that it shall be under the same obligations towards each of them as it would have been under if it had been an original party hereto as a Bank (whereupon such assignee shall become a party hereto as a “ Bank ”), the Agent, the Lead Arrangers, and the Banks shall not be obliged to recognise such assignee as having the rights against each of them which it would have had if it had been such a party hereto.
 
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29.7	Transfers by Banks	
If any Bank wishes to transfer all or any of its rights, benefits and/or obligations under the Finance Documents as contemplated in Clause 29.5 ( Assignments and Transfers by Banks ), then such transfer may be effected by the delivery to the Agent of a duly completed Transfer Certificate executed by such Bank and the relevant Transferee in which event, on the later of the Transfer Date specified in such Transfer Certificate and the fifth Business Day after (or such earlier Business Day endorsed by the Agent on such Transfer Certificate falling on or after) the date of delivery of such Transfer Certificate to the Agent:
 
 	29.7.1	to the extent that in such Transfer Certificate the Bank party thereto seeks to transfer by novation its rights, benefits and obligations under the Finance Documents, each of the Obligors and such Bank shall be released from further obligations towards one another under the Finance Documents and their respective rights against one another shall be cancelled (such rights and obligations being referred to in this Clause 29.7 as “ discharged rights and obligations ”);	
 
 	29.7.2	each of the Obligors and the Transferee party thereto shall assume obligations towards one another and/or acquire rights against one another which differ from such discharged rights and obligations only insofar as such Obligor and such Transferee have assumed and/or acquired the same in place of such Obligor and such Bank;	
 
 	29.7.3	the Agent, the Lead Arrangers, such Transferee and the other Banks shall acquire the same rights and benefits and assume the same obligations between themselves as they would have acquired and assumed had such Transferee been an original party hereto as a Bank with the rights, benefits and/or obligations acquired or assumed by it as a result of such transfer and to that extent the Agent, the Lead Arrangers and the relevant Bank shall each be released from further obligations to each other under the Finance Documents; and	
 
 	29.7.4	such Transferee shall become a party hereto as a “Bank”.	
 
29.8	Conditions of assignment or transfer	
If:
 
 	29.8.1	a Bank assigns or transfers any of its rights or obligations under the Finance Documents or changes its Facility Office; and	
 
 	29.8.2	as a result of circumstances existing at the date the assignment, transfer or change occurs, an Obligor would be obliged to make a payment to the new Bank or Bank acting through its new Facility Office under Clause 8.1 ( Tax Gross-up ), Clause 8.2 ( Tax Indemnity ) or Clause 10.1 ( Increased Costs ),	
 
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then the new Bank or Bank acting through its new Facility Office is only entitled to receive payment under those Clauses to the same extent as an existing Bank or Bank acting through its previous Facility Office would have been if the assignment, transfer or change had not occurred.
 
29.9	Agency Fee	
On the date upon which a transfer takes effect pursuant to Clause 29.7 ( Transfers by Banks ) the relevant Transferee shall pay to the Agent for its own account a fee of £1,000.
 
29.10	Disclosure of Information	
Any Bank may disclose to any person:
 
 	29.10.1	to (or through) whom such Bank assigns or transfers (or may potentially assign or transfer) all or any of its rights, benefits and obligations under the Finance Documents;	
 
 	29.10.2	with (or through) whom such Bank enters into (or may potentially enter into) any sub-participation in relation to, or any other transaction under which payments are to be made by reference to, this Agreement or any Obligor; or	
 
 	29.10.3	to whom information may be required to be disclosed by any applicable law,	
such information about any Obligor or the Group and the Finance Documents as such Bank shall consider appropriate and in the case of sub-clause 29.10.1 and 29.10.2, subject to requiring and receiving a confidentiality undertaking substantially in the form set out in Schedule 8 ( Form of Confidentiality Undertaking ).
 
29.11	Replacement of Affected Bank or Non-consenting Bank	
If at any time a Bank becomes an Affected Bank or a Non-consenting Bank, the Obligors may, upon written notice to the Agent, replace such Affected Bank or Non-consenting Bank as a party to this Agreement with one or more Transferees that are acceptable to the Agent and that are willing to accept a transfer from such Affected Bank or Non-consenting Bank. Such Affected Bank or Non-consenting Bank shall, 10 Business Days after receipt of a notice delivered to the Agent and to it pursuant to this Clause 29.11, transfer (pursuant to a Transfer Certificate), without recourse or warranty, its Commitment or its portion of the Loan (as applicable) and all of its other rights and obligations under this Agreement to such Transferee(s) for a purchase price in cash payable at the time of transfer equal to the sum of all the outstanding principal amount of the portion of the Loan so transferred, all accrued and unpaid interest thereupon and all other amounts owed to such Affected Bank or Non-consenting Bank under the Finance Documents. Notwithstanding the foregoing, (a) no Affected Bank or Non-consenting Bank shall be required to make any such transfer if, prior to receiving notice from the Obligors pursuant to this Clause 29.11, the circumstances entitling the Obligors to require such a transfer cease to apply, (b) no Non-consenting Bank shall be required to make any such transfer if at the time of such proposed transfer an Event of Default has occurred and is continuing, and (c) the Obligors shall have no right to replace the Agent.
 
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30.	CALCULATIONS AND EVIDENCE OF DEBT	
 
30.1	Basis of Accrual	
Interest shall accrue from day to day and shall be calculated on the basis of a year of 365 days (or in the case of any such amounts denominated in Australian dollars, 360 days) and the actual number of days elapsed.
 
30.2	Evidence of Debt	
Each Bank shall maintain in accordance with its usual practice accounts evidencing the face amount of its participations in the Loan and the amounts from time to time owing to it hereunder.
 
30.3	Control Accounts	
The Agent shall maintain on its books a control account or accounts in which shall be recorded (a) the amount of any Unpaid Sum and each Bank’s share in the Loan, (b) the amount of all fees, interest and other sums due or to become due from an Obligor and each Bank’s share therein and (c) the amount of any sum received or recovered by the Agent hereunder and each Bank’s share therein.
 
30.4	Prima Facie Evidence	
In any legal action or proceeding arising out of or in connection with this Agreement, the entries made in the accounts maintained pursuant to Clause 30.2 ( Evidence of Debt ) and Clause 30.3 ( Control Accounts ) shall be prima facie evidence of the existence and amounts of the specified obligations of the Obligors.
 
30.5	Certificates of Banks	
A certificate of a Bank as to:
 
 	30.5.1	the amount by which a sum payable to it hereunder is to be increased under Clause 8.1 ( Tax Gross-up );	
 
 	30.5.2	the amount for the time being required to indemnify it against any such cost, payment or liability as is mentioned in Clause 8.2 ( Tax Indemnity ) or Clause 10.1 ( Increased Costs ); or	
 
 	30.5.3	the amount of any credit, relief, remission or repayment as is mentioned in Clause 9.3 ( Tax Credit Payment ) or Clause 9.4 ( Tax Credit Clawback ),	
shall, in the absence of manifest error, be prima facie evidence of the existence and amounts of the specified obligations of the Obligors.
 
30.6	Agent’s Certificates	
A certificate of the Agent as to the amount at any time due from the Borrower hereunder or the amount which, but for any of the obligations of the Borrower hereunder being or becoming void, voidable, unenforceable or ineffective, at any time would have been due from the Borrower hereunder shall, in the absence of manifest error, be conclusive for the purposes of Clause 31 ( Guarantee and Indemnity ).
 
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31.	GUARANTEE AND INDEMNITY	
 
31.1	Guarantee and Indemnity	
The Guarantor irrevocably and unconditionally:
 
 	31.1.1	guarantees to each Finance Party the due and punctual observance and performance of all the terms, conditions and covenants on the part of the Borrower contained in the Finance Documents and agrees to pay from time to time on demand any and every sum or sums of money which the Borrower is at any time liable to pay to any Finance Party under or pursuant to the Finance Documents and which has become due and payable but has not been paid at the time such demand is made; and	
 
 	31.1.2	agrees as a primary obligation to indemnify each Finance Party from time to time on demand from and against any loss incurred by any Finance Party as a result of any of the obligations of the Borrower under or pursuant to the Finance Documents being or becoming void, voidable, unenforceable or ineffective as against the Borrower for any reason whatsoever, whether or not known to any Finance Party or any other person, the amount of such loss being the amount which the person or persons suffering it would otherwise have been entitled to recover from the Borrower.	
 
31.2	Additional Security	
The obligations of the Guarantor herein contained shall be in addition to and independent of every other security which any Finance Party may at any time hold in respect of any of the Borrower’s obligations under the Finance Documents.
 
31.3	Continuing Obligations	
The obligations of the Guarantor herein contained shall constitute and be continuing obligations notwithstanding any settlement of account or other matter or thing whatsoever and shall not be considered satisfied by any intermediate payment or satisfaction of all or any of the obligations of the Borrower under the Finance Documents and shall continue in full force and effect until final payment in full of all amounts owing by the Borrower under the Finance Documents and total satisfaction of all the Borrower’s actual and contingent obligations under the Finance Documents.
 
31.4	Obligations not Discharged	
Neither the obligations of the Guarantor herein contained nor the rights, powers and remedies conferred in respect of the Guarantor upon any Finance Party by the Finance Documents or by law shall be discharged, impaired or otherwise affected by:
 
 	31.4.1	the winding-up, dissolution, administration or re-organisation of the Borrower or any other person or any change in its status, function, control or ownership;	
 
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 	31.4.2	any of the obligations of the Borrower or any other person under the Finance Documents or under any other security taken in respect of any of its obligations under the Finance Documents being or becoming illegal, invalid, unenforceable or ineffective in any respect;	
 
 	31.4.3	time, waiver, consent or other indulgence being granted or agreed to be granted to the Borrower in respect of its obligations under the Finance Documents or under any such other security;	
 
 	31.4.4	any amendment to, or any variation, waiver or release of, any obligation of the Borrower under the Finance Documents or under any such other security;	
 
 	31.4.5	any failure to take, or fully to take, any security contemplated hereby or otherwise agreed to be taken in respect of the Borrower’s obligations under the Finance Documents;	
 
 	31.4.6	any failure to realise or fully to realise the value of, or any release, discharge, exchange or substitution of, any security taken in respect of the Borrower’s obligations under the Finance Documents;	
 
 	31.4.7	the release of the Borrower or any other person under the terms of any composition or arrangement with any creditor of any member of the Group;	
 
 	31.4.8	any incapacity or lack of power, authority or legal personality of or dissolution or change in the members or status of the Borrower or any other person; or	
 
 	31.4.9	any other act, event or omission which, but for this Clause 31.4, might operate to discharge, impair or otherwise affect any of the obligations of the Guarantor herein contained or any of the rights, powers or remedies conferred upon any of the Finance Parties by the Finance Documents or by law.	
 
31.5	Settlement Conditional	
Any settlement or discharge between the Borrower and any of the Finance Parties shall be conditional upon no security or payment to any Finance Party by the Borrower or any other person on behalf of the Borrower being avoided or reduced by virtue of any laws relating to bankruptcy, insolvency, liquidation or similar laws of general application and, if any such security or payment is so avoided or reduced, each Finance Party shall be entitled to recover the value or amount of such security or payment from the Borrower subsequently as if such settlement or discharge had not occurred.
 
31.6	Exercise of Rights	
No Finance Party shall be obliged before exercising any of the rights, powers or remedies conferred upon them in respect of each Guarantor by the Finance Documents or by law to:
 
 	31.6.1	make any demand of the Borrower;	
 
 	31.6.2	take any action or obtain judgment in any court against the Borrower;	
 
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 	31.6.3	make or file any claim or proof in a winding-up or dissolution of the Borrower; or	
 
 	31.6.4	enforce or seek to enforce any other security taken in respect of any of the obligations of the Borrower under the Finance Documents.	
 
31.7	Deferral of Guarantors’ Rights	
The Guarantor agrees that, so long as any amounts are or may be owed by the Borrower under the Finance Documents or the Borrower is under any actual or contingent obligations under the Finance Documents, it shall not exercise any rights which it may at any time have by reason of performance by it of its obligations under the Finance Documents:
 
 	31.7.1	to be indemnified by the Borrower; and/or	
 
 	31.7.2	to claim any contribution from any other guarantor of the Borrower’s obligations under the Finance Documents; and/or	
 
 	31.7.3	to take the benefit (in whole or in part and whether by way of subrogation or otherwise) of any rights of the Finance Parties under the Finance Documents or of any other security taken pursuant to, or in connection with, the Finance Documents by all or any of the Finance Parties.	
 
31.8	Suspense Accounts	
All moneys received, recovered or realised by a Bank by virtue of Clause 31.1 ( Guarantee and Indemnity ) may, in that Bank’s discretion, be credited to an interest bearing suspense or impersonal account and may be held in such account for so long as such Bank thinks fit pending the application from time to time (as such Bank may think fit) of such moneys in or towards the payment and discharge of any amounts owing by the Borrower to such Bank under the Finance Documents.
 
32.	REMEDIES AND WAIVERS, PARTIAL INVALIDITY	
 
32.1	Remedies and Waivers	
No failure to exercise, nor any delay in exercising, on the part of any Finance Party, any right or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right or remedy prevent any further or other exercise thereof or the exercise of any other right or remedy. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies provided by law.
 
32.2	Partial Invalidity	
If, at any time, any provision of the Finance Documents is or becomes illegal, invalid or unenforceable in any respect under the law of any jurisdiction, neither the legality, validity or enforceability of the remaining provisions thereof nor the legality, validity or enforceability of such provision under the law of any other jurisdiction shall in any way be affected or impaired thereby.
 
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33.	NOTICES	
 
33.1	Communications in writing	
 
 	33.1.1	Any communication to be made under or in connection with the Finance Documents shall be made in writing and, unless otherwise stated, may be made by fax, letter or telex or (to the extent that the relevant party hereto has specified such address pursuant to Clause 33.2 ( Addresses )) by e-mail.	
 
 	33.1.2	The Agent may additionally (if the parties hereto agree and the Guarantor has specifically approved in writing), in the case of any document to be forwarded by the Agent pursuant to this Agreement where such document has been supplied to such Agent pursuant to Clause 17 ( Information Covenants ), refer the relevant party or parties hereto (by fax, letter, telex or (if so specified) e-mail) to a web site considered by the Guarantor as secure and confidential and to the location of the relevant information on such web site in discharge of such notification or delivery obligation.	
 
33.2	Addresses	
The address, fax number, e-mail address, telex number and, where appropriate, web site (and the department or officer, if any, for whose attention the communication is to be made) of each party hereto for any communication or document to be made or delivered under or in connection with the Finance Documents is:
 
 	33.2.1	in the case of an Obligor, that identified with its name below;	
 
 	33.2.2	in the case of each Bank, that notified in writing to the Agent on or prior to the date on which it becomes a party hereto; and	
 
 	33.2.3	in the case of the Agent, that identified with its name below,	
or any substitute address, fax number, e-mail address, telex number, web site, department or officer as the party hereto may notify to the Agent (or the Agent may notify to the other parties hereto, if a change is made by the Agent or a web site carrying relevant information has been set up by the Agent) by not less than five Business Days’ notice.
 
33.3	Delivery	
 
 	33.3.1	Any communication or document made or delivered by one person to another under or in connection with the Finance Documents will only be effective:	
 
 	(a)	if by way of fax, when received in legible form; or	
 
 	(b)	if by way of letter, when it has been left at the relevant address or five Business Days after being deposited in the post postage prepaid in an envelope addressed to it at that address; or	
 
 	(c)	if by way of telex, when dispatched, but only if, at the time of transmission, the correct answerback appears at the start and at the end of the sender’s copy of the notice; or	
 
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 	(d)	if by way of e-mail, when sent in legible form, but only if, following transmission, the sender does not receive a non-delivery message; or	
 
 	(e)	where reference in such communication is to a web site, when the delivery of the letter, fax, telex or, as the case may be, e-mail referring the addressee to such web site is effective,	
and, if a particular department or officer is specified as part of its address details provided under Clause 33.2 ( Addresses ), if addressed to that department or officer.
 
 	33.3.2	Any communication or document to be made or delivered to the Agent will be effective only when actually received by the Agent and then only if it is expressly marked for the attention of the department or officer identified with the Agent’s signature below (or any substitute department or officer as the agent shall specify for this purpose).	
 
 	33.3.3	All notices from or to any Obligor shall be sent through the Agent.	
 
33.4	Notification of address, fax number and telex number	
Promptly upon receipt of notification of an address, fax number, telex number or e-mail address or change of such pursuant to Clause 33.2 ( Addresses ) or changing its own address, fax number, telex number or e-mail address, the Agent shall notify the other parties hereto.
 
33.5	English language	
 
 	33.5.1	Any notice given under or in connection with any Finance Document must be in English.	
 
 	33.5.2	All other documents provided under or in connection with any Finance Document must be:	
 
 	(a)	in English; or	
 
 	(b)	if not in English, accompanied (if so required by the Agent) by an English translation thereof certified (by an officer of the person making or delivering the same) as being a true and accurate translation thereof.	
 
33.6	Deemed receipt by the Obligors	
Any communication or document made or delivered to the Borrower in accordance with Clause 33.3 ( Delivery ) shall be deemed to have been made or delivered to both Obligors.
 
34.	COUNTERPARTS	
This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument.
 
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35.	AMENDMENTS	
 
35.1	Amendments	
The Agent, if it has the prior consent of the Majority Banks, and the Obligors may from time to time agree in writing to amend this Agreement or to waive, prospectively or retrospectively, any of the requirements of this Agreement and any amendments or waivers so agreed shall be binding on all the Finance Parties, provided that no such waiver or amendment shall subject any Finance Party hereto to any new or additional obligations without the consent of such Finance Party.
 
35.2	Amendments Requiring the Consent of all the Banks	
An amendment or waiver which relates to:
 
 	35.2.1	Clause 27 ( Sharing ) or this Clause 35;	
 
 	35.2.2	a change in the currency or amount of the Total Commitment or any payment of interest, fees or any other amount payable hereunder to any Finance Party or deferral of the date for payment thereof;	
 
 	35.2.3	a release of a Guarantor from any of its obligations set out in Clause 31 ( Guarantee and Indemnity );	
 
 	35.2.4	the definition of Majority Banks; or	
 
 	35.2.5	any provision which contemplates the need for the consent or approval of all the Banks,	
shall not be made without the prior consent of all the Banks.
 
35.3	Exceptions	
Notwithstanding any other provisions hereof, the Agent shall not be obliged to agree to any such amendment or waiver if the same would:
 
 	35.3.1	amend or waive this Clause 35, Clause 21 ( Costs and Expenses ) or Clause 28 ( The Agent, the Lead Arrangers and the Banks ); or	
 
 	35.3.2	otherwise amend or waive any of the Agent’s rights hereunder or subject the Agent or the Lead Arrangers to any additional obligations hereunder.	
 
36.	GOVERNING LAW	
This Agreement is governed by English law.
 
37.	JURISDICTION	
 
37.1	English Courts	
Each of the parties hereto irrevocably agrees for the benefit of each of the Agent, the Lead Arrangers and the Banks that the courts of England shall have jurisdiction to hear and determine any suit, action or proceeding, and to settle any disputes, which may arise out of or in connection with this Agreement and the other Finance Documents and, for such purposes, irrevocably submits to the jurisdiction of such courts.
 
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37.2	Convenient Forum	
The Obligors irrevocably waive any objection which either of them might now or hereafter have to the courts referred to in Clause 37.1 being nominated as the forum to hear and determine any suit, action or proceeding, and to settle any disputes, which may arise out of or in connection with this Agreement and agree not to claim that any such court is not a convenient or appropriate forum.
 
37.3	Service of Process	
Each Obligor agrees that the process by which any suit, action or proceeding is begun may be served on it by being delivered in connection with any suit, action or proceeding in England, to ACE INA Services UK Ltd at ACE Building, 100 Leadenhall Street, London EC3A 3BP or its other principal place of business for the time being.
 
37.4	Non-Exclusive Jurisdiction	
The submission to the jurisdiction of the courts referred to in Clause 37.1 shall not (and shall not be construed so as to) limit the right of the Agent, the Lead Arrangers and the Banks or any of them to take proceedings against the Borrower in any other court of competent jurisdiction nor shall the taking of proceedings in any one or more jurisdictions preclude the taking of proceedings in any other jurisdiction, whether concurrently or not.
AS WITNESS the hands of the duly authorised representatives of the parties hereto the day and year first before written.
 
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SCHEDULE 1
T HE B ANKS

Bank	  	Commitment (A$)	
HSBC Bank Australia Limited	  	26,000,000	
The Royal Bank of Scotland plc, Australia Branch	  	26,000,000	
ABN AMRO Bank N.V., Australian Branch	  	16,000,000	
Barclays Bank PLC Australian Branch	  	16,000,000	
National Australia Bank Limited	  	16,000,000	
	  	 	
Total	  	100,000,000	

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SCHEDULE 2
C ONDITIONS P RECEDENT
Part I
Conditions precedent to Initial Utilisation
 
1.	A copy of the constitutional documents of each Obligor.	
 
2.	A copy of a resolution of the board of directors of each Obligor:	
 
 	(a)	approving the terms of, and the transactions contemplated by, the Finance Documents to which it is a party and resolving that it execute the Finance Documents to which it is a party;	
 
 	(b)	authorising a specified person or persons to execute the Finance Documents to which it is a party on its behalf; and	
 
 	(c)	authorising a specified person or persons, on its behalf, to sign and/or despatch all documents and notices (including, if relevant, any Utilisation Request) to be signed and/or despatched by it under or in connection with the Finance Documents to which it is a party.	
 
3.	A specimen of the signature of each person authorised by the resolution referred to in paragraph (b) above.	
 
4.	A certificate of the Guarantor (signed by an officer of the Guarantor) confirming that borrowing or guaranteeing, as appropriate, the Facility would not cause any borrowing, guaranteeing or similar limit binding on any Obligor to be exceeded.	
 
5.	A certificate of an authorised signatory of the relevant Obligor certifying that each copy document relating to it specified in this Part I of Schedule 2 is correct, complete and in full force and effect as at a date no earlier than the date of this Agreement.	
 
6.	A legal opinion of Clifford Chance, legal advisers to the Agent in England.	
 
7.	If an Obligor is incorporated in a jurisdiction other than England and Wales, a legal opinion of the legal advisers to that Obligor in the relevant jurisdiction, substantially in the form distributed to the Agent prior to signing this Agreement.	
 
8.	Evidence that any agent for service of process referred to in Clause 37.3 ( Service of process ), if not an Obligor, has accepted its appointment.	
 
9.	A copy of any other authorisation or other document, opinion or assurance (including any APRA authorisation) which the Agent considers to be necessary or desirable (if it has notified the Guarantor accordingly) in connection with the entry into and performance of the transactions contemplated by any Finance Document or for the validity and enforceability of any Finance Document.	
 
10.	The original financial statements of the Guarantor.	
 
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11.	Evidence that the fees, costs and expenses then due from the Borrower pursuant to Clause 20 ( Fees ) and Clause 21 ( Costs and Expenses ) have been paid or will be paid by the first Utilisation Date.	
Part II
Conditions precedent required to be
delivered by a Borrower Transferee
 
1.	A Borrower Transfer Certificate duly executed by the Original Borrower and the Borrower Transferee.	
 
2.	A copy of the constitutional documents of the Borrower Transferee, if other than the Guarantor.	
 
3.	A copy of a resolution of the board of directors of the Borrower Transferee:	
 
 	(a)	approving the terms of, and the transactions contemplated by, the Borrower Transfer Certificate and the Finance Documents and resolving that it execute the Borrower Transfer Certificate;	
 
 	(b)	authorising a specified person or persons to execute the Accession Letter on its behalf; and	
 
 	(c)	authorising a specified person or persons, on its behalf, to sign and/or despatch all other documents and notices to be signed and/or despatched by it under or in connection with the Finance Documents.	
 
4.	A specimen of the signature of each person authorised by the resolution referred to in paragraph 3 above.	
 
5.	A certificate of the Borrower Transferee (signed by a director) confirming that borrowing the Total Commitments would not cause any borrowing or similar limit binding on it to be exceeded.	
 
6.	A certificate of an authorised signatory of the Borrower Transferee certifying that each copy document listed in this Part II of Schedule 2 is correct, complete and in full force and effect as at a date no earlier than the date of the Borrower Transfer Certificate.	
 
7.	A copy of any other authorisation or other document, opinion or assurance which the Agent considers to be necessary or desirable in connection with the entry into and performance of the transactions contemplated by the Borrower Transfer Certificate or for the validity and enforceability of any Finance Document.	
 
8.	If available, the latest audited financial statements of the Borrower Transferee.	
 
9.	A legal opinion of Clifford Chance, legal advisers to the Agent in England.	
 
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10.	If the Borrower Transferee is incorporated in a jurisdiction other than England and Wales, a legal opinion of the legal advisers to the Borrower Transferee in the jurisdiction in which the Borrower Transferee is incorporated.	
 
11.	If the proposed Borrower Transferee is incorporated in a jurisdiction other than England and Wales, evidence that the process agent specified in Clause 37.3 ( Service of process ), if not an Obligor, has accepted its appointment in relation to the proposed Borrower Transferee.	
 
12.	In the case of a partial transfer pursuant to Clause 29.3 ( Novation by Original Borrower ), evidence in form and substance satisfactory to the Agent that no breach of any applicable laws, ordinances, rules, regulations or other requirements of governmental authorities or regulatory bodies (including APRA) would result from the transfer.	
 
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SCHEDULE 3
U TILISATION R EQUEST
 
From:	[ Borrower ]	
 
To:	[ Agent ]	
Dated:
Dear Sirs,
ACE Australia Holdings Pty Limited – A$100,000,000 Credit Agreement
dated [    ] (the “Agreement”)
 
1.	We refer to the Agreement. This is a Utilisation Request. Terms defined in the Agreement have the same meaning in this Utilisation Request unless given a different meaning in this Utilisation Request.	
 
2.	We wish to borrow a Loan on the following terms:	

Proposed Utilisation Date:	  	[    ] (or, if that is not a Business Day, the next Business Day)	
Amount:	  	A$100,000,000	  		  		
 
3.	We confirm that each condition specified in Clause 3.2 ( Utilisation Conditions for the Facility ) is satisfied on the date of this Utilisation Request.	
 
4.	The proceeds of this Loan should be credited to [ account ].	
 
5.	This Utilisation Request is irrevocable.	

	 	Yours faithfully	 		

	 	authorised signatory for	 		
	 	[name of Borrower]	 		
 
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SCHEDULE 4
MARGIN SCHEDULE
“ Margin “ means, for any date:
 
(a)	to and including the date which is twenty-four (24) months after the Utilisation Date, the margin in respect of each Pricing Level set forth below (except where the Pricing Level is split, in which case the higher margin applies):	

Pricing Level	  	Level I	  	Level II	  	Level III	  	Level IV	  	Level V	
Margin	  	0.35 per cent.
per annum	  	0.40 per cent.
per annum	  	0.45 per cent.
per annum	  	0.50 per cent.
per annum	  	0.60 per cent.
per annum	
 
(b)	thereafter, four-tenths of one per cent. (0.40%) per annum.	
For purposes of this Schedule 4, the following Pricing Levels have the following meanings:
“ Level I ” applies at any date if, at such date, the Guarantor’s Public Debt Rating is rated A+/A1 or higher by S&P or Moody’s.
“ Level II ” applies at any date if, at such date, the Guarantor’s Public Debt Rating is rated A/A2 by S&P or Moody’s.
“ Level III ” applies at any date if, at such date, the Guarantor’s Public Debt Rating is rated A-/A3 by S&P or Moody’s.
“ Level IV ” applies at any date if, at such date, the Guarantor’s Public Debt Rating is rated BBB+/Baa1 by S&P or Moody’s.
“ Level V ” applies at any date if, at such date, the Guarantor’s Public Debt Rating is rated less than BBB+/Baa1 by S&P or the Guarantor does not receive a Public Debt Rating from S&P or Moody’s.
“ Moody’s ” means Moody’s Investors Service, Inc.
“ Public Debt Rating ” means, as of any date, the higher rating that has been most recently announced by either S&P or Moody’s, as the case may be, for any class of non-credit enhanced long-term senior unsecured debt issued by the Guarantor; provided that if at any time the difference between the ratings of such type most recently announced by S&P and Moody’s is more than one rating grade, the Public Debt Rating shall be the rating that is one grade below the higher of such two ratings. For purposes of the foregoing, (a) if only one of S&P and Moody’s shall have in effect a rating for any class of non-credit enhanced long-term senior unsecured debt issued by the Parent, the Public Debt Rating shall be the available rating; (b) if neither S&P nor Moody’s shall have in effect a rating for any class of non-credit enhanced long-term senior unsecured debt issued by the Guarantor, the Public Debt Rating shall be the rating which is three rating levels below the Guarantor’s S&P financial strength
 
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rating at such time, provided that , in the event that the Guarantor’s S&P financial strength rating is affirmed at (i) A+, the applicable Level will be Level II and (ii) A+ and on credit watch/review with negative implications, the applicable Level will be Level III; (c) if any rating established by S&P or Moody’s shall be changed, such change shall be effective as of the date on which such change is first announced publicly by the rating agency making such change, and (d) if S&P or Moody’s shall change the basis on which ratings are established, each reference herein to ratings announced by S&P or Moody’s as the case may be, shall refer to the then equivalent rating by S&P or Moody’s, as the case may be.
“ Pricing Level ” refers to the determination of which of Level I, Level II, Level III, Level IV or Level V applies at any date.
“ S&P ” means Standard & Poor’s Rating Services (a division of The McGraw-Hill Companies, Inc.).
The credit ratings to be utilised for the purposes of this Schedule 4 are those ratings assigned to the Public Debt Rating of the Group. The rating in effect at any date is that in effect at the close of business on such date.
 
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SCHEDULE 5
M ANDATORY C OST F ORMULAE
 
1.	The Mandatory Cost is an addition to the interest rate to compensate Banks for the cost of compliance with (a) the requirements of the Bank of England and/or the Financial Services Authority (or, in either case, any other authority which replaces all or any of its functions) or (b) the requirements of the European Central Bank.	
 
2.	On the first day of each Interest Period (or as soon as possible thereafter) the Agent shall calculate, as a percentage rate, a rate (the “ Additional Cost Rate ”) for each Bank, in accordance with the paragraphs set out below. The Mandatory Cost will be calculated by the Agent as a weighted average of the Banks’ Additional Cost Rates (weighted in proportion to the percentage participation of each Bank in the Loan) and will be expressed as a percentage rate per annum.	
 
3.	The Additional Cost Rate for any Lender lending from a Facility Office in the United Kingdom will be calculated by the Agent as follows:	

	 	E  × 0.01
300    	  	per cent. per annum.	
Where:
 
 	E	is designed to compensate Banks for amounts payable under the Fees Rules and is calculated by the Agent as being the average of the most recent rates of charge supplied by the Reference Banks to the Agent pursuant to paragraph 7 below and expressed in pounds per £1,000,000.	
 
4.	For the purposes of this Schedule:	
 
 	(a)	“ Fees Rules ” means the rules on periodic fees contained in the FSA Supervision Manual or such other law or regulation as may be in force from time to time in respect of the payment of fees for the acceptance of deposits;	
 
 	(b)	“ Fee Tariffs ” means the fee tariffs specified in the Fees Rules under the activity group A.1 Deposit acceptors (ignoring any minimum fee or zero rated fee required pursuant to the Fees Rules but taking into account any applicable discount rate); and	
 
 	(c)	“ Tariff Base ” has the meaning given to it in, and will be calculated in accordance with, the Fees Rules.	
 
5.	If requested by the Agent, each Reference Bank shall, as soon as practicable after publication by the Financial Services Authority, supply to the Agent, the rate of charge payable by that Reference Bank to the Financial Services Authority pursuant to the Fees Rules in respect of the relevant financial year of the Financial Services Authority (calculated for this purpose by that Reference Bank as being the average of the Fee Tariffs applicable to that Reference Bank for that financial year) and expressed in pounds per £1,000,000 of the Tariff Base of that Reference Bank.	
 
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6.	Each Bank shall supply any information required by the Agent for the purpose of calculating its Additional Cost Rate. In particular, but without limitation, each Lender shall supply the following information on or prior to the date on which it becomes a Lender:	
 
 	(a)	the jurisdiction of its Facility Office; and	
 
 	(b)	any other information that the Agent may reasonably require for such purpose.	
Each Bank shall promptly notify the Agent of any change to the information provided by it pursuant to this paragraph.
 
7.	The rates of charge of each Reference Bank for the purpose of E above shall be determined by the Agent based upon the information supplied to it pursuant to paragraphs 5 and 6 above and on the assumption that, unless a Bank notifies the Agent to the contrary, each Bank’s obligations in relation to cash ratio deposits and Special Deposits are the same as those of a typical bank from its jurisdiction of incorporation with a Facility Office in the same jurisdiction as its Facility Office.	
 
8.	The Agent shall have no liability to any person if such determination results in an Additional Cost Rate which over or under compensates any Bank and shall be entitled to assume that the information provided by any Bank or Reference Bank pursuant to paragraphs 5 and 6 above is true and correct in all respects.	
 
9.	The Agent shall distribute the additional amounts received as a result of the Mandatory Cost to the Banks on the basis of the Additional Cost Rate for each Bank based on the information provided by each Bank and each Reference Bank pursuant to paragraphs 5 and 6 above.	
 
10.	Any determination by the Agent pursuant to this Schedule in relation to a formula, the Mandatory Cost, an Additional Cost Rate or any amount payable to a Bank shall, in the absence of manifest error, be conclusive and binding on all Parties.	
 
11.	The Agent may from time to time, after consultation with the Borrower and the Banks, determine and notify to all Parties any amendments which are required to be made to this Schedule in order to comply with any change in law, regulation or any requirements from time to time imposed by the Bank of England, the Financial Services Authority or the European Central Bank (or, in any case, any other authority which replaces all or any of its functions) and any such determination shall, in the absence of manifest error, be conclusive and binding on all Parties.	
 
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SCHEDULE 6
F ORM OF B ORROWER T RANSFER C ERTIFICATE
 
To:	The Royal Bank of Scotland plc	
TRANSFER CERTIFICATE
relating to the agreement dated [                    ] (the “ Credit Agreement ”) whereby a A$100,000,000 term loan facility was made available to ACE Australia Holdings Pty Limited (“ Original Borrower ”) by a group of banks on whose behalf The Royal Bank of Scotland plc acted as agent in connection therewith.
 
1.	Terms defined in the Credit Agreement shall, subject to any contrary indication, have the same meanings herein. The term “Borrower Transferee” is defined in the schedule hereto.	
 
2.	The Original Borrower and Borrower Transferee hereby request the Agent to accept this Borrower Transfer Certificate for the transfer of all or part of the Original Borrower’s rights, benefits and obligations referred to in the schedule hereto as being delivered to the Agent pursuant to and for the purposes of Clause 29.4 ( Transfer by Original Borrower ) of the Credit Agreement so as to take effect in accordance with the terms thereof on the Borrower Transfer Date or on such later date as may be determined in accordance with the terms thereof.	
 
3.	The Borrower Transferee confirms that it has received a copy of the Credit Agreement together with such other information as it has required in connection with this transaction and that it has not relied and will not hereafter rely on the Original Borrower to check or enquire on its behalf into the legality, validity, effectiveness, adequacy, accuracy or completeness of any such information.	
 
4.	The Borrower Transferee hereby undertakes with the Finance Parties and each of the other parties to the Credit Agreement that it will perform in accordance with their terms all those obligations which by the terms of the Finance Documents will be assumed by it after delivery of this Borrower Transfer Certificate to the Agent and satisfaction of the conditions (if any) subject to which this Borrower Transfer Certificate is expressed to take effect.	
 
5.	This Borrower Transfer Certificate and the rights, benefits and obligations of the parties hereunder shall be governed by and construed in accordance with English law.	
THE SCHEDULE
 
6.	Portion to be transferred:	
 
7.	Borrower Transferee:	
 
8.	Transfer date:	
 
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        [Original Borrower]	 	        [Borrower Transferee]	 		
			
By:	 	By:	 		
			
Date:	 	Date:	 		

Administrative details of Borrower Transferee	
	
Address:	
Contact Name:	
Fax:	
Telephone:	
 
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SCHEDULE 7
F ORM OF T RANSFER C ERTIFICATE
Form of Transfer Certificate
 
To:	The Royal Bank of Scotland plc	
TRANSFER CERTIFICATE
relating to the agreement dated [                    ] (the “ Credit Agreement ”) whereby a A$100,000,000 term loan facility was made available to ACE Australia Holding Pty Limited by a group of banks on whose behalf The Royal Bank of Scotland plc acted as agent in connection therewith.
 
1.	Terms defined in the Credit Agreement shall, subject to any contrary indication, have the same meanings herein. The terms Bank, Transferee and Portion Transferred are defined in the schedule hereto.	
 
2.	The Bank (a) confirms that the details in the schedule hereto summarises its Commitment in the Credit Agreement and (b) requests the Transferee to accept and procure the transfer by novation to the Transferee of the Portion Transferred (specified in the schedule hereto) of its Commitment by counter-signing and delivering this Transfer Certificate to the Agent at its address for the service of notices specified in the Credit Agreement.	
 
3.	The Transferee hereby requests the Agent to accept this Transfer Certificate as being delivered to the Agent pursuant to and for the purposes of Clause 29.7 ( Transfers by Banks ) of the Credit Agreement so as to take effect in accordance with the terms thereof on the Transfer Date or on such later date as may be determined in accordance with the terms thereof.	
 
4.	The Transferee confirms that it has received a copy of the Credit Agreement together with such other information as it has required in connection with this transaction and that it has not relied and will not hereafter rely on the Bank to check or enquire on its behalf into the legality, validity, effectiveness, adequacy, accuracy or completeness of any such information and further agrees that it has not relied and will not rely on the Bank to assess or keep under review on its behalf the financial condition, creditworthiness, condition, affairs, status or nature of the Obligors.	
 
5.	The Transferee hereby undertakes with the Bank and each of the other parties to the Credit Agreement that it will perform in accordance with their terms all those obligations which by the terms of the Finance Documents will be assumed by it after delivery of this Transfer Certificate to the Agent and satisfaction of the conditions (if any) subject to which this Transfer Certificate is expressed to take effect.	
 
6.	The Bank makes no representation or warranty and assumes no responsibility with respect to the legality, validity, effectiveness, adequacy or enforceability of the Finance Documents or any document relating thereto and assumes no responsibility for the	
 
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 	financial condition of the Obligors or for the performance and observance by the Obligors of any of their respective obligations under the Finance Documents or any document relating thereto and any and all such conditions and warranties, whether express or implied by law or otherwise, are hereby excluded.	
 
7.	The Bank hereby gives notice that nothing herein or in the Finance Documents (or any document relating thereto) shall oblige the Bank to (a) accept a re-transfer from the Transferee of the whole or any part of its rights, benefits and/or obligations under the Finance Documents transferred pursuant hereto or (b) support any losses directly or indirectly sustained or incurred by the Transferee for any reason whatsoever including the non-performance by an Obligor or any other party to the Finance Documents (or any document relating thereto) of its obligations under any such document. The Transferee hereby acknowledges the absence of any such obligation as is referred to in (a) or (b) above.	
 
8.	This Transfer Certificate and the rights, benefits and obligations of the parties hereunder shall be governed by and construed in accordance with English law.	
THE SCHEDULE
 
9.	Bank:	
 
10.	Transferee:	
 
11.	Transfer Date:	

12.	  	   Bank’s Commitment	 		 	Portion Transferred	
				
	  	[Transferor Bank]	 		 	[Transferee Bank]	
				
By:	  		 	By:	 		
				
Date:	  		 	Date:	 		
 
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ADMINISTRATIVE DETAILS OF TRANSFEREE
Address
Contact Name:
Account for Payments in sterling:
Fax:
Telephone:
 
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SCHEDULE 8
F ORM OF C ONFIDENTIALITY U NDERTAKING
[Letterhead of Transferor]
[ Date ]
 
To:	[Transferee]	
Dear Sirs,
ACE Australia Holdings Pty Limited – A$100,000,000 Credit Agreement
dated [    ] (the “Agreement”)
Confidentiality Agreement
In connection with your possible interest in becoming a bank in the above-captioned facility (the “ Transaction ”) for ACE Australia Holdings Pty Limited (the “ Borrower ”), we will be providing you with information that is not in the public domain but that is confidential or proprietary in nature. Such information and any other information concerning the Borrower or the Transaction furnished to you by [Transferor], or by or on behalf of the Borrower (whether before, on or after the date of this Agreement), together with analyses, compilations or other materials prepared by you or your directors, officers, employees or advisors (collectively, “ Representatives ”) which contain or otherwise reflect such information, are hereinafter collectively referred to as the “ Information ”. In consideration of your receipt of the Information, you agree that:
 
1.	Except as otherwise expressly provided herein, you will not (a) use the Information except in connection with the Transaction or (b) disclose to any person any terms or conditions of the Transaction or any portion of the Information.	
 
2.	Notwithstanding the foregoing, you may disclose the Information: (a) to your Representatives who need to know the Information for purposes of evaluating the Transaction and who are informed by you of the confidential nature of the Information and who agree to be bound by the terms of this Agreement; (b) as may be required by applicable law or at the request of any regulatory or supervisory authority having jurisdiction over you or at the request of any rating agency for purposes of establishing or maintaining your debt ratings, provided that you request confidential treatment thereof to the extent permitted by law; or (c) with the prior written consent of the Borrower and [Transferor].	
 
3.	The reference to the term “Information” contained in paragraphs 1 and 2 shall not include such portions thereof which (a) are or become available to the public through no fault or action by you or your Representatives or (b) are or hereafter become available to you on a non-confidential basis from a source other than the Borrower, [Transferor] or their respective Representatives, which source, to the best of your knowledge, is not prohibited from disclosing such Information to you by a contractual, legal or fiduciary obligation to the Borrower or [Transferor].	
 
- 89 -

4.	In the event that you or any of your Representatives becomes legally compelled to disclose any of the Information or the existence of the Transaction, you will, to the extent permitted by law provide the Borrower and [Transferor] with prompt notice so that they may seek a protective order or other appropriate remedy. In the event that such protective order or remedy is not obtained, you shall furnish only that portion of the Information that is legally required and shall disclose such Information in a manner reasonably designed to preserve its confidential nature.	
 
5.	In the event that discussions with you concerning the Transaction are discontinued or your participation in the Transaction is otherwise terminated, you shall redeliver to [Transferor] any Information that was furnished to you by or on behalf of the Borrower or the Transferor or shall certify to the Borrower and [Transferor] that you have destroyed all such Information.	
 
6.	You agree to be responsible for any breach of this Agreement by you or your Representatives.	
 
7.	You acknowledge that money damages and other remedies at law may be inadequate to protect against breach of this Agreement and you hereby agree to the granting of injunctive or other equitable relief without proof of actual damages.	
 
8.	It is further understood and agreed that no failure or delay by the Borrower or [Transferor] in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof.	
 
9.	This Agreement shall be governed by and construed in accordance with the laws of England and Wales.	
If you are prepared to accept the Information on the foregoing terms, please countersign this Agreement in the space provided below and deliver it via telecopier (with the executed original to follow by next-day courier) to:
[Transferor]
[address]
Attention:
Telecopier:
Your acceptance of this Agreement shall be effective upon our receipt of such fax from you.
Yours faithfully,
 
- 90 -

[ TRANSFEROR]

By:	 	[            ]	 	[ACCEPTED AND AGREED]	 		 		 		
					
Title:	 	[                                ]	 		 		 	As at the date hereof	
					
	 		 		 		 	[Name of Transferee]	
						
	 		 		 		 	By:	 	[                                ]	
						
	 		 		 		 	Title:	 	[                                ]	
 
- 91 -

SCHEDULE 9
F ORM OF C OMPLIANCE C ERTIFICATE
 
To:	[ Agent ]	
 
From:	[ Guarantor ]	
Dated:
Dear Sirs
ACE Australia Holding Pty Limited – A$100,000,000 Credit Agreement
dated [    ] (the “Agreement”)
 
1.	We refer to the Agreement. This is a Compliance Certificate. Terms defined in the Agreement have the same meaning in this Compliance Certificate unless given a different meaning in this Compliance Certificate.	
 
2.	[We confirm that no Default is continuing].	
 
3.	We confirm that attached is a true and correct computation as at [date] of the covenants contained in Clause 18 ( Financial Covenants ) of the Agreement as required under [Clause 17.2.1 ( Annual Financials )]/[Clause 17.3 ( Quarterly financials )] of the Agreement.	

Signed:	 	 	
	 	Director	
	 	Of	
	 	[ Guarantor ]	
 
- 92 -

SCHEDULE 10
E XISTING L IENS
 
1.	Lien arising under a Subordination Agreement dated as of October 27, 1998 among ACE US Holdings, Inc., the Guarantor and The Chase Manhattan Bank (now JPMorgan Chase Bank, N.A.) encumbering ACE US Holdings, Inc.’s rights under the Subordinated Loan Agreement dated as of October 27, 1998 among ACE US Holdings, Inc., ACE Bermuda Insurance Ltd. and United States Trust Company of New York, as trustee under the Indenture dated October 27, 1998 of ACE US Holdings, Inc.	
 
2.	Liens securing the Seventh Amendment and Restatement of the Letter of Credit Facility Agreement dated 17 November 2006 among the Guarantor, ACE Bermuda Insurance Ltd., ACE Tempest Reinsurance Ltd., certain other financial institutions and Citibank International plc, as Agent and Security Trustee.	
 
- 93 -

SIGNATURES
THE BORROWER
ACE AUSTRALIA HOLDINGS PTY LIMITED

EXECUTED by ACE AUSTRALIA	 	)	  		  		
HOLDINGS PTY LIMITED in	 	)	  		  		
accordance with section 127(1) of the	 	)	  		  		
Corporations Act 2001 (Cwlth) by	 	)	  		  		
authority of its directors:	 	)	  		  		
	 	)	  		  		
PAUL A. VENNING	 	)	  	STEPHEN M. McCONNELL	  		
Signature of director	 	)	  	Signature of director/company secretary*	  		
	 	)	  	*  delete whichever is not applicable	  		
	 	)	  		  		
PAUL A. VENNING	 	)	  	STEPHEN M. McCONNELL	  		
Name of director (block letters)	 		  	Name of director/company secretary* (block letters)	  		
	 		  	*  delete whichever is not applicable	  		

Address:	 	Level 3 ACE Building	
	 	28-34 O’Connell Street	
	 	Sydney NSW 2000	
		
Fax:	 	+61 2 9233 7864	

			
THE GUARANTOR	
	
ACE LIMITED	
		
By:	 	ROBERT CUSUMANO	
		
Address:	 	17 Woodbourne Avenue	
	 	Hamilton HM 08	
		
Fax:	 	441 295 5221	
 
- 94 -

THE MANDATED LEAD ARRANGERS
HSBC SECURITIES (USA) INC.

By:	 	MICHAEL M c GOVERN	
		
Address:	 	452 Fifth Avenue	
	 	Tower 5	
	 	New York, NY 10018	
THE ROYAL BANK OF SCOTLAND PLC

By:	 	CHRIS PARSONS	
		
Address:	 	135 Bishopsgate	
	 	London
EC2M 3UR	
		
Fax:	 	0207 085 5143	
THE AGENT
THE ROYAL BANK OF SCOTLAND PLC

By:	 	CHRIS PARSONS	
		
Address:	 	135 Bishopsgate	
	 	London
EC2M 3UR	
		
Fax:	 	0207 085 4564	
THE BANKS

HSBC BANK AUSTRALIA LIMITED	
		
By:	 	GARRY JAMES RICHMOND	
		
Address:	 	580 George Street	
	 	Sydney NSW 2000	
 
- 95 -

THE ROYAL BANK OF SCOTLAND PLC, AUSTRALIA BRANCH

By:	 	CHRIS PARSONS	
		
Address:	 	Australia Square Tower	
	 	264-278 George Street	
	 	Sydney NSW 2000	

ABN AMRO BANK N.V., AUSTRALIAN BRANCH	
		
By:	 	KARIN EURELL	
		
Address:	 	Level 5	
	 	88 Phillip Street	
	 	Sydney NSW 2000	

BARCLAYS BANK PLC AUSTRALIAN BRANCH	
		
By:	 	TRACEY STRATFORD	
		
Address:	 	Level 24	
	 	400 George Street	
	 	Sydney NSW 2000	

NATIONAL AUSTRALIA BANK LIMITED	
		
By:	 	CHEYNE GHOUGNASSIAN	
		
Address:	 	Level 24	
	 	255 George Street	
	 	Sydney NSW 2000	
 
- 96 -

Exhibit 10.29

	  	ACE USA
Routing WA12C
436 Walnut Street
Philadelphia, PA 19106	  	215-640-5332 tel
215-640-2946 fax
 
www.ace-ina.com	
	  		  		
	  	Phillip B. Cole	  		
	  	Global Human Resources Officer	  		
April 10, 2006
Mr. John Keogh
474 Abbey Road
Manhasset, New York 11030
Dear John,
I am pleased to confirm our formal offer of employment to you as Chief Executive Officer of ACE Overseas General . Please confirm your acceptance of our offer of employment by executing this letter and returning a copy to me.
While your total annual compensation will depend on ACE company-wide performance, ACE Overseas General performance and your personal performance, your annual compensation target will be in the range of $2.3M to $2.5M. In addition, you will be eligible to receive certain executive perquisites. The details of your total reward package are outlined below.
 
 	•	 	Your gross annual base salary will be paid bi-weekly and will be at an annual rate of $575,000.	
 
 	•	 	You will be eligible to participate in the 2006 ACE bonus program (payable in March of 2007.) While your bonus amount will be at the discretion of the ACE LTD CEO and the Board of Directors, it is targeted at 100% of your base salary and will be based both on individual and company performance.	
 
 	•	 	You will be eligible to participate in the ACE Limited Long-Term Incentive Plan. While your award will again be at the discretion of the ACE LTD CEO and Board of Directors, it is targeted at 200% - 250% of your base salary.	
 
 	•	 	You will be paid a guaranteed signing bonus of $200,000 (less applicable taxes) within 60 days of your date of employment. However, if within the first twelve months of your employment you resign or your employment is terminated For Cause , which means termination due to your misconduct, conduct in violation of company policy, or unsatisfactory performance as determined by the company, you will be required to refund the signing cash award through offset of your final paycheck and direct payment for any remaining balance.	
 
 	•	 	You will be recommended for an additional signing award in the form of ACE equity, valued at approximately $800,000. This award will be comprised of 8700 Restricted Ordinary ACE Limited Shares to be granted on the 1 st business trading day of the month following your start date. These shares will vest 25% per annum over 4 years provided you are employed by the Company on each vesting date. This award will also be comprised of 7250 Options to purchase Ordinary ACE Limited Shares to be granted at the New York Stock Exchange closing price for ACE Limited Ordinary Shares on the 1 st business trading day of the month immediately following your start date. These Options will vest 33 1/3% per annum over three years provided you are employed by the Company on each vesting date. The awards will be governed by the terms of	
 
One of the ACE Group of Insurance & Reinsurance Companies

 
 	the applicable ACE Limited Long-Term Incentive Plan pursuant to which they are awarded. The ACE Limited Long-Term Incentive Plan may be changed by the ACE Limited Board of Directors at any time.	
 
 	•	 	You will also participate in all the benefit plans enjoyed by our senior executive group which includes financial and tax planning as well as an executive medical program; details of these programs will be forwarded to you under separate cover.	
 
 	•	 	You will also participate in our company-sponsored automobile program. The Company will provide you with a car of your choosing (from among the approved company selections). Should you wish to receive a car allowance in lieu of a company-provided automobile, we will arrange accordingly.	
 
 	•	 	You will be eligible to participate in the ACE USA benefits program. This comprehensive program allows you to personalize your benefits to meet your needs. Core benefits, such as vacation days, holidays, personal days, short-term disability (STD), basic life insurance, business travel accident insurance and basic long-term disability (LTD) are provided at no cost to you. Other plans, such as medical, prescription coverage, vision, dental and employee supplemental life as well as dependent supplemental life insurance coverage require you to make contributions if you enroll. Some of these contributions are made on a pre-tax basis. ACE USA also offers flexible spending accounts, a transit reimbursement account, an educational reimbursement program, an employee assistance program and an employee stock purchase plan.	
 
 	•	 	As an officer of ACE , you are eligible to receive four weeks vacation annually in accordance with ACE ’s vacation policy.	
 
 	•	 	As an employee of ACE , you are automatically eligible to participate in the ACE USA Employee Retirement Program. In addition to a company base contribution of 6% of your compensation (base salary plus any performance-based bonuses), you are eligible to contribute up to 10% of your compensation on a pre-tax basis. The company will match, dollar for dollar, any amount up to the first 6% of pay that you contribute. In addition, an annual discretionary variable match of up to 3% based on company performance may also be made on behalf of participants in the Retirement Program. Please note that once you are considered a “highly compensated employee” under IRS rules, the maximum you can contribute to ACE ’s qualified plan will be 10%.	
 
 	•	 	You are also eligible to participate in a non-qualified retirement savings plan – the ACE USA Supplemental Employee Retirement Savings Plan. This plan operates in conjunction with ACE ’s qualified plan – The ACE USA Employee Retirement Savings Plan. After you have contributed the maximum amount permitted under IRS rules to ACE ’s qualified plan, you may continue to make tax deferred contributions and continue to receive company contributions under ACE ’s non-qualified plan. To participate in this non-qualified plan, you must immediately elect to contribute a minimum of 10% of your compensation under ACE ’s qualified plan.	
 
Page 2/3

 
 	•	 	In addition, you are eligible to participate in the ACE USA Officer Deferred Compensation Plan, which allows you to defer salary and/or bonus to retirement, termination, or a specified year in the future. The Plan is currently being updated due to recent changes in legislation that govern such plans. As the updates are completed, you will receive a separate communication with instructions to enroll in the Plan.	
Information regarding both the ACE USA Supplemental Employee Retirement Savings Plan and the ACE USA Officer Deferred Compensation Plan, including election forms, will be sent to you under separate cover.
Our offer of employment is contingent upon satisfactory findings from our candidate background checks and a negative result from our routine drug test. If your confirmed drug test is positive for the presence of drugs, your employment offer will be rescinded. Human Resources will work with you to arrange for your test.
ACE places a high value on business ethics and we remind you that it would not be acceptable for you to bring with you to ACE any proprietary or confidential materials from your former employer.
John, we look forward to you joining us at ACE . If there is anything either I or Human Resources can do to assist in the transition, or if you have any questions regarding ACE policy, please do not hesitate to call.
Sincerely,
Phillip B. Cole
Global Human Resources Officer

John Keogh
I agree to employment under the terms of this letter
 
Page 3/3

Exhibit 10.30
ACE LIMITED EXECUTIVE SEVERANCE PLAN
PARTICIPATION AGREEMENT
Dear John Keogh,
You have been designated by ACE Limited (“ACE”) to become a participant in the ACE Limited Executive Severance Plan (the “Plan”). You will become a participant in the Plan by signing this letter agreement. If you do not sign this letter agreement, then you will not become a participant in the Plan.
If you become a participant in the Plan, you participation will be subject to and governed by the terms and conditions of the Plan, a copy of which is attached to this letter agreement. Generally, under the Plan and in accordance with schedule A of the Plan, if your employment is terminated by ACE without Cause, your:
 
•	 	Standard Severance Multiple (expressed at a percentage) will be 100%;	
 
•	 	Standard Vesting Continuation Period will be 12 months;	
 
•	 	Standard Option Extended Exercise Period will be 3 years (or possibly less);	
 
•	 	Standard Health Continuation Period will be 12 months;	
 
•	 	Standard Non-competition Period will be 12 months;	
 
•	 	Standard Clients/Customers Non-solicitation Period will be 12 months; and	
 
•	 	Standard Employee Non-solicitation Period will be 12 months.	
In addition, if your employment is terminated by ACE without Cause or by you for Good reason during the 180-day period immediately prior to a Change in Control or during the 2-year period immediately following a Change in Control, your:
 
•	 	Change-in-Control Severance Multiple (expressed as a percentage) will be 200%;	
 
•	 	Change-in-Control Option Extended Exercise Period will be 3 years (or possibly less);	
 
•	 	Change-in-Control Health Continuation Period will be 24 months;	
 
•	 	Change-in-Control Non-competition Period will be 12 months;	
 
•	 	Change-in-Control Clients/Customers Non-solicitation Period will be 12 months; and	
 
•	 	Change-in-Control Employee Non-solicitation Period will be 24 months.	
Please refer to the Plan for more specificity regarding your severance benefits and your post-termination obligations to ACE.
As a participant in the Plan, you agree to abide by the terms and conditions of the Plan. Please indicate your receipt of the Plan document, and your acceptance of and agreement to the terms and conditions of the Plan, by signing in the indicated space below.

Sincerely yours,	

Global HR Officer	
I ACCEPT AND AGREE TO BECOME A PARTICIPANT IN
AND WILL ABIDE BY THE TERMS AND CONDITIONS OF,
THE ACE LIMITED EXECUTIVE SEVERANCE PLAN.

 	 		 	 	
John Keogh	 		 	Date	

Exhibit 10.32
ACE LIMITED
DESCRIPTION OF EXECUTIVE OFFICER CASH COMPENSATION
FOR 2007
Set forth below are the 2007 annual base salaries of the Chief Executive Officer, the Chief Financial Officer and each of the four other most highly compensated executive officers in 2007 who were executive officers as of December 31, 2007
Evan G. Greenberg, President and Chief Executive Officer
$1,200,000
Philip V. Bancroft, Chief Financial Officer
$670,000
Robert Cusumano, General Counsel and Secretary
$515,000
Brian E. Dowd, Chief Executive Officer Insurance-North American
$700,000
John Keogh, Chief Executive Officer ACE Overseas General
$625,000
Paul Medini, Chief Accounting Officer
$425,000
In addition to the above, these officers receive an annual bonus for 2007 that is determined in the first quarter of 2008 and perquisites and other personal benefits that may include housing allowances, personal use of the Company aircraft, relocation expenses, club memberships, private drivers, financial planning, car allowance or Company leased vehicle, home security, personal apartment costs and long service awards, tax gross ups and contributions to retirement plans. The annual base salaries for 2008 for these officers is determined in the first quarter of 2008.

Exhibit 10.38
RESOLUTION
OF THE
PENSION COMMITTEE
OF
ACE LIMITED
WHEREAS , the ACE Limited Pension Committee (“Pension Committee”) has been delegated the authority to amend, with certain exceptions, the ACE Limited retirement plans; and
WHEREAS , the Pension Committee has established a new retirement plan, the ACE Bermuda Employee Retirement Plan (“ABERP”), exclusively for employees who are not United States taxpayers; and
WHEREAS , the ABERP will be amended to remove limits imposed by the U.S. Internal Revenue Code, so that non-U.S. taxpayers will participate in the ABERP in lieu of any participation in: the ACE Limited Supplemental Retirement Plan and the ACE Limited Elective Deferred Compensation Plan (“Nonqualified Plans”); and
WHEREAS , it is the intention of the Pension Committee to exclude participation by non-U.S. taxpayer participants from the Nonqualified Plans on and after the effective date of the above-referenced ABERP amendment.
NOW THEREFORE BE IT
RESOLVED , that the Nonqualified Plans are amended as follows:
 
1.	First Amendment to the ACE Limited Supplemental Retirement Plan	
The following sentence is added at the end of Section 2.1 which reads:
“Notwithstanding the foregoing, effective August 9, 2007, employees who are not U.S.-taxpayers (except for those who have chosen to participate in the U.S. tax-qualified plan sponsored by ACE Limited) shall not be eligible to participate in the Plan.”
 
2.	First Amendment to the ACE Limited Elective Deferred Compensation Plan	
The following sentence is added at the end of the definition of “Eligible Employee” in Article I, which reads:

“However, effective August 9, 2007, any employee who is not a U.S.-taxpayer (except if he or she has chosen to participate in the U.S. tax-qualified plan sponsored by ACE Limited) shall no longer be an Eligible Employee.”
AND BE IT FURTHER
RESOLVED, that the effective date of the aforementioned ABERP is August 9, 2007 and that all administrative actions necessary to establish this nonqualified version of the ABERP are hereby authorized.

Exhibit 10.39
RESOLUTION
OF THE
PENSION COMMITTEE
OF
ACE LIMITED
WHEREAS , the ACE Limited Pension Committee (“Pension Committee”) has been delegated the authority to amend, with certain exceptions, the ACE Limited retirement plans; and
WHEREAS , the ACE Limited Supplemental Retirement Plan (“Plan”) provides for payment of benefits at “retirement,” which the Pension Committee has defined as the later of age 55 or at termination of employment with ACE Limited, except in the case of participants with small sums; and
WHEREAS , the Plan also permits participants to choose from an array of distribution options ranging from single sum distributions to periodic distributions; and
WHEREAS , both the timing and form of the distributions from the Plan differ considerably from the corresponding ACE USA Supplement Retirement Savings Plan, which pays all benefits in a single sum in January following termination of employment; and
WHEREAS , the additional distribution alternatives increases the complexity of administering the Plan and, in addition, creates additional administrative difficulties when ACE employees transfer between Bermuda and the United States; and
WHEREAS , the Pension Committee desires to simplify the administration of the Plan and to ease administrative difficulties for employees transferring between the United States and Bermuda and change the timing and form of the distribution alternatives to match the ACE USA Supplemental Retirement Savings Plan provisions.
NOW THEREFORE BE IT
RESOLVED , that the Plan is amended as follows:
Second Amendment to the ACE Limited Supplemental Retirement Plan
1. Exhibit A is amended to read as follows:
1. For all participants who were active employees during 2007, distributions under the ACE Limited Supplement Retirement Plan will be made in a single sum in the January

following the participant’s termination of employment Employers and Related Companies, but for amounts subject to Internal Revenue Code section 409A, only to the extent permitted by section 409A.
2. For all participants who terminated prior to 2007, the previous rules and regulations as promulgated in the previous version of Exhibit A and by the Committee shall remain in effect, as will their elections as to distributions and forms of payment made pursuant to the previous version of Exhibit A, but for amounts subject to Internal Revenue Code section 409A, only to the extent permitted by section 409A.

Exhibit 12.1
Computation of Ratio of Earnings to Fixed Charges and Preferred Share Dividends

 	  	Fiscal year ended December 31	 	
 	  	2007	  	2006	  	2005	  	2004	  	2003	  	2002	 	
Earnings per Financial Statements	  	$	2,578,098	  	$	2,305,169	  	1,028,241	  	$	1,152,686	  	$	1,482,923	  	$	99,882	 	
Add (deduct):	  			  			  		  			  			  				
Provision for income taxes	  	 	575,475	  	 	523,267	  	272,557	  	 	286,443	  	 	310,707	  	 	(111,542	)	
Fixed charges	  	 	198,722	  	 	199,811	  	201,885	  	 	211,035	  	 	205,758	  	 	215,161	 	
	  	 	 	  	 	 	  	 	  	 	 	  	 	 	  	 	 	 	
Earnings for Computation	  	$	3,352,295	  	$	3,028,247	  	1,502,683	  	$	1,650,164	  	$	1,999,388	  	$	203,501	 	
	  	 	 	  	 	 	  	 	  	 	 	  	 	 	  	 	 	 	
Fixed Charges	  			  			  		  			  			  				
Interest Expense (1) 	  	$	174,870	  	$	175,698	  	174,029	  	$	182,984	  	$	177,425	  	$	193,494	 	
One third of payments under operating leases	  	 	23,852	  	 	24,113	  	27,856	  	 	28,051	  	 	28,333	  	 	21,667	 	
	  	 	 	  	 	 	  	 	  	 	 	  	 	 	  	 	 	 	
Total Fixed Charges	  	$	198,722	  	$	199,811	  	201,885	  	$	211,035	  	$	205,758	  	$	215,161	 	
	  	 	 	  	 	 	  	 	  	 	 	  	 	 	  	 	 	 	
Ratio of Earnings to Fixed Charges	  	 	16.9	  	 	15.2	  	7.4	  	 	7.8	  	 	9.7	  	 	(2) 	 	
	  	 	 	  	 	 	  	 	  	 	 	  	 	 	  	 	 	 	
Preferred Share Dividends	  	$	44,851	  	$	44,851	  	44,850	  	$	44,972	  	$	36,009	  	$	25,662	 	
	  	 	 	  	 	 	  	 	  	 	 	  	 	 	  	 	 	 	
Total Fixed Charges and Preferred Share Dividends	  	$	243,573	  	$	244,662	  	246,735	  	$	256,007	  	$	241,767	  	$	240,823	 	
	  	 	 	  	 	 	  	 	  	 	 	  	 	 	  	 	 	 	
Ratio of Earnings to Fixed Charges and Preferred Share Dividends	  	 	13.8	  	 	12.4	  	6.1	  	 	6.4	  	 	8.3	  	 	(2) 	 	

(1) 	The Company recognizes accruals for interest and penalties, if any, related to unrecognized tax benefits in income tax expense (i.e. excluded from interest expense).	

(2)	Earnings for the year ended December 31, 2002 were insufficient to cover fixed charges by $12 million and combined fixed charges and preferred share dividends by $37 million.	

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

Name	  	Jurisdiction of
Organization	  	Percentage
Ownership	
ACE Limited	  	Cayman Islands	  	Publicly held	
ACE Bermuda Insurance Ltd.	  	Bermuda	  	100%	
Paget Reinsurance International Ltd.	  	Bermuda	  	100%	
ACE Capital Title Reinsurance Company (EI# 06-1434264, NAIC # 50028, NY)	  	USA (New York)	  	100%	
ACE Financial Solutions International, Ltd.	  	Bermuda	  	100%	
ACE Bermuda International Reinsurance (Ireland) Limited	  	Ireland	  	100%	
ACE Bermuda International Insurance (Ireland) Limited	  	Ireland	  	100%	
Corporate Officers & Directors Assurance Ltd. (CODA)	  	Bermuda	  	100%	
Oasis Real Estate Company Ltd.	  	Bermuda	  	100%	
Sovereign Risk Insurance Limited	  	Bermuda	  	100%	
Tripar Partnership	  	Bermuda	  	95.37%
4.63% (CODA)	
ACE Realty Holdings Limited	  	Bermuda	  	100%	
Oasis Personnel Limited	  	Cayman Islands	  	100%	
Hamlin Capital Holdings Limited	  	Bermuda	  	100% Class A shares
50% Class B shares	
Hamlin Capital Limited	  	Bermuda	  	100% Class A shares
30% Class B shares	
Assured Guaranty Ltd.	  	Bermuda	  	24%	
ACE Global Markets Limited	  	England & Wales	  	100%	
ACE Group Holdings Limited	  	England & Wales	  	100%	
ACE Tarquin	  	England & Wales	  	100%	
ACE Capital V Limited	  	England & Wales	  	100%	
ACE Leadenhall Limited	  	England & Wales	  	100%	
ACE Underwriting Agencies Limited	  	England & Wales	  	100%	
ACE London Group Limited	  	England & Wales	  	100%	
ACE Capital Limited	  	England & Wales	  	100%	
ACE Capital III Limited	  	England & Wales	  	100%	
ACE Capital IV Limited	  	England & Wales	  	100%	
ACE London Holdings Limited	  	England & Wales	  	100%	
ACE Capital II Limited	  	England & Wales	  	100%	
ACE London Investments Limited	  	England & Wales	  	100%	
ACE London Aviation Limited	  	England & Wales	  	100%	
ACE London Underwriting Limited	  	England & Wales	  	100%	
ACE Underwriting Services Limited	  	England & Wales	  	100%	
ACE London Services Limited	  	England & Wales	  	100%	
ACE Capital VI Limited	  	England & Wales	  	100%	
ACE (PM) Limited	  	England & Wales	  	100%	
ACE Services Limited	  	Cayman Islands	  	100%	
ACE Holdings (Gibraltar) Limited	  	Gibraltar	  	100%	
ACE Gibraltar Limited	  	Gibraltar	  	100%	

					
Oasis Insurance Services Ltd.	  	Bermuda	  	100%	
ACE Tempest Life Reinsurance Ltd.	  	Bermuda	  	100%	
ACE Europe Life Limited	  	England & Wales	  	100%	
ACE Tempest Reinsurance Ltd.	  	Bermuda	  	100%	
Oasis Investments Limited	  	Bermuda	  	67%
33% (ACE Bermuda Insurance Ltd.)	
Oasis D1 LLC	  	USA (Delaware)	  	100%	
Oasis D2 LLC	  	USA (Delaware)	  	100%	
Oasis Investments 2 Ltd.	  	Bermuda	  	67%
33% (ACE Bermuda Insurance Ltd.)	
ACE Group Holdings Inc.	  	USA (Delaware)	  	100%	
ACE Life Insurance Company	  	USA (Connecticut)	  	100%	
ACE INA Holdings Inc.	  	USA (Delaware)	  	80%
20% (ACE Limited)	
Huatai Insurance Company of China, Limited	  	China	  	6.129%
10% (ACE Tempest Reinsurance Ltd.) 6%
(ACE U.S Holdings Inc.)	
Huatai Life Insurance Company, Limited	  	China	  	75.993%
20% (ACE INA Holdings Inc.)	
INA Corporation	  	USA (Pennsylvania)	  	100%	
ACE INA Properties, Inc.	  	USA (Delaware)	  	100%	
Conference Facilities, Inc.	  	USA (Pennsylvania)	  	100%	
INA Tax Benefits Reporting, Inc.	  	USA (Delaware)	  	100%	
INA Financial Corporation	  	USA (Delaware)	  	100%	
Brandywine Holdings Corporation	  	USA (Delaware)	  	100%	
Cravens, Dargan & Company, Pacific Coast	  	USA (Delaware)	  	100%	
Cravens, Dargan & Company, Pacific Coast of Illinois, Inc.	  	USA (Illinois)	  	100%	
Century Indemnity Company (EI# 06-6105395, NAIC #20710, PA)	  	USA (Pennsylvania)	  	100%	
Century Reinsurance Company (EI# 06-0988117, NAIC #35130, PA)	  	USA (Pennsylvania)	  	100%	
Century International Reinsurance Company Ltd.	  	Bermuda	  	100%	
INA Holdings Corporation	  	USA (Delaware)	  	100%	
INA Trust, fsb	  	Chartered by Office of Thrift Supervision	  	100%	
INA Reinsurance Company, Ltd.	  	Bermuda	  	100%	
ACE INA Financial Institution Solutions, Inc.	  	USA (Delaware)	  	100%	
American Lenders Facilities, Inc.	  	USA (California)	  	100%	
ESIS, Inc.	  	USA (Pennsylvania)	  	100%	
ACE Environmental Health and Safety Consulting (Shanghai) Company Limited	  	China	  	100%	
ESIS Asia Pacific Pte. Ltd.	  	Singapore	  	100%	
Hygienetics Environmental Services, Inc.	  	USA (Delaware)	  	100%	
NewMarkets Insurance Agency, Inc.	  	USA (Delaware)	  	100%	
ACE INA Excess and Surplus Insurance Services, Inc.	  	USA (Georgia)	  	100%	
ACE INA Excess and Surplus Insurance Services, Inc.	  	USA (Pennsylvania)	  	100%	

					
ACE INA Excess and Surplus Insurance Services, Inc.	  	USA (California)	  	100%	
ACE INA Excess and Surplus Insurance Services, Inc.	  	USA (Illinois)	  	100%	
Excess and Surplus Insurance Services, Inc.	  	USA (Texas)	  	100%	
ACE Financial Solutions, Inc.	  	USA (Delaware)	  	100%	
ACE Risk Solutions, Inc.	  	USA (New York)	  	100%	
Indemnity Insurance Company of North America (EI# 06-1016108, NAIC #43575, PA)	  	USA (Pennsylvania)	  	100%	
ACE Indemnity Insurance Company (EI#92-0040526, NAIC #10030, PA)	  	USA (Pennsylvania)	  	100%	
ACE American Insurance Company (EI#95-2371728, NAIC# 22667, PA)	  	USA (Pennsylvania)	  	100%	
Pacific Employers Insurance Company (EI#95-1077060, NAIC# 22748, PA)	  	USA (Pennsylvania)	  	100%	
Illinois Union Insurance Company (EI# 36-2759195, NAIC #27960, IL)	  	USA (Illinois)	  	100%	
INAMAR Insurance Underwriting Agency, Inc.	  	USA (New Jersey)	  	100%	
INAMAR Insurance Underwriting Agency, Inc. of Massachusetts	  	USA (Massachusetts)	  	100%	
INAMAR Insurance Underwriting Agency, Inc. of Texas	  	USA (Texas)	  	100%	
INAMAR Insurance Underwriting Agency, Inc. of Ohio	  	USA (Ohio)	  	100%	
Insurance Company of North America (EI# 23-0723970, NAIC #22713, PA)	  	USA (Pennsylvania)	  	100%	
Bankers Standard Insurance Company (EI# 75-1320184, NAIC #18279, PA)	  	USA (Pennsylvania)	  	100%	
Bankers Standard Fire and Marine Company (EI#75-6014863, NAIC #20591, PA)	  	USA (Pennsylvania)	  	100%	
ACE Property and Casualty Insurance Company (EI# 06-0237820, NAIC, #20699, PA)	  	USA (Pennsylvania)	  	100%	
ACE Fire Underwriters Insurance Company (EI# 06-6032187, NAIC #20702, PA)	  	USA (Pennsylvania)	  	100%	
Atlantic Employers Insurance Company (EI# 23-2173820, NAIC #38938, NJ)	  	USA (New Jersey)	  	100%	
ACE Insurance Company of the Midwest (EI# 06-0884361, NAIC #26417, IN)	  	USA (Indiana)	  	100%	
ACE Tempest Re USA, LLC	  	USA (Connecticut)	  	100%	
ACE Structured Products, Inc.	  	USA (Delaware)	  	100%	
Recovery Services International, Inc.	  	USA (Delaware)	  	100%	
ACE INA International Holdings, Ltd. (AIIH)	  	USA (Delaware)	  	100%	
ACE Australia Holdings Pty Limited	  	Australia	  	100%	
ACE Insurance Limited	  	Australia	  	100%	
ACE INA Superannuation Pty Limited	  	Australia	  	100%	
ACE Insurance Company Limited	  	Vietnam	  	100%	
ACE Life Insurance Company Limited	  	Vietnam	  	100%	
ACE Seguradora S.A.	  	Brazil	  	99.99%
0.01% (AFIA Finance Corporation)	
ESIS Canada Inc.	  	Canada	  	100%	
Servicios ACEINA, S.A. de C.V.	  	Mexico	  	99.998%
one share (AFIA Finance Corporation)	
ACE Seguros S.A.	  	Argentina	  	94.62%
4.73% (AFIA Finance Corporation)	
ACE INA International Holdings, Ltd Agencia Chile	  	Chile	  	100%	
ACE Seguros de Vida S.A.	  	Chile	  	99.5%
0.5% (AFIA Finance Corporation Agencia en Chile)	

					
ACE INA Overseas Holdings, Inc.	  	USA (Delaware)	  	100%	
ACE European Holdings Limited	  	England & Wales	  	100%	
ACE European Group Limited	  	England & Wales	  	30.8723%
69.1277% (ACE Insurance S.A. – N.V.)	
ACE European Holdings No 2 Limited	  	England & Wales	  	100%	
CJSC ACE Insurance Company	  	Russia	  	100%	
ACE Insurance S.A-N.V.	  	Belgium	  	99.9492%
.0507% (ACE INA International Holdings Ltd.)	
ACE Life Insurance	  	Russia	  	100%	
ACE Insurance S.A.	  	Macau	  	99.94%	
ACE Holdings Limited	  	Cayman Islands	  	100%	
ACE Insurance Company Egypt S.A.E.	  	Egypt	  	96.89%
0.88% (ACE INA Services UK Ltd.)
0.88% (ACE European Group Ltd.)	
ACE Life Insurance Company S.A.E.	  	Egypt	  	98.34%
0.98% (ACE Holdings Limited)
0.68% (AFIA Finance Corporation)	
ACE Synergy Insurance Berhad	  	Malaysia	  	51%	
ACE Seguros S.A.	  	Chile	  	78.125% (AIIH)
12.235% (AFIA Finance Corporation)
9.095% - (AFIA Finance Corp. Chile Limitada)	
ACE Seguros S.A.	  	Colombia	  	99.958%	
ACE Seguros S.A.	  	Ecuador	  	100%	
ACE Seguros S.A.	  	Mexico	  	99.9%	
ACE Seguros S.A. (formerly Altas Cumbres Compañía de Seguros de Vida )	  	Peru	  	99.9% 0.01% (AFIA Finance Corporation)	
ACE Insurance Limited	  	South Africa	  	100%	
ACE Insurance Limited	  	New Zealand	  	100%	
ACE International Management Corporation	  	Pennsylvania	  	100%	
Cover Direct, Inc.	  	USA (Delaware)	  	100%	
ACE INA G.B. Holdings, Ltd.	  	USA (Delaware)	  	100%	
ACE INA Services U.K. Limited	  	England & Wales	  	100%	
Century Inversiones, S.A.	  	Panama	  	100%	
ACE Arabia Insurance Company Limited E.C.	  	Bahrain	  	50%	
ACE Insurance Limited	  	Pakistan	  	100%	
ACE INA Overseas Insurance Company Ltd.	  	Bermuda	  	100%	
ACE Canada Holdings, Inc.	  	Delaware	  	100%	
INACAN Holdings, Inc.	  	Delaware	  	100%	
ACE INA Insurance	  	Canada	  	100%	
ACE INA Life Insurance	  	Canada	  	100%	

					
ACE Tempest Re Canada Inc.	  	Canada	  	100%	
ACE Insurance Limited	  	Singapore	  	100%	
ACE Insurance	  	Japan	  	100%	
ACE Songai Service Kabushikigaisha	  	Japan	  	100%	
ACE Marketing Group C.A.	  	Venezuela	  	100%	
ACE Insurance Company (EI# 66-0437305, NAIC #30953, PR)	  	Puerto Rico	  	100%	
ACE Insurance Agency, Inc.	  	Puerto Rico	  	100%	
ACE Insurance Limited	  	Hong Kong	  	100%	
ACE Risk Management International Ltd.	  	Bermuda	  	100%	
DELPANAMA S.A.	  	Panama	  	100%	
INAMEX S.A.	  	Mexico	  	100%	
Oriental Equity Holdings Limited	  	British Virgin Islands	  	100%	
AFIA Finance Corporation	  	USA (Delaware)	  	100%	
AFIA Finance Corporation Agencia en Chile	  	Chile	  	100%	
AFIA Venezolana C.A.	  	Venezuela	  	100%	
ACE ICNA Italy Societa a Responsabilita Limitata	  	Italy	  	99.7%
0.3% (AIIH)	
Siam Liberty Company Limited	  	Thailand	  	49% (AFC)
50.7% (Nam EK)	
ACE Servicios, S.A.	  	Argentina	  	100%	
AFIA Finance Corp. Chile Limitada	  	Chile	  	98%
2% (AIIH)	
Pembroke Reinsurance Inc.	  	USA (Delaware)	  	100%	
PT. ACE INA Insurance	  	Indonesia	  	80%
(20% PT. Adi Citra Mandiri)	
RIYAD Insurance Co. Ltd.	  	Bermuda	  	80%	
ACE Asia Pacific Services Pte. Ltd. (formerly, Safire Private Limited)	  	Singapore	  	100%	
ACE Asia Pacific Services Sdn Bhd	  	Malaysia	  	100%	
AFIA (INA) Corporation, Limited	  	USA (Delaware)	  	100%	
AFIA	  	Unincorporated
Association	  	60%	
AFIA (ACE) Corporation, Limited	  	USA (Delaware)	  	100%	
INAVEN, C.A. “Venezuela”	  	Venezuela	  	100%	
ACE U.S. Holdings, Inc.	  	USA (Delaware)	  	100%	
ACE USA, Inc.	  	USA (Delaware)	  	100%	
ASI Administrative Services Holdings Inc	  	Canada (Yukon)	  	100%	
Rhea International Marketing (L), Inc.	  	Malaysia	  	60%	
Westchester Fire Insurance Company (EI# 13-5481330, NAIC# 21121, NY)	  	USA (New York)	  	100%	
Westchester Surplus Lines Insurance Co. (EI# 58-2139927, NAIC #10172, GA)	  	USA (Georgia)	  	100%	
Westchester Specialty Services, Inc.	  	USA (Florida)	  	100%	
Westchester Specialty Insurance Services Inc.	  	USA (Nevada)	  	100%	
ACE Financial Services Inc.	  	Delaware	  	100%	
ACE (CR) Holdings	  	England & Wales	  	100%	
ACE Capital VII Limited	  	England & Wales	  	100%	
ACE (RGB) Holdings Limited	  	England & Wales	  	100%	
ACE (CIDR) Limited	  	England & Wales	  	100%	
Ridge Underwriting Agencies Limited	  	England & Wales	  	100%	
ACE Asset Management Inc.	  	USA (Delaware)	  	100%	

Exhibit 23.1
 
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-130378, 333-118722, 333-78841, 333-60985 and 333-88482), S-4 (No. 333-90927) and Form S-8 (Nos. 333-116532, 333-1400, 333-1402, 333-1404, 333-46301, 333-72299, 333-82175, 333-93867, 333-72301, 333-61038, 333-86102, 333-134504 and 333-103701) of ACE Limited our report dated February 28, 2008, relating to the financial statements, financial statement schedules, and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
 
P RICEWATERHOUSE C OOPERS LLP
Philadelphia, Pennsylvania
			
February 28, 2008	 	 	

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 annual report on Form 10-K of ACE Limited;	
 
 	2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 
 	3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 
 	4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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 February 28, 2008	
	
/s/ Evan G. Greenberg	
Chairman and Chief Executive Officer	

Exhibit 31.2
 
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
 
I, Philip V. Bancroft, certify that:
 
 	1)	I have reviewed this annual report on Form 10-K of ACE Limited;	
 
 	2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 
 	3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 
 	4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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 February 28, 2008	
	
/s/ 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 Annual Report on Form 10-K for the year ended December 31, 2007, fully complies with the applicable reporting requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) and that the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of ACE Limited.

Dated: February 28, 2008	 	 	 	 	 	/s/ Evan G. Greenberg	
 	 	 	 	 	 	 	 	Evan G. Greenberg
Chairman 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 Annual Report on Form 10-K for the year ended December 31, 2007, fully complies with the applicable reporting requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) and that the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of ACE Limited.

Dated: February 28, 2008	 	 	 	 	 	/s/ Philip V. Bancroft	
 	 	 	 	 	 	 	 	Philip V. Bancroft
Chief Financial Officer