Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x 	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 
For the Quarterly Period Ended March 31, 2004
 
OR
 
¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934	
 
For the Transition Period from                      to                     
 
Commission File No. 1-11778
 
I.R.S. Employer Identification No. 98-0091805
 
ACE LIMITED
(Incorporated in the Cayman Islands)
 
ACE Global Headquarters
17 Woodbourne Avenue
Hamilton HM 08
Bermuda
 
Telephone 441-295-5200
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
YES þ     NO ¨
 
Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).
 
YES þ     NO ¨
 
The number of registrant’s Ordinary Shares ($0.041666667 par value) outstanding as of May 5, 2004 was 283,143,342.

 
1

Table of Contents
ACE LIMITED
 
 INDEX TO FORM 10-Q

 	 	 	  	Page No.

Part I. FINANCIAL INFORMATION	  	 	
			
Item 1.	 	Financial Statements:	  	 	
			
 	 	Consolidated Balance Sheets
March 31, 2004 (Unaudited) and December 31, 2003	  	3	
			
 	 	Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, 2004 and 2003	  	4	
			
 	 	Consolidated Statements of Shareholders’ Equity (Unaudited)
Three Months Ended March 31, 2004 and 2003	  	5	
			
 	 	Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended March 31, 2004 and 2003	  	7	
			
 	 	Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, 2004 and 2003	  	8	
			
 	 	Notes to Interim Consolidated Financial Statements (Unaudited)	  	9	
			
Item 2.	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	  	29	
			
Item 3.	 	Quantitative and Qualitative Disclosures About Market Risk	  	50	
			
Item 4.	 	Controls and Procedures	  	51	
		
Part II. OTHER INFORMATION	  	 	
			
Item 1.	 	Legal Proceedings	  	52	
			
Item 5.	 	Other Information	  	52	
			
Item 6.	 	Exhibits and Reports on Form 8-K	  	52	
 
2

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

 	  	March 31
2004
	 	 	December 31
2003
	 	
 	  	(Unaudited)	 	 	 	 	
 	  	(in thousands of U.S. dollars,
except share and per share data)	 	
Assets	  	 	 	 	 	 	 	 	
Investments and cash	  	 	 	 	 	 	 	 	
Fixed maturities, at fair value (amortized cost - $19,128,774 and $18,006,405)	  	$	19,919,523	 	 	$	18,645,267	 	
Equity securities, at fair value (cost - $413,635 and $401,237)	  	 	538,861	 	 	 	543,811	 	
Securities on loan, at fair value (amortized cost/cost - $1,112,667 and $650,160)	  	 	1,183,380	 	 	 	684,629	 	
Short-term investments, at fair value	  	 	3,290,342	 	 	 	2,927,407	 	
Other investments (cost - $595,557 and $602,176)	  	 	642,511	 	 	 	645,085	 	
Cash	  	 	613,886	 	 	 	561,650	 	
 	  				 				
Total investments and cash	  	 	26,188,503	 	 	 	24,007,849	 	
Accrued investment income	  	 	275,888	 	 	 	258,379	 	
Insurance and reinsurance balances receivable	  	 	3,492,535	 	 	 	2,836,616	 	
Accounts and notes receivable	  	 	170,083	 	 	 	191,519	 	
Reinsurance recoverable	  	 	14,062,255	 	 	 	14,080,716	 	
Deferred policy acquisition costs	  	 	1,108,456	 	 	 	1,004,753	 	
Prepaid reinsurance premiums	  	 	1,578,228	 	 	 	1,372,568	 	
Funds withheld	  	 	238,833	 	 	 	255,587	 	
Value of reinsurance business assumed	  	 	328,039	 	 	 	346,365	 	
Goodwill	  	 	2,699,525	 	 	 	2,710,830	 	
Deferred tax assets	  	 	997,034	 	 	 	1,089,805	 	
Other assets	  	 	1,339,170	 	 	 	1,397,806	 	
 	  				 				
Total assets	  	$	52,478,549	 	 	$	49,552,793	 	
 	  				 				
Liabilities	  	 	 	 	 	 	 	 	
Unpaid losses and loss expenses	  	$	27,696,872	 	 	$	27,154,838	 	
Unearned premiums	  	 	6,929,562	 	 	 	6,050,788	 	
Future policy benefits for life and annuity contracts	  	 	495,780	 	 	 	491,837	 	
Funds withheld	  	 	188,275	 	 	 	208,728	 	
Insurance and reinsurance balances payable	  	 	2,145,287	 	 	 	1,902,622	 	
Deposit liabilities	  	 	217,443	 	 	 	212,335	 	
Securities lending collateral	  	 	1,207,953	 	 	 	698,587	 	
Payable for securities purchased	  	 	569,861	 	 	 	369,105	 	
Accounts payable, accrued expenses and other liabilities	  	 	1,194,625	 	 	 	1,206,046	 	
Dividends payable	  	 	53,717	 	 	 	53,182	 	
Short-term debt	  	 	545,713	 	 	 	545,727	 	
Long-term debt	  	 	1,349,268	 	 	 	1,349,202	 	
Trust preferred securities	  	 	487,373	 	 	 	475,000	 	
 	  				 				
Total liabilities	  	 	43,081,729	 	 	 	40,717,997	 	
 	  				 				
Commitments and contingencies	  	 	 	 	 	 	 	 	
Shareholders’ equity	  	 	 	 	 	 	 	 	
Preferred Shares ($1.00 par value, 2,300,000 shares authorized, issued and outstanding)	  	 	2,300	 	 	 	2,300	 	
Ordinary Shares ($0.041666667 par value, 500,000,000 shares authorized; 282,714,909 and 279,897,193 shares issued and outstanding)	  	 	11,781	 	 	 	11,662	 	
Additional paid-in capital	  	 	4,863,868	 	 	 	4,765,355	 	
Unearned stock grant compensation	  	 	(97,888	)	 	 	(44,912	)	
Retained earnings	  	 	3,762,514	 	 	 	3,380,619	 	
Deferred compensation obligation	  	 	16,648	 	 	 	16,687	 	
Accumulated other comprehensive income	  	 	854,245	 	 	 	719,772	 	
Ordinary Shares issued to employee trust	  	 	(16,648	)	 	 	(16,687	)	
 	  				 				
Total shareholders’ equity	  	 	9,396,820	 	 	 	8,834,796	 	
 	  				 				
Total liabilities and shareholders’ equity	  	$	52,478,549	 	 	$	49,552,793	 	

See accompanying notes to the interim consolidated financial statements.
 
3

Table of Contents
ACE LIMITED AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2004 and 2003
(Unaudited)

 	  	Three Months Ended
March 31
	 	
 	  	2004
	 	 	2003
	 	
 	  	(in thousands of U.S. dollars,
except per share data)	 	
Revenues	  	 	 	 	 	 	 	 	
Gross premiums written	  	$	4,415,475	 	 	$	4,112,764	 	
Reinsurance premiums ceded	  	 	(1,177,309	)	 	 	(1,182,712	)	
 	  				 				
Net premiums written	  	 	3,238,166	 	 	 	2,930,052	 	
Change in unearned premiums	  	 	(638,489	)	 	 	(858,520	)	
 	  				 				
Net premiums earned	  	 	2,599,677	 	 	 	2,071,532	 	
Net investment income	  	 	237,920	 	 	 	206,412	 	
Net realized gains (losses)	  	 	57,261	 	 	 	(40,089	)	
 	  				 				
Total revenues	  	 	2,894,858	 	 	 	2,237,855	 	
 	  				 				
Expenses	  	 	 	 	 	 	 	 	
Losses and loss expenses	  	 	1,542,597	 	 	 	1,282,833	 	
Life and annuity benefits	  	 	41,724	 	 	 	48,499	 	
Policy acquisition costs	  	 	364,914	 	 	 	295,894	 	
Administrative expenses	  	 	314,905	 	 	 	259,672	 	
Interest expense	  	 	44,272	 	 	 	44,929	 	
Other (income) expense	  	 	17,080	 	 	 	6,154	 	
 	  				 				
Total expenses	  	 	2,325,492	 	 	 	1,937,981	 	
 	  				 				
Income before income tax	  	 	569,366	 	 	 	299,874	 	
Income tax expense	  	 	122,541	 	 	 	52,430	 	
 	  				 				
Net income	  	$	446,825	 	 	$	247,444	 	
 	  				 				
Basic earnings per share	  	$	1.56	 	 	$	0.92	 	
 	  				 				
Diluted earnings per share	  	$	1.53	 	 	$	0.90	 	

See accompanying notes to the interim consolidated financial statements.
 
4

Table of Contents
ACE LIMITED AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
For the three months ended March 31, 2004 and 2003
(Unaudited)

 	  	2004
	 	 	2003
	 	
 	  	(in thousands of U.S. dollars)	 	
Preferred Shares	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	$	2,300	 	 	$	—  	 	
Shares issued	  	 	—  	 	 	 	—  	 	
 	  				 				
Balance – end of period	  	 	2,300	 	 	 	—  	 	
 	  				 				
Ordinary Shares	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	11,662	 	 	 	10,945	 	
Shares issued	  	 	64	 	 	 	68	 	
Exercise of stock options	  	 	60	 	 	 	7	 	
Issued under Employee Stock Purchase Plan (ESPP)	  	 	5	 	 	 	6	 	
Cancellation of shares	  	 	(10	)	 	 	(6	)	
 	  				 				
Balance – end of period	  	 	11,781	 	 	 	11,020	 	
 	  				 				
Additional paid-in capital	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	4,765,355	 	 	 	3,781,112	 	
Ordinary Shares issued	  	 	65,591	 	 	 	44,819	 	
Exercise of stock options	  	 	34,346	 	 	 	3,134	 	
Ordinary Shares issued under ESPP	  	 	3,678	 	 	 	3,381	 	
Cancellation of Ordinary Shares	  	 	(10,531	)	 	 	(3,901	)	
Tax benefit on employee stock options	  	 	5,429	 	 	 	11,109	 	
 	  				 				
Balance – end of period	  	 	4,863,868	 	 	 	3,839,654	 	
 	  				 				
Unearned stock grant compensation	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	(44,912	)	 	 	(42,576	)	
Stock grants awarded	  	 	(66,421	)	 	 	(44,882	)	
Stock grants forfeited	  	 	1,736	 	 	 	650	 	
Amortization	  	 	11,709	 	 	 	5,520	 	
 	  				 				
Balance – end of period	  	 	(97,888	)	 	 	(81,288	)	
 	  				 				
Retained earnings	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	3,380,619	 	 	 	2,199,313	 	
Net income	  	 	446,825	 	 	 	247,444	 	
Dividends declared on Ordinary Shares	  	 	(53,717	)	 	 	(44,964	)	
Dividends declared on Preferred Shares	  	 	(11,213	)	 	 	—  	 	
Dividends declared on Mezzanine equity	  	 	—  	 	 	 	(6,415	)	
 	  				 				
Balance – end of period	  	 	3,762,514	 	 	 	2,395,378	 	
 	  				 				
Deferred compensation obligation	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	16,687	 	 	 	18,361	 	
(Decrease) increase to obligation	  	 	(39	)	 	 	(248	)	
 	  				 				
Balance – end of period	  	$	16,648	 	 	$	18,113	 	

See accompanying notes to the interim consolidated financial statements.
 
5

Table of Contents
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (cont’d)
For the three months ended March 31, 2004 and 2003
(Unaudited)

 	  	2004
	 	 	2003
	 	
 	  	(in thousands of U.S. dollars)	 	
Accumulated other comprehensive income	  	 	 	 	 	 	 	 	
Net unrealized appreciation (depreciation) on investments	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	$	684,267	 	 	$	476,411	 	
Change in period, net of income tax	  	 	126,843	 	 	 	79,316	 	
 	  				 				
Balance – end of period	  	 	811,110	 	 	 	555,727	 	
 	  				 				
Minimum pension liability	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	(35,684	)	 	 	—  	 	
Change in period, net of income tax	  	 	(1,122	)	 	 	—  	 	
 	  				 				
Balance – end of period	  	 	(36,806	)	 	 	—  	 	
 	  				 				
Cumulative translation adjustment	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	71,189	 	 	 	(36,519	)	
Change in period, net of income tax	  	 	8,752	 	 	 	18,473	 	
 	  				 				
Balance – end of period	  	 	79,941	 	 	 	(18,046	)	
 	  				 				
Accumulated other comprehensive income	  	 	854,245	 	 	 	537,681	 	
 	  				 				
Ordinary Shares issued to employee trust	  	 	 	 	 	 	 	 	
Balance – beginning of period	  	 	(16,687	)	 	 	(18,361	)	
Decrease (increase) in Ordinary Shares	  	 	39	 	 	 	248	 	
 	  				 				
Balance – end of period	  	 	(16,648	)	 	 	(18,113	)	
 	  				 				
Total shareholders’ equity	  	$	9,396,820	 	 	$	6,702,445	 	

See accompanying notes to the interim consolidated financial statements
 
6

Table of Contents
ACE LIMITED AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31, 2004 and 2003
(Unaudited)

 	  	2004
	 	 	2003
	 	
 	  	(in thousands of U.S. dollars)	 	
Net income	  	$	446,825	 	 	$	247,444	 	
Other comprehensive income	  	 	 	 	 	 	 	 	
Net unrealized appreciation (depreciation) on investments	  	 	 	 	 	 	 	 	
Unrealized appreciation (depreciation) on investments	  	 	235,657	 	 	 	111,924	 	
Reclassification adjustment for net realized (gains) losses included in net income	  	 	(60,830	)	 	 	(23,087	)	
 	  				 				
 	  	 	174,827	 	 	 	88,837	 	
Cumulative translation adjustment	  	 	2,177	 	 	 	26,322	 	
Minimum pension liability	  	 	(1,991	)	 	 	—  	 	
 	  				 				
Other comprehensive income, before income tax	  	 	175,013	 	 	 	115,159	 	
Income tax expense related to other comprehensive income items	  	 	(40,540	)	 	 	(17,370	)	
 	  				 				
Other comprehensive income	  	 	134,473	 	 	 	97,789	 	
 	  				 				
Comprehensive income	  	$	581,298	 	 	$	345,233	 	

See accompanying notes to the interim consolidated financial statements
 
7

Table of Contents
ACE LIMITED AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2004 and 2003
(Unaudited)

 	  	2004
	 	 	2003
	 	
 	  	(in thousands of U.S. dollars)	 	
Cash flows from operating activities	  	 	 	 	 	 	 	 	
Net income	  	$	446,825	 	 	$	247,444	 	
Adjustments to reconcile net income to net cash flows from (used for) operating activities:	  	 	 	 	 	 	 	 	
Net realized (gains) losses	  	 	(57,261	)	 	 	40,089	 	
Amortization of premium/discounts on fixed maturities	  	 	25,972	 	 	 	15,724	 	
Deferred income taxes	  	 	55,082	 	 	 	45,757	 	
Unpaid losses and loss expenses	  	 	488,127	 	 	 	280,116	 	
Unearned premiums	  	 	804,708	 	 	 	967,486	 	
Future policy benefits for life and annuity contracts	  	 	3,943	 	 	 	16,293	 	
Insurance and reinsurance balances payable	  	 	233,762	 	 	 	87,578	 	
Accounts payable, accrued expenses and other liabilities	  	 	(19,736	)	 	 	(3,146	)	
Insurance and reinsurance balances receivable	  	 	(653,206	)	 	 	(543,324	)	
Reinsurance recoverable	  	 	57,899	 	 	 	(140,092	)	
Deferred policy acquisition costs	  	 	(97,377	)	 	 	(79,286	)	
Prepaid reinsurance premiums	  	 	(158,465	)	 	 	(68,546	)	
Funds withheld, net	  	 	(3,788	)	 	 	40,071	 	
Value of reinsurance business assumed	  	 	18,326	 	 	 	1,489	 	
Other	  	 	27,311	 	 	 	(307,016	)	
 	  				 				
Net cash flows from operating activities	  	$	1,172,122	 	 	$	600,637	 	
 	  				 				
Cash flows from investing activities	  	 	 	 	 	 	 	 	
Purchases of fixed maturities	  	$	(5,991,122	)	 	$	(4,511,425	)	
Purchases of equity securities	  	 	(109,176	)	 	 	(35,988	)	
Sales of fixed maturities	  	 	4,895,148	 	 	 	3,809,724	 	
Sales of equity securities	  	 	105,369	 	 	 	29,244	 	
Maturities of fixed maturities	  	 	160	 	 	 	3,180	 	
Net realized gains (losses) on investment derivatives	  	 	(877	)	 	 	(31	)	
Other	  	 	6,932	 	 	 	(37,279	)	
 	  				 				
Net cash flows used for investing activities	  	$	(1,093,566	)	 	$	(742,575	)	
 	  				 				
Cash flows from financing activities	  	 	 	 	 	 	 	 	
Dividends paid on Ordinary Shares	  	$	(53,182	)	 	$	(44,659	)	
Dividends paid on Preferred Shares	  	 	(11,213	)	 	 	—  	 	
Net proceeds from (repayment of) short-term debt	  	 	(14	)	 	 	498	 	
Proceeds from exercise of options for Ordinary Shares	  	 	34,406	 	 	 	3,141	 	
Proceeds from Ordinary Shares issued under ESPP	  	 	3,683	 	 	 	3,387	 	
Dividends paid on Mezzanine equity	  	 	—  	 	 	 	(6,415	)	
 	  				 				
Net cash flows used for financing activities	  	$	(26,320	)	 	$	(44,048	)	
 	  				 				
Net increase (decrease) in cash	  	 	52,236	 	 	 	(185,986	)	
Cash – beginning of period	  	 	561,650	 	 	 	633,355	 	
 	  				 				
Cash – end of period	  	$	613,886	 	 	$	477,369	 	

See accompanying notes to the interim consolidated financial statements
 
8

Table of Contents
ACE LIMITED AND SUBSIDIARIES
 NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.	General	
 
The interim unaudited consolidated financial statements, which include the accounts of the Company and its subsidiaries, have been prepared in accordance with accounting principles generally accepted in the United States of America and, in the opinion of management, reflect all adjustments (consisting of normally recurring accruals) necessary for a fair presentation of results for such periods. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the consolidated financial statements, and related notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
 
ACE Limited (ACE or the Company) is a holding company incorporated with limited liability under the Cayman Islands Companies Law and maintains its business office in Bermuda. The Company, through its various subsidiaries, provides a broad range of insurance and reinsurance products to insureds worldwide. ACE operates through four business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance and Financial Services. These segments are described in Note 15.
 
The following table summarizes the Company’s gross premiums written by geographic region for the three months ended March 31, 2004 and 2003. Allocations have been made on the basis of location of risk.

Three Months Ended
	  	North
America
	 	 	Europe
	 	 	Australia &
New Zealand
	 	 	Asia
Pacific
	 	 	Latin
America
	 	
March 31, 2004	  	60	%	 	27	%	 	3	%	 	6	%	 	4	%	
March 31, 2003	  	59	%	 	29	%	 	3	%	 	5	%	 	4	%	
 
2.	New accounting pronouncements	
 
In July 2003, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (SOP 03-1). This Statement of Position provides guidance on accounting and reporting by insurance enterprises for certain nontraditional long-duration contracts and for separate accounts and is effective for financial statements for fiscal years beginning after December 15, 2003. At the date of initial application of this SOP, the Company is required to make certain determinations, such as significance of mortality and morbidity risk and adjustment to contract holder liabilities. SOP 03-1 may not be applied retroactively to prior years’ financial statements, and the initial application should be as of the beginning of the entity’s fiscal year. Through the Global Reinsurance segment, the Company reinsures annuitization benefits, principally related to guaranteed minimum death benefits (GMDBs) and guaranteed minimum income benefits (GMIBs). The valuation of insurance liabilities related to the Company’s GMDB reinsurance product is subject to certain provisions of the SOP whereas the Company’s GMIB reinsurance product meets the definition of a derivative for accounting purposes and is therefore carried at fair value with changes in fair value recognized in income in the period of the change pursuant to FAS 133. Pursuant to SOP 03-1, liabilities for annuitization benefits, such as the minimum death benefit guarantee, are generally based on cumulative assessments or premiums to date multiplied by a benefit ratio that is determined by estimating the expected value of benefit payments and related adjustment expenses divided by the present value of cumulative assessment or expected fees during the annuitization period. In the event the Company was to anticipate an ultimate loss on the business over the in-force period of the underlying annuities, an additional liability would be established to recognize such losses. The Company adopted SOP 03-1 on January 1, 2004. In its capacity as reinsurer, the Company’s valuation of insurance liabilities related to its GMDB reinsurance program has been materially consistent with the requirements of the SOP. Consequently, the adoption of SOP 03-1 did not have a material impact on the Company’s consolidated financial statements. See Note 5b for further details regarding the Company’s reinsurance programs involving minimum benefit guarantees under annuity contracts.
 
In December 2003, FASB revised FAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (FAS 132), to require additional disclosures related to pensions and postretirement benefits. While retaining the existing disclosure requirements for pensions and postretirement benefits, additional disclosures are required related to pension plan assets, obligations, contributions and net benefit costs, beginning with fiscal years ending after December 15, 2003. For foreign plans, these additional disclosures are required beginning with fiscal years ending after June 15, 2004. Additional disclosures pertaining to benefit payments are also required for fiscal years ending after June 15, 2004. FAS 132 revisions also include additional disclosure requirements for interim financial reports beginning after December 15, 2003. Given that all of the Company’s defined benefit plans cover foreign employees, the Company is required to implement the additional disclosures beginning in its 2004 consolidated financial statements. Interim disclosure requirements have been implemented this quarter. (See Note 9).
 
9

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
3.	Investments	
 
a)	Gross unrealized loss	
 
The following table summarizes, for all securities in an unrealized loss position at March 31, 2004 (including securities on loan), the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position.

 	  	0 - 12 Months
	  	Over 12 Months
	  	Total
	
 	  	Fair Value
	  	Gross
Unrealized
Loss
	  	Fair Value
	  	Gross
Unrealized
Loss
	  	Fair Value
	  	Gross
Unrealized
Loss
	
 	  	(in thousands of U.S. dollars)	
U.S. Treasury and agency	  	$	279,982	  	$	1,430	  	$	—  	  	$	—  	  	$	279,982	  	$	1,430	
Non-U.S. governments	  	 	435,594	  	 	10,105	  	 	—  	  	 	—  	  	 	435,594	  	 	10,105	
Corporate securities	  	 	1,534,660	  	 	13,265	  	 	5,341	  	 	84	  	 	1,540,001	  	 	13,349	
Mortgage-backed securities	  	 	817,222	  	 	5,982	  	 	11,779	  	 	118	  	 	829,001	  	 	6,100	
States, municipalities and political subdivisions	  	 	172,840	  	 	816	  	 	692	  	 	11	  	 	173,532	  	 	827	
 	  			  			  			  			  			  			
Total fixed maturities	  	 	3,240,298	  	 	31,598	  	 	17,812	  	 	213	  	 	3,258,110	  	 	31,811	
Equities	  	 	62,500	  	 	4,923	  	 	—  	  	 	—  	  	 	62,500	  	 	4,923	
Other investments	  	 	59,030	  	 	4,710	  	 	—  	  	 	—  	  	 	59,030	  	 	4,710	
 	  			  			  			  			  			  			
Total	  	$	3,361,828	  	$	41,231	  	$	17,812	  	$	213	  	$	3,379,640	  	$	41,444	

b)	Variable interests related to equity investments in CDOs	
 
As a complement to the Company’s credit default swap business and with the objective of enhancing investment yield, the Company invested in the equity tranches of six CDOs from June 2001 through August 2002. While the underlying assets in all six CDOs aggregated to $2.6 billion, the Company’s aggregate maximum exposure was $43.8 million, which approximated the cost of these investments. For the three months ended March 31, 2004, the Company sold five of these six positions resulting in a realized loss of approximately $7 million. The five positions sold represented $2.3 billion of the aforementioned $2.6 billion of aggregate assets in all six CDOs. At March 31, 2004, the underlying assets in the remaining CDO of $0.3 billion are principally invested in asset-backed securities, including investments in the debt tranches of other CDOs. While management considers the related entity to be a variable interest entity, as defined by FIN 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51”, the Company’s equity investment represents a small portion of the variable interest in the CDO. Accordingly, under FIN 46, the Company is not required to consolidate the entity. At March 31, 2004, the Company’s aggregate carrying value for the investments held is $1.2 million, which represents the Company’s remaining loss exposure related to these investments as of March 31, 2004.
 
4.	Goodwill	
 
FAS No. 142, “Goodwill and Other Intangible Assets” (FAS 142) primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. All goodwill recognized in the Company’s consolidated balance sheet at January 1, 2002 was assigned to one or more reporting units. FAS 142 requires that goodwill in each reporting unit be tested for impairment annually. The Company recognized a goodwill impairment loss of $11 million primarily relating to the Company’s Lloyd’s life syndicate. The following table details the movement in goodwill by segment for the three months ended March 31, 2004.

 	  	Insurance –
North
American
	  	Insurance –
Overseas
General
	  	Global
Reinsurance
	  	Financial
Services
	 	 	ACE
Consolidated
	 	
 	  	(in thousands of U.S. dollars)	 	
Goodwill at beginning of period	  	$	1,127,513	  	$	1,121,636	  	$	364,958	  	$	96,723	 	 	$	2,710,830	 	
Goodwill impairment loss	  	 	—  	  	 	—  	  	 	—  	  	 	(11,305	)	 	 	(11,305	)	
 	  			  			  			  				 				
Goodwill at end of period	  	$	1,127,513	  	$	1,121,636	  	$	364,958	  	$	85,418	 	 	$	2,699,525	 	

10

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
5.	Reinsurance	
 
a)	Consolidated reinsurance	
 
The Company purchases reinsurance to manage various exposures including catastrophe risks. Although reinsurance agreements contractually obligate the Company’s reinsurers to reimburse it for the agreed-upon portion of its gross paid losses, they do not discharge the primary liability of the Company. The amounts for net premiums written and net premiums earned in the statements of operations are net of reinsurance. Direct, assumed and ceded amounts for these items for the three months ended March 31, 2004 and 2003 are as follows:

 	  	Three Months Ended
March 31
	 	
 	  	2004
	 	 	2003
	 	
 	  	(in thousands of U.S. dollars)	 	
Premiums written	  	 	 	 	 	 	 	 	
Direct	  	$	3,389,396	 	 	$	3,084,049	 	
Assumed	  	 	1,026,079	 	 	 	1,028,715	 	
Ceded	  	 	(1,177,309	)	 	 	(1,182,712	)	
 	  				 				
Net	  	$	3,238,166	 	 	$	2,930,052	 	
 	  				 				
Premiums earned	  	 	 	 	 	 	 	 	
Direct	  	$	3,046,488	 	 	$	2,598,802	 	
Assumed	  	 	583,044	 	 	 	585,598	 	
Ceded	  	 	(1,029,855	)	 	 	(1,112,868	)	
 	  				 				
Net	  	$	2,599,677	 	 	$	2,071,532	 	

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

 	  	March 31
2004
	 	 	December 31
2003
	 	
 	  	(in thousands of U.S. dollars)	 	
Reinsurance recoverable on paid losses and loss expenses	  	$	1,191,877	 	 	$	1,277,119	 	
Bad debt reserve on paid losses and loss expenses	  	 	(421,641	)	 	 	(402,680	)	
Reinsurance recoverable on future policy benefits	  	 	15,484	 	 	 	14,668	 	
Reinsurance recoverable on unpaid losses and loss expenses	  	 	13,817,518	 	 	 	13,749,189	 	
Bad debt reserve on unpaid losses and loss expenses	  	 	(540,983	)	 	 	(557,580	)	
 	  				 				
Net reinsurance recoverable	  	$	14,062,255	 	 	$	14,080,716	 	

The Company evaluates the financial condition of its reinsurers and potential reinsurers on a regular basis and also monitors concentrations of credit risk with reinsurers. The provision for unrecoverable reinsurance is established principally due to the anticipated failure of reinsurers to indemnify ACE, primarily because of disputes under reinsurance contracts and insolvencies. Provisions have been established for amounts estimated to be uncollectible.
 
Following is a breakdown of the Company’s reinsurance recoverable on paid losses at March 31, 2004 and December 31, 2003:

 	  	March 31, 2004
	 	 	December 31, 2003
	 	
Category
	  	Amount
	  	Bad Debt
Reserve
	  	% of Total
Reserve
	 	 	Amount
	  	Bad Debt
Reserve
	  	% of Total
Reserve
	 	
 	  	(in millions of U.S. dollars)	 	
General collections	  	$	639	  	$	44	  	6.9	%	 	$	730	  	$	45	  	6.2	%	
Other	  	 	553	  	 	378	  	68.4	%	 	 	547	  	 	358	  	65.4	%	
 	  			  			  			 			  			  			
Total	  	$	1,192	  	$	422	  	35.4	%	 	$	1,277	  	$	403	  	31.6	%	

General collections balances represents amounts in the process of collection in the normal course of business for which the Company has no indication of dispute or credit-related issues.
 
11

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The other category includes amounts recoverable that are in dispute or are from companies who are in supervision, rehabilitation or liquidation. The Company’s estimation of this reserve considers the credit quality of the reinsurer and whether the Company has received collateral or other credit protections such as parental guarantees.
 
b)	Reinsurance programs involving minimum benefit guarantees under annuity contracts	
 
Beginning in 2000, the Company has been engaged in reinsuring various death and living benefit guarantees associated with variable annuities issued primarily in the United States. Each reinsurance treaty covers variable annuities written during a limited period, typically not exceeding two years. The Company generally receives a monthly premium during the accumulation phase of the covered annuities (in-force) based on a percentage of the underlying accumulated account values. Depending on an annuitant’s age, the accumulation phase can last many years. To limit the Company’s exposure under these programs, all reinsurance treaties include aggregate claim limits and many include an aggregate deductible.
 
The guarantees which are payable on death, referred to as guaranteed minimum death benefits (GMDBs), principally cover shortfalls between accumulated account value at the time of an annuitant’s death and either i) an annuitant’s total deposits; ii) an annuitant’s total deposits plus a minimum annual return; or iii) the highest accumulated account value attained during any policy anniversary date. In addition, a death benefit may be based on a formula specified in the variable annuity contract that uses a percentage of the growth of the underlying contract value. Reinsurance programs covering GMDBs are accounted for pursuant to SOP 03-1. (See Note 2).
 
Under reinsurance programs covering living benefit guarantees, the Company assumes the risk of guaranteed minimum income benefits (GMIBs) associated with variable annuity contracts. The GMIB risk is triggered if, at the time the contract holder elects to convert the accumulated account value to a periodic payment stream (annuitize), the accumulated account value is not sufficient to purchase a guaranteed minimum level of monthly income. The Company’s GMIB reinsurance product meets the definition of a derivative for accounting purposes and is therefore carried at fair value with changes in fair value recognized in income in the period of the change pursuant to FAS 133. As the assuming entity, the Company is obligated to provide coverage until the expiration of the underlying annuities. Therefore, to best disclose the nature of the underlying risk over the exposure period within the statement of operations, the Company presents the change in fair value as follows. Premiums received under the reinsurance treaties are classified as premium. Expected losses allocated to premiums received are classified as life and annuity benefits and valued pursuant to SOP 03-1, similar to GMDB reinsurance. Other changes in fair value, principally arising from changes in expected losses allocated to expected future premiums, are classified as realized gains (losses). As fair value generally represents the cost to exit a business and thus includes a risk margin, the Company may recognize a loss for other changes in fair value during a given period due to temporary adverse changes in the capital markets (i.e., declining interest rates and/or declining equity markets) even when the Company continues to expect the business to be profitable. Management believes this presentation provides the most meaningful disclosure of changes in the underlying risk within the GMIB reinsurance program for a given reporting period.
 
For the quarter ended March 31, 2004, net premiums earned and life and annuity benefits expense were $9.6 million and $3.8 million, respectively, for GMDB reinsurance and $12.6 million and $5.2 million, respectively, for GMIB reinsurance. For the quarter ended March 31, 2003, net premiums earned and life and annuity benefits expense were $12.1 million and $11.1 million, respectively, for GMDB reinsurance and $3.1 million and $1.5 million, respectively, for GMIB reinsurance. In addition, for the quarter ended March 31, 2004, the Company reported a $25 million loss from other changes in fair value related to GMIB reinsurance which is reflected in net realized gains (losses).
 
At March 31, 2004, reported liabilities for GMDB and GMIB reinsurance were $23.5 million and $53.6 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 the equity markets, and changes in the allocation of the investments underlying annuitant’s account value. These models and the related assumptions are continually reviewed by management and enhanced, as appropriate, based upon improvements in modeling techniques and availability of more timely information, such as market conditions and demographics of in-force annuities.
 
At March 31, 2004, the Company’s net amount at risk from its GMDB and GMIB reinsurance programs are $246 million and $32 million, respectively. For each annuity reinsured under the GMDB program, the net amount at risk typically represents the excess, if any, of the current guaranteed value over the current account value as of the balance sheet date. In determining the aggregate net amount at risk for the GMDB program, it is assumed that there are no lapses or annuitizations, no future changes in each policy’s account value and guaranteed value, and deaths occur over the lifetime of the reinsured policies based on the 1994 GMDB mortality table. For each annuity reinsured under the GMIB program, the net amount at risk typically represents the excess, if any, of the present value of the minimum guaranteed annuity payments over the present value of the annuity payments otherwise available as of the balance sheet date. In determining the aggregate net amount at risk for the GMIB program, it is assumed that there are no lapses or deaths, no future changes in each policy’s account value and guaranteed value, and an annual annuitization rate at or near the limit stated for each reinsurance treaty. The net amount at risk is subject to significant fluctuation due to several factors including changes in equity markets and interest rates as well as the addition of new reinsured annuities.
 
6.	Commitments, contingencies and guarantees	
 
The Company invests in private equity partnerships with a carrying value of $91 million included in other investments. In connection with these investments, the Company has commitments that may require funding of up to $106.4 million over the next several years.
 
12

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The Company’s insurance subsidiaries are subject to claims litigation involving disputed interpretations of policy coverages and, in some jurisdictions, direct actions by allegedly-injured persons seeking damages from policyholders. These lawsuits, involving claims on policies issued by our subsidiaries which are typical to the insurance industry in general and in the normal course of business, are considered in the Company’s loss and loss expense reserves. In addition to claims litigation, the Company and its subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on insurance policies. This category of business litigation typically involves, inter alia, allegations of underwriting errors or misconduct, employment claims, regulatory activity or disputes arising from business ventures. While the outcomes of the business litigation involving the Company cannot be predicted with certainty at this point, the Company is disputing, and will continue to dispute, allegations against it that are without merit. The Company believes that the ultimate outcomes of matters in this category of business litigation will not have a material adverse effect on the financial condition, future operating results or liquidity of the Company, although an adverse resolution of a number of these items could have a material adverse effect on the Company’s results of operations in a particular quarter or fiscal year.
 
The Company provides and reinsures financial guaranties issued to support public and private borrowing arrangements. Financial guaranty insurance provides an unconditional and irrevocable guaranty that indemnifies the insured against non-payment of principal and interest on an insured debt obligation when due. The Company’s potential liability in the event of non-payment by the issuer of the insured obligation is represented by its proportionate share of the aggregate outstanding principal and interest payable (insurance in force) on such insured obligation. In synthetic transactions, the Company guarantees payment obligations of counterparties under credit default swaps. The Company does not record a carrying value for future installment premiums on financial guaranties as they are recognized over the term of the contract. The net par outstanding exposure as at March 31, 2004 and December 31, 2003, of financial guaranty aggregate insured portfolios was $90.6 billion and $88.9 billion respectively, which includes credit default swap exposures of $22.6 billion and $23.9 billion, respectively.
 
7.	Credit facilities	
 
In April 2004, the Company replaced its $500 million, 364-day revolving credit facility and its $250 million, five-year revolving credit facility with a $600 million three-year credit facility. This facility is available for general corporate purposes, commercial paper back-up and the issuance of letters of credit (LOCs). At March 31, 2004, the outstanding LOCs issued under the replaced facilities was $64 million and commercial paper outstanding was $146 million. There were no other drawings or LOCs issued under these facilities.
 
13

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

 	  	March 31
2004
	  	December 31
2003
	
 	  	(in millions of U.S. dollars)	
Short-term debt	  	 	 	  	 	 	
ACE INA commercial paper	  	$	146	  	$	146	
ACE INA Notes due 2004	  	 	400	  	 	400	
 	  			  			
 	  	 	546	  	 	546	
 	  			  			
Long-term debt	  	 	 	  	 	 	
ACE INA Notes due 2006	  	 	300	  	 	300	
ACE Limited Senior Notes due 2007	  	 	499	  	 	499	
ACE US Holdings Senior Notes due 2008	  	 	250	  	 	250	
ACE INA Subordinated Notes due 2009	  	 	200	  	 	200	
ACE INA Debentures due 2029	  	 	100	  	 	100	
 	  			  			
 	  	$	1,349	  	$	1,349	
 	  			  			
Trust Preferred Securities	  	 	 	  	 	 	
Capital Re LLC Monthly Income Preferred Securities due 2044	  	$	75	  	$	75	
ACE INA Trust Preferred Securities due 2029	  	 	103	  	 	100	
ACE INA Capital Securities due 2030	  	 	309	  	 	300	
 	  			  			
 	  	$	487	  	$	475	

a)	Short-term debt	
 
The Company has commercial paper programs that use revolving credit facilities as back-up facilities and provide for up to $2.8 billion in commercial paper issuance (subject to the availability of back-up facilities, which totaled $686 million at March 31, 2004) for ACE and for ACE INA. For the three months ended March 31, 2004, and 2003, commercial paper rates averaged 1.2 percent and 1.5 percent, respectively.
 
9.	Defined benefit plans	
 
The Company maintains non-contributory defined benefit plans that cover certain foreign employees, principally located in Europe and Asia. The Company does not provide any such plans to U.S. employees. Benefits under these plans are based on employees’ years of service and compensation during final years of service. All underlying defined benefit plans are subject to periodic actuarial valuation by qualified local actuarial firms. The Company funds the plans at the amount required by FAS No. 87, “Employers’ Accounting for Pensions” (FAS 87). The accumulated benefit obligation is compared to plan assets, both as defined in FAS 87, and any resulting deficiency is recorded as a liability.
 
14

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Net periodic benefit costs recognized by component for the three months ended March 31, 2004 and 2003 is as follows:

 	  	Three Months Ended
March 31
	 	
 	  	2004
	 	 	2003
	 	
 	  	(in thousands of U.S.
dollars)	 	
Components of net benefit cost	  	 	 	 	 	 	 	 	
Service cost	  	$	1,364	 	 	$	1,355	 	
Interest cost	  	 	3,972	 	 	 	3,807	 	
Expected return on plan assets	  	 	(3,468	)	 	 	(2,975	)	
Amortization of net transition asset	  	 	2	 	 	 	2	 	
Amortization of prior service cost	  	 	1,583	 	 	 	1,504	 	
Amortization of net actuarial loss	  	 	26	 	 	 	24	 	
 	  				 				
Net benefit cost	  	$	3,479	 	 	$	3,717	 	

10.	Restricted stock awards	
 
Under the Company’s long-term incentive plans, 1,508,080 restricted Ordinary Shares were awarded during the three months ended March 31, 2004, to officers of the Company and its subsidiaries. These shares vest at various dates through March 2008.
 
At the time of grant the market value of the shares awarded under these grants is recorded as unearned stock grant compensation and is presented as a separate component of shareholders’ equity. The unearned compensation is charged to income over the vesting period using the accelerated method.
 
11.	Earnings per share	
 
The following table sets forth the computation of basic and diluted earnings per share.

 	  	Three Months Ended March 31
	 	
 	  	2004
	 	 	2003
	 	
 	  	(in thousands of U.S. dollars, except
share and per share data)	 	
Numerator:	  	 	 	 	 	 	 	 	
Net income	  	$	446,825	 	 	$	247,444	 	
Dividends on Preferred Shares	  	 	(11,336	)	 	 	—  	 	
Dividends on Mezzanine equity	  	 	—  	 	 	 	(6,415	)	
 	  				 				
Net income available to holders of Ordinary Shares	  	$	435,489	 	 	$	241,029	 	
 	  				 				
Denominator:	  	 	 	 	 	 	 	 	
Denominator for basic earnings per share:	  	 	 	 	 	 	 	 	
Weighted average shares outstanding	  	 	278,937,204	 	 	 	260,986,223	 	
Dilutive effect of Mezzanine equity	  	 	—  	 	 	 	916,016	 	
Effect of other dilutive securities	  	 	5,352,364	 	 	 	6,138,426	 	
 	  				 				
Denominator for diluted earnings per share:	  	 	 	 	 	 	 	 	
Adjusted weighted average shares outstanding and assumed conversions	  	 	284,289,568	 	 	 	268,040,665	 	
 	  				 				
Basic earnings per share	  	$	1.56	 	 	$	0.92	 	
 	  				 				
Diluted earnings per share	  	$	1.53	 	 	$	0.90	 	

15

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
12.	FAS 148 Pro Forma Disclosures	
 
In December 2002, FASB issued FAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (FAS 148). FAS 148 amends the disclosure requirements of FAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The Company continues to account for stock-based compensation plans in accordance with APB 25. No compensation expense for options is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of the grant.
 
Following is a summary of options issued and outstanding for the three months ended March 31, 2004 and 2003:

 	  	Year of
Expiration
	  	Average
Exercise
Price
	  	Options for
Ordinary
Shares
	 	 	Year of
Expiration
	  	Average
Exercise
Price
	  	Options for
Ordinary
Shares
	 	
 	  	Three Months Ended March 31, 2004
	 	 	Three Months Ended March 31, 2003
	 	
Balance – beginning of period	  	 	  	 	 	  	18,391,136	 	 	 	  	 	 	  	19,312,287	 	
Options granted	  	2014	  	$	43.55	  	2,055,820	 	 	2013	  	$	27.61	  	3,383,712	 	
Options exercised	  	2004-2013	  	$	43.67	  	(1,432,480	)	 	2007-2010	  	$	29.90	  	(183,813	)	
Options forfeited	  	2006-2014	  	$	49.34	  	(62,996	)	 	2003-2012	  	$	41.16	  	(109,050	)	
 	  	 	  	 	 	  			 	 	  	 	 	  			
Balance – end of period	  	 	  	 	 	  	18,951,480	 	 	 	  	 	 	  	22,403,136	 	

The following table outlines the Company’s net income available to holders of Ordinary Shares and diluted earnings per share for the three months ended March 31, 2004 and 2003, had the compensation cost been determined in accordance with the fair value method recommended in FAS 123.

 	  	Three Months Ended
March 31
	
 	  	2004
	  	2003
	
 	  	(in thousands of U.S. dollars,
except per share data)	
Net income available to holders of Ordinary Shares:	  	 	 	  	 	 	
As reported	  	$	435,489	  	$	241,029	
Add: Stock-based compensation expense included in reported net income, net of income tax	  	$	9,153	  	$	4,597	
Deduct: Compensation expense, net of income tax	  	$	20,198	  	$	10,986	
Pro forma	  	$	424,444	  	$	234,640	
Basic earnings per share:	  	 	 	  	 	 	
As reported	  	$	1.56	  	$	0.92	
Pro forma	  	$	1.52	  	$	0.90	
Diluted earnings per share:	  	 	 	  	 	 	
As reported	  	$	1.53	  	$	0.90	
Pro forma	  	$	1.50	  	$	0.87	
 
The fair value of the options issued is estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions used for grants for the three months ended March 31, 2004 and 2003, respectively: dividend yield of 1.74 percent and 2.46 percent, expected volatility of 26.76 percent and 32.74 percent, risk free interest rate of 2.71 percent and 2.33 percent. The expected life is four years and the forfeiture rate is 5 percent for 2004 and 2003.
 
13.	Taxation	
 
Under current Cayman Islands’ law, the Company is not required to pay any taxes in the Cayman Islands on its income or capital gains. The Company has received an undertaking that, in the event of any taxes being imposed, the Company will be exempted from taxation in the Cayman Islands until the year 2013. Under current Bermuda law, the Company and its Bermuda subsidiaries are not required to pay any taxes in Bermuda on its income or capital gains. The Company has received an undertaking from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, the Company will be exempt from taxation in Bermuda until March 2016.
 
Income from the Company’s operations at Lloyd’s is subject to United Kingdom corporation taxes. Lloyd’s is required to pay U.S. income tax on U.S. connected income (U.S. income) written by Lloyd’s syndicates. Lloyd’s has a closing agreement with the IRS whereby the amount of tax due on this business is calculated by Lloyd’s and remitted directly to the IRS. These amounts are then charged to the personal accounts of the Names/Corporate Members in proportion to their participation in the relevant syndicates. The Company’s Corporate Members are subject to this arrangement but, as U.K. domiciled companies, will receive U.K. corporation tax credits for any U.S. income tax incurred up to the value of the equivalent U.K. corporation income tax charge on the U.S. income.
 
16

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
ACE Prime Holdings and ACE Cap Re USA Holdings, and their respective subsidiaries are subject to income taxes imposed by U.S. authorities and file U.S. tax returns. Should the U.S. subsidiaries pay a dividend to the Company, withholding taxes will apply. Certain international operations of the Company are also subject to income taxes imposed by the jurisdictions in which they operate.
 
The Company is not subject to taxation other than as stated above. There can be no assurance that there will not be changes in applicable laws, regulations or treaties, which might require the Company to change the way it operates or become subject to taxation.
 
The income tax provision for the three months ended March 31, 2004 and 2003 is as follows:

 	  	Three Months Ended
March 31
	
 	  	2004
	  	2003
	
 	  	(in thousands of U.S. dollars)	
Current tax expense	  	$	67,459	  	$	6,673	
Deferred tax expense	  	 	55,082	  	 	45,757	
 	  			  			
Provision for income taxes	  	$	122,541	  	$	52,430	

The weighted average expected tax provision has been calculated using pre-tax accounting income (loss) in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate. A reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average tax rate for the three months ended March 31, 2004 and 2003, is provided below.

 	  	Three Months Ended
March 31
	 	
 	  	2004
	 	 	2003
	 	
 	  	(in thousands of U.S. dollars)	 	
Expected tax provision at weighted average rate	  	$	122,596	 	 	$	52,296	 	
Permanent differences	  	 	 	 	 	 	 	 	
Tax-exempt interest	  	 	(4,098	)	 	 	(3,802	)	
Other	  	 	(3,342	)	 	 	(510	)	
Goodwill	  	 	3,957	 	 	 	525	 	
Net withholding taxes	  	 	3,428	 	 	 	3,921	 	
 	  				 				
Total provision for income taxes	  	$	122,541	 	 	$	52,430	 	

17

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

 	  	March 31
2004
	  	December 31
2003
	
 	  	(in thousands of U.S. dollars)	
Deferred tax assets	  	 	 	  	 	 	
Loss reserve discount	  	$	538,849	  	$	518,443	
Unearned premium reserve	  	 	125,192	  	 	114,521	
Foreign tax credits	  	 	263,963	  	 	204,052	
Investments	  	 	91,140	  	 	92,898	
Bad debts	  	 	151,978	  	 	152,619	
Net operating loss carryforward	  	 	347,306	  	 	412,469	
Other	  	 	34,059	  	 	107,593	
 	  			  			
Total deferred tax assets	  	 	1,552,487	  	 	1,602,595	
 	  			  			
Deferred tax liabilities	  	 	 	  	 	 	
Deferred policy acquisition costs	  	 	175,405	  	 	163,199	
Unrealized appreciation on investments	  	 	222,531	  	 	174,547	
Other	  	 	24,776	  	 	39,452	
 	  			  			
Total deferred tax liabilities	  	 	422,712	  	 	377,198	
 	  			  			
Valuation allowance	  	 	132,741	  	 	135,592	
 	  			  			
Net deferred tax asset	  	$	997,034	  	$	1,089,805	

The valuation allowance of $133 million at March 31, 2004 and $136 million at December 31, 2003, reflects management’s assessment, based on available information, that it is more likely than not that a portion of the deferred tax asset will not be realized due to the inability of certain foreign subsidiaries to generate sufficient taxable income. Adjustments to the valuation allowances are made when there is a change in management’s assessment of the amount of deferred tax asset that is realizable.
 
At March 31, 2004, the Company has net operating loss carryforwards for U.S. federal income tax purposes of approximately $992 million. The net operating loss carryforwards are available to offset future U.S. federal taxable income and, if unutilized, will expire in the years 2018-2022.
 
14.	Information provided in connection with outstanding debt of securities	
 
The following tables present the condensed consolidating financial information for ACE Limited (the “Parent Guarantor”), ACE INA Holdings, Inc. and ACE Financial Services, Inc. (formerly Capital Re Corporation), (the “Subsidiary Issuers”) at March 31, 2004 and December 31, 2003 and for the three months ended March 31, 2004 and 2003. The Subsidiary Issuers are direct or indirect wholly-owned subsidiaries of the Parent Guarantor. Investments in subsidiaries are accounted for by the Parent Guarantor and the Subsidiary Issuers under the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are reflected in the Parent Guarantor’s investment accounts and earnings. The Parent Guarantor fully and unconditionally guarantees certain of the debt of the Subsidiary Issuers.
 
18

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

 	  	ACE Limited
(Parent Co.
Guarantor)
	  	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)
	 	 	ACE Financial
Services, Inc.
(Subsidiary
Issuer)
	 	 	Other ACE
Limited
Subsidiaries and
Eliminations  (1)
	 	 	Consolidating
Adjustments  (2)
	 	 	ACE Limited
Consolidated
	
Assets	  	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Total investments and cash	  	$	63,225	  	$	11,661,955	 	 	$	1,243,585	 	 	$	13,219,738	 	 	$	—  	 	 	$	26,188,503	
Insurance and reinsurance balances receivable	  	 	—  	  	 	2,519,742	 	 	 	27,607	 	 	 	945,186	 	 	 	—  	 	 	 	3,492,535	
Reinsurance recoverable	  	 	—  	  	 	12,219,213	 	 	 	—  	 	 	 	1,843,042	 	 	 	—  	 	 	 	14,062,255	
Goodwill	  	 	—  	  	 	2,130,908	 	 	 	85,417	 	 	 	483,200	 	 	 	—  	 	 	 	2,699,525	
Investments in subsidiaries	  	 	9,447,596	  	 	—  	 	 	 	152,000	 	 	 	(152,000	)	 	 	(9,447,596	)	 	 	—  	
Due (to) from subsidiaries and affiliates, net	  	 	517,346	  	 	(83,204	)	 	 	(41,747	)	 	 	124,951	 	 	 	(517,346	)	 	 	—  	
Other assets	  	 	62,005	  	 	4,771,358	 	 	 	99,009	 	 	 	1,103,359	 	 	 	—  	 	 	 	6,035,731	
 	  			  				 				 				 				 			
Total assets	  	$	10,090,172	  	$	33,219,972	 	 	$	1,565,871	 	 	$	17,567,476	 	 	$	(9,964,942	)	 	$	52,478,549	
 	  			  				 				 				 				 			
Liabilities	  	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Unpaid losses and loss expenses	  	$	—  	  	$	19,659,130	 	 	$	115,955	 	 	$	7,921,787	 	 	$	—  	 	 	$	27,696,872	
Unearned premiums	  	 	—  	  	 	4,555,597	 	 	 	398,118	 	 	 	1,975,847	 	 	 	—  	 	 	 	6,929,562	
Future policy benefits for life and annuity contracts	  	 	—  	  	 	—  	 	 	 	—  	 	 	 	495,780	 	 	 	—  	 	 	 	495,780	
Short-term debt	  	 	—  	  	 	545,713	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	545,713	
Long-term debt	  	 	499,493	  	 	599,775	 	 	 	—  	 	 	 	250,000	 	 	 	—  	 	 	 	1,349,268	
Trust preferred securities	  	 	—  	  	 	412,373	 	 	 	75,000	 	 	 	—  	 	 	 	—  	 	 	 	487,373	
Other liabilities	  	 	193,859	  	 	3,513,416	 	 	 	36,048	 	 	 	1,833,838	 	 	 	—  	 	 	 	5,577,161	
 	  			  				 				 				 				 			
Total liabilities	  	 	693,352	  	 	29,286,004	 	 	 	625,121	 	 	 	12,477,252	 	 	 	—  	 	 	 	43,081,729	
 	  			  				 				 				 				 			
Total shareholders’ equity	  	 	9,396,820	  	 	3,933,968	 	 	 	940,750	 	 	 	5,090,224	 	 	 	(9,964,942	)	 	 	9,396,820	
 	  			  				 				 				 				 			
Total liabilities and shareholders’ equity	  	$	10,090,172	  	$	33,219,972	 	 	$	1,565,871	 	 	$	17,567,476	 	 	$	(9,964,942	)	 	$	52,478,549	

(1)	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
 
(2)	Includes ACE Limited parent company eliminations.	
 
19

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Condensed Consolidating Balance Sheet at December 31, 2003
(in thousands of U.S. dollars)

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

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

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

 	  	ACE Limited
(Parent Co.
Guarantor)
	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)
	 	 	ACE Financial
Services, Inc.
(Subsidiary
Issuer)
	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations  (1)
	 	 	Consolidating
Adjustments  (2)
	 	 	ACE Limited
Consolidated
	 	
Net premiums written	  	$	—  	 	 	$	1,789,252	 	 	$	47,565	 	 	$	1,401,349	 	 	$	—  	 	 	$	3,238,166	 	
Net premiums earned	  	 	—  	 	 	 	1,341,052	 	 	 	37,933	 	 	 	1,220,692	 	 	 	—  	 	 	 	2,599,677	 	
Net investment income	  	 	3,422	 	 	 	106,161	 	 	 	12,753	 	 	 	118,820	 	 	 	(3,236	)	 	 	237,920	 	
Other income (expense)	  	 	—  	 	 	 	(3,326	)	 	 	(11,305	)	 	 	(2,449	)	 	 	—  	 	 	 	(17,080	)	
Equity in earnings of subsidiaries	  	 	491,241	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(491,241	)	 	 	—  	 	
Net realized gains (losses)	  	 	(14,021	)	 	 	35,612	 	 	 	9,986	 	 	 	25,684	 	 	 	—  	 	 	 	57,261	 	
Losses and loss expenses	  	 	—  	 	 	 	875,091	 	 	 	9,015	 	 	 	658,491	 	 	 	—  	 	 	 	1,542,597	 	
Life and annuity benefits	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	41,724	 	 	 	—  	 	 	 	41,724	 	
Policy acquisition costs and administrative expenses	  	 	26,567	 	 	 	336,791	 	 	 	20,371	 	 	 	292,941	 	 	 	3,149	 	 	 	679,819	 	
Interest expense	  	 	6,280	 	 	 	32,536	 	 	 	1,613	 	 	 	5,120	 	 	 	(1,277	)	 	 	44,272	 	
Income tax expense	  	 	970	 	 	 	81,516	 	 	 	7,670	 	 	 	32,385	 	 	 	—  	 	 	 	122,541	 	
 	  				 				 				 				 				 				
Net income	  	$	446,825	 	 	$	153,565	 	 	$	10,698	 	 	$	332,086	 	 	$	(496,349	)	 	$	446,825	 	

Condensed Consolidating Statement of Operations
For the three months ended March 31, 2003
(in thousands of U.S. dollars)

 	  	ACE Limited
(Parent Co.
Guarantor)
	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)
	 	 	ACE Financial
Services, Inc.
(Subsidiary
Issuer)
	 	 	Other ACE
Limited
Subsidiaries
and
Eliminations  (1)
	 	 	Consolidating
Adjustments  (2)
	 	 	ACE Limited
Consolidated
	 	
Net premiums written	  	$	—  	 	 	$	1,413,028	 	 	$	52,344	 	 	$	1,464,680	 	 	$	—  	 	 	$	2,930,052	 	
Net premiums earned	  	 	—  	 	 	 	976,058	 	 	 	35,010	 	 	 	1,060,464	 	 	 	—  	 	 	 	2,071,532	 	
Net investment income	  	 	5,432	 	 	 	85,511	 	 	 	11,401	 	 	 	109,690	 	 	 	(5,622	)	 	 	206,412	 	
Other income (expense)	  	 	—  	 	 	 	(1,000	)	 	 	—  	 	 	 	(5,154	)	 	 	—  	 	 	 	(6,154	)	
Equity in earnings of subsidiaries	  	 	282,585	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(282,585	)	 	 	—  	 	
Net realized losses	  	 	(8,610	)	 	 	(16,268	)	 	 	(2,837	)	 	 	(12,374	)	 	 	—  	 	 	 	(40,089	)	
Losses and loss expenses	  	 	—  	 	 	 	662,456	 	 	 	8,055	 	 	 	612,322	 	 	 	—  	 	 	 	1,282,833	 	
Life and annuity benefits	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	48,499	 	 	 	—  	 	 	 	48,499	 	
Policy acquisition costs and administrative expenses	  	 	19,936	 	 	 	250,807	 	 	 	15,256	 	 	 	270,997	 	 	 	(1,430	)	 	 	555,566	 	
Interest expense	  	 	10,340	 	 	 	32,970	 	 	 	1,687	 	 	 	5,461	 	 	 	(5,529	)	 	 	44,929	 	
Income tax expense	  	 	1,687	 	 	 	34,859	 	 	 	4,349	 	 	 	11,535	 	 	 	—  	 	 	 	52,430	 	
 	  				 				 				 				 				 				
Net income	  	$	247,444	 	 	$	63,209	 	 	$	14,227	 	 	$	203,812	 	 	$	(281,248	)	 	$	247,444	 	

(1)	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
 
(2)	Includes ACE Limited parent company eliminations.	
 
21

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

 	  	ACE Limited
(Parent Co.
Guarantor)
	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)
	 	 	ACE Financial
Services, Inc.
(Subsidiary Issuer)
	 	 	Other ACE
Limited
Subsidiaries and
Eliminations (1)
	 	 	ACE Limited
Consolidated
	 	
Net cash flows from (used for) operating activities	  	$	(29,876	)	 	$	820,708	 	 	$	23,103	 	 	$	358,187	 	 	$	1,172,122	 	
 	  				 				 				 				 				
Cash flows from investing activities	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Purchases of fixed maturities	  	 	(26,877	)	 	 	(2,801,197	)	 	 	(40,839	)	 	 	(3,122,209	)	 	 	(5,991,122	)	
Purchases of equity securities	  	 	—  	 	 	 	(36,302	)	 	 	—  	 	 	 	(72,874	)	 	 	(109,176	)	
Sales of fixed maturities	  	 	—  	 	 	 	2,039,543	 	 	 	20,816	 	 	 	2,834,789	 	 	 	4,895,148	 	
Sales of equity securities	  	 	—  	 	 	 	35,840	 	 	 	—  	 	 	 	69,529	 	 	 	105,369	 	
Maturities of fixed maturities	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	160	 	 	 	160	 	
Net realized gains (losses) on investment derivatives	  	 	(14,021	)	 	 	5,031	 	 	 	—  	 	 	 	8,113	 	 	 	(877	)	
Capitalization of subsidiaries	  	 	(37,987	)	 	 	57,994	 	 	 	—  	 	 	 	(20,007	)	 	 	—  	 	
Dividends received from subsidiaries	  	 	235,834	 	 	 	—  	 	 	 	—  	 	 	 	(235,834	)	 	 	—  	 	
Other	  	 	—  	 	 	 	(21,057	)	 	 	4,913	 	 	 	23,076	 	 	 	6,932	 	
 	  				 				 				 				 				
Net cash flows from (used for) investing activities	  	$	156,949	 	 	$	(720,148	)	 	$	(15,110	)	 	$	(515,257	)	 	$	(1,093,566	)	
 	  				 				 				 				 				
Cash flows from financing activities	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends paid on Ordinary Shares	  	 	(53,182	)	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(53,182	)	
Dividends paid on Preferred Shares	  	 	(11,213	)	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(11,213	)	
Proceeds from short-term debt, net	  	 	—  	 	 	 	(14	)	 	 	—  	 	 	 	—  	 	 	 	(14	)	
Advances to (from) affiliates	  	 	(108,927	)	 	 	—  	 	 	 	—  	 	 	 	108,927	 	 	 	—  	 	
Proceeds from exercise of options for Ordinary Shares	  	 	34,406	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	34,406	 	
Proceeds from Ordinary Shares issued under ESPP	  	 	3,683	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	3,683	 	
 	  				 				 				 				 				
Net cash flows from (used for) financing activities	  	$	(135,233	)	 	$	(14	)	 	$	—  	 	 	$	108,927	 	 	$	(26,320	)	
 	  				 				 				 				 				
Net increase (decrease) in cash	  	 	(8,160	)	 	 	100,546	 	 	 	7,993	 	 	 	(48,143	)	 	 	52,236	 	
Cash – beginning of period	  	 	27,260	 	 	 	167,667	 	 	 	23,112	 	 	 	343,611	 	 	 	561,650	 	
 	  				 				 				 				 				
Cash – end of period	  	$	19,100	 	 	$	268,213	 	 	$	31,105	 	 	$	295,468	 	 	$	613,886	 	

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

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Condensed Consolidating Statement of Cash Flows
For the three months ended March 31, 2003
(in thousands of U.S. dollars)

 	  	ACE Limited
(Parent Co.
Guarantor)
	 	 	ACE INA
Holdings, Inc.
(Subsidiary
Issuer)
	 	 	ACE Financial
Services, Inc.
(Subsidiary Issuer)
	 	 	Other ACE
Limited
Subsidiaries and
Eliminations (1)
	 	 	ACE Limited
Consolidated
	 	
Net cash flows from (used for) operating activities	  	$	(45,560	)	 	$	222,213	 	 	$	31,363	 	 	$	392,621	 	 	$	600,637	 	
 	  				 				 				 				 				
Cash flows from investing activities	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Purchases of fixed maturities	  	 	(64,496	)	 	 	(1,565,382	)	 	 	(82,159	)	 	 	(2,799,388	)	 	 	(4,511,425	)	
Purchases of equity securities	  	 	—  	 	 	 	(18,652	)	 	 	—  	 	 	 	(17,336	)	 	 	(35,988	)	
Sales of fixed maturities	  	 	60,133	 	 	 	753,121	 	 	 	59,844	 	 	 	2,936,626	 	 	 	3,809,724	 	
Sales of equity securities	  	 	—  	 	 	 	18,545	 	 	 	—  	 	 	 	10,699	 	 	 	29,244	 	
Maturities of fixed maturities	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	3,180	 	 	 	3,180	 	
Net realized losses on investment derivatives	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(31	)	 	 	(31	)	
Capitalization of subsidiaries	  	 	(392,107	)	 	 	378,170	 	 	 	—  	 	 	 	13,937	 	 	 	—  	 	
Dividends received from subsidiaries	  	 	231,000	 	 	 	—  	 	 	 	—  	 	 	 	(231,000	)	 	 	—  	 	
Other	  	 	—  	 	 	 	(21,381	)	 	 	(5,504	)	 	 	(10,394	)	 	 	(37,279	)	
 	  				 				 				 				 				
Net cash flows from (used for) investing activities	  	$	(165,470	)	 	$	(455,579	)	 	$	(27,819	)	 	$	(93,707	)	 	$	(742,575	)	
 	  				 				 				 				 				
Cash flows from financing activities	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Dividends paid on Ordinary Shares	  	 	(44,659	)	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(44,659	)	
Dividends paid on Mezzanine equity	  	 	(6,415	)	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	(6,415	)	
Proceeds from short-term debt, net	  	 	—  	 	 	 	498	 	 	 	—  	 	 	 	—  	 	 	 	498	 	
Advances to (from) affiliates	  	 	264,851	 	 	 	(223	)	 	 	—  	 	 	 	(264,628	)	 	 	—  	 	
Proceeds from exercise of options for Ordinary Shares	  	 	3,141	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	3,141	 	
Proceeds from Ordinary Shares issued under ESPP	  	 	3,387	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	3,387	 	
 	  				 				 				 				 				
Net cash flows from (used for) financing activities	  	$	220,305	 	 	$	275	 	 	$	—  	 	 	$	(264,628	)	 	$	(44,048	)	
 	  				 				 				 				 				
Net increase (decrease) in cash	  	 	9,275	 	 	 	(233,091	)	 	 	3,544	 	 	 	34,286	 	 	 	(185,986	)	
Cash – beginning of period	  	 	2,150	 	 	 	478,161	 	 	 	4,438	 	 	 	178,606	 	 	 	663,355	 	
 	  				 				 				 				 				
Cash – end of period	  	$	11,425	 	 	$	245,070	 	 	$	7,982	 	 	$	212,892	 	 	$	477,369	 	

(1)	Includes all other subsidiaries of ACE Limited and intercompany eliminations.	
 
15.	Segment information	
 
The Company operates through four business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance and Financial Services. These segments distribute their products through various forms of brokers and agencies. Insurance - North American, Insurance - Overseas General and Global Reinsurance utilize direct marketing programs to reach clients, while Financial Services operates with major U.S. financial guaranty insurers, mortgage guaranty insurers in the U.S., U.K. and Australia, title insurers and European trade credit insurers. Additionally, Insurance—North American has formed internet distribution channels for some of its products and Global Reinsurance and Financial Services have established relationships with reinsurance intermediaries.
 
The Insurance – North American segment includes the operations of ACE USA, ACE Canada and ACE Bermuda, excluding the financial solutions business in both the U.S. and Bermuda, which are included in the Financial Services segment. These operations provide a broad range of property and casualty insurance and reinsurance products, including excess liability, excess property, professional lines, aerospace, accident and health coverages and claim and risk management products and services, to a diverse group of commercial and non-commercial enterprises and consumers. The operations of ACE USA also include the run-off operations, which include Brandywine, Commercial Insurance Services, residual market workers’ compensation business, pools and syndicates
 
23

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
not attributable to a single business group, the run-off of open market facilities and the run-off results of various other smaller exited lines of business. Run-off operations do not actively sell insurance products, but are responsible for the management of existing policies and related claims.
 
The Insurance – Overseas General segment consists of ACE International and the insurance operations of ACE Global Markets. ACE International includes ACE INA’s network of indigenous insurance operations, which were acquired in 1999. The segment has four regions of operations: ACE Asia Pacific, ACE Far East, ACE Latin America and the ACE European Group, (which comprises ACE Europe, ACE INA UK Limited and the insurance operations of ACE Global Markets). ACE Global Markets provides funds at Lloyd’s to support underwriting by the Lloyd’s syndicates managed by Lloyd’s managing agencies which are owned by the Company (including for segment purposes Lloyd’s operations owned by ACE Financial Services). The reinsurance operation of ACE Global Markets is included in the Global Reinsurance segment. Companies within the Insurance – Overseas General segment write a variety of insurance products including property, casualty, professional lines (D&O and E&O), marine, energy, aviation, political risk, consumer-oriented products and A&H – principally being supplemental accident.
 
The Global Reinsurance segment comprises ACE Tempest Re Bermuda, ACE Tempest Re USA and ACE Tempest Re Europe. These subsidiaries provide property catastrophe, casualty and property reinsurance. Global Reinsurance also includes the operations of ACE Tempest Life Re. The principal business of ACE Tempest Life Re is to provide reinsurance coverage to other life insurance companies.
 
The Financial Services segment includes the financial guaranty business of ACE Guaranty Corp. and ACE Capital Re International and the financial solutions business in the U.S. and Bermuda. The financial guaranty businesses serve the U.S. domestic and international financial guaranty insurance and reinsurance markets. Their principal business is the insurance and reinsurance of investment grade public finance and asset-backed debt issues (insured and ceded by the primary bond insurance companies), and insurance and reinsurance of credit-default swaps. In addition to financial guaranty business, the companies provide trade credit reinsurance and structured solutions to problems of financial and risk management through reinsurance and other forms of credit enhancement products, as well as mortgage guaranty reinsurance and title reinsurance. The financial solutions business includes insurance and reinsurance solutions to complex risks that generally cannot be adequately addressed by the traditional insurance marketplace. It consists of securitization and risk trading, finite and structured risk products, and retroactive contracts in the form of loss portfolio transfers.
 
24

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
a)	The following tables summarize the operations by segment for the three months ended March 31, 2004 and 2003.	
 
b)	For segment reporting purposes, certain items have been presented in a different manner than in the consolidated financial statements.	
 
Statement of Operations by Segment
For the three months ended March 31, 2004
(in thousands of U.S. Dollars)

 	  	Insurance –
North
American
	 	 	Insurance -
Overseas
General
	 	 	Global
Reinsurance
	 	 	Corporate
and
Other (1)
	 	 	Consolidated
Property &
Casualty (2)
	 	 	Financial
Services
	 	 	ACE
Consolidated
	 	
Operations Data	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross premiums written	  	$	1,905,331	 	 	$	1,673,610	 	 	$	576,512	 	 	$	—  	 	 	$	4,155,453	 	 	$	207,566	 	 	$	4,363,019	 	
Net premiums written	  	 	1,211,638	 	 	 	1,198,342	 	 	 	569,335	 	 	 	—  	 	 	 	2,979,315	 	 	 	207,784	 	 	 	3,187,099	 	
Net premiums earned	  	 	1,006,965	 	 	 	1,033,880	 	 	 	329,388	 	 	 	—  	 	 	 	2,370,233	 	 	 	178,913	 	 	 	2,549,146	 	
Losses and loss expenses	  	 	695,958	 	 	 	601,017	 	 	 	159,686	 	 	 	—  	 	 	 	1,456,661	 	 	 	85,936	 	 	 	1,542,597	 	
Policy acquisition costs	  	 	100,463	 	 	 	184,632	 	 	 	63,997	 	 	 	—  	 	 	 	349,092	 	 	 	10,595	 	 	 	359,687	 	
Administrative expenses	  	 	103,276	 	 	 	137,516	 	 	 	18,572	 	 	 	30,014	 	 	 	289,378	 	 	 	24,519	 	 	 	313,897	 	
 	  				 				 				 				 				 				 				
Underwriting income (loss)	  	 	107,268	 	 	 	110,715	 	 	 	87,133	 	 	 	(30,014	)	 	 	275,102	 	 	 	57,863	 	 	 	332,965	 	
 	  				 				 				 				 				 				 				
Life	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross premiums written	  	 	—  	 	 	 	—  	 	 	 	52,456	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	52,456	 	
Net premiums written	  	 	—  	 	 	 	—  	 	 	 	51,067	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	51,067	 	
Net premiums earned	  	 	—  	 	 	 	—  	 	 	 	50,531	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	50,531	 	
Life and annuity benefits	  	 	—  	 	 	 	—  	 	 	 	41,724	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	41,724	 	
Policy acquisition costs	  	 	—  	 	 	 	—  	 	 	 	5,227	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	5,227	 	
Administrative expenses	  	 	—  	 	 	 	—  	 	 	 	1,008	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	1,008	 	
Net investment income	  	 	—  	 	 	 	—  	 	 	 	8,391	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	8,391	 	
 	  				 				 				 				 				 				 				
Underwriting income	  	 	—  	 	 	 	—  	 	 	 	10,963	 	 	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	10,963	 	
 	  				 				 				 				 				 				 				
Net investment income	  	 	104,325	 	 	 	47,434	 	 	 	26,465	 	 	 	(1,700	)	 	 	176,524	 	 	 	53,005	 	 	 	229,529	 	
Other income (expense)	  	 	(3,295	)	 	 	(3,389	)	 	 	588	 	 	 	—  	 	 	 	(6,096	)	 	 	(10,984	)	 	 	(17,080	)	
Interest expense	  	 	5,155	 	 	 	—  	 	 	 	—  	 	 	 	37,666	 	 	 	42,821	 	 	 	1,451	 	 	 	44,272	 	
Income tax expense (benefit)	  	 	54,969	 	 	 	43,549	 	 	 	2,968	 	 	 	(13,432	)	 	 	88,054	 	 	 	13,244	 	 	 	101,298	 	
 	  				 				 				 				 				 				 				
Income (loss) excluding net realized gains (losses)	  	 	148,174	 	 	 	111,211	 	 	 	122,181	 	 	 	(55,948	)	 	 	314,655	 	 	 	85,189	 	 	 	410,807	 	
Net realized gains (losses)	  	 	51,726	 	 	 	24,185	 	 	 	(9,625	)	 	 	(14,021	)	 	 	52,265	 	 	 	4,996	 	 	 	57,261	 	
Tax effect of net realized gains (losses)	  	 	(6,648	)	 	 	(7,406	)	 	 	4	 	 	 	—  	 	 	 	(14,050	)	 	 	(7,193	)	 	 	(21,243	)	
 	  				 				 				 				 				 				 				
Net income (loss)	  	$	193,252	 	 	$	127,990	 	 	$	112,560	 	 	$	(69,969	)	 	$	352,870	 	 	$	82,992	 	 	$	446,825	 	

(1)	Includes ACE Limited, ACE INA Holdings and intercompany eliminations.	
 
(2)	Excludes life reinsurance business.	
 
25

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Statement of Operations by Segment
For the three months ended March 31, 2003
(in thousands of U.S. Dollars)

 	  	Insurance –
North
American
	 	 	Insurance –
Overseas
General
	 	 	Global
Reinsurance
	  	Corporate
and
Other (1)
	 	 	Consolidated
Property &
Casualty (2)
	 	 	Financial
Services
	 	 	ACE
Consolidated
	 	
Operations Data	  	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross premiums written	  	$	1,664,184	 	 	$	1,405,858	 	 	$	461,990	  	$	—  	 	 	$	3,532,032	 	 	$	532,071	 	 	$	4,064,103	 	
Net premiums written	  	 	933,345	 	 	 	980,923	 	 	 	442,744	  	 	—  	 	 	 	2,357,012	 	 	 	525,729	 	 	 	2,882,741	 	
Net premiums earned	  	 	752,981	 	 	 	813,703	 	 	 	248,046	  	 	—  	 	 	 	1,814,730	 	 	 	209,241	 	 	 	2,023,971	 	
Losses and loss expenses	  	 	512,359	 	 	 	493,598	 	 	 	115,790	  	 	—  	 	 	 	1,121,747	 	 	 	161,086	 	 	 	1,282,833	 	
Policy acquisition costs	  	 	83,053	 	 	 	152,226	 	 	 	46,096	  	 	—  	 	 	 	281,375	 	 	 	10,977	 	 	 	292,352	 	
Administrative expenses	  	 	87,363	 	 	 	114,166	 	 	 	14,963	  	 	24,446	 	 	 	240,938	 	 	 	18,017	 	 	 	258,955	 	
 	  				 				 			  				 				 				 				
Underwriting income (loss)	  	 	70,206	 	 	 	53,713	 	 	 	71,197	  	 	(24,446	)	 	 	170,670	 	 	 	19,161	 	 	 	189,831	 	
 	  				 				 			  				 				 				 				
Life	  	 	 	 	 	 	 	 	 	 	 	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Gross premiums written	  	 	—  	 	 	 	—  	 	 	 	48,661	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	48,661	 	
Net premiums written	  	 	—  	 	 	 	—  	 	 	 	47,311	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	47,311	 	
Net premiums earned	  	 	—  	 	 	 	—  	 	 	 	47,561	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	47,561	 	
Life and annuity benefits	  	 	—  	 	 	 	—  	 	 	 	48,499	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	48,499	 	
Policy acquisition costs	  	 	—  	 	 	 	—  	 	 	 	3,542	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	3,542	 	
Administrative expenses	  	 	—  	 	 	 	—  	 	 	 	717	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	717	 	
Net investment income	  	 	—  	 	 	 	—  	 	 	 	7,641	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	7,641	 	
 	  				 				 			  				 				 				 				
Underwriting income	  	 	—  	 	 	 	—  	 	 	 	2,444	  	 	—  	 	 	 	—  	 	 	 	—  	 	 	 	2,444	 	
 	  				 				 			  				 				 				 				
Net investment income	  	 	101,061	 	 	 	35,208	 	 	 	18,680	  	 	(6,903	)	 	 	148,046	 	 	 	50,725	 	 	 	198,771	 	
Other income (expense)	  	 	(6,443	)	 	 	(1,000	)	 	 	1,031	  	 	—  	 	 	 	(6,412	)	 	 	258	 	 	 	(6,154	)	
Interest expense	  	 	5,846	 	 	 	—  	 	 	 	72	  	 	37,552	 	 	 	43,470	 	 	 	1,459	 	 	 	44,929	 	
Income tax expense (benefit)	  	 	38,673	 	 	 	23,382	 	 	 	3,731	  	 	(14,058	)	 	 	51,728	 	 	 	9,075	 	 	 	60,803	 	
 	  				 				 			  				 				 				 				
Income (loss) excluding net realized gains (losses)	  	 	120,305	 	 	 	64,539	 	 	 	89,549	  	 	(54,843	)	 	 	217,106	 	 	 	59,610	 	 	 	279,160	 	
Net realized gains (losses)	  	 	(18,065	)	 	 	(12,512	)	 	 	2,866	  	 	(8,610	)	 	 	(36,321	)	 	 	(3,768	)	 	 	(40,089	)	
Tax effect of net realized gains (losses)	  	 	2,749	 	 	 	5,069	 	 	 	248	  	 	—  	 	 	 	8,066	 	 	 	307	 	 	 	8,373	 	
 	  				 				 			  				 				 				 				
Net income (loss)	  	$	104,989	 	 	$	57,096	 	 	$	92,663	  	$	(63,453	)	 	$	188,851	 	 	$	56,149	 	 	$	247,444	 	

(1)	Includes ACE Limited, ACE INA Holdings and intercompany eliminations.	
 
(2)	Excludes life reinsurance business.	
 
Underwriting assets for property and casualty and financial services are reviewed in total by management for purposes of decision-making. We do not allocate assets to our segments. Assets are specifically identified for our life reinsurance operations and corporate holding companies, including ACE Limited and ACE INA Holdings.
 
The following table summarizes the identifiable assets at March 31, 2004 and December 31, 2003.

 	  	March 31
2004
	  	December 31
2003
	
 	  	(in millions of
U.S. dollars)	
Life reinsurance	  	$	667	  	$	698	
Corporate	  	 	2,407	  	 	2,483	
All other	  	 	49,405	  	 	46,372	
 	  			  			
Total assets	  	$	52,479	  	$	49,553	

26

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following tables summarize the revenues of each segment by product offering for the three months ended March 31, 2004 and 2003.
 
Net premiums earned by type of premium
 
Three Months Ended March 31, 2004

 	  	Property &
Casualty
	  	Life, Accident
& Health
	  	Financial
Guaranty
	  	Financial
Solutions
	  	ACE
Consolidated
	
 	  	(in millions of U.S. dollars)	
Insurance – North American	  	$	965	  	$	42	  	$	—  	  	$	—  	  	$	1,007	
Insurance – Overseas General	  	 	821	  	 	213	  	 	—  	  	 	—  	  	 	1,034	
Global Reinsurance	  	 	329	  	 	51	  	 	—  	  	 	—  	  	 	380	
Financial Services	  	 	—  	  	 	—  	  	 	87	  	 	92	  	 	179	
 	  			  			  			  			  			
 	  	$	2,115	  	$	306	  	$	87	  	$	92	  	$	2,600	

Three Months Ended March 31, 2003	  	 	 	  	 	 	  	 	 	  	 	 	  	 	 	
						
 	  	Property &
Casualty
	  	Life, Accident
& Health
	  	Financial
Guaranty
	  	Financial
Solutions
	  	ACE
Consolidated
	
 	  	(in millions of U.S. dollars)	
Insurance – North American	  	$	716	  	$	37	  	$	—  	  	$	—	  	$	753	
Insurance – Overseas General	  	 	634	  	 	180	  	 	—  	  	 	—  	  	 	814	
Global Reinsurance	  	 	248	  	 	48	  	 	—  	  	 	—  	  	 	296	
Financial Services	  	 	—  	  	 	—  	  	 	78	  	 	131	  	 	209	
 	  			  			  			  			  			
 	  	$	1,598	  	$	265	  	$	78	  	$	131	  	$	2,072	

16.	Subsequent event – sale of financial and mortgage guaranty business through Assured Guaranty Ltd.	
 
On April 28, 2004, the Company completed the sale of approximately 65 percent of its financial and mortgage guaranty reinsurance and insurance businesses (transferred business) through the initial public offering (IPO) of 49 million common shares of Assured Guaranty Ltd. (Assured Guaranty) at $18.00 per share. Assured Guaranty was incorporated in Bermuda in August 2003 for the sole purpose of becoming a holding company for the transferred business. Subsequent to the IPO, the Company beneficially owns 26 million common shares, or approximately 35 percent of Assured Guaranty’s outstanding common shares. If the underwriters of the IPO fully exercise an option to purchase an additional 7.35 million common shares at the initial public offering price of $18.00 per share, we will ultimately retain 18.65 million common shares, or approximately 25 percent of Assured Guaranty. Such option is exercisable through May 22, 2004.
 
As part of the overall plan for the sale, the following formation transactions occurred:
 
•	On February 20, 2004, through ACE Financial Services Inc., the Company formed Assured Guaranty US Holdings, a Delaware holding company to hold the shares of Assured Guaranty Corp. and Assured Guaranty Financial Products.	
 
•	On April 15, 2004, ACE Capital Re Overseas Ltd. (Bermuda) transferred 100 percent of the stock ownership in ACE Capital Title to ACE Bermuda in exchange for a $39.3 million promissory note, which was repaid upon completion of the offering.	
 
•	On April 22, 2004, ACE Financial Services Inc. transferred the shares of Assured Guaranty Corp. and Assured Guaranty Financial Products to Assured Guaranty US Holdings in exchange for stock of Assured Guaranty US Holdings and a $200 million promissory note.	
 
On April 27, 2004, the following transactions occurred:
 
•	ACE Financial Services Inc. transferred 100 percent of the stock ownership in Assured Guaranty US Holdings and Assured Guaranty Finance Overseas to Assured Guaranty in exchange for 35,171,000 common shares of Assured Guaranty and promissory notes of Assured Guaranty in an aggregate amount of $1 million; and	
 
•	ACE Bermuda transferred 100 percent of the stock of ACE Capital Re International Ltd. (Bermuda) to Assured Guaranty in exchange for 39,829,000 common shares of Assured Guaranty and a $1 million promissory note of Assured Guaranty.	
 
27

Table of Contents
ACE LIMITED AND SUBSIDIARIES
NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
In connection with the IPO, the Company has entered into reinsurance agreements with Assured Guaranty in order to retain the insurance liabilities of certain run-off businesses, including trade credit and residual value insurance. Additionally, the Company has entered into a number of agreements with Assured Guaranty that will govern certain aspects of the relationship after this offering, including service agreements under which the Company will provide certain services to Assured Guaranty for a period of time.
 
Pursuant to the completion of the IPO on April 28, 2004, the Company received net proceeds of approximately $840 million. The Company expects the transaction to result in an estimated pretax loss of $40 million to $60 million and an estimated after tax loss of $50 million to $70 million. The ultimate loss is dependent on the equity of Assured Guaranty as of the date of sale and will be reflected in operating results in the second quarter of 2004. Subsequent to the completion of the offering, the Company will no longer consolidate its interest in the Assured Guaranty companies. Instead, the retained interest will be accounted for under the equity method of accounting with the Company’s carrying value of its investment and proportionate share of earnings reflected in one line of the balance sheet and income statement, respectively. Financial results related to the transferred business is included in the Financial Services segment.
 
28

Table of Contents

Item 2.	 	Management’s Discussion and Analysis of Financial Condition and Results of Operations	
 
The following is a discussion of our results of operations, financial condition, and liquidity and capital resources as of and for the three months ended March 31, 2004. Our results of operations and cash flows for any interim period are not necessarily indicative of our results for the full year. This discussion should be read in conjunction with our Consolidated Financial Statements and related notes and our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2003.
 
Cautionary Statement Regarding Forward-Looking Information
 
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Any written or oral statements made by us or on our behalf may include forward-looking statements that reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain uncertainties and other factors that could cause actual results to differ materially from such statements. These uncertainties and other factors (which are described in more detail elsewhere herein and in other documents we file with the Securities and Exchange Commission (SEC)) include but are not limited to:
 
•	global political conditions, the occurrence of any terrorist attacks, including any nuclear, biological or chemical events, or the outbreak and effects of war, and possible business disruption or economic contraction that may result from such events;	
 
•	the ability to collect reinsurance recoverable, credit developments of reinsurers, and any delays with respect thereto;	
 
•	the occurrence of catastrophic events or other insured or reinsured events with a frequency or severity exceeding our estimates;	
 
•	actual loss experience from insured or reinsured events;	
 
•	the uncertainties of the loss-reserving and claims-settlement processes, including the difficulties associated with assessing environmental damage and asbestos-related latent injuries, the impact of aggregate-policy-coverage limits, and the impact of bankruptcy protection sought by various asbestos producers and other related businesses;	
 
•	judicial decisions and rulings, new theories of liability, and legal tactics;	
 
•	the effects of public company bankruptcies and/or accounting restatements, as well as disclosures by and investigations of public companies relating to possible accounting irregularities, and other corporate governance issues, including the effects of such events on:	
 
 	•	the capital markets;	
 
 	•	the markets for directors and officers and errors and omissions insurance; and	
 
 	•	claims and litigation arising out of such disclosures or practices by other companies;	
 
•	the impact of the September 11 tragedy and its aftermath on our insureds, reinsureds, and on the insurance and reinsurance industry;	
 
•	uncertainties relating to governmental, legislative and regulatory policies, developments and treaties, which, among other things, could subject us to insurance regulation or taxation in additional jurisdictions or affect our current operations;	
 
•	the actual amount of new and renewal business, market acceptance of our products, and risks associated with the introduction of new products and services and entering new markets, including regulatory constraints on exit strategies;	
 
•	the competitive environment in which we operate, including trends in pricing or in policy terms and conditions, which may differ from our projections;	
 
•	actions that rating agencies may take from time to time, such as changes in our claims-paying, financial strength or credit ratings;	
 
•	developments in global financial markets, including changes in interest rates, stock markets and other financial markets, and foreign currency exchange rate fluctuations, which could affect our investment portfolio and financing plans;	
 
•	changing rates of inflation and other economic conditions;	
 
•	the amount of dividends received from subsidiaries;	
 
•	loss of the services of any of our executive officers without suitable replacements being recruited in a reasonable time frame;	
 
•	the ability of technology to perform as anticipated; and	
 
•	management’s response to these factors.	
 
29

Table of Contents
The words “believe”, “anticipate”, “estimate”, “project”, “should”, “plan”, “expect”, “intend”, “hope”, “will likely result” or “will continue”, and variations thereof and similar expressions, identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future events or otherwise. 
 
Overview
 
ACE Limited (ACE) is the Bermuda-based holding company of the ACE Group of Companies incorporated with limited liability under the Cayman Islands Companies Law. We created our business office in Bermuda in 1985 when we initially incorporated the Company and we continue to maintain our business office in Bermuda. Through our various operating subsidiaries, we provide a broad range of insurance and reinsurance products to insureds worldwide through operations in the U.S. and almost 50 other countries. Our long-term business strategy focuses on achieving underwriting income and providing value to our clients and shareholders through the utilization of our substantial capital base in the insurance and reinsurance markets.
 
As an insurance and reinsurance company, we generate gross revenues from two principal sources, premiums which are usually paid in advance of loss payments, and dividends and interest income earned on invested assets. Cash flow is generated from premiums collected and investment income received less paid losses and loss expenses. Generally when an insurance company writing long-tail business grows, as ACE has over the last several years, its cash flows tend to be positive. ACE generated approximately $1.2 billion in positive operating cash flow for the quarter ended March 31, 2004, while cash and invested assets over this period increased $2.2 billion.
 
Invested assets are generally held in liquid, investment grade fixed income securities of relatively short duration. We also invest a small portion of our assets in less liquid or higher risk assets in an attempt to achieve higher returns. Claims payments in any short-term period are highly unpredictable due to the random nature of loss events and the timing of claims awards or settlements. The value of investments held to pay future claims is subject to market forces such as the level of interest rates, stock market volatility and credit events such as corporate defaults. The actual cost of claims is also volatile based on loss trends, inflation rates, court awards and catastrophic events. We believe that our cash balances, our highly liquid investments, credit facilities and reinsurance protection provide sufficient liquidity to meet any unforeseen claim demands that might occur in the year ahead.
 
The insurance industry is highly competitive with many companies offering similar coverage. Following two years of sharply rising prices, property insurance rates have leveled off or have declined slightly. The global property catastrophe reinsurance market has also softened with adequate capacity available for good risks. In other lines with rising loss costs, such as casualty and liability lines, or directors and officers liability insurance, rate increases are beginning to decelerate while terms and conditions remain favorable. Overall, we believe that current rate levels are adequate for most of the risks seeking coverage and that favorable industry conditions should persist through the balance of 2004.
 
Sale of Financial and Mortgage Guaranty Business through Assured Guaranty Ltd.
 
On April 28, 2004, we completed the sale of approximately 65 percent of our financial and mortgage guaranty reinsurance and insurance businesses (transferred business) through the initial public offering (IPO) of 49 million common shares of Assured Guaranty Ltd. (Assured Guaranty) at $18.00 per share. Assured Guaranty was incorporated in Bermuda in August 2003 for the sole purpose of becoming a holding company for our transferred business. Subsequent to the offering, we beneficially own 26 million common shares, or approximately 35 percent of Assured Guaranty’s outstanding common shares. If the underwriters of the IPO fully exercise
 
30

Table of Contents
an option to purchase an additional 7.35 million common shares at the initial public offering price of $18.00 per share, we will ultimately retain 18.65 million common shares, or approximately 25 percent of Assured Guaranty. Such option is exercisable through May 22, 2004.
 
In connection with the IPO, we have entered into reinsurance agreements with Assured Guaranty in order to retain the insurance liabilities of certain run-off businesses, primarily including trade credit and residual value insurance. Additionally, we have entered into a number of agreements with Assured Guaranty that will govern certain aspects of our relationship after this offering, including service agreements under which we will provide certain services to Assured Guaranty for a period of time. For more information on these agreements, refer to the section entitled “Relationships with ACE” within Assured Guaranty’s amended Form S-1, filed April 22, 2004.
 
The completion of the IPO generated net proceeds to us of approximately $840 million and we plan to use these proceeds to support our P&C business and strengthen our balance sheet capital position. We expect the transaction to result in an estimated pretax loss of $40 million to $60 million and an estimated after tax loss of $50 million to $70 million. The ultimate loss is dependent on the equity of Assured Guaranty as of the date of sale and will be reflected in our operating results in the second quarter of 2004.
 
Critical Accounting Estimates
 
Our Consolidated Financial Statements include amounts that, either by their nature or due to requirements of accounting principles generally accepted in the U.S. (GAAP), are determined using best estimates and assumptions. While we believe that the amounts included in our Consolidated Financial Statements reflect our best judgment, actual amounts could ultimately materially differ from those currently presented in our Consolidated Financial Statements. We believe the items that require the most subjective and complex estimates are:
 
•	unpaid losses and loss expense reserves, including asbestos reserves;	
 
•	reinsurance recoverable, including our bad debt provision;	
 
•	impairments to the carrying value of our investment portfolio;	
 
•	the valuation of our deferred tax assets;	
 
•	the fair value of certain derivatives; and	
 
•	the valuation of goodwill.	
 
We believe our accounting policies for these items are of critical importance to our Consolidated Financial Statements. More information regarding the estimates and assumptions required to arrive at these amounts is included in the section entitled “Critical Accounting Estimates” in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2003.
 
Results of Operations – Three Months Ended March 31, 2004 and 2003
 
The discussions that follow include tables, which show both our consolidated and segment operating results for the three months ended March 31, 2004 and 2003. In presenting our operating results, we have discussed our performance with reference to underwriting results and with reference to income excluding net realized gains (losses) and the related income tax, which are both non-GAAP measures. Our consolidated and segment operating results below provide a reconciliation of underwriting results and income excluding net realized gains (losses) to net income, which we consider to be the most directly comparable GAAP financial measure. We consider these measures, which may be defined differently by other companies, to be important to an understanding of our overall results of operations. Underwriting results are calculated by subtracting losses and loss expenses, life and annuity benefits, policy acquisition costs and administrative expenses from net premiums earned. We use underwriting results and operating ratios to monitor the results of our operations without the impact of certain factors, including investment income, other income and expenses, interest and income tax expense and net realized gains (losses). We exclude net realized gains (losses), including the tax effect, when analyzing our operations because the amount of these gains (losses) is heavily influenced by, and fluctuates in part according to, the availability of market opportunities, and are generally driven by economic factors that are not necessarily consistent with key drivers of underwriting performance. We believe the use of these measures enhances the understanding of our results of operations by highlighting the underlying profitability of our insurance business. Underwriting results and income excluding net realized gains (losses) should not be viewed as a substitute for measures determined in accordance with GAAP.
 
31

Table of Contents
Consolidated Operating Results

 	  	Three Months Ended
March 31
	 	
 	  	2004
	 	 	2003
	 	
 	  	(in millions of U.S. dollars)	 	
Net premiums written	  	$	3,238	 	 	$	2,930	 	
Net premiums earned	  	 	2,600	 	 	 	2,072	 	
Losses and loss expenses	  	 	1,542	 	 	 	1,283	 	
Life and annuity benefits	  	 	42	 	 	 	48	 	
Policy acquisition costs	  	 	365	 	 	 	296	 	
Administrative expenses	  	 	315	 	 	 	260	 	
 	  				 				
Underwriting income	  	 	336	 	 	 	185	 	
 	  				 				
Net investment income	  	 	238	 	 	 	206	 	
Net realized gains (losses)	  	 	57	 	 	 	(40	)	
Other expense	  	 	17	 	 	 	6	 	
Interest expense	  	 	44	 	 	 	45	 	
Income tax expense	  	 	123	 	 	 	53	 	
 	  				 				
Net income	  	$	447	 	 	$	247	 	
 	  				 				
Loss and loss expense ratio	  	 	60.5	%	 	 	63.4	%	
Policy acquisition cost ratio	  	 	14.1	%	 	 	14.4	%	
Administrative expense ratio	  	 	12.3	%	 	 	12.8	%	
Combined ratio	  	 	86.9	%	 	 	90.6	%	
 
Net premiums written, which reflect the premiums we retain after purchasing reinsurance protection, increased 11 percent in the quarter ended March 31, 2004, compared with the same quarter of 2003. Adjusting for the appreciation of foreign currencies relative to the U.S. dollar, net premiums written increased seven percent in the current quarter. Net premiums written increased 26 percent (21 percent adjusting for foreign exchange), in our P&C businesses and decreased 60 percent in our Financial Services business. The increase in our P&C business is primarily a result of a robust market for casualty business. The decline in the Financial Services business was primarily due to the termination of equity CDOs as well as the non-renewal of several large accounts. In addition, our retention ratio (the ratio of net premiums written to gross premiums written) increased to 73 percent in the quarter ended March 31, 2004, compared with 71 percent in the same quarter of 2003. This reflects a conscious decision on our part to retain more of the business we write, in order to take advantage of the favorable market conditions.
 
32

Table of Contents
The following table provides a consolidated breakdown of net premiums earned by line of business for the three months ended March 31, 2004 and 2003.

 	  	Three Months Ended
March 31
	
 	  	2004
	  	2003
	
 	  	(in millions of U.S. dollars)	
Property and all other	  	$	752	  	$	728	
Casualty	  	 	1,363	  	 	870	
Personal accident	  	 	255	  	 	217	
 	  			  			
Total P&C	  	 	2,370	  	 	1,815	
Global Re – life	  	 	51	  	 	48	
Financial guaranty	  	 	87	  	 	78	
Financial solutions	  	 	92	  	 	131	
 	  			  			
Net premiums earned	  	$	2,600	  	$	2,072	

Net premiums earned, which reflect the portion of net premiums written that were recorded as revenues for the period, increased 31 percent in our P&C businesses (25 percent adjusting for foreign exchange), and decreased 14 percent in our Financial Services business. The change in net premiums earned for both the P&C and Financial Services businesses is consistent with the trend in net premiums written.
 
Underwriting results for our P&C and Financial Services business are discussed by reference to the combined ratio, the loss and loss expense ratio, the policy acquisition cost ratio and the administrative expense ratio. We calculate these ratios by dividing the respective expense amounts of our P&C and Financial Services business by net premiums earned from our P&C and Financial Services business. We do not calculate these ratios for the life reinsurance business, because they are not appropriate measures of the underwriting results for that business. The combined ratio is determined by adding the loss and loss expense ratio, the policy acquisition cost ratio and the administrative expense ratio. A combined ratio under 100 percent indicates underwriting income, and a combined ratio exceeding 100 percent indicates underwriting losses.
 
The loss and loss expense ratio decreased in the quarter ended March 31, 2004, compared with the same quarter of 2003. We have continued to take advantage of increasing rates and improved market conditions for casualty business, which is typically written at higher loss ratios than property business. In some cases, the losses for casualty business can emerge long after the coverage period has expired, and claim settlement can be more complex than for property claims, which tends to lengthen the settlement period. However, because of the longer claim pay-out duration, we benefit from investing the premiums for a longer period of time, therefore potentially increasing our net investment income. The effect on the loss and loss expense ratio of shifting towards casualty business in the quarter ended March 31, 2004, has been partially offset by rate increases on casualty lines of business. Also impacting our loss and loss expense ratio is prior period development. We incurred $8 million of favorable prior period development in the quarter ended March 31, 2004, compared with $34 million of adverse development in the same quarter of 2003. Our segment discussions below contain more information about prior period development.
 
Our policy acquisition costs include commissions, premium taxes, underwriting and other costs that vary with, and are primarily related to, the production of premium. The policy acquisition cost ratio decreased in the quarter ended March 31, 2004, due to changes in business mix. Administrative expenses include all other operating costs. Administrative expenses increased in the quarter ended March 31, 2004, to support the growth in our business and partially due to the depreciation of the U.S. dollar, which had the effect of increasing administrative expenses by $13 million. The administrative expense ratio improved due to the increase in net premiums earned.
 
Net investment income increased 16 percent to $238 million in the quarter ended March 31, 2004, compared with $206 million for the same quarter of 2003. This increase is due to higher average invested assets , partially offset by a decline in the investment portfolio’s yield due to the impact of lower interest rates. See the section entitled “Net Investment Income” for more information.
 
Underwriting income increased 82 percent in the quarter ended March 31, 2004, compared with the same quarter of 2003, primarily due to the increase in net premiums earned. Our net income increased 81 percent due to higher underwriting income and the impact of net realized gains of $57 million in the quarter ended March 31, 2004, compared with net realized losses of $40 million in same quarter of 2003. The appreciation of foreign currencies relative to the U.S. dollar added $12 million to our current quarter’s net income.
 
33

Table of Contents
Segment Operating Results – Three Months Ended March 31, 2004 and 2003
 
Insurance - North American
 
The Insurance – North American segment comprises our P&C insurance operations in the U.S., Bermuda and Canada. This segment writes a variety of insurance products including property, liability (general liability and workers’ compensation), professional lines (directors and officers (D&O) and errors and omissions coverages (E&O)), marine, program business, accident and health (A&H) - principally being personal accident, aerospace, consumer-oriented products and other specialty lines.

 	  	Three Months Ended
March 31
	 	
 	  	2004
	 	 	2003
	 	
 	  	(in millions of U.S. dollars)	 	
Net premiums written	  	$	1,212	 	 	$933	 	
Net premiums earned	  	 	1,007	 	 	753	 	
Losses and loss expenses	  	 	696	 	 	512	 	
Policy acquisition costs	  	 	101	 	 	83	 	
Administrative expenses	  	 	103	 	 	88	 	
 	  				 			
Underwriting income	  	 	107	 	 	70	 	
 	  				 			
Net investment income	  	 	104	 	 	101	 	
Other expense	  	 	3	 	 	6	 	
Interest expense	  	 	5	 	 	6	 	
Income tax expense	  	 	55	 	 	39	 	
 	  				 			
Income excluding net realized gains (losses)	  	 	148	 	 	120	 	
Net realized gains (losses)	  	 	52	 	 	(18	)	
Tax effect of net realized gains (losses)	  	 	(7	)	 	3	 	
 	  				 			
Net income	  	$	193	 	 	$105	 	
 	  				 			
Loss and loss expense ratio	  	 	69.1	%	 	68.0	%	
Policy acquisition cost ratio	  	 	10.0	%	 	11.0	%	
Administrative expense ratio	  	 	10.3	%	 	11.6	%	
Combined ratio	  	 	89.4	%	 	90.6	%	
 
Insurance – North American increased its net premiums written 30 percent in the quarter ended March 31, 2004, compared with the same quarter of 2003. Insurance – North American has been growing its proportion of casualty lines of business as rates, terms and conditions have been more favorable than property business. Property rates have stabilized, with some downward pressure experienced in the U.S. over the last year. Additionally, Insurance – North American’s retention ratio increased to 64 percent for the quarter ended March 31, 2004, compared with 56 percent for the same quarter of 2003. Insurance – North American increased its retention in order to take advantage of improved market conditions for rates and terms and to reduce reliance on reinsurance.
 
34

Table of Contents
The following table provides an entity/divisional breakdown of Insurance – North American’s net premiums earned for the three months ended March 31, 2004 and 2003.

 	  	Three Months
Ended
March 31
	
 	  	2004
	  	2003
	
 	  	(in millions of
U.S. dollars)	
ACE USA	  	$	650	  	$	466	
ACE Westchester Specialty	  	 	254	  	 	194	
ACE Bermuda	  	 	103	  	 	93	
 	  			  			
Net premiums earned	  	$	1,007	  	$	753	

ACE USA, which includes ACE operations in Canada, provides a broad array of products and services to corporate and consumer clients throughout the U.S. through licensed insurance companies. Distribution channels include retail brokers, agents, managing general agents, and managing general underwriters. ACE USA’s net premiums earned increased 39 percent in the quarter ended March 31, 2004, compared with the same quarter of 2003. ACE USA’s growth in the current quarter was driven by casualty business, particularly professional lines, which have been experiencing a favorable rate environment and more restrictive policy terms and conditions. ACE USA also experienced growth in excess workers’ compensation (primarily high deductible policies in national accounts business) due to new business and rate increases. Additionally, net premiums earned benefited from increased retention – ACE USA’s retention ratio increased to 66 percent in the quarter ended March 31, 2004, compared with 55 percent in the same quarter of 2003.
 
ACE Westchester Specialty specializes in the wholesale distribution of excess and surplus lines property, inland marine and
casualty coverages and products. ACE Westchester Specialty also provides coverage for agriculture business and specialty programs
through its Program division. ACE Westchester Specialty’s net premiums earned for the quarter ended March 31, 2004, increased 31
percent compared with the same quarter of 2003. This increase primarily reflects growth in agriculture business over the last year and
higher casualty writings due to the robust casualty market.
 
ACE Bermuda, which specializes in providing professional lines and excess liability coverage, reported an increase in net premiums earned of 11 percent in the quarter ended March 31, 2004, compared with the same quarter of 2003. ACE Bermuda reported growth in excess liability and professional lines business on the strength of increased rates and new business.
 
The loss and loss expense ratio increased in the quarter ended March 31, 2004, compared with the same quarter of 2003. Insurance – North American has been increasing its casualty business, which has a longer claim pay-out duration and typically produces higher loss and loss expense ratios than property business. The effect on the loss and loss expense ratio of shifting towards casualty business in the quarter ended March 31, 2004, has been partially offset by rate increases on casualty lines of business. Insurance – North American incurred adverse prior period development of $15 million in the quarter ended March 31, 2004, compared with adverse development of $25 million for the same quarter of 2003. The adverse development in the current quarter relates primarily to excess liability, aviation and auto residual value business, partially offset by favorable development on property, satellite and political risk business. 
 
The policy acquisition cost ratio decreased for the quarter ended March 31, 2004, compared with the same quarter of 2003. This decrease is primarily due to a reduction in premium taxes and commission expenses, relative to the growth in net premiums earned, particularly on professional lines. Administrative expenses increased primarily due to the increased costs associated with servicing the growth in Insurance – North American’s product lines. The administrative expense ratio declined due to an increase in net premiums earned that outpaced the growth in expenses.
 
35

Table of Contents
Income excluding net realized gains (losses) increased 23 percent in the quarter ended March 31, 2004, compared with the same quarter of 2003. This increase is primarily due to higher underwriting income.
 
Insurance - Overseas General
 
The Insurance – Overseas General segment comprises ACE International, our network of indigenous insurance operations, and the insurance operations of ACE Global Markets. The Insurance – Overseas General segment writes a variety of insurance products including property, casualty, professional lines (D&O and E&O), marine, energy, aviation, political risk, consumer-oriented products and A&H – principally being supplemental accident.

 	  	Three Months Ended
March 31
	 	
 	  	2004
	 	 	2003
	 	
 	  	(in millions of U.S. dollars)	 	
Net premiums written	  	$	1,198	 	 	$	981	 	
Net premiums earned	  	 	1,034	 	 	 	814	 	
Losses and loss expenses	  	 	601	 	 	 	494	 	
Policy acquisition costs	  	 	184	 	 	 	152	 	
Administrative expenses	  	 	138	 	 	 	114	 	
 	  				 				
Underwriting income	  	 	111	 	 	 	54	 	
 	  				 				
Net investment income	  	 	48	 	 	 	35	 	
Other income (expense)	  	 	(3	)	 	 	(1	)	
Interest expense	  	 	—  	 	 	 	—  	 	
Income tax expense	  	 	44	 	 	 	23	 	
 	  				 				
Income excluding net realized gains (losses)	  	 	112	 	 	 	65	 	
Net realized gains (losses)	  	 	24	 	 	 	(13	)	
Tax effect of net realized gains (losses)	  	 	(7	)	 	 	5	 	
 	  				 				
Net income	  	$	129	 	 	$	57	 	
 	  				 				
Loss and loss expense ratio	  	 	58.1	%	 	 	60.7	%	
Policy acquisition cost ratio	  	 	17.9	%	 	 	18.7	%	
Administrative expense ratio	  	 	13.3	%	 	 	14.0	%	
Combined ratio	  	 	89.3	%	 	 	93.4	%	
 
Net premiums written increased 22 percent (10 percent adjusting for foreign exchange) in the quarter ended March 31, 2004, compared with the same quarter of 2003. The retention ratio for Insurance—Overseas General increased to 72 percent in the quarter ended March 31, 2004, compared with 70 percent in the same quarter of 2003. The increase in retention is primarily due to the increased retention ratio at ACE International as a result of the non-renewal of certain highly reinsured business at ACE Europe and ACE Latin America
 
ACE International’s P&C operations are organized geographically along product lines. Property insurance products include traditional commercial fire coverage as well as energy industry-related coverages. Principal casualty products are commercial general liability and liability coverage for multinational organizations. Through our professional lines, we provide D&O and professional indemnity coverages for medium to large clients. The A&H insurance operations provide principally accident coverage to individuals and groups outside of U.S. insurance markets. ACE International’s net premiums written increased 28 percent (11 percent adjusting for foreign exchange) to $926 million for the quarter ended March 31, 2004, compared with $725 million for the same quarter of 2003. This increase is primarily due to the weakening of the U.S. dollar and also due to higher rates and higher production at ACE Europe and ACE Asia Pacific. ACE Europe, which accounted for approximately two-thirds of ACE International’s net premiums written for the quarter ended March 31, 2004, reported higher P&C production due to rising rates and new business, partially offset by a decline in A&H business due to non-renewal of a significant account. Asia Pacific reported strong growth in its A&H lines due to new business and rates holding firm. ACE Asia Pacific’s P&C lines also increased due to rate increases and higher production on casualty lines, partially offset by property rate reductions.
 
36

Table of Contents
ACE Global Markets primarily underwrites P&C insurance through Lloyd’s Syndicate 2488 and ACE INA UK Limited. The main lines of business include aviation, property, energy, professional lines, marine, political risk and A&H. ACE Global Markets’ net premiums written increased 6 percent (2 percent adjusting for foreign exchange) to $272 million in the quarter ended March 31, 2004, compared with $256 million in the same quarter of 2003. Rates for certain lines of business have stabilized however, there are a number of business classes, most notably professional lines and to a lesser extent marine and A&H, where rates continue to rise.
 
The table below shows net premiums earned by each of the Insurance – Overseas General segment’s key components for the three months ended March 31, 2004, and 2003.

 	  	Three Months Ended
March 31
	
 	  	2004
	  	2003
	
 	  	(in millions of U.S. dollars)	
ACE Europe	  	$	463	  	$	324	
ACE Asia Pacific	  	 	115	  	 	84	
ACE Far East	  	 	96	  	 	91	
ACE Latin America	  	 	80	  	 	67	
 	  			  			
ACE International	  	 	754	  	 	566	
ACE Global Markets	  	 	280	  	 	248	
 	  			  			
Net premiums earned	  	$	1,034	  	$	814	

ACE International’s increase in net premiums earned for the quarter ended March 31, 2004, is attributed to P&C and A&H lines across all geographical regions, with the exception of ACE Far East, where growth in net premiums written has been minimal. The increase in net premiums earned is principally driven by growth in net premiums written in these lines over the last two years and the appreciation of foreign currencies against the U.S. dollar over the last several quarters. ACE Global Markets’ increase in net premiums earned in the quarter ended March 31, 2004, is primarily a result of higher net premiums written over the last two years across most of its product lines. The devaluation of the U.S. dollar accounted for eight percent of Insurance – Overseas General’s net premiums earned in the quarter ended March 31, 2004.
 
The loss and loss expense ratio for Insurance – Overseas General declined in the quarter ended March 31, 2004, compared with the same quarter of 2003. Insurance – Overseas General reported favorable net prior period development of $8 million for the quarter ended March 31, 2004, compared with favorable net development of $1 million for the same quarter of 2003. ACE International had significant adverse prior period development from U.S. International casualty business and to a lesser extent in other casualty lines in the U.K. and Europe as well as marine and aviation. This was offset by significant favorable prior period development on property catastrophe and casualty lines and to a lesser extent on financial lines and fire, technical and energy lines. Additionally, the increase in net premiums earned resulted in an improvement in the loss and loss expense ratio.
 
The policy acquisition cost ratio for Insurance – Overseas General improved for the quarter ended March 31, 2004, compared with the same quarter of 2003. This decrease reflects underwriters’ continued focus on reducing commission charges, with improvements seen particularly within ACE Global Market’s financial lines and A&H divisions, together with changes in business mix. Insurance – Overseas General’s administrative expenses increased 21 percent in the quarter ended March 31, 2004, compared with the same quarter of 2003, primarily due to the depreciation of the U.S. dollar and increased staffing at ACE Europe. The administrative expense ratio for Insurance – Overseas General improved due to the increase in net premiums earned coupled with a reduction in Lloyd’s charges within ACE Global Markets.
 
Underwriting income increased in the quarter ended March 31, 2004, compared with the same quarter of 2003 primarily due to the increase in net premiums earned. Income excluding net realized gains (losses) increased due to the increase in underwriting income and higher net investment income, partially offset by higher income tax expense driven by increased profitability in taxable jurisdictions. The impact of the appreciation of foreign currencies against the U.S. dollar added $12 million to Insurance – Overseas General’s net income in the current quarter.
 
Global Reinsurance
 
The Global Reinsurance segment comprises ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re Europe, and ACE Tempest Life Re (ACE Life Re). ACE Life Re is our Bermuda-based life reinsurance operation and is addressed separately.
 
37

Table of Contents
Property and Casualty Reinsurance

 	  	Three Months
Ended March 31
	 	
 	  	2004
	 	 	2003
	 	
 	  	(in millions of
U.S. dollars)	 	
Net premiums written	  	$	569	 	 	$	443	 	
Net premiums earned	  	 	329	 	 	 	248	 	
Losses and loss expenses	  	 	159	 	 	 	116	 	
Policy acquisition costs	  	 	64	 	 	 	46	 	
Administrative expenses	  	 	19	 	 	 	15	 	
 	  				 				
Underwriting income	  	 	87	 	 	 	71	 	
 	  				 				
Net investment income	  	 	27	 	 	 	19	 	
Other income (expense)	  	 	—  	 	 	 	1	 	
Income tax expense	  	 	3	 	 	 	4	 	
 	  				 				
Income excluding net realized gains	  	 	111	 	 	 	87	 	
Net realized gains	  	 	15	 	 	 	4	 	
 	  				 				
Net income	  	$	126	 	 	$	91	 	
 	  				 				
Loss and loss expense ratio	  	 	48.5	%	 	 	46.7	%	
Policy acquisition cost ratio	  	 	19.4	%	 	 	18.6	%	
Administrative expense ratio	  	 	5.6	%	 	 	6.0	%	
Combined ratio	  	 	73.5	%	 	 	71.3	%	
 
Global Reinsurance’s net premiums written increased 28 percent in the quarter ended March 31, 2004, compared with the same quarter of 2003. Over the past two years, significant production gains have been recorded at ACE Tempest Re USA and ACE Tempest Re Europe as these units have benefited from higher rates and increased volume for P&C lines. The increase in Global Reinsurance’s retention ratio also contributed to the increase in net premiums written during the current quarter. Global Reinsurance’s retention ratio increased to 99 percent for the quarter ended March 31, 2004, compared with 96 percent for the same quarter of 2003.
 
The table below shows net premiums earned by each of the Global Reinsurance segment’s key components for the three months ended March 31, 2004 and 2003.

 	  	Three Months
Ended March 31
	
 	  	2004
	  	2003
	
 	  	(in millions of
U.S. dollars)	
ACE Tempest Re Europe	  	$	75	  	$	69	
ACE Tempest Re USA	  	 	169	  	 	86	
ACE Tempest Re Bermuda	  	 	85	  	 	93	
 	  			  			
Net premiums earned	  	$	329	  	$	248	

Net premiums earned increased 33 percent in the quarter ended March 31, 2004, compared with the same quarter of 2003. This increase is driven by growth in non-catastrophe P&C business which comprised approximately 75 percent of the current quarter’s net premiums earned. ACE Tempest Re USA, which focuses on writing property per risk and casualty reinsurance, reported a 97 percent increase in net premiums earned primarily due to increased casualty business written and higher rates. ACE Tempest Re Europe, which writes all lines of traditional and non-traditional P&C lines with an orientation towards specialty and short-tail products reported a nine percent increase in net premiums earned. This increase is primarily due to significantly higher casualty writings. ACE Tempest Re Bermuda, which principally provides property catastrophe reinsurance globally to insurers of commercial and personal property, reported an eight percent decrease in net premiums earned. ACE Tempest Re Bermuda has been experiencing downward pressure on premium production for several quarters due to the decline in rates on property catastrophe business.
 
The loss and loss expense ratio increased in the quarter ended March 31, 2004, compared with the same quarter of 2003. This increase is due to the shift in mix of business that has resulted from growth in non-catastrophe P&C business at ACE Tempest Re USA and ACE Tempest Re Europe, partially offset by favorable prior period development. Non-catastrophe P&C business typically has higher loss ratios than property catastrophe business (except in periods with high catastrophe losses). Property catastrophe business is mainly
 
38

Table of Contents
written at ACE Tempest Re Bermuda, which experienced a decline in losses and loss expenses. As Global Reinsurance increases non-catastrophe P&C writing, we expect its loss and loss expense ratio to continue to increase in line with what would be expected from a traditional multi-line reinsurer. Global Reinsurance had favorable prior period development of $13 million in the quarter ended March 31, 2004, compared with no prior period development in the same quarter of 2003. The favorable development for the current quarter relates primarily to property and property catastrophe lines of business.
 
The policy acquisition cost ratio increased in the quarter ended March 31, 2004, compared with the same quarter of 2003. The policy acquisition cost ratio for Global Reinsurance increased due to the higher proportion of business generated from ACE Tempest Re USA, relative to ACE Tempest Re Europe and ACE Tempest Re Bermuda. More of ACE Tempest Re USA’s business is written on a treaty-basis which incurs higher acquisition costs due to higher ceding commissions paid. Administrative expenses increased primarily due to higher staffing costs to support growth in business at ACE Tempest Re USA. The administrative expense ratio decreased due to increased net premiums earned.
 
Global Reinsurance’s underwriting income increased 23 percent in the quarter ended March 31, 2004, compared with the same quarter of 2003. The increase is primarily a result of higher net premiums earned, the lack of catastrophe losses and the favorable prior period development. Income excluding net realized gains (losses) for Global Reinsurance increased 28 percent as a result of higher underwriting income and net investment income. Foreign exchange did not have a material impact on Global Reinsurance’s income excluding net realized gains in the quarter ended March 31, 2004.
 
Life Reinsurance
 
ACE Life Re principally provides reinsurance coverage to other life insurance companies, focusing on guarantees included in certain fixed and variable annuity products. We do not compete on a traditional basis for pure mortality business. The reinsurance transactions we undertake typically help clients – ceding companies – to manage mortality, morbidity, investment, and/or lapse risks embedded in their book of business. We price life reinsurance using actuarial and investment models that incorporate a number of factors, including assumptions for mortality, morbidity, expenses, demographics, persistency, investment returns and inflation. We assess the performance of our life reinsurance business based on income excluding net realized gains (losses).

 	  	Three Months
Ended March 31
	 	
 	  	2004
	 	 	2003
	 	
 	  	(in millions of
U.S. dollars)	 	
Net premiums written	  	$	51	 	 	$	47	 	
Net premiums earned	  	 	51	 	 	 	48	 	
Life and annuity benefits	  	 	42	 	 	 	48	 	
Policy acquisition costs	  	 	5	 	 	 	4	 	
Administrative expenses	  	 	1	 	 	 	1	 	
Net investment income	  	 	8	 	 	 	7	 	
 	  				 				
Income excluding net realized gains (losses)	  	 	11	 	 	 	2	 	
Net realized gains (losses)	  	 	(25	)	 	 	(1	)	
 	  				 				
Net income	  	$	(14	)	 	$	1	 	

Income excluding net realized gains (losses) improved in the quarter ended March 31, 2004, compared with the same quarter of 2003 primarily due to the decrease in life and annuity benefits. Life and annuity benefits decreased 13 percent primarily due to the increased proportion of premium volume from variable annuity products, which typically have lower benefit pay-outs than other business. Net income decreased due to the net realized losses in the current quarter which represent the fair value adjustment of the derivative component of certain variable annuity products.
 
Financial Services
 
The Financial Services segment consists of two broad businesses: financial guaranty and financial solutions. The financial guaranty operations provide insurance and reinsurance for financial guaranty exposures, including municipal and non-municipal obligations, credit default swaps (CDSs), mortgage guaranty reinsurance, title reinsurance, and trade credit reinsurance. The financial solutions operations provide one-off insurance and reinsurance solutions to clients with unique or complex risks, which are not adequately addressed in the traditional insurance market. Each financial solutions contract is structured to meet the needs of each client. Certain products (principally credit protection oriented) issued by the Financial Services segment have been determined to meet the definition of a derivative under FAS 133. For more information see the “Critical Accounting Estimates” section in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2003.
 
39

Table of Contents
On April 28, 2004, we completed the sale of approximately 65 percent of the common shares of Assured Guaranty. Going forward, the Financial Services segment will include the financial solutions operations as well as the equity earnings in our retained ownership in Assured Guaranty. We have placed trade credit insurance and title reinsurance into run-off. The results described below reflect periods prior to the sale of Assured Guaranty’s common shares and therefore include the results of the financial guaranty operations on a wholly-owned basis.

 	  	Three Months
Ended March 31
	 	
 	  	2004
	 	 	2003
	 	
 	  	(in millions of
U.S. dollars)	 	
Net premiums written	  	$	208	 	 	$	526	 	
Net premiums earned	  	 	179	 	 	 	209	 	
Losses and loss expenses	  	 	86	 	 	 	161	 	
Policy acquisition costs	  	 	11	 	 	 	11	 	
Administrative expenses	  	 	24	 	 	 	18	 	
 	  				 				
Underwriting income	  	 	58	 	 	 	19	 	
 	  				 				
Net investment income	  	 	53	 	 	 	51	 	
Other income (expense)	  	 	(11	)	 	 	—  	 	
Interest expense	  	 	2	 	 	 	2	 	
Income tax expense	  	 	13	 	 	 	9	 	
 	  				 				
Income excluding net realized gains (losses)	  	 	85	 	 	 	59	 	
Net realized gains (losses)	  	 	5	 	 	 	(3	)	
Tax effect of net realized gains (losses)	  	 	(7	)	 	 	—  	 	
 	  				 				
Net income	  	$	83	 	 	$	56	 	
 	  				 				
Loss and loss expense ratio	  	 	48.0	%	 	 	77.0	%	
Policy acquisition cost ratio	  	 	5.9	%	 	 	5.2	%	
Administrative expense ratio	  	 	13.7	%	 	 	8.6	%	
Combined ratio	  	 	67.6	%	 	 	90.8	%	
 
Net premiums written decreased 60 percent in the quarter ended March 31, 2004, compared with the same quarter of 2003. This decrease is primarily related to non-renewal of certain financial solutions business and the reversal of unearned premium reserves and related premiums written in connection with the termination of equity CDO business in the financial guaranty operations.
 
Financial Services reported a 44 percent increase in income excluding realized gains (losses) in the quarter ended March 31, 2004, compared with the same quarter of 2003. The increase is a result of higher underwriting income. Offsetting this increase is other expense of $11 million attributed to the recognition of goodwill impairments in the current quarter, and the increase in income tax expense. Additionally, Financial Services experienced $2 million of favorable prior period development in the quarter ended March 31, 2004, compared with $10 million of adverse development in the same quarter of 2003. The development for the current quarter relates primarily to favorable development on LPT business, partially offset by adverse development on credit business.
 
Net premiums earned for the financial guaranty operations increased to $87 million in the current quarter, compared with $78 million in the same quarter of 2003, due primarily to growth in our swap and municipal lines of business. Our swap line of business reported growth due to the increasing base of installment premiums and our municipal line is benefiting from the low interest rate environment which continues to fuel municipal bond issuances and consequently, cession activity. Offsetting these favorable trends, mortgage net premiums earned declined primarily due to the low interest rate environment that has increased refinancing activity and resulted in a commensurate reduction in the existing in-force quota share book. The financial guaranty operations had adverse prior period development in 2004 relating primarily to credit business. Even with the adverse development, the loss and loss expense ratio improved due to the settlement of one-off transactions in preparation for the IPO. The policy acquisition cost ratio decreased due to a change in business mix. The administrative expense ratio increased as a result of the decline in net premiums earned. As a result of the previous factors, underwriting income increased to $44 million in the quarter ended March 31, 2004, compared with $17 million in the quarter ended March 31, 2003.
 
Net premiums earned for the financial solutions operations decreased to $92 million in the quarter ended March 31, 2004, compared with $131 million in the same quarter of 2003. This reduction relates primarily to the non-renewal of several large accounts in the current quarter. Due to the nature of the financial solutions business, premium volume can vary significantly from period to period and therefore premiums written in any one period are not indicative of premiums to be written in future periods. The financial solutions operations reported an increase in underwriting income of $12 million to $14 million in the quarter ended March 31, 2004, compared with $2 million in the same quarter of 2003. This increase is primarily driven by favorable prior period development on LPT business in 2004. The administrative expense ratio increased as a result of severance and other termination costs associated with a reduction in staff, combined with the decline in net premiums earned.
 
40

Table of Contents
Net Investment Income

 	  	Three Months
Ended March 31
	 	
 	  	2004
	 	 	2003
	 	
 	  	(in millions of U.S. dollars)	 	
Insurance – North American	  	$	104	 	 	$	101	 	
Insurance – Overseas General	  	 	48	 	 	 	35	 	
Global Reinsurance – P&C	  	 	27	 	 	 	19	 	
Global Reinsurance – Life	  	 	8	 	 	 	7	 	
Financial Services	  	 	53	 	 	 	51	 	
Corporate and Other	  	 	(2	)	 	 	(7	)	
 	  				 				
Net investment income	  	$	238	 	 	$	206	 	

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 16 percent for the quarter ended March 31, 2004, compared with the same quarter of 2003. The increased net investment income is primarily due to the positive operating cash flows during 2003 that resulted in a higher average invested asset base. This positive impact on investment income was partially offset by a decline in the investment portfolio’s yield, due to the impact of lower interest rates on investment of new cash and reinvestment of maturing securities. The average yield on fixed maturities was 4.0 percent at March 31, 2004 and 4.2 percent at March 31, 2003.
 
Net Realized Gains (Losses)
 
Our investment strategy takes a long-term view, and our investment portfolio is actively managed to maximize total return within certain specific guidelines, designed to minimize risk. Our investment portfolio is reported at fair value. The effect of market movements on our investment portfolio impact income (through net realized gains (losses)) when securities are sold, when “other than temporary” impairments are recorded on invested assets or when derivatives, including financial futures and options, interest rate swaps and credit-default swaps, are marked to fair value or are settled. Changes in unrealized appreciation and depreciation on available-for-sale securities, which result from the revaluation of securities held, are reported as a separate component of accumulated other comprehensive income in shareholders’ equity.
 
The following table presents our pre-tax net realized gains (losses) for the three months ended March 31, 2004 and 2003.

 	  	Three Months
Ended March 31
	 	
 	  	2004
	 	 	2003
	 	
 	  	(in millions of U.S. dollars)	 	
Fixed maturities and short-term investments	  	$	55	 	 	$	12	 	
Equity securities	  	 	28	 	 	 	(50	)	
Financial futures, options and interest rate swaps	  	 	(1	)	 	 	(9	)	
Other investments	  	 	(7	)	 	 	—  	 	
Fair value adjustment on insurance derivatives	  	 	(23	)	 	 	(2	)	
Currency	  	 	5	 	 	 	9	 	
 	  				 				
Total net realized gains (losses)	  	$	57	 	 	$	(40	)	

Given our total return objective for our investment portfolio, we may sell securities at a loss due to changes in the investment environment, our expectation that fair value may deteriorate further, our desire to reduce our exposure to an issuer or an industry, and changes in the credit quality of the security.
 
FAS 133 requires us to recognize all derivatives as either assets or liabilities on our consolidated balance sheet, and measure them at fair value. We record the gains and losses resulting from the fair value measurement of derivatives in net realized gains (losses). We participate in derivative instruments in two principal ways as follows: i) to offer protection to others as the seller or writer of the derivative, such as our credit derivatives business and, to a lesser extent, reinsurance of guaranteed minimum income benefits (GMIBs) that is treated as derivatives for accounting purposes; or ii) to mitigate our own risk, principally arising from our investment holdings. We do not consider either type of transaction to be speculative. For the quarter ended March 31, 2004, we recorded a net
 
41

Table of Contents
realized loss of $24 million on all derivative transactions, compared with a net realized loss of $11 million for the same quarter of 2003.
 
With respect to our credit derivatives and GMIB reinsurance businesses, we record a portion of the change in fair value in unpaid loss and loss expenses and future policy benefits for life and annuity contracts, respectively, representing our best estimate of loss pay-outs related to fees or premiums earned, and a portion in net realized gains (losses), representing other changes in fair value. The fair value adjustment included in net realized gains (losses) in the quarter ended March 31, 2004, was a net realized loss of $23 million, compared with a net realized loss of $2 million for the same quarter of 2003. For the quarter ended March 31, 2004, the change in fair value is related to many factors but primarily due to a $25 million loss from GMIB reinsurance principally resulting from a decline in interest rates and the related effect on new annuities attaching to reinsurance treaties during the quarter. Such annuities were priced using higher interest rates that were prevalent at the inception of the GMIB reinsurance treaties. Based on in-force annuities covered by GMIB reinsurance treaties at March 31, 2004, we estimate that the change in fair value to be reflected in net income from a 50 basis points decline in interest rates would approximate a $40 million realized loss and a 1 percent decline in the Standard and Poor’s (S&P) Index would approximate a $6 million realized loss. The gain or loss created by the estimated fair value adjustment will rise or fall each period based on estimated market pricing and may not be an indication of ultimate claims. Fair value is defined as the amount at which an asset or liability could be bought or sold in a current transaction between willing parties. We generally plan to hold derivative financial instruments to maturity. Where we hold derivative financial instruments to maturity, these fair value adjustments would generally be expected to reverse resulting in no gain or loss over the entire term of the contract. However, in the event that we terminate a derivative contract prior to maturity, as a result of a decision to exit a line of business or for risk management purposes, the unrealized gain or loss will be realized through premiums earned and losses incurred.
 
We recorded net realized losses on financial futures and option contracts and interest rate swaps of $1 million in the quarter ended March 31, 2004, compared with net realized losses of $9 million for the same quarter of 2003. We recorded net realized losses of $14 million on interest rate swaps in the quarter ended March 31, 2004, compared with net realized losses of $9 million in the same quarter of 2003. The interest rate swaps are designed to reduce the negative impact of increases in interest rates on our fixed maturity portfolio. We recorded net realized gains of $6 million on our S&P equity index futures contracts as the S&P 500 equity index increased 1.7 percent in the current quarter. The quarter ended March 31, 2003, included net realized losses of $5 million relating to our S&P equity index futures. We recorded net realized gains of $7 million on foreign currency forward contracts in the current quarter, compared with net realized loss of $5 million in the same quarter of 2003. We use foreign currency forward contracts to minimize the effect of fluctuating foreign currencies on certain non-U.S. dollar holdings in our portfolio that are not specifically matching foreign currency liabilities. These contracts are not designated as specific hedges and, in accordance with FAS 133, we record all realized and unrealized gains and losses on these contracts as net realized gains (losses) in the period in which the currency values change.
 
We regularly review our investment portfolio for possible impairment based on criteria including economic conditions, credit loss experience and issuer-specific developments. If there is a decline in a security’s net realizable value, we must determine whether that decline is temporary or “other than temporary”. If we believe a decline in the value of a particular investment is temporary, we record it as an unrealized loss in our shareholders’ equity. If we believe the decline is “other than temporary”, we write down the carrying value of the investment and record a net realized loss in our statement of operations. The decision to recognize a decline in the value of a security carried at fair value as “other than temporary” rather than temporary has no impact on our book value. Once a security is identified as having a potential “other than temporary” impairment, we determine whether or not cost will ultimately be recovered and whether we have the intent and ability to hold the security until an expected recovery period, absent a significant change in facts that is expected to have a material adverse financial effect on the issuer.
 
Our net realized gains (losses) in the quarter ended March 31, 2004, included write-downs of $1 million related to fixed maturity investments and $1 million related to equity securities as a result of conditions which caused us to conclude the decline in fair value of the investment was “other than temporary”. This compares with write-downs of $18 million related to fixed maturity investments, and $46 million related to equity securities for the quarter ended March 31, 2003.
 
The process of determining whether a decline in value is temporary or “other than temporary” requires considerable judgment and differs depending on whether or not the security is traded on a public market as well as by type of security. For more information on our process for reviewing our investments for possible impairment, see the “Net Realized Gains (Losses)” section in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2003.
 
See Note 3 (a) to the Consolidated Financial Statements for a table which summarizes for all securities in an unrealized loss position at March 31, 2004 (including securities on loan), the aggregate fair value and gross unrealized loss by length of time the amounts have continuously been in an unrealized loss position.
 
42

Table of Contents
Other Income and Expense Items

 	  	Three Months Ended
March 31
	
 	  	2004
	  	2003
	
 	  	(in millions of U.S. dollars)	
Other expense	  	$	17	  	$	6	
 	  			  			
Interest expense	  	$	44	  	$	45	
 	  			  			
Income tax expense	  	$	123	  	$	53	

Other expense for the quarters ended March 31, 2004 and 2003, relates primarily to goodwill impairments recognized as a result of reviews conducted during the first quarter of each year.
 
Interest expense was relatively stable in the quarter ended March 31, 2004, as interest rates declined only slightly compared with the same quarter of 2003.
 
The increase in income tax expense is primarily due to the increase in net income in the quarter ended March 31, 2004, compared with the same quarter of 2003. The increased profitability for Insurance - Overseas General and Insurance – North American added $37 million to income tax expense in the current quarter. Additionally, our net realized gains in the current quarter compared with net realized losses in the same quarter of 2003 increased income tax expense by $29 million. Our effective tax rate on income excluding net realized gains (losses) for the quarter ended March 31, 2004, was 20 percent, compared with 18 percent for the same quarter of 2003. Our effective tax rate is dependent upon the mix of earnings from different jurisdictions with various tax rates; a different geographic mix of actual earnings would change the effective tax rate.
 
Investments and Cash
 
Our principal investment objective is to ensure that funds are available to meet our insurance and reinsurance obligations. Within this broad liquidity constraint, the purpose of our investment portfolio’s structure is to maximize total return subject to specifically approved guidelines of overall asset classes, credit quality, and liquidity and volatility of expected returns. Our investment portfolio is invested primarily in fixed income securities with an average credit quality of AA, as rated by the independent investment rating service S&P. The portfolio is externally managed by independent, professional, investment managers. The average duration of our fixed income securities, including the effect of interest rate swaps, is 3.4 years at March 31, 2004, and December 31, 2003. Our other investments principally comprise direct investments, investments in investment funds and investments in limited partnerships.
 
The following table identifies our invested assets by type held at fair value and cost/amortized cost at March 31, 2004 and December 31, 2003.

 	  	March 31, 2004
	  	December 31, 2003
	
 	  	Fair Value
	  	Cost/
Amortized Cost
	  	Fair Value
	  	Cost/
Amortized Cost
	
 	  	(in millions of U.S. dollars)	
Fixed maturities	  	$	19,920	  	$	19,129	  	$	18,645	  	$	18,006	
Securities on loan	  	 	1,183	  	 	1,113	  	 	684	  	 	650	
Short-term investments	  	 	3,290	  	 	3,290	  	 	2,928	  	 	2,928	
Cash	  	 	614	  	 	614	  	 	562	  	 	562	
 	  			  			  			  			
 	  	 	25,007	  	 	24,146	  	 	22,819	  	 	22,146	
Equity securities	  	 	539	  	 	414	  	 	544	  	 	401	
Other investments	  	 	643	  	 	595	  	 	645	  	 	602	
 	  			  			  			  			
Total investments and cash	  	$	26,189	  	$	25,155	  	$	24,008	  	$	23,149	

We also gain exposure to equity markets through the use of derivative instruments. The combined equity exposure through both our equity portfolio and derivative instruments was valued at $659 million at March 31, 2004, compared with $662 million at December 31, 2003. The increase of $2.2 billion in total investments and cash is due to positive cash flows from operations as a result of strong premium volume, increased unrealized gains, and increased securities lending collateral.
 
43

Table of Contents
The following tables show the market value of our fixed maturities, short-term investments, securities on loan and cash at March 31, 2004. The first table lists elements according to type, and the second according to S&P credit rating. 

 	  	Market Value
	  	Percentage of
Total
	 	
 	  	(in millions of
U.S. dollars)	  	 	 	
Treasury	  	$	1,491	  	6.0	%	
Agency	  	 	1,723	  	6.9	%	
Corporate	  	 	7,201	  	28.8	%	
Mortgage-backed securities	  	 	4,536	  	18.1	%	
Asset-backed securities	  	 	800	  	3.2	%	
Municipal	  	 	1,498	  	6.0	%	
Non-U.S.	  	 	3,854	  	15.4	%	
Cash and short-term investments	  	 	3,904	  	15.6	%	
 	  			  			
Total	  	$	25,007	  	100	%	

 	  	Market Value
	  	Percentage of
Total
	 	
 	  	(in millions of
U.S. dollars)	  	 	 	
AAA	  	$	13,211	  	52.8	%	
AA	  	 	4,200	  	16.8	%	
A	  	 	3,847	  	15.4	%	
BBB	  	 	2,002	  	8.0	%	
BB	  	 	653	  	2.6	%	
B	  	 	1,045	  	4.2	%	
Other	  	 	49	  	0.2	%	
 	  			  			
Total	  	$	25,007	  	100	%	

In accordance with our investment process, we invest in below-investment grade securities through dedicated investment portfolios managed by external investments managers that have investment professionals specifically dedicated to this asset class. At March 31, 2004, our fixed income investment portfolio included below-investment grade securities and non-rated securities which, in total, comprised approximately seven percent of our fixed income portfolio. We define a security as being below-investment grade if it has an S&P credit rating of BB or less. Our below investment-grade and non-rated portfolio includes approximately 500 names, with the top ten holdings making up approximately 10 percent of the $1.7 billion balance at March 31, 2004. The highest single exposure in this portfolio of securities is $24 million. Below-investment grade securities have different characteristics than investment grade corporate debt securities. Risk of loss from default by the borrower is greater with below-investment grade securities. Below-investment grade securities are generally unsecured and are often subordinated to other creditors of the issuer. Also, issuers of below-investment grade securities usually have higher levels of debt and are more sensitive to adverse economic conditions such as recession or increasing interest rates, than are investment grade issuers. We reduce the overall risk in the below-investment grade portfolio, as in all investments, through careful credit analysis, strict investment policy guidelines, and diversification by issuer and/or guarantor as well as by industry.
 
Off-Balance Sheet Arrangements – Variable Interests Related to Equity Investments in CDOs
 
See Note 3 (b) to the Consolidated Financial Statements for a discussion of our off-balance sheet arrangements.
 
44

Table of Contents
Unpaid Losses and Loss Expenses
 
We establish reserves for the estimated unpaid ultimate liability for losses and loss expenses under the terms of our policies and agreements. These reserves take into account estimates both for claims that have been reported and for IBNR, and include estimates of expenses associated with processing and settling claims. The table below presents a rollforward of our unpaid losses and loss expenses for the three months ended March 31, 2004. 

 	  	Gross
Losses
	 	 	Reinsurance
Recoverable
	 	 	Net
Losses
	 	
 	  	(in millions of U.S. dollars)	 	
Balance at December 31, 2003	  	$	27,155	 	 	$	13,192	 	 	$	13,963	 	
Losses and loss expenses incurred	  	 	2,298	 	 	 	756	 	 	 	1,542	 	
Losses and loss expenses paid	  	 	(1,873	)	 	 	(781	)	 	 	(1,092	)	
Other (including foreign exchange revaluation)	  	 	117	 	 	 	110	 	 	 	7	 	
 	  				 				 				
Balance at March 31, 2004	  	$	27,697	 	 	$	13,277	 	 	$	14,420	 	

The process of establishing reserves for claims can be complex and imprecise as it requires the use of informed estimates and judgments. Our estimates and judgments may be revised as claims develop; as additional experience and other data become available; as new or improved methodologies are developed; and as current laws change.
 
We continually evaluate our reserve estimates taking into account new information and discussion and negotiation with our insureds. While we believe our reserve for unpaid losses and loss expenses at March 31, 2004 is adequate, new information or trends may lead to future developments in ultimate losses and loss expenses significantly greater or less than the reserve provided, which could have a material adverse effect on future operating results. More information relating to our loss reserves and disclosure of prior period development by line of business is included in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2003.
 
Reinsurance
 
One of the ways we manage our loss exposure is through the use of reinsurance. While reinsurance agreements are designed to limit our losses from large exposures and permit recovery of a portion of direct unpaid losses, reinsurance does not relieve us of liability to our insureds. Accordingly, the losses and loss expense reserves on our balance sheet represent our total unpaid gross losses. The reinsurance recoverable represents anticipated recoveries of a portion of those gross unpaid losses as well as amounts recoverable from reinsurers with respect to claims paid. The table below presents our net reinsurance recoverable at March 31, 2004 and December 31, 2003.

 	  	March 31
2004
	 	 	December 31
2003
	 	
 	  	(in millions of U.S. dollars)	 	
Reinsurance recoverable on paid losses and loss expenses	  	$	1,192	 	 	$	1,277	 	
Bad debt reserve on paid losses and loss expenses	  	 	(422	)	 	 	(403	)	
Reinsurance recoverable on future policy benefits	  	 	15	 	 	 	15	 	
Reinsurance recoverable on unpaid losses and loss expenses	  	 	13,817	 	 	 	13,749	 	
Bad debt reserve on unpaid losses and loss expenses	  	 	(540	)	 	 	(557	)	
 	  				 				
Net reinsurance recoverable	  	$	14,062	 	 	$	14,081	 	

We evaluate the financial condition of our reinsurers and potential reinsurers on a regular basis and also monitor concentrations of credit risk with reinsurers. 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.
 
45

Table of Contents
Following is a breakdown of our reinsurance recoverable on paid losses at March 31, 2004 and December 31, 2003:

 	  	March 31, 2004
	 	 	December 31, 2003
	 	
Category
	  	Amount
	  	Bad Debt
Reserve
	  	% of Total
Reserve
	 	 	Amount
	  	Bad Debt
Reserve
	  	% of Total
Reserve
	 	
 	  	(in millions of U.S. dollars)	 	
General collections	  	$	639	  	$	44	  	6.9	%	 	$	730	  	$	45	  	6.2	%	
Other	  	 	553	  	 	378	  	68.4	%	 	 	547	  	 	358	  	65.4	%	
 	  			  			  			 			  			  			
Total	  	$	1,192	  	$	422	  	35.4	%	 	$	1,277	  	$	403	  	31.6	%	

The general collections category represents amounts in the process of collection in the normal course of business. These are balances for which we have no indication of dispute or credit-related issues.
 
The o ther category includes amounts recoverable that are in dispute, or are from companies in supervision, rehabilitation or liquidation. Our estimation of this reserve considers the credit quality of the reinsurer and whether we have received collateral or other credit protections, such as parental guarantees.
 
Asbestos and Environmental Claims
 
Included in our liabilities for losses and loss expenses are amounts for A&E. These A&E liabilities principally relate to claims arising from remediation costs associated with hazardous waste sites and bodily-injury claims related to asbestos products and environmental hazards. These amounts include provision for both reported and IBNR claims.
 
The table below presents selected loss reserve data for A&E exposures at March 31, 2004 and December 31, 2003.

 	  	March 31, 2004
	  	December 31, 2003
	
 	  	Gross
	  	Net
	  	Gross
	  	Net
	
 	  	(in millions of U.S. dollars)	
Asbestos	  	$	2,824	  	$	239	  	$	2,899	  	$	277	
Environmental and other latent exposures	  	 	1,104	  	 	218	  	 	1,148	  	 	250	
 	  			  			  			  			
Total	  	$	3,928	  	$	457	  	$	4,047	  	$	527	

Paid losses for the quarter ended March 31, 2004 for asbestos claims were $96 million on gross reserves and $48 million on net reserves. Foreign exchange revaluation increased the gross asbestos reserve by $21 million and the net reserve by $10 million in 2004. Environmental and other latent exposure claim payments were $47 million on gross reserves and $34 million on net reserves for the quarter ended March 31, 2004. Foreign exchange revaluation increased the gross environmental and other latent exposure reserve by $3 million and the net reserve by $2 million in 2004.
 
The Pennsylvania Insurance Department requires a biennial, external actuarial review of liabilities residing in the various subsidiaries of Brandywine Holdings (Brandywine), which we acquired when we purchased the P&C business of CIGNA in 1999. That review was last competed during the first quarter of 2003 and we recorded the financial impact in the year ended December 31, 2002. We expect to report the results of the next review in the fourth quarter of 2004.
 
In a lawsuit filed in the state of California in December 1999, certain competitors of ACE USA have challenged the restructuring that resulted in the creation of Brandywine. The restructuring was previously upheld by the Pennsylvania Supreme Court in July 1999. The lawsuit alleges that the restructuring does not effectively relieve the insurance subsidiary that issued the policies prior to the restructuring (Insurance Company of North America) from liabilities for claims on those policies by California policyholders. The California trial court has held in response to a pre-trial motion that a California statute does prohibit the transfer of California policies to a subsequent legal entity without the consent of the policyholders and noted that consent was not received in the context of the Brandywine restructuring. ACE intends to appeal this decision. In addition, the liabilities that are the subject of this California lawsuit are included within our A&E reserves for Brandywine.
 
Congress has been working on possible legislation to move all U.S. asbestos bodily-injury claims to a federal trust for compensation in accordance with an established set of medical criteria and claim values. The trust would be funded by asbestos defendants and their insurers. As currently proposed, ACE would be one of the insurer participants. We believe that if the proposed legislation is enacted, our ultimate funding obligation under the trust would be less than we would be required to pay under the current tort system because the trust would avoid payments to unimpaired victims and obviate the need for extensive legal costs. However, we cannot predict if any such proposed legislation will be modified or adopted.
 
More information relating to our A&E loss reserves is included in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2003.
 
46

Table of Contents
LIQUIDITY AND CAPITAL RESOURCES
 
Liquidity
 
Liquidity is a measure of a company’s ability to generate cash flows sufficient to meet short-term and long-term cash requirements of its business operations. As a holding company, ACE possesses assets that consist primarily of the stock of its subsidiaries, and of other investments. In addition to net investment income, our cash flows currently depend primarily on dividends or other statutorily permissible payments. Historically, these dividends and other payments have come from our Bermuda-based operating subsidiaries, which we refer to as our Bermuda subsidiaries. During the quarter ended March 31, 2004, we were able to meet all of our obligations, including the payment of dividends declared on our ordinary shares and preferred shares, with our net cash flow and dividends received. Should the need arise, we generally have access to the debt markets and other available credit facilities that are discussed below.
 
Our sale of approximately 65 percent of the common shares of Assured Guaranty generated net proceeds of approximately $840 million. We plan to use these proceeds to support our P&C business and strengthen our balance sheet capital position. If the underwriter’s exercise their over allotment option in full, the sale would generate additional net proceeds of approximately $126 million.
 
The payments of dividends or other statutorily permissible distributions from our operating companies are subject to the laws and regulations applicable to each jurisdiction, as well as the need to maintain capital levels adequate to support the insurance and reinsurance operations, including financial strength ratings issued by independent rating agencies, which are discussed later.
 
We assess which subsidiaries to draw dividends from based on a number of factors. Considerations such as regulatory and legal restrictions as well as the subsidiary’s financial condition are paramount to the dividend decision. The legal restrictions on the payment of dividends from retained earnings by our Bermuda subsidiaries are currently satisfied by the share capital and additional paid-in capital of each of the Bermuda subsidiaries. During the quarter ended March 31, 2004, ACE Bermuda and ACE Tempest Life Reinsurance Ltd. declared and paid dividends of $86 million and $150 million, respectively. During the quarter ended March 31, 2003, ACE Bermuda declared and paid dividends of $231 million, while ACE Tempest Life Reinsurance Ltd. did not declare or pay any dividends. We expect that a majority of our cash inflows for the remainder of 2004 will be from our Bermuda subsidiaries.
 
The payment of any dividends from ACE Global Markets or its subsidiaries would be subject to applicable U.K. insurance laws and regulations including those promulgated by the Society of Lloyd’s. ACE INA’s and ACE Financial Services’ U.S. insurance subsidiaries may pay dividends, without prior regulatory approval, only from earned surplus and subject to certain annual limitations and the maintenance of a minimum capital requirement. ACE INA’s international subsidiaries are also subject to insurance laws and regulations particular to the countries in which the subsidiaries operate. These laws and regulations include restrictions that limit the amount of dividends payable without prior approval of regulatory insurance authorities.
 
We did not receive any dividends from ACE Global Markets or ACE INA in the current quarter. Under the Lloyd’s accounting model, syndicates in Lloyd’s operate each year as an annual venture. Each year of account is held open for three years. At the end of three years, the year of account purchases reinsurance from the next open year, which is known as reinsurance to close or RITC, and distributes the remaining funds to the investors in the syndicate. ACE Global Markets has historically retained these funds for operational purposes. ACE INA issued debt to provide partial financing for the ACE INA acquisition and for other operating needs. This debt is serviced by dividends paid by ACE INA’s insurance subsidiaries to ACE INA as well as other group resources. ACE Financial Services’ U.S. insurance subsidiaries are limited in their dividend paying abilities due to their need to maintain their AA and AAA financial strength ratings.
 
Our consolidated sources of funds consist primarily of net premiums written, net investment income and proceeds from sales and maturities of investments. Funds are used primarily to pay claims, operating expenses, dividends and for the purchase of investments. After satisfying our cash requirements, excess cash flows from these underwriting and investing activities are invested.
 
Our insurance and reinsurance operations provide liquidity in that premiums are received in advance, sometimes substantially in advance, of the time claims are paid. Generally cash flows are affected by claim payments that, due to the nature of our operations, may comprise large loss payments on a limited number of claims and which can fluctuate significantly from year to year. The irregular timing of these loss payments can create significant variations in cash flows from operations between periods. Sources of liquidity include cash from operations, financing arrangements or routine sales of investments.
 
•	Our consolidated net cash flows from operating activities were $1.2 billion in the quarter ended March 31, 2004, compared with $600 million in the same quarter of 2003. The positive operating cash flows were generated primarily from an increase in net premiums written and net investment income, combined with a decrease in loss and loss expenses paid.	
 
•	Our consolidated net cash flows used for investing activities increased to $1.1 billion in the quarter ended March 31, 2004, compared with $742 million in the same quarter of 2003. This increase primarily reflects our strong consolidated net cash flows	
 
47

Table of Contents

 	from operating activities. Net purchases of fixed maturities were $1.1 billion in the quarter ended March 31, 2004, compared with $702 million in the same quarter of 2003.	
 
•	Our consolidated net cash flows used for financing activities were $26 million in the quarter ended March 31, 2004, compared with usage of $44 million in the same quarter of 2003. Usage for financing activities decreased primarily due to an increase in proceeds from the exercise of options for ordinary shares in the current quarter, compared with the same quarter of 2003. The increase in proceeds was partially offset by an increase in dividends paid on Ordinary Shares and the payment of dividends on the Preferred Shares.	
 
Although our ongoing operations continue to generate positive cash flows, our cash flows are currently impacted by a large book of loss reserves from businesses in run-off. The run-off operations generated negative operating cash flows of $2 million in the quarter ended March 31, 2004, compared with $129 million in the same quarter of 2003, primarily due to claim payments.
 
Both internal and external forces influence our financial condition, results of operations and cash flows. Claim settlements, premium levels and investment returns may be impacted by changing rates of inflation and other economic conditions. In many cases, significant periods of time, ranging up to several years or more, may lapse between the occurrence of an insured loss, the reporting of the loss to us and the settlement of the liability for that loss. We believe that our cash balances, cash flow from operations, routine sales of investments and the liquidity provided by our credit facilities, as discussed below are adequate to meet expected cash requirements.
 
ACE and its subsidiaries are assigned debt and financial strength (insurance) ratings from internationally recognized rating agencies, including S&P, A.M. Best, Moody’s Investors Service and Fitch IBCA. The ratings issued on our companies by these agencies are announced publicly and are available directly from the agencies. Our website, acelimited.com, also contains some information about our ratings, which you can find under the “Investor Information” tab.
 
Financial strength ratings represent the opinions of the rating agencies on the financial strength of a company and its capacity to meet the obligations of insurance policies. Independent ratings are one of the important factors that establish our competitive position in the insurance markets. The rating agencies consider many factors in determining the financial strength rating of an insurance company, including the relative level of statutory surplus necessary to support the business operations of the company. These ratings are based upon factors relevant to policyholders, agents and intermediaries and are not directed toward the protection of investors. Such ratings are not recommendations to buy, sell or hold securities.
 
Debt ratings apply to short- and long-term debt as well as preferred stock. These ratings are assessments of the likelihood that we will make timely payments of principal and interest and preferred stock dividends.
 
It is possible that, in the future, one or more of the rating agencies may reduce our existing ratings. If one or more of our ratings were downgraded, we could incur higher borrowing costs and our ability to access the capital markets could be impacted. In addition, our insurance and reinsurance operations could be adversely impacted by a downgrade in our financial strength ratings, including a possible reduction in demand for our products in certain markets.
 
Capital Resources
 
Capital resources consist of funds deployed or available to be deployed to support our business operations. The following table summarizes the components of our capital resources at March 31, 2004 and December 31, 2003.

 	  	March 31
2004
	 	 	December 31
2003
	 	
 	  	(in millions of U.S. dollars)	 	
Short-term debt	  	$	546	 	 	$	546	 	
Long-term debt	  	 	1,349	 	 	 	1,349	 	
 	  				 				
Total debt	  	 	1,895	 	 	 	1,895	 	
 	  				 				
Trust preferred securities	  	 	487	 	 	 	475	 	
Preferred shares	  	 	557	 	 	 	557	 	
Ordinary shareholders’ equity	  	 	8,840	 	 	 	8,278	 	
 	  				 				
Total shareholders’ equity	  	 	9,397	 	 	 	8,835	 	
 	  				 				
Total capitalization	  	$	11,779	 	 	$	11,205	 	
 	  				 				
Ratio of debt to total capitalization	  	 	16.1	%	 	 	16.9	%	
Ratio of debt plus trust preferreds to total capitalization	  	 	20.2	%	 	 	21.2	%	
 
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.
 
48

Table of Contents
Our short-term debt includes $400 million of ACE INA 8.2 percent notes due August 15, 2004. We plan to refinance this debt.
 
Our diluted book value per ordinary share increased to $31.36 at March 31, 2004, compared with $29.46 at December 31, 2003. In calculating our diluted book value per ordinary share, we include in the denominator in-the-money options. The expected proceeds from the in-the-money options are included in the numerator. Shareholders’ equity increased $562 million in the current quarter primarily due to our net income, and an increase in unrealized gains on our investment portfolio of $127 million.
 
On January 14, 2004 and April 14, 2004, we paid dividends of 19 cents per ordinary share to shareholders of record on December 31, 2003 and March 31, 2004, respectively. We have paid dividends each quarter since we became a public company in 1993. However, the declaration, payment and value of future dividends on ordinary shares is at the discretion of our Board of Directors and will be dependent upon our profits, financial requirements and other factors, including legal restrictions on the payment of dividends and such other factors as our Board of Directors deems relevant. Dividends on the preferred shares are payable quarterly, when and if declared by our Boards of Directors, in arrears on March 1, June 1, September 1 and December 1 of each year. On March 1, 2004, we paid dividends of $4.875 per preferred share to shareholders of record on February 29, 2004.
 
As part of our capital management program, in November 2001, our Board of Directors authorized the repurchase of any ACE issued debt or capital securities including ordinary shares, up to $250 million. At March 31, 2004, this authorization had not been utilized.
 
Credit Facilities
 
The following table shows our credit facilities by credit line, usage, expiry date and purpose at March 31, 2004.

 	  	Credit Line
	  	Usage
	  	Expiry Date
	  	Purpose
	
Liquidity Facilities	  	 	 	  	 	 	  	 	  	 	
ACE Limited 1, 2	  	$	500	  	$	146	  	April 2004	  	General Corporate	
ACE Limited 1,2,3	  	 	250	  	 	64	  	May 2005	  	General Corporate	
ACE Guaranty Corp	  	 	140	  	 	—  	  	May 2004	  	General Corporate	
Secured Operational LOC Facilities	  	 	 	  	 	 	  	 	  	 	
ACE Group	  	 	500	  	 	277	  	Sept. 2006	  	General Corporate	
Unsecured Operational LOC Facilities	  	 	 	  	 	 	  	 	  	 	
ACE Limited	  	 	500	  	 	301	  	Sept. 2004	  	General Corporate	
ACE Limited	  	 	100	  	 	91	  	Oct. 2004	  	General Corporate	
ACE Global Markets	  	 	200	  	 	200	  	Oct. 2004	  	General Corporate	
ACE Tempest Re	  	 	200	  	 	124	  	Dec. 2004	  	General Corporate	
ACE International	  	 	29	  	 	29	  	Various	  	General Corporate	
Unsecured Capital Facilities	  	 	 	  	 	 	  	 	  	 	
ACE Guaranty Corp	  	 	175	  	 	—  	  	Dec. 2010	  	Rating Agency Capital	
ACE Global Markets 4	  	 	702	  	 	697	  	Nov. 2008	  	Underwriting capacity for
Lloyd’s Syndicate 2488-2004
capacity of £550 million
(approximately $1 billion)	
 	  			  			  	 	  	 	
Total	  	$	3,296	  	$	1,929	  	 	  	 	

1.	Commercial paper back-up facility	
 
2.	In April 2004, we replaced the ACE Limited $500 million and $250 million liquidity facilities with a $600 million credit facility expiring in April 2007	
 
3.	May also be used for LOCs	
 
4.	Unsecured letters of credit are placed with Lloyd’s as capital on behalf of ACE’s corporate capital vehicles	
 
Some of the facilities noted above require that we maintain certain covenants, all of which have been met at March 31, 2004. These covenants include:
 
(i)	maintenance of a minimum consolidated net worth covenant of not less than $4.4 billion plus 25 percent of consolidated net income for each fiscal quarter ending on or after March 31, 2003 for which such consolidated net income is positive, plus 50 percent of net proceeds of any issuance of equity interests (other than the net proceeds from any issuance of equity interests in substitution and replacement of other equity interests to the extent such net proceeds do not exceed the amount of a substantially contemporaneous redemption of equity interests) subsequent to March 31, 2003; and	
 
(ii)	maintenance of a maximum debt to total capitalization ratio of not greater than 0.35 to 1. Under this covenant, debt does not include trust preferred securities or mezzanine equity, except where the ratio of the sum of trust preferred securities and	
 
49

Table of Contents

 	mezzanine equity to total capitalization is greater than 15 percent. In this circumstance, the amount greater than 15 percent would be included in the debt to total capitalization ratio.	
 
At March 31, 2004, (a) the minimum consolidated net worth requirement under the covenant described in (i) above was $5.3 billion and our actual consolidated net worth as calculated under that covenant was $8.6 billion; and (b) our ratio of debt to total capitalization was 0.16 to 1.
 
Certain facilities are guaranteed by either operating subsidiaries or ACE Limited.
 
In addition to these covenants, the ACE Global Markets capital facility requires that collateral be posted if the financial strength rating of ACE Limited falls to S&P BBB+ or lower. Prior to November 2003 (the renewal date of the ACE Global Markets unsecured LOC), this requirement related to ACE Bermuda.
 
We negotiated a $600 million credit facility that was effective on April 2, 2004. The net worth covenant requires that we maintain a minimum consolidated net worth covenant of not less than $6 billion plus 25 percent of cumulative net income since December 31, 2003, plus 50 percent of net proceeds of any issuance of equity interests subsequent to December 31, 2003. More information on the amended covenant requirements is included under “Article 5” of Exhibit 10.2 filed with this Form 10-Q.
 
Our failure to comply with the covenants under any credit facility would, subject to grace periods in the case of certain covenants, result in an event of default. This could require us to repay any outstanding borrowings or to cash collateralize letters of credit under such facility. An event of default under one or more credit facilities with outstanding credit extensions of $25 million or more would result in an event of default under all of the facilities described above.
 
As our Bermuda subsidiaries are not admitted insurers and reinsurers in the U.S., the terms of certain insurance and reinsurance contracts require them to provide LOCs to clients. In addition, ACE Global Markets is required to satisfy certain U.S. regulatory trust fund requirements which can be met by the issuance of LOCs.
 
Recent Accounting Pronouncements
 
See Note 2 to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.
 
 Item 3.	 	Quantitative and Qualitative Disclosures about Market Risk	
 
Market Sensitive Instruments and Risk Management
 
Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments. We are exposed to potential loss to various market risks, including changes in interest rates and foreign currency exchange rates. Our investment portfolio consists of both fixed income and equity securities, denominated in both U.S. and foreign currencies, which are sensitive to changes in interest rates, equity prices and foreign currency exchange rates. Therefore our net income is affected by changes in interest rates, equity prices and foreign currency exchange rates. We use investment derivative instruments such as futures, options, interest rate swaps, and foreign currency forward contracts to manage the duration of our investment portfolio and foreign currency exposures and also to obtain exposure to a particular financial market. These instruments are sensitive to changes in interest rates, foreign currency exchange rates and equity security prices. The portfolio includes other market sensitive instruments, which are subject to changes in market values with changes in interest rates.
 
Duration Management and Market Exposure Management
 
We use financial futures, options, interest rate swaps and foreign currency forward contracts for the purpose of managing certain investment portfolio exposures. These instruments are recognized as assets or liabilities in our Consolidated Financial Statements and changes in market value are included in net realized gains or losses in the consolidated statements of operations.
 
Our exposure to interest rate risk is concentrated in our fixed income portfolio, and to a lesser extent, our debt obligations. An increase in interest rates of 100 basis points applied instantly across the yield curve would have resulted in a decrease in the market value of our fixed income portfolio of 3.3 percent at March 31, 2004, compared with 3.4 percent at December 31, 2003. This equates to a pre-tax decrease in market value of approximately $739 million on a fixed income portfolio valued at $22 billion at March 31, 2004. This compares with an approximately $696 million pre-tax decrease in market value on a fixed income portfolio valued at $20.6 billion at December 31, 2003. An immediate time horizon was used as this presents the worst case scenario.
 
Our portfolio of equity securities, which we carry on our balance sheet at fair value, has exposure to price risk. This risk is defined as the potential loss in fair value resulting from adverse changes in stock prices. In addition, we attain exposure to the equity markets through the use of derivative instruments which also have exposure to price risk. Our U.S. equity portfolio is highly correlated with the S&P 500 index and changes in that index would approximate the impact on our portfolio. Our international equity portfolio has exposure to a broad range of non-U.S. equity markets, primarily in those countries where we have insurance operations. This portfolio
 
50

Table of Contents
is correlated to movement in each of these countries’ broad equity market. The combined equity exposure through both our portfolios of equity securities and derivative instruments was valued at $659 million at March 31, 2004, compared with $662 million at December 31, 2003. A hypothetical ten percent pre-tax decline in the price of each stock in our portfolio of equity securities and the index correlated to the derivative instruments would have resulted in a $66 million pre-tax decline in fair value at March 31, 2004 and December 31, 2003. Changes in fair value of these derivative instruments are recorded as net realized gains (losses) in the consolidated statements of operations. Changes in the fair value of our equity portfolio are recorded as unrealized appreciation (depreciation) and are included as other comprehensive income in shareholders’ equity.
 
Many of our non-U.S. companies maintain both assets and liabilities in local currencies. Therefore, exchange rate risk is generally limited to net assets denominated in those foreign currencies. Foreign exchange risk is reviewed as part of our risk management process. Locally required capital levels are invested in home currencies in order to satisfy regulatory requirements, and to support local insurance operations regardless of currency fluctuations.
 
 Item 4.	 	Controls and Procedures	
 
As of the end of the period covered by this report, the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in allowing information required to be disclosed in reports filed under the Securities and Exchange Act of 1934 to be recorded, processed, summarized and reported within time periods specified in the rules and forms of the SEC.
 
51

Table of Contents
ACE LIMITED
PART II OTHER INFORMATION
 
 Item 1.	 	Legal Proceedings	
 
Our insurance subsidiaries are subject to claims litigation involving disputed interpretations of policy coverages and in some jurisdictions, direct actions by allegedly injured persons seeking damages from policyholders. These lawsuits involving claims on policies issued by our subsidiaries which are typical to the insurance industry in general and in the normal course of business, are considered in our loss and loss expense reserves which are discussed in the unpaid losses and loss expenses discussion. In addition to claims litigation, we and our subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on insurance policies. This category of business litigation typically involves, inter alia, allegations of underwriting errors or misconduct, employment claims, regulatory activity or disputes arising from our business ventures. While the outcomes of the business litigation involving us cannot be predicted with certainty at this point, we are disputing and will continue to dispute allegations against us that are without merit and believe that the ultimate outcomes of matters in this category of business litigation will not have a material adverse effect on our financial condition, future operating results or liquidity, although an adverse resolution of a number of these items could have a material adverse effect on our results of operations in a particular quarter or fiscal year. 
 
 Item 5.	 	Other Information	
 
1.	On March 11, 2004, the Board of Directors elected Evan G. Greenberg to the position of Chief Executive Officer of ACE Limited, effective May 27, 2004. Brian Duperreault will remain as Chairman of ACE Limited.	
 
2.	On February 26, 2004, the Company declared a quarterly dividend of $0.19 per Ordinary Share payable on April 14, 2004, to shareholders of record on March 31, 2004.	
 
3.	On February 26, 2004, the Company declared a dividend of $4.875 per Preferred Share, payable on March 1, 2004, to shareholders of record on February 29, 2004.	
 
 Item 6.	 	Exhibits and Reports on Form 8-K	

1.	 	 	Exhibits	
		
10.1	*	 	Executive Severance Agreement between ACE Limited and Philip Bancroft, effective as of January 2, 2002.	
		
10.2	 	 	Credit agreement for $600 million dated as of April 2, 2004, among ACE Limited, certain subsidiaries, various lenders and J.P. Morgan Securities and Barclays Capital as joint lead arrangers and joint bookrunners.	
		
31.1	 	 	Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.	
		
31.2	 	 	Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.	
		
32.1	 	 	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.	
		
32.2	 	 	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.	
 
*	Management Contract or Compensation Plan	
 
2.	Reports on Form 8-K	
 
The Company filed a Form 8-K current report (date of earliest event reported: April 27, 2004) pertaining to ACE Limited’s press release reporting its first quarter 2004 results and the availability of its first quarter financial supplement.
 
52

Table of Contents
ACE LIMITED
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 	 	 	 	ACE LIMITED	
			
May 7, 2004	 	 	 	/ S /    B RIAN D UPRERREAULT          	
 	 	 	 		
 	 	 	 	Brian Duperreault
Chairman and Chief
Executive Officer	

					
			
May 7, 2004	 	 	 	/ S /    P HILIP V. B ANCROFT          	
 	 	 	 		
 	 	 	 	Philip V. Bancroft
Chief Financial Officer	
 
53

Table of Contents
ACE LIMITED
EXHIBITS

Exhibit
Number
	  	Description
	  	Numbered
Page

 	  	Exhibits	  	 	
			
10.1	  	Executive Severance Agreement between ACE Limited and Philip Bancroft, effective as of January 2, 2002.	  	 	
			
10.2	  	Credit agreement for $600 million dated as of April 2, 2004, among ACE Limited, certain subsidiaries, various lenders and J.P. Morgan Securities and Barclays Capital as joint lead arrangers and joint bookrunners.	  	 	
			
31.1	  	Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.	  	 	
			
31.2	  	Certification Pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.	  	 	
			
32.1	  	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.	  	 	
			
32.2	  	Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.	  	 	
 
54

Exhibit 10.1
 
ACE LIMITED
EXECUTIVE SEVERANCE AGREEMENT
 
THIS AGREEMENT , effective as of this 2nd day of January, 2002, is made by and between ACE Limited, a Cayman Islands company (the “Company), and Philip Bancroft (the “Executive”).
 
WHEREAS , the Company considers it essential to foster the continued employment of well qualified, senior executive management personnel; and
 
WHEREAS , the Company has determined that appropriate steps should be taken to foster such continued employment by setting forth the benefits and compensation to be awarded to such personnel in the event of a voluntary or involuntary termination within the meaning of this Agreement; and
 
WHEREAS , the Company further recognizes that the possibility of a Change in Control of the Company exists and that such possibility, and the uncertainty and questions that it may raise among executive management, may result in the departure or distraction of executive personnel to the detriment of the Company; and
 
WHEREAS , the Company has further determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company’s executive management, including the Executive, to their assigned duties without

distraction in the face of potentially disturbing circumstances arising from the possibility of a Change in Control;
 
NOW, THEREFORE, in consideration of the promises and the mutual covenants herein contained, the Company and the Executive hereby agree as follows:
 
1. Term of Agreement. The term of this Agreement shall be for a rolling, three (3) year term commencing on the date hereof, and shall be deemed automatically (without further action by either the Company or the Executive) to extend each day for an additional day such that the remaining term of the Agreement shall continue to be three (3) years. However, on the Executive’s 62nd birthday, this Agreement shall cease to extend automatically and, on such date, the remaining term of this Agreement shall be three (3) years. In addition, the Company may, by notice to the Executive, cause this Agreement to cease to extend automatically and, upon such notice, the “Term” of this Agreement shall be three (3) years following such notice.
 
2. Definitions.
 
(a) Base Amount shall mean the Executive’s annual includible compensation for the base period as described in Section 280G(b)(3) of the Code.
 
(b) Beneficial Owner or Beneficial Ownership shall have the meaning ascribed to such term in Rule 13d-3 of the Exchange Act.
 
(c) Board or Board of Directors shall mean the Board of Directors of ACE Limited, or its successor.
 
(d) Cause shall mean:
 
-2-

(i) the Executive’s material fraud, malfeasance, gross negligence, or willful misconduct with respect to business affairs of the Company that is directly or materially harmful to the business or reputation of the Company or any subsidiary of the Company, or
 
(ii) Executive’s conviction of or failure to contest prosecution for a felony or a crime involving moral turpitude.
 
A termination of Executive for “Cause” based on clause (i) of the preceding sentence shall take effect thirty (30) days after the Company gives written notice of such termination to Executive specifying the conduct deemed to qualify as Cause, unless Executive shall, during such 30-day period, remedy the events or circumstances constituting cause to the reasonable satisfaction of the Company. A termination for Cause based on clause (ii) above shall take effect immediately upon giving of the termination notice. The Company shall have sole discretion to determine whether an Executive’s termination is for Cause.
 
(e) Change in Control shall mean:
 
(1) An acquisition by any Person (as such term is defined in Section 3(a) (9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a “group” as defined in Section 13(d) thereof) of Beneficial Ownership of the Shares then outstanding (the “Company Shares Outstanding”) or the voting securities of the Company then outstanding entitled to vote generally in the election of directors (the “Company Voting Securities Outstanding”), if such acquisition of Beneficial Ownership results in the Person beneficially owning (within the meaning of Rule 13d-3 promulgated under the Exchange Act) fifty percent (50%) or more of the Company Shares Outstanding or fifty percent (50%) or more of the combined voting power of the Company Voting Securities Outstanding; excluding,
 
-3-

however, any such acquisition by a trustee or other fiduciary holding such Shares under one or more employee benefit plans maintained by the Company or any of its subsidiaries; or
 
(2) The approval of the shareholders of the Company of a reorganization, merger, consolidation, complete liquidation, or dissolution of the Company, the sale or disposition of all or substantially all of the assets of the Company or any similar corporate transaction (in each case referred to in this Section 3(e) as a “Corporate Transaction”), other than a Corporate Transaction that would result in the outstanding common stock of the Company immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into common stock of the surviving entity or a parent or affiliate thereof) at least fifty percent (50%) of the outstanding common stock of the Company or such surviving entity or parent or affiliate thereof immediately after such Corporate Transaction; provided, however, if the consummation of such Corporate Transaction is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the Change in Control shall not occur until the obtaining of such consent (either explicitly or implicitly); or
 
(3) A change in the composition of the Board such that the individuals who, as of the Effective Date, constitute the Board (such Board shall be hereinafter referred to as the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, for purposes of this Section 3(e) that any individual who becomes a member of the Board subsequent to the Effective Date whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; but, provided, further, that any such individual whose initial assumption of
 
-4-

office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, including any successor to such Rule), or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board, shall not be so considered as a member of the Incumbent Board.
 
(f) Code shall mean the Internal Revenue Code of 1986, as amended from time to time.
 
(g) Disability shall mean the Executive’s inability as a result of physical or mental incapacity to substantially perform his duties for the Company on a full-time basis for a period of six (6) months.
 
(h) Employment shall mean any work that is a reasonable match with the Executive’s qualifications, skills and experience, including any self-employment, consulting or independent contractor arrangement, or employer-employee relationship.
 
(i) Excess Severance Payment shall have the same meaning as the term “excess parachute payment” defined in Section 280G(b)(l) of the Code.
 
(j) Excise Tax shall mean the excise tax imposed under Code Section 4999.
 
(k) Exchange Act shall mean the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto.
 
(l) Involuntary Termination shall mean termination of employment that is involuntary on the part of the Executive and that occurs for reasons other than for Cause, Disability or death.
 
(m) Reasonable Compensation shall have the same meaning as provided in Section 280G(b)(4) of the Code.
 
-5-

(n) Severance Payment shall have the same meaning as the term “parachute payment” defined in Section 280G(b)(2) of the Code.
 
(o) Shares shall mean the shares of common stock of the Company.
 
(p) Threatened Change in Control shall mean any pending tender offer for any class of the Company’s outstanding Shares, or any pending bona fide offer to acquire the Company by merger or consolidation, or any other pending action or plan to effect, or which would lead to, a Change in Control of the Company. A Threatened Change in Control Period shall commence on the first day the actions described in the preceding sentence become manifest and shall end when such actions are abandoned or the Change in Control occurs.
 
(q) Voluntary Termination shall mean termination of employment that is voluntary on the part of the Executive but is due to:
 
(i) a significant reduction of the Executive’s responsibilities, title or status resulting from a formal change in such title or status, or from the assignment to the Executive of any duties inconsistent with his title, duties, or responsibilities;
 
(ii) a reduction in the Executive’s compensation or benefits; or
 
(iii) a Company-required involuntary relocation of Executive’s place of residence or a significant increase in the Executive’s travel requirements.
 
A termination shall not be considered voluntary within the meaning of this Agreement if such termination is the result of Cause, Disability, or death of the Executive. The Company shall have sole discretion to determine whether an Executive’s termination is Voluntary within the meaning of this Section 2.(q).
 
3. Events That Trigger Benefits Under This Agreement. The Executive shall be eligible for the compensation and benefits described in Section 4. of this Agreement as follows:
 
(a) The Executive’s employment is Involuntarily Terminated within the meaning of Section 2.(l) of this Agreement;
 
-6-

(b) The Executive’s employment if Voluntarily Terminated within the meaning of Section 2.(q) of this Agreement;
 
(c) A Change in Control occurs with the result that the Executive’s employment is Involuntarily or Voluntarily Terminated within twenty four (24) months following the date of the Change in Control;
 
(d) A Change in Control occurs with the result that the Executive’s employment is Involuntarily or Voluntarily Terminated within six (6) months prior to the date of the Change in Control; or
 
(e) A Threatened Change in Control occurs and the Executive’s employment is Involuntarily or Voluntarily Terminated during a Threatened Change in Control Period.
 
4. Benefits Upon Termination. If the Executive becomes eligible for benefits under Section 3. above, the Company shall pay or provide to the Executive the following compensation and benefits:
 
(a) Salary . The Executive will continue to receive his current salary (subject to withholding of all applicable taxes) for the twenty four (24) month period following the Executive’s date of termination in the same manner as it was being paid as of the date of termination. For purposes hereof, the Executive’s “current salary” shall be the highest rate in effect during the twelve-month period prior to the Executive’s termination.
 
(b) Qualified and Non-Qualified Plan Coverage . The Executive shall continue to participate in the tax-qualified and non-qualified retirement and savings plans of the Company during the twenty four (24) month period following the Executive’s date of
 
-7-

termination unless the Executive commences Employment prior to the end of the twenty four (24) month period, in which case, such participation shall end on the date of his new Employment.
 
(c) Health, Dental, and Life Insurance Coverage . The health, dental, and life insurance benefits coverage (including any executive medical plan) provided to the Executive at his date of termination shall be continued by the Company during the twenty four (24) month period following the Executive’s date of termination unless the Executive commences Employment prior to the end of the twenty four (24) month period, in which case, such insurance coverages shall end on the date of his new Employment. The Company shall provide for such insurance coverages at its expense at the same level and in the same manner as if the Executive’s employment had not terminated (subject to the customary changes in such coverages if the Executive retires under a Company retirement plan, reaches age 65, or similar events and subject to Executive’s right to make any changes in such coverages that an active employee is permitted to make). Any additional coverages the Executive had at termination, including dependent coverage, will also be continued for such period on the same terms, to the extent permitted by the applicable policies or contracts. Any costs the Executive was paying for such coverages at the time of termination shall be paid by the Executive by separate check payable to the Company each month in advance. If the terms of any benefit plan referred to in this Section do not permit continued participation by the Executive, the Company will arrange for other coverage at its expense providing substantially similar benefits. If the Executive is covered by a split-dollar or similar life insurance program at the date of termination, he shall have the option in his sole discretion to have such policy transferred to him upon termination, provided that the Company is paid for its interest m the policy upon such transfer.
 
-8-

(d) Restricted Stock Grants and Options . All outstanding restricted stock grants and options under any Company stock plan that the Executive holds on the date of his termination shall continue to vest in accordance with the vesting schedule of the applicable plan during the twenty four (24) month period following the Executive’s date of termination unless the Executive commences Employment prior to the end of the twenty four (24) month period, in which case, such continued vesting shall end on the date of his new Employment. No new stock based grants shall be issued to the Executive after the date that the Executive’s employment is terminated.
 
(e) Outplacement Services . The Company shall provide the Executive with outplacement services in accordance with the Company’s Executive Outplacement Services Plan.
 
5. Limitation and Adjustment of Benefits.
 
(a) Limitation and Adjustment of Benefits Upon Termination . Notwithstanding anything in this Agreement to the contrary, if, in the opinion of independent tax accountants or counsel selected and retained by the Company and reasonably acceptable to the Executive (“Tax Counsel”), any of the compensation or benefits payable, or to be provided, to Executive by the Company or any member of its affiliated group (the Company and all members of its affiliated group hereinafter collectively referred to as the “Controlled Group”) under this Agreement are treated as Excess Severance Payments (whether alone or in conjunction with payments or benefits outside of this Agreement), the Company shall direct Tax Counsel to determine and compare (i) Executive’s net income after payment of all federal, state, and local taxes assuming that all of the compensation and benefits payable by the Controlled Group under this Agreement and all such other arrangements are paid to Executive and Executive pays the
 
-9-

Excise Tax; and (ii) Executive’s net income after payment of all federal, state, and local taxes assuming that the total amount of compensation and benefits payable by the Controlled Group under this Agreement and all such other arrangements is reduced such that no Excess Severance Payments result and the Excise Tax is not triggered. If the amount calculated under (ii) above is less than 95% of the amount calculated under (i) above, then the full amount due from the Controlled Group under all such arrangements shall be payable to Executive. If the amount calculated under (ii) above is at least 95% of the amount calculated under (i) above, then the total amount of compensation and benefits payable under all such arrangements shall be reduced, as provided in 5(b) below, such that Executive shall receive no Excess Severance Payments and shall have no liability for Excise Tax.
 
(b) Reduction of Amount . In the event that the amount of any Severance Payments, including any benefits, that would be payable to or for the benefit of Executive under this Agreement must be modified or reduced to comply with this Section 5, Executive shall direct which Severance Payments are to be modified or reduced; provided, however, that no increase in the amount of any payment or change in the timing of the payment shall be made without the consent of the Company.
 
(c) Avoidance of Penalty Taxes . This Section 5 shall be interpreted so as to maximize the net after-tax dollar value to Executive. In determining whether any Excess Severance Payments exist and the most advantageous outcome for Executive, the parties shall take into account all provisions of Code Section 280G, and the Regulations thereunder, including making appropriate adjustments to such calculations for amounts established to be Reasonable Compensation. Both the Company and Executive shall cooperate fully with Tax Counsel and provide Tax Counsel with all Compensation and benefit amounts, personal tax information and
 
-10-

other information necessary or helpful in calculating such net after-tax amounts. In the event of any Internal Revenue Service examination, audit, or other inquiry, the Company and Executive agree to take action to provide, and to cooperate in providing, evidence to the Internal Revenue Service and, if applicable, the state revenue department, to achieve this goal.
 
(d) Correction of Determination . If it is established pursuant to a final determination of a court or an Internal Revenue Service proceeding, or pursuant to an opinion of Tax Counsel, that notwithstanding the good faith of the Company and Executive in applying the terms of this Section 5, either (i) the amounts paid to Executive unintentionally constituted Excess Severance Payments and triggered the Excise Tax, even though the payments to Executive were reduced in an effort to avoid such result; or (ii) the amounts paid to Executive were reduced by more than was necessary to avoid triggering the Excise Tax, then the parties shall make the applicable correction that will achieve the goal described in Section 5(c) hereof. In the event the error referred to in clause (i) hereof occurs, Executive is hereby required to repay to the Company, within 15 days after the error is discovered, the amount necessary to avoid the Excise Tax; provided, however, that if Executive, based on advice from Tax Counsel and Executive’s own tax advisor, determines that the return of such amounts will not serve to eliminate the Excess Severance Payments and the Excise Tax, the Company then shall be obligated to pay to Executive, within 15 days after Executive notifies the Company of Executive’s determination, the total amount by which the original amount of Executive’s compensation and benefits were reduced pursuant to the terms of Sections 5(a) and (b) hereof. In the event the error referred to in clause (ii) hereof occurs, the Company is hereby required to repay to Executive, within 15 days after the error is discovered, the maximum amount of the
 
-11-

compensation and benefits that were reduced pursuant to the terms of Sections 5(a) and (b) hereof that Executive may receive without triggering the Excise Tax.
 
6. Obligation Not to Solicit.
 
(a) Executive hereby agrees that, regardless of whether other provisions of this Agreement may have been terminated: (i) while he is employed by the Company; and (ii) for at least two years following his termination of employment (the “Restricted Period”), Executive shall not in any manner attempt to induce or assist others to attempt to induce any officer, employee, customer or client of the Company to terminate its association with the Company, nor do anything directly or indirectly to interfere with the relationship between the Company and any such persons or concerns.
 
(b) In the event that the Executive engages in any activity within the meaning of Sections 6.(a) all compensation and benefits described in Section 4 shall immediately cease. The Company shall have sole discretion to determine whether an Executive has engaged in business within the meaning of Sections 6.(a).
 
7. Confidentiality. The terms of this Agreement are to be of the highest confidentiality. In order to insure and maintain such confidentiality, it is agreed that neither party, including all persons and entities under a party’s control, shall, directly or indirectly, publicize or disclose to third persons the terms of this Agreement or the substance of negotiations with respect to it; provided, however, that nothing herein shall be construed to prevent disclosures which are reasonably necessary to enforce the terms of this Agreement or which are otherwise required by law to be made to governmental agencies or others; moreover, nothing herein shall be construed to prevent the parties hereto, or their attorneys, from making such disclosures for legitimate business purposes to their respective insurers, financial
 
-12-

institutions, accountants and attorneys or, in the case of a corporation, limited liability company or partnership, to its respective officers, directors, employees, managers, members and agents or any of its respective subsidiaries, group or divisions, provided that each such recipient of such disclosures agrees to be bound by the requirements concerning disclosure of confidential information as set forth in this Paragraph 7.
 
8. Settlement of Disputes; Arbitration.
 
(a) All claims by the Executive for benefits under this Agreement shall be directed to and determined by the Company and shall be in writing. Any denial by the Company of a claim for benefits under this Agreement shall be delivered to the Executive in writing and shall set forth the specific reasons for the denial and the specific provisions of this Agreement relied upon. The Company shall afford a reasonable opportunity to the Executive for a review of the decision denying a claim and shall further allow the Executive to appeal to the Company a decision of the Company within sixty (60) days after notification by the Company that the Executive’s claim has been denied.
 
(b) Any further dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration in Philadelphia, Pennsylvania, or in such other location as may be agreed to by the parties, in accordance with the National Rules for Resolution of Employment Disputes of the American Arbitration Association, then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction.
 
9. Miscellaneous.
 
(a) Executive’s Obligation to Seek Other Employment . The Executive shall be required to diligently seek other Employment following his termination.
 
-13-

(b) Notices . Any notice or other communication required or permitted under this Agreement shall be effective only if it is in writing and shall be deemed to have been duly given when delivered personally or seven days after mailing if mailed first class by registered or certified mail, postage prepaid, addressed as follows:
 
If to the Company:
 
ACE Limited
ACE Global Headquarters
17 Woodbourne Avenue
Hamilton HM08
Bermuda

Attention:	  	Keith White	  	 	
 	  	Chief Administrator	  	 	
 
If to the Executive:
 
or to such other address as any party may designate by notice to the others.
 
(c) Assignment . This Agreement shall inure to the benefit of and shall be binding upon the parties hereto and their respective executors, administrators, heirs, personal representatives, and successors, but, except as hereinafter provided, neither this Agreement nor any right hereunder may be assigned or transferred by either party thereto, or by any beneficiary or any other person, nor be subject to alienation, anticipation, sale, pledge, encumbrance, execution, levy, or other legal process of any kind against the Executive, his beneficiary or any other person. Notwithstanding the foregoing, any person or business entity succeeding to substantially all of the business of the Company by purchase, merger, consolidation, sale of assets, or otherwise, shall be bound by and shall adopt and assume this Agreement and the Company shall obtain the assumption of this Agreement by such successor. If Executive shall die while any amount would still be payable to Executive hereunder (other than amounts that, by
 
-14-

their terms, terminate upon the death of Executive) if Executive had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the executors, personal representatives or administrators of Executive’s estate.
 
(d) No Obligation to Fund . The agreement of the Company (or its successor) to make payments to the Executive hereunder shall represent solely the unsecured obligation of the Company (and its successor), except to the extent the Company (or its successors) in its sole discretion elects in whole or in part to fund its obligations under this Agreement pursuant to a trust arrangement or otherwise.
 
(e) Applicable Law . This Agreement shall be governed by and construed and enforced in accordance with the laws of the Commonwealth of Pennsylvania.
 
(f) Amendment . This Agreement may only be amended by a written instrument signed by the parties hereto, which makes specific reference to this Agreement.
 
(g) Severability . If any provision of this Agreement shall be held invalid or unenforceable by any court of competent jurisdiction, such holding shall not invalidate or render unenforceable any other provisions hereof.
 
(h) Withholding . The Company shall have the right to withhold any and all local, state and federal taxes which may be withheld in accordance with applicable law.
 
(i) Other Benefits . Nothing in this Agreement shall limit or replace the compensation or benefits payable to Executive, or otherwise adversely affect Executive’s rights, under any other benefit plan, program, or agreement to which Executive is a party.
 
-15-

IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on its behalf by its duly authorized officers and the Executive has hereunder set his hand, as of the date first above written.

ACE Limited	
		
By:	 	 	

Name:	 		
		
Title:	 		
	
[Name of Executive]	
		
By:	 	 	

 
-16-

Exhibit 10.2
 
EXECUTION COPY
 
$600,000,000
 
THREE-YEAR
CREDIT AGREEMENT
 
Dated as of April 2, 2004
 
Among
 
ACE LIMITED
 
ACE BERMUDA INSURANCE LTD.
 
ACE TEMPEST REINSURANCE LTD.
 
ACE INA HOLDINGS INC.
 
as Borrowers
 
and
 
THE INITIAL LENDERS NAMED HEREIN
 
as Initial Lenders
 
and
 
BARCLAYS CAPITAL
 
as Syndication Agent
 
Citibank, N.A.
Bank of America, N.A.
Lloyds TSB Bank plc
 
as Co-Documentation Agents
 
JPMORGAN CHASE BANK 
 
as Administrative Agent
 
J.P. MORGAN SECURITIES INC.
BARCLAYS CAPITAL
 
as Joint Lead Arrangers and Joint Bookrunners

TABLE OF CONTENTS

 	 	 	  	P AGE
	
ARTICLE 1
D EFINITIONS A ND A CCOUNTING T ERMS	  	 	
			
Section 1.01.	 	Certain Defined Terms	  	1	
Section 1.02.	 	Computation of Time Periods; Other Definitional Provisions	  	19	
Section 1.03.	 	Accounting Terms and Determinations	  	19	
		
ARTICLE 2
A MOUNTS A ND T ERMS O F T HE A DVANCES A ND T HE L ETTERS O F C REDIT	  	 	
			
Section 2.01.	 	The Committed Advances and the Letters of Credit	  	19	
Section 2.02.	 	Making the Committed Advances	  	20	
Section 2.03.	 	The Competitive Bid Advances	  	22	
Section 2.04.	 	Issuance and Renewals and Drawings, Participations and Reimbursement with Respect to Letters of Credit	  	26	
Section 2.05.	 	Repayment of Advances	  	29	
Section 2.06.	 	Termination or Reduction of the Commitments	  	31	
Section 2.07.	 	Prepayments	  	31	
Section 2.08.	 	Interest	  	32	
Section 2.09.	 	Fees	  	33	
Section 2.10.	 	Conversion of Advances	  	34	
Section 2.11.	 	Increased Costs, Etc	  	35	
Section 2.12.	 	Payments and Computations	  	37	
Section 2.13.	 	Taxes	  	38	
Section 2.14.	 	Sharing of Payments, Etc	  	41	
Section 2.15.	 	Use of Proceeds	  	42	
Section 2.16.	 	Defaulting Lenders	  	42	
Section 2.17.	 	Replacement of Affected Lender	  	45	
Section 2.18.	 	Certain Provisions Relating to the Issuing Bank and Letters of Credit.	  	45	
Section 2.19.	 	Downgrade Event with Respect to a Lender	  	47	
Section 2.20.	 	Downgrade Event or Other Event with Respect to the Issuing Bank	  	49	
Section 2.21.	 	Non-Dollar Letters of Credit	  	50	
Section 2.22.	 	Increase in Commitments	  	52	
Section 2.23.	 	Registry	  	53	
		
ARTICLE 3
C ONDITIONS O F L ENDING A ND I SSUANCES O F L ETTERS O F C REDIT	  	 	
			
Section 3.01.	 	Conditions Precedent to Effectiveness	  	54	
 
i

					
Section 3.02.	 	Conditions Precedent to Each Committed Borrowing and Issuance, Extension or Increase of a Letter of Credit	  	56	
Section 3.03.	 	Conditions Precedent to Each Competitive Bid Borrowing	  	57	
		
ARTICLE 4
R EPRESENTATIONS A ND W ARRANTIES	  	 	
			
Section 4.01.	 	Representations and Warranties of the Borrowers	  	57	
		
ARTICLE 5
C OVENANTS O F T HE B ORROWERS	  	 	
			
Section 5.01.	 	Affirmative Covenants	  	61	
Section 5.02.	 	Negative Covenants	  	63	
Section 5.03.	 	Reporting Requirements	  	67	
Section 5.04.	 	Financial Covenants	  	70	
		
ARTICLE 6
E VENTS O F D EFAULT	  	 	
			
Section 6.01.	 	Events Of Default	  	70	
Section 6.02.	 	Actions in Respect of the Letters of Credit upon Default	  	73	
		
ARTICLE 7
T HE G UARANTY	  	 	
			
Section 7.01.	 	The Guaranty	  	74	
Section 7.02.	 	Guaranty Unconditional	  	74	
Section 7.03.	 	Discharge only upon Payment in Full; Reinstatement in Certain Circumstances	  	75	
Section 7.04.	 	Waiver by the Guarantors	  	75	
Section 7.05.	 	Subrogation	  	75	
Section 7.06.	 	Stay of Acceleration	  	76	
Section 7.07.	 	Continuing Guaranty; Assignments	  	76	
		
ARTICLE 8
T HE A GENTS	  	 	
			
Section 8.01.	 	Authorization and Action	  	77	
Section 8.02.	 	Agents’ Reliance, Etc	  	77	
Section 8.03.	 	JPMCB and Affiliates	  	78	
Section 8.04.	 	Lender Credit Decision	  	78	
Section 8.05.	 	Indemnification	  	78	
Section 8.06.	 	Successor Agents	  	79	
Section 8.07.	 	Co-Documentation Agents	  	79	
 
ii

					
 	 	ARTICLE 9
M ISCELLANEOUS	  	 	
			
Section 9.01.	 	Amendments, Etc	  	80	
Section 9.02.	 	Notices, Etc	  	80	
Section 9.03.	 	No Waiver; Remedies	  	81	
Section 9.04.	 	Costs and Expenses	  	81	
Section 9.05.	 	Right of Set-off	  	83	
Section 9.06.	 	Successors; Participations and Assignments	  	83	
Section 9.07.	 	Designated Lenders	  	85	
Section 9.08.	 	Execution in Counterparts	  	86	
Section 9.09.	 	No Liability of the Issuing Bank	  	86	
Section 9.10.	 	Confidentiality	  	86	
Section 9.11.	 	Jurisdiction, Etc	  	87	
Section 9.12.	 	Governing Law	  	88	
Section 9.13.	 	Waiver of Jury Trial	  	88	
Section 9.14.	 	Nature of Borrowers’ Obligations	  	88	
Section 9.15.	 	USA Patriot Act	  	88	

SCHEDULES	  	 	
		
Pricing Schedule	  	 	
Commitment Schedule	  	 	
Schedule 4.01(b)	  	Subsidiaries	
Schedule 5.02(a)	  	Liens	

EXHIBITS	  	 	
		
Exhibit A	  	Form of Note	
Exhibit B-1	  	Form of Notice of Committed Borrowing	
Exhibit B-2	  	Form of Notice of Competitive Bid Borrowing	
Exhibit C	  	Form of Assignment and Assumption Agreement	
Exhibit D-1	  	Form of Opinion of Cayman Islands Counsel to the Parent	
Exhibit D-2	  	Form of Opinion of New York Counsel to the Loan Parties	
Exhibit D-3	  	Form of Opinion of Bermuda Counsel to the ACE Bermuda and ACE Tempest	
Exhibit E	  	Form of Designation Agreement	

iii

THREE-YEAR CREDIT AGREEMENT
 
THREE-YEAR CREDIT AGREEMENT dated as of April 2, 2004 among ACE Limited, a Cayman Islands company (the “ Parent ”), ACE Bermuda Insurance Ltd. (“ ACE Bermuda ”), ACE Tempest Reinsurance Ltd. (“ ACE Tempest ”) and ACE INA Holdings Inc. (“ ACE INA ”) (ACE Bermuda, ACE Tempest and ACE INA, together with the Parent, the “ Borrowers ”), the banks, financial institutions and other institutional lenders listed on the signature pages hereof as the Initial Lenders (the “ Initial Lenders ”), Barclays Capital, the investment banking division of Barclays Bank PLC (“ Barclays ”), as syndication agent (together with any successor syndication agent appointed pursuant to Article 8, the “ Syndication Agent ”), Bank of America, N.A., Citibank, N.A. and Lloyds TSB Bank plc, as co-documentation agents (together with any successor documentation agent appointed pursuant to Article 8, the “ Co-Documentation Agents ”), JPMorgan Chase Bank (“ JPMCB ”), as administrative agent (together with any successor administrative agent appointed pursuant to Article 8, the “ Administrative Agent ” and, together with the Syndication Agent and the Co-Documentation Agents, the “ Agents ”) for the Lenders (as hereinafter defined) and J.P. Morgan Securities Inc. and Barclays as Joint Lead Arrangers and Joint Bookrunners.
 
In consideration of the premises and of the mutual covenants and agreements contained herein, the parties hereto hereby agree as follows:
 
ARTICLE 1
D EFINITIONS A ND A CCOUNTING T ERMS
 
Section 1.01 . Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):
 
“ Account Party ” with respect to any outstanding or proposed Letter of Credit means the Borrower for the account of which such Letter of Credit was or is proposed to be issued.
 
“ ACE Bermuda ” has the meaning specified in the recital of parties to this Agreement.
 
“ ACE INA ” has the meaning specified in the recital of parties to this Agreement.
 
“ ACE Tempest ” has the meaning specified in the recital of parties to this Agreement.
 
“ Additional Lender ” has the meaning set forth in Section 2.22.
 
“ Adjusted Consolidated Debt ” means, at any time, an amount equal to (i) the then outstanding Consolidated Debt of the Parent and its Subsidiaries plus

(ii) to the extent exceeding an amount equal to 15% of Total Capitalization, the then issued and outstanding amount of Preferred Securities (other than any Mandatorily Convertible Preferred Securities).
 
“ Administrative Agent ” has the meaning specified in the recital of parties to this Agreement.
 
“ Administrative Agent’s Account ” means the account of the Administrative Agent maintained by the Administrative Agent with JPMCB, at its office at 270 Park Avenue, New York, New York 10017, Account No. 323222587, Attention: Loan Agency Group, or such other account as the Administrative Agent shall specify in writing to the Lenders.
 
“ Administrative Questionnaire ” means, with respect to each Lender, an administrative questionnaire in the form prepared by the Administrative Agent, completed by such Lender and returned to the Administrative Agent (with a copy to the Borrowers).
 
“ Advance ” means a Committed Advance, a Competitive Bid Advance or a Letter of Credit Advance.
 
“ Affected Lender ” means any Lender that (i) has made, or notified any Borrower that an event or circumstance has occurred which may give rise to, a demand for compensation under Section 2.11(a) or (b) or Section 2.13 (but only so long as the event or circumstance giving rise to such demand or notice is continuing), (ii) has notified any Borrower (which notice has not been withdrawn) of any event or circumstance of a type described in Section 2.11(c) or (d) or (iii) is a Downgraded Lender.
 
“ 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 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% or more of the Voting Interests of such Person or to direct or cause the direction of the management and policies of such Person, whether through the ownership of Voting Interests, by contract or otherwise.
 
“ Agents ” has the meaning specified in the recital of parties to this Agreement.
 
“ Agreement Currency ” has the meaning specified in Section 2.21(g).
 
“ Applicable Facility Fee Percentage ” means, as of any date, a percentage per annum determined by reference to the Pricing Schedule.
 
“ Applicable Lending Office ” means, with respect to each Lender, such Lender’s Domestic Lending Office in the case of a Base Rate Advance and such Lender’s Eurodollar Lending Office in the case of a Eurodollar Rate Advance
 
2

and, in the case of a Competitive Bid Advance, the office of such Lender notified by such Lender to the Administrative Agent as its Applicable Lending Office with respect to such Competitive Bid Advance.
 
“ Applicable Margin ” means, as of any date, a percentage per annum determined by reference to the Pricing Schedule.
 
“ Approved Investment ” means any Investment that was made by the Parent or any of its Subsidiaries pursuant to investment guidelines set forth by the board of directors of the Parent which are consistent with past practices.
 
“ Assignee ” has the meaning specified in Section 9.06(c).
 
“ Available Amount ” of any Letter of Credit means, at any time, the maximum amount available to be drawn under such Letter of Credit at such time or at any future time (assuming compliance at such time or such future time with all conditions to drawing).
 
“ Bankruptcy Law ” means any proceeding of the type referred to in Section 6.01(f) or Title 11, U.S. Code, or any similar foreign, federal or state law for the relief of debtors.
 
“ Base Rate ” means a fluctuating interest rate per annum in effect from time to time, which rate per annum shall at all times be equal to the higher of:
 
(a) the rate of interest announced publicly by JPMCB in New York, New York, from time to time, as JPMCB’s prime rate; and
 
(b) 2 of 1% per annum above the Federal Funds Rate.
 
“ Base Rate Advance ” means an Advance that bears interest as provided in Section 2.08(a)(i).
 
“ Borrowers ” has the meaning specified in the recital of parties to this Agreement.
 
“ Borrowers’ Account ” means the account of one or more Borrowers maintained by such Borrower(s) with The Bank of Bermuda Limited at its office at 6 Front Street, Hamilton, Bermuda HM12 Account No. 18000035, Attention: Paula Saints, or such other account as the Parent shall specify in writing to the Administrative Agent or such other account as the Borrowers (or any one of them) shall specify in writing to the Administrative Agent.
 
“ Borrowing ” means a Committed Borrowing or a Competitive Bid Borrowing.
 
“ Business Day ” means a day of the year on which banks are not required or authorized by law to close in New York City and, if the applicable Business Day relates to any Eurodollar Rate Advances or LIBO Rate Advances, on which dealings are carried on in the London interbank market.
 
3

“ Capitalized Leases ” means all leases that have been or should be, in accordance with GAAP, recorded as capitalized 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 Parent (or other securities convertible into such Voting Interests) representing 30% or more of the combined voting power of all Voting Interests of the Parent or (b) a majority of the board of directors of the Parent shall not be Continuing Members.
 
“ Co-Documentation Agents ” has the meaning specified in the recital of parties to this Agreement.
 
“ Commitment ” means (i) with respect to each Lender listed on the Commitment Schedule, the amount set forth opposite such Lender’s name on the Commitment Schedule, (ii) with respect to any Person which becomes a Lender pursuant to Section 2.22, the amount of the Commitment undertaken by such Additional Lender pursuant to the documentation under Section 2.22 and (iii) with respect to any Person which becomes a Lender pursuant to Section 9.06(c), the amount of the transferor Lender’s Commitment assigned to it pursuant to Section 9.06(c), in each case as such amount may be changed from time to time pursuant to Section 2.06, 2.22 or 9.06(c); provided that, if the context so requires, the term “ Commitment ” means the obligation of a Lender to extend credit up to such amount to the Borrowers hereunder.
 
“ Commitment Schedule ” means the Schedule hereto denominated as such.
 
“ Committed Advance ” has the meaning specified in Section 2.01(a).
 
“ Committed Borrowing ” means a borrowing consisting of simultaneous Committed Advances of the same Type made by the Lenders to the same Borrower.
 
“ Committed Facility ” means, at any time, the aggregate amount of the Lenders’ Commitments at such time.
 
“ Competitive Bid Advance ” means an advance by a Lender to any Borrower as part of a Competitive Bid Borrowing resulting from the competitive bidding procedure described in Section 2.03 and refers to a Fixed Rate Advance or a LIBO Rate Advance.
 
“ Competitive Bid Borrowing ” means a borrowing consisting of simultaneous Competitive Bid Advances from each of the Lenders whose offer to make one or more Competitive Bid Advances as part of such borrowing has been accepted under the competitive bidding procedure described in Section 2.03.
 
4

“ Confidential Information ” means information that any Loan Party furnishes to any Agent or any Lender, but does not include any such information that is or becomes generally available to the public other than as a result of a breach by such Agent or any Lender of its obligations hereunder or that is or becomes available to such Agent or such Lender from a source other than the Loan Parties that is not, to the best of such Agent’s or such Lender’s knowledge, acting in violation of a confidentiality agreement with a Loan Party.
 
“ Consolidated ” refers to the consolidation of accounts in accordance with GAAP.
 
“ Consolidated Net Income ” means, for any period, the net income of the Parent and its Consolidated Subsidiaries, determined on a Consolidated basis for such period.
 
“ Consolidated Net Worth ” means at any date the Consolidated stockholders’ equity of the Parent and its Consolidated Subsidiaries determined as of such date, provided that such determination for purposes of Section 5.04 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.
 
“ Contingent Obligation ” means, with respect to any Person, any obligation or arrangement of such Person to guarantee or intended to guarantee 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 nonperformance 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 (A) for the purchase or payment of any such primary obligation or (B) 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
 
5

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 Parent who either (i) was a member of the Parent’s Board of Directors on the date of execution and delivery of this Agreement by the Parent 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 Parent’s Board of Directors.
 
“ Conversion ”, “ Convert ” and “ Converted ” each refer to a conversion of Advances of one Type into Advances of the other Type pursuant to Section 2.10 or 2.11.
 
“ Debenture ” means debt securities issued by ACE INA or the Parent 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 Capitalized 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 clauses (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
 
6

indebtedness or other payment obligations; provided, however, that the amount of Debt of such Person under clause (i) above shall, if such Person has not assumed or otherwise become liable for any such Debt, be limited to the lesser of the principal amount of such Debt or the fair market value of all property of such Person securing such Debt; provided further that “ Debt ” shall not include obligations in respect of insurance or reinsurance contracts entered into in the ordinary course of business or any obligations of such Person (1) to purchase securities (or other property) which arise 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 purposes of Section 5.04 and the definitions of “ Adjusted Consolidated Debt ” and “ Total Capitalization ”, “ 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 Parent or ACE INA under any Debentures or under any subordinated guaranty of any Preferred Securities or obligations of a Special Purpose Trust under any Preferred Securities.
 
“ Default ” means any Event of Default or any event that would constitute an Event of Default but for the requirement that notice be given or time elapse or both.
 
“ Defaulted Advance ” means, with respect to any Lender at any time, the portion of any Advance required to be made by such Lender to any Borrower pursuant to Section 2.01 or 2.02 at or prior to such time that has not been made by such Lender or by the Administrative Agent for the account of such Lender pursuant to Section 2.02(d) as of such time.
 
“ Defaulted Amount ” means, with respect to any Lender at any time, any amount required to be paid by such Lender to any Agent or any other Lender hereunder or under any other Loan Document at or prior to such time that has not been so paid as of such time, including, without limitation, any amount required to be paid by such Lender to (a) the Administrative Agent pursuant to Section 2.02(d) to reimburse the Administrative Agent for the amount of any Committed Advance made by the Administrative Agent for the account of such Lender, (b) the Issuing Bank pursuant to Section 2.04(c) to purchase a portion of a Letter of Credit Advance made by the Issuing Bank, (c) any other Lender pursuant to Section 2.14 to purchase any participation in Committed Advances owing to such other Lender and (d) any Agent or the Issuing Bank pursuant to Section 8.05 to reimburse such Agent or the Issuing Bank for such Lender’s ratable share of any amount required to be paid by the Lenders to such Agent or the Issuing Bank as provided therein.
 
“ Defaulting Lender ” means, at any time, any Lender that, at such time, (a) owes a Defaulted Advance or a Defaulted Amount or (b) shall take any action or be the subject of any action or proceeding of a type described in Section 6.01(f).
 
7

“ Designated Lender ” means, with respect to any Designating Lender, an Eligible Designee designated by it pursuant to Section 9.07(a) as a Designated Lender for purposes of this Agreement.
 
“ Designating Lender ” means, with respect to each Designated Lender, the Lender that designated such Designated Lender pursuant to Section 9.07(a).
 
“ Dollar Equivalent ” has the meaning specified in Section 2.21(h).
 
“ Domestic Lending Office ” means, with respect to any Lender, the office of such Lender specified as its “ Domestic Lending Office ” in its Administrative Questionnaire or such other office of such Lender as such Lender may from time to time specify to any Borrower and the Administrative Agent.
 
“ Downgrade Account ” has the meaning specified in Section 2.19(a).
 
“ Downgrade Event ” means, with respect to any Lender, a reduction of the credit rating for the senior unsecured unsupported long-term debt of such Lender by S&P or Moody’s.
 
“ Downgraded Lender ” means any Lender which has a credit rating of less than A- (in the case of S&P) or A3 (in the case of Moody’s) for its senior unsecured unsupported long-term debt or which does not have any credit rating on such debt from one of S&P or Moody’s.
 
“ Downgrade Notice ” has the meaning specified in Section 2.19(a).
 
“ Effective Date ” means the first date on which the conditions set forth in Article 3 shall have been satisfied.
 
“ Eligible Designee ” means a special purpose entity that (i) is organized under the laws of the United States or any state thereof, (ii) is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business and (iii) issues (or the parent of which issues) commercial paper rated at least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent thereof by Moody’s.
 
“ 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.
 
8

“ 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 authorization 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 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 authorized or otherwise existing on any date of determination.
 
“ ERISA ” means the 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 is a member of the controlled group of any Loan Party, or under common control with any Loan Party, within the meaning of Section 414 of the Internal Revenue Code or Section 4001 of ERISA.
 
“ Eurocurrency Liabilities ” has the meaning specified in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time.
 
“ Eurodollar Lending Office ” means, with respect to any Lender, the office of such Lender specified as its “ Eurodollar Lending Office ” in its Administrative Questionnaire (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Parent and the Administrative Agent.
 
“ Eurodollar Rate ” means, for any Interest Period for all Eurodollar Rate Advances comprising part of the same Committed Borrowing, an interest rate per annum equal to the rate per annum appearing on Dow Jones Markets (Telerate) Page 3750 (or any successor page) as the London interbank offered rate for deposits in U.S. dollars at 11:00 a.m. (London time) two Business Days before the first day of such Interest Period for a period equal to such Interest Period (provided that, if for any reason such rate is not available, the term “ Eurodollar
 
9

Rate ” shall mean, for any Interest Period for all Eurodollar Rate Advances comprising part of the same Committed Borrowing, the rate per annum appearing on Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates).
 
“ Eurodollar Rate Advance ” means an Advance that bears interest as provided in Section 2.08(a)(ii).
 
“ Eurodollar Rate Reserve Percentage ” for any Interest Period for all Eurodollar Rate Advances comprising part of the same Committed Borrowing means the reserve percentage applicable two Business Days before the first day of such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or with respect to any other category of liabilities that includes deposits by reference to which the interest rate on Eurodollar Rate Advances is determined) having a term equal to such Interest Period.
 
“ Events of Default ” has the meaning specified in Section 6.01.
 
“ Existing Agreements ” means (i) the Third Amended and Restated 364-Day Credit Agreement dated as of April 4, 2003 and (ii) the Amended and Restated Five-Year Credit Agreement dated as of May 8, 2000, each among the Borrowers and the lenders, agents and other parties thereto, as amended to the Effective Date.
 
“ Existing Letter of Credit ” means LOC #S876241, issued by Mellon Bank, N.A., in the amount of $63,905,865.00, for the benefit of Liberty Mutual Insurance Company, expiring 12/31/04.
 
“ Federal Funds Rate ” means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day for such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it.
 
“ Fee Letter ” means the fee letter dated March 15, 2004 between the Parent and the Administrative Agent.
 
10

“ Fiscal Year ” means a fiscal year of the Parent and its Consolidated Subsidiaries ending on December 31 in any calendar year.
 
“ Fixed Rate Advances ” has the meaning specified in Section 2.03(a)(i).
 
“ Foreign Government Scheme or Arrangement ” has the meaning specified in Section 4.01(l)(ii).
 
“ Foreign Plan ” has the meaning specified in Section 4.01(l)(ii).
 
“ GAAP ” has the meaning specified in Section 1.03.
 
“ Guarantor ” means each of the Borrowers.
 
“ Guaranty ” means the undertaking by each of the Guarantors under Article 8.
 
“ 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.
 
“ Indemnified Party ” has the meaning specified in Section 9.04(b).
 
“ Initial Lenders ” has the meaning specified in the recital of parties to this Agreement.
 
“ Interest Period ” means, for each Eurodollar Rate Advance comprising part of the same Committed Borrowing and each LIBO Rate Advance comprising part of the same Competitive Bid Borrowing, the period commencing on the date of such Eurodollar Rate Advance or LIBO Rate Advance or the date of the Conversion of any Base Rate Advance into such Eurodollar Rate Advance, and ending on the last day of the period selected by the Borrower requesting such Borrowing or Conversion pursuant to the provisions below and, thereafter, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the applicable Borrower pursuant to the provisions below. The duration of each such Interest Period shall be one or two weeks or one, two, three or six months, as the Borrower requesting such Borrowing or Conversion may, upon notice received by the Administrative Agent not later than 11:00 a.m. (New York City time) on the third Business Day prior to the first day of such Interest Period, select; provided, however, that:
 
(a) such Borrower may not select any Interest Period with respect to any Eurodollar Rate Advance that ends after the Termination Date;
 
11

(b) Interest Periods commencing on the same date for Eurodollar Rate Advances comprising part of the same Committed Borrowing or for LIBO Rate Advances comprising part of the same Competitive Bid Borrowing shall be of the same duration;
 
(c) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided, however, that, if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; and
 
(d) whenever the first day of any Interest Period (other than a one or two week Interest Period) occurs on a day of an initial calendar month for which there is no numerically corresponding day in the calendar month that succeeds such initial calendar month by the number of months equal to the number of months in such Interest Period, such Interest Period shall end on the last Business Day of such succeeding calendar month.
 
“ Internal Revenue Code ” means the 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 clause (h) or (i) of the definition of “ Debt ” in respect of such Person; provided, however, that any purchase by any Loan Party or any Subsidiary of any catastrophe-linked instruments which are (x) issued for the purpose of transferring traditional reinsurance risk to the capital markets and (y) purchased by such Loan Party or Subsidiary in accordance with its customary reinsurance underwriting procedures, or the entry by any Loan Party or any Subsidiary into swap instruments 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.
 
“ Issuing Bank ” means Barclays Bank PLC, JPMCB, Mellon Bank, N.A., Wachovia Bank, National Association and any “ New Issuing Bank ” appointed in accordance with Section 2.20. Except as otherwise indicated, each reference to Issuing Bank means, with respect to any Letter of Credit, the Issuing Bank which has issued such Letter of Credit.
 
12

“ JPMCB ” means JPMorgan Chase Bank, a New York banking corporation.
 
“ Judgment Currency ” has the meaning specified in Section 2.21(g).
 
“ LC Participation Obligations ” has the meaning specified in Section 2.19(a).
 
“ L/C Related Documents ” has the meaning specified in Section 2.05(b)(ii).
 
“ Lender ” means (i) each bank or other institution listed on the Commitment Schedule, (ii) each Person which becomes a Lender pursuant to Section 2.22 or Section 9.06(c) and (iii) their respective successors.
 
“ Letter of Credit Advance ” has the meaning specified in Section 2.04(f).
 
“ Letter of Credit Agreement ” has the meaning specified in Section 2.04(a).
 
“ Letter of Credit Business Day ” means, for any Issuing Bank, a day of the year on which banks are not required or authorized by law to close in New York City and on which banks are not required or authorized by law to close in the city in which the principal letter of credit operations of the Issuing Bank are located.
 
“ Letters of Credit ” has the meaning specified in Section 2.01(b).
 
“ Letter of Credit Exposure ” at any time means the sum at such time of (a) the aggregate outstanding amount of Letter of Credit Advances, (b) the aggregate Available Amounts of all outstanding Letters of Credit and (c) the aggregate Available Amounts of all Letters of Credit which have been requested by a Borrower to be issued hereunder but have not yet been so issued.
 
“ Letter of Credit Participating Interest ” has the meaning specified in Section 2.04(d).
 
“ Letter of Credit Participating Interest Commitment ” has the meaning specified in Section 2.04(d).
 
“ LIBO Rate ” means, for any Interest Period for all LIBO Rate Advances comprising part of the same Competitive Bid Borrowing, an interest rate per annum equal to the rate per annum appearing on Dow Jones Markets (Telerate) Page 3750 (or any successor page) as the London interbank offered rate for deposits in U.S. dollars at 11:00 a.m. (London time) two Business Days before the first day of such Interest Period for a period equal to such Interest Period (provided that, if for any reason such rate is not available, the term “ LIBO Rate ” shall mean for any Interest Period for all LIBO Rate Advances comprising part of the same Competitive Bid Borrowing, the rate per annum appearing on Reuters
 
13

Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates).
 
“ LIBO Rate Advances ” has the meaning specified in Section 2.03(a)(i).
 
“ 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.
 
“ Loan Documents ” means (i) this Agreement, (ii) the Notes, (iii) the Fee Letter and (iv) each Letter of Credit Agreement, in each case as amended.
 
“ Loan Parties ” means the Borrowers.
 
“ Mandatorily Convertible Preferred Securities ” means units comprised of (i) Preferred Securities or preferred shares of Parent and (ii) a contract for the sale of ordinary shares of the Parent.
 
“ 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 Parent 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 Parent and its Subsidiaries, taken as a whole, (b) the rights and remedies of any Agent or any Lender under any Loan Document or (c) the ability of the Loan Parties, taken as a whole, to perform their obligations under the Loan Documents.
 
“ Material Financial Obligation ” means a principal amount of Debt and/or payment obligations in respect of any Hedge Agreement of the Parent and/or one or more of its Subsidiaries arising in one or more related or unrelated transactions exceeding in the aggregate $50,000,000.
 
“ Minimum Amount ” has the meaning set forth in Section 5.04(b).
 
“ Moody’s ” means Moody’s Investors Service, Inc.
 
“ Multiemployer Plan ” means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which any Loan Party 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.
 
14

“ Non-Dollar Letters of Credit ” has the meaning specified in Section 2.21(a).
 
“ Notes ” means promissory notes of a Borrower, substantially in the form of Exhibit A hereto, evidencing the obligation of such Borrower to repay the Loans made to it, and “ Note ” means any one of such promissory notes issued hereunder.
 
“ Notice of Committed Borrowing ” has the meaning specified in Section 2.02(a).
 
“ Notice of Competitive Bid Borrowing ” has the meaning specified in Section 2.03(a).
 
“ OECD ” means the Organization for Economic Cooperation and Development.
 
“ Other Taxes ” has the meaning specified in Section 2.13(b).
 
“ Overnight Rate ” has the meaning specified in Section 2.21(h).
 
“ Parent ” has the meaning specified in the recital of parties to this Agreement.
 
“ Participant ” has the meaning specified in Section 9.06(b).
 
“ PBGC ” means the Pension Benefit Guaranty Corporation (or any successor).
 
“ Pension Plan ” means a “ pension plan ”, as such term is defined in Section 3(2) of ERISA, which is subject to title IV of ERISA (other than any “ multiemployer plan ” as such term is defined in section 4001(a)(3) of ERISA), and to which any Loan Party or any ERISA Affiliate may have any liability, including any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA.
 
“ 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 materialmen’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.
 
15

“ Person ” means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof.
 
“ 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 (i) 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 Debentures, or (ii) other instruments that may be treated in whole or in part as equity for rating agency purposes while being treated as debt for tax purposes.
 
“ Pricing Schedule ” means the Schedule hereto denominated as such.
 
“ Pro Rata Share ” of any amount means, with respect to any Lender at any time, the product of such amount times a fraction the numerator of which is the amount of such Lender’s Commitment at such time (or, if the Commitments shall have been terminated pursuant to Section 2.06 or 6.01, such Lender’s Commitment as in effect immediately prior to such termination) and the denominator of which is the Committed Facility at such time (or, if the Commitments shall have been terminated pursuant to Section 2.05 or 6.01, the Committed Facility as in effect immediately prior to such termination).
 
“ 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.
 
“ Regulation U ” means Regulation U of the Board of Governors of the Federal Reserve System, as in effect from time to time.
 
“ Required Lenders ” means, at any time, Lenders owed or holding at least a majority in interest of the sum of (a) aggregate principal amount of the Committed Advances outstanding at such time and (b) the aggregate Available Amount of all Letters of Credit outstanding at such time, or, if no such principal amount and no Letters of Credit are outstanding at such time, Lenders holding at least a majority in interest of the aggregate of the Commitments; provided, however, that if any Lender shall be a Defaulting Lender at such time, there shall be excluded from the determination of Required Lenders at such time (A) the
 
16

aggregate principal amount of the Committed Advances owing to such Lender (in its capacity as a Lender) and outstanding at such time, (B) such Lender’s Pro Rata Share of the aggregate Available Amount of all Letters of Credit outstanding at such time and (C) the Unused Commitment of such Lender at such time.
 
“ Responsible Officer ” means the Chairman, Chief Executive Officer, President, Chief Financial Officer, Treasurer, Chief Accounting Officer or Chief Investment Officer of the Parent.
 
“ S&P ” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc.
 
“ Significant Subsidiary ” means a Subsidiary of Parent that is a “ significant subsidiary ” of the Parent under Regulation S-X promulgated by the Securities and Exchange Commission.
 
“ Securitization Transaction ” means any sale, assignment or other transfer by Parent or any Subsidiary of any accounts receivable, premium finance loan receivables, lease receivables or other payment obligations owing to Parent 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, guaranties or other property or claims in favor of Parent or such Subsidiary supporting or securing payment by the obligor thereon of, or otherwise related to, any such receivables.
 
“ 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 salable 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 debts and liabilities as they mature and (d) 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 capital. 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 Parent or ACE INA of which the Parent or ACE INA will hold all the common securities, which will be the issuer of Preferred Securities, and which will loan to the Parent or ACE INA (such loan being evidenced by the Debentures) the net proceeds of the issuance and sale of the Preferred Securities and common securities of such Special Purpose Trust.
 
17

“ Subsidiary ” of any Person means any corporation, partnership, joint venture, limited liability company, trust or estate of which (or in which) more than 50% 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.
 
“ Syndication Agent ” has the meaning specified in the recital of parties to this Agreement.
 
“ Taxes ” has the meaning specified in Section 2.13(a).
 
“ Termination Date ” means the earlier of April 2, 2007 and the date of termination in whole of the Commitments.
 
“ Total Capitalization ” means, at any time, an amount (without duplication) equal to (i) the then outstanding Consolidated Debt of the Parent and its Subsidiaries plus (ii) Consolidated stockholders equity of the Parent and its Subsidiaries plus (without duplication) (iii) the then issued and outstanding amount of Preferred Securities (including Mandatorily Convertible Preferred Securities) and (without duplication) Debentures.
 
“ Type ” refers to the distinction between Advances bearing interest at the Base Rate and Advances bearing interest at the Eurodollar Rate.
 
“ Unused Commitment ” means, with respect to any Lender at any time, (a) such Lender’s Commitment at such time minus (b) the sum of (i) the aggregate principal amount of all Committed Advances made by such Lender hereunder plus (ii) such Lender’s Pro Rata Share of (A) the aggregate Available Amount of all Letters of Credit hereunder and (B) the aggregate principal amount of all Letter of Credit Advances made by the Issuing Bank pursuant to Section 2.04(c) and outstanding at such time (whether held by the Issuing Bank or the Lenders) and (C) the aggregate principal amount of all Competitive Bid Advances hereunder.
 
“ Voting Interests ” means shares of capital stock issued by a corporation, or equivalent Equity Interests 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.
 
18

“ Welfare Plan ” means a welfare plan, as defined in Section 3(1) of ERISA, that is maintained for employees of any Loan Party or in respect of which any Loan Party could have liability.
 
“ Withdrawal Liability ” has the meaning specified in Part I of Subtitle E of Title IV of ERISA.
 
Section 1.02 . Computation of Time Periods; Other Definitional Provisions. In this Agreement and the other Loan Documents in the computation of periods of time from a specified date to a later specified date, the word “ from ” means “ from and including ” and the words “ to ” and “ until ” each mean “ to but excluding ”. References in the Loan Documents to any agreement or contract “ as amended ” shall mean and be a reference to such agreement or contract as amended, amended and restated, supplemented or otherwise modified from time to time in accordance with its terms.
 
Section 1.03 . Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with generally accepted accounting principles as in effect from time to time (“ GAAP ”), applied on a basis consistent (except for changes concurred in by the Parent’s independent public accountants) with the most recent audited consolidated financial statements of the Parent and its Subsidiaries delivered to the Lenders; provided that, if the Parent notifies the Administrative Agent that the Parent wishes to amend any covenant in Article 5 to eliminate the effect of any change in generally accepted accounting principles on the operation of such covenant (or if the Administrative Agent notifies the Parent that the Required Lenders wish to amend Article 5 for such purpose), then the Parent’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 accounting principles became effective (and, concurrently with the delivery of any financial statements required to be delivered hereunder, the Parent shall provide a statement of reconciliation conforming such financial information to such generally accepted accounting principles as previously in effect), until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Parent and the Required Lenders.
 
ARTICLE 2
A MOUNTS A ND T ERMS O F T HE A DVANCES A ND T HE L ETTERS O F C REDIT
 
Section 2.01 . The Committed Advances and the Letters of Credit. (a) The Committed Advances . Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make advances (each a “ Committed Advance ”) to any Borrower from time to time on any Business Day during the period from the date hereof until the Termination Date in an amount for each such Committed Advance not to exceed such Lender’s Unused Commitment at such time. Each
 
19

Committed Borrowing shall be in an aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof and shall consist of Committed Advances made simultaneously by the Lenders ratably according to their Commitments. Within the limits of each Lender’s Unused Commitment in effect from time to time, each Borrower may borrow under this Section 2.01, prepay pursuant to Section 2.07 and reborrow under this Section 2.01.
 
(b) Letters of Credit . The Issuing Bank agrees, on the terms and subject to the conditions herein set forth, to issue letters of credit (the “ Letters of Credit ”) for the account of any Borrower on any Letter of Credit Business Day from time to time during the period from the date hereof until 30 days prior to the Termination Date. The Issuing Bank shall have no obligation to issue, and no Borrower shall request the issuance of, any Letter of Credit hereunder if the Available Amount of such Letter of Credit exceeds, immediately before the time of such issuance, an amount equal to the total Unused Commitments of the Lenders at such time (as such amount shall be advised by the Administrative Agent to the Issuing Bank as contemplated by Section 2.04). No Issuing Bank shall have any obligation to issue, and no Borrower shall request the issuance of, any Letter of Credit hereunder if the aggregate Available Amounts or the aggregate stated amount of all Letters of Credit issued by such Issuing Bank would exceed, after giving effect to such issuance, the maximum amount set forth in a letter agreement between such Issuing Bank and Parent, on behalf of the Borrowers. The Issuing Bank shall have no obligation to issue, and no Borrower shall request the issuance of, any Letter of Credit except within the following limitations: (i) each Letter of Credit shall be denominated in U.S. dollars (unless issued pursuant to Section 2.21), (ii) each Letter of Credit shall be payable only against sight drafts (and not time drafts) and (iii) no Letter of Credit shall have an expiration date (including all rights of the applicable Borrower or the beneficiary to require renewal) later than the earlier of 10 days prior to the Termination Date and one year after the date of issuance thereof, but a Letter of Credit may by its terms be automatically renewable annually unless the Issuing Bank notifies the beneficiary thereof of its election not to renew such Letter of Credit; provided that the terms of each Letter of Credit that is automatically renewable annually shall not permit the expiration date (after giving effect to any renewal) of such Letter of Credit in any event to be extended to a date later than 10 days prior to the Termination Date. The Issuing Bank shall have no obligation to issue any letter of credit which is unsatisfactory in form, substance or beneficiary to the Issuing Bank in the exercise of its reasonable judgment consistent with its customary practice.
 
Section 2.02 . Making the Committed Advances. (a) Except as otherwise provided in Section 2.03, each Committed Borrowing shall be made on notice, given not later than 11:00 a.m. (New York City time) on the third Business Day prior to the date of the proposed Committed Borrowing in the case of a Committed Borrowing consisting of Eurodollar Rate Advances, or not later than 10:30 a.m. (New York City time) on the date of the proposed Committed Borrowing in the case of a Committed Borrowing consisting of Base Rate
 
20

Advances, by any Borrower to the Administrative Agent, which shall give to each Lender prompt notice thereof by facsimile. Each such notice of a Committed Borrowing (a “ Notice of Committed Borrowing ”) shall be by telephone, confirmed immediately in writing, or facsimile, in substantially the form of Exhibit B-1 hereto, specifying therein the requested (i) date of such Committed Borrowing, (ii) Type of Advances comprising such Committed Borrowing, (iii) aggregate amount of such Committed Borrowing and (iv) in the case of a Committed Borrowing consisting of Eurodollar Rate Advances, initial Interest Period for such Committed Advances. Each Lender shall, before 12:00 noon (New York City time) on the date of such Committed Borrowing, make available for the account of its Applicable Lending Office to the Administrative Agent at the Administrative Agent’s Account, in same day funds, such Lender’s ratable portion of such Committed Borrowing in accordance with the respective Commitments of such Lender and the other Lenders. After the Administrative Agent’s receipt of such funds and upon fulfillment of the applicable conditions set forth in Article 3, the Administrative Agent will make such funds available to the Borrower requesting such Committed Borrowing by crediting the applicable Borrowers’ Account.
 
(b) Anything in subsection (a) above to the contrary notwithstanding, (i) no Borrower may select Eurodollar Rate Advances if the obligation of the Lenders to make Eurodollar Rate Advances shall then be suspended pursuant to Section 2.10 or 2.11 and (ii) the Committed Advances may not be outstanding as part of more than ten (10) separate Committed Borrowings.
 
(c) Each Notice of Committed Borrowing shall be irrevocable and binding on the Borrower that requested such Committed Borrowing. In the case of any Committed Borrowing that the related Notice of Committed Borrowing specifies is to be comprised of Eurodollar Rate Advances, the Borrower that requested such Committed Borrowing shall indemnify each Lender against any loss, cost or expense incurred by such Lender as a result of any failure to fulfill on or before the date specified in such Notice of Committed Borrowing for such Committed Borrowing the applicable conditions set forth in Article 3, including, without limitation, any loss (excluding loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Committed Advance to be made by such Lender as part of such Committed Borrowing when such Committed Advance, as a result of such failure, is not made on such date.
 
(d) Unless the Administrative Agent shall have received notice from a Lender prior to the date of any Committed Borrowing that such Lender will not make available to the Administrative Agent such Lender’s ratable portion of such Committed Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Committed Borrowing in accordance with subsection (a) of this Section 2.02 and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower requesting such Committed Borrowing on such date a corresponding amount. If and to the extent that such Lender shall not have so
 
21

made such ratable portion available to the Administrative Agent, such Lender and such Borrower severally agree to repay or pay to the Administrative Agent forthwith on demand such corresponding amount and to pay interest thereon, for each day from the date such amount is made available to such Borrower until the date such amount is repaid or paid to the Administrative Agent, at (i) in the case of such Borrower, the interest rate applicable at such time under Section 2.08 to Advances comprising such Committed Borrowing and (ii) in the case of such Lender, the Federal Funds Rate. If such Lender shall pay to the Administrative Agent such corresponding amount, such amount so paid shall constitute such Lender’s Committed Advance as part of such Borrowing for all purposes.
 
(e) The failure of any Lender to make the Committed Advance to be made by it as part of any Committed Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Committed Advance on the date of such Committed Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Committed Advance to be made by such other Lender on the date of any Committed Borrowing.
 
Section 2.03 . The Competitive Bid Advances. (a) Each Lender severally agrees that any Borrower may make Competitive Bid Borrowings under this Section 2.03 from time to time on any Business Day during the period from the date hereof until the date occurring 7 days prior to the Termination Date in the manner set forth below; provided that, following the making of each Competitive Bid Borrowing, the aggregate amount of the Advances then outstanding plus the then Available Amount of all Letters of Credit shall not exceed the aggregate amount of the Commitments of the Lenders.
 
(i) Any Borrower may request a Competitive Bid Borrowing under this Section 2.03 by delivering to the Administrative Agent, by telecopier, a notice of a Competitive Bid Borrowing (a “ Notice of Competitive Bid Borrowing ”), in substantially the form of Exhibit B-2 hereto, specifying therein the requested (v) date of such proposed Competitive Bid Borrowing, (w) aggregate amount of such proposed Competitive Bid Borrowing, (x) in the case of a Competitive Bid Borrowing consisting of LIBO Rate Advances, Interest Period, or in the case of a Competitive Bid Borrowing consisting of Fixed Rate Advances, maturity date for repayment of each Fixed Rate Advance to be made as part of such Competitive Bid Borrowing (which maturity date may not be earlier than the date occurring 7 days after the date of such Competitive Bid Borrowing or later than the earlier of (I) 180 days after the date of such Competitive Bid Borrowing and (II) the Termination Date), (y) interest payment date or dates relating thereto, and (z) other terms (if any) to be applicable to such Competitive Bid Borrowing, not later than 10:30 A.M. (New York City time) (A) at least one Business Day prior to the date of the proposed Competitive Bid Borrowing, if such Borrower shall specify in the Notice of Competitive Bid Borrowing that the rates of interest to be offered by the Lenders shall be fixed rates per annum (the Advances comprising any such Competitive Bid Borrowing being referred
 
22

to herein as “ Fixed Rate Advances ”) and (B) at least four Business Days prior to the date of the proposed Competitive Bid Borrowing, if such Borrower shall instead specify in the Notice of Competitive Bid Borrowing that the rates of interest to be offered by the Lenders are to be based on a margin above or below the LIBO Rate (the Advances comprising such Competitive Bid Borrowing being referred to herein as “ LIBO Rate Advances ”). Each Notice of Competitive Bid Borrowing shall be irrevocable and binding on such Borrower. The Administrative Agent shall in turn promptly notify each Lender of each request for a Competitive Bid Borrowing received by it from such Borrower by sending such Lender a copy of the related Notice of Competitive Bid Borrowing.
 
(ii) Each Lender may, if, in its sole discretion, it elects to do so, irrevocably offer to make one or more Competitive Bid Advances to the Borrower requesting the Competitive Bid Advances as part of such proposed Competitive Bid Borrowing at a rate or rates of interest specified by such Lender in its sole discretion, by notifying the Administrative Agent (which shall give prompt notice thereof to the Borrower requesting the Competitive Bid Borrowing), before 9:30 a.m. (New York City time) on the date of such proposed Competitive Bid Borrowing, in the case of a Competitive Bid Borrowing consisting of Fixed Rate Advances and before 10:00 a.m. (New York City time) three Business Days before the date of such proposed Competitive Bid Borrowing, in the case of a Competitive Bid Borrowing consisting of LIBO Rate Advances, of the minimum amount and maximum amount of each Competitive Bid Advance which such Lender would be willing to make as part of such proposed Competitive Bid Borrowing (which amounts may, subject to the proviso to the first sentence of this Section 2.03(a), exceed such Lender’s Commitment, if any), the rate or rates of interest therefor and such Lender’s Applicable Lending Office with respect to such Competitive Bid Advance; provided that if the Administrative Agent in its capacity as a Lender shall, in its sole discretion, elect to make any such offer, it shall notify the Borrower requesting such Competitive Bid Borrowing of such offer at least 30 minutes before the time and on the date on which notice of such election is to be given to the Administrative Agent by the other Lenders. If any Lender shall elect not to make such an offer, such Lender shall so notify the Administrative Agent, before 10:00 a.m. (New York City time) on the date on which notice of such election is to be given to the Administrative Agent by the other Lenders, and such Lender shall not be obligated to, and shall not, make any Competitive Bid Advance as part of such Competitive Bid Borrowing; provided that the failure by any Lender to give such notice shall not cause such Lender to be obligated to make any Competitive Bid Advance as part of such proposed Competitive Bid Borrowing.
 
(iii) The Borrower requesting any particular Competitive Bid Borrowing shall, in turn, before 10:30 a.m. (New York City time) on the
 
23

date of such proposed Competitive Bid Borrowing, in the case of a Competitive Bid Borrowing consisting of Fixed Rate Advances and before 11:00 a.m. (New York City time) three Business Days before the date of such proposed Competitive Bid Borrowing, in the case of a Competitive Bid Borrowing consisting of LIBO Rate Advances, either:
 
(x) cancel such Competitive Bid Borrowing by giving the Administrative Agent notice to that effect, or
 
(y) accept one or more of the offers made by any Lender or Lenders pursuant to paragraph (ii) above, in its sole discretion, by giving notice to the Administrative Agent of the amount of each Competitive Bid Advance (which amount shall be equal to or greater than the minimum amount, and equal to or less than the maximum amount, notified to such Borrower by the Administrative Agent on behalf of such Lender for such Competitive Bid Advance pursuant to paragraph (ii) above) to be made by each such Lender as part of such Competitive Bid Borrowing, and reject any remaining offers made by Lenders pursuant to paragraph (ii) above by giving the Administrative Agent notice to that effect. The Borrower that requested such Competitive Bid Borrowing shall accept the offers made by any Lender or Lenders to make Competitive Bid Advances in order of the lowest to the highest rates of interest offered by such Lenders. If two or more Lenders have offered the same interest rate, the amount to be borrowed at such interest rate will be allocated among such Lenders in proportion to the amount that each such Lender offered at such interest rate.
 
(iv) If the Borrower that requested any particular Competitive Bid Borrowing notifies the Administrative Agent that such Competitive Bid Borrowing is canceled pursuant to paragraph (iii)(x) above, the Administrative Agent shall give prompt notice thereof to the Lenders and such Competitive Bid Borrowing shall not be made.
 
(v) If the Borrower that requested any particular Competitive Bid Borrowing accepts one or more of the offers made by any Lender or Lenders pursuant to paragraph (iii)(y) above, the Administrative Agent shall in turn promptly notify (A) each Lender that has made an offer as described in paragraph (ii) above, of the date and aggregate amount of such Competitive Bid Borrowing and whether or not any offer or offers made by such Lender pursuant to paragraph (ii) above have been accepted by such Borrower, (B) each Lender that is to make a Competitive Bid Advance as part of such Competitive Bid Borrowing, of the amount of each Competitive Bid Advance to be made by such Lender as part of such Competitive Bid Borrowing, and (C) each Lender that is to make a Competitive Bid Advance as part of such Competitive Bid Borrowing, upon receipt, that the Administrative Agent has received forms of
 
24

documents appearing to fulfill the applicable conditions set forth in Article 3. Each Lender that is to make a Competitive Bid Advance as part of such Competitive Bid Borrowing shall, before 12:00 noon (New York City time) on the date of such Competitive Bid Borrowing specified in the notice received from the Administrative Agent pursuant to clause (A) of the preceding sentence or any later time when such Lender shall have received notice from the Administrative Agent pursuant to clause (C) of the preceding sentence, make available for the account of its Applicable Lending Office to the Administrative Agent at the Administrative Agent’s Account, in same day funds, such Lender’s portion of such Competitive Bid Borrowing. Upon fulfillment of the applicable conditions set forth in Article 3 and after receipt by the Administrative Agent of such funds, the Administrative Agent will make such funds available to the Borrower that requested such Borrowing at the Administrative Agent’s address referred to in Section 8.02. Promptly after each Competitive Bid Borrowing the Administrative Agent will notify each Lender of the amount of the Competitive Bid Borrowing.
 
(vi) If the Borrower that requested any particular Competitive Bid Borrowing notifies the Administrative Agent that it accepts one or more of the offers made by any Lender or Lenders pursuant to paragraph (iii)(y) above, such notice of acceptance shall be irrevocable and binding on such Borrower. Such Borrower shall indemnify each Lender against any loss, cost or expense incurred by such Lender as a result of any failure to fulfill on or before the date specified in the related Notice of Competitive Bid Borrowing for such Competitive Bid Borrowing the applicable conditions set forth in Article 3, including, without limitation, any loss (excluding loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Competitive Bid Advance to be made by such Lender as part of such Competitive Bid Borrowing when such Competitive Bid Advance, as a result of such failure, is not made on such date.
 
(b) Each Competitive Bid Borrowing shall be in an aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof and, following the making of each Competitive Bid Borrowing, the Borrowers shall be in compliance with the limitations set forth in the proviso to the first sentence of subsection (a) above.
 
(c) Within the limits and on the conditions set forth in this Section 2.03, any Borrower may from time to time borrow under this Section 2.03, repay or prepay pursuant to subsection (d) below, and reborrow under this Section 2.03, provided that a Competitive Bid Borrowing shall not be made within three Business Days of the date of any other Competitive Bid Borrowing.
 
(d) The Borrower to which any particular Competitive Bid Borrowing is made shall repay the then unpaid principal amount of each Competitive Bid
 
25

Advance to the Administrative Agent for the account of each Lender that has made such Competitive Bid Advance, on the maturity date of such Competitive Bid Advance (such maturity date being that specified by such Borrower as the last day of the Interest Period or the maturity date of such Competitive Bid Advance in the related Notice of Competitive Bid Borrowing delivered pursuant to subsection (a)(i) above). No Borrower shall have any right to prepay any principal amount of any Competitive Bid Advance unless, and then only on the terms, specified by such Borrower for such Competitive Bid Advance in the related Notice of Competitive Bid Borrowing delivered pursuant to subsection (a)(i) above.
 
(e) The Borrower to which any particular Competitive Bid Borrowing is made shall pay interest on the unpaid principal amount of each Competitive Bid Advance from the date of such Competitive Bid Advance to the date the principal amount of such Competitive Bid Advance is repaid in full, at the rate of interest for such Competitive Bid Advance specified by the Lender making such Competitive Bid Advance in its notice with respect thereto delivered pursuant to subsection (a)(ii) above, payable on the interest payment date or dates specified by such Borrower for such Competitive Bid Advance in the related Notice of Competitive Bid Borrowing delivered pursuant to subsection (a)(i) above. Upon the occurrence and during the continuance of an Event of Default under Section 6.01(a) or 6.01(f) or at the request of the Required Lenders during the existence of any other Event of Default, such Borrower shall pay interest on the amount of unpaid principal of and interest on each Competitive Bid Advance owing to a Lender, payable in arrears on the date or dates interest is payable thereon, at a rate per annum equal at all times to 2% per annum above the rate per annum otherwise required to be paid on such Competitive Bid Advance.
 
Section 2.04. Issuance and Renewals and Drawings, Participations and Reimbursement with Respect to Letters of Credit. (a) Request for Issuance. A Borrower may from time to time request, upon at least three Letter of Credit Business Days’ written notice (given not later than 11:00 a.m. New York City time on the last day permitted therefor), the Issuing Bank to issue or renew (other than any automatic renewal thereof) a Letter of Credit by:
 
(i) delivering to the Issuing Bank and the Administrative Agent a written request to such effect, specifying the date on which such Letter of Credit is to be issued (which shall be a Letter of Credit Business Day), the expiration date thereof, the Available Amount thereof, the name and address of the beneficiary thereof and the form thereof, and
 
(ii) in the case of the issuance of a Letter of Credit, delivering to the Issuing Bank a completed agreement and application with respect to such Letter of Credit as the Issuing Bank may specify for use in connection with such requested Letter of Credit (a “ Letter of Credit Agreement ”), together with such other certificates, documents and other papers as are specified in such Letter of Credit Agreement.
 
26

The Administrative Agent shall, promptly upon receiving such notice, notify the Lenders of such proposed Letter of Credit (which notice shall specify the Available Amount and term of such proposed Letter of Credit) or such proposed renewal of a Letter of Credit (which notice shall specify the term of such renewal), and shall determine, as of 11:00 a.m. (New York City time) on the Business Day immediately preceding such proposed issuance, whether such proposed Letter of Credit complies with the limitations set forth in Section 2.01 hereof. If such limitations set forth in Section 2.01 are not satisfied or if the Required Lenders have given notice to the Administrative Agent to cease issuing or renewing Letters of Credit as contemplated by this Agreement, the Administrative Agent shall immediately notify the Issuing Bank (in writing or by telephone immediately confirmed in writing) that the Issuing Bank is not authorized to issue or renew, as the case may be, such Letter of Credit. If the Issuing Bank issues or renews a Letter of Credit, it shall deliver the original of such Letter of Credit to the beneficiary thereof or as the Account Party shall otherwise direct, and shall promptly notify the Administrative Agent thereof and furnish a copy thereof to the Administrative Agent.
 
(b) Request for Extension or Increase . An Account Party may from time to time request the Issuing Bank to extend the expiration date of an outstanding Letter of Credit or increase (or, with the consent of the beneficiary, decrease) the Available Amount of or the amount available to be drawn on such Letter of Credit. Such extension or increase shall for all purposes hereunder be treated as though such Account Party had requested issuance of a replacement Letter of Credit (except only that the Issuing Bank may, if it elects, issue a notice of extension or increase in lieu of issuing a new Letter of Credit in substitution for the outstanding Letter of Credit).
 
(c) Limitations on Issuance, Extension, Renewal and Amendment . As between the Issuing Bank, on the one hand, and the Agents and the Lenders, on the other hand, the Issuing Bank shall be justified and fully protected in issuing or renewing a proposed Letter of Credit unless it shall have received notice from the Administrative Agent as provided in Section 2.04(a) hereof that it is not authorized to do so (and, in the case of automatic renewals, ten days shall have passed following the date of the Issuing Bank’s receipt of such notice), notwithstanding any subsequent notices to the Issuing Bank, any knowledge of a Default, any knowledge of failure of any condition specified in Article 3 hereof to be satisfied, any other knowledge of the Issuing Bank, or any other event, condition or circumstance whatsoever. The Issuing Bank may amend, modify or supplement Letters of Credit or Letter of Credit Agreements, or waive compliance with any condition of issuance, renewal or payment, without the consent of, and without liability to, any Agent or any Lender, provided that any such amendment, modification or supplement that extends the expiration date or increases the Available Amount of or the amount available to be drawn on an outstanding Letter of Credit shall be subject to Section 2.01.
 
(d) Letter of Credit Participating Interests . Concurrently with the issuance of each Letter of Credit, the Issuing Bank automatically shall be deemed,
 
27

irrevocably and unconditionally, to have sold, assigned, transferred and conveyed to each other Lender, and each other Lender automatically shall be deemed, irrevocably and unconditionally, severally to have purchased, acquired, accepted and assumed from the Issuing Bank, without recourse to, or representation or warranty by, the Issuing Bank, an undivided interest, in a proportion equal to such Lender’s Pro Rata Share, in all of the Issuing Bank’s rights and obligations in, to or under such Letter of Credit, the related Letter of Credit Agreement, all reimbursement obligations with respect to such Letter of Credit, and all collateral, guarantees and other rights from time to time directly or indirectly securing the foregoing (such interest of each Lender being referred to herein as a “ Letter of Credit Participating Interest ”, it being understood that the Letter of Credit Participating Interest of the Issuing Bank is the interest not otherwise attributable to the Letter of Credit Participating Interests of the other Lenders). Each Lender irrevocably and unconditionally agrees to the immediately preceding sentence, such agreement being herein referred to as such Bank’s “ Letter of Credit Participating Interest Commitment ”. Amounts, other than Letter of Credit Advances made by a Lender other than the Issuing Bank and other than Letter of Credit commissions under Section 2.09(d)(i), payable from time to time under or in connection with a Letter of Credit or Letter of Credit Agreement shall be for the sole account of the Issuing Bank. On the date that any Assignee becomes a party to this Agreement in accordance with Section 9.07 hereof, Letter of Credit Participating Interests in all outstanding Letters of Credit held by the Lender from which such Assignee acquired its interest hereunder shall be proportionately reallocated between such Assignee and such assignor Lender (and, to the extent such assignor Lender is the Issuing Bank, the Assignee shall be deemed to have acquired a Letter of Credit Participating Interest from the Issuing Bank to such extent). Notwithstanding any other provision hereof, each Lender hereby agrees that its obligation to participate in each Letter of Credit, its obligation to make the payments specified in Section 2.04(e), and the right of the Issuing Bank to receive such payments in the manner specified therein, are each absolute, irrevocable and unconditional and shall not be affected by any event, condition or circumstance whatever. The failure of any Lender to make any such payment shall not relieve any other Lender of its funding obligation hereunder on the date due, but no Lender shall be responsible for the failure of any other Lender to meet its funding obligations hereunder.
 
(e) Payment by Lenders on Account of Unreimbursed Draws . If the Issuing Bank makes a payment under any Letter of Credit and is not reimbursed in full therefor on such payment date in accordance with Section 2.05(b), the Issuing Bank may notify the Administrative Agent thereof (which notice may be by telephone), and the Administrative Agent shall forthwith notify each Lender (which notice may be by telephone promptly confirmed in writing) thereof. No later than the Administrative Agent’s close of business on the date such notice is given (if notice is given by 2:00 p.m. New York City time) or 10:00 a.m. New York City time the following day (if notice is given after 2:00 p.m. New York City time or in the case of any Lender whose Applicable Lending Office is located in Europe), each Lender will pay to the Administrative Agent, for the
 
28

account of the Issuing Bank, in immediately available funds, an amount equal to such Lender’s Pro Rata Share of the unreimbursed portion of such payment by the Issuing Bank. Amounts received by the Administrative Agent for the account of the Issuing Bank shall be forthwith transferred, in immediately available funds, to the Issuing Bank. If and to the extent that any Lender fails to make such payment to the Administrative Agent for the account of the Issuing Bank on such date, such Lender shall pay such amount on demand, together with interest, for the Issuing Bank’s own account, for each day from and including the date of the Issuing Bank’s payment to but not including the date of repayment to the Issuing Bank (before and after judgment) at a rate per annum for each day (i) from and including the date of such payment by the Issuing Bank to and including the second Business Day thereafter equal to the Federal Funds Rate and (ii) thereafter equal to the Base Rate.
 
(f) Letter of Credit Advances . The term “ Letter of Credit Advance ” is used in this Agreement in accordance with the meanings set forth in this paragraph 2.04(f). The making of any payment by the Issuing Bank under a Letter of Credit is sometimes referred to herein as the making of a Letter of Credit Advance by the Issuing Bank in the amount of such payment. The making of any payment by a Lender for the account of the Issuing Bank under Section 2.04(e) on account of an unreimbursed drawing on a Letter of Credit is sometimes referred to herein as the making of a Letter of Credit Advance to the applicable Borrower by such Lender. The making of such a Letter of Credit Advance by a Lender with respect to an unreimbursed drawing on a Letter of Credit shall reduce, by a like amount, the outstanding Letter of Credit Advance of the Issuing Bank with respect to such unreimbursed drawing.
 
(g) Letter of Credit Reports. The Issuing Bank will furnish to the Administrative Agent prompt written notice of each issuance of a Letter of Credit (including the Available Amount and expiration date thereof), amendment to a Letter of Credit, cancellation of a Letter of Credit and payment on a Letter of Credit. The Administrative Agent will furnish (A) to each Lender prior to the tenth Business Day of each month a written report summarizing issuance and expiration dates of Letters of Credit issued during the preceding month and payments and reductions in Available Amount during such month on all Letters of Credit and (B) to each Lender prior to the tenth Business Day of each calendar quarter a written report setting forth the average daily aggregate Available Amount during the preceding calendar quarter of all Letters of Credit.
 
(h) Existing Letter of Credit . The Existing Letter of Credit shall be deemed to have been issued pursuant hereto, and from and after the Effective Date shall be a Letter of Credit hereunder and shall be (and Mellon Bank, N.A. as the applicable Issuing Bank thereof shall be) entitled to all rights and benefits provided by the terms and conditions hereof.
 
Section 2.05 . Repayment of Advances. (a) Committed Advances . Each Borrower shall repay to the Administrative Agent for the ratable account of the Lenders on the Termination Date the aggregate outstanding principal amount of the Committed Advances then outstanding.
 
29

(b) Account Party’s Reimbursement Obligation. (i) Each Account Party hereby agrees to reimburse the Issuing Bank (by making payment to the Administrative Agent for the account of the Issuing Bank in accordance with Section 2.12) in the amount of each payment made by the Issuing Bank under any Letter of Credit issued for such Account Party’s account, such reimbursement to be made on the date such payment under such Letter of Credit is made by the Issuing Bank (but not earlier than the date which is one Business Day after notice of such payment under such Letter of Credit or of the drawing giving rise to such payment under such Letter of Credit is given to such Account Party). Such reimbursement obligation shall be payable without further notice, protest or demand, all of which are hereby waived, and an action therefor shall immediately accrue. To the extent such payment by such Account Party is not timely made, such Account Party hereby agrees to pay to the Administrative Agent, for the respective accounts of the Issuing Bank and the Lenders which have funded their respective shares of such amount remaining unpaid by such Account Party, on demand, interest thereon at the rate then applicable to Base Rate Advances under . Each Letter of Credit Advance shall be a Base Rate Advance.
 
(ii) The obligation of each Account Party to reimburse the Issuing Bank for any payment made by the Issuing Bank under any Letter of Credit, and the obligation of each Lender under Section 2.04(e) with respect thereto, shall be unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement, the applicable Letter of Credit Agreement and any other applicable agreement or instrument under all circumstances, including, without limitation, the following circumstances:
 
(A) any lack of validity or enforceability of any Loan Document, any Letter of Credit Agreement, any Letter of Credit or any other agreement or instrument relating thereto (all of the foregoing being, collectively, the “ L/C Related Documents ”);
 
(B) any change in the time, manner or place of payment of, or in any other term of, all or any of the obligations of any Borrower or any other Person in respect of any L/C Related Document or any other amendment or waiver of or any consent to departure from all or any of the L/C Related Documents;
 
(C) the existence of any claim, set-off, defense or other right that any Borrower or any other Person may have at any time against any beneficiary or any transferee of a Letter of Credit (or any Persons for which any such beneficiary or any such transferee may be acting), the Issuing Bank or any other Person, whether in connection with the transactions contemplated by the L/C Related Documents or any unrelated transaction;
 
30

(D) any statement or any other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect;
 
(E) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or certificate that does not strictly comply with the terms of such Letter of Credit;
 
(F) any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from the Guaranty or any other guarantee, for all or any of the obligations of any Borrower or any other Person in respect of the L/C Related Documents; or
 
(G) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including, without limitation, any other circumstance that might otherwise constitute a defense available to, or a discharge of, any Borrower or a guarantor.
 
(c) Rescission . If any amount received by the Issuing Bank on account of any Letter of Credit Advance shall be avoided, rescinded or otherwise returned or paid over by the Issuing Bank for any reason at any time, whether before or after the termination of this Agreement (or the Issuing Bank believes in good faith that such avoidance, rescission, return or payment is required, whether or not such matter has been adjudicated), each Lender will (except to the extent a corresponding amount received by such Lender on account of its Letter of Credit Advance relating to the same payment on a Letter of Credit has been avoided, rescinded or otherwise returned or paid over by such Lender), promptly upon notice from the Administrative Agent or the Issuing Bank, pay over to the Administrative Agent for the account of the Issuing Bank its Pro Rata Share of such amount, together with its Pro Rata Share of any interest or penalties payable with respect thereto.
 
Section 2.06 . Termination or Reduction of the Commitments. The Parent may, upon at least three Business Days’ notice to the Administrative Agent, terminate in whole or reduce in part the unused portion of the Commitments; provided, however, that each partial reduction (i) shall be in an aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof and (ii) shall be made ratably among the Lenders in accordance with their Commitments.
 
Section 2.07 . Prepayments. Each Borrower may, upon notice given not later than 11:00 a.m. (New York City Time) on the Business Day on which such prepayment is to be made, in the case of Base Rate Advances, or on the third Business Day prior to the date on which such prepayment is to be made, in the case of Eurodollar Rate Advances, in each case to the Administrative Agent
 
31

stating the proposed date and aggregate principal amount of the prepayment, and if such notice is given such Borrower shall, prepay the outstanding aggregate principal amount of the Committed Advances comprising part of the same Committed Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the aggregate principal amount prepaid; provided, however, that (x) each partial prepayment shall be in an aggregate principal amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof (except that prepayment of any Letter of Credit Advance may be made in any amount so long as such Letter of Credit Advance is paid in full or, after giving effect to such prepayment, the aggregate principal amount of all Letter of Credit Advances is an integral multiple of $1,000,000) and (y) if any prepayment of a Eurodollar Rate Advance is made on a date other than the last day of an Interest Period for such Committed Advance, such Borrower shall also pay any amounts owing pursuant to Section 9.04(c). All prepayments in respect of Eurodollar Rate Advances shall be made together with accrued interest to the date of such prepayment on the principal amount prepaid.
 
Section 2.08 . Interest. (a) Scheduled Interest . Each Borrower shall pay interest on the unpaid principal amount of each Advance owing to each Lender from the date of such Advance until such principal amount shall be paid in full, at the following rates per annum:
 
(i) Base Rate Advances . During such periods as such Advance is a Base Rate Advance, a rate per annum equal at all times to the Base Rate in effect from time to time, payable in arrears quarterly on the last day of each March, June, September and December during such periods and on the Termination Date.
 
(ii) Eurodollar Rate Advances . During such periods as such Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during each Interest Period for such Advance to the sum of (A) the Eurodollar Rate for such Interest Period for such Advance plus (B) the Applicable Margin in effect from time to time, payable in arrears on the last day of such Interest Period and, if such Interest Period has a duration of more than three months, on each day that occurs during such Interest Period every three months from the first day of such Interest Period and on the date such Eurodollar Rate Advance shall be Converted or paid in full.
 
(iii) Regulation D Compensation . Each Lender that is subject to reserve requirements of the Board of Governors of the Federal Reserve System (or any successor) may require the applicable Borrower to pay, contemporaneously with each payment of interest on Eurodollar Rate Advances, additional interest on the related Eurodollar Rate Advances of such Lender at the rate per annum equal to the excess of (i)(A) the applicable Eurodollar Rate, divided by (B) one minus the Eurodollar Rate Reserve Requirement over (ii) the rate specified in clause (i)(A). Any Lender wishing to require payment of such additional interest shall so notify such Borrower directly, in which case such additional interest on
 
32

the Eurodollar Rate Advances of such Lender shall be payable to such Lender at the place indicated in such notice with respect to each Interest Period commencing after the giving of such notice.
 
(b) Default Interest . Upon the occurrence and during the existence of an Event of Default under Section 6.01(a) or 6.01(f) or at the request of the Required Lenders during the existence of any other Event of Default, each Borrower shall pay interest on (i) the unpaid principal amount of each Advance owing to each Lender, payable in arrears on the dates referred to in clause (a)(i) or (a)(ii) above and at a rate per annum equal at all times to 2% per annum above the rate per annum required to be paid on such Advance pursuant to clause (a)(i) or (a)(ii) above and (ii) to the fullest extent permitted by law, the amount of any interest, fee or other amount payable under the Loan Documents that is not paid when due, from the date such amount shall be due until such amount shall be paid in full, payable in arrears on the date such amount shall be paid in full and on demand, at a rate per annum equal at all times to 2% per annum above the rate per annum required to be paid, in the case of interest, on the Type of Advance on which such interest has accrued pursuant to clause (a)(i) or (a)(ii) above and, in all other cases, on Base Rate Advances pursuant to clause (a)(i) above.
 
(c) Notice of Interest Period and Interest Rate . Promptly after receipt of a Notice of Borrowing pursuant to Section 2.01(a), a notice of Conversion pursuant to Section 2.10 or a notice of selection of an Interest Period pursuant to the terms of the definition of “ Interest Period ”, the Administrative Agent shall give notice to the Borrowers and each Lender of the applicable Interest Period and the applicable interest rate determined by the Administrative Agent for purposes of clause (a)(i) or (a)(ii) above.
 
Section 2.09 . Fees. (a) Facility Fee . The Borrowers agree to pay to the Administrative Agent for the account of the Lenders a facility fee, from the Effective Date until the Termination Date, payable in arrears quarterly on the last day of each March, June, September and December, commencing on June 30, 2004, and on the Termination Date, at the rate of the Applicable Facility Fee Percentage on the average daily Commitment of each Lender during such quarter (whether used or unused); provided, however, that no facility fee shall accrue on the Unused Commitment of a Defaulting Lender so long as such Lender shall be a Defaulting Lender.
 
(b) Agents’ Fees . Each Borrower agrees that it shall pay to each Agent for its own account such fees as may from time to time be agreed between such Borrower and such Agent.
 
(c) Letter of Credit Fees, Etc . (i) Each Borrower agrees that it shall pay to the Administrative Agent for the account of each Lender a commission, payable in arrears quarterly on the last day of each calendar quarter commencing June 30, 2004, and on the earliest to occur of the full drawing, expiration, termination or cancellation of any Letter of Credit and on the Termination Date, on such Lender’s Pro Rata Share of the average daily aggregate Available
 
33

Amount during such quarter of all Letters of Credit issued for the account of such Borrower outstanding from time to time at the rate equal to the then Applicable Margin.
 
(ii) Each Borrower agrees that it shall pay to the Issuing Bank, for its own account, such commissions, issuance fees, fronting fees, transfer fees and other fees and charges in connection with the issuance or administration of each Letter of Credit issued for the account of such Borrower as such Borrower and the Issuing Bank shall agree in a side letter.
 
Section 2.10 . Conversion of Advances. (a) Optional . Each Borrower may on any Business Day, upon notice given to the Administrative Agent not later than 11:00 a.m. (New York City time) on the third Business Day prior to the date of the proposed Conversion and subject to the provisions of Section 2.11, Convert all or any portion of the Committed Advances of one Type comprising the same Committed Borrowing into Committed Advances of the other Type; provided, however, that any Conversion of Base Rate Advances into Eurodollar Rate Advances shall be in an amount not less than the minimum amount specified in Section 2.01 for a Committed Borrowing, no Conversion of any Committed Advances shall result in more separate Committed Borrowings than permitted under Section 2.02(b) and each Conversion of Committed Advances comprising part of the same Committed Borrowing shall be made ratably among the Lenders in accordance with their respective Commitments. Each such notice of Conversion shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the Committed Advances to be Converted and (iii) if such Conversion is into Eurodollar Rate Advances, the duration of the initial Interest Period for such Committed Advances. Each notice of Conversion shall be irrevocable and binding on such Borrower.
 
(b) Mandatory . (i) On the date on which the aggregate unpaid principal amount of Eurodollar Rate Advances comprising any Committed Borrowing shall be reduced, by payment or prepayment or otherwise, to less than $10,000,000, such Committed Advances shall automatically Convert into Base Rate Advances at the end of the applicable Interest Period.
 
(ii) If the Borrowers shall fail to select the duration of any Interest Period for any Eurodollar Rate Advances in accordance with the provisions contained in the definition of “ Interest Period ” in Section 1.01, the Administrative Agent will forthwith so notify the Borrowers and the Lenders, whereupon each such Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance.
 
(iii) Upon the occurrence and during the existence of an Event of Default under Section 6.01(a) or 6.01(f) or at the request of the Required Lenders during the existence of any other Event of Default, (x) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance and (y) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended.
 
34

Section 2.11 . Increased Costs, Etc. (a) If, due to either (i) the introduction of or any change in or in the interpretation of, in each case after the date hereof, any law or regulation or (ii) the compliance with any guideline or request issued after the date hereof from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to any Lender of agreeing to make or of making, funding or maintaining Eurodollar Rate Advances or LIBO Rate Advances or of agreeing to issue or of issuing or maintaining or participating in Letters of Credit (excluding, for purposes of this Section 2.11, any such increased costs resulting from (x) Taxes or Other Taxes (as to which Section 2.13 shall govern) and (y) changes in the basis of taxation of overall net income or overall gross income by the United States or by the foreign jurisdiction or state under the laws of which such Lender is organized or has its Applicable Lending Office or any political subdivision thereof), then the Borrowers agree to pay, from time to time, within ten days after demand by such Lender (with a copy of such demand to the Administrative Agent), which demand shall include a statement of the basis for such demand and a calculation in reasonable detail of the amount demanded, to the Administrative Agent for the account of such Lender additional amounts sufficient to compensate such Lender for such increased cost. A certificate as to the amount of such increased cost, submitted to the Borrowers by such Lender, shall be conclusive and binding for all purposes, absent manifest error.
 
(b) If, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation, in each case after the date hereof, or (ii) the compliance with any guideline or request issued after the date hereof from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the amount of capital required or expected to be maintained by any Lender or any corporation controlling such Lender as a result of or based upon the existence of such Lender’s commitment to lend hereunder and other commitments of such type, then, within ten days after demand by such Lender or such corporation (with a copy of such demand to the Administrative Agent), which demand shall include a statement of the basis for such demand and a calculation in reasonable detail of the amount demanded, the Borrowers agree to pay to the Administrative Agent for the account of such Lender, from time to time as specified by such Lender, additional amounts sufficient to compensate such Lender in the light of such circumstances, to the extent that such Lender reasonably determines such increase in capital to be allocable to the existence of such Lender’s commitment to lend or to issue or participate in Letters of Credit hereunder or to the issuance or maintenance of or participation in any Letters of Credit. A certificate as to such amounts submitted to the Borrowers by such Lender shall be conclusive and binding for all purposes, absent manifest error.
 
(c) If, prior to the first day of any Interest Period with respect to any Eurodollar Rate Advances, the Required Lenders notify the Administrative Agent
 
35

that the Eurodollar Rate for such Interest Period for such Committed Advances will not adequately reflect the cost to such Lenders of making, funding or maintaining their Eurodollar Rate Advances for such Interest Period, the Administrative Agent shall forthwith so notify the Borrower and the Lenders, whereupon each such Eurodollar Rate Advance will (i) in the case of requested new Eurodollar Rate Advances, be made as or remain Base Rate Advances or as a Eurodollar Rate Advance with a different Interest Period as to which the Required Lenders have not given such a notice and (ii) in the case of existing Eurodollar Rate Advances, automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Advances or be continued as a Eurodollar Rate Advance with a different Interest Period as to which the Required Lenders have not given such notice.
 
(d) Notwithstanding any other provision of this Agreement, if the introduction of or any change in or in the interpretation of any law or regulation, in each case after the date hereof, shall make it unlawful, or any central bank or other governmental authority shall assert that it is unlawful, for any Lender or its Eurodollar Lending Office to perform its obligations hereunder to make Eurodollar Rate Advances or LIBO Rate Advances or to continue to fund or maintain Eurodollar Rate Advances or LIBO Rate Advances hereunder, then, on notice thereof and demand therefor by such Lender to the Borrowers through the Administrative Agent, (i) each Eurodollar Rate Advance or LIBO Rate Advance, as the case may be, of such Lender will automatically, upon such demand, Convert into a Base Rate Advance or an Advance that bears interest at the rate set forth in Section 2.08(a)(i), as the case may be, and (ii) the obligation of such Lender to make Eurodollar Rate Advances or LIBO Rate Advances or to Convert Committed Advances into Eurodollar Rate Advances shall be suspended until the Administrative Agent shall notify the Borrowers that such Lender has determined that the circumstances causing such suspension no longer exist (it being understood that such Lender shall make and maintain Base Rate Advances in the amount that would otherwise be made and maintained by such Lender as Eurodollar Advances absent the circumstances described above).
 
(e) Each Lender shall promptly notify the Borrowers and the Administrative Agent of any event of which it has actual knowledge which will result in, and will use reasonable commercial efforts available to it (and not, in such Lender’s good faith judgment, otherwise disadvantageous to such Lender) to mitigate or avoid, (i) any obligation by the Borrowers to pay any amount pursuant to subsection (a) or (b) above or pursuant to Section 2.13 or (ii) the occurrence of any circumstances of the nature described in subsection (c) or (d) above (and, if any Lender has given notice of any event described in clause (i) or (ii) above and thereafter such event ceases to exist, such Lender shall promptly so notify the Borrowers and the Administrative Agent). Without limiting the foregoing, each Lender will designate a different Applicable Lending Office if such designation will avoid (or reduce the cost to the Borrowers of) any event described in clause (i) or (ii) of the preceding sentence and such designation will not, in such Lender’s good faith judgment, be otherwise disadvantageous to such Lender.
 
36

(f) Notwithstanding the provisions of subsections (a) and (b) above or Section 2.13 (and without limiting subsection (e) above), if any Lender fails to notify the Borrowers of any event or circumstance that will entitle such Lender to compensation pursuant subsection (a) or (b) above or Section 2.13 within 120 days after such Lender obtains actual knowledge of such event or circumstance, then such Lender shall not be entitled to compensation, from the Borrowers for any amount arising prior to the date which is 120 days before the date on which such Lender notifies the Borrowers of such event or circumstance.
 
Section 2.12 . Payments and Computations. (a) The applicable Borrower shall make each payment hereunder and under the applicable Notes, irrespective of any right of counterclaim or set-off (except as otherwise provided in Section 2.16), not later than 12:00 noon (New York City time) on the day when due in U.S. dollars to the Administrative Agent at the Administrative Agent’s Account in same day funds, with payments being received by the Administrative Agent after such time being deemed to have been received on the next succeeding Business Day. The Administrative Agent will promptly thereafter cause like funds to be distributed (i) if such payment by such Borrower is in respect of principal, interest, facility fees or any other amount then payable hereunder and under the Notes to more than one Lender, to such Lenders for the account of their respective Applicable Lending Offices ratably in accordance with the amounts of such respective amount then payable to such Lenders and (ii) if such payment by such Borrower is in respect of any amount then payable hereunder to one Lender, to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement.
 
(b) Each Borrower hereby authorizes each Lender, if an Event of Default under Section 6.01(a) has occurred and is continuing, to charge from time to time against any or all of such Borrower’s accounts with such Lender any amount owing under this Agreement that resulted in such Event of Default.
 
(c) All computations of interest on Base Rate Advances (and any other amount payable by reference to the Base Rate) when the Base Rate is determined by reference to JPMCB’s prime rate shall be made by the Administrative Agent on the basis of a year of 365 or, if applicable, 366 days; all other computations of interest, fees and Letter of Credit commissions shall be made by the Administrative Agent on the basis of a year of 360 days. All such computations shall be made for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest, fees or commissions are payable. Each determination by the Administrative Agent of an interest rate, fee or commission hereunder shall be conclusive and binding for all purposes, absent manifest error.
 
(d) Whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fee, as the case may be; provided, however, that, if such extension would cause payment of interest on or principal of Eurodollar Rate Advances or LIBO Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day.
 
37

(e) Unless the Administrative Agent shall have received notice from any Borrower required to make any payment prior to the date on which any payment is due to any Lender hereunder that such Borrower will not make such payment in full, the Administrative Agent may assume that such Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance upon such assumption, cause to be distributed to each such Lender on such due date an amount equal to the amount then due such Lender. If and to the extent such Borrower shall not have so made such payment in full to the Administrative Agent, each such Lender shall repay to the Administrative Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent, at the Federal Funds Rate.
 
Section 2.13 . Taxes. (a) Any and all payments by any Loan Party hereunder or under the Notes shall be made, in accordance with Section 2.12, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and each Agent, taxes that are imposed on its overall net income and any branch profits taxes by the United States and taxes that are imposed on its overall net income (and franchise taxes imposed in lieu thereof) and any branch profits taxes by the state or foreign jurisdiction under the laws of which such Lender or such Agent, as the case may be, is organized or any political subdivision thereof and, in the case of each Lender, taxes that are imposed on its overall net income (and franchise taxes imposed in lieu thereof) and any branch profits taxes by the state or foreign jurisdiction of such Lender’s Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities in respect of payments hereunder or under the Notes being herein referred to as “ Taxes ”). If any Loan Party shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note to any Lender or any Agent, (i) the sum payable by such Loan Party shall be increased as may be necessary so that after such Loan Party and the Administrative Agent have made all required deductions (including deductions applicable to additional sums payable under this Section 2.13) such Lender or such Agent, as the case may be, receives an amount equal to the sum it would have received had no such deductions been made, (ii) such Loan Party shall make all such deductions and (iii) such Loan Party shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law.
 
(b) In addition, each Loan Party shall pay any present or future stamp, documentary, excise, property or similar taxes, charges or levies that arise from any payment made hereunder or under the Notes or from the execution, delivery or registration of, performance under, or otherwise with respect to, this Agreement or the Notes (herein referred to as “ Other Taxes ”).
 
38

(c) Each Loan Party shall indemnify each Lender and each Agent for and hold them harmless against the full amount of Taxes and Other Taxes, and for the full amount of taxes of any kind imposed by any jurisdiction on amounts payable under this Section 2.13, imposed on or paid by such Lender or such Agent (as the case may be) and any liability (including penalties, additions to tax, interest and expenses) arising therefrom or with respect thereto. This indemnification payment shall be made within 30 days from the date such Lender or such Agent (as the case may be) makes written demand therefor.
 
(d) Within 30 days after the date of any payment of Taxes, each Loan Party shall furnish to the Administrative Agent, at its address referred to in Section 9.02, the original or a certified copy of a receipt evidencing such payment. In the case of any payment hereunder or under the Notes by or on behalf of a Loan Party through an account or branch outside the United States or by or on behalf of a Loan Party by a payor that is not a United States person, if such Loan Party determines that no Taxes are payable in respect thereof, such Loan Party shall furnish, or shall cause such payor to furnish, to the Administrative Agent, at such address, an opinion of counsel acceptable to the Administrative Agent stating that such payment is exempt from Taxes. For purposes of subsections (d) and (e) of this Section 2.13, the terms “ United States ” and “ United States person ” shall have the meanings specified in Section 7701(a)(9) and 7701(a)(10) of the Internal Revenue Code, respectively.
 
(e) Each Lender organized under the laws of a jurisdiction outside the United States shall, on or prior to the date of its execution and delivery of this Agreement in the case of each Initial Lender or the initial Issuing Bank, as the case may be, and on the date on which it becomes a Lender in the case of each other Lender, and from time to time thereafter as requested in writing by the Parent (but only so long thereafter as such Lender remains lawfully able to do so), provide each of the Administrative Agent and the Parent with two original Internal Revenue Service forms W-8BEN or W-8ECI or (in the case of a Lender that has certified in writing to the Administrative Agent that it is not a “ bank ” as defined in Section 881(c)(3)(A) of the Internal Revenue Code) form W-8 (and, if such Lender delivers a form W-8, a certificate representing that such Lender is not a “ bank ” for purposes of Section 881(c)(3)(A) of the Internal Revenue Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Internal Revenue Code) of the Parent and is not a controlled foreign corporation related to the Parent (within the meaning of Section 864(d)(4) of the Internal Revenue Code)), as appropriate, or any successor or other form prescribed by the Internal Revenue Service, certifying that such Lender is exempt from or entitled to a reduced rate of United States withholding tax on payments pursuant to this Agreement or the Notes or, in the case of a Lender providing a form W-8, certifying that such Lender is a foreign corporation, partnership, estate or trust. If the forms provided by a Lender at the time such Lender first becomes a party to this Agreement indicate a United States interest withholding tax rate in excess of
 
39

zero, withholding tax at such rate shall be considered excluded from Taxes unless and until such Lender provides the appropriate forms certifying that a lesser rate applies, whereupon withholding tax at such lesser rate only shall be considered excluded from Taxes for periods governed by such forms; provided, however, that if, at the effective date of the Assignment and Acceptance pursuant to which a Lender becomes a party to this Agreement, the Lender assignor was entitled to payments under subsection (a) of this Section 2.13 in respect of United States withholding tax with respect to interest paid at such date, then, to such extent, the term Taxes shall include (in addition to withholding taxes that may be imposed in the future or other amounts otherwise includible in Taxes) United States withholding tax, if any, applicable with respect to the Lender assignee on such date. If any form or document referred to in this subsection (e) requires the disclosure of information, other than information necessary to compute the tax payable and information required on the date hereof by Internal Revenue Service form W-8BEN,W-8ECI or W-8 (and the related certificate described above), that the Lender reasonably considers to be confidential, the Lender shall give notice thereof to the Parent and shall not be obligated to include in such form or document such confidential information.
 
(f) For any period with respect to which a Lender which may lawfully do so has failed to provide the Parent with the appropriate form described in subsection (e) above ( other than if such failure is due to a change in law occurring after the date on which a form originally was required to be provided or if such form otherwise is not required under subsection (e) above), such Lender shall not be entitled to indemnification under subsection (a) or (c) of this Section 2.13 with respect to Taxes imposed by the United States by reason of such failure; provided, however, that should a Lender become subject to Taxes because of its failure to deliver a form required hereunder, the Parent shall take such steps as such Lender shall reasonably request to assist such Lender to recover such Taxes.
 
(g) Each Lender represents and warrants to the Borrowers that, as of the date such Lender becomes a party to this Agreement, such Lender is entitled to receive payments hereunder from the Borrowers without deduction or withholding for or on account of any Taxes.
 
(h) If a Lender or the Administrative Agent shall become aware that it is entitled to claim a refund from a governmental authority in respect of Taxes or Other Taxes as to which it has been indemnified by the Borrowers, or with respect to which the Borrowers have paid additional amounts, pursuant to this Section 2.13, it shall promptly notify the Borrowers of the availability of such refund claim and shall, within 30 days after receipt of a request by the Borrowers, make a claim to such governmental authority for such refund at the Borrowers’ expense, if obtaining such refund would not, in the good faith judgment of the Lender or Administrative Agent entitled to such refund, be materially disadvantageous to such Lender or the Administrative Agent; provided that nothing in this Section 2.13(h) shall be construed to require any Lender or the Administrative Agent to institute any administrative proceeding (other than the filing of a claim for any such refund) or judicial proceeding to obtain any such refund. If a Lender or the
 
40

Administrative Agent determines, in its sole discretion, that it has received a refund in respect of any Taxes or Other Taxes as to which it has been indemnified by the Borrowers or with respect to which the Borrowers have paid additional amounts pursuant to this Section 2.13, it shall within 60 days from the date of such receipt pay over such refund to the Borrowers (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrowers under this Section 2.13 with respect to the Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses of such Lender or the Administrative Agent and without interest (other than interest paid by the relevant governmental authority with respect to such refund); provided, however, that the Borrowers, upon request of such Lender or the Administrative Agent, agree to repay the amount paid over to the Borrowers (plus penalties, interest or other charges) to such Lender or the Administrative Agent in the event such Lender or the Administrative Agent is required to repay such refund to such governmental authority. Nothing in this Section 2.13(h) shall be construed to require the Administrative Agent or any Lender to make available its tax returns (or any other information relating to its taxes which it deems confidential) to the Borrowers or any other Person.
 
(i) Any Lender or the Administrative Agent claiming any indemnity payment or additional amounts payable pursuant to this Section 2.13 shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document reasonably requested by the Parent or to change the jurisdiction of its Applicable Lending Office if the making of such a filing or change would avoid the need for or reduce the amount of any such indemnity payment or additional amounts that may thereafter accrue and would not, in the determination of such Lender or the Administrative Agent, as the case may be, be otherwise disadvantageous to such Lender or the Administrative Agent.
 
Section 2.14 . Sharing of Payments, Etc. If any Lender shall obtain at any time any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise, other than as a result of an assignment pursuant to Section 9.07) (a) on account of obligations due and payable to such Lender hereunder and under the Notes at such time in excess of its ratable share (according to the proportion of (i) the amount of such obligations due and payable to such Lender at such time to (ii) the aggregate amount of the obligations due and payable to all Lenders hereunder and under the Notes at such time) of payments on account of the obligations due and payable to all Lenders hereunder and under the Notes at such time obtained by all the Lenders at such time or (b) on account of obligations owing (but not due and payable) to such Lender hereunder and under the Notes at such time in excess of its ratable share (according to the proportion of (i) the amount of such obligations owing to such Lender at such time to (ii) the aggregate amount of the obligations owing (but not due and payable) to all Lenders hereunder and under the Notes at such time) of payments on account of the obligations owing (but not due and payable) to all Lenders hereunder and under the Notes at such time obtained by all of the Lenders at such time, such Lender shall forthwith purchase from the other
 
41

Lenders such interests or participating interests in the obligations due and payable or owing to them, as the case may be, as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each other Lender shall be rescinded and such other Lender shall repay to the purchasing Lender the purchase price to the extent of such Lender’s ratable share (according to the proportion of (i) the purchase price paid to such Lender to (ii) the aggregate purchase price paid to all Lenders) of such recovery together with an amount equal to such Lender’s ratable share (according to the proportion of (i) the amount of such other Lender’s required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. Each Borrower agrees that any Lender so purchasing an interest or participating interest from another Lender pursuant to this Section 2.14 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such interest or participating interest, as the case may be, as fully as if such Lender were the direct creditor of such Borrower in the amount of such interest or participating interest, as the case may be.
 
Section 2.15 . Use of Proceeds. The proceeds of the Advances shall be available (and each Borrower agrees that it shall use such proceeds) to provide working capital, and for other general corporate purposes of the Borrowers and their respective Subsidiaries.
 
Section 2.16 . Defaulting Lenders. (a) In the event that, at any one time, (i) any Lender shall be a Defaulting Lender, (ii) such Defaulting Lender shall owe a Defaulted Advance to any Borrower and (iii) such Borrower shall be required to make any payment hereunder or under any other Loan Document to or for the account of such Defaulting Lender, then such Borrower may, to the fullest extent permitted by applicable law, set off and otherwise apply the obligation of such Borrower to make such payment to or for the account of such Defaulting Lender against the obligation of such Defaulting Lender to make such Defaulted Advance. In the event that, on any date, any Borrower shall so set off and otherwise apply its obligation to make any such payment against the obligation of such Defaulting Lender to make any such Defaulted Advance on or prior to such date, the amount so set off and otherwise applied by such Borrower shall constitute for all purposes of this Agreement and the other Loan Documents an Advance by such Defaulting Lender made on the date of such setoff. Such Committed Advance shall be considered, for all purposes of this Agreement, to comprise part of the Committed Borrowing in connection with which such Defaulted Advance was originally required to have been made pursuant to Section 2.01, even if the other Committed Advances comprising such Borrowing shall be Eurodollar Rate Advances on the date such Committed Advance is deemed to be made pursuant to this subsection (a). Each Borrower shall notify the Administrative Agent at any time such Borrower exercises its right of set-off pursuant to this subsection (a) and shall set forth in such notice (A) the name of
 
42

the Defaulting Lender and the Defaulted Advance required to be made by such Defaulting Lender and (B) the amount set off and otherwise applied in respect of such Defaulted Advance pursuant to this subsection (a). Any portion of such payment otherwise required to be made by such Borrower to or for the account of such Defaulting Lender which is paid by such Borrower, after giving effect to the amount set off and otherwise applied by such Borrower pursuant to this subsection (a), shall be applied by the Administrative Agent as specified in subsection (b) or (c) of this Section 2.16.
 
(b) In the event that, at any one time, (i) any Lender shall be a Defaulting Lender, (ii) such Defaulting Lender shall owe a Defaulted Amount to any Agent or any of the other Lenders and (iii) any Borrower shall make any payment hereunder or under any other Loan Document to the Administrative Agent for the account of such Defaulting Lender, then the Administrative Agent may, on its behalf or on behalf of such other Agents or such other Lenders and to the fullest extent permitted by applicable law, apply at such time the amount so paid by such Borrower to or for the account of such Defaulting Lender to the payment of each such Defaulted Amount to the extent required to pay such Defaulted Amount. In the event that the Administrative Agent shall so apply any such amount to the payment of any such Defaulted Amount on any date, the amount so applied by the Administrative Agent shall constitute for all purposes of this Agreement and the other Loan Documents payment, to such extent, of such Defaulted Amount on such date. Any such amount so applied by the Administrative Agent shall be retained by the Administrative Agent or distributed by the Administrative Agent to such other Agents or such other Lenders, ratably in accordance with the respective portions of such Defaulted Amounts payable at such time to the Administrative Agent, such other Agents and such other Lenders and, if the amount of such payment made by such Borrower shall at such time be insufficient to pay all Defaulted Amounts owing at such time to the Administrative Agent, such other Agents and such other Lenders, in the following order of priority:
 
(i) first , to the Agents for any Defaulted Amounts then owing to the Agents, ratably in accordance with such respective Defaulted Amounts then owing to the Agents;
 
(ii) second , to the Issuing Bank for any amount then due and payable to it, in its capacity as such, by such Defaulting Lender, ratably in accordance with such amounts then due and payable to such Issuing Bank; and
 
(iii) third , to any other Lenders for any Defaulted Amounts then owing to such other Lenders, ratably in accordance with such respective Defaulted Amounts then owing to such other Lenders.
 
Any portion of such amount paid by such Borrower for the account of such Defaulting Lender remaining, after giving effect to the amount applied by the Administrative Agent pursuant to this subsection (b), shall be applied by the Administrative Agent as specified in subsection (c) of this Section 2.16.
 
43

(c) In the event that, at any one time, (i) any Lender shall be a Defaulting Lender, (ii) such Defaulting Lender shall not owe a Defaulted Advance or a Defaulted Amount and (iii) any Borrower, any Agent or any other Lender shall be required to pay or distribute any amount hereunder or under any other Loan Document to or for the account of such Defaulting Lender, then such Borrower or such Agent or such other Lender shall pay such amount to the Administrative Agent to be held by the Administrative Agent, to the fullest extent permitted by applicable law, in escrow or the Administrative Agent shall, to the fullest extent permitted by applicable law, hold in escrow such amount otherwise held by it. Any funds held by the Administrative Agent in escrow under this subsection (c) shall be deposited by the Administrative Agent in an account with JPMCB, in the name and under the control of the Administrative Agent, but subject to the provisions of this subsection (c). The terms applicable to such account, including the rate of interest payable with respect to the credit balance of such account from time to time, shall be JPMCB’s standard terms applicable to escrow accounts maintained with it. Any interest credited to such account from time to time shall be held by the Administrative Agent in escrow under, and applied by the Administrative Agent from time to time in accordance with the provisions of, this subsection (c). The Administrative Agent shall, to the fullest extent permitted by applicable law, apply all funds so held in escrow from time to time to the extent necessary to make any Advances required to be made by such Defaulting Lender and to pay any amount payable by such Defaulting Lender hereunder and under the other Loan Documents to the Administrative Agent or any other Lender, as and when such Advances or amounts are required to be made or paid and, if the amount so held in escrow shall at any time be insufficient to make and pay all such Advances and amounts required to be made or paid at such time, in the following order of priority:
 
(i) first , to the Agents for any amounts then due and payable by such Defaulting Lender to the Agents hereunder, ratably in accordance with such amounts then due and payable to the Agents;
 
(ii) second , to the Issuing Bank for any amount then due and payable to it, in its capacity as such, by such Defaulting Lender, ratably in accordance with such amounts then due and payable to such Issuing Bank;
 
(iii) third , to any other Lenders for any amount then due and payable by such Defaulting Lender to such other Lenders hereunder, ratably in accordance with such respective amounts then due and payable to such other Lenders; and
 
(iv) fourth , to such Borrower for any Advance then required to be made by such Defaulting Lender pursuant to the Commitment of such Defaulting Lender.
 
44

In the event that any Lender that is a Defaulting Lender shall, at any time, cease to be a Defaulting Lender, any funds held by the Administrative Agent in escrow at such time with respect to such Lender shall be distributed by the Administrative Agent to such Lender and applied by such Lender to the obligations owing to such Lender at such time under this Agreement and the other Loan Documents ratably in accordance with the respective amounts of such obligations outstanding at such time.
 
(d) The rights and remedies against a Defaulting Lender under this Section 2.16 are in addition to other rights and remedies that such Borrower may have against such Defaulting Lender with respect to any Defaulted Advance and that any Agent or any Lender may have against such Defaulting Lender with respect to any Defaulted Amount.
 
Section 2.17 . Replacement of Affected Lender. At any time any Lender is an Affected Lender, the Borrowers may replace such Affected Lender as a party to this Agreement with one or more other Lenders and/or Assignees, and upon notice from the Borrowers such Affected Lender shall assign, and without recourse or warranty, its Commitment, its Committed Advances, its Letter of Credit Advances, its obligations to fund Letter of Credit payments, its participation in, and its rights and obligations with respect to, Letters of Credit, and all of its other rights and obligations hereunder to such other Lenders and/or Assignees for a purchase price equal to the sum of the principal amount of the Committed Advances so assigned, all accrued and unpaid interest thereon, such Affected Lender’s ratable share of all accrued and unpaid fees payable pursuant to Section 2.09, any amounts payable pursuant to Section 9.04(c) as a result of such Affected Lender receiving payment of any Eurodollar Rate Advance prior to the end of an Interest Period therefor (assuming for such purpose that receipt of payment pursuant to such Assignment and Acceptance constitutes payment of such Eurodollar Rate Advances) and all other obligations owed to such Affected Lender hereunder.
 
Section 2.18. Certain Provisions Relating to the Issuing Bank and Letters of Credit .
 
(a) Letter of Credit Agreements . The representations, warranties and covenants by the Borrowers under, and the rights and remedies of the Issuing Bank under, any Letter of Credit Agreement relating to any Letter of Credit are in addition to, and not in limitation or derogation of, representations, warranties and covenants by the Borrowers under, and rights and remedies of the Issuing Bank and the Lenders under, this Agreement and applicable law. Each Account Party acknowledges and agrees that all rights of the Issuing Bank under any Letter of Credit Agreement shall inure to the benefit of each Lender to the extent of its Letter of Credit Participating Interest Commitment as fully as if such Lender was a party to such Letter of Credit Agreement. In the event of any inconsistency between the terms of this Agreement and any Letter of Credit Agreement, this Agreement shall prevail.
 
45

(b) Certain Provisions . The Issuing Bank shall have no duties or responsibilities to any Agent or any Lender except those expressly set forth in this Agreement, and no implied duties or responsibilities on the part of the Issuing Bank shall be read into this Agreement or shall otherwise exist. The duties and responsibilities of the Issuing Bank to the Lenders and the Agents under this Agreement and the other Loan Documents shall be mechanical and administrative in nature, and the Issuing Bank shall not have a fiduciary relationship in respect of any Agent, any Lender or any other Person. The Issuing Bank shall not be liable for any action taken or omitted to be taken by it under or in connection with this Agreement or any Loan Document or Letter of Credit, except as specifically set forth in . The Issuing Bank shall not be under any obligation to ascertain, inquire or give any notice to any Agent or any Lender relating to (i) the performance or observance of any of the terms or conditions of this Agreement or any other Loan Document on the part of any Borrower, (ii) the business, operations, condition (financial or otherwise) or prospects of the Borrowers or any other Person, or (iii) the existence of any Default. The Issuing Bank shall not be under any obligation, either initially or on a continuing basis, to provide any Agent or any Lender with any notices, reports or information of any nature, whether in its possession presently or hereafter, except for such notices, reports and other information expressly required by this Agreement to be so furnished. The Issuing Bank shall not be responsible for the execution, delivery, effectiveness, enforceability, genuineness, validity or adequacy of this Agreement or any Loan Document.
 
(c) Administration . The Issuing Bank may rely upon any notice or other communication of any nature (written or oral, including but not limited to telephone conversations, whether or not such notice or other communication is made in a manner permitted or required by this Agreement or any other Loan Document) purportedly made by or on behalf of the proper party or parties, and the Issuing Bank shall not have any duty to verify the identity or authority of any Person giving such notice or other communication. The Issuing Bank may consult with legal counsel (including, without limitation, in-house counsel for the Issuing Bank or in-house or other counsel for the Borrowers), independent public accountants and any other experts selected by it from time to time, and the Issuing Bank shall not be liable for any action taken or omitted to be taken in good faith in accordance with the advice of such counsel, accountants or experts. Whenever the Issuing Bank shall deem it necessary or desirable that a matter be proved or established with respect to any Borrower, Agent or Lender, such matter may be established by a certificate of such Borrower, Agent or Lender, as the case may be, and the Issuing Bank may conclusively rely upon such certificate. The Issuing Bank shall not be deemed to have any knowledge or notice of the occurrence of any Default unless the Issuing Bank has received notice from a Lender, an Agent or a Borrower referring to this Agreement, describing such Default, and stating that such notice is a “ notice of default ”.
 
(d) Indemnification of Issuing Bank by Lenders . Each Lender hereby severally agrees to reimburse and indemnify the Issuing Bank and each of its directors, officers, employees and agents (to the extent not reimbursed by the
 
46

Borrowers and without limitation of the obligations of the Borrowers to do so), in accordance with its Pro Rata Share, from and against any and all amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature (including, without limitation, the reasonable fees and disbursements of counsel (other than in-house counsel) for the Issuing Bank or such other Person in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not the Issuing Bank or such other Person shall be designated a party thereto) that may at any time be imposed on, incurred by or asserted against the Issuing Bank, in its capacity as such, or such other Person, as a result of, or arising out of, or in any way related to or by reason of, this Agreement, any other Loan Document or any Letter of Credit, any transaction from time to time contemplated hereby or thereby, or any transaction financed in whole or in part or directly or indirectly with the proceeds of any Letter of Credit, provided , that no Lender shall be liable for any portion of such amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements to the extent resulting from the gross negligence or willful misconduct of the Issuing Bank or such other Person, as finally determined by a court of competent jurisdiction.
 
(e) Issuing Bank in its Individual Capacity . With respect to its Commitments and the obligations owing to it, the Issuing Bank shall have the same rights and powers under this Agreement and each other Loan Document as any other Lender and may exercise the same as though it were not the Issuing Bank, and the term “ Lenders ” and like terms shall include the Issuing Bank in its individual capacity as such. The Issuing Bank and its affiliates may, without liability to account to any Person, make loans to, accept deposits from, acquire debt or equity interests in, act as trustee under indentures of, act as agent under other credit facilities for, and engage in any other business with, any Borrower and any stockholder, subsidiary or affiliate of any Borrower, as though the Issuing Bank were not the Issuing Bank hereunder.
 
Section 2.19 . Downgrade Event with Respect to a Lender. (a) If a Downgrade Event shall occur with respect to (i) any Downgraded Lender or (ii) any other Lender and, as a result thereof, such other Lender becomes a Downgraded Lender, then the Issuing Bank may, by notice to such Downgraded Lender, the Administrative Agent and the Parent within 45 days after such Downgrade Event (any such notice, a “ Downgrade Notice ”), request that the Borrowers use reasonable efforts to replace such Lender as a party to this Agreement pursuant to . If such Lender is not so replaced within 45 days after receipt by the Borrowers of such Downgrade Notice, then : (x) if no Default exists and such Downgraded Lender has not exercised its right to remain a Lender hereunder pursuant to clause (y) below, the following shall occur concurrently:
 
(A) the Committed Facility shall be reduced by the amount of the Commitment of such Downgraded Lender,
 
47

(B) the Borrowers shall prepay all amounts owed to such Downgraded Lender hereunder or in connection herewith (including any amount payable pursuant to Section 9.04(c) as a result of such Downgraded Lender receiving payment of any Eurodollar Rate Advance prior to the end of an Interest Period therefor),
 
(C) if, upon the reduction of the Committed Facility under clause (A) above and the payment under clause (B) above, the sum of the principal amount of all Advances plus the Available Amount of all Letters of Credit (valuing the Available Amount of, and Letter of Credit Advances of the Issuing Bank in respect of, any Non-Dollar Letter of Credit at the Dollar Equivalent thereof as of the time of such calculation) would exceed the amount of the Committed Facility, then the Borrowers will immediately eliminate such excess by prepaying Committed Advances and/or causing the Available Amount of one or more Letters of Credit to be reduced, and
 
(D) upon completion of the events described in clauses (A), (B) and (C) above, such Downgraded Lender shall cease to be a party to this Agreement; provided that the provisions of Sections 2.11, 2.13 and 9.04 of this Agreement shall continue to inure to the benefit of each such Downgraded Lender.
 
or (y) if a Default exists or, not later than 30 days after receipt of such Downgrade Notice, such Downgraded Lender notifies the Borrowers, the Issuing Bank and the Administrative Agent that such Downgraded Lender elects to provide (in a manner reasonably satisfactory to the Issuing Bank) cash collateral to the Issuing Bank for (or if such Downgraded Lender is unable, without regulatory approval, to provide cash collateral, a letter of credit reasonably satisfactory to the Issuing Bank covering) its contingent obligations to reimburse the Issuing Bank for any payment under any Letter of Credit as provided in Section 2.04(e) (its “ LC Participation Obligations ”), such Downgraded Lender shall be obligated to (and each Lender agrees that in such circumstances it will) deliver to the Issuing Bank (I) immediately, cash collateral (or, as aforesaid, a letter of credit) in an amount equal to its LC Participation Obligations and (II) from time to time thereafter (so long as it is a Downgraded Lender), cash collateral (or, as aforesaid, a letter of credit) sufficient to cover any increase in its LC Participation Obligations as a result of any proposed issuance of or increase in a Letter of Credit. Any funds provided by a Downgraded Lender for such purpose shall be maintained in a segregated deposit account in the name of the Issuing Bank at the Issuing Bank’s principal office in the United States (a “ Downgrade Account ”). The funds so deposited in any Downgrade Account shall be used only in accordance with the following provisions of this Section 2.19.
 
(b) If any Downgraded Lender shall be required to fund its participation in a payment under a Letter of Credit pursuant to Section 2.04(e), then the Issuing
 
48

Bank shall apply the funds deposited in the applicable Downgrade Account by such Downgraded Lender to fund such participation. The deposit of funds in a Downgrade Account by any Downgraded Lender shall not constitute a Letter of Credit Advance (and the Downgraded Lender shall not be entitled to interest on such funds except as provided in clause (c) below) unless and until (and then only to the extent that) such funds are used by the Issuing Bank to fund the participation of such Downgraded Lender pursuant to the first sentence of this clause (b).
 
(c) Funds in a Downgrade Account shall be invested in such investments as may be agreed between the Issuing Bank and the applicable Downgraded Lender, and the income from such investments shall be distributed to such Downgraded Lender from time to time (but not less often than monthly) as agreed between the Issuing Bank and such Downgraded Lender. The Issuing Bank will (i) from time to time, upon request by a Downgraded Lender, release to such Downgraded Lender any amount on deposit in the applicable Downgrade Account in excess of the LC Participation Obligations of such Downgraded Lender and (ii) upon the earliest to occur of (A) the effective date of any replacement of such Downgraded Lender as a party hereto pursuant to an Assignment and Acceptance, (B) the termination of such Downgraded Lender’s Commitment pursuant to clause (a) or (C) the first Letter of Credit Business Day after receipt by the Issuing Bank of evidence (reasonably satisfactory to the Issuing Bank) that such Lender is no longer a Downgraded Lender, release to such Lender all amounts on deposit in the applicable Downgrade Account.
 
(d) At any time any Downgraded Lender is required to maintain cash collateral with the Issuing Bank pursuant to this Section 2.19, the Issuing Bank shall have no obligation to issue or increase any Letter of Credit unless such Downgraded Lender has provided sufficient funds as cash collateral to the Issuing Bank to cover all LC Participation Obligations of such Downgraded Lender (including in respect of the Letter of Credit to be issued or increased).
 
Section 2.20 . Downgrade Event or Other Event with Respect to the Issuing Bank. At any time that the Issuing Bank is a Downgraded Lender or at such other times as the Issuing Bank and the Borrowers may agree, the Borrowers may, upon not less than three Letter of Credit Business Days’ notice to the Issuing Bank (in this Section sometimes referred to as the “ Old Issuing Bank ”) and the Administrative Agent, designate any Lender (so long as such Lender has agreed to such designation) as an additional “ Issuing Bank ” hereunder (in this Section sometimes referred to as the “ New Issuing Bank ”). Such notice shall specify the date (which shall be a Letter of Credit Business Day) on which the New Issuing Bank is to become an additional “ Issuing Bank ” hereunder. From and after such date, all new Letters of Credit requested to be issued hereunder shall be issued by the New Issuing Bank. From and after such date (and until the first date on which no Letters of Credit issued by the Old Issuing Bank are outstanding and no reimbursement obligations are owed to the Old Issuing Bank, on which date the Old Issuing Bank shall cease to be an Issuing Bank hereunder), references in this Agreement to the “ Issuing Bank ” shall be deemed to refer (a) to the Old Issuing
 
49

Bank, with respect to Letters of Credit issued by it, (b) to the New Issuing Bank, with respect to Letters of Credit issued or to be issued by it, and (c) to each of the Old Issuing Bank and the New Issuing Bank, with respect to other matters. Notwithstanding the fact that an Old Issuing Bank shall cease to be an “ Issuing Bank ” hereunder, all of the exculpatory, indemnification and similar provisions hereof in favor of the “ Issuing Bank ” shall inure to such Old Issuing Bank’s benefit as to any actions taken or omitted by it while it was an “ Issuing Bank ” under this Agreement. The Borrowers agree that after any appointment of a New Issuing Bank hereunder, the Borrowers shall use reasonable commercial efforts to promptly replace (or otherwise cause the applicable beneficiary to return to the Old Issuing Bank for cancellation) each letter of credit issued by the Old Issuing Bank.
 
Section 2.21 . Non-Dollar Letters of Credit. (a) The Borrowers, the Administrative Agent, the Issuing Bank and the Lenders (i) agree that the Issuing Bank may (in its sole discretion) issue Letters of Credit (“ Non-Dollar Letters of Credit ”) in currencies other than U.S. dollars and (ii) further agree as follows with respect to such Non-Dollar Letters of Credit:
 
(b) The Borrowers agree that their reimbursement obligations under Section 2.05(b) and any resulting Letter of Credit Advance, in each case in respect of a drawing under any Non-Dollar Letter of Credit, (i) shall be payable in Dollars at the Dollar Equivalent of such obligation in the currency in which such Non-Dollar Letter of Credit was issued (determined on the date of payment) and (ii) shall bear interest at a rate per annum equal to (A) in the case of amounts owed to the Issuing Bank, the sum of the Overnight Rate plus the Applicable Margin for Eurodollar Rate Advances plus 2% and (B) in the case of amounts owing to any other Lender, the Base Rate plus 2%, in each case for each day from and including the date on which the applicable Account Party is to reimburse the Issuing Bank pursuant to Section 2.05(b) to but excluding the date such obligation is paid in full.
 
(c) Each Lender agrees that its obligation to pay the Issuing Bank such Lender’s Pro Rata Share of the unreimbursed portion of any payment by the Issuing Bank under Section 2.04(e) in respect of a drawing under any Non-Dollar Letter of Credit shall be payable in Dollars at the Dollar Equivalent of such obligation in the currency in which such Non-Dollar Letter of Credit was issued (calculated on the date of payment) (and any such amount which is not paid when due shall bear interest at a rate per annum equal to the Overnight Rate plus , beginning on the third Business Day after such amount was due, the Applicable Margin for Eurodollar Rate Advances).
 
(d) For purposes of determining whether there is availability for the Borrowers to request any Advance or to request the issuance or extension of, or any increase in, any Letter of Credit, the Dollar Equivalent amount of the Available Amount of each Non-Dollar Letter of Credit shall be calculated as of the date such Advance is to be made or such Letter of Credit is to be issued, extended or increased.
 
50

(e) For purposes of determining the letter of credit fee under Section 2.09(d), the Dollar Equivalent amount of the Available Amount of any Non-Dollar Letter of Credit shall be determined on each of (i) the date of an issuance, extension or change in the Available Amount of such Non-Dollar Letter of Credit, (ii) the date of any payment by the Issuing Bank in respect of a drawing under such Non-Dollar Letter of Credit, (iii) the last day of each calendar month and (iv) each day on which the Commitments are to be reduced pursuant to Section 2.06 (it being understood that no requested reduction shall be permitted to the extent that, after making a calculation pursuant this clause (e), such reduction would be greater than the unused portion of the Commitments).
 
(f) If, on the last day of any calendar month, the sum of the principal amount of all Advances plus the Available Amount of all Letters of Credit (valuing the Available Amount of, and Letter of Credit Advances in respect of, any Non-Dollar Letter of Credit at the Dollar Equivalent thereof as of such day) would exceed the amount of the Committed Facility, then the Borrowers will immediately eliminate such excess by prepaying Committed Advances and/or causing the Available Amount of one or more Letters of Credit to be reduced.
 
(g) If, for the purposes of obtaining judgment in any court, it is necessary to convert a sum due in respect of any Non-Dollar Letter of Credit in one currency into another currency, the rate of exchange used shall be that at which in accordance with its normal banking procedures the Issuing Bank could purchase the first currency with such other currency on the Letter of Credit Business Day preceding that on which final judgment is given. The obligation of any Account Party in respect of any such sum due from it to the Issuing Bank or any Lender hereunder shall, notwithstanding any judgment in a currency (the “ Judgment Currency ”) other than that in which such sum is denominated in accordance with the applicable provisions of this Agreement and the applicable Non-Dollar Letter of Credit (the “ Agreement Currency ”), be discharged only to the extent that on the Letter of Credit Business Day following receipt by the Issuing Bank or such Lender of any sum adjudged to be so due in the Judgment Currency, the Issuing Bank or such Lender may in accordance with normal banking procedures purchase the Agreement Currency with the Judgment Currency. If the amount of the Agreement Currency so purchased is less than the sum originally due to the Issuing Bank or such Lender in the Agreement Currency, the applicable Account Party agrees, as a separate obligation and notwithstanding any such judgment, to indemnify the Issuing Bank or such Lender, as applicable, against such loss. If the amount of the Agreement Currency so purchased is greater than the sum originally due to the Issuing Bank or such Lender in such currency, the Issuing Bank and each Lender agrees to return the amount of any excess to the applicable Account Party (or to any other Person who may be entitled thereto under applicable law).
 
(h) For purposes of this Section, “ Dollar Equivalent ” means, in relation to an amount denominated in a currency other than U.S. dollars, the amount of U.S. dollars which could be purchased with such amount by the Issuing Bank in accordance with its customary procedures (and giving effect to any
 
51

transaction costs) at the quoted foreign exchange spot rate of the Issuing Bank at the time of determination; and “ Overnight Rate ” means, for any day, the rate of interest per annum at which overnight deposits in the applicable currency, in an amount approximately equal to the amount with respect to which such rate is being determined, would be offered for such day by the Issuing Bank to major banks in the London or other applicable offshore interbank market. The Overnight Rate for any day which is not a Letter of Credit Business Day (or on which dealings are not carried on in the applicable offshore interbank market) shall be the Overnight Rate for the immediately preceding Letter of Credit Business Day.
 
Section 2.22 . Increase in Commitments. (a) From time to time subsequent to the Effective Date, the Borrowers jointly may, upon at least 30 days’ notice to the Administrative Agent (which shall promptly provide a copy of such notice to the Lenders), propose to increase the aggregate amount of the Commitments by an amount which (i) is not less than $25,000,000 with respect to any such request nor (ii) when aggregated with all prior increases in the Commitments pursuant to this Section 2.22, is not in excess of $1,000,000,000. The Borrowers may increase the aggregate amount of the Commitments by (i) having another lender or other lenders (each, an “ Additional Lender ”) become party to this Agreement, (ii) agreeing with any Lender to increase its Commitment hereunder or (iii) a combination of the procedures described in clauses (i) and (ii) of this sentence; provided that the sum of the increases in the Commitments of the Lenders plus the Commitments of the Additional Lenders shall not in the aggregate exceed the amount of the requested increase. 
 
(b) An increase in the aggregate amount of the Commitments pursuant to this Section 2.22 shall become effective upon the receipt by the Administrative Agent of an agreement in form and substance satisfactory to the Administrative Agent signed by the Borrowers, by each Additional Lender and by each other Lender whose Commitment is to be increased, setting forth the new Commitments of such Lenders and setting forth the agreement of each Additional Lender to become a party to this Agreement and to be bound by all the terms and provisions hereof, together with such evidence of appropriate corporate authorization on the part of the Borrowers with respect thereto and such opinions of counsel for the Borrowers with respect thereto as the Administrative Agent may reasonably request. At the time of any increase in the aggregate amount of the Commitments pursuant to this Section 2.22, the Borrowers shall represent (i) that, immediately before and after any such increase is made, no Default has occurred and is continuing and (ii) that the representations and warranties of the Borrowers contained in the Loan Documents are true in all material respects on and as of the date such increase is made, except for such representations or warranties which by their terms are made as of a specified date, which shall be true and correct as of such specified date.
 
52

(c) Upon any increase in the amount of the Commitments pursuant to this Section 2.22:
 
(i) the applicable Borrower shall (A) at the end of the current Interest Period, in the case of any Eurodollar Rate Advances then outstanding and (B) within five Business Days, in the case of any Base Rate Advances then outstanding, prepay or repay each such Advance then outstanding in its entirety and, to the extent such Borrower elects to do so and subject to the conditions specified in Article 3, such Borrower shall reborrow Committed Advances from the Lenders in proportion to their respective Commitments after giving effect to such increase, until such time as all outstanding Committed Advances are held by the Lenders in such proportion; provided that if at any time after such increase but prior to such prepayment or repayment an Event of Default shall have occurred and shall have continued unremedied for a period of at least five Business Days, the Lenders whose Commitments have not been increased pursuant to clause (b) of this Section (each, a “ Non-Increasing Lender ”) shall sell to each Lender whose Commitment has been assumed or increased pursuant to clause (b) of this Section (each, an “ Increased Commitment Lender ”), and each Increased Commitment Lender shall purchase from each Non-Increasing Lender, such participations in the Committed Advances then outstanding in an amount such that, after giving effect to all such purchases and sales, all outstanding Committed Advances are held by the Lenders in proportion to their respective Commitments, after giving effect to such assumptions and increases; and
 
(ii) each existing Non-Increasing Lender shall be deemed, without further action by any party hereto, to have sold to each Increased Commitment Lender and each Increased Commitment Lender shall be deemed, without further action by any party hereto, to have purchased from each Non-Increasing Lender, a participation on the terms specified in this Article 2 in each Letter of Credit in an amount such that, after giving effect to all such purchases and sales, the outstanding Letter of Credit Exposure is held by the Lenders in proportion to their respective Commitments after giving effect to such assumptions and increases.
 
(d) Any increase in the Commitments pursuant to this Section 2.22 shall be subject to the prior written approval of each Issuing Bank.
 
Section 2.23. Registry. (a) The Administrative Agent shall maintain a register (a “ Register ”) on which it will record the Commitment of each Lender, each Advance made by each Lender and each repayment of any such Advance made to such Lender. Any such recordation by the Administrative Agent on a Register shall be conclusive, absent manifest error. With respect to any Lender, the assignment or other transfer of the Commitment of such Lender and the rights to the principal of, and interest on, any Advance made pursuant to this Agreement shall not be effective until such assignment or other transfer is recorded on the applicable Register and otherwise complies with Section 9.06. The Register shall be available at the offices where kept by the Administrative Agent for inspection by the Borrowers and any Lender at any reasonable time upon reasonable prior notice to the Administrative Agent. Each Lender shall record on its internal
 
53

records (including computerized systems) the foregoing information as to its own Commitment and Advances. Failure to make any such recordation, or any error in such recordation, shall not affect the obligations of any Borrower under the Loan Documents. 
 
(b) Each Borrower hereby agrees that, upon the request of any Lender at any time, any or all of such Lender’s Advances shall be evidenced by one or more Notes of such Borrower payable to the order of such Lender and representing the obligation of such Borrower to pay the unpaid principal amount of such Advances to such Borrower made by such Lender, with interest as provided herein on the unpaid principal amount of such Advances from time to time outstanding.
 
ARTICLE 3
C ONDITIONS O F L ENDING A ND I SSUANCES O F L ETTERS O F C REDIT
 
Section 3.01 . Conditions Precedent to Effectiveness. This Agreement shall not become effective, and no Lender shall be obligated to make any Advance and the Issuing Bank shall not be obligated to issue any Letter of Credit hereunder, until each of the following conditions precedent is satisfied:
 
(a) The Administrative Agent shall have received counterparts of this Agreement duly executed by each of the parties listed on the signature pages hereof (or in the case of any party as to which such an executed counterpart shall not have been received, the Administrative Agent shall have received evidence satisfactory to it of the execution and delivery of a counterpart hereof by such party).
 
(b) The Administrative Agent shall have received the following in form and substance reasonably satisfactory to the Administrative Agent (unless otherwise specified) and in sufficient copies for each Lender:
 
(i) Certified copies of the resolutions of the Board of Directors of each Loan Party approving the transactions contemplated by the Loan Documents and each Loan Document to which it is or is to be a party, and of all documents evidencing other necessary corporate action and governmental and other third party approvals and consents, if any, with transactions contemplated by the Loan Documents and each Loan Document to which it is or is to be a party.
 
(ii) A copy of a certificate of the Secretary of State or other appropriate official of the jurisdiction of incorporation of (x) ACE INA, dated reasonably near the Effective Date, certifying (A) as to a true and correct copy of its charter and each amendment thereto on file in such Secretary’s office and (B) that (1) such amendments are the only amendments to its charter on file in such Secretary’s office, (2) in the case of ACE INA, it has paid all franchise taxes to the date of such certificate and (C) it is duly incorporated and in good standing or presently subsisting
 
54

under the laws of the State of the jurisdiction of its incorporation and (y) each other Loan Party, dated reasonably near the Effective Date, certifying as to the good standing (or existence) of such Loan Party.
 
(iii) A certificate of each Loan Party, signed on behalf of such Loan Party by its President or a Vice President and its Secretary or any Assistant Secretary, dated the Effective Date (the statements made in which certificate shall be true on and as of the Effective Date), certifying as to (A) in the case of ACE INA, the absence of any amendments to the charter of such Loan Party since the date of the Secretary of State’s certificate referred to in Section 3.01(ii)(C), (B) a true and correct copy of the bylaws (in the case of ACE INA) or the constitutional documents (in the case of each other Loan Party) of such Loan Party as in effect on the date on which the resolutions referred to in Section 3.01(ii)(B) were adopted and on the Effective Date, (C) the due incorporation and good standing or valid existence of such Loan Party as a corporation organized under the laws of the jurisdiction of its incorporation, and the absence of any proceeding for the dissolution or liquidation of such Loan Party, (D) the truth of the representations and warranties contained in the Loan Documents as though made on and as of the Effective Date and (E) the absence of any event occurring and continuing, or resulting from the Effective Date, that constitutes a Default.
 
(iv) A certificate of the Secretary or an Assistant Secretary of each Loan Party certifying the names and true signatures of the officers of such Loan Party authorized to sign each Loan Document to which it is or is to be a party and the other documents to be delivered hereunder and thereunder.
 
(v) A favorable opinion of (A) Maples and Calder, Cayman Islands counsel for the Parent, in substantially the form of Exhibit D-1 hereto and as to such other matters as any Lender through the Administrative Agent may reasonably request, (B) Mayer, Brown, Rowe & Maw LLP, New York counsel for the Loan Parties, in substantially the form of Exhibit D-2 hereto and as to such other matters as any Lender through the Administrative Agent may reasonably request, and (C) Conyers Dill & Pearman, Bermuda counsel for ACE Bermuda and ACE Tempest, in substantially the form of Exhibit D-3 hereto and as to such other matters as any Lender through the Administrative Agent may reasonably request.
 
(c) There shall have occurred no material adverse change since December 31, 2003 in the business, financial condition, operations or properties of the Parent and its Subsidiaries, taken as a whole.
 
(d) There shall exist no action, suit, investigation, litigation or proceeding affecting any Loan Party or any of its Subsidiaries pending or threatened before any court, governmental agency or arbitrator that (x) could be
 
55

reasonably expected to have a Material Adverse Effect or (y) would reasonably be expected to materially adversely affect the legality, validity or enforceability of any Loan Document or the other transactions contemplated by the Loan Documents.
 
(e) The Borrowers shall have paid all accrued fees of the Agents and the Lenders and all accrued expenses of the Agents (including the accrued fees and expenses of counsel to the Administrative Agent and local counsel on behalf of all of the Lenders), in each case to the extent then due and payable.
 
(f) The Borrowers shall have repaid all principal amounts outstanding under the Existing Agreements, together with all accrued interest, fees and other accrued amounts payable thereunder to the Effective Date, and no letters of credit or other credit extensions shall be outstanding thereunder (it being understood that the Existing Letter of Credit shall become a Letter of Credit hereunder).
 
The Lenders that are parties to the Existing Agreements, comprising the “Required Lenders” as defined in each of the Existing Agreements, and the Borrowers hereby agree that the commitments under the Existing Agreements shall terminate automatically on and as of the Effective Date, without notice or further action by any party under the Existing Agreements, and all accrued interest, fees and other accrued amounts thereunder shall be due and payable on the Effective Date.
 
Section 3.02 . Conditions Precedent to Each Committed Borrowing and Issuance, Extension or Increase of a Letter of Credit. The obligation of each Lender to make a Committed Advance on the occasion of each Committed Borrowing (including the initial Committed Borrowing), and the obligation of the Issuing Bank to issue, extend or increase a Letter of Credit (including the initial issuance), shall be subject to the further conditions precedent that on the date of such Committed Borrowing or issuance, extension or increase (a) the following statements shall be true (and each of the giving of the applicable Notice of Committed Borrowing or request for issuance, extension, or increase, and the acceptance by the Borrower that requested such Committed Borrowing of the proceeds of such Committed Borrowing or of such issuance, extension or increase shall constitute a representation and warranty by such Borrower that both on the date of such notice and on the date of such Committed Borrowing or such issuance, extension or increase such statements are true):
 
(i) the representations and warranties contained in Section 4.01 are correct in all material respects on and as of such date, before and after giving effect to such Committed Borrowing and to the application of the proceeds therefrom or such issuance, extension or increase, as though made on and as of such date, other than any such representations or warranties that, by their terms, refer to a specific date other than the date of such Committed Borrowing or the date of such issuance, extension or increase, in which case as of such specific date; and
 
56

(ii) no Default has occurred and is continuing, or would result from such Committed Borrowing or the application of the proceeds therefrom or from such issuance, extension or increase; and
 
(b) the Administrative Agent shall have received such other approvals, opinions or documents as any Lender or the Issuing Bank through the Administrative Agent may reasonably request.
 
Section 3.03 . Conditions Precedent to Each Competitive Bid Borrowing. The obligation of each Lender that is to make a Competitive Bid Advance on the occasion of a Competitive Bid Borrowing (including the initial Competitive Bid Borrowing) to make such Competitive Bid Advance as part of such Competitive Bid Borrowing is subject to the conditions precedent that (a) the Administrative Agent shall have received the written confirmatory Notice of Competitive Bid Borrowing with respect thereto, and (b) on the date of such Competitive Bid Borrowing the following statements shall be true (and each of the giving of the applicable Notice of Competitive Bid Borrowing and the acceptance by the Borrower that requested such Competitive Bid Borrowing of the proceeds of such Competitive Bid Borrowing shall constitute a representation and warranty by such Borrower that on the date of such Competitive Bid Borrowing such statements are true):
 
(i) the representations and warranties contained in Section 4.01 are correct in all material respects on and as of the date of such Competitive Bid Borrowing, before and after giving effect to such Competitive Bid Borrowing and to the application of the proceeds therefrom, as though made on and as of such date, other than any such representations or warranties that, by their terms, refer to a specific date other than the date of such Competitive Bid Borrowing, in which case as of such specific date, and
 
(ii) no Default has occurred and is continuing, or would result from such Competitive Bid Borrowing or from the application of the proceeds therefrom.
 
ARTICLE 4
R EPRESENTATIONS A ND W ARRANTIES
 
Section 4.01. Representations and Warranties of the Borrowers. Each Borrower represents and warrants as follows:
 
(a) Each Loan Party and each of its Subsidiaries (i) is duly organized 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, (ii) is duly qualified 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
 
57

qualify or be licensed would not be reasonably likely to have a Material Adverse Effect and (iii) has all requisite power and authority (including, without limitation, all governmental licenses, permits and other approvals) 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 Borrower (other than the Parent) have been validly issued, are fully paid and non-assessable and (except for any Preferred Securities issued after the date of this Agreement) are owned, directly or indirectly, by the Parent free and clear of all Liens.
 
(b) Set forth on Schedule 4.01(b) hereto is a complete and accurate list of all Subsidiaries of each Loan Party as of the Effective Date.
 
(c) The execution, delivery and performance by each Loan Party of each Loan Document to which it is or is to be a party and the consummation of the transactions contemplated by the Loan Documents, are within such Loan Party’s corporate powers, have been duly authorized by all necessary corporate action, and do not (i) contravene such Loan Party’s constitutional documents, (ii) violate any law, rule, regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award, (iii) 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 Loan Party, any of its Subsidiaries or any of their properties or (iv) except for the Liens created under the Loan Documents, result in or require the creation or imposition of any Lien upon or with respect to any of the properties of any Loan Party or any of its Subsidiaries. No Loan Party or any of its Subsidiaries is in violation of any such law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or in breach of any such contract, loan agreement, indenture, mortgage, deed of trust, lease or other instrument, the violation or breach of which could be reasonably likely to have a Material Adverse Effect.
 
(d) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or any other third party is required for (i) the due execution, delivery, recordation, filing or performance by any Loan Party of any Loan Document to which it is or is to be a party or the other transactions contemplated by the Loan Documents, or (ii) the exercise by any Agent or any Lender of its rights under the Loan Documents, except for the authorizations, approvals, actions, notices and filings which have been duly obtained, taken, given or made and are in full force and effect.
 
(e) This Agreement has been, and each other Loan Document when delivered hereunder will have been, duly executed and delivered by each Loan Party party thereto. This Agreement is, and each other Loan Document when delivered hereunder will be, the legal, valid and binding obligation of each Loan Party party thereto, enforceable against such Loan Party in accordance with its terms.
 
58

(f) There is no action, suit, investigation, litigation or proceeding affecting any Loan Party or any of its Subsidiaries, including any Environmental Action, pending or, to such Loan Party’s knowledge, threatened before any court, governmental agency or arbitrator that (i) could be reasonably likely to have a Material Adverse Effect or (ii) would reasonably be expected to affect the legality, validity or enforceability of any Loan Document or the transactions contemplated by the Loan Documents.
 
(g) The Consolidated balance sheet of the Parent and its Subsidiaries as at December 31, 2003, and the related Consolidated statement of income and of cash flows of the Parent and its Subsidiaries for the Fiscal Year then ended, accompanied by an unqualified opinion of PricewaterhouseCoopers LLP, independent public accountants, copies of which have been furnished to each Lender, fairly present the Consolidated financial condition of the Parent and its Subsidiaries as at such date and the Consolidated results of operations of the Parent and its Subsidiaries for the Fiscal Year ended on such date, all in accordance with generally accepted accounting principles applied on a consistent basis, and, as of the Effective Date, since December 31, 2003, there has been no Material Adverse Change.
 
(h) No information, exhibit or report furnished by or on behalf of any Loan Party to any Agent or any Lender in connection with the negotiation and syndication of the Loan Documents or pursuant to the terms of the Loan 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).
 
(i) Following application of the proceeds of each Advance hereunder, Margin Stock will constitute less than 25% of the value of those assets of any Borrower which are subject to any limitation on sale, pledge or other disposition hereunder.
 
(j) Neither any Loan Party 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 any Advances, nor the issuance of any Letters of Credit, nor the application of the proceeds or repayment thereof by any Borrower, nor the consummation of the other transactions contemplated by the Loan Documents, will violate any provision of such Act or any rule, regulation or order of the Securities and Exchange Commission thereunder.
 
(k) Each Loan Party is, individually and together with its Subsidiaries, Solvent.
 
(l) Except to the extent that any and all events and conditions under clauses (i) through (v) below of this paragraph (l) in the aggregate are not reasonably expected to have a Material Adverse Effect,
 
59

(i) Neither any Loan Party nor any ERISA Affiliate has incurred or is reasonably expected to incur any Withdrawal Liability to any Multiemployer Plan.
 
(ii) 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 Loan Party or with respect to which any Subsidiary of any Loan Party may have liability under applicable local law (a “ Foreign Plan ”):
 
(x) 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.
 
(y) 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.
 
(z) Each Foreign Plan required to be registered has been registered and has been maintained in good standing with applicable regulatory authorities.
 
(iii) During the twelve-consecutive-month period to the date of the execution and delivery of this Agreement and prior to any Borrowing 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 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 Loan Party or any ERISA Affiliate incurring any material liability, fine or penalty.
 
(iv) Each Pension Plan is in compliance in all respects with the applicable provisions of ERISA, the Internal Revenue Code and other federal or state laws.
 
60

(v) No assets of any Loan Party are or are deemed under applicable law to be “plan assets” within the meaning of Department of Labor Regulation §2510.3-101.
 
(m) (i) In the ordinary course of its business, each Borrower reviews the effect of Environmental Laws on the operations and properties of such 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 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 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.
 
(ii) The operations and properties of each Loan Party 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 Loan Party 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 Loan Party 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.
 
(n) Each Loan Party 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 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 GAAP).
 
61

ARTICLE 5
C OVENANTS O F T HE B ORROWERS
 
Section 5.01 . Affirmative Covenants. So long as any Advance or any other obligation of any Loan Party under any Loan Document shall remain unpaid, any Letter of Credit shall be outstanding or any Lender shall have any Commitment hereunder, each Borrower will:
 
(a) Compliance with Laws, Etc . 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 Environmental Laws, Environmental Permits, ERISA 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, could not reasonably be expected to result in a Material Adverse Effect.
 
(b) Payment of Taxes, Etc. Pay and discharge, and cause each of its Subsidiaries to pay and discharge, before the same shall become delinquent, (i) all material taxes, assessments and governmental charges or levies imposed upon it or upon its property and (ii) all lawful material claims that, if unpaid, might by law become a Lien upon its property; provided, however, that neither any Borrower nor any of its Subsidiaries shall be required to pay or discharge any such tax, assessment, charge or claim that is being contested in good faith and by proper proceedings and as to which appropriate reserves are being maintained.
 
(c) Maintenance of Insurance . Maintain, and cause each of its 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 Parent or such Subsidiary operates (it being understood that the foregoing shall not apply to maintenance of reinsurance or similar matters which shall be solely within the reasonable business judgment of the Parent and its Subsidiaries).
 
(d) Preservation of Corporate Existence, Etc . Preserve and maintain, and cause each of its Subsidiaries to preserve and maintain, its existence, legal structure, legal name, rights (charter and statutory), permits, licenses, approvals, privileges and franchises; provided, however, that the Parent and its Subsidiaries may consummate any merger, amalgamation or consolidation permitted under Section 5.02(c) and provided further that neither the Parent nor any of its Subsidiaries shall be required to preserve any right, permit, license, approval, privilege or franchise if the Board of Directors of the Parent or such Subsidiary shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Parent or such Subsidiary, as the case may be, and that the loss thereof is not disadvantageous in any material respect to the Parent, such Subsidiary or the Lenders.
 
(e) Visitation Rights . At any reasonable time and from time to time upon prior notice, permit the Agents (upon request made by any Agent or any Lender), or any agents or representatives thereof, at the expense (so long as no Default has occurred and is continuing) of such Agents (or such Lender, 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 Parent and any of its
 
62

Subsidiaries, and to discuss the affairs, finances and accounts of the Parent and any of its Subsidiaries with any of their officers or directors and with, so long as a representative of the Parent is present, their independent certified public accountants; provided that neither the Parent nor any of its Subsidiaries shall be required to disclose any information subject to its attorney-client privilege.
 
(f) 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 Parent and each such Subsidiary sufficient to permit the preparation of financial statements in accordance with GAAP.
 
(g) Maintenance of Properties, Etc . 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 could not reasonably be expected to result in a Material Adverse Effect.
 
(h) Transactions with Affiliates . Conduct, and cause each of its Subsidiaries to conduct, all transactions otherwise permitted under the Loan Documents with any of their Affiliates (other than any such transactions between Loan Parties or wholly-owned Subsidiaries of Loan Parties) on terms that are fair and reasonable and no less favorable than it would obtain in a comparable arm’s-length transaction with a Person not an Affiliate.
 
(i) Pari Passu ranking . Each Borrower shall procure that its obligations under the Loan Documents will rank at least pari passu with all its other present and future unsecured and unsubordinated obligations, except for obligations which are mandatorily preferred by law applying to insurance companies generally.
 
Section 5.02 . Negative Covenants. So long as any Advance or any other obligation of any Loan Party under any Loan Document shall remain unpaid, any Letter of Credit shall be outstanding or any Lender shall have any Commitment hereunder, Parent will not, at any time:
 
(a) Liens, Etc . 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:
 
(i) Liens created under the Loan Documents;
 
(ii) Permitted Liens;
 
(iii) Liens described on Schedule 5.02(a) hereto;
 
63

(iv) purchase money Liens upon or in any property acquired or held by the Parent 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 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;
 
(v) Liens arising in connection with Capitalized Leases; provided that no such Lien shall extend to or cover any assets other than the assets subject to such Capitalized Leases;
 
(vi) (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 Parent or any of it Subsidiaries in accordance with Section 5.02(c) and not created in contemplation of such event and (C) any Lien existing on any asset prior to the acquisition thereof by the Parent or any of its Subsidiaries and not created in contemplation of such acquisition;
 
(vii) Liens securing obligations under credit default swap transactions determined by reference to, or Contingent Obligations in respect of, Debt issued by the Parent or one of its Subsidiaries; such Debt not to exceed an aggregate principal amount of $550,000,000;
 
(viii) 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;
 
(ix) Liens on cash and Approved Investments securing Hedge Agreements arising in the ordinary course of business;
 
(x) other Liens securing Debt or other obligations outstanding in an aggregate principal or face amount not to exceed at any time 5% of Consolidated Net Worth;
 
(xi) Liens consisting of deposits made by the Parent or any insurance Subsidiary with any insurance regulatory authority or other statutory Liens or Liens or claims imposed or required by applicable
 
64

insurance law or regulation against the assets of the Parent or any insurance Subsidiary, in each case in favor of policyholders of the Parent or such insurance Subsidiary or an insurance regulatory authority and in the ordinary course of the Parent’s or such insurance Subsidiary’s business;
 
(xii) Liens on Investments and cash balances of the Parent or any insurance Subsidiary (other than capital stock of any Subsidiary) securing obligations of the Parent or any insurance Subsidiary in respect of (i) letters of credit obtained in the ordinary course of business and/or (ii) trust arrangements formed in the ordinary course of business for the benefit of cedents to secure reinsurance recoverables owed to them by the Parent or any insurance Subsidiary;
 
(xiii) the replacement, extension or renewal of any Lien permitted by clause (iii) or (vi) 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;
 
(xiv) Liens securing obligations owed by any Loan Party to any other Loan Party or owed by any Subsidiary of the Parent (other than a Loan Party) to the Parent or any other Subsidiary;
 
(xv) Liens incurred in the ordinary course of business in favor 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;
 
(xvi) judgment or judicial attachment Liens, provided that the enforcement of such Liens is effectively stayed;
 
(xvii) Liens on securities arising out of repurchase agreements with a term of not more than three months entered into with Lenders or their Affiliates or with securities dealers of recognized standing; provided that the aggregate amount of all assets of the Parent and its Subsidiaries subject to such agreements shall not at any time exceed $1,000,000,000; and
 
(xviii) Liens securing up to an aggregate amount of $200,000,000 of obligations of ACE Tempest, the Parent or any wholly owned Subsidiary, arising out of catastrophe bond financing.
 
(b) Change in Nature of Business . Make any material change in the nature of the business of the Parent and its Subsidiaries, taken as a whole, as carried on at the date hereof.
 
65

(c) Mergers, Etc . Merge into, 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:
 
(i) any Subsidiary of the Parent may merge into, amalgamate or consolidate with any other Subsidiary of the Parent, 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 Parent, provided further that, in the case of any such merger, amalgamation or consolidation to which a Borrower is a party, the Person formed by such merger, amalgamation or consolidation shall be such Borrower;
 
(ii) any Subsidiary of any Borrower may merge into, 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 such Borrower;
 
(iii) in connection with any sale or other disposition permitted under Section 5.02(d), any Subsidiary of the Parent may merge into, amalgamate or consolidate with any other Person or permit any other Person to merge into, amalgamate or consolidate with it; and
 
(iv) the Parent or any other Borrower may merge into, 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 Parent or such 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.
 
(d) Sales, Etc., of Assets . Sell, lease, transfer or otherwise dispose of or permit any other Borrower 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).
 
(e) Restricted Payments . Declare or pay any dividends, purchase, redeem, retire, defease or otherwise acquire for value any of its Equity Interests now or hereafter outstanding, return any capital to its stockholders, partners or members (or the equivalent Persons thereof) as such, make any distribution of assets, Equity Interests, obligations or securities to its stockholders, partners or members (or the equivalent Persons thereof) as such or issue or sell any Equity Interests or accept any capital contributions, or permit any of its Subsidiaries to do any of the foregoing, or permit any of its Subsidiaries to purchase, redeem, retire, defease or otherwise acquire for value any Equity Interests in the Parent or to issue or sell any Equity Interests therein, if in any case referred to above, a Default shall have occurred and be continuing at the time of such action or would result therefrom.
 
66

(f) 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.
 
Section 5.03 . Reporting Requirements. So long as any Advance or any other obligation of any Loan Party under any Loan Document shall remain unpaid, any Letter of Credit shall be outstanding or any Lender shall have any Commitment hereunder, the Parent will furnish to the Administrative Agent for distribution to the Lenders:
 
(a) 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 the chief financial officer of the Parent setting forth details of such Default, event, development or occurrence and the action that the Parent or the applicable Subsidiary has taken and proposes to take with respect thereto.
 
(b) Annual Financials . (i) As soon as available and in any event within 90 days after the end of each Fiscal Year, a copy of the annual Consolidated audit report for such year for the Parent and its Subsidiaries, including therein a Consolidated balance sheet of the Parent and its Subsidiaries as of the end of such Fiscal Year and Consolidated statements of income and cash flows of the Parent 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 recognized standing reasonably acceptable to the Required Lenders, together with (A) a certificate of the Chief Financial Officer or Chief Accounting Officer of the Parent 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 Parent has taken a proposes to take with respect thereto, and (B) a schedule in form reasonably satisfactory to the Administrative Agent of the computations used by the Parent in determining, as of the end of such Fiscal Year, compliance with the covenants contained in Section 5.04.
 
(ii) As soon as available and in any event within 120 days after the end of each Fiscal Year, a copy of the annual Consolidated audit report for such year for each Subsidiary Guarantor and its Subsidiaries, including therein a Consolidated balance sheet of such Subsidiary Guarantor 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 Subsidiary Guarantor and its Subsidiaries for such Fiscal Year, in each case accompanied by an opinion acceptable to the Required Lenders of PricewaterhouseCoopers LLP or other independent public accountants of recognized standing acceptable to the Required Lenders.
 
67

(c) 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, Consolidated balance sheets of the Parent and its Subsidiaries as of the end of such quarter and Consolidated statements of income and a Consolidated statement of cash flows of the Parent 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 Parent 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 or Chief Accounting Officer of the Parent as having been prepared in accordance with GAAP, together with (i) a certificate of said officer 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 Parent has taken and proposes to take with respect thereto and (ii) a schedule in form reasonably satisfactory to the Administrative Agent of the computations used by the Parent in determining compliance with the covenants contained in Section 5.04.
 
(d) 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 Loan Party or any of its Subsidiaries of the type described in Section 4.01(f).
 
(e) Securities Reports . Promptly after the sending or filing thereof, copies of all proxy statements, financial statements and reports that the Parent sends to its stockholders generally, and copies of all regular, periodic and special reports, and all registration statements, that any Loan Party 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.
 
(f) ERISA . (i) ERISA Events . Promptly and in any event within 10 days after any Loan Party 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, or the taking of any action with respect to a Pension Plan which could result in the requirement that any Loan Party 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 result in any Loan Party or any ERISA Affiliate incurring any material liability,
 
68

fine or penalty, or the incurrence by any Loan Party or any ERISA Affiliate of any liability with respect to the withdrawal or partial withdrawal from any Multiemployer Plan or the receipt by any Loan Party or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from Borrower or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA, notice thereof and copies of all documentation relating thereto.
 
(ii) Plan Annual Reports . Promptly upon request of any Agent or any Lender, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Pension Plan.
 
(iii) Multiemployer Plan Notices . Promptly and in any event within 15 Business Days after receipt thereof by any Loan Party 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 reorganization or termination, within the meaning of Title IV of ERISA, of any such Multiemployer Plan or (C) the amount of liability incurred, or that may be incurred, by such Loan Party 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 Lender, 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 Loan Party or any ERISA Affiliate incurring any material liability, fine, or penalty.
 
(g) Statutory Statements . As soon as available and in any event within 20 days after submission, each statutory statement of the Loan Parties (or any of them) in the form submitted to The Supervisor of Insurance, the Insurance Division of the Bermuda Monetary Authority.
 
(h) Regulatory Notices, Etc . Promptly after any Responsible Officer of the Parent obtains knowledge thereof, (i) 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 Borrower 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, (ii) copies of any correspondence by, to or concerning any Loan Party 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 (iii) 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 Loan Party.
 
(i) Other Information . Such other information respecting the business, condition (financial or otherwise), operations, performance, properties or prospects of any Loan Party or any of its Subsidiaries as any Agent, or any Lender through the Administrative Agent, may from time to time reasonably request.
 
69

Information required to be delivered pursuant to clauses 5.03(b), 5.03(c) and 5.03(e) above shall be deemed to have been delivered on the date on which the Parent provides notice to the Administrative Agent that such information has been posted on the Parent’s website on the Internet at the website address listed on the signature pages hereof, at sec.gov/edaux/searches.htm or at another website identified in such notice and accessible by the Lenders without charge; provided that (x) such notice may be included in a certificate delivered pursuant to clause 5.03(b)(i)(A) or 5.01(c)(i) and (y) the Parent shall deliver paper copies of the information referred to in clauses 5.03(b), 5.03(c) and 5.03(e) to any Lender which requests such delivery.
 
Section 5.04 . Financial Covenants. So long as any Advance or any other obligation of any Loan Party under any Loan Document shall remain unpaid, any Letter of Credit shall be outstanding or any Lender shall have any Commitment hereunder, the Parent will:
 
(a) Adjusted Consolidated Debt to Total Capitalization Ratio . Maintain at all times a ratio of Adjusted Consolidated Debt to Total Capitalization of not more than 0.35 to 1.
 
(b) Consolidated Net Worth . Maintain at all times Consolidated Net Worth in an amount not less than the Minimum Amount.
 
For this purpose, the “ Minimum Amount ” is an amount equal to the sum of (i) the Base Amount plus (ii) (A) 25% of Consolidated Net Income for each fiscal quarter of the Parent, ending on or after the date on which the current Base Amount became effective and before the last day of the current Fiscal Year, for which such Consolidated Net Income is positive and (B) 50% of any increase in Consolidated Net Worth during such period attributable to the issuance of ordinary and preferred shares. The “ Base Amount ” shall be $6,000,000,000 as of December 31, 2003 and shall be reset on the last day of each Fiscal Year to equal the greater of (x) 70% of Consolidated Net Worth as of the last day of such Fiscal Year and (y) the Minimum Amount in effect immediately prior to such last day.
 
ARTICLE 6
E VENTS O F D EFAULT
 
Section 6.01 . Events Of Default. If any of the following events (“ Events of Default ”) shall occur and be continuing:
 
(a) (i) any Borrower shall fail to pay any principal of any Advance or any reimbursement obligation in respect of any payment made by an Issuing Bank pursuant to a Letter of Credit when and as the same shall become due and payable or (ii) any Borrower shall fail to pay any interest on any Advance, or any Loan
 
70

Party shall fail to make any other payment under any Loan Document, in each case under this clause (ii) within five Business Days after the same becomes due and payable; or
 
(b) any representation or warranty made by any Loan Party (or any of its officers) under or in connection with any Loan Document shall prove to have been incorrect in any material respect when made; or
 
(c) any Borrower shall fail to perform or observe any term, covenant or agreement contained in Section 2.15, 5.01(d) (with respect to the Parent) or (e), 5.02, 5.03(a) or 5.04; or
 
(d) any Loan Party shall fail to perform or observe any other term, covenant or agreement contained in any Loan 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 Loan Party by any Agent or any Lender; or
 
(e) the Parent or any of its Subsidiaries shall fail to pay any Material Financial Obligation (but excluding Debt outstanding hereunder) of the Parent 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 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; or
 
(f) any Loan Party 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 Loan Party or any Significant Subsidiary seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, 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
 
71

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 Loan Party or any Significant Subsidiary shall take any corporate action to authorize any of the actions set forth above in this subsection (f); or
 
(g) any final judgment or order for the payment of money in excess of $100,000,000 shall be rendered against any Loan Party 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; or
 
(h) any non-monetary judgment or order shall be rendered against any Loan Party or any of its Subsidiaries that could be reasonably likely to have a Material Adverse Effect, and 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; or
 
(i) any provision in Article 7 of this Agreement shall for any reason cease to be valid and binding on or enforceable against any Loan Party (other than as a result of a transaction permitted hereunder), or any such Loan Party shall so state in writing; or
 
(j) a Change of Control shall occur; or
 
(k) Any Loan Party or any ERISA Affiliate shall incur or shall be reasonably expected to incur liability in excess of $25,000,000 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:
 
(i) Institution of any steps by any Loan Party, any ERISA Affiliate or any other Person, including, without limitation, the PBGC to terminate a Pension Plan if as a result of such termination a Loan Party or any ERISA Affiliate could reasonably expect to be required to make a contribution to such Pension Plan, or could reasonably expect to incur a liability or obligation;
 
(ii) A contribution failure occurs with respect to any Pension Plan sufficient to give rise to a lien under section 302(f) of ERISA; or
 
(iii) Any condition shall exist or event shall occur with respect to a Pension Plan that is reasonably expected to result in any Loan Party 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.
 
72

(l) any Loan Party 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, has occurred with respect to such Multiemployer Plan which could cause any Loan Party or any ERISA Affiliate to incur a payment obligation in excess of $25,000,000;
 
then, and in any such event, the Administrative Agent (i) shall at the request, or may with the consent, of the Required Lenders, by notice to the Borrowers, declare the Commitments of each Lender and the obligation of each Lender to make Advances (other than Letter of Credit Advances by the Issuing Bank or a Lender pursuant to Section 2.04(c)) and of the Issuing Bank to issue Letters of Credit to be terminated, whereupon the same shall forthwith terminate, and/or (ii) shall at the request, or may with the consent, of the Required Lenders, by notice to the Borrowers, declare the Notes, all interest thereon and all other amounts payable under this Agreement and the other Loan Documents to be forthwith due and payable, whereupon the Notes, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrowers; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to any Borrower under the Federal Bankruptcy Code, (x) the Commitments of each Lender and the obligation of each Lender to make Advances (other than Letter of Credit Advances by the Issuing Bank or a Lender pursuant to Section 2.04(c)) and of the Issuing Bank to issue Letters of Credit shall automatically be terminated and (y) the Notes, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrowers.
 
Section 6.02 . Actions in Respect of the Letters of Credit upon Default. If any Event of Default shall have occurred and be continuing, the Administrative Agent may, or shall at the request of the Required Lenders, after having taken any of the actions described in Section 6.01(ii) or otherwise, make demand upon the Borrower to, and forthwith upon such demand the Borrower will, pay to the Administrative Agent on behalf of the Lenders in same day funds at the Administrative Agent’s office designated in such demand, an amount equal to the aggregate Available Amount of all Letters of Credit then outstanding as cash collateral. If at any time during the continuance of an Event of Default the Administrative Agent determines that such funds are subject to any right or claim of any Person other than the Administrative Agent and the Lenders or that the total amount of such funds is less than the aggregate Available Amount of all Letters of Credit, the Borrower will, forthwith upon demand by the Administrative Agent, pay to the Administrative Agent, as additional cash collateral, an amount equal to the excess of (a) such aggregate Available Amount over (b) the total amount of funds, if any, that the Administrative Agent determines to be free and clear of any such right and claim. Upon the drawing of any Letter of Credit, such funds shall be applied to reimburse the Issuing Bank or Lenders, as applicable, to the extent permitted by applicable law.
 
73

ARTICLE 7
T HE G UARANTY
 
Section 7.01 . The Guaranty. (a) Each Guarantor hereby jointly and severally, unconditionally, absolutely and irrevocably guarantees the full and punctual payment (whether at stated maturity, upon acceleration or otherwise) of all amounts payable by each of the other Borrowers under the Loan Documents including, without limitation, the principal of and interest on each Note issued by such other Borrowers pursuant to this Agreement and for reimbursement obligations with respect to Letters of Credit. Upon failure by a Borrower to pay punctually any such amount, each other Guarantor agrees to pay forthwith on demand the amount not so paid at the place and in the manner specified in this Agreement.
 
(b) Each Guarantor (other than the Parent), and by its acceptance of this Guaranty, the Administrative Agent and each Lender, hereby confirms that it is the intention of all such Persons that this Guaranty and the obligations of each Guarantor hereunder not constitute a fraudulent transfer or conveyance for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar foreign, federal or state law to the extent applicable to this Guaranty and the obligations of each Guarantor (other than the Parent) hereunder. To effectuate the foregoing intention, the Administrative Agent, the Lenders and the Guarantors hereby irrevocably agree that the obligations of each Guarantor (other than the Parent) under this Article 7 at any time shall be limited to the maximum amount as will result in the obligations of such Guarantor under this Guaranty not constituting a fraudulent transfer or conveyance.
 
Section 7.02 . Guaranty Unconditional. The obligations of each Guarantor under this Article 7 shall be unconditional, absolute and irrevocable and, without limiting the generality of the foregoing, shall not be released, discharged or otherwise affected by:
 
(a) any extension, renewal, settlement, compromise, waiver or release in respect of any obligation of any other obligor under any of the Loan Documents, by operation of law or otherwise;
 
(b) any modification or amendment of or supplement to any of the Loan Documents;
 
(c) any release, non-perfection or invalidity of any direct or indirect security for any obligation of any other obligor under any of the Loan Documents;
 
74

(d) any change in the corporate existence, structure or ownership of any obligor, or any insolvency, bankruptcy, reorganization or other similar proceeding affecting any other obligor or its assets or any resulting release or discharge of any obligation of any other obligor contained in any of the Loan Documents;
 
(e) the existence of any claim, set-off or other rights which any obligor may have at any time against any other obligor, the Administrative Agent, any Lender or any other corporation or person, whether in connection with any of the Loan Documents or any unrelated transactions, provided that nothing herein shall prevent the assertion of any such claim by separate suit or compulsory counterclaim;
 
(f) any invalidity or unenforceability relating to or against any other obligor for any reason of any of the Loan Documents, or any provision of applicable law or regulation purporting to prohibit the payment by any other obligor of the principal of or interest on any Note or any other amount payable under any of the Loan Documents;
 
(g) any law, regulation or order of any jurisdiction, or any other event, affecting any term of any obligation or the Lenders’ rights with respect thereto; or
 
(h) any other act or omission to act or delay of any kind by any obligor, the Administrative Agent, any Lender or any other corporation or person or any other circumstance whatsoever which might, but for the provisions of this paragraph, constitute a legal or equitable discharge of or defense to a Guarantor’s obligations under this Article 7.
 
Section 7.03 . Discharge only upon Payment in Full; Reinstatement in Certain Circumstances. Each Guarantor’s obligations under this Article 7 shall remain in full force and effect until the Commitments shall have terminated and the principal of and interest on the Notes and all other amounts payable by the other Borrowers under the Loan Documents shall have been paid in full. If at any time any payment of the principal of or interest on any Note or any other amount payable by a Borrower under the Loan Documents is rescinded or must be otherwise restored or returned upon the insolvency, bankruptcy or reorganization of such Borrower or otherwise, each Guarantor’s obligations under this Article 7 with respect to such payment shall be reinstated as though such payment had been due but not made at such time.
 
Section 7.04 . Waiver by the Guarantors. Each Guarantor irrevocably waives acceptance hereof, presentment, demand, protest and any notice not provided for herein, as well as any requirement that at any time any action be taken by any corporation or person against any other obligor or any other corporation or person.
 
Section 7.05 . Subrogation. Each Guarantor hereby unconditionally and irrevocably agrees not to exercise any rights that it may now have or hereafter acquire against any other Borrower or any other insider guarantor that arise from
 
75

the existence, payment, performance or enforcement of such Guarantor’s obligations under or in respect of this Guaranty or any other Loan Document, including, without limitation, any right of subrogation, reimbursement, exoneration, contribution or indemnification and any right to participate in any claim or remedy of any Lender against any other Borrower or any other insider guarantor or any collateral, whether or not such claim, remedy or right arises in equity or under contract, statute or common law, including, without limitation, the right to take or receive from any other Borrower or any other insider guarantor, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim, remedy or right, unless and until all amounts payable under this Guaranty shall have been paid in full in cash, and the Commitments shall have expired or been terminated. If any amount shall be paid to any Guarantor in violation of the immediately preceding sentence at any time prior to the latest of (a) the payment in full in cash of all amounts payable under this Guaranty, and (b) the Termination Date, such amount shall be received and held in trust for the benefit of the Lenders, shall be segregated from other property and funds of such Guarantor and shall forthwith be paid or delivered to the Administrative Agent in the same form as so received (with any necessary endorsement or assignment) to be credited and applied to all amounts payable under this Guaranty, whether matured or unmatured, in accordance with the terms of the Loan Documents, or to be held as collateral for any amounts payable under this Guaranty thereafter arising. If (i) any Guarantor shall make payment to any Lender of all or any amounts payable under this Guaranty, (ii) all amounts payable under this Guaranty shall have been paid in full in cash, and (iii) the Termination Date shall have occurred, the Lenders will, at such Guarantor’s request and expense, execute and deliver to such Guarantor appropriate documents, without recourse and without representation or warranty, necessary to evidence the transfer by subrogation to such Guarantor of an interest in the obligations resulting from such payment made by such Guarantor pursuant to this Guaranty.
 
Section 7.06 . Stay of Acceleration. If acceleration of the time for payment of any amount payable by any Borrower under any of the Loan Documents is stayed upon the insolvency, bankruptcy or reorganization of such Borrower, all such amounts otherwise subject to acceleration under the terms of this Agreement shall nonetheless by payable by the Guarantors under this Article 7 forthwith on demand by the Administrative Agent made at the request of the requisite proportion of the Lenders.
 
Section 7.07 . Continuing Guaranty; Assignments. This Guaranty is a continuing guaranty and shall (a) remain in full force and effect until the latest of (i) the payment in full in cash of all amounts payable under this Guaranty and (ii) the Termination Date, (b) be binding upon each Guarantor, its successors and assigns and (c) inure to the benefit of and be enforceable by the Lenders and their successors, transferees and assigns. Without limiting the generality of clause (c) of the immediately preceding sentence, any Lender may assign or otherwise transfer all or any portion of its rights and obligations under this Agreement
 
76

(including, without limitation, all or any portion of its Commitments, the Advances owing to it and the Note or Notes held by it) to any other Person, and such other Person shall thereupon become vested with all the benefits in respect thereof granted to such Lender herein or otherwise, in each case as and to the extent provided in Sections 9.06 and 9.07.
 
ARTICLE 8
T HE A GENTS
 
Section 8.01 . Authorization and Action. Each Lender (in its capacity as a Lender) hereby appoints and authorizes each Agent to take such action as agent on its behalf and to exercise such powers and discretion under this Agreement and the other Loan Documents as are delegated to such Agent by the terms hereof and thereof, together with such powers and discretion as are reasonably incidental thereto. As to any matters not expressly provided for by the Loan Documents (including, without limitation, enforcement or collection of the Notes), no Agent shall be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Lenders or all the Lenders where unanimity is required, and such instructions shall be binding upon all Lenders and all holders of Notes; provided, however, that no Agent shall be required to take any action that exposes such Agent to personal liability or that is contrary to this Agreement or applicable law. Each Agent agrees to give to each Lender prompt notice of each notice given to it by any Borrower pursuant to the terms of this Agreement.
 
Section 8.02 . Agents’ Reliance, Etc. Neither any Agent nor any of their respective directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with the Loan Documents, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, each Agent: (a) may consult with legal counsel (including counsel for any Loan Party), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (b) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations (whether written or oral) made in or in connection with the Loan Documents; (c) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of any Loan Document on the part of any Loan Party or to inspect the property (including the books and records) of any Loan Party; (d) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any lien or security interest created or purported to be created under or in connection with, any Loan Document or any other instrument or document furnished pursuant thereto; and (e) shall incur no liability under or in respect of any Loan Document
 
77

by acting upon any notice, consent, certificate or other instrument or writing (which may be by telegram or telecopy) reasonably believed by it to be genuine and signed or sent by the proper party or parties.
 
Section 8.03 . JPMCB and Affiliates. With respect to its Commitments and the Committed Advances made by it, JPMCB shall have the same rights and powers under the Loan Documents as any other Lender and may exercise the same as though it were not an Agent; and the term “ Lender ” or “ Lenders ” shall, unless otherwise expressly indicated, include JPMCB in its individual capacity. JPMCB and its affiliates may accept deposits from, lend money to, act as trustee under indentures of, accept investment banking engagements from and generally engage in any kind of business with, any Loan Party, any of its Subsidiaries and any Person that may do business with or own securities of any Loan Party or any such Subsidiary, all as if JPMCB were not Agent and without any duty to account therefor to the Lenders.
 
Section 8.04 . Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon any Agent or any other Lender and based on the financial statements referred to in Section 8.04 and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon any Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement.
 
Section 8.05 . Indemnification. (a) Each Lender severally agrees to indemnify each Agent (to the extent not promptly reimbursed by the Borrowers) from and against such Lender’s ratable share (determined as provided below) of any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever that may be imposed on, incurred by, or asserted against such Agent in any way relating to or arising out of the Loan Documents or any action taken or omitted by such Agent under the Loan Documents; provided, however, that no Lender shall be liable for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from such Agent’s gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse each Agent promptly upon demand for its ratable share of any costs and expenses (including, without limitation, fees and expenses of counsel) payable by the Borrowers under Section 9.04, to the extent that such Agent is not promptly reimbursed for such costs and expenses by the Borrowers.
 
(b) For purposes of this Section 8.05, the Lenders’ respective ratable shares of any amount shall be determined, at any time, according to the sum of (i) the aggregate principal amount of the Advances outstanding at such time and owing to the respective Lenders, (ii) their respective Pro Rata Shares of the aggregate Available Amounts of all Letters of Credit outstanding at such time and
 
78

(iii) their respective Unused Commitments at such time. The failure of any Lender to reimburse any Agent promptly upon demand for its ratable share of any amount required to be paid by the Lenders to such Agent as provided herein shall not relieve any other Lender of its obligation hereunder to reimburse such Agent for its ratable share of such amount, but no Lender shall be responsible for the failure of any other Lender to reimburse such Agent for such other Lender’s ratable share of such amount. Without prejudice to the survival of any other agreement of any Lender hereunder, the agreement and obligations of each Lender contained in this Section 8.05 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under the other Loan Documents.
 
Section 8.06 . Successor Agents. Any Agent may resign at any time by giving written notice thereof to the Lenders and the Parent. Upon any such resignation or removal, the Required Lenders shall have the right to appoint a successor Agent, subject (so long as no Event of Default exists) to the consent of the Parent (which consent shall not be unreasonably withheld). If no successor Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the retiring Agent’s giving of notice of resignation or the Required Lenders’ removal of the retiring Agent, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a commercial bank organized under the laws of the United States or of any State thereof and having a combined capital and surplus of at least $250,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent such successor Agent shall succeed to and become vested with all the rights, powers, discretion, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under the Loan Documents. If within 45 days after written notice is given of the retiring Agent’s resignation or removal under this Section 8.06 no successor Agent shall have been appointed and shall have accepted such appointment, then on such 45th day (a) the retiring Agent’s resignation or removal shall become effective, (b) the retiring Agent shall thereupon be discharged from its duties and obligations under the Loan Documents and (c) the Required Lenders shall thereafter perform all duties of the retiring Agent under the Loan Documents until such time, if any, as the Required Lenders appoint a successor Agent as provided above. After any retiring Agent’s resignation or removal hereunder as Agent shall have become effective, the provisions of this Article 8 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement.
 
Section 8.07 . Co-Documentation Agents. The Co-Documentation Agents, in their capacity as such, shall not have any duties or obligations of any kind under this Agreement.
 
79

ARTICLE 9
M ISCELLANEOUS
 
Section 9.01 . Amendments, Etc. No amendment or waiver of any provision of this Agreement or the Notes or any other Loan Document, nor consent to any departure by any Loan Party therefrom, shall in any event be effective unless the same shall be in writing and signed by the Required Lenders (and, in the case of an amendment, the Parent), and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided that no amendment, waiver or consent shall:
 
(a) unless in writing and signed by all of the Lenders (other than any Lender that is, at such time, a Defaulting Lender), do any of the following at any time: (i) waive any of the conditions specified in Section 3.01, (ii) change the number of Lenders or the percentage of (x) the Commitments, (y) the aggregate unpaid principal amount of the Advances or (z) the aggregate Available Amount of outstanding Letters of Credit that, in each case, shall be required for the Lenders or any of them to take any action hereunder, (iii) reduce or limit the obligations of any Guarantor under Article 7 or release such Guarantor or otherwise limit such Guarantor’s liability with respect to the obligations owing to the Agents and the Lenders, (iv) amend this Section 9.01 or any of the definitions herein that would have such effect, (v) extend the Termination Date or (vi) limit the liability of any Loan Party under any of the Loan Documents;
 
(b) unless in writing and signed by each affected Lender, do any of the following at any time: (i) increase the Commitments of the Lenders or subject the Lenders to any additional obligations, (ii) reduce the principal of, or interest on, the Notes or any fees or other amounts payable hereunder or (iii) postpone any date fixed for any payment of principal of, or interest on, the Notes or any fees or other amounts payable hereunder;
 
provided further that no amendment, waiver or consent shall, unless in writing and signed by an Agent in addition to the Lenders required above to take such action, affect the rights or duties of such Agent under this Agreement or the other Loan Documents and no amendment, waiver or consent shall, unless in writing and signed by the Issuing Bank in addition to the Lenders above required to take such action, affect the rights or duties of the Issuing Bank under this Agreement or the other Loan Documents (including, without limitation, any change in Section 2.01(b), 2.04, 2.05(b), 2.05(c), 2.09(c)(ii), 2.18, 2.19, 2.20, 2.21, 2.22 or 9.09).
 
Section 9.02 . Notices, Etc. All notices and other communications provided for hereunder shall be in writing (including telegraphic or telecopy communication) and mailed, telegraphed, telecopied or delivered, if to any Borrower, at its address set forth below on the signature pages hereof; if to any Lender, the address for notices specified in its Administrative Questionnaire; and
 
80

if to the Administrative Agent, at its address at 1111 Fannin, 10th Floor, Houston, TX 77002, Attention: Carla Kinney; or, as to any party, at such other address as shall be designated by such party in a written notice to the other parties. All such notices and communications shall, when mailed, telegraphed or telecopied, be effective when deposited in the mails, delivered to the telegraph company or transmitted by telecopier, respectively, except that notices and communications to any Agent pursuant to Article 2, 3 or 8 shall not be effective until received by such Agent. Manual delivery by telecopier of an executed counterpart of any amendment or waiver of any provision of this Agreement or the Notes or of any Exhibit hereto to be executed and delivered hereunder shall be effective as delivery of an original executed counterpart thereof.
 
Section 9.03 . No Waiver; Remedies. No failure on the part of any Lender or any Agent to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law.
 
Section 9.04 . Costs and Expenses. (a) The Borrowers agree to pay on demand (i) all reasonable costs and expenses of the Agents and of the Issuing Bank in connection with the preparation, execution, delivery, administration, modification and amendment of the Loan Documents (including, without limitation, (A) all due diligence, collateral review, syndication, transportation, computer, duplication, appraisal, audit, insurance, consultant, search, filing and recording fees and expenses and (B) the reasonable fees and expenses of a single counsel for the Agents and a single counsel for the Issuing Bank with respect thereto, with respect to advising the Agents as to its rights and responsibilities, or the perfection, protection or preservation of rights or interests, under the Loan Documents, with respect to negotiations with any Loan Party or with other creditors of any Loan Party or any of its Subsidiaries arising out of any Default or any events or circumstances that may give rise to a Default and with respect to presenting claims in or otherwise participating in or monitoring any bankruptcy, insolvency or other similar proceeding involving creditors’ rights generally and any proceeding ancillary thereto) and (ii) all reasonable costs and expenses of each Agent, the Issuing Bank and each Lender in connection with the enforcement of the Loan Documents, whether in any action, suit or litigation, or any bankruptcy, insolvency or other similar proceeding affecting creditors’ rights generally (including, without limitation, the reasonable fees and expenses of counsel for the Administrative Agent, the Issuing Bank and each Lender with respect thereto).
 
(b) The Borrowers agree to indemnify and hold harmless each Agent, the Issuing Bank, each Lender and each of their Affiliates and their respective officers, directors, employees, agents and advisors (each, an “ Indemnified Party ”) from and against any and all claims, damages, losses, liabilities and expenses (including, without limitation, reasonable fees and expenses of counsel) that may be incurred by or asserted or awarded against any Indemnified Party, in
 
81

each case arising out of or in connection with or by reason of (including, without limitation, in connection with any investigation, litigation or proceeding or preparation of a defense in connection therewith) this Agreement, the actual or proposed use of the proceeds of the Advances, the Loan Documents or any of the transactions contemplated thereby, including, without limitation, any acquisition or proposed acquisition by any Borrower or any of its Subsidiaries or Affiliates, except to the extent such claim, damage, loss, liability or expense is found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party’s gross negligence or willful misconduct. In the case of an investigation, litigation or other proceeding to which the indemnity in this Section 9.04(b) applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by any Loan Party, its directors, shareholders or creditors or an Indemnified Party or any Indemnified Party is otherwise a party thereto and whether or not the transactions contemplated by the Loan Documents are consummated. Each of the Borrowers also agrees not to assert any claim against any Agent, any Lender or any of their Affiliates, or any of their respective officers, directors, employees, attorneys and agents, on any theory of liability, for special, indirect, consequential or punitive damages arising out of or otherwise relating to the credit facilities provided hereunder, the actual or proposed use of the proceeds of the Advances or the Letters of Credit, the Loan Documents or any of the transactions contemplated by the Loan Documents.
 
(c) If any payment of principal of, or Conversion of, any Eurodollar Rate Advance or LIBO Rate Advance is made by any Borrower to or for the account of a Lender other than on the last day of the Interest Period for such Advance, as a result of a payment or Conversion pursuant to Section 2.07, 2.10(b)(i) or 2.11(d), acceleration of the maturity of the Notes pursuant to Section 6.01 or for any other reason, or if any Borrower fails to make any payment or prepayment of an Advance for which a notice of prepayment has been given or that is otherwise required to be made, whether pursuant to Section 2.05, 2.07 or 6.01 or otherwise, the Borrowers agree, within 10 days after demand by such Lender (with a copy of such demand to the Administrative Agent), which demand shall include a calculation in reasonable detail of the amount demanded, to pay to the Administrative Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses that it may reasonably incur as a result of such payment or Conversion or such failure to pay or prepay, as the case may be, including, without limitation, any loss (excluding loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Advance.
 
(d) Without prejudice to the survival of any other agreement of any Loan Party hereunder or under any other Loan Document, the agreements and obligations of the Borrowers contained in Sections 2.11 and 2.13 and this Section 9.04 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under any of the other Loan Documents.
 
82

Section 9.05 . Right of Set-off. Upon (a) the occurrence and during the continuance of any Event of Default and (b) the making of the request or the granting of the consent specified by Section 6.01 to authorize the Administrative Agent to declare the Notes due and payable pursuant to the provisions of Section 6.01, each Agent and each Lender and each of their respective Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and otherwise apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Agent, such Lender or such Affiliate to or for the credit or the account of any Borrower against any and all of the obligations of such Borrower now or hereafter existing under the Loan Documents, irrespective of whether such Agent or such Lender shall have made any demand under this Agreement or such Note or Notes and although such obligations may be unmatured. Each Agent and each Lender agrees promptly to notify each Borrower after any such set-off and application; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of each Agent and each Lender and their respective Affiliates under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) that such Agent, such Lender and their respective Affiliates may have.
 
Section 9.06 . Successors; Participations and Assignments. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that no Borrower may assign or otherwise transfer any of its rights and obligations under this Agreement without the prior written consent of all the Lenders.
 
(b) Any Lender may at any time grant to one or more banks or other institutions (each a “ Participant ”) participating interests in its Commitment or any or all of its Advances. If a Lender grants any such participating interest to a Participant, whether or not upon notice to the Borrowers and the Administrative Agent, such Lender shall remain responsible for the performance of its obligations hereunder, and the Borrowers and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement. Any agreement pursuant to which any Lender may grant such a participating interest shall provide that such Lender shall retain the sole right and responsibility to enforce the obligations of the Borrowers hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Lender will not agree to any modification, amendment or waiver of this Agreement described in clauses (i)-(vi) of Section 9.01 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Sections 2.11, 2.13 and 9.04(c) and with respect to its participating interest. An assignment or other transfer which is not permitted by Section 9.06(c) or 9.06(d) shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection.
 
83

(c) Any Lender may at any time assign to one or more banks or other institutions (each an “ Assignee ”) all, or a proportionate part (equivalent to an initial Commitment of not less than $10,000,000) of all, of its rights and obligations under this Agreement and its Note, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement substantially in the form of Exhibit C hereto signed by such Assignee and such transferor Lender, with (and subject to) the subscribed consent of the Parent, each Issuing Bank and the Administrative Agent (which consent shall not be unreasonably withheld or delayed); provided that (i) if an Assignee is an affiliate of such transferor Lender or was a Lender immediately before such assignment, no such consent of the Parent shall be required, (ii) such assignment may, but need not, include rights of the transferor Lender in respect of outstanding Competitive Bid Advances, (iii) no such consent of the Parent shall be required if at the time an Event of Default exists, (iv) such consent shall be deemed to have been given by the Parent, the Issuing Bank or the Administrative Agent, as the case may be, if it shall not have responded to a written request for consent within five Business Days of its receipt thereof and (v) neither the Parent nor any of its Subsidiaries or Affiliates may be an Assignee. When such instrument has been signed and delivered by the parties thereto and such Assignee has paid to such transferor Lender the purchase price agreed between them, such Assignee shall be a Lender party to this Agreement and shall have all the rights and obligations of a Lender with a Commitment as set forth in such instrument of assumption, and the transferor Lender shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection, the transferor Lender, the Administrative Agent and the Borrowers shall make appropriate arrangements so that, if required, new Notes are issued to the Assignee. In connection with any such assignment, the transferor Lender shall pay to the Administrative Agent an administrative fee for processing such assignment in the amount of $3,500. If the Assignee is not incorporated under the laws of the United States or a State thereof, it shall deliver to the Borrowers and the Administrative Agent certification as to exemption from deduction or withholding of United States federal income taxes in accordance with Section 2.13(e).
 
(d) Any Lender may at any time assign all or any portion of its rights under this Agreement and its Notes to a Federal Reserve Bank. No such assignment shall release the transferor Lender from its obligations hereunder.
 
(e) No Assignee, Participant or other transferee of any Lender’s rights shall be entitled to receive any greater payment under Section 2.11 or 2.13 than such Lender would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower’s prior written consent or by reason of the provisions of Section 2.11 requiring such Lender to designate a different Applicable Lending Office under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist.
 
84

Section 9.07 . Designated Lenders. (a) Subject to the provisions of this subsection (a), any Lender may at any time designate an Eligible Designee to provide all or a portion of the Committed Advances and Competitive Bid Advances to be made by such Lender pursuant to this Agreement; provided that such designation shall not be effective unless the Parent and the Administrative Agent consent thereto (which consents shall not be unreasonably withheld). When a Lender and its Eligible Designee shall have signed an agreement substantially in the form of Exhibit E hereto (a “ Designation Agreement ”) and the Parent and the Administrative Agent shall have signed their respective consents thereto, such Eligible Designee shall become a Designated Lender for purposes of this Agreement. The Designating Lender shall thereafter have the right to permit such Designated Lender to provide all or a portion of the Committed Advances and Competitive Bid Advances to be made by such Designating Lender pursuant to Section 2.01 or 2.03, and the making of such Advances or portion thereof shall satisfy the obligation of the Designating Lender to the same extent, and as if, such Advances or portion thereof were made by the Designating Lender. As to any Advances or portion thereof made by it, each Designated Lender shall have all the rights that a Lender making such Advances or portion thereof would have had under this Agreement and otherwise; provided that (x) its voting rights under this Agreement shall be exercised solely by its Designating Lender and (y) its Designating Lender shall remain solely responsible to the other parties hereto for the performance of such Designated Lender’s obligations under this Agreement, including its obligations in respect of the Advances or portion thereof made by it. No additional Note shall be required to evidence the Advances or portion thereof made by a Designated Lender; and the Designating Lender shall be deemed to hold its Notes as agent for its Designated Lender to the extent of the Advances or portion thereof funded by such Designated Lender. Each Designating Lender shall act as administrative agent for its Designated Lender and give and receive notices and other communications on its behalf. Any payments for the account of any Designated Lender shall be paid to its Designating Lender as administrative agent for such Designated Lender and neither the Borrower nor the Administrative Agent shall be responsible for any Designating Lender’s application of such payments. In addition, any Designated Lender may, with notice to (but without the prior written consent of) the Parent and the Administrative Agent, (i) assign all or portions of its interest in any Advances to its Designating Lender or to any financial institutions consented to by the Parent and the Administrative Agent that provide liquidity and/or credit facilities to or for the account of such Designated Lender to support the funding of Advances or portions thereof made by it and (ii) disclose on a confidential basis any non-public information relating to its Advances or portions thereof to any rating agency, commercial paper dealer or provider of any guarantee, surety, credit or liquidity enhancement to such Designated Lender.
 
(b) Each party to this Agreement agrees that it will not institute against, or join any other person in instituting against, any Designated Lender any bankruptcy, insolvency, reorganization or other similar proceeding under any federal or state bankruptcy or similar law, for one year and a day after all
 
85

outstanding senior indebtedness of such Designated Lender is paid in full. The Designating Lender for each Designated Lender agrees to indemnify, save, and hold harmless each other party hereto for any loss, cost, damage and expense arising out of its inability to institute any such proceeding against such Designated Lender. This subsection (b) shall survive the termination of this Agreement.
 
Section 9.08 . Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of an original executed counterpart of this Agreement.
 
Section 9.09 . No Liability of the Issuing Bank. Each Borrower assumes all risks of the acts or omissions of any beneficiary or transferee of any Letter of Credit with respect to its use of such Letter of Credit. Neither the Issuing Bank nor any of its officers, directors, employees or agents shall be liable or responsible for: (a) the use that may be made of any Letter of Credit or any acts or omissions of any beneficiary or transferee in connection therewith; (b) the validity, sufficiency or genuineness of documents, or of any endorsement thereon, even if such documents should prove to be in any or all respects invalid, insufficient, fraudulent or forged; (c) payment by the Issuing Bank against presentation of documents that do not strictly comply with the terms of a Letter of Credit, including failure of any documents to bear any reference or adequate reference to the Letter of Credit; or (d) any other circumstances whatsoever in making or failing to make payment under any Letter of Credit, except that such Borrower shall have a claim against the Issuing Bank, and the Issuing Bank shall be liable to such Borrower, to the extent of any direct, but not consequential, damages suffered by such Borrower that such Borrower proves were caused by (i) the Issuing Bank’s willful misconduct or gross negligence as determined in a final, non-appealable judgment by a court of competent jurisdiction in determining whether documents presented under any Letter of Credit comply with the terms of the Letter of Credit or (ii) the Issuing Bank’s willful failure to make lawful payment under a Letter of Credit after the presentation to it of a draft and certificates strictly complying with the terms and conditions of the Letter of Credit. In furtherance and not in limitation of the foregoing, the Issuing Bank may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary.
 
Section 9.10 . Confidentiality. Neither any Agent nor any Lender shall disclose any Confidential Information to any Person without the consent of the Parent, other than (a) to such Agent’s or such Lender’s Affiliates and their officers, directors, employees, agents and advisors and to actual or prospective Assignees and Participants, and then only on a confidential basis, (b) as required by any law, rule or regulation or judicial process, (c) as requested or required by any state, Federal or foreign authority or examiner regulating such Lender or
 
86

pursuant to any request of any self-regulatory body having or claiming authority to regulate or oversee any aspect of a Lender’s business or that of any of its affiliates and (d) to any rating agency when required by it, provided that, prior to any such disclosure, such rating agency shall undertake to preserve the confidentiality of any Confidential Information relating to the Loan Parties received by it from such Lender.
 
Section 9.11 . Jurisdiction, Etc. (a) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or any of the other Loan Documents to which it is a party, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement or any of the other Loan Documents in the courts of any jurisdiction.
 
(b) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any of the other Loan Documents to which it is a party in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
 
(c) Each of the Borrowers hereby irrevocably appoints CT Corporation System, with offices on the Effective Date at 111 Eighth Avenue, New York, New York, 10011, USA as its agent to receive, accept and acknowledge for and on its behalf service of any and all legal process, summons, notices and documents which may be served in any such action or proceeding. If for any reason such agent shall cease to be available to act as such, the Borrowers agree to promptly designate a new agent satisfactory to the Administrative Agent in the Borough of Manhattan, The City of New York to receive, accept and acknowledge for and on its behalf service of any and all legal process, summons, notices and documents which may be served in any such action or proceeding pursuant to the terms of this Section 9.11. In the event that any Borrower shall fail to designate such new agent, service of process in any such action or proceeding may be made on such Borrower by the mailing of copies thereof by express or overnight mail or overnight courier, postage prepaid, to such Borrower at its address set forth opposite its signature below.
 
87

Section 9.12 . Governing Law. This Agreement and the Notes shall be governed by, and construed in accordance with, the laws of the State of New York.
 
Section 9.13 . Waiver of Jury Trial. Each of the Borrowers, the Agents and the Lenders irrevocably waives all right to trial by jury in any action, proceeding or counterclaim (whether based on contract, tort or otherwise) arising out of or relating to any of the Loan Documents, the Advances or the actions of any Agent or any Lender in the negotiation, administration, performance or enforcement thereof.
 
Section 9.14 . Nature of Borrowers’ Obligations. Any payment obligation of the Borrowers or the Loan Parties under Section 2.09, 2.11, 2.13 or 9.04 shall be the joint and several obligation of each Borrower or Loan Party, as the case may be.
 
Section 9.15 . USA Patriot Act. Each Lender hereby notifies the Borrowers that pursuant to the requirements of the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “ Act ”), it is required to obtain, verify and record information that identifies each Borrower, which information includes the name and address of such Borrower and other information that will allow such Lender to identify such Borrower in accordance with the Act.
 
88

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written.
 
ACE LIMITED
P.O. Box HM 1015
Hamilton HM DX
Bermuda
Telephone: +1 (441) 295-5200
Fax: +1 (441) 295-5221
www.acelimited.com

The Common Seal of ACE Limited was hereunto affixed in the presence of:	

	

	
 
Signature Page to ACE Three-Year Credit Agreement

ACE BERMUDA INSURANCE LTD.
P.O. Box HM 1015
Hamilton HM DX
Bermuda
Telephone: +1 (441) 295-5200
Fax: +1 (441) 296-7802

The Common Seal of ACE Bermuda Insurance Ltd. was hereunto affixed in the presence of:	

	

	
 
Signature Page to ACE Three-Year Credit Agreement

ACE TEMPEST REINSURANCE LTD.
P.O. Box HM 2702
Hamilton HM KX
Bermuda
Telephone: +1 (441) 292-2603
Fax: +1 (441) 292-2395

The Common Seal of ACE Tempest Reinsurance Ltd. was hereunto affixed in the presence of:	

	

	
 
Signature Page to ACE Three-Year Credit Agreement

			
ACE INA HOLDINGS INC.	
Two Liberty Place	
1601 Chestnut Street	
Philadelphia, PA 19103	
Telephone: +1 (215) 640-1000	
Fax: +1 (215) 640-2489	
		
By:	 	 
	
Title:	 	 	
	
Taxpayer Identification Number:	

 
Signature Page to ACE Three-Year Credit Agreement

			
JPMORGAN CHASE BANK, as Administrative Agent and as a Lender	
		
By:	 	 
	
Title:	 	 	
 
Signature Page to ACE Three-Year Credit Agreement

			
BARCLAYS BANK PLC, as Syndication Agent and as a Lender	
		
By:	 	 
	
Title:	 	 	
 
Signature Page to ACE Three-Year Credit Agreement

			
BANK OF AMERICA, N.A.	
		
By:	 	 
	
Name:	 	 	
Title:	 	 	
 
Signature Page to ACE Three-Year Credit Agreement

			
CITIBANK, N.A.	
		
By:	 	 
	
Name:	 	 	
Title:	 	 	
 
Signature Page to ACE Three-Year Credit Agreement

			
LLOYDS TSB BANK plc	
		
By:	 	 
	
Name:	 	 	
Title:	 	 	
		
By:	 	 
	
Name:	 	 	
Title:	 	 	
 
Signature Page to ACE Three-Year Credit Agreement

			
ABN AMRO BANK N.V.	
		
By:	 	 
	
Name:	 	 	
Title:	 	 	
		
By:	 	 
	
Name:	 	 	
Title:	 	 	
 
Signature Page to ACE Three-Year Credit Agreement

			
DEUTSCHE BANK AG NEW YORK BRANCH	
		
By:	 	 
	
Name:	 	 	
Title:	 	 	
		
By:	 	 
	
Name:	 	 	
Title:	 	 	
 
Signature Page to ACE Three-Year Credit Agreement

			
WACHOVIA BANK, NATIONAL ASSOCIATION	
		
By:	 	 
	
Name:	 	 	
Title:	 	 	
 
Signature Page to ACE Three-Year Credit Agreement

			
THE BANK OF TOKYO-MITSUBISHI, LTD., NEW YORK BRANCH	
		
By:	 	 
	
Name:	 	 	
Title:	 	 	
 
Signature Page to ACE Three-Year Credit Agreement

			
BNP PARIBAS	
		
By:	 	 
	
Name:	 	 	
Title:	 	 	
		
By:	 	 
	
Name:	 	 	
Title:	 	 	
 
Signature Page to ACE Three-Year Credit Agreement

			
CREDIT LYONNAIS NEW YORK BRANCH	
		
By:	 	 
	
Name:	 	 	
Title:	 	 	
 
Signature Page to ACE Three-Year Credit Agreement

			
HSBC BANK USA	
		
By:	 	 
	
Name:	 	 	
Title:	 	 	
 
Signature Page to ACE Three-Year Credit Agreement

			
MELLON BANK, N.A.	
		
By:	 	 
	
Name:	 	 	
Title:	 	 	
 
Signature Page to ACE Three-Year Credit Agreement

			
ROYAL BANK OF CANADA	
		
By:	 	 
	
Name:	 	 	
Title:	 	 	
 
Signature Page to ACE Three-Year Credit Agreement

			
THE ROYAL BANK OF SCOTLAND plc	
		
By:	 	 
	
Name:	 	 	
Title:	 	 	
 
Signature Page to ACE Three-Year Credit Agreement

			
STATE STREET BANK AND TRUST COMPANY	
		
By:	 	 
	
Name:	 	 	
Title:	 	 	
 
Signature Page to ACE Three-Year Credit Agreement

PRICING SCHEDULE
 
Each of “ Applicable Facility Fee Percentage ” and “ Applicable Margin ” means, for any day, the rate per annum set forth below in the row opposite such term and in the column corresponding to the Pricing Level and Usage that apply on such day:

Pricing Level
	  	Level I
	 	 	Level II
	 	 	Level III
	 	 	Level IV
	 	 	Level V
	 	 	Level VI
	 	
Applicable Facility Fee Percentage	  	0.060	%	 	0.080	%	 	0.100	%	 	0.125	%	 	0.150	%	 	0.200	%	
							
Applicable Margin	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Usage < 33%	  	0.190	%	 	0.270	%	 	0.350	%	 	0.425	%	 	0.500	%	 	0.675	%	
Usage ³ 33%	  	0.290	%	 	0.370	%	 	0.450	%	 	0.525	%	 	0.625	%	 	0.800	%	
							
Letter of Credit Fee	  	0.240	%	 	0.320	%	 	0.400	%	 	0.475	%	 	0.5625	%	 	0.7375	%	
 
For purposes of this Schedule, the following terms have the following meanings, subject to the concluding paragraph of this Schedule:
 
“ Level I Pricing ” applies on any day on which the Borrower’s long-term debt is rated A+ or higher by S&P or A1 or higher by Moody’s.
 
“ Level II Pricing ” applies on any day on which (i) the Borrower’s long-term debt is rated A or higher by S&P or A2 or higher by Moody’s and (ii) Level I Pricing does not apply.
 
“ Level III Pricing ” applies on any day on which (i) the Borrower’s long-term debt is rated A- or higher by S&P or A3 or higher by Moody’s and (ii) neither Level I Pricing nor Level II Pricing applies.
 
“ Level IV Pricing ” applies on any day on which (i) the Borrower’s long-term debt is rated BBB+ or higher by S&P and/or Baa1 or higher by Moody’s and (ii) none of Level I Pricing, Level II Pricing and Level III Pricing applies.
 
“ Level V Pricing ” applies on any day on which (i) the Borrower’s long-term debt is rated BBB or higher by S&P or Baa2 or higher by Moody’s and (ii) none of Level I Pricing, Level II Pricing, Level III Pricing and Level IV Pricing applies.
 
“ Level VI Pricing ” applies on any day if no other Pricing Level applies on such day.
 
“ Moody’s ” means Moody’s Investors Service, Inc.
 
“ Pricing Level ” refers to the determination of which of Level I, Level II, Level III, Level IV, Level V or Level VI Pricing applies on any day.
 
“ S&P ” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc.

The “ Usage ” applicable to any date is the percentage equivalent of a fraction the numerator of which is the sum of the aggregate outstanding principal amount of the Advances at such date and the Available Amounts under all outstanding Letters of Credit at such date and the denominator of which is the aggregate amount of the Commitments at such date. If for any reason any Advances or Letters of Credit remain outstanding following the termination of the Commitments, Usage will be deemed to be more than 33%.
 
The credit ratings to be utilized for purposes of this Schedule are those assigned to the senior unsecured long-term debt securities of the Parent without third-party credit enhancement, and any rating assigned to any other debt security of the Parent shall be disregarded. The ratings in effect for any day are those in effect at the close of business on such day.
 
In the case of split ratings from S&P and Moody’s, the rating to be used to determine the applicable Pricing Level is the higher of the two (e.g., A+/A2 results in Level I Pricing); provided that if the split is more than one full rating category, the intermediate (or higher of the two intermediate ratings) will be used (e.g. A+/A3 results in Level II Pricing and AA-/A3 results in Level I Pricing); and provided further that unless the Parent’s credit ratings qualify for at least Level V Pricing, no better Pricing Level will be applicable.

Commitment Schedule

Lender
	  	Commitment
	
JPMorgan Chase Bank	  	$	49,000,000	
Barclays Bank PLC	  	$	49,000,000	
Bank of America, N.A.	  	$	43,000,000	
Citibank, N.A.	  	$	43,000,000	
Lloyds TSB Bank plc	  	$	43,000,000	
ABN AMRO Bank N.V.	  	$	39,000,000	
Deutsche Bank AG New York Branch	  	$	39,000,000	
Wachovia Bank, National Association	  	$	39,000,000	
The Bank of Tokyo-Mitsubishi, Ltd., New York Branch	  	$	32,000,000	
BNP Paribas	  	$	32,000,000	
Credit Lyonnais New York Branch	  	$	32,000,000	
HSBC Bank USA	  	$	32,000,000	
Mellon Bank, N.A.	  	$	32,000,000	
Royal Bank of Canada	  	$	32,000,000	
The Royal Bank of Scotland plc	  	$	32,000,000	
State Street Bank and Trust Company	  	$	32,000,000	
 	  			
Total	  	$	600,000,000	

Exhibit 4.01(b)
 
ACE LIMITED GROUP OF COMPANIES
MARCH 31, 2004

Name
	  	Jurisdiction of
Organization
	  	Percentage
Ownership
	 	Jurisdictions in which Authorized
and Type of Business
	
ACE Limited	  	Cayman Islands	  	Publicly held	 	Bermuda, holding company	
				
ACE Bermuda Insurance Ltd.	  	Bermuda	  	100%	 	Bermuda, insurance, reinsurance, general and long term; Mexico, reinsurance	
				
ACE PCC Insurance Limited	  	Guernsey	  	100%	 	Guernsey, protected cell rent-a-captive business	
				
Paget Reinsurance International Ltd.	  	Bermuda	  	100%	 	Bermuda, insurance/reinsurance	
				
ACE Capital Re International Ltd.	  	Bermuda	  	100%	 	Bermuda, insurance/reinsurance, general and long term	
				
ACE KRE Holdings Limited	  	Barbados	  	100%	 	Barbados, investment holding	
				
ACE Capital Re USA Holdings Incorporated	  	Delaware	  	100%	 	Delaware, investment holding	
				
ACE Capital Re Overseas Ltd.	  	Bermuda	  	100%	 	Bermuda, insurance/reinsurance, general and long term	
				
ACE Capital Mortgage Reinsurance Company
(EI# 06-1384770, NAIC# 10021, NY)	  	New York	  	100%	 	New York, DC, mtg. guaranty insurance/reinsurance	
				
ACE Capital Title Reinsurance Company
(EI# 06-1434264, NAIC# 50028, NY)	  	New York	  	100%	 	CA, MI, NY, TX, title insurance/reinsurance	
				
ACE Capital Re Inc.	  	New York	  	100%	 	New York, reinsurance intermediary	
				
Oasis Investments Limited	  	Bermuda	  	67%	 	Bermuda, Investment Holding	
				
Oasis Investments 2 Ltd.	  	Bermuda	  	67%	 	Bermuda, holding company	
				
ACE Financial Solutions International, Ltd.	  	Bermuda	  	100%	 	Bermuda, insurance management	
				
ACE European Markets Reinsurance Limited	  	Ireland	  	100%	 	Ireland, general and life reinsurance	
				
ACE European Markets Insurance Limited	  	Ireland	  	100%	 	EEA/Europe, direct non-life insurance, UK branch	
				
Corporate Officers & Directors Assurance Ltd.	  	Bermuda	  	100%	 	Bermuda, insurance	

							
Name
	  	Jurisdiction of
Organization
	  	Percentage
Ownership
	 	Jurisdictions in which Authorized
and Type of Business
	
Oasis Real Estate Company Ltd.	  	Bermuda	  	100%	 	Bermuda, investment holding	
				
Scarborough Property Holdings Ltd.	  	Bermuda	  	40%	 	Bermuda, investment holding	
				
Sovereign Risk Insurance Limited	  	Bermuda	  	50%	 	Bermuda, insurance agent	
				
Tripar Partnership	  	Bermuda	  	98%
2% (CODA)	 	Bermuda, investment holding	
				
ACE Realty Holdings Limited	  	Bermuda	  	100%	 	Bermuda, investment holding	
				
Oasis Personnel Limited	  	Cayman Islands	  	100%	 	Cayman Islands, general services	
				
Shipowners Insurance and Guaranty Co. Limited	  	Bermuda	  	10% Series A
8% Series B	 	Bermuda, insurance	
				
Intrepid Re Holdings Limited	  	Bermuda	  	38.5%	 	Bermuda, holding	
				
Intrepid Re Limited	  	Bermuda	  	100%	 	Bermuda, Reinsurance	
				
Freisenbruch-Meyer Insurance Ltd.	  	Bermuda	  	40%	 	Bermuda, local and commercial insurance	
				
Freisenbruch-Meyer Insurance Services Ltd.	  	Bermuda	  	40%	 	Bermuda, local and commercial insurance	
				
ACE Global Markets Limited	  	United Kingdom	  	100%	 	UK, investment holding	
				
ACE Group Holdings Limited	  	United Kingdom	  	100%	 	UK, investment holding	
				
ACE Tarquin	  	United Kingdom	  	100%	 	UK, investment holding	
				
ACE Capital V Limited	  	United Kingdom	  	100%	 	UK, Lloyd’s corporate member	
				
ACE Leadenhall Limited	  	United Kingdom	  	100%	 	UK, investment holding	
				
ACE Underwriting Agencies Limited	  	United Kingdom	  	100%	 	UK, Lloyd’s managing agent	
				
ACE Trustees Limited	  	United Kingdom	  	100%	 	UK, investment holding	
				
ACE London Group Limited	  	United Kingdom	  	100%	 	UK, investment holding	
				
ACE Capital Limited	  	United Kingdom	  	100%	 	UK, Lloyd’s corporate member	
				
ACE Capital III Limited	  	United Kingdom	  	100%	 	UK, Lloyd’s corporate member	
				
ACE Capital IV Limited	  	United Kingdom	  	100%	 	UK, Lloyd’s corporate member	
				
ACE London Holdings Limited	  	United Kingdom	  	100%	 	UK, investment holding	
				
ACE Capital II Limited	  	United Kingdom	  	100%	 	UK, Lloyd’s corporate member	
				
ACE London Investments Limited	  	United Kingdom	  	100%	 	UK, investment holding	
				
ACE London Aviation Limited	  	United Kingdom	  	100%	 	UK, Lloyd’s managing agent	
				
ACE London Underwriting Limited	  	United Kingdom	  	100%	 	UK, Lloyd’s managing agent	
				
ACE Underwriting Services Limited	  	United Kingdom	  	100%	 	UK, Lloyd’s service company	
				
AGM Underwriting Limited	  	United Kingdom	  	100%	 	UK, dormant	

							
Name
	  	Jurisdiction of
Organization
	 	Percentage
Ownership
	 	Jurisdictions in which Authorized
and Type of Business
	
ACE London Services Limited	  	United Kingdom	 	100%	 	UK, service company	
				
ACE Capital VI Limited	  	United Kingdom	 	100%	 	UK, Lloyd’s corporate member	
				
ACE UK Limited	  	United Kingdom	 	77%	 	UK, investment holding	
				
ACE UK Holdings Limited	  	United Kingdom	 	100%	 	UK, investment holding	
				
ACE (MI) Limited	  	United Kingdom	 	100%	 	UK, dormant	
				
ACE (MS) Limited	  	United Kingdom	 	100%	 	UK, dormant	
				
ACE UK Underwriting Limited	  	United Kingdom	 	100%	 	Lloyd’s managing agent	
				
ACE (PM) Limited	  	United Kingdom	 	100%	 	UK, investment holding	
				
ACE UK Limited	  	United Kingdom	 	23%	 	UK, investment holding	
				
ACE Services Limited	  	Cayman Islands	 	100%	 	Cayman Islands, general services	
				
ACE Holdings (Gibraltar) Limited	  	Gibraltar	 	100%	 	Gilbraltar, Bermuda permit, investment holding	
				
ACE Gibraltar Limited	  	Gibraltar	 	51%	 	Gilbraltar, insurance intermediary	
				
ACE-ii Limited	  	United Kingdom	 	100%	 	dormant, to become internet company	
				
ACE-ii (Gibraltar) Limited	  	Gibraltar	 	100%	 	dormant,	
				
ACE Underwriting Services (Gibraltar) Limited	  	Gibraltar	 	100%	 	dormant,	
				
Arles Services Limited	  	Gibraltar	 	100%	 	dormant,	
				
AGC Holdings Limited	  	Bermuda	 	100%	 	Bermuda, holding company	
				
CGA Group Limited	  	Bermuda	 	18.20%	 	Bermuda investment holding	
				
CGA Investment Management, Inc.	  	USA (Delaware)	 	100%	 	USA, investment	
				
Commercial Guaranty Assurance Ltd.	  	Bermuda	 	100%	 	Bermuda, insurance	
				
Oasis Insurance Services Ltd.	  	Bermuda	 	100%	 	Bermuda, general services	
				
ACE Tempest Life Reinsurance Ltd.	  	Bermuda	 	100%	 	Bermuda, insurance, reinsurance, general and long term (life, health, annuities)	
				
ACE Tempest Reinsurance Ltd.	  	Bermuda	 	100%	 	Bermuda, insurance/reinsurance, long term; Puerto Rico, reinsurance	
				
Oasis Investments Limited	  	Bermuda	 	33%	 	Bermuda, investment holding	
				
Oasis Investments 2 Ltd.	  	Bermuda	 	33%	 	Bermuda, holding company	
				
St. George Holdings Ltd	  	Cayman Islands	 	10.71%	 	Cayman Islands, investment holding	
				
St. George Investments Ltd.	  	Cayman Islands	 	100%	 	Cayman Islands, investment holding	

							
Name
	  	Jurisdiction of
Organization
	  	Percentage
Ownership
	  	Jurisdictions in which Authorized
and Type of Business
	
ACE INA Holdings Inc.	  	USA (Delaware)	  	20%	  	USA, investment holding	
				
ACE Prime Holdings Inc.	  	USA (Delaware)	  	100%	  	USA, investment holding	
				
ACE INA Holdings Inc.	  	USA (Delaware)	  	80%	  	USA, investment holding	
				
ACE Seguros S.A.	  	Argentina	  	99.35%	  	Argentina, Insurance	
				
Huatai Insurance Company of China, Limited	  	China	  	6.129%
10% (ACE Tempest Reinsurance Ltd.)
6% (ACE US
Holdings, Inc.)	  	China, property and casualty insurer	
				
ACE Seguradora S.A.	  	Brazil	  	99.9%
0.1% (ACE Prime
Holdings Inc.)	  	Brazil, insurance	
				
Servicios ACE INA S.A. de C.V.	  	Mexico	  	99.99%
.00002% (ACE
Prime Holdings
Inc.)	  	Mexico, service company	
				
ACE Tempest Re USA, Inc.	  	USA (Connecticut)	  	100%	  	CT, NJ, NY, OH, PA, SC, TX, reinsurance intermediary manager	
				
INA Corporation	  	USA (Pennsylvania)	  	100%	  	USA, investment holding company	
				
ACE INA Properties, Inc.	  	USA (Delaware)	  	100%	  	USA, holding company	
				
Conference Facilities, Inc.	  	USA (Pennsylvania)	  	100%	  	USA, owns & operates corporate facilities	
				
INA Tax Benefits Reporting, Inc.	  	USA (Delaware)	  	100%	  	USA, tax info & 3rd party reporting	
				
INA Financial Corporation	  	USA (Delaware)	  	100%	  	USA, investment holding	
				
Brandywine Holdings Corporation	  	USA (Delaware)	  	100%	  	USA, holding company	
				
Brandywine Run-Off Services, Inc.	  	USA (Delaware)	  	100%	  	USA, management company for 1792	
				
Assurex Development Corporation	  	USA (Ohio)	  	11.011%	  	USA, provides loans to insurance agents	
				
Cravens, Dargan & Company, Pacific Coast	  	USA (Delaware)	  	100%	  	USA, managing general agency	
				
Cravens, Dargan & Company, Pacific Coast of
Illinois, Inc.	  	USA (Illinois)	  	100%	  	USA, managing general agency	
				
Century Indemnity Company
(EI# 05-6105395, NAIC #20710, PA)	  	USA (Pennsylvania)	  	100%	  	USA, insurance	

							
Name
	  	Jurisdiction of
Organization
	  	Percentage
Ownership
	  	Jurisdictions in which Authorized
and Type of Business
	
Century Reinsurance Company
(EI# 06-0988117, NAIC #35130, PA)	  	USA (Pennsylvania)	  	100%	  	USA, reinsurance	
				
ACE American Reinsurance Company
(EI# 23-1740414, NAIC#22705, PA)	  	USA (Pennsylvania)	  	100%	  	USA, reinsurance	
				
Brandywine Reinsurance Company
S.A.-N.V.	  	Belgium	  	100%	  	Belgium, reinsurance	
				
The 1792 Company	  	USA (Delaware)	  	100%	  	USA, (former underwriting member of New York Insurance Exchange)	
				
Century International Reinsurance Company Ltd.	  	Bermuda	  	100%	  	Bermuda, insurance & reinsurance	
				
INA Holdings Corporation	  	USA (Delaware)	  	100%	  	USA, holding company	
				
INATrust, fsb	  	Chartered by Office
of Thrift
Supervision	  	100%	  	USA, savings bank	
				
INA Reinsurance Company, Ltd.	  	Bermuda	  	100%	  	Bermuda, reinsurance	
				
ACE INA Financial Institution Solutions, Inc.	  	USA (Delaware)	  	100%	  	USA, floodplain determination &
other services to financial institutions	
				
ESIS, Inc.	  	USA (Pennsylvania)	  	100%	  	USA, markets risk management
Programs	
				
NewMarkets Insurance Agency, Inc.	  	USA (Delaware)	  	100%	  	USA, managing general agency	
				
ACE INA Excess and Surplus Insurance Services, Inc.	  	USA (Georgia)	  	100%	  	USA, excess & surplus lines broker	
				
ACE INA Excess and Surplus Insurance Services, Inc.	  	USA (Pennsylvania)	  	100%	  	USA, excess & surplus lines broker	
				
ACE INA Excess and Surplus Insurance Services, Inc.	  	USA (California)	  	100%	  	USA, excess & surplus lines broker	
				
ACE INA Excess and Surplus Insurance Services, Inc.	  	USA (Illinois)	  	100%	  	USA, excess & surplus lines broker	
				
Excess and Surplus Insurance Services, Inc.	  	USA (Texas)	  	100%	  	USA, managing general agency	
				
ACE Financial Solutions, Inc.	  	USA (Delaware)	  	100%	  	USA, premium finance company	
				
Oasis US Inc.	  	USA (Delaware)	  	100%	  	USA, general services	
				
ACE Risk Solutions, Inc.	  	USA (NewYork)	  	100%	  	USA, reinsurance intermediary	
				
Indemnity Insurance Company of North America
(EI# 06-1016108, NAIC #43575, PA)	  	USA (Pennsylvania)	  	100%	  	USA, Puerto Rico, USVI, insurance	

							
Name
	  	Jurisdiction of
Organization
	  	Percentage
Ownership
	  	Jurisdictions in which Authorized
and Type of Business
	
ACE Indemnity Insurance Company
(EI#92-0040526, NAIC #10030, PA)	  	USA (Pennsylvania)	  	100%	  	USA, insurance	
				
Allied Insurance Company
(EI# 23-2021364, NAIC #36528, CA)	  	USA (California)	  	100%	  	USA, insurance	
				
ACE American Insurance Company
(EI#95-2371728, NAIC# 22667, PA)	  	USA (Pennsylvania)	  	100%	  	USA, Korea, Puerto Rico USVI,
Guam, Bermuda permit,
Taiwan (life), insurance	
				
Pacific Employers Insurance Company
(EI#95-1077060, NAIC# 22748, PA)	  	USA (Pennsylvania)	  	100%	  	USA, USVI, insurance	
				
ACE Insurance Company of Texas
(EI# 74-1480965, NAIC #22721, 22920, TX)	  	USA (Texas)	  	100%	  	USA, insurance	
				
Illinois Union Insurance Company
(EI# 36-2759195, NAIC #27960, IL)	  	USA (Illinois)	  	100%	  	USA, surplus lines insurer	
				
Rain and Hail Insurance Service Incorporated	  	USA (Iowa)	  	20%	  	 	
				
INAMAR Insurance Underwriting Agency, Inc.	  	USA (New Jersey)	  	100%	  	USA, insurance agency	
				
INAMAR Insurance Underwriting Agency, Inc. of Massachusetts	  	USA (Massachusetts)	  	100%	  	USA, general agency	
				
INAMAR Insurance Underwriting Agency, Inc. of Texas	  	USA (Texas)	  	100%	  	USA, general agency	
				
INAMAR Insurance Underwriting Agency, Inc. of Ohio	  	USA (Ohio)	  	100%	  	USA, general agency	
				
Insurance Company of North America
(EI# 23-0723970, NAIC #22713, PA)	  	USA (Pennsylvania)	  	100%	  	USA, Guam, Northern Mariana
Islands, Philippines, Puerto Rico,
Taiwan (p/c), insurance	
				
Bankers Standard Insurance Company
(EI# 75-1320184, NAIC #18279, PA)	  	USA (Pennsylvania)	  	100%	  	USA, insurance	
				
Bankers Standard Fire and Marine Company
(EI#75-6014863, NAIC #20591, PA)	  	USA (Pennsylvania)	  	100%	  	USA, insurance	
				
ACE Property and Casualty Insurance Company
(EI# 06-0237820, NAIC, #20699, PA)	  	USA (Pennsylvania)	  	100%	  	USA, Puerto Rico, insurance	
				
ACE Employers Insurance Company
(EI# 23-2137343, NAIC #38741, PA)	  	USA (Pennsylvania)	  	100%	  	USA, insurance	
				
ACE Insurance Company of Ohio
(EI#23-1859893, NAIC #22764, OH)	  	USA (Ohio)	  	100%	  	USA, insurance	

							
Name
	  	Jurisdiction of
Organization
	  	Percentage
Ownership
	  	Jurisdictions in which Authorized
and Type of Business
	
INA Surplus Insurance Company
(EI# 52-1208598, NAIC #42072, PA)	  	USA (Pennsylvania)	  	100%	  	USA, reinsurance	
				
ACE Fire Underwriters Insurance Company
(EI# 06-6032187, NAIC #20702, PA)	  	USA (Pennsylvania)	  	100%	  	USA, insurance	
				
Atlantic Employers Insurance Company
(EI# 23-2173820, NAIC #38938, NJ)	  	USA (New Jersey)	  	100%	  	USA, insurance	
				
Cover-All Technologies, Inc.	  	USA (Delaware)	  	7.41%	  	USA, develop software products for insurance industry	
				
ALIC, Incorporated	  	USA (Texas)	  	100%	  	USA, general agency &
attorney-in-fact for ACE Lloyds	
				
ACE American Lloyds Insurance
Company (Sponsored Lloyds Association)
(EI# 75-1365570, NAIC #18511, TX)	  	USA (Texas)	  	100%	  	USA, Lloyds Association	
				
ACE Insurance Company of Illinois
(EI# 36-2709121, NAIC #22691, IL)	  	USA (Illinois)	  	100%	  	USA, insurance	
				
ACE Insurance Company of the Midwest
(EI# 06-0884361, NAIC #26417, IN)	  	USA (Indiana)	  	100%	  	USA, insurance	
				
ACE Structured Products, Inc.
(formerly INAPRO, Inc.)	  	USA (Delaware)	  	100%	  	USA, insurance management services & underwriting	
				
Recovery Services International, Inc.	  	USA (Delaware)	  	100%	  	USA, subrogation, collection & recovery services	
				
RSI Health Care Recovery, Inc.	  	USA (Delaware)	  	100%	  	USA, subrogation, collection & recovery services	
				
American Adjustment Company, Inc.	  	USA (Delaware)	  	100%	  	USA, run-off of automobile guaranty Loans	
				
American Lenders Facilities, Inc.	  	USA (California)	  	100%	  	USA, collection & loan servicing for third parties	
				
ACE INA International Holdings, Ltd.	  	USA (Delaware)	  	100%	  	USA, international insurance & financial holding company	
				
ACE Insurance S.A.	  	Macau	  	99.94%	  	Macau, insurance	
				
ACE CIIC Holdings Limited	  	Cayman Islands	  	100%	  	Cayman Islands, holding company	
				
ACE CIIC Insurance Company Egypt S.A.E.	  	Egypt	  	51%	  	Egypt, insurance	
				
ACE Life Insurance Company S.A.E.	  	Egypt	  	99.98%	  	Egypt, life insurance	

							
Name
	  	Jurisdiction of
Organization
	  	Percentage
Ownership
	  	Jurisdictions in which Authorized
and Type of Business
	
ACE Synergy Insurance Berhad	  	Malaysia	  	51%	  	Malaysia, insurance	
				
ACE Insurance S.A.-N.V.	  	Belgium	  	.0523%
99.9477% (ACE
INA Overseas
Holdings, Inc.)	  	Europe, insurance/reinsurance	
				
ACE Seguros S.A.	  	Chile	  	66.53% (AIIH)
18.70% (AFIA
Finance
Corporation)
13.90% - (AFIA
Finance Corp. Chile Limitada)	  	Chile, insurance	
				
ACE Seguros S.A.	  	Colombia	  	99.958%	  	Colombia, insurance	
				
ACE Seguros S.A.	  	Ecuador	  	100%	  	Ecuador, insurance	
				
ACE Seguros S.A.	  	Mexico	  	99.9%	  	Mexico, insurance/assumed reinsurance	
				
Brandywine Reinsurance Co. (UK) Ltd	  	United Kingdom	  	100%	  	UK, reinsurance	
				
ACE INA UK Limited	  	United Kingdom	  	100%	  	UK, Greece, insurance	
				
Eksupsiri Company Limited	  	Thailand	  	49%
50.99% (Nam Ek)	  	Thailand, holding company	
				
ACE Life Assurance Co. Ltd.	  	Thailand	  	70%
25% (Oriental)	  	Thailand, life insurance	
				
Nam Ek Company Limited	  	Thailand	  	49%	  	Thailand, holding company	
				
Chilena Consolidata Seguros Generales, S.A.	  	Chile	  	.65%	  	Chile, insurance	
				
ACE Insurance Limited	  	South Africa	  	100%	  	South Africa, insurance	
				
ACE Insurance Limited	  	New Zealand	  	100%	  	New Zealand, insurance/reinsurance	
				
ACE International Management Corporation	  	Pennsylvania	  	100%	  	Management Services	
				
Cover Direct, Inc.	  	USA (Delaware)	  	100%	  	Japan, direct marketing service Company	
				
Victoria Hall Company Limited	  	Bermuda	  	20%	  	Bermuda, investment holding	
				
ACE INA G.B. Holdings, Ltd	  	USA (Delaware)	  	100%	  	Delaware, UK, insurance holding	
				
ACE INA Services U.K. Limited	  	United Kingdom	  	100%	  	UK, computer services for affiliates	
				
INACAP Sociedad Anonima	  	Nicaragua	  	100%	  	Nicaragua, holding company	

							
Name
	  	Jurisdiction of
Organization
	    	Percentage
Ownership
	    	Jurisdictions in which Authorized
and Type of Business
	
INACAP Reaseguros, Sociedad Anonima	  	Nicaragua	    	100%	    	Nicaragua, reinsurance broker	
				
Century Inversiones, S.A.	  	Panama	    	100%	    	Panama, reinsurance administrator	
				
Arabia ACE Insurance Company Limited E.C.	  	Bahrain	    	25%	    	Saudi Arabia, insurance & reinsurance	
				
ACE Insurance Limited	  	Australia	    	100%	    	Australia, Pakistan, Thailand, Solomon Islands, Vanuatu, insurance & reinsurance	
				
ACE INA Superannuation Pty. Limited	  	Australia	    	100%	    	Australia, corporate trustee for ACE Australia superannuation plan	
				
ACE Insurance Limited	  	Pakistan	    	100%	    	Pakistan, insurance	
				
ACE INA Overseas Insurance Company Ltd.	  	Bermuda	    	100%	    	Bermuda, insurance/reinsurance, general and long term	
				
ACE Insurance Limited	  	Singapore	    	100%	    	Singapore, insurance	
				
ACE Insurance	  	Japan	    	100%	    	Japan, insurance/reinsurance	
				
ACE Songai Service Kabushikigaisha	  	Japan	    	100%	    	Japanese service company	
				
ACE INA Marketing Group C.A.	  	Venezuela	    	100%	    	Venezuela, services & direct marketing	
				
ACE INA Overseas Holdings, Inc.	  	USA (Delaware)	    	100%	    	Delaware, holding company	
				
INACAN Holdings, Ltd.	  	Canada	    	100%	    	Canada, insurance holding	
				
ACE INA Insurance	  	Canada	    	100%	    	Canada, insurance & reinsurance	
				
ACE INA Life Insurance	  	Canada	    	100%	    	Canada, life insurance	
				
ACE Insurance S.A.-N.V.	  	Belgium	    	99.9477%
.0523% (AIIH)	    	Europe, insurance/reinsurance	
				
ACE Insurance Company
(EI# 66-0437305, NAIC #30953, PR)	  	Puerto Rico	    	100%	    	Puerto Rico, insurance	
				
ACE Insurance Limited	  	Hong Kong	    	100%	    	Hong Kong, insurance	
				
ACE Risk Management International Ltd.
(formerly ACE INA Bermuda Insurance Managers Ltd.)	  	Bermuda	    	100%	    	Bermuda, management services for
non-affiliates	
				
DELPANAMA S.A.	  	Panama	    	100%	    	Panama, holding company	
				
INAMEX S.A.	  	Mexico	    	100%	    	Mexico, reinsurance broker	
				
Maritime General Ins. Company Ltd	  	Trinidad	    	8.06%	    	Trinidad insurance	
				
Oriental Equity Holdings Limited	  	British Virgin Islands	    	100%	    	BVI, holding company	
				
ACE Life Assurance Co. Ltd.	  	Thailand	    	25%
70% (Eksupsiri)	    	Thailand, life insurance	

							
Name
	  	Jurisdiction of
Organization
	  	Percentage
Ownership
	  	Jurisdictions in which Authorized
and Type of Business
	
AFIA Finance Corporation	  	USA (Delaware)	  	100%	  	Delaware, insurance holding	
				
AFIA Venezolana C.A.	  	Venezuela	  	100%	  	Venezuela, inactive claims & settling agent	
				
ACE ICNA Italy Societa a Responsabilita Limitata	  	Italy	  	99.7%
0.3% (AIIH)	  	Italy, legal representative for CIGNA Insurance Company of Europe, S.A.-N.V.	
				
Siam Liberty Company Limited	  	Thailand	  	49% (AFC)
45% (Nam EK)	  	Thailand, broker, surveyor & claims settling agency	
				
ACE Servicios, S.A.	  	Argentina	  	100%	  	Argentina, service company	
				
AFIA Finance Corp. Chile Limitada	  	Chile	  	98%
2% (AIIH)	  	Chile, claims & settling agent	
				
Fire, Equity and General Insurance Company Limited	  	Nigeria	  	6.25%	  	Nigeria, insurance	
				
Inversiones Continental S.A. de C.V.	  	Honduras	  	1.29%	  	Honduras, insurance holding	
				
PT. ACE INA Insurance	  	Indonesia	  	80%	  	Indonesia, insurance	
				
PT. Adi Citra Mandiri	  	Indonesia	  	45%	  	Indonesia, service company	
				
RIYAD Insurance Co. Ltd.	  	Bermuda	  	80%	  	Bermuda, insurance	
				
Safire Private Ltd.	  	Singapore	  	100%	  	Singapore, management & computer service bureau	
				
AFIA (INA) Corporation, Limited	  	USA (Delaware)	  	100%	  	Delaware, holding company	
				
AFIA	  	Unincorporated
Association	  	60%	  	Association for international insurance	
				
AFIA (ACE) Corporation, Limited	  	USA (Delaware)	  	100%	  	Delaware, holding company	
				
AFIA	  	Unincorporated
Association	  	40%	  	Association for international insurance	
				
Compania Anonima de Seguros “AVILA”	  	Venezuela	  	0.6%	  	Venezuela, insurance	
				
INAVEN, C.A. “Venezuela”	  	Venezuela	  	100%	  	Venezuela, corporation	
				
La Positiva Compania Nacional de Seguros Sociedad Anonima	  	Peru	  	7.6869%	  	Peru, insurance	
				
Reaseguradora Nuevo Mundo S.A.	  	Panama	  	3.7246%	  	Panama, reinsurance	
				
Amazones Compania Anonima de Seguros	  	Ecuador	  	1.423%	  	Ecuador, insurance	
				
ACE US Holdings, Inc.	  	USA (Delaware)	  	100%	  	USA, investment holding	

							
Name
	  	Jurisdiction of
Organization
	  	Percentage
Ownership
	  	Jurisdictions in which Authorized
and Type of Business
	
ACE Financial Services International, Inc.
(f/k/a ACE Financial Solutions International, Inc.)	  	USA (Delaware)	  	100%	  	USA, investment holding	
				
ACE USA, Inc.	  	USA (Delaware)	  	100%	  	USA, investment holding	
				
ASI Administrative Services Inc. (formerly ASI Administrative
Services Holdings Inc. and CRC Creditor Resources Canada Ltd.)	  	Canada (Yukon)	  	100%	  	Canada, warranties business	
				
Industrial Underwriters Insurance Company
(EI# 75-6015738, NAIC# 21075, TX)	  	USA (Texas)	  	100%	  	USA, insurance	
				
Rhea International Marketing (L), Inc.	  	Malaysia	  	60%	  	Malaysia, general services	
				
Westchester Fire Insurance Company
(EI# 13-5481330, NAIC# 21121, NY)	  	USA
(New York)	  	100%	  	USA, Bermuda permit, insurance	
				
Westchester Surplus Lines Insurance Company
(EI# 58-2139927, NAIC #10172, GA)	  	USA (Georgia)	  	100%	  	USA, insurance	
				
Westchester Specialty Services, Inc.	  	USA (Florida)	  	100%	  	USA, warranties	
				
Westchester Specialty Insurance Services, Inc.	  	USA (Nevada)	  	100%	  	USA, insurance services, brokering, warranties	
				
WDH Corporation	  	USA (Ohio)	  	80%	  	USA, insurance services	
				
Dimension Service Corporation	  	USA (Ohio)	  	80%	  	USA, warranties	
				
Dimension Holdings Inc.	  	USA (Ohio)	  	80%	  	USA, insurance services	
				
ACE Financial Services Inc. (f/k/a Capital Re Corporation)	  	USA (Delaware)	  	100%	  	Delaware, insurance holding company	
				
ACE Finance Overseas Limited	  	United Kingdom	  	100%	  	 	
				
AGR Financial Products Inc.	  	USA (Delaware)	  	100%	  	Delaware, financial products	
				
Capital RE LLC	  	Turks & Caicos	  	100%	  	Turks & Caicos, holding company	
				
ACE (CR) Holdings	  	United Kingdom	  	100%	  	UK, holding co	
				
ACE Capital VII Limited	  	United Kingdom	  	100%	  	UK, Lloyd’s capital vehicle	
				
ACE (RGB) Holdings Limited	  	United Kingdom	  	100%	  	UK, holding company	
				
ACE (CIDR) Limited	  	United Kingdom	  	100%	  	UK, Lloyd’s agency	
				
Global Life Services Limited	  	United Kingdom	  	100%	  	UK, Lloyd’s agency	
				
Ridge Underwriting Agencies Limited	  	United Kingdom	  	100%	  	UK, Lloyd’s agency	

							
Name
	  	Jurisdiction of
Organization
	  	Percentage
Ownership
	  	Jurisdictions in which Authorized
and Type of Business
	
ACE Guaranty Corp. (EI# 52-1533088, NAIC #30180, MD)	  	Maryland	  	100%	  	AK, AL, AR, CA, CO, CT, DC, FL, HI, ID, IL, KS, KY, MA, MD, MI, MO, NE, NY, NC, ND, NM, NV, OH, OK, OR, PA, RI, SC, TN, TX, UT, VA, WA,
Primary financial guaranty insurance company	
				
ACE Guaranty (UK), Ltd.	  	United Kingdom	  	100%	  	UK, property/casualty insurer	
				
ACE Risk Assurance Company (EI# 13-4027591,
NAIC #10943, MD)	  	Maryland	  	100%	  	Maryland, reinsurance	
				
ACE Asset Management Inc.	  	Delaware	  	100%	  	Delaware, Bermuda permit corporation	
				
ACE (Barbados) Holdings Limited	  	Barbados	  	100%	  	Barbados, holding company	

Schedule 5.02(a)
 
1.	Lien arising under a Subordination Agreement dated as of October 27, 1998 among ACE US Holdings, Inc., ACE Limited and The Chase Manhattan Bank encumbering ACE US Holdings, Inc.’s rights under the Subordinated Loan Agreement dated as of 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 Fourth Amendment and Restatement of Letter of Credit Facility Agreement dated November 14, 2003 among ACE Limited, ACE Bermuda Insurance Ltd., ACE Tempest Reinsurance Ltd., certain other financial institutions and Citibank International plc, as Agent and Security Trustee.	

Exhibit 31.1
 
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
 
I, Brian Duperreault, certify that:
 
 	1)	I have reviewed this quarterly report on Form 10-Q of ACE Limited;	
 
 	2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 
 	3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 
 	4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:	
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
 	5)	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Dated: May 7, 2004

	
/ S /    B RIAN D UPERREAULT	
	
Chairman and Chief Executive Officer	

 
Exhibit 31.2
 
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
 
I, Philip V. Bancroft, certify that:
 
 	1)	I have reviewed this quarterly report on Form 10-Q of ACE Limited;	
 
 	2)	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;	
 
 	3)	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;	
 
 	4)	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:	
 
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
 	5)	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):	
 
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
 
Dated: May 7, 2004

	
/ S /    P HILIP V. B ANCROFT	
	
Chief Financial Officer	

 
Exhibit 32.1
 
CERTIFICATIONS PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
The undersigned officer of ACE Limited (the “Corporation”) hereby certifies that the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, fully complies with the applicable reporting requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of ACE Limited.

			
Dated: May 7, 2004	 	 	 	/ S /    B RIAN D UPERREAULT	
 	 	 	 		
 	 	 	 	Brian Duperreault
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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2004, fully complies with the applicable reporting requirements of Section 13(a) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a)) and that the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of ACE Limited.

			
Dated: May 7, 2004	 	 	 	/ S /    P HILIP V. B ANCROFT	
 	 	 	 		
 	 	 	 	Philip V. Bancroft
Chief Financial Officer