ACE LTD - 10-Q Quarterly Report

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, 2005

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to


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

ACE LIMITED

(Incorporated in the Cayman Islands)

ACE Global Headquarters

17 Woodbourne Avenue

Hamilton HM 08

Bermuda

Telephone 441-295-5200

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ NO ¨

Indicate by check mark whether registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

YES þ NO ¨

The number of registrant’s Ordinary Shares ($0.041666667 par value) outstanding as of May 4, 2005 was 287,460,034.

ACE LIMITED

INDEX TO FORM 10-Q


		Page No.

Part I. FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets March 31, 2005 (Unaudited) and December 31, 2004	3

	Consolidated Statements of Operations and Comprehensive Income (Unaudited) Three Months Ended March 31, 2005 and 2004	4

	Consolidated Statements of Shareholders’ Equity (Unaudited) Three Months Ended March 31, 2005 and 2004	5

	Consolidated Statements of Cash Flows (Unaudited) Three Months Ended March 31, 2005 and 2004	7

	Notes to Interim Consolidated Financial Statements (Unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 4.	Controls and Procedures	60

Part II. OTHER INFORMATION

Item 1.	Legal Proceedings	61

Item 5.	Other Information	61

Item 6.	Exhibits and Reports on Form 8-K	61

ACE LIMITED

PART I FINANCIAL INFORMATION

Item 1.

Financial Statements

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	March 31 2005			December 31 2004
	(Unaudited)
	(in thousands of U.S. dollars, except share and per share data)
Assets
Investments
Fixed maturities available for sale, at fair value (amortized cost - $ 20,065,684 and $22,270,804)	$	20,188,127		$	22,740,711
Fixed maturities held to maturity, at amortized cost (fair value - $3,206,649)		3,211,021			—
Equity securities, at fair value (cost - $1,169,538 and $1,060,671)		1,350,993			1,265,588
Short-term investments, at fair value (amortized cost - $2,135,247 and $2,140,243)		2,135,226			2,140,035
Other investments (cost - $462,593 and $449,577)		521,157			504,233

Total investments		27,406,524			26,650,567

Cash		574,118			533,995
Securities lending collateral		1,255,326			1,059,135
Accrued investment income		306,828			307,541
Insurance and reinsurance balances receivable		3,692,013			3,272,490
Accounts and notes receivable		195,382			195,710
Reinsurance recoverable		14,608,236			15,253,896
Deferred policy acquisition costs		999,633			944,456
Prepaid reinsurance premiums		1,426,971			1,319,574
Funds withheld		298,147			340,082
Value of reinsurance business assumed		274,010			273,140
Goodwill		2,608,449			2,612,449
Deferred tax assets		1,171,745			1,161,224
Investments in partially-owned insurance companies (cost - $769,816 and $755,545)		822,588			796,356
Other assets		1,324,795			1,621,821

Total assets	$	56,964,765		$	56,342,436

Liabilities
Unpaid losses and loss expenses	$	31,425,625		$	31,512,621
Unearned premiums		6,527,031			5,922,968
Future policy benefits for life and annuity contracts		507,186			509,005
Funds withheld		131,020			143,353
Insurance and reinsurance balances payable		2,259,848			2,308,098
Deposit liabilities		301,524			343,487
Securities lending payable		1,255,326			1,059,135
Payable for securities purchased		629,614			717,102
Accounts payable, accrued expenses and other liabilities		1,493,507			1,523,521
Dividends payable		60,344			59,739
Short-term debt		147,059			146,295
Long-term debt		1,849,008			1,848,927
Trust preferred securities		412,373			412,373

Total liabilities		46,999,465			46,506,624

Commitments and contingencies Shareholders’ equity
Preferred Shares ($1.00 par value, 2,300,000 shares authorized, issued and outstanding)		2,300			2,300
Ordinary Shares ($0.041666667 par value, 500,000,000 shares authorized; 287,353,327 and 284,478,525 shares issued and outstanding)		11,973			11,853
Additional paid-in capital		5,002,701			4,899,895
Unearned stock grant compensation		(114,581	)		(56,836	)
Retained earnings		4,603,645			4,242,174
Deferred compensation obligation		12,273			11,829
Accumulated other comprehensive income		459,262			736,426
Ordinary Shares issued to employee trust		(12,273	)		(11,829	)

Total shareholders’ equity		9,965,300			9,835,812

Total liabilities and shareholders’ equity	$	56,964,765		$	56,342,436

See accompanying notes to the interim consolidated financial statements

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

For the three months ended March 31, 2005 and 2004

(Unaudited)


	Three Months Ended March 31
	2005			2004
	(in thousands of U.S. dollars, except per share data)
Revenues
Gross premiums written	$	4,542,531		$	4,415,475
Reinsurance premiums ceded		(1,177,389	)		(1,177,309	)

Net premiums written		3,365,142			3,238,166
Change in unearned premiums		(489,255	)		(638,489	)

Net premiums earned		2,875,887			2,599,677
Net investment income		283,647			237,920
Net realized gains (losses)		(3,852	)		57,261

Total revenues		3,155,682			2,894,858

Expenses
Losses and loss expenses		1,785,763			1,542,597
Life and annuity benefits		34,837			41,724
Policy acquisition costs		388,614			364,914
Administrative expenses		355,537			314,905
Interest expense		42,679			44,272
Other (income) expense		(4,559	)		17,080

Total expenses		2,602,871			2,325,492

Income before income tax		552,811			569,366
Income tax expense		119,783			122,541

Net income	$	433,028		$	446,825

Other comprehensive income
Net unrealized appreciation (depreciation) on investments
Unrealized appreciation (depreciation) arising during the period		(291,047	)		235,657
Reclassification adjustment for net realized (gains) losses included in net income		(47,820	)		(60,830	)

		(338,867	)		174,827
Cumulative translation adjustments		(12,991	)		2,177
Minimum pension liability		1,948			(1,991	)

Other comprehensive income (loss), before income tax		(349,910	)		175,013
Income tax benefit (expense) related to other comprehensive income items		72,746			(40,540	)

Other comprehensive income (loss)		(277,164	)		134,473

Comprehensive income	$	155,864		$	581,298

Basic earnings per share	$	1.49		$	1.56

Diluted earnings per share	$	1.46		$	1.53

See accompanying notes to the interim consolidated financial statements

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the three months ended March 31, 2005 and 2004

(Unaudited)


	2005			2004
	(in thousands of U.S. dollars)
Preferred Shares
Balance – beginning of period	$	2,300		$	2,300
Shares issued		—			—

Balance – end of period		2,300			2,300

Ordinary Shares
Balance – beginning of period		11,853			11,662
Shares issued		68			64
Exercise of stock options		59			60
Issued under Employee Stock Purchase Plan (ESPP)		5			5
Cancellation of shares		(12	)		(10	)

Balance – end of period		11,973			11,781

Additional paid-in capital
Balance – beginning of period		4,899,895			4,765,355
Ordinary Shares issued		72,721			65,591
Exercise of stock options		38,807			34,346
Ordinary Shares issued under ESPP		3,906			3,678
Cancellation of Ordinary Shares		(12,628	)		(10,531	)
Other		—			5,429

Balance – end of period		5,002,701			4,863,868

Unearned stock grant compensation
Balance – beginning of period		(56,836	)		(44,912	)
Stock grants awarded		(72,864	)		(66,421	)
Stock grants forfeited		2,313			1,736
Amortization		12,806			11,709

Balance – end of period		(114,581	)		(97,888	)

Retained earnings
Balance – beginning of period		4,242,174			3,380,619
Net income		433,028			446,825
Dividends declared on Ordinary Shares		(60,344	)		(53,717	)
Dividends declared on Preferred Shares		(11,213	)		(11,213	)

Balance – end of period		4,603,645			3,762,514

Deferred compensation obligation
Balance – beginning of period		11,829			16,687
Increase (decrease) to obligation		444			(39	)

Balance – end of period	$	12,273		$	16,648

See accompanying notes to the interim consolidated financial statements

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (cont’d)

For the three months ended March 31, 2005 and 2004

(Unaudited)


	2005			2004
	(in thousands of U.S. dollars)
Accumulated other comprehensive income
Net unrealized appreciation (depreciation) on investments
Balance – beginning of period	$	634,925		$	684,267
Change in period		(338,867	)		174,827
Income tax benefit (expense)		68,597			(47,984	)

Balance – end of period		364,655			811,110

Minimum pension liability
Balance – beginning of period		(64,162	)		(35,684	)
Change in period		1,948			(1,991	)
Income tax benefit (expense)		(478	)		869

Balance – end of period		(62,692	)		(36,806	)

Cumulative translation adjustment
Balance – beginning of period		165,663			71,189
Change in period		(12,991	)		2,177
Income tax benefit		4,627			6,575

Balance – end of period		157,299			79,941

Accumulated other comprehensive income		459,262			854,245

Ordinary Shares issued to employee trust
Balance – beginning of period		(11,829	)		(16,687	)
(Increase) decrease in Ordinary Shares		(444	)		39

Balance – end of period		(12,273	)		(16,648	)

Total shareholders’ equity	$	9,965,300		$	9,396,820

See accompanying notes to the interim consolidated financial statements

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three months ended March 31, 2005 and 2004

(Unaudited)


	2005			2004
	(in thousands of U.S. dollars)
Cash flows from operating activities
Net income	$	433,028		$	446,825
Adjustments to reconcile net income to net cash flows from operating activities:
Net realized (gains) losses		3,852			(57,261	)
Amortization of premium/discounts on fixed maturities		31,245			25,972
Deferred income taxes		55,828			55,082
Unpaid losses and loss expenses		554,940			488,127
Unearned premiums		647,069			804,708
Future policy benefits for life and annuity contracts		(1,819	)		3,943
Insurance and reinsurance balances payable		(41,163	)		233,762
Accounts payable, accrued expenses and other liabilities		23,113			(19,736	)
Insurance and reinsurance balances receivable		(450,211	)		(653,206	)
Reinsurance recoverable		21,578			57,899
Deferred policy acquisition costs		(56,764	)		(97,377	)
Prepaid reinsurance premiums		(129,244	)		(158,465	)
Funds withheld, net		28,742			(3,788	)
Value of reinsurance business assumed		(870	)		18,326
Other		90,988			17,092

Net cash flows from operating activities		1,210,312			1,161,903

Cash flows used for investing activities
Purchases of fixed maturities available for sale		(6,028,922	)		(5,991,122	)
Purchases of equity securities		(179,872	)		(109,176	)
Sales of fixed maturities available for sale		5,014,822			4,895,148
Sales of equity securities		85,135			105,369
Maturities of fixed maturities available for sale		—			160
Net proceeds from (payments made on) the settlement of investment derivatives		51			(877	)
Other		(30,177	)		6,932

Net cash flows used for investing activities		(1,138,963	)		(1,093,566	)

Cash flows used for financing activities
Dividends paid on Ordinary Shares		(59,739	)		(53,182	)
Dividends paid on Preferred Shares		(11,213	)		(11,213	)
Net proceeds from (repayment of) short-term debt		764			(14	)
Proceeds from exercise of options for Ordinary Shares		38,866			34,406
Proceeds from Ordinary Shares issued under ESPP		3,911			3,683

Net cash flows used for financing activities		(27,411	)		(26,320	)

Effect of foreign currency rate changes on cash and cash equivalents		(3,815	)		10,219

Net increase in cash		40,123			52,236
Cash – beginning of period		533,995			561,650

Cash – end of period	$	574,118		$	613,886

See accompanying notes to the interim consolidated financial statements

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	General

ACE Limited (ACE or the Company) is a holding company incorporated with limited liability under the Cayman Islands Companies Law and maintains its business office in Bermuda. The Company, through its various subsidiaries, provides a broad range of insurance and reinsurance products to insureds worldwide. ACE operates through four business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance and Financial Services. These segments are described in Note 13.

The interim unaudited consolidated financial statements, which include the accounts of the Company and its subsidiaries, have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and, in the opinion of management, reflect all adjustments (consisting of normally recurring accruals) necessary for a fair presentation of results for such periods. Certain items in the prior year financial statements have been reclassified to conform to the current year presentation. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the consolidated financial statements, and related notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

On April 28, 2004, the Company sold 65.3 percent of its financial and mortgage guaranty reinsurance and insurance businesses through the initial public offering (IPO) of 49 million common shares of Assured Guaranty Ltd. (Assured Guaranty). Subsequent to the completion of the IPO, the Company beneficially owns 26 million common shares or 34.7 percent of Assured Guaranty’s outstanding common shares and, accordingly, no longer consolidates its interest in the Assured Guaranty companies. The retained interest is accounted for under the equity method of accounting with the Company’s carrying value of its investment reflected in “Investments in partially-owned insurance companies” within the consolidated balance sheet and the proportionate share of earnings reflected in “Other (income) expense” within the consolidated statement of operations.

2.	Significant accounting policies

a)	*Investments*

Securities classified as held to maturity are securities that the Company has the ability and intent to hold to maturity or redemption and are carried at amortized cost less declines in value that are deemed other than temporary. Changes in the market value of the held to maturity securities, except for declines that are other than temporary, are not reflected in the Company’s financial statements. All other debt and equity securities are classified as available for sale and are carried at fair value. Transfers of securities to the held to maturity portfolio are recorded at fair value at the date of transfer. The unrealized appreciation (depreciation) for securities transferred from available for sale to held to maturity are included in accumulated other comprehensive income or loss and amortized into earnings over the remaining life of the security as an adjustment to yield in a manner consistent with the amortization or accretion of premium or discount on the associated security.

b)	*Stock-based compensation*

The Company accounts for stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). No compensation expense for 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.

The following table outlines the Company’s net income available to holders of Ordinary Shares and diluted earnings per share for the periods indicated had the compensation cost been determined in accordance with the fair value method recommended in FAS No. 123, “Accounting for Stock-Based compensation” (FAS 123).

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Three Months Ended March 31
	2005		2004
	(in thousands of U.S. dollars, except per share data)
Net income available to holders of Ordinary Shares:
As reported	$	421,692	$	435,489
Add: Stock-based compensation expense included in reported net income, net of income tax		9,963		9,153
Deduct: Compensation expense, net of income tax		13,147		20,198
Pro forma	$	418,508	$	424,444
Basic earnings per share:
As reported	$	1.49	$	1.56
Pro forma	$	1.48	$	1.52
Diluted earnings per share:
As reported	$	1.46	$	1.53
Pro forma	$	1.46	$	1.50

The fair value of the options issued is estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions used for grants for the periods indicated:


	Three Months Ended March 31
	2005		2004
Dividend yield	1.89	%	1.74	%
Expected volatility	22.36	%	26.76	%
Risk free interest rate	3.87	%	2.71	%
Forfeiture rate	5	%	5	%
Expected life	4 years		4 years

c)	*New accounting pronouncements*

In December 2004, the FASB issued FAS 123R Share-Based Payment – a revision of FAS 123 that supersedes APB 25, Accounting for Stock Issued to Employees. This statement requires all companies to measure compensation cost for all share-based payment awards (including employee stock options) at grant-date fair value. In accordance with APB 25, the Company has not recognized compensation expense for employee stock options in net income because the exercise price equaled the market value of the underlying common stock on the grant date. In addition, the Company has not recognized expenses related to its employee stock purchase plan. Upon adopting FAS 123R the Company will be required to expense employee stock options and its employee stock purchase plan. On April 14, 2005, the SEC delayed the required effective date of FAS 123R for public companies. FAS 123R is now effective for public companies for annual, rather than interim, periods that begin after June 15, 2005. Accordingly, the Company has decided to delay its adoption of FAS 123R to January 1, 2006.

In adopting FAS 123R, the Company will apply the modified-prospective transition method. Under this method, the Company will recognize compensation costs for all share-based payments granted, modified, or settled after January 1, 2006, as well as for any awards that were granted prior to January 1, 2006 for which the requisite service has not been provided as of January 1, 2006 (i.e., unvested awards). Unvested awards are to be expensed consistent with the valuation used in previous disclosures of the pro forma effect of FAS 123. As described in Note 2(b) above, the Company uses the Black-Scholes option-pricing model to disclose the pro forma effect of FAS 123. With respect to awards granted after the adoption of FAS 123R, the Company is evaluating alternative models and assumptions to be used to determine the fair value of stock compensation. Accordingly, the ultimate amount of expense to be recognized in connection with the adoption of FAS 123R is dependent on the model and related assumptions used to determine the fair value of the options awarded as well as the actual number of employee stock options to be awarded in the future. Assuming the number of options granted for the period April 1, 2005 through December 31, 2006 is consistent with grants of the past two years, the

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Company estimates pre-tax stock compensation expense related to the adoption of FAS 123R will range from $18 million to $22 million for the year ended December 31, 2006.

3.	Investments

a)	*Transfers of securities*

Given the significant growth in the Company’s investment portfolio over the last several years, as well as continued efforts to manage the diversification of the portfolio on an enterprise-wide basis, the Company has implemented a strategy to hold to maturity certain fixed maturity securities that are considered essential holdings in a diversified portfolio of our size. Because the Company has the intent to hold such securities to maturity, they have been reclassified from available for sale to held to maturity in the consolidated financial statements for the quarter ended March 31, 2005. A transfer of such securities with a carrying value (fair value) of $3.2 billion was made during the first quarter of 2005. The unrealized appreciation on the date of transfer was $16 million.

b)	*Fixed maturities*

The fair values and amortized costs of fixed maturities at March 31, 2005, are as follows:


	Available for Sale				Held to Maturity
	Fair Value		Amortized Cost		Fair Value		Amortized Cost
	(in thousands of U.S. dollars)
U.S. Treasury and agency	$	2,125,705	$	2,134,619	$	1,081,940	$	1,081,944
Foreign		5,361,068		5,297,476		43,652		43,682
Corporate securities		8,021,775		7,936,186		717,601		718,693
Mortgage-backed securities		4,402,956		4,430,804		1,080,909		1,081,477
States, municipalities and political subdivisions		276,623		266,599		282,547		285,225

	$	20,188,127	$	20,065,684	$	3,206,649	$	3,211,021

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


	Available for Sale				Held to Maturity
	Fair Value		Amortized Cost		Fair Value		Amortized Cost
	(in thousands of U.S. dollars)
Maturity period
Less than 1 year	$	1,264,400	$	1,258,236	$	146,963	$	147,041
1 – 5 years		7,594,278		7,566,819		957,124		959,300
5 – 10 years		5,518,565		5,438,395		932,652		933,979
Greater than 10 years		1,480,514		1,444,396		89,001		89,224

		15,857,757		15,707,846		2,125,740		2,129,544
Mortgage-backed securities		4,330,370		4,357,838		1,080,909		1,081,477

	$	20,188,127	$	20,065,684	$	3,206,649	$	3,211,021

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

c)	*Gross unrealized loss*

The following table summarizes, for all available for sale securities in an unrealized loss position at March 31, 2005, the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position.


	0 - 12 Months					Over 12 Months				Total
	Fair Value		Gross Unrealized Loss			Fair Value		Gross Unrealized Loss		Fair Value		Gross Unrealized Loss
	(in thousands of U.S. dollars)
U.S. Treasury and agency	$	2,715,193	$	(18,607	)	$	—	$	—	$	2,715,193	$	(18,607	)
Foreign		3,336,616		(26,106	)		—		—		3,336,616		(26,106	)
Corporate securities		5,684,268		(81,318	)		—		—		5,684,268		(81,318	)
Mortgage-backed securities		4,525,699		(42,325	)		—		—		4,525,699		(42,325	)
States, municipalities and political subdivisions		327,454		(3,833	)		—		—		327,454		(3,833	)

Total fixed maturities		16,589,230		(172,189	)		—		—		16,589,230		(172,189	)
Equities		552,231		(20,744	)		—		—		552,231		(20,744	)
Other investments		—		—			—		—		—		—

Total	$	17,141,461	$	(192,933	)	$	—	$	—	$	17,141,461	$	(192,933	)

4.	Goodwill

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


	Insurance – North American			Insurance – Overseas General		Global Reinsurance		ACE Consolidated
	(in thousands of U.S. dollars)
Goodwill at beginning of period	$	1,125,855		$	1,121,636	$	364,958	$	2,612,449
Sale of subsidiary		(4,000	)		—		—		(4,000	)

Goodwill at end of period	$	1,121,855		$	1,121,636	$	364,958	$	2,608,449

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 periods indicated are as follows:


	Three Months Ended March 31
	2005			2004
	(in thousands of U.S. dollars)
Premiums written
Direct	$	3,321,261		$	3,389,396
Assumed		1,221,270			1,026,079
Ceded		(1,177,389	)		(1,177,309	)

Net	$	3,365,142		$	3,238,166

Premiums earned
Direct	$	2,960,036		$	3,046,488
Assumed		959,120			583,044
Ceded		(1,043,269	)		(1,029,855	)

Net	$	2,875,887		$	2,599,677

b)	*Reinsurance recoverable on ceded reinsurance*

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


	March 31 2005			December 31 2004
	(in thousands of U.S. dollars)
Reinsurance recoverable on paid losses and loss expenses	$	1,205,396		$	1,210,731
Bad debt reserve on paid losses and loss expenses		(305,229	)		(308,921	)
Reinsurance recoverable on future policy benefits		13,978			15,271
Reinsurance recoverable on unpaid losses and loss expenses		14,305,606			14,956,239
Bad debt reserve on unpaid losses and loss expenses		(611,515	)		(619,424	)

Net reinsurance recoverable	$	14,608,236		$	15,253,896

The Company evaluates the financial condition of its reinsurers and potential reinsurers on a regular basis and also monitors concentrations of credit risk with reinsurers. The provision for uncollectible reinsurance is required principally due to the failure of reinsurers to indemnify ACE, primarily because of disputes under reinsurance contracts and insolvencies. Provisions have been established for amounts estimated to be uncollectible.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Following is a breakdown of the Company’s reinsurance recoverable on paid losses at March 31, 2005 and December 31, 2004.


	March 31, 2005						December 31, 2004
Category	Amount		Bad Debt Reserve		% of Total Reserve		Amount		Bad Debt Reserve		% of Total Reserve
	(in millions of U.S. dollars)
General collections	$	713	$	37	5.2	%	$	717	$	37	5.2	%
Other		492		268	54.5	%		494		272	55.1	%

Total	$	1,205	$	305	25.3	%	$	1,211	$	309	25.5	%

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

The other category includes amounts recoverable that are in dispute or are from companies who are in supervision, rehabilitation or liquidation for the Brandywine Group and active operations. The Company’s estimation of this reserve considers the merits of the underlying matter, the credit quality of the reinsurer and whether the Company has received collateral or other credit protections such as parental guarantees.

c)	*Reinsurance programs involving minimum benefit guarantees under annuity contracts*

The Company reinsures various death and living benefit guarantees associated with variable annuities issued primarily in the United States. Each reinsurance treaty covers variable annuities written during a limited period, typically not exceeding two years. The Company generally receives a monthly premium during the accumulation phase of the covered annuities (in-force) based on a percentage of the underlying accumulated account values. Depending on an annuitant’s age, the accumulation phase can last many years. To limit the Company’s exposure under these programs, all reinsurance treaties include aggregate claim limits and many include an aggregate deductible.

The guarantees which are payable on death, referred to as guaranteed minimum death benefits (GMDBs), principally cover shortfalls between accumulated account value at the time of an annuitant’s death and either i) an annuitant’s total deposits; ii) an annuitant’s total deposits plus a minimum annual return; or iii) the highest accumulated account value attained during any policy anniversary date. In addition, a death benefit may be based on a formula specified in the variable annuity contract that uses a percentage of the growth of the underlying contract value. Reinsurance programs covering GMDBs are accounted for pursuant to Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (SOP 03-1).

Under reinsurance programs covering living benefit guarantees, the Company assumes the risk of guaranteed minimum income benefits (GMIBs) associated with variable annuity contracts. The GMIB risk is triggered if, at the time the contract holder elects to convert the accumulated account value to a periodic payment stream (annuitize), the accumulated account value is not sufficient to provide a guaranteed minimum level of monthly income. The Company’s GMIB reinsurance product meets the definition of a derivative for accounting purposes and is therefore carried at fair value with changes in fair value recognized in income in the period of the change pursuant to FAS 133 and classified as described below. As the assuming entity, the Company is obligated to provide coverage until the expiration of the underlying annuities. Premiums received under the reinsurance treaties are classified as premium. Expected losses allocated to premiums received are classified as life and annuity benefits and valued pursuant to SOP 03-1, similar to GMDB reinsurance. Other changes in fair value, principally arising from changes in expected losses allocated to expected future premiums, are classified as realized gains (losses). As fair value generally represents the cost to exit a business and thus includes a risk margin, the Company may recognize a loss for other changes in fair value during a given period due to adverse changes in the capital markets (e.g. declining interest rates and/or declining equity markets) even when the Company continues to expect the business to be profitable. Management believes this presentation provides the most meaningful disclosure of changes in the underlying risk within the GMIB reinsurance programs for a given reporting period.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The presentation of income and expenses relating to GMDB and GMIB reinsurance for the periods indicated are as follows:


	Three Months Ended March 31
	2005			2004
	(in millions of U.S. dollars)
GMDB
Net premiums earned	$	17.5		$	9.6
Life and annuity benefits expense	$	8.3		$	3.8

GMIB
Net premiums earned	$	20.6		$	12.6
Life and annuity benefits expense	$	2.4		$	5.2
Realized gains (losses)	$	(20.6	)	$	(25.0	)

At March 31, 2005, reported liabilities for GMDB and GMIB reinsurance were $37 million and $51.6 million, respectively, compared with $31.3 million and $28.7 million, respectively, at December 31, 2004. Reported liabilities for both GMDB and GMIB reinsurance are determined using internal valuation models. Such valuations require considerable judgment and are subject to significant uncertainty. The valuation of these products is subject to fluctuations arising from, among other factors, changes in interest rates, changes in the equity markets, and changes in the allocation of the investments underlying annuitant’s account value. These models and the related assumptions are continually reviewed by management and enhanced, as appropriate, based upon improvements in modeling techniques and availability of more timely information, such as market conditions and demographics of in-force annuities.

At March 31, 2005, the Company’s net amount at risk from its GMDB and GMIB reinsurance programs was $395 million and $18 million, respectively. For the GMDB programs, the net amount at risk is defined as the excess, if any, of the current guaranteed value over the current account value. For the GMIB programs, the net amount at risk is defined as the excess, if any, of the present value of the minimum guaranteed annuity payments over the present value of the annuity payments assumed (under the terms of the reinsurance contract) to be available to each policyholder.

6.	Commitments, contingencies and guarantees

a)	Other investments

The Company invests in limited partnerships with a carrying value of $102 million included in other investments. In connection with these investments, the Company has commitments that may require funding of up to $100 million over the next several years.

b)	Legal proceedings

(i)	Claims Litigation

The Company’s insurance subsidiaries are subject to claims litigation involving disputed interpretations of policy coverages and, in some jurisdictions, direct actions by allegedly-injured persons seeking damages from policyholders. These lawsuits, involving claims on policies issued by the Company’s subsidiaries which are typical to the insurance industry in general and in the normal course of business, are considered in the Company’s loss and loss expense reserves which are discussed in the P&C loss reserves discussion. In addition to claims litigation, the Company and its subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on insurance policies. 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.

(ii)

Subpoenas

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

participated in the practices in question. There can be no assurance that ACE will not be named in future actions brought by the NYAG or any other state attorneys general. In addition, an underwriter who is no longer employed by ACE has pleaded guilty to a misdemeanor based on these practices. ACE is cooperating and will continue to cooperate with the attorneys general.

ACE, its subsidiaries and affiliates have received numerous subpoenas, interrogatories, and civil investigative demands in connection with the pending investigations of insurance industry practices. These inquiries have been issued by a number of attorneys general, state departments of insurance, and state and federal regulatory authorities, including the NYAG, the Pennsylvania Department of Insurance and the Securities and Exchange Commission (SEC). These inquiries seek information concerning underwriting practices and non-traditional or loss mitigation insurance products. ACE is cooperating and will continue to cooperate with such inquiries.

ACE is conducting its own internal investigation that encompasses the subjects raised by the NYAG, the other state attorneys general and the SEC. It is being conducted by a team from the firm of Debevoise & Plimpton LLP. The team is headed by former United States Attorney Mary Jo White and operates under the direction of the Audit Committee of the Board of Directors. The Audit Committee of the Board of Directors has retained Cleary Gottlieb Steen & Hamilton, special outside counsel, to advise it in connection with these matters. The Company has terminated three employees, one of which has pleaded guilty to a misdemeanor, and has suspended two other employees as a result of its internal investigation. ACE’s internal investigation pertaining to underwriting practices is essentially complete. The investigation pertaining to non-traditional or loss mitigation insurance products is ongoing.

(iii)

Other Litigation

In January 2005, the Connecticut Attorney General (the CTAG) filed a civil suit against a subsidiary of ACE in Connecticut state court under the Connecticut Unfair Trade Practices Act. The CTAG’s suit alleges that an ACE subsidiary made an unauthorized and undisclosed payment to a broker who placed a portfolio of state workers’ compensation cases with ACE and seeks restitution to the state and payment of punitive damages. ACE believes that it has not violated any law or duty to the state and has filed a motion to dismiss the action. The State of Connecticut has not yet responded to the motion.

ACE, ACE INA Holdings, Inc. and ACE USA have been named in the following 13 federal putative nationwide class actions brought by insurance policyholders. Bayou Steel Corporation v. ACE INA Holdings, et al. (Case No. 04 CV 5391 E.D. Pa) (filed November 18, 2004); Eagle Creek, Inc. v. ACE INA Holdings, et al. (Case No. 04 CV 5255; E.D. Pa.) (filed November 10, 2004); Stephen Lewis vs. Marsh & McLennan Companies, Inc., et al. (Case No. 04 CV 7847; N.D. Ill.) (filed December 6, 2004); Opticare Health Systems, Inc. v. Marsh & McLennan Companies, Inc., et al. (Case No. 04 CV 06954; S.D.N.Y.) (filed October 19, 2004); Diane Preuss v. Marsh & McLennan Companies, et al. (Case No. 04 CV 78553; N.D. Ill.) (filed December 6, 2004); Redwood Oil Company v. Marsh & McLennan Companies, Inc. (Case No. 05 C 0390; N.D. Ill.) (filed January 21, 2005, dismissed voluntarily by plaintiff); Shell Vacations LLC v. Marsh & McLennan Companies, Inc., et al. (Case No. 05 C 0270; N.D. Ill.) (filed January 14, 2005); Edward Macuish v. Marsh & McLennan Companies, Inc., et al. (Case No. 2005 CV 00440; N.D. Ill.) (filed January 25, 2005); David Boros v. Marsh & McLennan Companies, Inc., et al. (Case No. C050543EDL; N.D. Calf.) (filed February 4, 2005), and Robert Mulcahy v. Arthur J. Gallagher & Co., et al. (Case No. 2005 CV 01064; D. N.J.) (filed February 23, 2005); Golden Gate Bridge, Highway and Transportation District vs. Marsh & McLennan Companies, Inc., et.al. (Case No. 05-1214, D. N.J.) filed February 23, 2005); The Prococcianti Group vs. Marsh & McLennan Companies, Inc., et. al. (Case No. 05-1368, D. N.J.) (filed March 7, 2005); Palm Tree Computers Systems, Inc. et al. v. ACE USA et al. (Case No. 6:05-cv-418-ACC-JGG) (filed February 16, 2005) (Case originally filed in the Eighteenth Judicial Circuit in and for Seminole County, Florida. AIG removed case. Motion to remand pending). In each of these cases, the plaintiff has sued a number of other insurance entities in addition to the ACE entities.

The Judicial Panel on Multidistrict Litigation (JPML) consolidated these cases, as well as other putative class actions in which no ACE entity is named as a party in the District of New Jersey. In each of the actions in which they have been served, the obligation of the ACE entities to answer the complaints has been, or will be, stayed until after a consolidated complaint has been filed. In each of these cases, the plaintiff alleges that insurers, including certain ACE entities, and brokers conspired to increase premiums and allocate customers through the use of “B” quotes and contingent commissions. Although the causes of action in the petitions somewhat vary, Plaintiffs allege causes of action under the Federal Racketeer Influenced and Corrupt Organization Act (RICO), federal antitrust law, state antitrust law, state consumer-protection laws, and state common law (breach of fiduciary duty and misrepresentation). In each of the cases, the plaintiff has sought unspecified compensatory damages and reimbursement of expenses, including legal fees.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Illinois Union Insurance Company, an ACE subsidiary, has been named in a state court class action: Van Emden Management Corporation v. Marsh & McLennan Companies, Inc., et al. (Case No. 05-0066A; Superior Court of Massachusetts) (filed January 13, 2005). The allegations are similar to the allegations in the federal class actions identified above. Plaintiffs assert causes of action under Massachusetts’ antitrust statute and Massachusetts’ consumer protection statute. Plaintiffs also assert a conspiracy cause of action and seek an injunction. Plaintiffs have sought unspecified compensatory damages and reimbursement of expenses, including legal fees.

ACE has been named in the following four putative securities class action suits: John Mahaney, Jr. v. ACE Limited, et al. (Case No. 04 CV 07696; S.D.N.Y) (filed October 18, 2004); Steven Burda v. ACE Limited, et al.; (Case No. 04 CV 833; S.D.N.Y.) (filed October 21, 2004); Thomas E. Barton v. ACE Limited, et al.; (Case No. 04 CV 8683; S.D.N.Y.) (filed November 1, 2004); and Friends of Ariel Center for Policy Research v. ACE Limited, et al. (Case No. 04 CV 04907; E.D. Pa.) (filed October 19, 2004). Evan G. Greenberg, ACE’s President and Chief Executive Officer, Brian Duperreault, ACE’s Chairman and former Chief Executive Officer, and Philip V. Bancroft, ACE’s Chief Financial Officer were also named as defendants in each of these suits. In addition, Dominic J. Frederico, ACE’s former Vice Chairman and former President and Chief Operating Officer, and Christopher Z. Marshall, ACE’s former Chief Financial Officer, were named as defendants in the Burda action. On January 3, 2005, the Burda and Barton actions were consolidated for all purposes into the Mahaney action. In December 2004, the defendants filed a motion with the JPML seeking consolidation of the cases for pretrial purposes in the Eastern District of Pennsylvania. That motion is currently pending, and no plaintiffs have yet filed a brief stating a position on consolidation and transfer. The plaintiffs in these cases assert claims solely under Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act), Rule 10b-5 promulgated thereunder, and Section 20(a) of the Exchange Act (control person liability). The plaintiffs allege that ACE’s public statements and securities filings should have revealed that insurers, including certain ACE entities and brokers conspired to increase premiums and allocate customers through the use of “B” quotes and contingent commissions and that ACE’s revenue and earnings were inflated by premiums which it may have to forfeit by fines or judgments.

ACE understands that it has been named as a defendant in a derivative suit filed in Delaware Chancery Court by shareholders of Marsh. The derivative suit seeks to recover damages for Marsh and its subsidiary, Marsh, Inc., against officers and directors of Marsh, American International Group Inc. (AIG), AIG’s chief executive officer, and ACE. The suit alleges that the defendants damaged Marsh and Marsh, Inc. by participating in a bid rigging scheme and obtaining “kickbacks” in the form of contingent commissions. The suit alleges that ACE knowingly participated in the officers’ and directors’ breaches of fiduciary duty to Marsh, Inc. and Marsh. The plaintiff has sought unspecified compensatory damages and reimbursement of expenses, including legal fees. ACE has not been served in this action, though no assurance can be given that it will not be served.

On December 6, 2004, Goss International Corporation filed a “Verified Petition for Discovery” in Illinois state court naming several respondents, including ACE, Illinois Union Insurance Co., a subsidiary of ACE, five other insurance companies, Marsh and Marsh Inc. This petition was filed under an Illinois Supreme Court rule which purports to allow a person to engage in discovery for the sole purpose of identifying one who may be responsible in damages in anticipation of filing a complaint. Goss claims that it has used Marsh as its broker, and that Marsh presented quotes to Goss from each of the insurance company respondents. ACE has not been served in this action, though no assurance can be given that it will not be served. Goss and the defendants, including Illinois Union Insurance Co., have negotiated an agreed briefing schedule pertaining to Goss’s request for pre-suit discovery. If it is served, ACE intends to vigorously oppose the request for pre-suit discovery.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

liability for these matters is not likely to have a material adverse effect on ACE’s consolidated financial condition, although it is possible that the effect could be material to ACE’s consolidated results of operations for an individual reporting period.

Debt

The following table outlines the Company’s debt at March 31, 2005 and December 31, 2004.


	March 31 2005		December 31 2004
	(in millions of U.S. dollars)
Short-term debt
Reverse Repurchase Agreements	$	147	$	146

		147		146


Long-term debt
ACE INA Notes due 2006		300		300
ACE Limited Senior Notes due 2007		500		500
ACE US Holdings Senior Notes due 2008		250		250
ACE INA Subordinated Notes due 2009		200		200
ACE INA Senior Notes due 2014		499		499
ACE INA Debentures due 2029		100		100

		1,849		1,849


Trust preferred securities
ACE INA Trust Preferred Securities due 2029		103		103
ACE INA Capital Securities due 2030		309		309

	$	412	$	412

a)	*Short-term debt*

The Company has commercial paper programs that use revolving credit facilities as back-up facilities and provide for up to $2.8 billion in commercial paper issuance (subject to the availability of back-up facilities, which currently total $600 million) for ACE and for ACE INA. At March 31, 2005, short-term debt consisted of $147 million of amounts owed to brokers under securities repurchase transactions.

8.	Employee benefit plans

a)	Defined benefit plans

The Company maintains non-contributory defined benefit plans that cover certain foreign employees, principally located in Europe and Asia. The Company does not provide any such plans to U.S. based employees. Benefits under these plans are based on employees’ years of service and compensation during final years of service. All underlying defined benefit plans are subject to periodic actuarial valuation by qualified local actuarial firms. The Company funds the plans at the amount required by local tax and legal requirements for sponsoring a defined benefit retirement plan. The accumulated benefit obligation is compared to plan assets, both as defined in FAS No. 87, “Employers’ Accounting for Pensions”, and any resulting deficiency is recorded as an additional liability.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table details the net periodic benefit costs recognized by component for the periods indicated.


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

Net periodic benefit cost	$	4,915		$	3,479

b)	Restricted stock awards

Under the Company’s long-term incentive plans, 1,636,665 and 1,508,080 restricted Ordinary Shares were awarded during the three months ended March 31, 2005 and 2004, respectively, to officers of the Company and its subsidiaries. These shares vest at various dates through March 2009 and 2008.

At the time of grant the market value of the shares awarded under these grants is recorded as unearned stock grant compensation and is presented as a separate component of shareholders’ equity. The unearned compensation is charged to income over the vesting period using the accelerated method.

9.	Other (income) expense

The following table details the components of other (income) expense as reflected in the consolidated statements of operations for the periods indicated.


	Three Months Ended March 31
	2005			2004
	(in thousands of U.S. dollars)
Equity in net income of partially-owned companies	$	(10,557	)	$	(1,446	)
Minority interest expense		5,057			5,700
Other		941			1,521
Goodwill impairment		—			11,305

Other (income) expense	$	(4,559	)	$	17,080

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

10.

Earnings per share

The following table sets forth the computation of basic and diluted earnings per share for the periods indicated.


	Three Months Ended March 31
	2005			2004
	(in thousands of U.S. dollars, except share and per share data)
Numerator:
Net income	$	433,028		$	446,825
Dividends on Preferred Shares		(11,336	)		(11,336	)

Net income available to holders of Ordinary Shares	$	421,692		$	435,489

Denominator:
Denominator for basic earnings per share:
Weighted average shares outstanding		283,179,820			278,937,204
Effect of other dilutive securities		4,385,550			5,352,364

Denominator for diluted earnings per share:
Adjusted weighted average shares outstanding and assumed conversions		287,565,370			284,289,568

Basic earnings per share	$	1.49		$	1.56

Diluted earnings per share	$	1.46		$	1.53

11.

Taxation

Under current Cayman Islands’ law, the Company is not required to pay any taxes in the Cayman Islands on its income or capital gains. The Company has received an undertaking that, in the event of any taxes being imposed, the Company will be exempted from taxation in the Cayman Islands until the year 2013. Under current Bermuda law, the Company and its Bermuda subsidiaries are not required to pay any taxes in Bermuda on their income or capital gains. The Company has received an undertaking from the Minister of Finance in Bermuda that, in the event of any taxes being imposed, the Company will be exempt from taxation in Bermuda until March 2016.

Income from the Company’s operations at Lloyd’s is subject to United Kingdom corporation taxes. Lloyd’s is required to pay U.S. income tax on U.S. connected income (U.S. income) written by Lloyd’s syndicates. Lloyd’s has a closing agreement with the IRS whereby the amount of tax due on this business is calculated by Lloyd’s and remitted directly to the IRS. These amounts are then charged to the personal accounts of the Names/Corporate Members in proportion to their participation in the relevant syndicates. The Company’s Corporate Members are subject to this arrangement but, as U.K. domiciled companies, will receive U.K. corporation tax credits for any U.S. income tax incurred up to the value of the equivalent U.K. corporation income tax charge on the U.S. income.

ACE Prime Holdings and its respective subsidiaries are subject to income taxes imposed by U.S. authorities and file a consolidated U.S. tax return. Should ACE Prime Holdings pay a dividend to the Company, withholding taxes will apply. Currently, however, no withholding taxes are accrued with respect to such unremitted earnings as management has no intention of subjecting these earnings to withholding tax. The cumulative amount that would be subject to withholding tax if distributed, as well as the determination of the associated tax liability are not practicable to compute, however, such amount would be material to the Company. Certain international operations of the Company are also subject to income taxes imposed by the jurisdictions in which they operate.

The Company is not subject to taxation other than as stated above. There can be no assurance that there will not be changes in applicable laws, regulations or treaties, which might require the Company to change the way it operates or become subject to taxation.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The income tax provision for the periods indicated is as follows:


	Three Months Ended March 31
	2005		2004
	(in thousands of U.S. dollars)
Current tax expense	$	63,955	$	67,459
Deferred tax expense		55,828		55,082

Provision for income taxes	$	119,783	$	122,541

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


	Three Months Ended March 31
	2005			2004
	(in thousands of U.S. dollars)
Expected tax provision at weighted average rate	$	124,924		$	122,596
Permanent differences
Tax-exempt interest		(1,673	)		(4,098	)
American Jobs Creation Act Repatriation		(8,356	)		—
Other		2,748			(3,342	)
Goodwill		—			3,957
Net withholding taxes		2,140			3,428

Total provision for income taxes	$	119,783		$	122,541

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The components of the net deferred tax asset for the periods indicated are as follows:


	March 31 2005		December 31 2004
	(in thousands of U.S. dollars)
Deferred tax assets
Loss reserve discount	$	599,038	$	595,162
Unearned premium reserve		155,015		142,540
Foreign tax credits		448,345		431,437
Investments		127,663		127,078
Bad debts		172,735		171,432
Net operating loss carry-forward		155,918		228,264
Other, net		69,014		72,959

Total deferred tax assets		1,727,728		1,768,872

Deferred tax liabilities
Deferred policy acquisition costs		134,583		131,805
Unrealized appreciation on investments		66,561		135,158
Unremitted foreign earnings		265,920		251,122

Total deferred tax liabilities		467,064		518,085

Valuation allowance		88,919		89,563

Net deferred tax asset	$	1,171,745	$	1,161,224

The valuation allowance of $89 million at March 31, 2005 and at December 31, 2004, reflects management’s assessment, based on available information, that it is more likely than not that a portion of the deferred tax asset will not be realized due to the inability of certain foreign subsidiaries to generate sufficient taxable income or the inability to utilize foreign tax credits. Adjustments to the valuation allowances are made when there is a change in management’s assessment of the amount of deferred tax asset that is realizable. The $0.6 million reduction in the valuation allowance during the period relates to the change in the excess of tax basis over financial reporting basis of a foreign subsidiary due to currency translation adjustments.

At March 31, 2005, the Company has net operating loss carryforwards for U.S. federal income tax purposes of approximately $445 million. The net operating loss carryforwards are available to offset future U.S. federal taxable income and, if unutilized, will expire in the years 2021-2022. In addition, the Company has a foreign tax credit carryforward in the amount of $50 million which, if unutilized, will expire in the years 2011-2014. The Company has an alternative minimum tax credit carryforward of $20.8 million which can be carried forward indefinitely.

American Jobs Creation Act of 2004

On October 22, 2004, the American Jobs Creation Act (the Act) was signed into law by the President of the United States. The Act provides for the election of a special one-time tax deduction of 85 percent of certain foreign earnings that are repatriated (as defined in the Act) under a Domestic Reinvestment Plan to its United States parent corporation in either the parent’s last tax year that began before the enactment date, or the first tax year that begins during the one-year period beginning on the date of enactment. The Company expects to apply the provisions of the Act to certain of its applicable subsidiaries.

The Act includes several provisions for which the United States Treasury has indicated it will issue further guidance, or for which issues have been raised that may require a technical correction to the Act. In January of 2005, the United States Treasury issued its first guidance on selected provisions of the Act, and it expects to issue additional guidance sometime in 2005.

During February of 2005, the Company repatriated foreign earnings of approximately $42 million subject to a limited Domestic Reinvestment Plan that would qualify under the Act based on guidance issued in January of 2005. Additional foreign earnings of approximately $299 million are expected to be repatriated in the second quarter of 2005. The tax benefit

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

recorded in the first quarter associated with these repatriations is $8.4 million due to the reduction of the net deferred tax liability associated with these repatriated earnings and based on guidance issued to date. This tax benefit may increase by as much as approximately $21 million due to the anticipated guidance and technical corrections expected to be issued sometime in 2005.

Additional earnings repatriations up to the limitation under the Act of $500 million may be completed through the remainder of 2005. Subject to the expected guidance or technical corrections, the Company is not in a position to complete the evaluation or determine the total associated tax impact as a result of the Act. However, the Company anticipates that the tax impact would be a reduction of the net deferred tax liability associated with the unremitted earnings. The Company expects to finalize the assessment of the Act after the expected United States Treasury Guidance has been issued.

12.

Information provided in connection with outstanding debt of subsidiaries

The following tables present condensed consolidating financial information at March 31, 2005 and December 31, 2004 and for the three months ended March 31, 2005 and 2004, for ACE Limited (the “Parent Guarantor”) and its “Subsidiary Issuer”, ACE INA Holdings, Inc. The Subsidiary Issuer is an indirect wholly-owned subsidiary of the Parent Guarantor. Investments in subsidiaries are accounted for by the Parent Guarantor under the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are reflected in the Parent Guarantor’s investment accounts and earnings. The Parent Guarantor fully and unconditionally guarantees certain of the debt of the Subsidiary Issuer.

Condensed Consolidating Balance Sheet at March 31, 2005

(in thousands of U.S. dollars)


	ACE Limited (Parent Co. Guarantor)		ACE INA Holdings, Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries and Eliminations ⁽¹⁾		Consolidating Adjustments ⁽²⁾			ACE Limited Consolidated
Assets
Investments	$	11,511	$	14,328,725		$	13,066,288	$	—		$	27,406,524
Cash		33,736		232,668			307,714		—			574,118
Insurance and reinsurance balances receivable		—		2,869,886			822,127		—			3,692,013
Reinsurance recoverable		—		13,579,058			1,029,178		—			14,608,236
Goodwill		—		2,130,908			477,541		—			2,608,449
Investments in subsidiaries		10,465,958		—			—		(10,465,958	)		—
Due (to) from subsidiaries and affiliates, net		50,957		(179,817	)		179,817		(50,957	)		—
Other assets		84,445		5,670,134			2,320,846		—			8,075,425

Total assets	$	10,646,607	$	38,631,562		$	18,203,511	$	(10,516,915	)	$	56,964,765

Liabilities
Unpaid losses and loss expenses	$	—	$	23,186,669		$	8,238,956	$	—		$	31,425,625
Unearned premiums		—		4,898,318			1,628,713		—			6,527,031
Future policy benefits for life and annuity contracts		—		—			507,186		—			507,186
Short-term debt		—		—			147,059		—			147,059
Long-term debt		499,662		1,099,346			250,000		—			1,849,008
Trust preferred securities		—		412,373			—		—			412,373
Other liabilities		181,645		4,416,439			1,533,099		—			6,131,183

Total liabilities		681,307		34,013,145			12,305,013		—			46,999,465

Total shareholders’ equity		9,965,300		4,618,417			5,898,498		(10,516,915	)		9,965,300

Total liabilities and shareholders’ equity	$	10,646,607	$	38,631,562		$	18,203,511	$	(10,516,915	)	$	56,964,765

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

⁽²⁾	Includes ACE Limited parent company eliminations.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Condensed Consolidating Balance Sheet at December 31, 2004

(in thousands of U.S. dollars)


	ACE Limited (Parent Co. Guarantor)		ACE INA Holdings, Inc. (Subsidiary Issuer)		Other ACE Limited Subsidiaries and Eliminations ⁽¹⁾			Consolidating Adjustments ⁽²⁾			ACE Limited Consolidated
Assets
Investments	$	34,745	$	13,709,263	$	12,906,559		$	—		$	26,650,567
Cash		6,327		252,048		275,620			—			533,995
Insurance and reinsurance balances receivable		—		2,524,354		748,136			—			3,272,490
Reinsurance recoverable		—		14,037,263		1,216,633			—			15,253,896
Goodwill		—		2,130,908		481,541			—			2,612,449
Investments in subsidiaries		10,491,718		—		—			(10,491,718	)		—
Other assets		83,061		5,617,300		2,318,678			—			8,019,039

Total assets	$	10,615,851	$	38,271,136	$	17,947,167		$	(10,491,718	)	$	56,342,436

Liabilities
Unpaid losses and loss expenses	$	—	$	23,288,132	$	8,224,489		$	—		$	31,512,621
Unearned premiums		—		4,416,338		1,506,630			—			5,922,968
Future policy benefits for life and annuity contracts		—		—		509,005			—			509,005
Due to (from) subsidiaries and affiliates, net		123,689		164,114		(164,114	)		(123,689	)		—
Short-term debt		—		—		146,295			—			146,295
Long-term debt		499,620		1,099,307		250,000			—			1,848,927
Trust preferred securities		—		412,373		—			—			412,373
Other liabilities		156,730		4,449,497		1,548,208			—			6,154,435

Total liabilities		780,039		33,829,761		12,020,513			(123,689	)		46,506,624

Total shareholders’ equity		9,835,812		4,441,375		5,926,654			(10,368,029	)		9,835,812

Total liabilities and shareholders’ equity	$	10,615,851	$	38,271,136	$	17,947,167		$	(10,491,718	)	$	56,342,436

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

⁽²⁾	Includes ACE Limited parent company eliminations.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Condensed Consolidating Statement of Operations

For the three months ended March 31, 2005

(in thousands of U.S. dollars)


	ACE Limited (Parent Co. Guarantor)			ACE INA Holdings, Inc. (Subsidiary Issuer)		Other ACE Limited Subsidiaries and Eliminations⁽¹⁾			Consolidating Adjustments⁽²⁾			ACE Limited Consolidated
Net premiums written	$	—		$	1,994,126	$	1,371,016		$	—		$	3,365,142
Net premiums earned		—			1,678,859		1,197,028			—			2,875,887
Net investment income		230			141,169		142,248			—			283,647
Equity in earnings of subsidiaries		477,728			—		—			(477,728	)		—
Net realized gains (losses)		(4,414	)		17,430		(16,868	)		—			(3,852	)
Losses and loss expenses		—			1,083,376		702,387			—			1,785,763
Life and annuity benefits		—			—		34,837			—			34,837
Policy acquisition costs and administrative expenses		33,391			409,843		306,657			(5,740	)		744,151
Interest expense		7,125			31,935		5,575			(1,956	)		42,679
Other (income) expense		—			694		(5,253	)		—			(4,559	)
Income tax expense		—			102,090		17,693			—			119,783

Net income	$	433,028		$	209,520	$	260,512		$	(470,032	)	$	433,028

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)		Other ACE Limited Subsidiaries and Eliminations⁽¹⁾		Consolidating Adjustments⁽²⁾			ACE Limited Consolidated
Net premiums written	$	—		$	1,789,252	$	1,448,914	$	—		$	3,238,166
Net premiums earned		—			1,341,052		1,258,625		—			2,599,677
Net investment income		3,422			106,161		131,573		(3,236	)		237,920
Equity in earnings of subsidiaries		491,241			—		—		(491,241	)		—
Net realized gains (losses)		(14,021	)		35,612		35,670		—			57,261
Losses and loss expenses		—			875,091		667,506		—			1,542,597
Life and annuity benefits		—			—		41,724		—			41,724
Policy acquisition costs and administrative expenses		26,567			336,791		313,312		3,149			679,819
Interest expense		6,280			32,536		6,733		(1,277	)		44,272
Other (income) expense		—			3,326		13,754		—			17,080
Income tax expense		970			81,516		40,055		—			122,541

Net income	$	446,825		$	153,565	$	342,784	$	(496,349	)	$	446,825

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

⁽²⁾	Includes ACE Limited parent company eliminations.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Condensed Consolidating Statement of Cash Flows

For the three months ended March 31, 2005

(in thousands of U.S. dollars)


	ACE Limited (Parent Co. Guarantor)			ACE INA Holdings, Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries and Eliminations ⁽¹⁾			ACE Limited Consolidated
Net cash flows from (used for) operating activities	$	(11,525	)	$	713,478		$	508,359		$	1,210,312

Cash flows used for investing activities
Purchases of fixed maturities available for sale		23,734			(2,654,698	)		(3,397,958	)		(6,028,922	)
Purchases of equity securities		—			(102,299	)		(77,573	)		(179,872	)
Sales of fixed maturities available for sale		—			1,918,706			3,096,116			5,014,822
Sales of equity securities		—			54,918			30,217			85,135
Net proceeds from the settlement of investment derivatives		(4,414	)		—			4,465			51
Capitalization of subsidiaries		(100,000	)		100,000			—			—
Dividends received from subsidiaries		274,912			—			(274,912	)		—
Other		—			368			(30,545	)		(30,177	)

Net cash flows from (used for) investing activities	$	194,232		$	(683,005	)	$	(650,190	)	$	(1,138,963	)

Cash flows from (used for) financing activities
Dividends paid on Ordinary Shares		(59,739	)		—			—			(59,739	)
Dividends paid on Preferred Shares		(11,213	)		—			—			(11,213	)
Net proceeds from short-term debt		—			—			764			764
Proceeds from exercise of options for Ordinary Shares		38,866			—			—			38,866
Proceeds from Ordinary Shares issued under ESPP		3,911			—			—			3,911
Advances (to) from affiliates		(127,123	)		(26,379	)		153,502			—

Net cash flows from (used for) financing activities	$	(155,298	)	$	(26,379	)	$	154,266		$	(27,411	)

Effect of foreign currency rate changes on cash and cash equivalents	$	—		$	(1,580	)	$	(2,235	)	$	(3,815	)

Net increase in cash		27,409			2,514			10,200			40,123
Cash – beginning of period		6,327			230,154			297,514			533,995

Cash – end of period	$	33,736		$	232,668		$	307,714		$	574,118

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

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)			Other ACE Limited Subsidiaries and Eliminations ⁽¹⁾			ACE Limited Consolidated
Net cash flows from (used for) operating activities	$	(29,876	)	$	816,776		$	375,003		$	1,161,903

Cash flows from (used for) investing activities
Purchases of fixed maturities		(26,877	)		(2,801,197	)		(3,163,048	)		(5,991,122	)
Purchases of equity securities		—			(36,302	)		(72,874	)		(109,176	)
Sales of fixed maturities		—			2,039,543			2,855,605			4,895,148
Sales of equity securities		—			35,840			69,529			105,369
Maturities of fixed maturities		—			—			160			160
Net proceeds from (payments made on) the settlement of investment derivatives		(14,021	)		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	)		27,989			6,932

Net cash flows from (used for) investing activities	$	156,949		$	(720,148	)	$	(530,367	)	$	(1,093,566	)

Cash flows from (used for) financing activities
Dividends paid on Ordinary Shares		(53,182	)		—			—			(53,182	)
Dividends paid on Preferred Shares		(11,213	)		—			—			(11,213	)
Proceeds from short-term debt, net		—			(14	)		—			(14	)
Proceeds from exercise of options for Ordinary Shares		34,406			—			—			34,406
Proceeds from Ordinary Shares issued under ESPP		3,683			—			—			3,683
Advances to (from) affiliates		(108,927	)		—			108,927			—

Net cash flows from (used for) financing activities	$	(135,233	)	$	(14	)	$	108,927		$	(26,320	)

Effect of foreign currency rate changes on cash and cash equivalents	$	—		$	3,932		$	6,287		$	10,219

Net increase (decrease) in cash		(8,160	)		100,546			(40,150	)		52,236
Cash – beginning of period		27,260			167,667			366,723			561,650

Cash – end of period	$	19,100		$	268,213		$	326,573		$	613,886

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

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

13.

Segment information

The Company operates through four business segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance and Financial Services. These segments distribute their products through various forms of brokers and agencies. Insurance - North American, Insurance - Overseas General and Global Reinsurance utilize direct marketing programs to reach clients. Additionally, Insurance - North American has formed internet distribution channels for some of its products and Global Reinsurance and Financial Services have established relationships with reinsurance intermediaries.

The Insurance – North American segment includes the operations of ACE USA, ACE Canada and ACE Bermuda, excluding the financial solutions business in both the U.S. and Bermuda, which are included in the Financial Services segment. These operations provide a broad range of property and casualty insurance and reinsurance products, including excess liability, excess property, professional lines, aerospace, accident and health coverages and claim and risk management products and services, to a diverse group of commercial and non-commercial enterprises and consumers. Subsequent to the IPO of Assured Guaranty, the title insurance business is included in the Insurance – North American segment. The operations of ACE USA also include the run-off operations, which include Brandywine, Commercial Insurance Services, residual market workers’ compensation business, pools and syndicates not attributable to a single business group, the run-off of open market facilities and the run-off results of various other smaller exited lines of business. Run-off operations do not actively sell insurance products, but are responsible for the management of existing policies and related claims.

The Insurance – Overseas General segment consists of ACE International and the insurance operations of ACE Global Markets. ACE International includes ACE INA’s network of indigenous insurance operations, which were acquired in 1999. The segment has four regions of operations: ACE Asia Pacific, ACE Far East, ACE Latin America and the ACE European Group, (which comprises ACE Europe, ACE INA UK Limited and the insurance operations of ACE Global Markets). ACE Global Markets provides funds at Lloyd’s to support underwriting by the Lloyd’s syndicates managed by Lloyd’s managing agencies which are owned by the Company (including for segment purposes Lloyd’s operations owned by ACE Financial Services). The reinsurance operation of ACE Global Markets is included in the Global Reinsurance segment. Companies within the Insurance – Overseas General segment write a variety of insurance products including property, casualty, professional lines (D&O and E&O), marine, energy, aviation, political risk, consumer-oriented products and A&H – principally being supplemental accident.

The Global Reinsurance segment comprises ACE Tempest Re Bermuda, ACE Tempest Re USA and ACE Tempest Re Europe. These subsidiaries provide property catastrophe, casualty and property reinsurance. Subsequent to the IPO of Assured Guaranty, the trade credit business is included in the Global Reinsurance segment. Global Reinsurance also includes the operations of ACE Tempest Life Re. The principal business of ACE Tempest Life Re is to provide reinsurance coverage to other life insurance companies.

The Financial Services segment includes the financial solutions business in the U.S. and Bermuda and the Company’s share of Assured Guaranty’s earnings. Prior to the IPO of Assured Guaranty, the Financial Services segment included the financial guaranty business of ACE Guaranty Corp. and ACE Capital Re International. The financial results of the transferred business are included in the results of the Financial Services segment through April 28, 2004 (the date of the sale). Commencing April 29, 2004, the Company’s proportionate share of Assured Guaranty’s earnings is reflected in other (income) expenses in the Financial Services segment. The financial solutions business includes insurance and reinsurance solutions to complex risks that generally cannot be adequately addressed by the traditional insurance marketplace. It consists of securitization and risk trading, finite and structured risk products, and retroactive contracts in the form of loss portfolio transfers.

Corporate and other includes ACE Limited and ACE INA Holdings (Corporate) and intercompany eliminations. In addition, included in losses and loss expenses for the quarter ended March 31, 2005 are losses incurred in connection with the commutation of ceded reinsurance contracts that resulted from a differential between the consideration received from reinsurers and the related reduction of reinsurance recoverables, principally related to the time value of money. Due to the Company’s initiatives to reduce reinsurance recoverable balances and thereby encourage such commutations, losses recognized in connection with the commutation of ceded reinsurance contracts are generally not considered when assessing segment performance and accordingly, are directly allocated to Corporate. Additionally, the Company does not consider the development of loss reserves related to the September 11 tragedy in assessing segment performance as these loss reserves are

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

managed by Corporate. Accordingly, the effect of the related loss reserve development on net income is reported within Corporate. There were no losses related to the September 11 tragedy included in Corporate for the three months ended March 31, 2005 and 2004.

For segment reporting purposes, certain items have been presented in a different manner than in the consolidated financial statements. The following tables summarize the operations by segment for the periods indicated.

Statement of Operations by Segment

For the three months ended March 31, 2005

(in thousands of U.S. dollars)


	Insurance – North American			Insurance - Overseas General		Global Reinsurance			Corporate and Other			Consolidated Property & Casualty⁽¹⁾			Financial Services			ACE Consolidated
Gross premiums written	$	2,150,918		$	1,635,555	$	535,680		$	—		$	4,322,153		$	162,705		$	4,484,858
Net premiums written		1,424,756			1,194,224		526,879			—			3,145,859			161,634			3,307,493
Net premiums earned		1,283,119			1,088,903		356,606			—			2,728,628			89,662			2,818,290
Losses and loss expenses		887,626			610,867		205,450			(888	)		1,703,055			82,708			1,785,763
Policy acquisition costs		117,403			192,112		72,985			—			382,500			2,006			384,506
Administrative expenses		131,576			144,342		15,303			58,403			349,624			4,106			353,730

Underwriting income (loss)		146,514			141,582		62,868			(57,515	)		293,449			842			294,291

Life
Gross premiums written		—			—		57,673			—			—			—			57,673
Net premiums written		—			—		57,649			—			—			—			57,649
Net premiums earned		—			—		57,597			—			—			—			57,597
Life and annuity benefits		—			—		34,837			—			—			—			34,837
Policy acquisition costs		—			—		4,108			—			—			—			4,108
Administrative expenses		—			—		1,807			—			—			—			1,807
Net investment income		—			—		9,189			—			—			—			9,189

Underwriting income		—			—		26,034			—			—			—			26,034

Net investment income		127,911			74,325		39,357			1,247			242,840			31,618			274,458
Net realized gains (losses)		(4,178	)		17,641		(22,131	)		(4,415	)		(13,083	)		9,231			(3,852	)
Interest expense		5,151			—		766			36,762			42,679			—			42,679
Other (income) expense		228			5,970		942			(294	)		6,846			(11,405	)		(4,559	)
Income tax expense (benefit)		72,737			52,918		9,133			(20,653	)		114,135			5,648			119,783

Net income (loss)	$	192,131		$	174,660	$	95,287		$	(76,498	)	$	359,546		$	47,448		$	433,028

⁽¹⁾	Excludes life reinsurance business.

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Statement of Operations by Segment

For the three months ended March 31, 2004

(in thousands of U.S. dollars)


	Insurance – North American		Insurance - Overseas General		Global Reinsurance			Corporate and Other			Consolidated Property & Casualty⁽¹⁾		Financial Services		ACE Consolidated
Gross premiums written	$	1,905,331	$	1,673,610	$	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
Net realized gains (losses)		51,726		24,185		(9,625	)		(14,021	)		52,265		4,996		57,261
Interest expense		5,155		—		—			37,666			42,821		1,451		44,272
Other (income) expense		3,295		3,389		(588	)		—			6,096		10,984		17,080
Income tax expense (benefit)		61,617		50,955		2,964			(13,432	)		102,104		20,437		122,541

Net income (loss)	$	193,252	$	127,990	$	112,560		$	(69,969	)	$	352,870	$	82,992	$	446,825

⁽¹⁾	Excludes life reinsurance business.

Underwriting assets for property and casualty and financial services are reviewed in total by management for purposes of decision-making. The Company does not allocate assets to its segments. Assets are specifically identified for our life reinsurance operations and corporate holding companies, including ACE Limited and ACE INA Holdings.

The following table summarizes the identifiable assets at March 31, 2005 and December 31, 2004.


	March 31 2005		December 31 2004
	(in millions of U.S. dollars)
Life reinsurance	$	773	$	749
Corporate		2,216		2,130
All other		53,976		53,463

Total assets	$	56,965	$	56,342

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following tables summarize the revenues of each segment by product offering for the periods indicated.

Net premiums earned by type of premium


	Property & Casualty		Life, Accident & Health		Financial Services		ACE Consolidated
	(in millions of U.S. dollars)
Three Months Ended March 31, 2005
Insurance – North American	$	1,236	$	47	$	—	$	1,283
Insurance – Overseas General		837		252		—		1,089
Global Reinsurance		356		58		—		414
Financial Services		—		—		90		90

	$	2,429	$	357	$	90	$	2,876


Three Months Ended March 31, 2004
Insurance – North American	$	965	$	42	$	—	$	1,007
Insurance – Overseas General		821		213		—		1,034
Global Reinsurance		329		51		—		380
Financial Services		—		—		179		179

	$	2,115	$	306	$	179	$	2,600

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


Three Months Ended	North America	Europe	Australia & New Zealand	Asia Pacific	Latin America
March 31, 2005	58%	28%	2%	7%	5%
March 31, 2004	60%	27%	3%	6%	4%

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion of our results of operations, financial condition, and liquidity and capital resources as of and for the three months ended March 31, 2005. Our results of operations and cash flows for any interim period are not necessarily indicative of our results for the full year. This discussion should be read in conjunction with our Consolidated Financial Statements and related notes and our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2004.

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Any written or oral statements made by us or on our behalf may include forward-looking statements that reflect our current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks, uncertainties and assumptions about our business that could cause actual results to differ materially from such statements. These risks, uncertainties and assumptions (which are described in more detail elsewhere herein and in other documents we file with the Securities and Exchange Commission (SEC)) include but are not limited to:

•

global political conditions, the occurrence of any terrorist attacks, including any nuclear, biological or chemical events, or the outbreak and effects of war, and possible business disruption or economic contraction that may result from such events;

•

the ability to collect reinsurance recoverable, credit developments of reinsurers, and any delays with respect thereto and changes in the cost, quality or availability of reinsurance;

•

the occurrence of catastrophic events or other insured or reinsured events with a frequency or severity exceeding our estimates;

•

actual loss experience from insured or reinsured events and the timing of claim payments;

•

the uncertainties of the loss-reserving and claims-settlement processes, including the difficulties associated with assessing environmental damage and asbestos-related latent injuries, the impact of aggregate-policy-coverage limits, and the impact of bankruptcy protection sought by various asbestos producers and other related businesses and the timing of loss payments;

•

judicial decisions and rulings, new theories of liability, and legal tactics;

•

the effects of public company bankruptcies and/or accounting restatements, as well as disclosures by and investigations of public companies relating to possible accounting irregularities, and other corporate governance issues, including the effects of such events on:

•

the capital markets;

•

the markets for directors and officers and errors and omissions insurance; and

•

claims and litigation arising out of such disclosures or practices by other companies;

•

uncertainties relating to governmental, legislative and regulatory policies, developments, investigations and treaties, which, among other things, could subject us to insurance regulation or taxation in additional jurisdictions or affect our current operations;

•

the actual amount of new and renewal business, market acceptance of our products, and risks associated with the introduction of new products and services and entering new markets, including regulatory constraints on exit strategies;

•

the competitive environment in which we operate, including trends in pricing or in policy terms and conditions, which may differ from our projections and changes in market conditions that could render our business strategies ineffective or obsolete;

•

actions that rating agencies may take from time to time, such as changes in our claims-paying, financial strength or credit ratings;

•

developments in global financial markets, including changes in interest rates, stock markets and other financial markets, and foreign currency exchange rate fluctuations, which could affect our statement of operations, investment portfolio and financing plans;

•

the potential impact from government-mandated insurance coverage for acts of terrorism;

•

the availability of borrowings and letters of credit under our credit facilities;

•

changes in the distribution or placement of risks due to increased consolidation of insurance and reinsurance brokers;

•

material differences between actual and expected assessments for guaranty funds and mandatory pooling arrangements;

•

the effects of investigations into market practices in the U.S. property and casualty industry;

•

changing rates of inflation and other economic conditions;

•

the amount of dividends received from subsidiaries;

•

loss of the services of any of our executive officers without suitable replacements being recruited in a reasonable time frame;

•

the ability of technology to perform as anticipated; and

•

management’s response to these factors.

The words “believe”, “anticipate”, “estimate”, “project”, “should”, “plan”, “expect”, “intend”, “hope”, “will likely result” or “will continue”, and variations thereof and similar expressions, identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

ACE Limited (ACE) is the Bermuda-based holding company of the ACE Group of Companies, incorporated with limited liability under the Cayman Islands Companies Law. We created our business office in Bermuda in 1985 when we initially incorporated the Company and we continue to maintain our corporate headquarters in Bermuda. Through our various operating subsidiaries, we provide a broad range of insurance and reinsurance products to businesses and individuals worldwide through operations in more than 140 countries. Our long-term business strategy focuses on sustained growth in book value achieved through a combination of underwriting and investment income. By doing so, we provide value to our clients and shareholders through the utilization of our substantial capital base in the insurance and reinsurance markets.

As an insurance and reinsurance company, we generate gross revenues from two principal sources, premiums which are usually paid in advance of loss payments, and dividends and interest income earned on invested assets. Cash flow is generated from premiums collected and investment income received less paid losses and loss expenses.

Invested assets are generally held in liquid, investment grade fixed income securities of relatively short duration. We also invest a small portion of our assets in less liquid or higher risk assets in an attempt to achieve higher risk-adjusted returns. Claims payments in any short-term period are highly unpredictable due to the random nature of loss events and the timing of claims awards or settlements. The value of investments held to pay future claims is subject to market forces such as the level of interest rates, stock market volatility and credit events such as corporate defaults. The actual cost of claims is also volatile based on loss trends, inflation rates, court awards and catastrophes. We believe that our cash balances, our highly liquid investments, credit facilities and reinsurance protection provide sufficient liquidity to meet any unforeseen claim demands that might occur in the year ahead.

The insurance industry is highly competitive with many companies offering similar coverage. The rates, terms and conditions related to the products we offer have historically changed depending on the timing of the insurance cycle. During periods of excess underwriting capacity, as defined by availability of capital, competition can result in lower pricing and less favorable terms and conditions. During periods of reduced underwriting capacity, pricing and terms and conditions are generally more favorable. For the quarter ended March 31, 2005, we have observed continued weakness in rates and while terms and conditions were generally favorable, they have begun to relax. As a result, our net premiums written were stable overall and declined in several of our businesses – a reflection of our underwriting discipline.

We are actively following developments on possible legislation to move all U.S. asbestos bodily injury claims to a federal trust for compensation in accordance with an established set of medical criteria and claim values. The trust would be funded by asbestos defendants and their insurers. The current bill, as it stands, requires a number of changes in order to win our support and we are working to get those accepted in the next draft of the bill.

Insurance Industry Investigations and Related Matters

On October 14, 2004, the New York Attorney General (NYAG) filed a civil suit against Marsh & McLennan Companies Inc. (Marsh), alleging that certain Marsh business practices were fraudulent and violated antitrust and securities laws. ACE was not named as a defendant in the suit, although ACE was named as one of four insurance companies whose employees participated in the practices in question. There can be no assurance that ACE will not be named in future actions brought by the NYAG or any other state attorneys general. In addition, an underwriter who is no longer employed by ACE has pleaded guilty to a misdemeanor based on these practices. ACE is cooperating and will continue to cooperate with the attorneys general.

ACE, its subsidiaries and affiliates have received numerous subpoenas, interrogatories, and civil investigative demands in connection with the pending investigations of insurance industry practices. These inquiries have been issued by a number of attorneys general, state departments of insurance, and state and federal regulatory authorities, including the NYAG, the Pennsylvania Department of Insurance and the Securities and Exchange Commission. These inquiries seek information concerning underwriting practices and non-traditional or loss mitigation insurance products. ACE is cooperating and will continue to cooperate with such inquiries.

ACE is conducting its own internal investigation that encompasses the subjects raised by the NYAG, the other state attorneys general and the SEC. It is being conducted by a team from the firm of Debevoise & Plimpton LLP. The team is headed by former United States Attorney Mary Jo White and operates under the direction of the Audit Committee of the Board of Directors. The Audit Committee of the Board of Directors has retained Cleary Gottlieb Steen & Hamilton, special outside counsel, to advise it in connection with these matters. We have terminated three employees, one of which has pleaded guilty to a misdemeanor, and have suspended two other employees as a result of our internal investigation. ACE’s internal investigation pertaining to underwriting practices is essentially complete. The investigation pertaining to non-traditional or loss mitigation insurance products is ongoing.

ACE, ACE INA Holdings, Inc. and ACE USA have been named in the following 13 federal putative nationwide class actions brought by insurance policyholders. Bayou Steel Corporation v. ACE INA Holdings, et al. (Case No. 04 CV 5391 E.D. Pa) (filed November 18, 2004); Eagle Creek, Inc. v. ACE INA Holdings, et al. (Case No. 04 CV 5255; E.D. Pa.) (filed November 10, 2004); Stephen Lewis vs. Marsh & McLennan Companies, Inc., et al. (Case No. 04 CV 7847; N.D. Ill.) (filed December 6, 2004); Opticare Health Systems, Inc. v. Marsh & McLennan Companies, Inc., et al. (Case No. 04 CV 06954; S.D.N.Y.) (filed October 19, 2004); Diane Preuss v. Marsh & McLennan Companies, et al. (Case No. 04 CV 78553; N.D. Ill.) (filed December 6, 2004); Redwood Oil Company v. Marsh & McLennan Companies, Inc. (Case No. 05 C 0390; N.D. Ill.) (filed January 21, 2005, dismissed voluntarily by plaintiff); Shell Vacations LLC v. Marsh & McLennan Companies, Inc., et al. (Case No. 05 C 0270; N.D. Ill.) (filed January 14, 2005); Edward Macuish v. Marsh & McLennan Companies, Inc., et al. (Case No. 2005 CV 00440; N.D. Ill.) (filed January 25, 2005); David Boros v. Marsh & McLennan Companies, Inc., et al. (Case No. C050543EDL; N.D. Calf.) (filed February 4, 2005), and Robert Mulcahy v. Arthur J. Gallagher & Co., et al. (Case No. 2005 CV 01064; D. N.J.) (filed February 23, 2005); Golden Gate Bridge, Highway and Transportation District vs. Marsh & McLennan Companies, Inc., et. al. (Case No. 05-1214, D. N.J.) filed February 23, 2005); The Prococcianti Group vs. Marsh & McLennan Companies, Inc., et. al. (Case No. 05-1368, D. N.J.) (filed March 7, 2005); Palm Tree Computers Systems, Inc. et al. v. ACE USA et al. (Case No. 6:05-cv-418-ACC-JGG) (filed February 16, 2005) (Case originally filed in the Eighteenth Judicial Circuit in and for Seminole County, Florida. AIG removed case. Motion to remand pending). In each of these cases, the plaintiff has sued a number of other insurance entities in addition to the ACE entities.

All of these suits seek compensatory damages without specifying an amount. As a result, ACE cannot at this time estimate its potential costs related to these legal matters and accordingly no liability for compensatory damages has been established in the Consolidated Financial Statements. The quarter ended March 31, 2005, includes approximately $30 million of investigation related legal expenses. To date, since the investigation has started, we have paid and accrued over $40 million for legal related fees. In the opinion of ACE’s management, ACE’s ultimate liability for these matters is not likely to have a material adverse effect on ACE’s consolidated financial condition, although it is possible that the effect could be material to ACE’s consolidated results of operations for an individual reporting period.

Critical Accounting Estimates

Our Consolidated Financial Statements include amounts that, either by their nature or due to requirements of accounting principles generally accepted in the U.S. (GAAP), are determined using best estimates and assumptions. While we believe that

the amounts included in our Consolidated Financial Statements reflect our best judgment, actual amounts could ultimately materially differ from those currently presented in our Consolidated Financial Statements. We believe the items that require the most subjective and complex estimates are:

•

unpaid losses and loss expense reserves, including asbestos reserves;

•

reinsurance recoverable, including our bad debt provision;

•

impairments to the carrying value of our investment portfolio;

•

the valuation of deferred tax assets;

•

the fair value of certain derivatives;

•

the valuation of goodwill; and

•

assessment of risk transfer for certain structured insurance and reinsurance contracts.

We believe our accounting policies for these items are of critical importance to our Consolidated Financial Statements. More information regarding our critical accounting estimates is included in the section entitled “Critical Accounting Estimates” in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2004.

Sale of Financial and Mortgage Guaranty Business through Assured Guaranty Ltd.

On April 28, 2004, we sold 65.3 percent of our financial and mortgage guaranty reinsurance and insurance businesses through the initial public offering (IPO) of 49 million common shares of Assured Guaranty Ltd. (Assured Guaranty). Subsequent to the completion of the IPO, we beneficially own 26 million common shares or 34.7 percent of Assured Guaranty’s outstanding common shares and, accordingly, no longer consolidate our interest in the Assured Guaranty companies. We account for our retained interest under the equity method of accounting and reflect the value of our investment in “Investments in partially-owned insurance companies” within our consolidated balance sheet and the proportionate share of earnings reflected in “Other (income) expense” within our consolidated statement of operations.

Results of Operations – Three Months Ended March 31, 2005 and 2004

The discussions that follow include tables, which show both our consolidated and segment operating results for the three months ended March 31, 2005 and 2004. In presenting our operating results, we have discussed our performance with reference to underwriting results, which is a non-GAAP measure. We consider this measure, which may be defined differently by other companies, to be important in understanding our overall results of operations. Underwriting results are calculated by subtracting losses and loss expenses, life and annuity benefits, policy acquisition costs and administrative expenses from net premiums earned. We use underwriting results and operating ratios to monitor the results of our operations without the impact of certain factors, including investment income, other income and expenses, interest and income tax expense and net realized gains (losses). We believe the use of these measures enhance the understanding of our results of operations by highlighting the underlying profitability of our insurance business. Underwriting results should not be viewed as a substitute for measures determined in accordance with GAAP.

Consolidated Operating Results


	Three Months Ended March 31
	2005			2004
	(in millions of U.S. dollars)
Net premiums written	$	3,365		$	3,238
Net premiums earned		2,876			2,600
Net investment income		284			238
Net realized gains (losses)		(4	)		57

Total revenues		3,156			2,895

Losses and loss expenses		1,786			1,542
Life and annuity benefits		35			42
Policy acquisition costs		388			365
Administrative expenses		356			315
Interest expense		42			44
Other (income) expense		(4	)		17

Total expenses	$	2,603		$	2,325

Income before income tax		553			570
Income tax expense		120			123

Net income	$	433		$	447

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

The following table provides a consolidated breakdown of net premiums earned by line of business for the periods indicated.


	Three Months Ended March 31
	2005		% of total		2004		% of Total
	(in millions of U.S. dollars)				(in millions of U.S. dollars)
Property and all Other	$	873	30	%	$	785	30	%
Casualty		1,556	54	%		1,330	51	%
Personal Accident (A&H)		299	11	%		255	10	%

Total P&C		2,728	95	%		2,370	91	%
Global Re – life		58	2	%		51	2	%
Financial Services		90	3	%		179	7	%

Net premiums earned	$	2,876	100	%	$	2,600	100	%

Net premiums earned reflect the portion of net premiums written that were recorded as revenues for the period as the exposure period expires. Net premiums earned in our P&C business increased 15 percent (14 percent, adjusting for foreign exchange) in the quarter ended March 31, 2005, compared with the same quarter of 2004. Our Financial Services business reported a decrease in net premiums earned of 50 percent in the quarter ended March 31, 2005, compared with the same quarter of 2004. The change in net premiums earned for P&C business is consistent with the development in net premiums written. For our Financial Services segment, the decrease is primarily related to the sale of Assured Guaranty – the quarter ended March 31, 2004, included $87 million of net premiums earned from financial guaranty business prior to the IPO.

Net investment income increased 19 percent in the quarter ended March 31, 2005, compared with the same quarter of 2004. The increase in net investment income was primarily due to positive operating cash flows, which have resulted in a higher overall average invested asset base.

In evaluating our P&C and Financial Services businesses we use the combined ratio, the loss and loss expense ratio, the policy acquisition cost ratio and the administrative expense ratio. We calculate these ratios by dividing the respective expense amounts by net premiums earned. We do not calculate these ratios for the life reinsurance business as we do not use these measures to monitor or manage that business. The combined ratio is determined by adding the loss and loss expense ratio, the policy acquisition cost ratio and the administrative expense ratio. A combined ratio under 100 percent indicates underwriting income, and a combined ratio exceeding 100 percent indicates underwriting losses.

The following table shows our consolidated loss and loss expense ratio, policy acquisition ratio, administrative expense ratio and combined ratio for the periods indicated.


	Three Months Ended March 31
	2005		2004
Loss and loss expense ratio	63.4	%	60.5	%
Policy acquisition cost ratio	13.6	%	14.1	%
Administrative expense ratio	12.6	%	12.3	%
Combined ratio	89.6	%	86.9	%

Our loss and loss expense ratio increased 2.9 percentage points in the quarter ended March 31, 2005, compared with the same quarter of 2004. This increase was primarily due to a higher loss and loss expense ratio in our Financial Services segment and, to a lesser extent, net adverse prior period development. The following table shows the impact of prior period development on our loss and loss expense ratio for the periods indicated.


	Three Months Ended March 31
	2005		2004
Loss and loss expense ratio, as reported	63.4	%	60.5	%
Catastrophe losses	(0.1	)%	—
Prior period development	(1.1	)%	0.3	%

Loss and loss expense ratio, adjusted	62.2	%	60.8	%

We recorded $3 million in catastrophe losses, related to European windstorms, in the quarter ended March 31, 2005, compared with nil in the same quarter of 2004. Our loss and loss expense ratio is also impacted by prior period development. Prior period development arises from changes to loss estimates recognized in the current year that relate to loss reserves first reported in previous calendar years and excludes the effect of losses from the development of earned premium from previous accident years. For purposes of analysis and disclosure, management views prior period development to be changes in the nominal value of loss estimates from period to period and excludes changes in loss estimates that do not arise from the emergence of claims, such as those related to uncollectible reinsurance, interest, or foreign currency. Accordingly, specific items excluded from prior period development include the following: gains/losses related to foreign currency translation that affect both the valuation of unpaid losses and loss expenses and losses incurred; losses recognized from the early termination or commutation of reinsurance agreements that principally relate to the time value of money; changes in the value of reinsurance business assumed reflected in losses incurred but principally related to the time value of money and losses that arise from changes in estimates of earned premiums from prior accident years. We experienced net adverse prior period development of $30 million for the quarter ended March 31, 2005, compared with net favorable prior period development of $8 million in the same quarter of 2004. Our Segment Operating Results, below, contain further detail of the prior period development recognized in our Consolidated Financial Statements.

Policy acquisition costs include commissions, premium taxes, underwriting and other costs that vary with, and are primarily related to, the production of premium. Administrative expenses include all other operating costs. Our policy acquisition cost ratio decreased in the quarter ended March 31, 2005, compared with the same quarter of 2004, primarily due to improvements in the Insurance – North American segment. Our administrative expense ratio increased primarily due to approximately $30 million of legal costs in connection with the investigations by the various attorneys general and related matters.

Interest expense decreased in the quarter ended March 31, 2005, compared with the same quarter of 2004. This was primarily due to the $75 million of Capital Re LLC preferred securities which were outstanding during the quarter ended March 31, 2004, and redeemed on July 12, 2004.

Segment Operating Results – Three Months Ended March 31, 2005 and 2004

Our business consists of four segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Financial Services. Our Annual Report on Form 10-K for the year ended December 31, 2004, includes more information on each of our segments in the section entitled, “Segment Information”, under Item 1.

Insurance - North American

The Insurance – North American segment comprises our P&C insurance operations in the U.S., Bermuda and Canada. This segment writes a variety of insurance products including property, casualty (general liability, workers’ compensation, risk management, professional lines (directors and officers (D&O) and errors and omissions coverages (E&O)), marine, program business, aerospace, consumer-oriented products, specialty lines and accident and health (A&H) - principally being personal accident.


	Three Months Ended March 31
	2005			2004
	(in millions of U.S. dollars)
Net premiums written	$	1,425		$	1,212
Net premiums earned		1,283			1,007
Losses and loss expenses		888			696
Policy acquisition costs		117			101
Administrative expenses		132			103

Underwriting income	$	146		$	107

Net investment income		128			104
Net realized gains (losses)		(4	)		52
Interest expense		5			5
Other expense		—			3
Income tax expense		73			62

Net income	$	192		$	193

Loss and loss expense ratio		69.2	%		69.1	%
Policy acquisition cost ratio		9.1	%		10.0	%
Administrative expense ratio		10.3	%		10.3	%
Combined ratio		88.6	%		89.4	%

Net premiums written for the Insurance – North American segment increased 18 percent in the quarter ended March 31, 2005, compared with the same quarter in 2004. The increase was primarily related to new business in our risk management unit and growth emanating from recently established casualty units. Additionally, Insurance – North American’s retention ratio increased to 66 percent for the quarter ended March 31, 2005, compared with 64 percent for the same quarter of 2004.

The following tables provide an entity/divisional breakdown of Insurance – North American’s net premiums earned for the periods indicated.


	Three Months Ended March 31
	2005		% of total		2004	% of total
	(in millions of U.S. dollars)				(in millions of U.S. dollars)
Property and all Other	$	318	25	%	277	28	%
Casualty		918	71	%	688	68	%
Personal Accident (A&H)		47	4	%	42	4	%

Net premiums earned	$	1,283	100	%	1,007	100	%


	Three Months Ended March 31
	2005		2004
	(in millions of U.S. dollars)
ACE USA	$	846	$	650
ACE Westchester Specialty		332		254
ACE Bermuda		105		103

Net premiums earned	$	1,283	$	1,007

ACE USA, which includes ACE operations in Canada, provides a broad array of products and services to corporate and consumer clients throughout the U.S. and Canada, through licensed insurance companies. Distribution channels include retail brokers, agents, managing general agents, and managing general underwriters. Net premiums earned for ACE USA increased 30 percent in the quarter ended March 31, 2005, compared with the same quarter in 2004. Consistent with net premiums written, the increase was related to our risk management unit which reported growth in demand for its custom coverage

solutions for large companies and national accounts and construction wrap-up programs. Additionally, ACE USA benefited from continued growth in new business units offering workers’ compensation and medical liability coverage. The current quarter’s growth in net premiums earned has outpaced the growth of net premiums written, reflecting the launch of new products first offered in late 2003, expanded distribution and the more favorable rate environment experienced in 2004 and 2003.

ACE Westchester Specialty specializes in the wholesale distribution of excess and surplus lines property, inland marine and casualty coverages and products. ACE Westchester Specialty also provides coverage for agriculture business and specialty programs through its Program division. ACE Westchester Specialty’s net premiums earned for the quarter ended March 31, 2005, increased 31 percent compared with the same quarter of 2004. This increase primarily reflects growth in agriculture (crop) and casualty business.

ACE Bermuda, which specializes in providing professional lines and excess liability coverage, reported an increase in net premiums earned of two percent in the quarter ended March 31, 2005, compared with the same quarter of 2004. This increase is primarily due to modest prior period growth in net premiums written on excess liability business, partially offset by a decrease in professional lines business due to continued competition between carriers, which has put downward pressure on rates.

Insurance – North American’s loss and loss expense ratio increased 0.1 percentage points in the quarter ended March 31, 2005, compared with the same quarter of 2004. The following table shows the impact of the prior period development on our loss and loss expense ratio for the periods indicated.


	Three Months Ended March 31
	2005		2004
Loss and loss expense ratio, as reported	69.2	%	69.1	%
Adverse prior period development	(1.7	)%	(1.5	)%

Loss and loss expense ratio, adjusted	67.5	%	67.6	%

The loss and loss expense ratio for the quarter ended March 31, 2005, was negatively impacted by net adverse prior period development of $22 million, representing 0.26 percent of the segment’s net unpaid loss and loss expense reserves at January 1, 2005. This compares with net adverse prior period development of $15 million for the same quarter of 2004, representing 0.23 percent of the segment’s net unpaid loss and loss expense reserves at January 1, 2004. The prior period development for the quarter ended March 31, 2005, was the net result of several underlying favorable and adverse movements, the most significant of which was $19 million of adverse prior period development impacting the 2002 and 2001 accident years relating to changes in the legal and claim positions on an account that provided financial guarantee insurance to a now bankrupt facility that ran leasing pools. The prior period development for the quarter ended March 31, 2004, was the net result of several underlying favorable and adverse movements. The adverse development related primarily to excess liability, aviation and auto residual value business, partially offset by favorable development on property, satellite and political risk business.

Insurance – North American’s policy acquisition ratio decreased in the quarter ended March 31, 2005, compared with the same quarter of 2004, primarily due to lower overall commission expenses resulting from a shift in our business mix whereby higher-commission professional lines represented a lower proportion of our total production. Administrative expenses increased primarily due to the increased costs associated with servicing business growth and recently established units at ACE USA and ACE Westchester Specialty, partially offset by reduced expenses at ACE Bermuda.

Insurance - Overseas General

The Insurance – Overseas General segment comprises ACE International, our network of indigenous insurance operations, and the insurance operations of ACE Global Markets, our excess and surplus lines writer (which underwrites P&C insurance through Lloyd’s Syndicate 2488 and ACE European Group Limited (formerly known as ACE INA UK Limited)). The Insurance – Overseas General segment writes a variety of insurance products including property, casualty consisting of general liability, professional lines (D&O and E&O), marine, energy, aviation, political risk, consumer-oriented products and A&H – principally being personal accident.


	Three Months Ended March 31
	2005			2004
	(in millions of U.S. dollars)
Net premiums written	$	1,194		$	1,198
Net premiums earned		1,089			1,034
Losses and loss expenses		611			601
Policy acquisition costs		192			184
Administrative expenses		144			138

Underwriting income	$	142		$	111

Net investment income		74			48
Net realized gains		18			24
Other expense		6			3
Income tax expense		53			51

Net income	$	175		$	129

Loss and loss expense ratio		56.1	%		58.1	%
Policy acquisition cost ratio		17.6	%		17.9	%
Administrative expense ratio		13.3	%		13.3	%
Combined ratio		87.0	%		89.3	%

Net premiums written were stable (decreased four percent adjusting for foreign exchange) in the quarter ended March 31, 2005, compared with the same quarter of 2004. Decreases in production were offset by the weakening of the U.S. dollar against the British pound sterling and the Euro.

ACE International’s P&C operations are organized geographically and along product lines. Property insurance products include traditional commercial fire coverage as well as energy industry-related coverages. Principal casualty products are commercial general liability and liability coverage for multinational organizations. Through our professional lines, we provide D&O and professional indemnity coverages for medium to large clients. The A&H insurance operations provide principally accident coverage to individuals and groups outside of U.S. insurance markets. ACE International’s net premiums written increased four percent (decreased one percent adjusting for foreign exchange) to $965 million for the quarter ended March 31, 2005, compared with $926 million for the same quarter of 2004. This increase was primarily due to the weakening of the U.S. dollar, as strong A&H growth was offset by lower P&C writings. ACE Europe, which accounted for approximately two-thirds of ACE International’s net premiums written for the quarter ended March 31, 2005, reported a decline in production, particularly on U.K. P&C business, as increased competitive conditions have resulted in lower rates and a deterioration of terms. ACE Latin American experienced robust demand for its A&H product offerings, particularly in Mexico and Brazil.

ACE Global Markets’ main lines of business include aviation, property, energy, professional lines, marine, political risk and A&H. ACE Global Markets’ net premiums written decreased 16 percent (17 percent adjusting for foreign exchange) to $229 million in the quarter ended March 31, 2005, compared with $272 million in the same quarter of 2004. This decrease was due in part to rate reductions within the professional lines.

The following two tables provide a line of business and entity/divisional breakdown of Insurance – Overseas General’s net premiums earned for the periods indicated.


	Three Months Ended March 31
	2005		% of total		2004		% of total
	(in millions of U.S. dollars)				(in millions of U.S. dollars)
Property and all Other	$	402	37	%	$	338	32	%
Casualty		435	40	%		483	47	%
Personal Accident (A&H)		252	23	%		213	21	%

Net premiums earned	$	1,089	100	%	$	1,034	100	%


	Three Months Ended March 31
	2005		2004
	(in millions of U.S. dollars)
ACE Europe	$	476	$	463
ACE Asia Pacific		134		115
ACE Far East		99		96
ACE Latin America		102		80

ACE International		811		754
ACE Global Markets		278		280

Net premiums earned	$	1,089	$	1,034

Insurance – Overseas General increased net premiums earned five percent in the quarter ended March 31, 2005, compared with the same quarter of 2004 (two percent adjusting for foreign exchange). The increase was primarily due to growth in property and A&H business at ACE International and aviation writings at ACE Global Markets, partially offset by decreases in casualty business across the segment, reflecting the decline in rates, late in 2004.

Insurance – Overseas General’s loss and loss expense ratio decreased two percentage points in the quarter ended March 31, 2005, compared with the same quarter of 2004, primarily due to favorable current accident year experience at ACE Europe and to a lesser extent, changes in the mix of business—mainly the increase in A&H, which typically experiences lower loss ratios than other types of business. The following table shows the impact of prior period development on our loss and loss expense ratio for the periods indicated.


	Three Months Ended March 31
	2005		2004
Loss and loss expense ratio, as reported	56.1	%	58.1	%
Prior period development	(0.6	)%	0.8	%

Loss and loss expense ratio, adjusted	55.5	%	58.9	%

The loss and loss expense ratio for the quarter ended March 31, 2005, was negatively impacted by net adverse prior period development of $7 million, representing 0.14 percent of the segment’s net unpaid loss and loss expense reserves at January 1, 2005. This compares with net favorable prior period development of $8 million for the same quarter of 2004, representing 0.21 percent of the segment’s net unpaid loss and loss expense reserves at January 1, 2004. The net prior period development for the quarter ended March 31, 2005, was the net result of several underlying favorable and adverse movements, the most significant of which were:

•

Favorable development of $35 million on short-tail property, tech and energy lines and $15 million on short-tail European A&H lines (personal accident) identified as part of our standard quarterly reserving process arising from the favorable emergence of actual claims relative to expectations used to establish the reserves, principally related to the 2004 and 2003 accident years.

•

Adverse development of $41 million on ACE’s share of a consortium that reinsured U.S. workers compensation business across the 1995-1999 underwriting years. The adverse development arose following the completion in the quarter of a financial and actuarial review of updated bordereaux information received from the client.

•

Adverse development of $7 million on discontinued lines arising from re-evaluation of ceded reinsurance on an individual energy claim on the 2000 accident year.

The net prior period development for the quarter ended March 31, 2004, was the net result of several underlying favorable and adverse movements. The adverse prior period development related primarily to significant adverse development from U.S. International casualty business and to a lesser extent in other casualty lines in the U.K. and Europe as well as marine and aviation. This was offset by significant favorable prior period development on property catastrophe and casualty lines and to a lesser extent on financial lines and fire, technical and energy lines.

The policy acquisition cost ratio for Insurance – Overseas General improved in the quarter ended March 31, 2005, compared with the same quarter of 2004, which was negatively impacted by a one-time reinstatement cost at ACE Global Markets. Insurance – Overseas General administrative expenses increased four percent in the quarter ended March 31, 2005, primarily due to the depreciation of the U.S. dollar, and to a lesser extent increased headcount at ACE Europe.

Global Reinsurance

The Global Reinsurance segment comprises the operations of the ACE Tempest Re Group – ACE Tempest Re Bermuda, ACE Tempest Re USA, ACE Tempest Re Europe, and ACE Tempest Life Re (ACE Life Re). ACE Life Re is our Bermuda-based life reinsurance operation and is addressed separately.

Property and Casualty Reinsurance


	Three Months Ended March 31
	2005			2004
	(in millions of U.S. dollars)
Net premiums written	$	527		$	569
Net premiums earned		356			329
Losses and loss expenses		205			159
Policy acquisition costs		73			64
Administrative expenses		15			19

Underwriting income	$	63		$	87

Net investment income		40			27
Net realized gains (losses)		(6	)		15
Other (income) expense		1			—
Income tax expense		9			3

Net income	$	87		$	126

Loss and loss expense ratio		57.6	%		48.5	%
Policy acquisition cost ratio		20.5	%		19.4	%
Administrative expense ratio		4.3	%		5.6	%
Combined ratio		82.4	%		73.5	%

Global Reinsurance’s net premiums written decreased seven percent in the quarter ended March 31, 2005, compared with the same quarter of 2004. This decrease was primarily related to continued weakness in the rate environment for property, and property catastrophe lines and, in Europe, softening rates on casualty business.

The following two tables provide a line of business and entity/divisional breakdown of Global Reinsurance’s net premiums earned for the periods indicated.


	Three Months Ended March 31
	2005		% of total		2004		% of total
	(in millions of U.S. dollars)				(in millions of U.S. dollars)
Property and all Other	$	86	24	%	$	86	26	%
Casualty		203	57	%		159	48	%
Property Catastrophe		67	19	%		84	26	%

Net premiums earned	$	356	100	%	$	329	100	%


	Three Months Ended March 31
	2005		2004
	(in millions of U.S. dollars)
ACE Tempest Re Europe	$	76	$	75
ACE Tempest Re USA		212		169
ACE Tempest Re Bermuda		68		85

Net premiums earned	$	356	$	329

Net premiums earned increased eight percent in the quarter ended March 31, 2005, compared with the same quarter of 2004. The increase was primarily driven by strong production written in prior periods on non-catastrophe P&C business. Non-catastrophe P&C business has represented a growing portion of Global Reinsurance’s net premiums written over the last three years, and in general, has experienced more favorable market conditions over this time period compared with catastrophe lines.

ACE Tempest Re USA, which focuses on writing property per risk and casualty reinsurance, reported a 25 percent increase in net premiums earned in the quarter ended March 31, 2005, compared with the same quarter of 2004, primarily due to new business and higher renewal rates, mainly on policies written in 2004. ACE Tempest Re Europe, which writes most lines of P&C with an orientation towards specialty and short-tail products, reported stable net premiums earned in the quarter ended March 31, 2005, as declines in rates on property catastrophe business, were offset by growth in net premiums earned on casualty business written in 2004. ACE Tempest Re Bermuda, which principally provides property catastrophe reinsurance globally to insurers of commercial and personal property, reported a 20 percent decrease in net premiums earned in the quarter ended March 31, 2005, compared with the same quarter of 2004. A market-wide decline in rates on property catastrophe business, combined with the commitment to maintaining our underwriting standards has resulted in downward pressure on premium production for ACE Tempest Re Bermuda.

The loss and loss expense ratio increased 9.1 percentage points in the quarter ended March 31, 2005, compared with the same quarter of 2004. The prior year quarter benefited from net favorable prior period development, and a lack of catastrophe losses, while changes in the mix of business has had the effect of increasing the loss and loss expense ratio for the current quarter. The following table shows the impact of catastrophe losses and prior period development on our loss and loss expense ratio for the periods indicated.


	Three Months Ended March 31
	2005		2004
Loss and loss expense ratio, as reported	57.6	%	48.5	%
Catastrophe losses	(0.8	)%	—
Favorable prior period development	—		3.9	%

Loss and loss expense ratio, adjusted	56.8	%	52.4	%

Global Reinsurance recorded $3 million in catastrophe losses, related to European windstorms, in the quarter ended March 31, 2005, compared with nil in the same quarter of 2004. The loss and loss expense ratio for the quarter ended March 31, 2005, was not impacted by net prior period development. This compares with net favorable prior period development of $13 million for the same quarter of 2004, representing 1.58 percent of the segment’s net unpaid loss and loss expense reserves at January 1,

2004. The net prior period development for the quarter ended March 31, 2005, was the net result of several offsetting favorable and adverse movements on reserves established following catastrophe events for property and property catastrophe lines of business. These movements were identified as part of our standard quarterly reserving process and included $17 million of adverse prior period development on the third quarter 2004 storms principally related to increased loss estimates on certain previously reported claims and $10 million of miscellaneous favorable development on accident years 2003 and prior. The net prior period development for the quarter ended March 31, 2004, was the net result of favorable development on reserves established following catastrophe events for property and property catastrophe lines of business. The remaining increase in the loss and loss expense ratio was primarily related to the shift in mix of business that has resulted from growth in non-catastrophe P&C business at ACE Tempest Re USA and ACE Tempest Re Europe. Non-catastrophe P&C business typically exhibits higher loss ratios than property catastrophe business (except for periods with high catastrophe losses).

Global Reinsurance’s policy acquisition cost ratio increased in the quarter ended March 31, 2005, compared with the same quarter of 2004, due to the higher proportion of business generated from ACE Tempest Re USA, relative to ACE Tempest Re Europe and ACE Tempest Re Bermuda. ACE Tempest Re USA’s business is written more on a pro-rata basis (versus excess-of-loss), which incurs higher acquisition costs due to the higher level of ceding commissions paid. Administrative expenses decreased, primarily due to a reduction of expenses associated with Sarbanes-Oxley compliance.

Life Reinsurance

ACE Life Re principally provides reinsurance coverage to other life insurance companies, focusing on guarantees included in certain fixed and variable annuity products. The reinsurance transactions ACE Life Re enters into typically help clients (ceding companies) to manage mortality, morbidity, lapse and/or capital market risks embedded in their books of business. Sophisticated stochastic modeling techniques are used to price reinsurance products based on robust actuarial and investment models which incorporate a number of factors. These factors include assumptions for mortality, morbidity, expenses, demographics, persistency, investment returns, macroeconomic factors such as inflation and taxation and certain regulatory factors such as reserve and surplus requirements. ACE Life Re’s reinsurance treaties are non-proportional in nature, all of which incorporate some form of annual claim limit, and many of which include an aggregate claim limit as well as either an annual or aggregate claim deductible. ACE Life Re also uses modeling software to monitor, measure, and manage the aggregate exposure which is bound by limits set by senior management.

We assess the performance of our life reinsurance business based on life underwriting income which includes net investment income.


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

Life underwriting income		26			11
Net realized losses		(16	)		(25	)

Net income (loss)	$	10		$	(14	)

Life underwriting income improved in the quarter ended March 31, 2005, compared with the same quarter of 2004, primarily due to the increase in net premiums earned, combined with the decrease in life and annuity benefits. Net premiums earned increased due to higher variable annuity production, partially offset by the continued decrease in production of group long-term disability business, which was discontinued in 2002. Life and annuity benefits declined primarily due to the decrease in group long-term disability business, which typically incurs higher benefit ratios than other types of business and also experienced a reserve strengthening in the prior year quarter. Net income increased, due to higher life underwriting income, combined with lower net realized losses in the quarter ended March 31, 2005, compared with the same quarter of 2004. The net realized losses for both periods consisted primarily of fair value adjustments on guaranteed minimum income benefits (GMIBs), due to movements in interest rates and the equity markets.

Financial Services

The Financial Services segment consists of our financial solutions business and our proportionate share of Assured Guaranty’s earnings, which is 100 percent through April 28, 2004, and 34.7 percent thereafter. The financial solutions operations provide one-off insurance and reinsurance solutions to clients with unique or complex risks, which are not adequately addressed in the traditional insurance market. Each financial solutions contract is structured to meet the needs of each client. Assured Guaranty provides credit enhancement products to the municipal finance, structured finance and mortgage markets.

Certain products (principally credit protection oriented) issued by the Financial Services segment have been determined to meet the definition of a derivative under FAS 133. For more information see the section entitled “Critical Accounting Estimates”, under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2004.

From April 29, 2004, our proportionate share of Assured Guaranty’s earnings is reflected in “Other (income) expense” in our consolidated statement of operations. The equity in net income recorded from Assured Guaranty for the quarter ended March 31, 2005 was $11 million.


	Three Months Ended March 31
	2005			2004
	(in millions of U.S. dollars)
Net premiums written	$	161		$	208
Net premiums earned		90			179
Losses and loss expenses		83			86
Policy acquisition costs		2			11
Administrative expenses		4			24

Underwriting income	$	1		$	58

Net investment income		32			53
Net realized gains		9			5
Interest expense		—			2
Other (income) expense		(11	)		11
Income tax expense		6			20

Net income	$	47		$	83

Loss and loss expense ratio		92.2	%		48.0	%
Policy acquisition cost ratio		2.2	%		5.9	%
Administrative expense ratio		4.6	%		13.7	%
Combined ratio		99.0	%		67.6	%

Financial Services reported a decrease in net premiums written of 23 percent in the quarter ended March 31, 2005, compared with the same quarter of 2004. With respect to the financial solutions business, premium volume can vary significantly from period to period and therefore premiums written in any one period are not indicative of premiums to be written in future periods. Financial Services did not write any loss portfolio transfers (LPTs) in the quarters ended March 31, 2005 and 2004.

The Financial Services segment reported a significant decrease in underwriting income in the quarter ended March 31, 2005, compared with the same quarter of 2004. The quarter ended March 31, 2004, included $44 million of underwriting income from financial guaranty business prior to the IPO, mainly driven by an especially low loss and loss expense ratio due to the settlement of one-time transactions in preparation for the IPO. In addition, the loss and loss expense ratio for the quarter ended March 31, 2005, was negatively impacted by $1 million of adverse prior period development, representing less than 0.1 percent of the segment’s net unpaid loss and loss expense reserves at January 1, 2005. This compares with $2 million of favorable prior period development for the same quarter of 2004, representing less than 0.1 percent of the segment’s net unpaid loss and loss expense reserves at January 1, 2004. The prior period development for the quarter ended March 31, 2005, was the net result of several underlying modest favorable and adverse movements. The prior period development for the quarter ended March 31, 2004, was the net result of several underlying favorable and adverse movements relating primarily to favorable prior period development on LPT business, partially offset by adverse prior period development on credit business.

Net Investment Income


	Three Months Ended March 31
	2005		2004
	(in millions of U.S. dollars)
Insurance – North American	$	128	$	104
Insurance – Overseas General		74		48
Global Reinsurance – P&C		40		27
Global Reinsurance – Life		9		8
Financial Services		32		53
Corporate and Other		1		(2	)

Net investment income	$	284	$	238

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 19 percent in the quarter ended March 31, 2005, compared with the same quarter of 2004. The increase in net investment income was primarily due to positive operating cash flows, which have resulted in a higher overall average invested asset base. Additionally, the investment portfolio’s average yield on fixed maturities increased to 4.5 percent at March 31, 2005, compared with 4.0 percent at March 31, 2004. These positive influences were partially offset by the impact from the sale of Assured Guaranty in 2004, which reduced the average invested asset base for Financial Services and resulted in an approximately 40 percent decline in net investment income for that segment.

Net Realized Gains (Losses)

Our investment strategy takes a long-term view, and our investment portfolio is actively managed to maximize total return within certain specific guidelines, designed to minimize risk. During the quarter ended March 31, 2005, we transferred securities that we have the ability and intent to hold to maturity or redemption from the available for sale classification to the held to maturity classification. The transfer was made at the fair value at the date of transfer (refer to the section entitled “Investments” for more information). Our held to maturity investment portfolio is reported at amortized cost. Our available for sale investment portfolio is reported at fair value. The effect of market movements on our available for sale investment portfolio impacts net income (through net realized gains (losses)) when securities are sold or when “other than temporary” impairments are recorded on invested assets. Additionally, net income is impacted through the reporting of changes in the fair value of derivatives, including financial futures, options, spread lock swaps, GMIB reinsurance, and credit-default swaps. Changes in unrealized appreciation and depreciation on available for sale securities, which result from the revaluation of securities held, are reported as a separate component of accumulated other comprehensive income in shareholders’ equity.

The following table presents our pre-tax net realized gains (losses) for the periods indicated:


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

Subtotal derivatives		(14	)		(24	)

Total net realized gains (losses)	$	(4	)	$	57

Subject to investment guidelines approved by our Finance and Investment Committee (relating to asset classes, credit quality, and liquidity), our investment managers generally have the ability to sell securities from our available for sale investment

portfolio when they determine that an alternative security with comparable risks is likely to provide a higher investment return, considering the realized gain or loss on sale and differential in future investment income. Often, sales of individual securities occur when investment managers conclude there are changes in the credit quality of a particular security or, for other reasons, market value is apt to deteriorate. Further, we may sell securities when we conclude it is prudent to reduce a concentration in a particular issuer or industry. Therefore, sales volume may increase in a volatile credit market in which credit spreads and thus the market value of fixed maturity investments are subject to significant changes in a short period of time. The interest rate environment will tend to have a limited effect on sales volume but extreme conditions could have an affect on the magnitude of realized gains or losses. For example, in a declining rate environment, the market value of securities increase, resulting in a greater likelihood of net realized gains and we would therefore tend to reduce the average duration of our fixed maturity investment portfolio. An increasing rate environment would tend to have the opposite effect. The effect of a high level of realized losses or gains for a particular period will tend to be offset by increases or decreases in investment income, respectively, in subsequent periods. From a liquidity perspective, our greatest risk is that we could be forced to sell a large volume of securities at a loss (i.e., in a high interest rate environment) to meet operating needs and are thus unable to reinvest proceeds to recoup such losses with future investment income (see section entitled “Liquidity and Capital Resources” for more information).

FAS 133 requires us to recognize all derivatives as either assets or liabilities on our consolidated balance sheet and measure them at fair value. We record the gains and losses resulting from the fair value measurement of derivatives in net realized gains (losses). We participate in derivative instruments in two principal ways as follows: i) to offer protection to others as the seller or writer of the derivative, such as our GMIB reinsurance contracts that are treated as derivatives for accounting purposes ; or ii) to mitigate our own risk, principally arising from our investment holdings. We do not consider either type of transaction to be speculative. In the quarters ended March 31, 2005 and 2004, we recorded net realized losses of $14 million and $24 million, respectively, on derivative transactions. For an analysis of the effect of changes in interest rates and equity indices on the fair value of derivatives and the resulting impact on our net income, refer to Item 7A. of our Annual Report on Form 10-K for the year ended December 31, 2004.

With respect to our GMIB reinsurance, we record a portion of the change in fair value in future policy benefits for life and annuity contracts, representing our best estimate of loss pay-outs related to fees or premiums earned, and a portion in net realized gains (losses), representing other changes in fair value. For the quarter ended March 31, 2005, the fair value adjustment included in net realized gains (losses), was net realized losses of $14 million, compared with $23 million in the same quarter of 2004. The change in fair value for the quarter ended March 31, 2005, was primarily related to a $21 million net realized loss from GMIB reinsurance. The changes in the fair value of GMIBs are determined using internal valuation models. Such valuations require considerable judgment and are subject to significant uncertainty. The valuation of these products is subject to fluctuations arising from, among other factors, changes in interest rates, changes in the equity markets, and changes in the allocation of the investments underlying annuitant’s account value. These models and the related assumptions are continually reviewed by management and enhanced, as appropriate, based upon improvements in modeling techniques and availability of more timely information, such as market conditions and demographics of in-force annuities.

We recorded a net realized gain of $2 million on spread lock swaps in the quarter ended March 31, 2005, compared with a net realized loss of $14 million on interest rate swaps in the same quarter of 2004. This was offset by a net realized loss of $2 million and a net realized gain of $13 million on our futures contracts in the quarters ended March 31, 2005 and 2004, respectively. The spread lock swaps and interest rate swaps are designed to reduce the negative impact of increases in interest rates on our fixed maturity portfolio. For the quarter ended March 31, 2005, we recorded a net realized gain of $2 million on our fixed income futures contracts and we recorded a net realized loss of $4 million on our S&P equity index futures contracts as the S&P 500 equity index decreased two percent during the quarter. We use foreign currency forward contracts to minimize the effect of fluctuating foreign currencies on certain non-U.S. dollar holdings in our portfolio that are not specifically matching foreign currency liabilities. These contracts are not designated as specific hedges and we record all realized and unrealized gains and losses on these contracts as net realized gains (losses) in the period in which the currency values change.

We regularly review our investment portfolio for possible impairment based on criteria including economic conditions, credit loss experience and issuer-specific developments. If there is a decline in a security’s net realizable value, we must determine whether that decline is temporary or “other than temporary”. If we believe a decline in the value of a particular investment is temporary, we record it as an unrealized depreciation in our shareholders’ equity. If we believe the decline is “other than temporary”, we write down the carrying value of the investment and record a net realized loss in our statement of operations. The decision to recognize a decline in the value of a security carried at fair value as “other than temporary” rather than temporary has no impact on our book value. Once a security is identified as having a potential “other than temporary” impairment, we determine whether or not cost will ultimately be recovered and whether we have the intent and ability to hold

the security until an expected recovery period, absent a significant change in facts that is expected to have a material adverse financial effect on the issuer.

Our net realized gains (losses) in the quarter ended March 31, 2005 included write-downs of $20 million related to fixed maturity investments and $1 million related to equity securities, as a result of conditions which caused us to conclude the decline in fair value of the investment was “other than temporary”. This compares with write-downs of $1 million related to fixed maturity investments and $1 million related to equity securities for the quarter ended March 31, 2004.

The process of determining whether a decline in value is temporary or “other than temporary” requires considerable judgment and differs depending on whether or not the security is traded on a public market as well as by type of security. We review all of our fixed maturities and equity securities for potential impairment each quarter. See our Annual Report on Form 10-K (Note 4 (f) to the Consolidated Financial Statements) for criteria we consider in assessing potential impairment.

Other Income and Expense Items


	Three Months Ended March 31
	2005			2004
	(in millions of U.S. dollars)
Equity in net income of unconsolidated entities	$	(10	)	$	(1	)
Minority interest expense		5			6
Other		1			1
Goodwill impairment		—			11

Other (income) expense	$	(4	)	$	17

Other income for the quarter ended March 31, 2005, was primarily composed of $11 million related to equity in net income of Assured Guaranty. We incurred no goodwill impairments in the quarter ended March 31, 2005, although our goodwill balance was reduced by $4 million in connection with the sale of a wholly-owned service company.

Investments

Our principal investment objective is to ensure that funds are available to meet our insurance and reinsurance obligations. Within this broad liquidity constraint, the purpose of our investment portfolio’s structure is to maximize total return subject to specifically approved guidelines of overall asset classes, credit quality, liquidity and volatility of expected returns. Our investment portfolio is invested primarily in fixed income securities with an average credit quality of AA, as rated by the independent investment rating service S&P. The portfolio is externally managed by independent, professional investment managers. The average duration of our fixed income securities, including the effect of spread lock swaps, declined to 3.1 years at March 31, 2005, compared with 3.4 years at December 31, 2004. Our “other investments” principally comprise direct investments, investments in investment funds and investments in limited partnerships.

Given the significant growth in our investment portfolio over the last several years, as well as our continued efforts to manage the diversification of the portfolio on an enterprise-wide basis, we have implemented a strategy to hold to maturity certain fixed maturity securities that are considered essential holdings in a diversified portfolio of our size. Because we have the intent to hold such securities to maturity, they have been reclassified from available for sale to held to maturity in our consolidated financial statements for the quarter ended March 31, 2005. A transfer of such securities with a carrying value (fair value) of $3.2 billion was made during the first quarter of 2005. The unrealized appreciation (depreciation) at the date of the transfer continues to be reported in a separate component of stockholders’ equity and is to be amortized over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of any premium or discount. The unrealized appreciation on the date of transfer was $16 million.

Our debt securities include fixed-maturity securities, which are classified as either held to maturity or available for sale. Securities classified as held to maturity are securities that we have the ability and intent to hold to maturity or redemption and are carried at amortized cost. All other debt securities and our equity securities are classified as available for sale and are carried at fair value. The net unrealized appreciation (depreciation) on securities available for sale, plus the unamortized unrealized appreciation (depreciation) on debt securities transferred to the held to maturity portfolio, less related deferred income taxes, are included in accumulated other comprehensive income.

The following table shows the fair value and cost/amortized cost of our invested assets at March 31, 2005 and December 31, 2004.


	March 31, 2005				December 31, 2004
	Fair Value		Cost/ Amortized Cost		Fair Value		Cost/ Amortized Cost
	(in millions of U.S. dollars)
Fixed maturities available for sale	$	20,188	$	20,066	$	22,741	$	22,271
Fixed maturities held to maturity		3,207		3,211		—		—
Short-term investments		2,135		2,135		2,140		2,140

		25,530		25,412		24,881		24,411
Equity securities		1,351		1,170		1,265		1,061
Other investments		521		463		504		450

Total investments	$	27,402	$	27,045	$	26,650	$	25,922

We also gain exposure to equity markets through the use of derivative instruments. The combined equity exposure through both our equity portfolio and derivative instruments was valued at $1.5 billion at March 31, 2005, compared with $1.4 billion at December 31, 2004. The increase of $752 million in the fair value of total investments is due to positive cash flows from operations during the quarter ended March 31, 2005. The increase in total investments was partially offset by unrealized depreciation of $339 million, mainly on fixed maturities, due to the increase in U.S. short-term interest rates.

The following tables show the market value of our fixed maturities and short-term investments at March 31, 2005 and December 31, 2004. The first table lists elements according to type and the second according to S&P credit rating.


	March 31, 2005				December 31, 2004
	Market Value		Percentage of Total		Market Value		Percentage of Total
	(in millions of U.S. dollars)				(in millions of U.S. dollars)
Treasury	$	1,713	7	%	$	1,536	6	%
Agency		1,495	6	%		1,527	6	%
Corporate		7,532	30	%		7,530	30	%
Mortgage-backed securities		5,482	21	%		5,010	20	%
Asset-backed securities		1,209	5	%		1,217	5	%
Municipal		559	2	%		566	2	%
Non-US		5,405	21	%		5,376	22	%
Cash and cash equivalents		2,135	8	%		2,119	9	%

Total	$	25,530	100	%	$	24,881	100	%


	Market Value		Percentage of Total		Market Value		Percentage of Total
	(in millions of U.S. dollars)				(in millions of U.S. dollars)
AAA	$	14,655	57	%	$	13,800	55	%
AA		2,459	10	%		2,618	11	%
A		4,392	17	%		4,336	17	%
BBB		2,176	9	%		2,269	9	%
BB		817	3	%		774	3	%
B		982	4	%		1,041	4	%
Other		49	—			43	1	%

Total	$	25,530	100	%	$	24,881	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, 2005, our fixed income investment portfolio included below-investment grade and non-rated securities which, in total, comprised approximately seven percent of our fixed income portfolio. We define a security as being below-investment grade if it has an S&P credit rating of BB or less. Our below investment-grade and non-rated portfolio includes approximately 750 issues, with the top 15 holdings making up approximately 11 percent of the $1.8 billion balance at March 31, 2005. The highest single exposure in this portfolio of securities is $19 million. Below-investment grade securities have different characteristics than investment grade corporate debt securities. Risk of loss from default by the borrower is greater with below-investment grade securities. Below-investment grade securities are generally unsecured and are often subordinated to other creditors of the issuer. Also, issuers of below-investment grade securities usually have higher levels of debt and are more sensitive to adverse economic conditions such as recession or increasing interest rates, than are investment grade issuers. We reduce the overall risk in the below-investment grade portfolio, as in all investments, through careful credit analysis, strict investment policy guidelines, and diversification by issuer and/or guarantor as well as by industry.

Unpaid Losses and Loss Expenses

We establish reserves for the estimated unpaid ultimate liability for losses and loss expenses under the terms of our policies and agreements. These reserves take into account estimates both for claims that have been reported and for IBNR, and include estimates of expenses associated with processing and settling claims. The table below presents a roll forward of our unpaid losses and loss expenses for the quarter ended March 31, 2005.


	Gross Losses			Reinsurance Recoverable			Net Losses
	(in millions of U.S. dollars)
Balance at December 31, 2004	$	31,513		$	14,337		$	17,176
Losses and loss expenses incurred		2,536			750			1,786
Losses and loss expenses paid		(2,028	)		(797	)		(1,231	)
Other (including foreign exchange revaluation)		(595	)		(596	)		1

Balance at March 31, 2005	$	31,426		$	13,694		$	17,732

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


	March 31, 2005						December 31, 2004
	Gross		Ceded		Net		Gross		Ceded		Net
	(in millions of U.S. dollars)
Case reserves	$	14,683	$	5,920	$	8,763	$	14,827	$	6,073	$	8,754
IBNR		16,743		7,774		8,969		16,686		8,264		8,422

Total	$	31,426	$	13,694	$	17,732	$	31,513	$	14,337	$	17,176

During the quarter we completed a novation of certain business that we fronted for CIGNA, which resulted in a reduction of gross and ceded reserves of approximately $600 million. The ultimate novation of this business was anticipated under our 1999 agreement that was entered into in connection with the purchase of CIGNA’s P&C businesses.

We continually evaluate our reserve estimates taking into account new information and discussion and negotiation with our insureds. We estimate the ultimate loss amounts by projecting losses as of the valuation date using loss development patterns derived from historical data. In addition, a tail factor is applied to the projected loss amount to reflect further potential development beyond the period of historical record. While we believe our reserve for unpaid losses and loss expenses at March 31, 2005 is adequate, new information or trends, such as judicial action broadening the scope of coverage or expanding liability, may lead to future developments in ultimate losses and loss expenses significantly greater or less than the reserve provided, which could have a material adverse effect on future operating results. Particularly significant variables for which a change in assumption could have a material effect on unpaid losses and loss expenses include, but are not limited to, the following:

Insurance - North American Segment

Given the long reporting and paid development pattern, the tail factors used to project actual current losses to ultimate losses for claims covered by our middle market workers’ compensation policies require considerable judgment that could be material to consolidated losses and loss expense reserves. Specifically, a one percent change in the tail factor could cause approximately a $45 million change, either positively or negatively, for the selected net loss and loss expense ultimate for that segment. We believe that our selected tail factors represent the most likely loss development based on historical loss payment patterns of this and other comparable long-tail lines of business as well as the current legal and economic environment. The actual tail factor could vary by several percentage points from the tail factor selected. Because tail factors are stated in terms of decimals (e.g., 1.125) and often, the actuary’s choice regarding reasonably supportable tail factors range within percentages of each other, the realistic change in tail factors can be expressed in percentage points.

Our ACE Bermuda operations write predominantly high excess of loss claims made professional liability business typically with attachment points in excess of $100 million. Claims development for this business can vary significantly for individual claims and historically could vary by as much as $50 million per claim depending on the nature of the loss.

Insurance - Overseas General

Certain international long tail lines, such as casualty and professional lines, are particularly susceptible to changes in loss trend and claim inflation. Heightened perceptions of tort and settlement awards around the world are increasing the demand for these products as well as contributing to the uncertainty of the reserving estimates. Our reserving methods rely heavily on loss development patterns estimated from historical data and while we attempt to adjust such factors for known changes in the current tort environment, it is possible that such factors may not entirely reflect all recent trends in tort environments. For example, a three month delay of our selected loss development patterns could increase reserve estimates on long tail casualty and professional lines by approximately $69 million.

Global Reinsurance

Typically there is inherent uncertainty around the length of paid and reporting development patterns, especially for certain casualty lines such as excess workers’ compensation or general liability, which may take up to 30 years to fully develop. This uncertainty is accentuated by the need to supplement client development patterns with industry development patterns as justified by the credibility of the data. The underlying source and selection of the final development pattern can thus have a significant impact on the selected net loss and loss expense ultimate. For example, a 10 percent slowing or quickening of the development pattern for certain long-tail lines could cause the ultimate loss derived by the reported Bornhuetter-Ferguson method to increase by as much as three percent, or $33 million.

Assumed Reinsurance

At March 31, 2005, net unpaid losses and loss expenses for the Global Reinsurance segment aggregated to $1.5 billion, consisting of $395 million of case reserves and $1.1 billion of IBNR. For the current quarter, increases in Global Reinsurance’s net unpaid losses and loss expenses were partially offset by claim payments made in connection with third quarter 2004 storms.

On occasion, there will be differences between our carried loss reserves and unearned premium reserves and the amount of loss reserves and unearned premium reserves recorded at ceding companies. This is due to the fact that we only receive consistent and timely information from ceding companies with respect to case reserves. For IBNR, we use historical experience and other statistical information, depending on the type of business, to estimate the ultimate loss (see Unpaid Losses and Loss Expenses

for more information). We estimate our unearned premium reserve by applying estimated earning patterns to net premiums written for each treaty based upon that treaty’s coverage basis (i.e. risks attaching or losses occurring). At March 31, 2005, the case reserves reported to us by our ceding companies were $379 million, compared with the $395 million we recorded. We do, on occasion, post additional case reserves in addition to the amounts reported by our cedants when our evaluation of the ultimate value of a reported claim is different than the evaluation of that claim by our cedant.

Asbestos and Environmental and Other Run-off Liabilities

Included in our liabilities for losses and loss expenses are amounts for asbestos, environmental and latent injury damage claims and expenses (A&E). These A&E liabilities principally relate to claims arising from remediation costs associated with hazardous waste sites and bodily-injury claims related to asbestos products and environmental hazards. The estimation of these liabilities is particularly sensitive to the recent legal environment, including specific settlements that may be used as precedents to settle future claims. These liabilities include provision for both reported and IBNR claims.

Our exposure to A&E claims principally arises out of liabilities acquired when we purchased Westchester Specialty in 1998 and the P&C business of CIGNA in 1999, with the larger exposure contained within the liabilities acquired in the CIGNA transaction. In 1996, prior to our acquisition of the P&C business of CIGNA, the Pennsylvania Insurance Commissioner approved a plan to restructure INA Financial Corporation and its subsidiaries (the “Restructuring”) which included the division of Insurance Company of North America (INA) into two separate corporations: (1) an active insurance company that retained the INA name and continued to write P&C business and (2) an inactive run-off company, now called Century Indemnity Company (Century). As a result of the division, the A&E liabilities of INA were allocated to Century and extinguished, as a matter of Pennsylvania law, as liabilities of INA. As part of the Restructuring, the A&E liabilities of various U.S. affiliates of INA were reinsured to Century, and Century and certain other run-off companies housing A&E liabilities were contributed to Brandywine Holdings Corporation (Brandywine Holdings). As part of the 1999 acquisition of the P&C business of CIGNA, we acquired Brandywine Holdings and its various subsidiaries.

There were nominal incurred losses and loss expenses associated with A&E exposures in the three months ended March 31, 2005 because we conducted an internal, ground-up review of our consolidated A&E liabilities during the second half of 2004. During this same period, a team of external actuaries performed an evaluation as to the adequacy of the reserves of Century and its two U.S. insurance subsidiaries, ACE American Reinsurance Company (ACE American Re), and Century Reinsurance Company (Century Re), both Pennsylvania insurers. The external review was conducted in accordance with the Brandywine restructuring order, which requires that an external actuarial review of Century’s reserves be completed every two years. The studies were completed early in 2005 and adjustments were recorded as of December 31, 2004. Activity in the period since completing the studies has not indicated a need to further adjust ultimate A&E reserves. Our A&E reserves are not discounted and do not reflect any anticipated changes in the legal, social or economic environment, or any benefit from future legislative reforms.

Reinsurance and Other Considerations relating to ACE’s Ultimate A&E and other Run-off Exposures

Westchester Specialty

As part of the acquisition of Westchester Specialty, National Indemnity Company (NICO) provided a 75 percent pro-rata share of $1 billion of reinsurance protection for adverse development on loss and loss adjustment expense reserves. At December 31, 2004, the remaining unused limit under this NICO Westchester Specialty cover was $499 million.

Brandywine Run-off Entities

As part of the acquisition of the CIGNA P&C business, NICO provided $2.5 billion of reinsurance protection to Century on all Brandywine loss and loss adjustment expense reserves and on the A&E reserves of various ACE INA insurance subsidiaries reinsured by Century (in each case, including uncollectible reinsurance). The benefits of this NICO agreement (the “Brandywine NICO Agreement”) flow to the other Brandywine companies and to the ACE INA insurance subsidiaries through reinsurance agreements between those companies and Century. The Brandywine NICO Agreement was exhausted on an incurred basis with the increase in the A&E reserves in the fourth quarter of 2002.

In addition to housing a significant portion of our A&E exposure, the Brandywine operations include run-off liabilities related to various insurance and reinsurance businesses. The following companies comprise ACE’s Brandywine operations: Century, a Pennsylvania insurer, Century Re, ACE American Re, Brandywine Reinsurance Company S.A.-N.V., a Belgium insurer (Brandywine SANV), Century International Reinsurance Company Ltd., a Bermuda insurer (CIRC), and Brandywine Reinsurance Company (UK) Ltd., a U.K. insurer (BRUK). All of the Brandywine companies are direct or indirect subsidiaries of Brandywine Holdings except for BRUK, which is a direct subsidiary of ACE INA International Holdings, Ltd. (ACE INA International Holdings). BRUK’s liabilities have been ceded to Century through CIRC.

The U.S.-based ACE INA companies assumed two contractual obligations in respect of the Brandywine operations in connection with the Restructuring: a dividend retention fund obligation and a surplus maintenance obligation in the form of an aggregate excess of loss reinsurance agreement. In accordance with the Brandywine restructuring order, INA Financial Corporation established and funded a dividend retention fund (the “Dividend Retention Fund”) consisting of $50 million plus investment earnings. The full balance of the Dividend Retention Fund was contributed to Century as of December 31, 2002. To the extent future dividends are paid by INA Holdings Corporation to its parent, INA Financial Corporation, and to the extent INA Financial Corporation then pays such dividends to INA Corporation, a portion of those dividends must be withheld to replenish the principal of the Dividend Retention Fund to $50 million within five years. In 2004 and 2003, no such dividends were paid, and therefore no replenishment of the Dividend Retention Fund occurred. The obligation to maintain and to replenish the Dividend Retention Fund as necessary and to the extent dividends are paid is ongoing until ACE INA receives prior written approval from the Pennsylvania Insurance Commissioner to terminate the fund.

In addition, the ACE INA insurance subsidiaries are obligated to provide insurance coverage to Century in the amount of $800 million under an aggregate excess of loss reinsurance agreement (the “Aggregate Excess of Loss Agreement”) if the statutory capital and surplus of Century falls below $25 million or if Century lacks liquid assets with which to pay claims as they become due, after giving effect to the contribution of the balance, if any, of the Dividend Retention Fund. Coverage under the Aggregate Excess of Loss Agreement was triggered as of December 31, 2002 following contribution of the balance of the Dividend Retention Fund, because Century’s capital and surplus fell below $25 million at December 31, 2002.

Effective December 31, 2004, ACE INA Holdings contributed $100 million to Century in exchange for a surplus note. After giving effect to the contribution and issuance of the surplus note, the statutory surplus of Century at December 31, 2004 was $25 million and approximately $458 million in statutory-basis losses were ceded to the Aggregate Excess of Loss Agreement. Century reports the amount ceded under the Aggregate Excess of Loss Agreement in accordance with statutory accounting principles, which differ from GAAP by, among other things, allowing Century to discount its asbestos and environmental reserves. For GAAP reporting purposes, intercompany reinsurance recoverables related to the Aggregate Excess of Loss Agreement are eliminated in consolidation. To estimate ACE’s remaining claim exposure under the Aggregate Excess of Loss Agreement under GAAP, we adjust the statutory cession to exclude the discount embedded in statutory loss reserves. At December 31, 2004, approximately $769 million in GAAP basis losses were ceded under the Aggregate Excess of Loss Agreement, leaving a remaining limit of coverage under that agreement of approximately $31 million. If the limit of coverage were to be exhausted, ACE’s results would nevertheless continue to recognize losses arising from any adverse loss reserve development of the Brandywine entities for so long as those companies remain consolidated subsidiaries of ACE.

Uncertainties Relating to ACE’s Ultimate Brandywine Exposure

In addition to the Dividend Retention Fund and Aggregate Excess of Loss Agreement commitments described above, certain ACE entities are primarily liable for asbestos, environmental and other exposures that they have reinsured to Century. Accordingly, if Century were to become insolvent and ACE were to lose control of Century, some or all of the recoverables due to these ACE companies from Century could become uncollectible, yet those ACE entities would continue to be responsible to pay claims to their insureds or reinsureds. Under such circumstances, ACE would recognize a loss in its consolidated statement of operations. As of December 31, 2004, the aggregate reinsurance balances ceded by the active ACE companies to Century were $1.58 billion. At December 31, 2004, Century’s carried reserves (including reserves ceded by the active ACE companies to Century) were $5.1 billion. We believe the intercompany reinsurance recoverables, which relate to liabilities payable over many years (i.e., 25 years or more), are not impaired at this time. The liabilities ceded to Century by its affiliates have in turn been ceded by Century to NICO and, as of December 31, 2004, approximately $2 billion of cover remains on a paid basis. As a result, any economic exposure there may be to adverse developments in the future is substantially less than the nominal value of the reinsurance recoverables. The impact of the transaction described below would reduce the balance due from Century to active ACE companies by $90 million. Should Century’s loss reserves experience adverse development in the future and should Century be placed into rehabilitation or liquidation, the reinsurance recoverables due to Century’s affiliates would be payable only after the payment in full of all administrative expenses and direct policy liabilities. Thus, the intercompany reinsurance recoverables would be at risk to the extent of the shortage of assets remaining to pay these recoverables. As of December 31, 2004, reserves ceded by Century to the active ACE companies and other amounts owed to Century by the ACE active companies were $930 million in the aggregate.

In a lawsuit filed in California state court in December 1999 (AICCO, Inc v. Insurance Company of North America, et al.) certain competitors of ACE USA challenged the validity of the Restructuring under California’s Unfair Competition Law, Business and Professions Code Section 17200 (UCL). The lawsuit claims that the Restructuring is not applicable to California policyholders under the UCL because it constituted a transfer of liabilities without the consent of the policyholders. The suit also claims that the notice of the Restructuring was misleading. In November 2004, the voters of California approved Proposition 64 amending the UCL by, inter alia, requiring that lawsuits brought under the UCL be brought by plaintiffs who have suffered actual injury as a result of the challenged business practice. In response to a motion to dismiss brought by ACE USA, the court ruled in February 2005 that the competitors/plaintiffs who brought this suit have not alleged actual injury as required by Proposition 64 and dismissed the suit. The time for appeal has not yet run and it is possible that the plaintiffs will appeal the ruling.

Pending Sale of Certain Brandywine Companies

On January 5, 2005, Century and ACE INA International Holdings entered into a Stock Purchase Agreement with Randall & Quilter Investment Holdings Limited (“R&Q”), which provides for the sale of ACE American Re, BRUK and Brandywine SANV to R&Q. Closing of the sale is subject to the satisfaction of certain conditions, including without limitation the obtaining of all necessary consents and approvals from third parties, including the Pennsylvania Insurance Department and the Financial Services Authority of the United Kingdom, and the commutation of certain affiliate reinsurance agreements. In connection with certain of these commutations, Century’s assumed loss reserves would be reduced and an associated amount of coverage would become available under the Aggregate Excess of Loss Agreement.

We are pursuing potential options for the disposition of other Brandywine entities, including a possible sale of Century. There can be no assurance that any such sale or other disposition will be consummated.

Legislative Initiatives

Congress has been working on possible legislation to move all U.S. asbestos bodily-injury claims to a federal trust for compensation in accordance with an established set of medical criteria and claim values. The trust would be funded by asbestos defendants and their insurers. As currently proposed, ACE would be one of the insurer participants. However, we cannot predict if any such proposed legislation will be modified or adopted.

Reinsurance

One of the ways we manage our loss exposure is through the use of reinsurance. While reinsurance agreements are designed to limit our losses from large exposures and permit recovery of a portion of direct unpaid losses, reinsurance does not relieve us of our liability to our insureds. Accordingly, the losses and loss expense reserves on our balance sheet represent our total unpaid gross losses. The reinsurance recoverable represents anticipated recoveries of a portion of those gross unpaid losses as well as amounts recoverable from reinsurers with respect to claims paid. The table below presents our net reinsurance recoverable at March 31, 2005 and December 31, 2004.


	March 31 2005			December 31 2004
	(in millions of U.S. dollars)
Reinsurance recoverable on paid losses and loss expenses	$	1,205		$	1,211
Bad debt reserve on paid losses and loss expenses		(305	)		(309	)
Reinsurance recoverable on future policy benefits		14			15
Reinsurance recoverable on unpaid losses and loss expenses		14,306			14,956
Bad debt reserve on unpaid losses and loss expenses		(612	)		(619	)

Net reinsurance recoverable	$	14,608		$	15,254

Our reinsurance recoverable on unpaid losses and loss expenses decreased $650 million during the quarter ended March 31, 2005. This decrease was primarily due to the novation of approximately $600 million of reinsurance recoverable on unpaid losses and loss expenses as intended under our 1999 agreement in connection with the purchase of CIGNA’s P&C businesses.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity is a measure of a company’s ability to generate cash flows sufficient to meet short-term and long-term cash requirements of its business operations. As a holding company, ACE Limited possesses assets that consist primarily of the stock of its subsidiaries, and of other investments. In addition to net investment income, our cash flows currently depend primarily on dividends or other statutorily permissible payments. Historically, these dividends and other payments have come from our Bermuda-based operating subsidiaries, which we refer to as our Bermuda subsidiaries.

As an insurance company, one of our principal responsibilities to our clients is to ensure that we have ready access to funds to settle large unforeseen claims. Given anticipated growth in premiums and a lengthening of the average duration of our claim liabilities due to a higher proportionate growth in long-tail relative to short-tail business, we expect that positive cash flow from operations (underwriting activities and investment income) will be sufficient to cover cash outflows under most loss scenarios through 2005. To further ensure the sufficiency of funds to settle unforeseen claims, we hold a certain amount of invested assets in cash and short-term investments and maintain available credit facilities. In addition, for certain insurance, reinsurance, or deposit contracts that tend to have relatively large and reasonably predictable cash outflows, such as loss portfolio contracts, we attempt to establish dedicated portfolios of assets that are duration-matched with the related liabilities. With respect to the duration of our overall investment portfolio, we manage asset durations to both maximize return given current market conditions and provide sufficient liquidity to cover future loss payments. In a low rate environment, the overall duration of our fixed maturity investments tends to be shorter and in a high rate environment, such durations tend to be longer.

Despite our safeguards, if paid losses accelerated beyond our ability to fund such paid losses from current operating cash flows, we might need to either liquidate a portion of our investment portfolio or arrange for financing. Potential events causing such a liquidity strain could be several significant catastrophes occurring in a relatively short period of time or large scale uncollectible reinsurance recoverables on paid losses (as a result of coverage disputes, reinsurers’ credit problems or decreases in the value of collateral supporting reinsurance recoverables). Additional strain on liquidity could occur if the investments sold to fund loss payments were sold at depressed prices. Because each subsidiary focuses on a more limited number of specific product lines than is collectively available from the ACE group of companies, the mix of business tends to be less diverse at the subsidiary level. As a result, the probability of a liquidity strain, as described above, may be greater for individual subsidiaries than when liquidity is assessed on a consolidated basis. If such a liquidity strain were to occur in a subsidiary, we may be required to contribute capital to the particular subsidiary and/or curtail dividends from the subsidiary to support holding company operations.

The payments of dividends or other statutorily permissible distributions from our operating companies are subject to the laws and regulations applicable to each jurisdiction, as well as the need to maintain capital levels adequate to support the insurance and reinsurance operations, including financial strength ratings issued by independent rating agencies, which are discussed below. During the quarter ended March 31, 2005, we were able to meet all of our obligations, including the payment of dividends declared on our Ordinary Shares and Preferred Shares, with our net cash flow and dividends received. Should the need arise, we generally have access to the debt markets and other available credit facilities that are discussed below.

We assess which subsidiaries to draw dividends from based on a number of factors. Considerations such as regulatory and legal restrictions as well as the subsidiary’s financial condition are paramount to the dividend decision. The legal restrictions on the payment of dividends from retained earnings by our Bermuda subsidiaries are currently satisfied by the share capital and additional paid-in capital of each of the Bermuda subsidiaries. During the quarter ended March 31, 2005, ACE Bermuda and ACE Tempest Life Reinsurance Ltd declared and paid dividends of $243 million and $32 million, respectively. During the quarter ended March 31, 2004, ACE Bermuda and ACE Tempest Life Reinsurance Ltd declared and paid dividends of $86 million and $150 million, respectively. We expect that a majority of our cash inflows for the remainder of 2005 will be from our Bermuda subsidiaries.

The payment of any dividends from ACE Global Markets or its subsidiaries would be subject to applicable U.K. insurance laws and regulations including those promulgated by the Society of Lloyd’s. ACE INA’s U.S. insurance subsidiaries may pay dividends, without prior regulatory approval, only from earned surplus and subject to certain annual limitations and the maintenance of a minimum capital requirement. ACE INA’s international subsidiaries are also subject to insurance laws and regulations particular to the countries in which the subsidiaries operate. These laws and regulations include restrictions that limit the amount of dividends payable without prior approval of regulatory insurance authorities.

We did not receive any dividends from ACE Global Markets or ACE INA during the quarter ended March 31, 2005. ACE INA issued debt to provide partial financing for the ACE INA acquisition and for other operating needs. This debt is serviced by statutorily permissible distributions by ACE INA’s insurance subsidiaries to ACE INA as well as other group resources.

Our consolidated sources of funds consist primarily of net premiums written, net investment income and proceeds from sales and maturities of investments. Funds are used primarily to pay claims, operating expenses, dividends and for the purchase of investments. After satisfying our cash requirements, excess cash flows from these underwriting and investing activities are invested.

Our insurance and reinsurance operations provide liquidity in that premiums are received in advance, sometimes substantially in advance, of the time claims are paid. Generally cash flows are affected by claim payments that, due to the nature of our operations, may comprise large loss payments on a limited number of claims and which can fluctuate significantly from period

to period. The irregular timing of these loss payments can create significant variations in cash flows from operations between periods.

Sources of liquidity include cash from operations, financing arrangements or routine sales of investments.

•

Our consolidated net cash flows from operating activities were $1.2 billion for the quarters ended March 31, 2005 and 2004. These amounts reflect net income for each quarter, adjusted for non-cash items and changes in working capital. Net income was stable for the indicated periods. Net cash flows from operating activities in the quarter ended March 31, 2005, were bolstered by increases in unearned premiums and unpaid losses and loss expenses, partially offset by an increase in insurance and reinsurance balances receivable. Typically, the adjustments to net income reflect the fact that there is a significant period of time between the recording of a loss (ranging up to several years or more) and the actual claim payment. Non-cash items for the quarter ended March 31, 2005, reflect the impact of the novation of approximately $600 million of gross and ceded reserves, which had no impact on our net cash flows from operating activities.

•

Our consolidated net cash flows used for investing activities were $1.1 billion for the quarters ended March 31, 2005, and 2004. For the indicated periods, net cash flows used for investing activities were related principally to purchases of fixed maturities. Net purchases of fixed maturities were $1 billion in the quarter ended March 31, 2005, compared with $1.1 billion in the same quarter of 2004.

•

Our consolidated net cash flows used for financing activities were $27 million in the quarter ended March 31, 2005, compared with $26 million in the same quarter of 2004. For the indicated periods, net cash flows usage for financing activities were primarily related to dividends paid, partially offset by proceeds from exercise of options.

Although our ongoing operations continue to generate positive cash flows, our cash flows are currently impacted by a large book of loss reserves from businesses in run-off. The run-off operations generated negative operating cash flows of $99 million in the quarter ended March 31, 2005, compared with $2 million in the same quarter of 2004, primarily due to reinsurance collections on claim payments in 2004.

Both internal and external forces influence our financial condition, results of operations and cash flows. Claim settlements, premium levels and investment returns may be impacted by changing rates of inflation and other economic conditions. In many cases, significant periods of time, ranging up to several years or more, may lapse between the occurrence of an insured loss, the reporting of the loss to us and the settlement of the liability for that loss. We believe that our cash balances, cash flow from operations, routine sales of investments and the liquidity provided by our credit facilities, as discussed below, are adequate to meet expected cash requirements.

ACE and its subsidiaries are assigned debt and financial strength (insurance) ratings from internationally recognized rating agencies, including S&P, A.M. Best, Moody’s Investors Service and Fitch IBCA. The ratings issued on our companies by these agencies are announced publicly and are available directly from the agencies. Our website, acelimited.com, also contains some information about our ratings, which can be found under the “Investor Information” tab.

Financial strength ratings represent the opinions of the rating agencies on the financial strength of a company and its capacity to meet the obligations of insurance policies. Independent ratings are one of the important factors that establish our competitive position in the insurance markets. The rating agencies consider many factors in determining the financial strength rating of an insurance company, including the relative level of statutory surplus necessary to support the business operations of the company. These ratings are based upon factors relevant to policyholders, agents and intermediaries and are not directed toward the protection of investors. Such ratings are not recommendations to buy, sell or hold securities.

Debt ratings apply to short-term and long-term debt as well as preferred stock. These ratings are assessments of the likelihood that we will make timely payments of principal and interest and preferred stock dividends.

It is possible that, in the future, one or more of the rating agencies may reduce our existing ratings. If one or more of our ratings were downgraded, we could incur higher borrowing costs and our ability to access the capital markets could be impacted. In addition, our insurance and reinsurance operations could be adversely impacted by a downgrade in our financial strength ratings, including a possible reduction in demand for our products in certain markets.

Capital Resources

Capital resources consist of funds deployed or available to be deployed to support our business operations. The following table summarizes the components of our capital resources at March 31, 2005 and December 31, 2004.


	March 31 2005			December 31 2004
	(in millions of U.S. dollars)
Short-term debt	$	147		$	146
Long-term debt		1,849			1,849

Total debt		1,996			1,995

Trust preferred securities		412			412
Preferred shares		557			557
Ordinary shareholders’ equity		9,408			9,279

Total shareholders’ equity		9,965			9,836

Total capitalization	$	12,373		$	12,243

Ratio of debt to total capitalization		16.1	%		16.3	%
Ratio of debt plus trust preferreds to total capitalization		19.5	%		19.7	%

We believe our financial strength provides us with the flexibility and capacity to obtain funds externally through debt or equity financing on both a short-term and long-term basis. Our ability to access the capital markets is dependent on, among other things, market conditions and our perceived financial strength. We have accessed both the debt and equity markets from time to time.

Our diluted book value per Ordinary Share increased to $32.62 at March 31, 2005, compared with $32.48 at December 31, 2004. In calculating our diluted book value per Ordinary Share, we include in the denominator, in-the-money options. The expected proceeds from the in-the-money options are included in the numerator. Shareholders’ equity increased $129 million in the quarter ended March 31, 2005, primarily due to net income of $433 million, partially offset by unrealized deprecation on our investment portfolio of $270 million net of income tax and dividends declared of $72 million.

On January 14, 2005, and April 14, 2005, we paid dividends of 21 cents per ordinary share to shareholders of record on December 31, 2004 and March 31, 2005, respectively. We have paid dividends each quarter since we became a public company in 1993. However, the declaration, payment and value of future dividends on ordinary shares is at the discretion of our Board of Directors and will be dependent upon our profits, financial requirements and other factors, including legal restrictions on the payment of dividends and such other factors as our Board of Directors deems relevant. Dividends on the preferred shares are payable quarterly, when and if declared by our Boards of Directors, in arrears on March 1, June 1, September 1 and December 1 of each year. On March 1, 2005 we paid a dividend of $4.875 per preferred share to shareholders of record on February 28, 2005.

As part of our capital management program, in November 2001, our Board of Directors authorized the repurchase of any ACE issued debt or capital securities including Ordinary Shares, up to $250 million. At March 31, 2005, this authorization had not been utilized. During 2004, we filed a shelf registration statement with the SEC relating to the issuance of up to $1.5 billion of certain types of debt and equity securities. This registration became effective during the first quarter of 2005.

Credit Facilities

As our Bermuda subsidiaries are not admitted insurers and reinsurers in the U.S., the terms of certain U.S. insurance and reinsurance contracts require them to provide letters of credit (LOCs) to clients. In addition, ACE Global Markets is required to satisfy certain U.S. regulatory trust fund requirements which can be met by the issuance of LOCs.

The following table shows our credit facilities by credit line, usage, expiry date and purpose at March 31, 2005.


	Credit Line¹		Usage		Expiry Date	Purpose
	(in millions of U.S. dollars)
Unsecured Liquidity Facilities
ACE Limited²	$	600	$	64	April 2007	General Corporate
Secured Operational LOC Facilities
ACE Limited		500		269	Sept. 2007	General Corporate
Other³		49		49	Various	General Corporate
Unsecured Operational LOC Facilities
ACE Limited		850		756	Sept. 2007	General Corporate
Unsecured Capital Facilities
ACE Limited⁴		713		690	Dec. 2009	General Corporate

Total	$	2,712	$	1,828

⁽¹⁾	Certain facilities are guaranteed by operating subsidiaries and/or ACE Limited

⁽²⁾	Commercial paper back-up facility, may also be used for LOCs

⁽³⁾	These facilities are issued in the name of ACE European Group Limited and Lloyd’s Syndicate 2488

⁽⁴⁾	Supports ACE Global Markets underwriting capacity for Lloyd’s Syndicate 2488-2005 capacity of £400 million (approximately $750 million)

With the exception of the LOC facilities noted under “Other”, the facilities noted above require that we maintain certain covenants, all of which have been met at March 31, 2005. These covenants include:

(i)

maintenance of a minimum consolidated net worth in an amount not less than the “Minimum Amount”. For the purpose of this calculation, the Minimum Amount is an amount equal to the sum of the base amount (currently $6.4 billion) plus 25 percent of consolidated net income for each fiscal quarter, ending after the date on which the current base amount became effective, plus 50 percent of any increase in consolidated net worth during the same period, attributable to the issuance of ordinary and preferred shares. The Minimum Amount is subject to a reset provision on the last day of each fiscal year; and

(ii)

maintenance of a maximum debt to total capitalization ratio of not greater than 0.35 to 1. Under this covenant, debt does not include trust preferred securities or mezzanine equity, except where the ratio of the sum of trust preferred securities and mezzanine equity to total capitalization is greater than 15 percent. In this circumstance, the amount greater than 15 percent would be included in the debt to total capitalization ratio.

At March 31, 2005, (a) the minimum consolidated net worth requirement under the covenant described in (i) above was $6.5 billion and our actual consolidated net worth as calculated under that covenant was $9.6 billion; and (b) our ratio of debt to total capitalization was 0.16 to 1.

In addition to these covenants, the ACE Global Markets capital facility requires that collateral be posted if the financial strength rating of ACE Limited falls to S&P BBB+ or lower.

Our failure to comply with the covenants under any credit facility would, subject to grace periods in the case of certain covenants, result in an event of default. This could require us to repay any outstanding borrowings or to cash collateralize letters of credit under such facility. An event of default under one or more credit facilities with outstanding credit extensions of $25 million or more would result in an event of default under all of the facilities described above.

American Jobs Creation Act of 2004

On October 22, 2004, the American Jobs Creation Act (the Act) was signed into law by the President of the United States. The Act provides for the election of a special one-time tax deduction of 85 percent of certain foreign earnings that are repatriated (as defined in the Act) under a Domestic Reinvestment Plan to its United States parent corporation in either the parent’s last tax year that began before the enactment date, or the first tax year that begins during the one-year period beginning on the date of enactment. We expect to apply the provisions of the Act to certain of our applicable subsidiaries.

Treasury issued its first guidance on selected provisions of the Act, and it expects to issue additional guidance sometime in 2005.

During the quarter ended March 31, 2005, we repatriated foreign earnings of approximately $42 million subject to a limited Domestic Reinvestment Plan that would qualify under the Act based on the guidance issued in January of 2005. Additional foreign earnings of approximately $299 million are expected to be repatriated in the second quarter of 2005. For the quarter ended March 31, 2005, the tax benefit associated with these repatriations was $8.4 million and was a result of the reduction of the net deferred tax liability associated with these repatriated earnings, based on guidance issued to date. This tax benefit may increase by as much as approximately $21 million due to the anticipated guidance and technical corrections expected to be issued sometime in 2005.

Additional earnings repatriations up to the limitation under the Act of $500 million may be completed through the remainder of 2005. Subject to the expected guidance or technical corrections, we are not in a position to complete our evaluation or determine the total associated tax impact as a result of the Act. However, we anticipate that the tax impact would be a reduction of the net deferred tax liability associated with the unremitted earnings. We expect to finalize our assessment of the Act after the expected United States Treasury Guidance has been issued.

Recent Accounting Pronouncements

See Note 2 (c) to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.

Item 4.

Controls and Procedures

As of the end of the period covered by this report, the Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in allowing information required to be disclosed in reports filed under the Securities and Exchange Act of 1934 to be recorded, processed, summarized and reported within time periods specified in the rules and forms of the SEC.

During the quarter ended March 31, 2005, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

ACE LIMITED

PART II OTHER INFORMATION

Item 1.

Legal Proceedings

Our insurance subsidiaries are subject to claims litigation involving disputed interpretations of policy coverages and in some jurisdictions, direct actions by allegedly injured persons seeking damages from policyholders. These lawsuits involving claims on policies issued by our subsidiaries which are typical to the insurance industry in general and in the normal course of business, are considered in our loss and loss expense reserves which are discussed in the unpaid losses and loss expenses discussion. In addition to claims litigation, we and our subsidiaries are subject to lawsuits and regulatory actions in the normal course of business that do not arise from or directly relate to claims on insurance policies. This category of business litigation typically involves, inter alia, allegations of underwriting errors or misconduct, employment claims, regulatory activity or disputes arising from our business ventures. While the outcomes of the business litigation involving us cannot be predicted with certainty at this point, we are disputing and will continue to dispute allegations against us that are without merit and believe that the ultimate outcomes of matters in this category of business litigation will not have a material adverse effect on our financial condition, future operating results or liquidity, although an adverse resolution of a number of these items could have a material adverse effect on our results of operations in a particular quarter or fiscal year.

Information on the Company’s legal proceedings is set forth in the section entitled, “Insurance Industry Investigations and Related Matters”, included under Part I, Item 2.

Item 2.

Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

This table provides information with respect to purchases by the Company of its Ordinary Shares during the three months ended March 31, 2005.

Issuer’s Purchases of Equity Securities


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

Total	232,395

*	As part of ACE’s capital management program, in November 2001, the Company’s Board of Directors authorized the repurchase of any ACE issued debt or capital securities including Ordinary Shares, up to $250 million. At March 31, 2005, this authorization had not been utilized.

**	For the three months ended March 31, 2005, this column relates entirely to the surrender to the Company of shares of Common Stock to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees.

Item 5.

Other Information

1.	On February 24, 2005, the Company declared a quarterly dividend of $0.21 per Ordinary Share payable on April 14, 2005, to shareholders of record on March 31, 2005.

2.	On February 24, 2005, the Company declared a dividend of $4.875 per Preferred Share, payable on March 1, 2005, to shareholders of record on February 28, 2005.

Item 6.

Exhibits

Exhibits


10.1		Description of Executive Officer Cash Compensation.

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.

ACE LIMITED

SIGNATURE

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 9, 2005				/S/ EVAN G. GREENBERG
				Evan G. Greenberg
				President and Chief Executive Officer

May 9, 2005				/S/ PHILIP V. BANCROFT
				Philip V. Bancroft
				Chief Financial Officer

ACE LIMITED

EXHIBITS


Exhibit Number		Description
		Exhibits

10.1		Description of Executive Officer Cash Compensation.

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.