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 September 30, 2003

OR

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

For the Transition Period from                                  to                                     

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

ACE LIMITED

(Incorporated in the Cayman Islands)

ACE Global Headquarters

17 Woodbourne Avenue

Hamilton HM 08

Bermuda

Telephone 441-295-5200

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

YES  þ    NO  ¨

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

YES  þ    NO  ¨

The number of registrant’s Ordinary Shares ($0.041666667 par value) outstanding as of November 10, 2003 was 279,076,892.

ACE LIMITED

INDEX TO FORM 10-Q

		Page No.
Part I.	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Balance Sheets September 30, 2003 (Unaudited) and December 31, 2002	3
	Consolidated Statements of Operations (Unaudited) Three and Nine Months Ended September 30, 2003 and 2002	4
	Consolidated Statements of Shareholders’ Equity (Unaudited) Nine Months Ended September 30, 2003 and 2002	5
	Consolidated Statements of Comprehensive Income (Unaudited) Nine Months Ended September 30, 2003 and 2002	7
	Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2003 and 2002	8
	Notes to Interim Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	60
Item 4.	Controls and Procedures	61
Part II.	OTHER INFORMATION
Item 1.	Legal Proceedings	62
Item 5.	Other Information	62
Item 6.	Exhibits and Reports on Form 8-K	62

2

ACE LIMITED

PART I    FINANCIAL INFORMATION

Item 1.    Financial Statements

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30 2003			December 31 2002
	(Unaudited)
	(in thousands of U.S. dollars, except share and per share data)
Assets
Investments and cash
Fixed maturities, at fair value (amortized cost — $16,712,551 and $13,790,742)	$	17,412,949		$	14,419,741
Equity securities, at fair value (cost — $371,492 and $442,266)		459,529			411,031
Securities on loan, at fair value (amortized cost/cost — $548,778 and $285,569)		596,449			292,973
Short-term investments, at fair value		2,519,956			1,884,760
Other investments (cost — $625,498 and $621,715)		664,705			652,048
Cash		431,121			663,355
Total investments and cash		22,084,709			18,323,908
Accrued investment income		247,764			216,941
Insurance and reinsurance balances receivable		2,821,444			2,653,990
Accounts and notes receivable		181,367			250,956
Reinsurance recoverable		14,032,408			13,991,453
Deferred policy acquisition costs		998,423			831,580
Prepaid reinsurance premiums		1,370,097			1,721,267
Funds withheld		309,263			300,106
Value of reinsurance business assumed		345,336			367,275
Goodwill		2,710,830			2,716,860
Deferred tax assets		1,102,612			1,287,983
Other assets		1,030,245			788,618
Total assets	$	47,234,498		$	43,450,937
Liabilities
Unpaid losses and loss expenses	$	25,637,136		$	24,315,182
Unearned premiums		6,243,098			5,585,524
Future policy benefits for life and annuity contracts		479,291			442,264
Funds withheld		247,473			214,535
Insurance and reinsurance balances payable		1,874,466			1,870,264
Contract holder deposit funds		75,957			89,843
Securities lending collateral		607,555			301,016
Accounts payable, accrued expenses and other liabilities		1,300,538			1,514,972
Dividends payable		52,912			47,724
Short-term debt		145,980			145,940
Long-term debt		1,749,136			1,748,937
Trust preferred securities		475,000			475,000
Total liabilities		38,888,542			36,751,201
Commitments and contingencies
Mezzanine equity		—			311,050
Shareholders’ equity
Preferred Shares ($1.00 par value, 2,300,000 shares authorized, issued and outstanding)		2,300			—
Ordinary Shares ($0.041666667 par value, 500,000,000 shares authorized; 278,480,910 and 262,679,356 shares issued and outstanding)		11,603			10,945
Additional paid-in capital		4,727,307			3,781,112
Unearned stock grant compensation		(64,059	)		(42,576	)
Retained earnings		3,000,430			2,199,313
Deferred compensation obligation		18,967			18,631
Accumulated other comprehensive income		668,375			439,892
Ordinary Shares issued to employee trust		(18,967	)		(18,631	)
Total shareholders’ equity		8,345,956			6,388,686
Total liabilities, mezzanine equity and shareholders’ equity	$	47,234,498		$	43,450,937

See accompanying notes to the interim consolidated financial statements

3

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the three and nine months ended September 30, 2003 and 2002

(Unaudited)

	Three Months Ended September 30						Nine Months Ended September 30
	2003			2002			2003			2002
	(in thousands of U.S. dollars, except per share data)
Revenues
Gross premiums written	$	3,450,912		$	3,528,725		$	10,968,594		$	9,575,826
Reinsurance premiums ceded		(1,144,781	)		(1,305,938	)		(3,326,418	)		(3,491,633	)
Net premiums written		2,306,131			2,222,787			7,642,176			6,084,193
Change in unearned premiums		91,394			(297,208	)		(866,527	)		(1,223,098	)
Net premiums earned		2,397,525			1,925,579			6,775,649			4,861,095
Net investment income		214,689			199,740			633,048			600,679
Other income (expense)		(3,088	)		(14,032	)		(8,516	)		(21,301	)
Net realized gains (losses)		57,556			(235,282	)		124,028			(400,884	)
Total revenues		2,666,682			1,876,005			7,524,209			5,039,589
Expenses
Losses and loss expenses		1,518,478			1,327,792			4,260,690			3,141,886
Life and annuity benefits		44,524			59,697			136,582			106,004
Policy acquisition costs		344,066			253,013			973,242			685,016
Administrative expenses		293,355			250,668			840,315			677,597
Interest expense		44,348			48,679			132,958			146,633
Total expenses		2,244,771			1,939,849			6,343,787			4,757,136
Income (loss) before income tax		421,911			(63,844	)		1,180,422			282,453
Income tax expense (benefit)		66,946			(7,334	)		207,545			37,258
Net income (loss)	$	354,965		$	(56,510	)	$	972,877		$	245,195
Basic earnings (loss) per share	$	1.25		$	(0.24	)	$	3.53		$	0.87
Diluted earnings (loss) per share	$	1.22		$	(0.24	)	$	3.46		$	0.84

See accompanying notes to the interim consolidated financial statements

4

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the nine months ended September 30, 2003 and 2002

(Unaudited)

	2003			2002
	(in thousands of U.S. dollars)
Preferred Shares
Balance — beginning of period	$	—		$	—
Shares issued		2,300			—
Balance — end of period		2,300			—
Ordinary Shares
Balance — beginning of period		10,945			10,828
Shares issued		563			36
Exercise of stock options		110			81
Issued under Employee Stock Purchase Plan (ESPP)		12			10
Cancellation of shares		(27	)		(18	)
Balance — end of period		11,603			10,937
Additional paid-in capital
Balance — beginning of period		3,781,112			3,710,698
Ordinary Shares issued		47,628			36,509
Exercise of stock options		36,394			40,642
Ordinary Shares issued under ESPP		7,332			7,462
Cancellation of Ordinary Shares		(21,320	)		(15,179	)
Preferred Shares issued, net		554,587			—
Conversion of Mezzanine equity, net		310,465			—
Tax benefit on employee stock options		11,109			—
Balance — end of period		4,727,307			3,780,132
Unearned stock grant compensation
Balance — beginning of period		(42,576	)		(37,994	)
Stock grants awarded		(47,112	)		(39,106	)
Stock grants forfeited		3,687			7,830
Amortization		21,942			21,880
Balance — end of period		(64,059	)		(47,390	)
Retained earnings
Balance — beginning of period		2,199,313			2,321,576
Net income		972,877			245,195
Dividends declared on Ordinary Shares		(150,650	)		(128,491	)
Dividends declared on Mezzanine equity		(9,773	)		(19,246	)
Dividends declared on Preferred Shares		(11,337	)		—
Balance — end of period		3,000,430			2,419,034
Deferred compensation obligation
Balance — beginning of period		18,631			16,497
Net change in period		336			2,133
Balance — end of period	$	18,967		$	18,630

See accompanying notes to the interim consolidated financial statements

5

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (cont’d)

For the nine months ended September 30, 2003 and 2002

(Unaudited)

	2003			2002
	(in thousands of U.S. dollars)
Accumulated other comprehensive income
Net unrealized appreciation (depreciation) on investments
Balance — beginning of period	$	476,411		$	136,916
Change in period, net of income tax		211,335			182,553
Balance — end of period		687,746			319,469
Minimum pension liability
Balance — beginning of period		—			—
Change in period, net of income tax		(40,054	)		—
Balance — end of period		(40,054	)		—
Cumulative translation adjustment
Balance — beginning of period		(36,519	)		(35,317	)
Change in period, net of income tax		57,202			653
Balance — end of period		20,683			(34,664	)
Accumulated other comprehensive income		668,375			284,805
Ordinary Shares issued to employee trust
Balance — beginning of period		(18,631	)		(16,497	)
Net change in period		(336	)		(2,133	)
Balance — end of period		(18,967	)		(18,630	)
Total shareholders’ equity	$	8,345,956		$	6,447,518

See accompanying notes to the interim consolidated financial statements

6

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the nine months ended September 30, 2003 and 2002

(Unaudited)

	2003			2002
	(in thousands of U.S. dollars)
Net income	$	972,877		$	245,195
Other comprehensive income
Net unrealized appreciation (depreciation) on investments
Unrealized appreciation (depreciation) on investments		300,900			227,651
Reclassification adjustment for net realized (gains) losses included in net income		(61,088	)		42,654
		239,812			270,305
Cumulative translation adjustment		81,594			4,150
Minimum pension liability		(62,081	)		—
Other comprehensive income, before income tax		259,325			274,455
Income tax expense related to other comprehensive income items		(30,842	)		(91,249	)
Other comprehensive income		228,483			183,206
Comprehensive income	$	1,201,360		$	428,401

See accompanying notes to the interim consolidated financial statements

7

ACE LIMITED AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the nine months ended September 30, 2003 and 2002

(Unaudited)

	2003			2002
	(in thousands of U.S. dollars)
Cash flows from operating activities
Net income	$	972,877		$	245,195
Adjustments to reconcile net income to net cash flows from (used for) operating activities:
Net realized (gains) losses		(124,028	)		400,884
Amortization of premium/discounts on fixed maturities		66,554			28,364
Deferred income taxes		157,451			9,089
Unpaid losses and loss expenses		1,205,295			866,239
Unearned premiums		532,220			1,639,827
Future policy benefits for life and annuity contracts		37,027			36,311
Insurance and reinsurance balances payable		(177,348	)		411,633
Accounts payable, accrued expenses and other liabilities		(134,845	)		(133,797	)
Insurance and reinsurance balances receivable		(84,468	)		(670,472	)
Reinsurance recoverable		(40,955	)		(490,922	)
Deferred policy acquisition costs		(139,155	)		(135,932	)
Prepaid reinsurance premiums		383,815			(423,506	)
Funds withheld, net		27,656			71,901
Value of reinsurance business assumed		21,939			(84,377	)
Other		(64,898	)		(178,530	)
Net cash flows from operating activities	$	2,639,137		$	1,591,907
Cash flows from investing activities
Purchases of fixed maturities	$	(14,490,369	)	$	(12,751,573	)
Purchases of equity securities		(75,464	)		(154,835	)
Sales of fixed maturities		11,099,741			11,468,572
Sales of equity securities		107,873			110,377
Maturities of fixed maturities		94,612			249,426
Net realized gains (losses) on investment derivatives		18,502			(117,580	)
Other		(60,469	)		(102,411	)
Settlement of an acquisition-related lawsuit		—			54,380
Net cash flows used for investing activities	$	(3,305,574	)	$	(1,243,644	)
Cash flows from financing activities
Dividends paid on Ordinary Shares	$	(145,462	)	$	(122,846	)
Dividends paid on Mezzanine equity		(9,773	)		(19,246	)
Dividends paid on Preferred Shares		(11,337	)		—
Net proceeds from issuance of Preferred Shares		556,887			—
Net proceeds from (repayment of) short-term debt		40			(275,128	)
Proceeds from exercise of options for Ordinary Shares		36,504			40,723
Proceeds from Ordinary Shares issued under ESPP		7,344			7,472
Repayment of trust preferred securities		—			(400,000	)
Net proceeds from long-term debt		—			399,155
Net cash flows from (used for) financing activities	$	434,203		$	(369,870	)
Net decrease in cash		(232,234	)		(21,607	)
Cash — beginning of period		663,355			671,381
Cash — end of period	$	431,121		$	649,774

See accompanying notes to the interim consolidated financial statements

8

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.    General

The interim unaudited consolidated financial statements, which include the accounts of the Company and its subsidiaries, have been prepared in accordance with accounting principles generally accepted in the United States of America and, in the opinion of management, reflect all adjustments (consisting of normally recurring accruals) necessary for a fair presentation of results for such periods. The results of operations and cash flows for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the consolidated financial statements, and related notes thereto, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002.

ACE Limited (ACE or the Company) is a holding company incorporated with limited liability under the Cayman Islands Companies Law and maintains its business office in Bermuda. The Company, through its various subsidiaries, provides a broad range of insurance and reinsurance products to insureds worldwide. ACE operates through four business segments: Insurance — North American, Insurance — Overseas General, Global Reinsurance and Financial Services. These segments are described in Note 15.

The following table summarizes the Company’s gross premiums written by geographic region for the nine months ended September 30, 2003 and 2002. Allocations have been made on the basis of location of risk.

Nine Months Ended	North America		Europe		Australia & New Zealand		Asia Pacific		Latin America
September 30, 2003	64	%	22	%	3	%	7	%	4	%
September 30, 2002	64	%	22	%	2	%	8	%	4	%

2.    New accounting pronouncements

In July 2003, the Accounting Standards Executive Committee issued Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (SOP 03-1). This Statement of Position provides guidance on accounting and reporting by insurance enterprises for certain nontraditional long-duration contracts and for separate accounts and is effective for financial statements for fiscal years beginning after December 15, 2003. At the date of initial application of this SOP, the Company is required to make various determinations, such as qualification for separate account treatment, classification of securities in separate account arrangements, significance of mortality and morbidity risk, adjustments to contract holder liabilities, and adjustments to estimated gross profits as defined in SFAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments”. The Company is currently evaluating the impact of adoption of SOP 03-1 on its consolidated financial statements.

In May 2003, Financial Accounting Standards Board (FASB) issued FAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (FAS 150), which establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. FAS 150 requires the classification of a financial instrument that is within its scope as a liability (or an asset in some circumstances). The adoption of FAS No. 150 did not impact the Company’s consolidated financial statements.

In April 2003, FASB issued FAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (FAS 149), which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as

9

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

derivatives) and for hedging activities under FAS No. 133. FAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of FAS 149 did not have a material impact on the Company’s consolidated financial statements.

In January 2003, FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46), which requires consolidation of all variable interest entities (VIE) by the primary beneficiary, as these terms are defined in FIN 46. In addition, it requires expanded disclosure for all VIEs. FIN 46 is effective immediately for VIEs created after January 31, 2003. On October 9, 2003, FASB deferred the effective date of FIN 46 for VIEs that existed prior to February 1, 2003, until the end of the first interim or annual period ending after December 15, 2003. Based on the guidance and interpretations issued to date, the Company does not expect the adoption of FIN 46 to have a material impact on its consolidated financial statements.

In December 2002, FASB issued FAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (FAS 148). FAS 148 provides alternative methods of transitioning for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. FAS 148 amends the disclosure requirements of FAS No. 123 (FAS 123) to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. The Company continues to account for stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25 (APB 25).

Following is a summary of options issued and outstanding for the three and nine months ended September 30, 2003 and 2002:

	Year of Expiration	Average Exercise Price		Options for Ordinary Shares		Year of Expiration	Average Exercise Price		Options for Ordinary Shares
	Three Months Ended September 30, 2003					Three Months Ended September 30, 2002
Balance — beginning of period				20,444,862					19,611,437
Options granted	2013	$	32.86	203,000		2012	$	32.13	171,200
Options exercised	2003-2010	$	33.12	(560,738	)	2003-2011	$	30.26	(167,613	)
Options forfeited	2009-2013	$	37.74	(249,800	)	2008-2012	$	36.42	(143,622	)
Balance — end of period				19,837,324					19,471,402
	Nine Months Ended September 30, 2003					Nine Months Ended September 30, 2002
Balance — beginning of period				19,312,287					17,070,630
Options granted	2013	$	28.02	3,686,962		2012	$	42.97	5,037,742
Options exercised	2003-2011	$	33.86	(2,632,109	)	2003-2011	$	41.13	(1,957,522	)
Options forfeited	2003-2013	$	38.66	(529,816	)	2006-2012	$	32.11	(679,448	)
Balance — end of period				19,837,324					19,471,402

10

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

The following table outlines the Company’s net income available to holders of Ordinary Shares and diluted earnings per share for the three and nine months ended September 30, 2003 and 2002, had the compensation cost been determined in accordance with the fair value method recommended in FAS 123.

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2003			2002			2003			2002
	(in thousands of U.S. dollars, except per share data)
Net income (loss) available to holders of Ordinary Shares:
As reported	$	343,751		$	(62,926	)	$	948,204		$	225,949
Add: Stock-based compensation expense included in reported net income, net of income tax	$	5,401		$	4,301		$	18,105		$	17,259
Deduct: Compensation expense, net of income tax	$	(13,070	)	$	(12,809	)	$	(39,898	)	$	(43,359	)
Pro forma	$	336,082		$	(71,434	)	$	926,411		$	199,849
Basic earnings (loss) per share:
As reported	$	1.25		$	(0.24	)	$	3.53		$	0.87
Pro forma	$	1.22		$	(0.27	)	$	3.45		$	0.77
Diluted earnings (loss) per share:
As reported	$	1.22		$	(0.24	)	$	3.46		$	0.84
Pro forma	$	1.19		$	(0.27	)	$	3.38		$	0.74

The fair value of the options issued is estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions used for grants for the three months ended September 30, 2003 and 2002, respectively: dividend yield of 2.32 percent and 2.20 percent, expected volatility of 30.75 percent and 34.67 percent, risk free interest rate of 2.76 percent and 3.32 percent. The following weighted-average assumptions were used for the nine months ended September 30, 2003 and 2002, respectively: dividend yield of 2.45 percent and 1.41 percent, expected volatility of 32.67 percent and 35.26 percent, risk free interest rate of 2.35 percent and 4.04 percent. The expected life for both years is four years and the forfeiture rate is 5 percent and 7 percent for 2003 and 2002, respectively.

3.    Goodwill

FAS No. 142, “Goodwill and Other Intangible Assets” (FAS 142) primarily addresses the accounting for goodwill and intangible assets subsequent to their acquisition. All goodwill recognized in the Company’s consolidated balance sheet at January 1, 2002 was assigned to one or more reporting units. FAS 142 requires that goodwill in each reporting unit be tested for impairment annually. Based on a profitability review performed in 2003, it was determined that two majority owned warranty program administration companies were not currently profitable. As a result of that review, updated forecasts supported indications that these companies would not under current market conditions achieve sufficient contract sales volumes to generate and sustain future profitable results. As a consequence of these revised expectations, the Company recognized a goodwill impairment loss of $6 million during the first quarter of 2003.

11

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

4.    Reinsurance

The Company purchases reinsurance to manage various exposures including catastrophe risks. Although reinsurance agreements contractually obligate the Company’s reinsurers to reimburse it for the agreed-upon portion of its gross paid losses, they do not discharge the primary liability of the Company. The amounts for net premiums written and net premiums earned in the statements of operations are net of reinsurance. Direct, assumed and ceded amounts for these items for the three and nine months ended September 30, 2003 and 2002 are as follows:

	Three Months Ended September 30						Nine Months Ended September 30
	2003			2002			2003			2002
	(in thousands of U.S. dollars)
Premiums written
Direct	$	2,798,564		$	2,731,725		$	8,651,950		$	7,194,180
Assumed		652,348			797,000			2,316,644			2,381,646
Ceded		(1,144,781	)		(1,305,938	)		(3,326,418	)		(3,491,633	)
Net	$	2,306,131		$	2,222,787		$	7,642,176		$	6,084,193
Premiums earned
Direct	$	2,957,712		$	2,225,720		$	8,558,501		$	6,068,443
Assumed		701,051			721,531			1,875,242			1,809,927
Ceded		(1,261,238	)		(1,021,672	)		(3,658,094	)		(3,017,275	)
Net	$	2,397,525		$	1,925,579		$	6,775,649		$	4,861,095

The composition of the Company’s reinsurance recoverable at September 30, 2003 and December 31, 2002, is as follows:

	September 30 2003			December 31 2002
	(in thousands of U.S. dollars)
Reinsurance recoverable on paid losses and loss expenses	$	1,297,471		$	1,363,247
Bad debt reserve on paid losses and loss expenses		(384,642	)		(377,804	)
Reinsurance recoverable on future policy benefits		14,170			8,846
Reinsurance recoverable on unpaid losses and loss expenses		13,656,234			13,558,623
Bad debt reserve on unpaid losses and loss expenses		(550,825	)		(561,459	)
Net reinsurance recoverable	$	14,032,408		$	13,991,453

The Company evaluates the financial condition of its reinsurers and potential reinsurers on a regular basis and also monitors concentrations of credit risk with reinsurers. The provision for unrecoverable reinsurance is 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.

12

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

Following is a breakdown of the Company’s reinsurance recoverable on paid losses at September 30, 2003 and December 31, 2002:

	September 30, 2003						December 31, 2002
Category	Amount		Bad Debt Reserve		% of Total Reserve		Amount		Bad Debt Reserve		% of Total Reserve
	(in millions of U.S. dollars)
General collections	$	765	$	46	6.0	%	$	848	$	43	5.1	%
Other		532		339	63.7	%		515		335	65.0	%
Total	$	1,297	$	385	29.7	%	$	1,363	$	378	27.7	%

The general collections category represents amounts in the process of collection in the normal course of business. These are balances which the Company has no indication of dispute or credit-related issues. The Company provides bad debt reserves based primarily on the application of historical loss experience to credit categories.

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

5.    Commitments, contingencies and guarantees

The Company invests in private equity partnerships with a carrying value of $83 million included in other investments. In connection with these investments, the Company has commitments that may require funding of up to $74 million over the next several years.

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

The Company provides and reinsures financial guaranties issued to support public and private borrowing arrangements. Financial guaranty insurance provides an unconditional and irrevocable guaranty that indemnifies the insured against non-payment of principal and interest on an insured debt obligation when due. The Company’s potential liability in the event of non-payment by the issuer of the insured obligation is represented by its proportionate share of the aggregate outstanding principal and interest payable (insurance in force) on such insured obligation. In synthetic transactions, the Company guarantees payment obligations of counterparties under credit default swaps. The Company does not record a carrying value for future installment premiums on

13

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

financial guaranties as they are recognized over the term of the contract. The net par outstanding exposure as at September 30, 2003 and December 31, 2002, of financial guaranty aggregate insured portfolios was $86 billion and $82 billion respectively, which includes credit default swap exposures of $23 billion and $21 billion, respectively.

6.    Credit facilities

In April 2003, the Company renewed, at substantially the same terms, its $500 million, 364-day revolving credit facility. This facility, together with the Company’s $250 million, five-year revolving credit facility, which was last renewed in May 2000, is available for general corporate purposes and each of the facilities may also be used as commercial paper back up. The five-year facility also permits the issuance of letters of credit (LOCs). At September 30, 2003, the outstanding LOCs issued under these facilities was $64 million. There were no other drawings or LOCs issued under these facilities.

At September 30, 2003, ACE Guaranty Corp. was party to a non-recourse credit facility which provides up to $175 million specifically supporting the company’s municipal portfolio and designed to provide rating agency qualified capital to support ACE Guaranty Corp.’s claims paying resources. During 2002, the facility’s expiry date was extended to November 2009. ACE Guaranty Corp. has not borrowed under this credit facility. In May 2003, ACE Guaranty Corp. entered into a $140 million, 364-day revolving credit facility that is available for general corporate purposes. ACE Guaranty Corp. has not borrowed under this credit facility.

In September 2003, the Company arranged a $500 million unsecured, one-year LOC facility for general business purposes, including the issuance of insurance and reinsurance letters of credit. This facility replaced an existing $500 million LOC facility, which was last renewed in September 2002. Usage under this facility was $264 million at September 30, 2003.

In September 2003, the Company also arranged a $500 million secured, three-year LOC facility for general business purposes, including the issuance of insurance and reinsurance letters of credit. This facility replaced an existing $350 million LOC facility, which was last renewed in September 2002. Usage under this facility was $283 million at September 30, 2003.

14

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

7.    Debt

The following table outlines the Company’s debt at September 30, 2003 and December 31, 2002.

	September 30 2003		December 31 2002
	(in millions of U.S. dollars)
Short-term debt
ACE INA commercial paper	$	146	$	146
Long-term debt
ACE INA Notes due 2004	$	400	$	400
ACE INA Notes due 2006		300		300
ACE Limited Senior Notes due 2007		499		499
ACE US Holdings Senior Notes due 2008		250		250
ACE INA Subordinated Notes due 2009		200		200
ACE INA Debentures due 2029		100		100
	$	1,749	$	1,749
Trust Preferred Securities
Capital Re LLC Monthly Income Preferred Securities due 2044	$	75	$	75
ACE INA Trust Preferred Securities due 2029		100		100
ACE INA Capital Securities due 2030		300		300
	$	475	$	475

8.    Mezzanine equity

In 2000, the Company publicly offered and issued 6,221,000 FELINE PRIDES for aggregate net proceeds of $311 million. Each FELINE PRIDE initially consisted of a unit referred to as an Income PRIDE. Each Income PRIDE consisted of (i) one 8.25 percent Cumulative Redeemable Preferred Share, Series A, liquidation preference $50 per share, and (ii) a purchase contract pursuant to which the holder of the Income PRIDE agreed to purchase from the Company, on May 16, 2003, $311 million of Ordinary Shares at the applicable settlement rate. On May 16, 2003, the Company issued approximately 11.8 million Ordinary Shares, in satisfaction of the purchase contracts underlying its FELINE PRIDES. In consideration, on June 16, 2003, all of its 8.25 percent Cumulative Redeemable Preferred Shares, Series A, were redeemed at a rate representing an issuance of 1.8991 Ordinary Shares per preferred share.

9.    Preferred shares

On May 30, 2003, the Company sold in a public offering 20 million depositary shares, each representing one-tenth of one of its 7.80 percent Cumulative Redeemable Preferred Shares, for $25 per depositary share. Underwriters exercised their over-allotment option, which resulted in the issuance of an additional three million depositary shares. Gross proceeds from the sale of the Preferred Shares were $575 million and related expenses were $18 million.

The shares have an annual dividend rate of 7.80 percent with the first quarterly dividend paid on September 1, 2003. The shares will not be convertible into or exchangeable for the Company’s Ordinary Shares. The Company may redeem these shares at any time after May 30, 2008 at a redemption value of $25.00 per depositary share or at any time under certain limited circumstances.

15

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

10.    Defined benefit plans

In accordance with FAS No. 87, “Employers’ Accounting for Pensions”, the Company was required to record a minimum pension liability for underfunded plans representing the excess of the unfunded accumulated benefit obligation over the fair value of trust assets and previously recorded pension cost liabilities. The minimum pension liability is included in accounts payable, accrued expenses and other liabilities and in accumulated other comprehensive income. The principal cause of the accrual for additional minimum pension liability was a decline in the value of equity securities held by the pension trusts in Europe.

11.    Restricted stock awards

Under the Company’s long-term incentive plans, 1,707,389 restricted Ordinary Shares were awarded during the nine months ended September 30, 2003, to officers of the Company and its subsidiaries. These shares vest at various dates through September 2007.

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.

In addition, during the period, 11,165 restricted Ordinary Shares were awarded to outside directors under the terms of the 1995 Outside Directors Plan. These shares vest in May 2004.

12.    Earnings (loss) per share

The following table sets forth the computation of basic and diluted earnings (loss) per share.

	Three Months Ended September 30						Nine Months Ended September 30
	2003			2002			2003			2002
	(in thousands of U.S. dollars, except share and per share data)
Numerator:
Net income (loss)	$	354,965		$	(56,510	)	$	972,877		$	245,195
Dividends on Mezzanine equity		—			(6,416	)		(9,773	)		(19,246	)
Dividends on preferred shares		(11,214	)		—			(14,900	)		—
Net income (loss) available to holders of Ordinary Shares	$	343,751		$	(62,926	)	$	948,204		$	225,949
Denominator:
Denominator for basic earnings (loss) per share:
Weighted average shares outstanding		275,404,544			260,264,791			268,474,758			259,810,039
Dilutive effect of Mezzanine equity		—			—			—			3,137,944
Effect of other dilutive securities		6,485,692			—			5,731,326			7,247,792
Denominator for diluted earnings (loss) per share:
Adjusted weighted average shares outstanding and assumed conversions		281,890,236			260,264,791			274,206,084			270,195,775
Basic earnings (loss) per share	$	1.25		$	(0.24	)	$	3.53		$	0.87
Diluted earnings (loss) per share	$	1.22		$	(0.24	)	$	3.46		$	0.84

16

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

The denominator for diluted loss per share for the three months ended September 30, 2002 does not include the dilutive effect of FELINE PRIDES and other dilutive securities. The incremental shares from assumed conversions are not included in computing diluted loss per share amounts as these shares are considered anti-dilutive. The dilutive effect of FELINE PRIDES for the three months ended September 30, 2002 is 1,614,340 shares. Other dilutive securities totaled 6,383,065 shares for the three months ended September 30, 2002.

13.    Taxation

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

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

ACE Prime Holdings and ACE Cap Re USA Holdings, and their respective subsidiaries are subject to income taxes imposed by U.S. authorities and file U.S. tax returns. Certain international operations of the Company are also subject to income taxes imposed by the jurisdictions in which they operate.

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

The income tax provision for the three and nine months ended September 30, 2003 and 2002 is as follows:

	Three Months Ended September 30					Nine Months Ended September 30
	2003		2002			2003		2002
	(in thousands of U.S. dollars)
Current tax expense	$	26,375	$	23,312		$	50,094	$	28,169
Deferred tax expense (benefit)		40,571		(30,646	)		157,451		9,089
Provision for income taxes	$	66,946	$	(7,334	)	$	207,545	$	37,258

17

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

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 nine months ended September 30, 2003 and 2002, is provided below.

	Nine Months Ended September 30
	2003			2002
	(in thousands of U.S. dollars)
Expected tax provision at weighted average rate	$	202,144		$	33,331
Permanent differences
Tax-exempt interest		(11,621	)		(13,589	)
Other		4,355			6,166
Goodwill		1,575			—
Net withholding taxes		11,092			11,350
Total provision for income taxes	$	207,545		$	37,258

The components of the net deferred tax asset at September 30, 2003 and December 31, 2002 are as follows:

	September 30 2003		December 31 2002
	(in thousands of U.S. dollars)
Deferred tax assets
Loss reserve discount	$	512,791	$	500,061
Unearned premium reserve		114,414		94,566
Foreign tax credits		163,696		133,811
Investments		113,236		123,410
Bad debts		171,844		177,197
Net operating loss carryforward		402,842		518,879
Other		126,850		199,461
Total deferred tax assets		1,605,673		1,747,385
Deferred tax liabilities
Deferred policy acquisition costs		155,787		148,811
Unrealized appreciation on investments		171,796		135,627
Other		39,886		39,372
Total deferred tax liabilities		367,469		323,810
Valuation allowance		135,592		135,592
Net deferred tax asset	$	1,102,612	$	1,287,983

The valuation allowance of $136 million at September 30, 2003 and December 31, 2002, reflects management’s assessment, based on available information, that it is more likely than not that a portion of the deferred tax asset will not be realized due to the inability of certain foreign subsidiaries to generate sufficient taxable income. Adjustments to the valuation allowances are made when there is a change in management’s assessment of the amount of deferred tax asset that is realizable.

18

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

At September 30, 2003, the Company has net operating loss carryforwards for U.S. federal income tax purposes of approximately $1.2 billion. The net operating loss carryforwards are available to offset future U.S. federal taxable income and, if unutilized, will expire in the years 2018-2022.

14.    Subsidiary issuer information

The following tables present the condensed consolidating financial information for ACE Limited (the “Parent Guarantor”), ACE INA Holdings, Inc. and ACE Financial Services, Inc. (formerly Capital Re Corporation), (the “Subsidiary Issuers”) at September 30, 2003 and December 31, 2002 and for the three and nine months ended September 30, 2003 and 2002. The Subsidiary Issuers are direct or indirect wholly-owned subsidiaries of the Parent Guarantor. Investments in subsidiaries are accounted for by the Parent Guarantor and the Subsidiary Issuers under the equity method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are reflected in the Parent Guarantor’s investment accounts and earnings. The Parent Guarantor fully and unconditionally guarantees certain of the debt of the Subsidiary Issuers.

19

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

Condensed Consolidating Balance Sheet at September 30, 2003

(in thousands of U.S. dollars)

	ACE Limited (Parent Co. Guarantor)		ACE INA Holdings, Inc. (Subsidiary Issuer)			ACE Financial Services, Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries and Eliminations (1)			Consolidating Adjustments (2)			ACE Limited Consolidated
Assets
Total investments and cash	$	59,693	$	9,305,252		$	1,180,455		$	11,539,309		$	—		$	22,084,709
Insurance and reinsurance balances receivable		—		1,988,992			27,693			804,759			—			2,821,444
Reinsurance recoverable		—		11,971,099			—			2,061,309			—			14,032,408
Goodwill		—		2,130,908			96,723			483,199			—			2,710,830
Investments in subsidiaries		8,642,675		—			152,000			(152,000	)		(8,642,675	)		—
Due from subsidiaries and affiliates, net		267,941		(19,427	)		(53,674	)		73,101			(267,941	)		—
Other assets		57,845		4,278,963			181,507			1,066,792			—			5,585,107
Total assets	$	9,028,154	$	29,655,787		$	1,584,704		$	15,876,469		$	(8,910,616	)	$	47,234,498
Liabilities
Unpaid losses and loss expenses	$	—	$	18,078,932		$	94,043		$	7,464,161		$	—		$	25,637,136
Unearned premiums		—		3,739,011			385,858			2,118,229			—			6,243,098
Future policy benefits for life and annuity contracts		—		—			—			479,291			—			479,291
Short-term debt		—		145,980			—			—			—			145,980
Long-term debt		499,409		999,727			—			250,000			—			1,749,136
Trust preferred securities		—		400,000			75,000			—			—			475,000
Other liabilities		182,789		2,721,810			144,853			1,109,449			—			4,158,901
Total liabilities		682,198		26,085,460			699,754			11,421,130			—			38,888,542
Total shareholders’ equity		8,345,956		3,570,327			884,950			4,455,339			(8,910,616	)		8,345,956
Total liabilities and shareholders’ equity	$	9,028,154	$	29,655,787		$	1,584,704		$	15,876,469		$	(8,910,616	)	$	47,234,498

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

(2) Includes ACE Limited parent company eliminations.

20

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

Condensed Consolidating Balance Sheet at December 31, 2002

(in thousands of U.S. dollars)

	ACE Limited (Parent Co. Guarantor)		ACE INA Holdings, Inc. (Subsidiary Issuer)		ACE Financial Services, Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries and Eliminations (1)			Consolidating Adjustments (2)			ACE Limited Consolidated
Assets
Total investments and cash	$	77,506	$	7,413,714	$	1,023,777		$	9,808,911		$	—		$	18,323,908
Insurance and reinsurance balances receivable		—		1,729,439		28,252			896,299			—			2,653,990
Reinsurance recoverable		—		11,616,228		11,420			2,363,805			—			13,991,453
Goodwill		—		2,130,908		96,723			489,229			—			2,716,860
Investments in subsidiaries		7,095,429		—		152,000			(152,000	)		(7,095,429	)		—
Due from subsidiaries and affiliates, net		162,314		50,967		(49,681	)		(1,286	)		(162,314	)		—
Other assets		42,703		4,235,625		210,477			1,275,921			—			5,764,726
Total assets	$	7,377,952	$	27,176,881	$	1,472,968		$	14,680,879		$	(7,257,743	)	$	43,450,937
Liabilities
Unpaid losses and loss expenses	$	—	$	17,057,979	$	75,960		$	7,181,243		$	—		$	24,315,182
Unearned premiums		—		3,233,614		352,551			1,999,359			—			5,585,524
Future policy benefits for life and annuity contracts		—		—		—			442,264			—			442,264
Short-term debt		—		145,940		—			—			—			145,940
Long-term debt		499,282		999,655		—			250,000			—			1,748,937
Trust preferred securities		—		400,000		75,000			—			—			475,000
Other liabilities		178,934		2,574,801		160,238			1,124,381			—			4,038,354
Total liabilities		678,216		24,411,989		663,749			10,997,247			—			36,751,201
Mezzanine equity		311,050		—		—			—			—			311,050
Total shareholders’ equity		6,388,686		2,764,892		809,219			3,683,632			(7,257,743	)		6,388,686
Total liabilities, mezzanine equity and shareholders’ equity	$	7,377,952	$	27,176,881	$	1,472,968		$	14,680,879		$	(7,257,743	)	$	43,450,937

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

(2) Includes ACE Limited parent company eliminations.

21

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

Condensed Consolidating Statement of Operations

For the three months ended September 30, 2003

(in thousands of U.S. dollars)

	ACE Limited (Parent Co. Guarantor)		ACE INA Holdings, Inc. (Subsidiary Issuer)			ACE Financial Services, Inc. (Subsidiary Issuer)		Other ACE Limited Subsidiaries and Eliminations (1)			Consolidating Adjustments (2)			ACE Limited Consolidated
Net premiums written	$	—	$	1,266,366		$	56,422	$	983,343		$	—		$	2,306,131
Net premiums earned		—		1,257,160			44,439		1,095,926			—			2,397,525
Net investment income		3,314		91,605			11,988		110,967			(3,185	)		214,689
Other income (expense)		—		(360	)		—		(2,728	)		—			(3,088	)
Equity in earnings of subsidiaries		383,607		—			—		—			(383,607	)		—
Net realized gains (losses) on investments		5,386		1,617			14,936		35,617			—			57,556
Losses and loss expenses		—		894,728			14,452		609,298			—			1,518,478
Life and annuity benefits		—		—			—		44,524			—			44,524
Policy acquisition costs and administrative expenses		29,170		317,396			17,045		275,910			(2,100	)		637,421
Interest expense		7,217		32,256			1,658		5,392			(2,175	)		44,348
Income tax expense		955		37,988			11,052		16,951			—			66,946
Net income (loss)	$	354,965	$	67,654		$	27,156	$	287,707		$	(382,517	)	$	354,965

Condensed Consolidating Statement of Operations

For the three months ended September 30, 2002

(in thousands of U.S. dollars)

	ACE Limited (Parent Co. Guarantor)			ACE INA Holdings, Inc. (Subsidiary Issuer)			ACE Financial Services, Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries and Eliminations (1)			Consolidating Adjustments (2)			ACE Limited Consolidated
Net premiums written	$	—		$	1,075,787		$	42,887		$	1,104,113		$	—		$	2,222,787
Net premiums earned		—			863,326			29,613			1,032,640			—			1,925,579
Net investment income		12,872			76,737			11,703			106,491			(8,063	)		199,740
Other income (expense)		—			(14,516	)		—			484			—			(14,032	)
Equity in earnings of subsidiaries		17,301			—			—			—			(17,301	)		—
Net realized losses on investments		(55,564	)		(47,386	)		(33,012	)		(99,320	)		—			(235,282	)
Losses and loss expenses		—			609,457			4,976			713,359			—			1,327,792
Life and annuity benefits		—			—			—			59,697			—			59,697
Policy acquisition costs and administrative expenses		20,174			235,300			13,487			235,601			(881	)		503,681
Interest expense		8,619			35,742			3,017			5,227			(3,926	)		48,679
Income tax expense (benefit)		2,326			(2,815	)		(7,103	)		258			—			(7,334	)
Net income (loss)	$	(56,510	)	$	477		$	(6,073	)	$	26,153		$	(20,557	)	$	(56,510	)

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

(2) Includes ACE Limited parent company eliminations.

22

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

Condensed Consolidating Statement of Operations

For the nine months ended September 30, 2003

(in thousands of U.S. dollars)

	ACE Limited (Parent Co. Guarantor)			ACE INA Holdings, Inc. (Subsidiary Issuer)			ACE Financial Services, Inc. (Subsidiary Issuer)		Other ACE Limited Subsidiaries and Eliminations (1)			Consolidating Adjustments (2)			ACE Limited Consolidated
Net premiums written	$	—		$	3,846,762		$	209,166	$	3,586,248		$	—		$	7,642,176
Net premiums earned		—			3,360,354			131,942		3,283,353			—			6,775,649
Net investment income		15,110			266,834			34,791		330,865			(14,552	)		633,048
Other income (expense)		—			(1,809	)		—		(6,707	)		—			(8,516	)
Equity in earnings of subsidiaries		1,072,991			—			—		—			(1,072,991	)		—
Net realized gains (losses) on investments		(8,594	)		38,459			24,527		69,636			—			124,028
Losses and loss expenses		—			2,335,223			38,269		1,887,198			—			4,260,690
Life and annuity benefits		—			—			—		136,582			—			136,582
Policy acquisition costs and administrative expenses		75,521			859,336			53,605		831,445			(6,350	)		1,813,557
Interest expense		26,743			97,274			5,027		16,246			(12,332	)		132,958
Income tax expense		4,366			128,297			26,367		48,515			—			207,545
Net income (loss)	$	972,877		$	243,708		$	67,992	$	757,161		$	(1,068,861	)	$	972,877

Condensed Consolidating Statement of Operations

For the nine months ended September 30, 2002

(in thousands of U.S. dollars)

	ACE Limited (Parent Co. Guarantor)			ACE INA Holdings, Inc. (Subsidiary Issuer)			ACE Financial Services, Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries and Eliminations (1)			Consolidating Adjustments (2)			ACE Limited Consolidated
Net premiums written	$	—		$	2,887,006		$	88,637		$	3,108,550		$	—		$	6,084,193
Net premiums earned		—			2,232,787			78,029			2,550,279			—			4,861,095
Net investment income		41,948			236,989			35,154			313,380			(26,792	)		600,679
Other income (expense)		—			(25,587	)		—			4,286			—			(21,301	)
Equity in earnings of subsidiaries		358,254			—			—			—			(358,254	)		—
Net realized losses on investments		(78,248	)		(81,859	)		(51,933	)		(188,844	)		—			(400,884	)
Losses and loss expenses		—			1,557,630			10,818			1,573,438			—			3,141,886
Life and annuity benefits		—			—			—			106,004			—			106,004
Policy acquisition costs and administrative expenses		53,263			607,442			36,764			667,787			(2,643	)		1,362,613
Interest expense		16,745			116,374			9,564			14,482			(10,532	)		146,633
Income tax expense		6,751			23,330			(5,664	)		12,841			—			37,258
Net income (loss)	$	245,195		$	57,554		$	9,768		$	304,549		$	(371,871	)	$	245,195

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

(2) Includes ACE Limited parent company eliminations.

23

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

Condensed Consolidating Statement of Cash Flows

For the nine months ended September 30, 2003

(in thousands of U.S. dollars)

	ACE Limited (Parent Co. Guarantor)			ACE INA Holdings, Inc. (Subsidiary Issuer)			ACE Financial Services, Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries and Eliminations (1)			ACE Limited Consolidated
Net cash flows from (used for) operating activities	$	(117,372	)	$	1,040,898		$	162,121		$	1,553,490		$	2,639,137
Cash flows from investing activities
Purchases of fixed maturities		(20,448	)		(4,616,326	)		(346,596	)		(9,506,999	)		(14,490,369	)
Purchases of equity securities		—			(44,076	)		—			(31,388	)		(75,464	)
Sales of fixed maturities		60,133			2,624,522			191,024			8,224,062			11,099,741
Sales of equity securities		—			56,364			—			51,509			107,873
Maturities of fixed maturities		—			—			3,000			91,612			94,612
Net realized gains (losses) on investment derivatives		(9,222	)		—			—			27,724			18,502
Other		—			(39,167	)		—			(21,302	)		(60,469	)
Net cash flows from (used for) investing activities	$	30,463		$	(2,018,683	)	$	(152,572	)	$	(1,164,782	)	$	(3,305,574	)
Cash flows from financing activities
Dividends paid on Ordinary Shares		(145,462	)		—			—			—			(145,462	)
Dividends paid on Mezzanine equity		(9,773	)		—			—			—			(9,773	)
Dividends paid on Preferred Shares		(11,337	)		—			—			—			(11,337	)
Net proceeds from issuance of Preferred Shares		556,887			—			—			—			556,887
Proceeds from short-term debt, net		—			40			—			—			40
Advances to (from) affiliates		66,256			—			—			(66,256	)		—
Proceeds from exercise of options for Ordinary Shares		36,504			—			—			—			36,504
Proceeds from Ordinary Shares issued under ESPP		7,344			—			—			—			7,344
Capitalization of subsidiaries		(697,393	)		667,617			—			29,776			—
Dividends received from subsidiaries		306,000			—			—			(306,000	)		—
Net cash flows from (used for) financing activities	$	109,026		$	667,657		$	—		$	(342,480	)	$	434,203
Net increase (decrease) in cash		22,117			(310,128	)		9,549			46,228			(232,234	)
Cash — beginning of period		2,150			478,161			4,438			178,606			663,355
Cash — end of period	$	24,267		$	168,033		$	13,987		$	224,834		$	431,121

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

24

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

Condensed Consolidating Statement of Cash Flows

For the nine months ended September 30, 2002

(in thousands of U.S. dollars)

	ACE Limited (Parent Co. Guarantor)			ACE INA Holdings, Inc. (Subsidiary Issuer)			ACE Financial Services, Inc. (Subsidiary Issuer)			Other ACE Limited Subsidiaries and Eliminations (1)			ACE Limited Consolidated
Net cash flows from (used for) operating activities	$	(148,253	)	$	127,199		$	36,047		$	1,576,914		$	1,591,907
Cash flows from investing activities
Purchases of fixed maturities		(149,170	)		(2,231,174	)		(480,079	)		(9,891,150	)		(12,751,573	)
Purchases of equity securities		—			(60,165	)		—			(94,670	)		(154,835	)
Sales of fixed maturities		342,097			1,842,602			436,144			8,847,729			11,468,572
Sales of equity securities		—			54,512			—			55,865			110,377
Maturities of fixed maturities		—			—			—			249,426			249,426
Net realized losses on investment derivatives		—			—			—			(117,580	)		(117,580	)
Settlement of an acquisition-related lawsuit		—			54,380			—			—			54,380
Other		—			—			1,129			(103,540	)		(102,411	)
Net cash flows from (used for) investing activities	$	192,927		$	(339,845	)	$	(42,806	)	$	(1,053,920	)	$	(1,243,644	)
Cash flows from financing activities
Dividends paid on Ordinary Shares		(122,846	)		—			—			—			(122,846	)
Dividends paid on Mezzanine equity		(19,246	)		—			—			—			(19,246	)
Proceeds from short-term debt, net		—			(383,109	)		(25,000	)		132,981			(275,128	)
Proceeds from long-term debt		499,155			(100,000	)		—			—			399,155
Advances to (from) affiliates		359,103			—			9,891			(368,994	)		—
Repayment of trust preferred securities		—			(400,000	)		—			—			(400,000	)
Proceeds from exercise of options for Ordinary Shares		40,723			—			—			—			40,723
Proceeds from Ordinary Shares issued under ESPP		7,472			—			—			—			7,472
Capitalization of subsidiaries		(1,098,896	)		1,185,956			25,000			(112,060	)		—
Dividends received from subsidiaries		260,000			—			—			(260,000	)		—
Net cash flows from (used for) financing activities	$	(74,535	)	$	302,847		$	9,891		$	(608,073	)	$	(369,870	)
Net increase (decrease) in cash		(29,861	)		90,201			3,132			(85,079	)		(21,607	)
Cash — beginning of period		32,525			355,327			1,027			282,502			671,381
Cash — end of period	$	2,664		$	445,528		$	4,159		$	197,423		$	649,774

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

25

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

15.    Segment information

The Company operates through four business segments: Insurance — North American, Insurance — Overseas General, Global Reinsurance and Financial Services. These segments distribute their products through various forms of brokers and agencies. Insurance — North American, Insurance — Overseas General and Global Reinsurance utilize direct marketing programs to reach clients, while Financial Services operates with major U.S. financial guaranty insurers, mortgage guaranty insurers in the U.S., U.K. and Australia, title insurers and European trade credit insurers. Additionally, Insurance — North American has formed Internet distribution channels for some of its products and Global Reinsurance and Financial Services have established relationships with reinsurance intermediaries.

The Insurance — North American segment includes the operations of ACE USA, ACE Canada and ACE Bermuda, excluding the financial solutions business in both the U.S. and Bermuda, which are included in the Financial Services segment. These operations provide a broad range of property and casualty insurance and reinsurance products, including excess liability, excess property, professional lines, aerospace, accident and health coverages and claim and risk management products and services, to a diverse group of commercial and non-commercial enterprises and consumers. The operations of ACE USA also include the run-off operations, which include Brandywine, Commercial Insurance Services, residual market workers’ compensation business, pools and syndicates 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, primary and excess casualty, energy, professional risk, marine, trade credit, accident and health, aviation and consumer-oriented products. ACE International provides insurance coverage on a worldwide basis.

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

The Financial Services segment includes the financial guaranty business of ACE Guaranty Corp. and ACE Capital Re International and the financial solutions business in the U.S. and Bermuda. The financial guaranty businesses serve the U.S. domestic and international financial guaranty insurance and reinsurance markets. Their principal business is the insurance and reinsurance of investment grade public finance and asset-backed debt issues (insured and ceded by the primary bond insurance companies), and insurance and reinsurance of credit-default swaps. In addition to financial guaranty business, the companies provide trade credit reinsurance and structured solutions to problems of financial and risk management through reinsurance and other forms of credit enhancement products, as well as mortgage guaranty reinsurance and title reinsurance. The financial solutions

26

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

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.

a) The following tables summarize the operations by segment for the three and nine months ended September 30, 2003 and 2002.

b) For segment reporting purposes, certain items have been presented in a different manner than in the consolidated financial statements. For segment reporting purposes, net realized gains (losses) and the tax on net realized gains (losses) have been shown separately.

Statement of Operations by Segment

For the three months ended September 30, 2003

(in thousands of U.S. Dollars)

	Insurance — North American			Insurance — Overseas General			Global Reinsurance		Corporate and Other (1)			Consolidated Property & Casualty (2)			Financial Services			ACE Consolidated
Operations Data
Gross premiums written	$	1,818,820		$	1,200,752		$	275,526	$	—		$	3,295,098		$	107,073		$	3,402,171
Net premiums written		1,064,794			871,405			217,400		—			2,153,599			105,742			2,259,341
Net premiums earned		990,321			881,942			273,560		—			2,145,823			205,277			2,351,100
Losses and loss expenses		711,987			528,673			133,762		—			1,374,422			144,056			1,518,478
Policy acquisition costs		94,873			170,444			55,975		—			321,292			17,850			339,142
Administrative expenses		103,209			120,595			15,485		31,485			270,774			21,811			292,585
Underwriting income (loss)		80,252			62,230			68,338		(31,485	)		179,335			21,560			200,895
Life
Gross premiums written		—			—			48,741		—			—			—			48,741
Net premiums written		—			—			46,790		—			—			—			46,790
Net premiums earned		—			—			46,425		—			—			—			46,425
Life and annuity benefits		—			—			44,524		—			—			—			44,524
Policy acquisition costs		—			—			4,924		—			—			—			4,924
Administrative expenses		—			—			770		—			—			—			770
Net investment income		—			—			9,357		—			—			—			9,357
Underwriting income		—			—			5,564		—			—			—			5,564
Net investment income		99,753			40,110			23,498		(6,343	)		157,018			48,314			205,332
Other income (expense)		(697	)		(2,414	)		607		—			(2,504	)		(584	)		(3,088	)
Interest expense		6,913			1,150			—		34,649			42,712			1,636			44,348
Income tax expense (benefit)		47,383			12,831			2,778		(13,436	)		49,556			10,934			60,490
Income (loss) excluding net realized gains (losses)		125,012			85,945			95,229		(59,041	)		241,581			56,720			303,865
Net realized gains (losses)		7,893			4,382			10,306		5,386			27,967			29,589			57,556
Tax effect of net realized gains (losses)		115			(427	)		58		—			(254	)		(6,202	)		(6,456	)
Net income (loss)	$	133,020		$	89,900		$	105,593	$	(53,655	)	$	269,294		$	80,107		$	354,965

(1) Includes ACE Limited, ACE INA Holdings and intercompany eliminations.

(2) Excludes life reinsurance business.

27

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

Statement of Operations by Segment

For the three months ended September 30, 2002

(in thousands of U.S. Dollars)

	Insurance — North American			Insurance — Overseas General			Global Reinsurance			Corporate and Other (1)			Consolidated Property & Casualty (2)			Financial Services			ACE Consolidated
Operations Data
Gross premiums written	$	1,783,574		$	1,007,923		$	185,474		$	—		$	2,976,971		$	493,225		$	3,470,196
Net premiums written		869,008			689,318			131,008			—			1,689,334			476,605			2,165,939
Net premiums earned		654,003			647,308			194,307			—			1,495,618			373,113			1,868,731
Losses and loss expenses		452,643			445,900			101,069			—			999,612			328,180			1,327,792
Policy acquisition costs		54,493			140,860			37,339			—			232,692			17,132			249,824
Administrative expenses		86,031			107,031			10,174			29,894			233,130			15,912			249,042
Underwriting income (loss)		60,836			(46,483	)		45,725			(29,894	)		30,184			11,889			42,073
Life
Gross premiums written		—			—			58,529			—			—			—			58,529
Net premiums written		—			—			56,848			—			—			—			56,848
Net premiums earned		—			—			56,848			—			—			—			56,848
Life and annuity benefits		—			—			59,697			—			—			—			59,697
Policy acquisition costs		—			—			3,189			—			—			—			3,189
Administrative expenses		—			—			1,626			—			—			—			1,626
Net investment income		—			—			6,927			—			—			—			6,927
Underwriting income (loss)		—			—			(737	)		—			—			—			(737	)
Net investment income		101,500			28,519			19,298			(2,119	)		147,198			45,615			192,813
Other income (expense)		(271	)		(230	)		554			(14,516	)		(14,463	)		431			(14,032	)
Interest expense		7,595			493			—			37,488			45,576			3,103			48,679
Income tax expense (benefit)		41,661			(3,141	)		(1,432	)		(21,429	)		15,659			6,761			22,420
Income (loss) excluding net realized gains (losses)		112,809			(15,546	)		66,272			(62,588	)		101,684			48,071			149,018
Net realized gains (losses)		(54,718	)		(21,011	)		(26,593	)		(55,564	)		(157,886	)		(77,396	)		(235,282	)
Tax effect of net realized gains (losses)		3,712			7,161			29			—			10,902			18,852			29,754
Net income (loss)	$	61,803		$	(29,396	)	$	39,708		$	(118,152	)	$	(45,300	)	$	(10,473	)	$	(56,510	)

(1) Includes ACE Limited, ACE INA Holdings and intercompany eliminations.

(2) Excludes life reinsurance business.

28

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

Statement of Operations by Segment

For the nine months ended September 30, 2003

(in thousands of U.S. Dollars)

	Insurance — North American			Insurance — Overseas General			Global Reinsurance		Corporate and Other (1)			Consolidated Property & Casualty (2)			Financial Services			ACE Consolidated
Operations Data
Gross premiums written	$	5,131,214		$	3,850,494		$	1,086,710	$	—		$	10,068,418		$	756,474		$	10,824,892
Net premiums written		2,966,874			2,768,618			1,005,558		—			6,741,050			763,505			7,504,555
Net premiums earned		2,663,089			2,555,787			790,957		—			6,009,833			629,541			6,639,374
Losses and loss expenses		1,860,915			1,540,888			392,674		—			3,794,477			466,213			4,260,690
Policy acquisition costs		278,612			485,251			152,835		—			916,698			45,536			962,234
Administrative expenses		292,663			355,736			44,778		84,528			777,705			60,251			837,956
Underwriting income (loss)		230,899			173,912			200,670		(84,528	)		520,953			57,541			578,494
Life
Gross premiums written		—			—			143,702		—			—			—			143,702
Net premiums written		—			—			137,621		—			—			—			137,621
Net premiums earned		—			—			136,275		—			—			—			136,275
Life and annuity benefits		—			—			136,582		—			—			—			136,582
Policy acquisition costs		—			—			11,008		—			—			—			11,008
Administrative expenses		—			—			2,359		—			—			—			2,359
Net investment income		—			—			25,004		—			—			—			25,004
Underwriting income		—			—			11,330		—			—			—			11,330
Net investment income		306,121			113,107			63,293		(23,218	)		459,303			148,741			608,044
Other income (expense)		(6,966	)		(3,707	)		1,893		—			(8,780	)		264			(8,516	)
Interest expense		21,813			2,016			72		103,850			127,751			5,207			132,958
Income tax expense (benefit)		128,957			60,643			10,287		(40,563	)		159,324			27,792			187,116
Income (loss) excluding net realized gains (losses)		379,284			220,653			266,827		(171,033	)		684,401			173,547			869,278
Net realized gains (losses)		14,751			(7,053	)		26,482		(8,594	)		25,586			98,442			124,028
Tax effect of net realized gains (losses)		183			4,745			598		—			5,526			(25,955	)		(20,429	)
Net income (loss)	$	394,218		$	218,345		$	293,907	$	(179,627	)	$	715,513		$	246,034		$	972,877

(1) Includes ACE Limited, ACE INA Holdings and intercompany eliminations.

(2) Excludes life reinsurance business.

29

ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

Statement of Operations by Segment

For the nine months ended September 30, 2002

(in thousands of U.S. Dollars)

	Insurance — North American			Insurance — Overseas General			Global Reinsurance			Corporate and Other (1)			Consolidated Property & Casualty (2)			Financial Services			ACE Consolidated
Operations Data
Gross premiums written	$	4,476,260		$	2,911,298		$	773,649		$	—		$	8,161,207		$	1,299,179		$	9,460,386
Net premiums written		2,100,172			1,919,904			682,840			—			4,702,916			1,269,479			5,972,395
Net premiums earned		1,732,934			1,721,892			459,133			—			3,913,959			835,567			4,749,526
Losses and loss expenses		1,176,275			1,082,973			192,748			—			2,451,996			689,890			3,141,886
Policy acquisition costs		146,821			382,383			83,008			—			612,212			57,551			669,763
Administrative expenses		243,604			281,486			26,054			79,214			630,358			42,979			673,337
Underwriting income (loss)		166,234			(24,950	)		157,323			(79,214	)		219,393			45,147			264,540
Life
Gross premiums written		—			—			115,440			—			—			—			115,440
Net premiums written		—			—			111,798			—			—			—			111,798
Net premiums earned		—			—			111,569			—			—			—			111,569
Life and annuity benefits		—			—			106,004			—			—			—			106,004
Policy acquisition costs		—			—			15,253			—			—			—			15,253
Administrative expenses		—			—			4,260			—			—			—			4,260
Net investment income		—			—			19,124			—			—			—			19,124
Underwriting income		—			—			5,176			—			—			—			5,176
Net investment income		306,801			77,109			62,198			(5,044	)		441,064			140,491			581,555
Other income (expense)		(291	)		3,592			554			(25,587	)		(21,732	)		431			(21,301	)
Interest expense		24,286			1,414			227			110,348			136,275			10,358			146,633
Income tax expense (benefit)		115,728			9,397			519			(59,993	)		65,651			23,702			89,353
Income (loss) excluding net realized gains (losses)		332,730			44,940			224,505			(160,200	)		436,799			152,009			593,984
Net realized gains (losses)		(106,164	)		(32,186	)		(57,236	)		(78,248	)		(273,834	)		(127,050	)		(400,884	)
Tax effect of net realized gains (losses)		15,433			9,939			189			—			25,561			26,534			52,095
Net income (loss)	$	241,999		$	22,693		$	167,458		$	(238,448	)	$	188,526		$	51,493		$	245,195

(1) Includes ACE Limited, ACE INA Holdings and intercompany eliminations.

(2) Excludes life reinsurance business.

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ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

The following tables summarize the revenues of each segment by product offering for the three and nine months ended September 30, 2003 and 2002.

Net premiums earned by type of premium

Three Months Ended September 30, 2003

	Property & Casualty		Life, Accident & Health		Financial Guaranty		Financial Solutions		ACE Consolidated
	(in millions of U.S. dollars)
Insurance — North American	$	958	$	32	$	—	$	—	$	990
Insurance — Overseas General		682		200		—		—		882
Global Reinsurance		274		46		—		—		320
Financial Services		—		—		80		125		205
	$	1,914	$	278	$	80	$	125	$	2,397
Three Months Ended September 30, 2002
	Property & Casualty		Life, Accident & Health		Financial Guaranty		Financial Solutions		ACE Consolidated
	(in millions of U.S. dollars)
Insurance — North American	$	635	$	19	$	—	$	—	$	654
Insurance — Overseas General		478		169		—		—		647
Global Reinsurance		194		57		—		—		251
Financial Services		—		—		46		327		373
	$	1,307	$	245	$	46	$	327	$	1,925
Nine Months Ended September 30, 2003
	Property & Casualty		Life, Accident & Health		Financial Guaranty		Financial Solutions		ACE Consolidated
	(in millions of U.S. dollars)
Insurance — North American	$	2,558	$	105	$	—	$	—	$	2,663
Insurance — Overseas General		1,989		567		—		—		2,556
Global Reinsurance		791		136		—		—		927
Financial Services		—		—		240		389		629
	$	5,338	$	808	$	240	$	389	$	6,775
Nine Months Ended September 30, 2002
	Property & Casualty		Life, Accident & Health		Financial Guaranty		Financial Solutions		ACE Consolidated
	(in millions of U.S. dollars)
Insurance — North American	$	1,671	$	62	$	—	$	—	$	1,733
Insurance — Overseas General		1,275		447		—		—		1,722
Global Reinsurance		459		112		—		—		571
Financial Services		—		—		201		634		835
	$	3,405	$	621	$	201	$	634	$	4,861

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ACE LIMITED AND SUBSIDIARIES

NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Cont’d)

(Unaudited)

The following table summarizes the identifiable assets for the property and casualty underwriting operations, including the Financial Services segment, the life reinsurance operations and corporate holding companies, including ACE Limited and ACE INA Holdings at September 30, 2003 and December 31, 2002.

	September 30 2003		December 31 2002
	(in millions of U.S. dollars)
Property and casualty	$	44,016	$	40,651
Life reinsurance		723		610
Corporate		2,495		2,190
Total assets	$	47,234	$	43,451

16.     Basis of presentation

Certain items in the prior year financial statements have been reclassified to conform with the current year presentation.

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

The following is a discussion of our results of operations, financial condition, and liquidity and capital resources as of and for the three and nine months ended September 30, 2003. 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, 2002.

Safe Harbor Disclosure

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

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

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

• the capital markets;

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

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

• the ability to collect reinsurance recoverable, credit developments of reinsurers and any delays with respect thereto;

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

• actual loss experience from insured or reinsured events;

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

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

• the impact of the September 11 tragedy and its aftermath on our insureds and reinsureds, on the insurance and reinsurance industry, and on the economy in general;

• uncertainties relating to governmental, legislative and regulatory policies, developments and treaties, which, among other things, could affect coverage and liability for asbestos claims, subject us to insurance regulation or taxation in additional jurisdictions, change the tax rate applicable to us 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;

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• the competitive environment in which we operate, including trends in pricing or in policy terms and conditions, which may differ from our projections;

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

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

• changing rates of inflation and other economic conditions;

• the amount of dividends received from subsidiaries;

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

• the ability of technology to perform as anticipated; and

• management’s response to these factors.

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.

Critical Accounting Policies

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 fair value of our investment portfolio;

• the fair value of certain derivatives; and

• the valuation of goodwill.

We believe our accounting policies for these items are of critical importance to our consolidated financial statements. In addition to the discussion that follows, more information regarding the estimates and assumptions required to arrive at these amounts is included in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2002.

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Results of Operations—Three and Nine Months Ended September 30, 2003 and 2002

Consolidated Operating Results

	Three Months Ended September 30						Nine Months Ended September 30
	2003			2002			2003			2002
	(in millions of U.S. dollars)
Gross premiums written	$	3,451		$	3,528		$	10,969		$	9,575
Net premiums written		2,306			2,223			7,642			6,084
Net premiums earned		2,397			1,925			6,775			4,861
Losses and loss expenses		1,519			1,328			4,261			3,142
Life and annuity benefits		45			60			137			106
Policy acquisition costs		343			253			973			685
Administrative expenses		293			250			840			678
Underwriting income	$	197		$	34		$	564		$	250
Net investment income		216			199			633			600
Net realized gains (losses)		57			(235	)		124			(401	)
Other income (expense)		(3	)		(15	)		(8	)		(22	)
Interest expense		45			48			133			146
Income tax expense (benefit)		67			(8	)		207			36
Net income (loss)	$	355		$	(57	)	$	973		$	245
Loss and loss expense ratio		64.6	%		71.0	%		64.2	%		66.1	%
Policy acquisition cost ratio		14.4	%		13.4	%		14.5	%		14.1	%
Administrative expense ratio		12.4	%		13.3	%		12.6	%		14.2	%
Combined ratio		91.4	%		97.7	%		91.3	%		94.4	%

Gross premiums written decreased two percent for the three months ended September 30, 2003, compared with the same period in 2002. For the nine months ended September 30, 2003, gross premiums written increased 15 percent. Gross premiums written reflect the premiums paid by our customers to secure insurance or reinsurance protection from us. Gross premiums written in our property and casualty businesses (P&C) increased 11 percent and 23 percent for the three and nine months ended September 30, 2003, respectively while our Financial Services business decreased 78 percent and 42 percent, respectively. Most of this decline was due to the absence of new loss portfolio transfer (LPT) and equity collateralized debt obligation (CDO) premiums for the quarter. As discussed later in this report, production in the Financial Services segment can fluctuate dramatically from period to period. Insurance and reinsurance rates in the P&C market increased steadily throughout 2002 and continued to do so in 2003. Property rates in the U.S. have stabilized, while property rates in Europe continue to increase. We believe the property catastrophe reinsurance market has also now stabilized due to the absorption of new capacity and adequate levels of pricing in most areas. We believe casualty rates will continue to rise for the remainder of 2003. Demand for our new product offerings has been good and this has also contributed to the growth in premiums in 2003. Terrorism coverage has been modest and largely limited to insureds that seek the coverage to meet third-party requirements.

Net premiums written, which reflect the premiums we retain after purchasing reinsurance protection, increased four percent for the three months ended September 30, 2003. For the nine months ended September 30, 2003, net premiums written increased 26 percent. Net premiums written in our P&C businesses increased 27 percent and 43 percent for the three and nine months ended September 30, 2003, respectively while our Financial Services business decreased 78 percent and 40 percent, respectively. Our P&C net premiums written are growing more than our P&C gross premiums written because we are retaining more of the business we write. This reflects a conscious decision on our part to focus on direct lines of business and to shift away from heavily reinsured program business.

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Net premiums earned, which reflect the portion of net premiums written that were recorded as revenues for the period, increased 25 percent and 39 percent for the three and nine months ended September 30, 2003, respectively. Net premiums earned in our P&C businesses increased 44 percent and 54 percent for the three and nine months ended September 30, 2003, respectively while our Financial Services business had decreases of 45 percent and 25 percent, respectively. The growth in P&C net premiums earned is a result of the growth in P&C net premiums written in 2003 and 2002.

Underwriting results for our P&C and Financial Services business are discussed by reference to the combined ratio, the loss and loss expense ratio, the policy acquisition cost ratio and the administrative expense ratio. We calculate these ratios by dividing the respective expense amounts of our P&C and Financial Services business by net premiums earned from our P&C and Financial Services business. We do not calculate these ratios for the life reinsurance business, because they are not appropriate measures of the underwriting results for that business. The combined ratio is determined by adding the loss and loss expense ratio, the policy acquisition cost ratio and the administrative expense ratio. A combined ratio under 100 percent indicates underwriting income, and a combined ratio exceeding 100 percent indicates underwriting losses.

The loss and loss expense ratio declined for the three and nine months ended September 30, 2003. Our loss and loss expense ratio is impacted by changes in the mix of business written and level of catastrophe losses in a period. We have taken advantage of increasing rates and market opportunities and most of these opportunities are in the casualty insurance and reinsurance areas, where rate increases are accelerating. Casualty business is typically written at higher loss ratios than property business because the loss settlement period for casualty business is longer in duration, and thus we earn more investment income on premiums invested. We have also increased our loss ratio assumptions over the past year in some of our casualty lines in connection with increases we have made in our retained risk levels. The three months ended September 30, 2003 included $42 million of catastrophe losses compared with $100 million for the same quarter in 2002. Our loss and loss expense ratio is also influenced by the size of LPTs written in a particular quarter. LPTs are typically recorded at higher loss ratios than our other lines of business. For the three and nine months ended September 30, 2002, we recorded gross premiums written attributed to LPT business of $187 million and $212 million, respectively, compared with $4 million for the nine months ended September 30, 2003. Also impacting our loss and loss expense ratio is adverse prior period development. For the three months ended September 30, 2003 and 2002, we had adverse prior period development of $60 million and $55 million, respectively. For the nine months ended September 30, 2003 and 2002 adverse prior period development was $106 million and $120 million, respectively. Our segment discussions below contain more information about prior period development.

Our policy acquisition costs include commissions, premium taxes, underwriting and other costs that vary with, and are primarily related to, the production of premium. The policy acquisition cost ratio increased for the three and nine months ended September 30, 2003 due to changes in the mix of business written. We have increased the volume of business generated from Global Reinsurance in ACE Tempest Re USA which typically incurs higher brokerage commissions than business generated in Bermuda or Europe. We have also purchased less reinsurance in the Insurance – North American segment, which has resulted in reduced ceding commissions. Administrative expenses include all other operating costs. Administrative expenses increased to support the growth in our business and partially due to the depreciation of the U.S. dollar, which had the effect of increasing administrative expenses for Insurance – Overseas General. The administrative expense ratio has improved for the three and nine months ended September 30, 2003 due to the significant increase in net premiums earned.

Net investment income increased for the three and nine months ended September 30, 2003, due to higher average invested assets, partially offset by a decline in the investment portfolio’s yield due to the impact of lower interest rates.

Increases in net premiums earned and lower catastrophe losses in 2003 contributed to the higher underwriting income. Our net income increased $412 million and $728 million for the three and nine months ended September 30, 2003, respectively. The increases in the current periods are due to higher underwriting

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income and the impact of net realized gains in the current year compared with net realized losses in the prior year. This increased net income by $256 million and $452 million for the three and nine months ended September 30, 2003, respectively.

Segment Operating Results — Three and Nine Months Ended September 30, 2003 and 2002

The performance of our management for the P&C and Financial Services segments are measured based on the results achieved in underwriting income and income excluding net realized gains (losses).

Insurance – North American

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

	Three Months Ended September 30						Nine Months Ended September 30
	2003			2002			2003			2002
	(in millions of U.S. dollars)
Gross premiums written	$	1,819		$	1,783		$	5,131		$	4,476
Net premiums written		1,065			869			2,967			2,100
Net premiums earned		990			654			2,663			1,733
Losses and loss expenses		712			453			1,861			1,176
Policy acquisition costs		95			55			279			147
Administrative expenses		103			86			293			244
Underwriting income	$	80		$	60		$	230		$	166
Net investment income		100			101			306			306
Other income (expense)		—			—			(6	)		—
Interest expense		7			7			22			24
Income tax expense		48			41			129			115
Income excluding net realized gains (losses)	$	125		$	113		$	379		$	333
Net realized gains (losses)		8			(55	)		15			(107	)
Tax effect of net realized gains (losses)		—			4			—			16
Net income	$	133		$	62		$	394		$	242
Loss and loss expense ratio		71.9	%		69.2	%		69.9	%		67.9	%
Policy acquisition cost ratio		9.6	%		8.3	%		10.4	%		8.5	%
Administrative expense ratio		10.4	%		13.2	%		11.0	%		14.0	%
Combined ratio		91.9	%		90.7	%		91.3	%		90.4	%

Insurance – North American increased gross premiums written two percent and 15 percent for the three and nine months ended September 30, 2003, respectively, compared with the same periods in 2002. This segment continues to benefit from a robust market for casualty lines of business, which represent a growing portion of this segment’s gross premiums written. Despite strong casualty premium production in 2003, the growth in gross premiums written has been moderate compared with levels experienced in prior quarters. This reflects both our decision to exit certain heavily reinsured program business in late 2002 and the stabilization of property rates. Renewal rates for property business in the U.S. were down slightly for the current quarter compared with the significant renewal rate increases experienced for the same quarter in 2002. Overall, property rates are generally at pricing levels that adequately compensate for the exposure being underwritten. During the current quarter,

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renewal rates on certain longer tail casualty lines, such as workers compensation, continued to rise but at a lower pace than in 2002. Casualty lines that had already experienced significant price increases, such as D&O and umbrella excess business, continued to experience solid rate increases during the current quarter. We expect demand for casualty business to remain strong for the remainder of 2003.

Net premiums written increased at a significantly higher rate than gross premiums written for the three and nine months ended September 30, 2003. Insurance – North American is retaining more of its gross premiums written in order to take advantage of improved market conditions for rates and terms and due to shifts in business mix. ACE Risk Management (ARM) has shifted its business mix away from the heavily reinsured program business and has increased retention of national account business. In addition, ACE Bermuda has grown its professional lines premiums, of which it retains approximately 90 percent. As a result, the retention ratio (the ratio of net premiums written to gross premiums written) for Insurance – North American increased to 58 percent for the nine months ended September 30, 2003, compared with 47 percent for the same period in 2002.

Insurance – North American’s insurance operations are organized into distinct divisions each offering specialized products and services targeted at specific markets.

ACE Westchester Specialty focuses on the wholesale distribution of excess, surplus and specialty P&C products, including wind and earthquake exposures, agri-business and inland marine coverage. ACE Westchester Specialty’s net premiums earned for the three and nine months ended September 30, 2003 increased $68 million and $166 million, respectively, compared with the same periods in 2002. These increases primarily reflect higher casualty writings due to the robust casualty market and growth in agri-business.

ARM, which offers custom coverage solutions for large companies and national accounts reported an increase of $94 million and $254 million for the three and nine months ended September 30, 2003, respectively, compared with the same periods in 2002. ARM’s increase in net premiums earned is driven by new business and increased retention ratios.

Diversified Risk, which writes D&O, E&O, and aerospace business, reported a $76 million and $215 million increase in net premiums earned for the three and nine months ended September 30, 2003, respectively, compared with the same periods in 2002. The primary drivers of this growth are the professional lines, which have been experiencing a favorable rate environment and more restrictive policy terms and conditions.

Specialty Property and Casualty (Specialty P&C) provides worldwide risk protection for U.S.-based multi-national companies. As a result of new business and higher renewal rates, Specialty P&C’s net premiums earned for the three and nine months ended September 30, 2003 increased $23 million and $67 million, respectively, compared with the same periods in 2002.

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ACE Bermuda, which specializes in providing professional lines and excess liability coverage, reported an increase in net premiums earned of $29 million and $111 million for the three and nine months ended September 30, 2003, respectively, compared with the same periods in 2002. ACE Bermuda benefited from both higher renewal rates and increased volume of new business.

ACE Casualty Risk was established in 2002 to offer casualty excess, umbrella and environmental liability products in the commercial market. ACE Casualty Risk reported increases in net premiums earned of $18 million and $47 million for the three and nine months ended September 30, 2003, respectively, compared with the same periods in 2002. ACE Casualty Risk’s increase in net premiums earned is a result of new umbrella liability business.

Insurance—North American’s other divisions include the Consumer Solutions group, the Accident and Health group, ACE USA Warranty, the run-off operations and our insurance-related service operations. Net premiums earned for these divisions increased $28 million and $70 million for the three and nine months ended September 30, 2003, respectively, compared with the same periods in 2002. Contributing to this increase was higher premium volume for the Accident and Health group, which commenced operations in 2001 and is experiencing strong demand for personal accident coverage. In addition, the Consumer Solutions group also reported strong increases in net premiums earned.

The loss and loss expense ratio increased slightly for the three and nine months ended September 30, 2003 compared with the same periods in 2002. Insurance – North American continues to increase its retention ratio and its writings of longer tail casualty business, which typically carries a higher loss and loss expense ratio than property business. Hurricane related losses were $20 million for the three and nine months ended September 30, 2003, compared with no such losses in 2002. These losses added 2.0 and 0.8 percentage points to Insurance – North American’s loss and loss expense ratio for the three months and nine months ended September 30, 2003, respectively. Additionally, Insurance – North American incurred adverse prior period development of $30 million and $26 million for the three months ended September 30, 2003 and 2002, respectively, contributing 3.0 and 4.0 percentage points to the loss and loss expense ratio. The 2003 development was primarily for a few large individual casualty case reserves for discontinued lines, partially offset by favorable prior period development on property business. For the nine months ended September 30, 2003 and 2002, Insurance – North American experienced adverse prior period development of $77 million and $44 million, respectively, primarily related to casualty lines contributing 2.9 and 2.5 percentage points to the loss and loss expense ratio.

The policy acquisition cost ratio increased for the three and nine months ended September 30, 2003 compared with the same periods in 2002 reflecting our decision to purchase less reinsurance, which has resulted in reduced ceding commissions for Insurance – North American. The administrative expense ratio declined due to the increase in net premiums earned. Administrative expenses increased mainly due to the increased costs associated with servicing the growth in Insurance – North American’s product lines.

Income excluding net realized gains (losses) increased 11 percent and 14 percent for the three and nine months ended September 30, 2003 as a result of higher underwriting income.

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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 Lloyd’s operation. The Insurance – Overseas General segment writes a variety of insurance products including property, liability, financial lines (D&O and E&O), marine, A&H — principally being personal accident, aerospace and consumer-oriented products.

	Three Months Ended September 30						Nine Months Ended September 30
	2003			2002			2003			2002
	(in millions of U.S. dollars)
Gross premiums written	$	1,200		$	1,008		$	3,850		$	2,911
Net premiums written		872			690			2,769			1,920
Net premiums earned		882			647			2,556			1,722
Losses and loss expenses		529			446			1,541			1,083
Policy acquisition costs		170			140			485			382
Administrative expenses		121			107			356			282
Underwriting income (loss)	$	62		$	(46	)	$	174		$	(25	)
Net investment income		40			28			113			77
Other income (expense)		(3	)		(1	)		(4	)		3
Interest expense		1			1			2			2
Income tax expense (benefit)		12			(4	)		60			9
Income (loss) excluding net realized gains (losses)	$	86		$	(16	)	$	221		$	44
Net realized gains (losses)		4			(21	)		(7	)		(32	)
Tax effect of net realized gains (losses)		—			7			5			10
Net income (loss)	$	90		$	(30	)	$	219		$	22
Loss and loss expense ratio		59.9	%		68.9	%		60.3	%		62.9	%
Policy acquisition cost ratio		19.3	%		21.8	%		19.0	%		22.2	%
Administrative expense ratio		13.7	%		16.5	%		13.9	%		16.3	%
Combined ratio		92.9	%		107.2	%		93.2	%		101.4	%

Insurance – Overseas General reported 19 percent and 32 percent increases in gross premiums written for the three and nine months ended September 30, 2003, respectively, compared with the same periods in 2002. ACE International and ACE Global Markets both experienced improved market conditions across most lines of business.

ACE International’s P&C operations are organized geographically along product lines. Property insurance products include traditional commercial fire coverage as well as energy industry-related coverages. Principal casualty products are commercial general liability and liability coverage for multinational organizations. The A&H insurance operations provide coverage to individuals and groups outside of U.S. insurance markets. ACE International’s gross premiums written increased 24 percent to $849 million and 39 percent to $2.7 billion for the three and nine months ended September 30, 2003, respectively. The increases are driven by higher rates and new business across most regions and also due to the weakening of the U.S. dollar against the pound sterling, Euro and yen during the period. The depreciation of the U.S. dollar against the major currencies accounted for approximately 7 and 10 percentage points of the increase in gross premiums written for the three and nine months ended September 30, 2003, respectively. ACE Europe, which accounts for about 60 percent of ACE International’s gross premiums written, continues to experience rising rates and growth in new policies for casualty business. Additionally, ACE Europe’s A&H lines have contributed positive growth due to strong volume increases. Property rates in Europe are increasing at a slower rate, while casualty lines rate increases are

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accelerating. We expect no significant change in P&C rate momentum in Europe for the remainder of 2003. ACE Asia Pacific reported production growth for P&C lines due to increases in new business and A&H lines due to favorable results from direct marketing channels in Korea and Taiwan. ACE Latin America reported strong demand for A&H products in Mexico and Brazil, and growth in new P&C policies. ACE Far East production declined due primarily to the adverse effect of the SARS epidemic on travel accident insurance.

ACE Global Markets primarily underwrites P&C insurance through Lloyd’s Syndicate 2488 and ACE INA UK. The main lines of business include aviation, property, energy, professional lines, marine, political risk and A&H. ACE Global Markets’ gross premiums written increased eight percent to $351 million and 19 percent to $1.1 billion for the three and nine months ended September 30, 2003, respectively. The increase is driven by continued improvement in market conditions. However, price increases have begun to stabilize in a number of areas, with the notable exception of financial lines, where rates continue to rise. Better terms and conditions continue to be experienced in all product lines. The retention ratio at ACE Global Markets has increased to 72 percent for the nine months ended September 30, 2003, compared with 54 percent for the same period in 2002. This increase is due to the reinsurance premiums we incurred in 2002 associated with reinsurance arrangements put into place following a revision of our underwriting strategy and the rebuilding of our reinsurance cover following the September 11 tragedy. In late 2002, we received approval from the U.K. insurance regulator, the Financial Services Authority (FSA-U.K.), to use ACE INA UK as our London-based FSA-U.K.-regulated company to underwrite U.K. and Continental Europe insurance and reinsurance business. For the 2003 underwriting year, approximately 25 percent of ACE Global Markets’ gross premiums written has been underwritten through ACE INA UK, with most of this business emanating from the energy, financial lines and property classes.

The table below shows net premiums earned by each of the Insurance – Overseas General segment’s key components for the three and nine months ended September 30, 2003 and 2002.

	Three Months Ended September 30				Nine Months Ended September 30
	2003		2002		2003		2002
	(in millions of U.S. dollars)
ACE International	$	638	$	466	$	1,808	$	1,237
ACE Global Markets		244		181		748		485
Net premiums earned	$	882	$	647	$	2,556	$	1,722

ACE International’s increase in net premiums earned is attributed to P&C and A&H lines across all geographical regions, with the exception of ACE Far East where growth in net premiums written has been minimal. The increase in net premiums earned is principally driven by growth in net premiums written over the last several quarters and additionally the appreciation of foreign currencies against the U.S. dollar. ACE Global Markets’ increase in net premiums earned is a result of higher net premiums written across most of its product lines, particularly the financial lines, aviation, property and energy portfolios.

The loss and loss expense ratio for Insurance – Overseas General improved for the three and nine months ended September 30, 2003, respectively, compared with the same periods in 2002. The three months ended September 30, 2002 included $68 million of catastrophe losses related to the European floods. During the three months ended September 30, 2003, this segment incurred $10 million of catastrophe losses principally related to Hurricanes Fabian and Isabel. Adverse prior period development for the three months ended September 30, 2003 and 2002 was $35 million and $25 million, respectively. For the nine months ended September 30, 2003 and 2002, Insurance – Overseas General experienced adverse development of $46 million and $50 million, respectively. The development for the three and nine months ended September 30, 2003 relates primarily to ACE International’s casualty and consumer lines while the development for the three and nine months ended September 30, 2002 related to ACE Global Markets’ losses from satellite and other discontinued lines.

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The policy acquisition cost ratio for Insurance – Overseas General improved for the three and nine months ended September 30, 2003, primarily due to a change in business mix. The administrative expense ratio for Insurance – Overseas General improved due to the increase in net premiums earned. ACE International’s administrative expenses increased 17 percent for the three months ended September 30, 2003, due mainly to increased costs associated with supporting business growth across all regions of the world and the depreciation of the U.S. dollar.

Underwriting income increased $108 million and $199 million for the three and nine months ended September 30, 2003, respectively, compared with the same periods in 2002. The increase in underwriting income is primarily due to the increase in net premiums earned and a decrease in catastrophe losses of $58 million for the three and nine months ended September 30, 2003. Income excluding net realized gains (losses) increased significantly for the three and nine months ended September 30, 2003 driven by increased underwriting income and higher net investment income, partially offset by higher income tax expense.

Global Reinsurance

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

Property and Casualty Reinsurance

	Three Months Ended September 30						Nine Months Ended September 30
	2003			2002			2003			2002
	(in millions of U.S. dollars)
Gross premiums written	$	276		$	186		$	1,087		$	774
Net premiums written		217			131			1,005			683
Net premiums earned		274			194			791			459
Losses and loss expenses		134			101			393			193
Policy acquisition costs		56			37			153			83
Administrative expenses		16			11			45			26
Underwriting income	$	68		$	45		$	200		$	157
Net investment income		23			20			63			63
Other income		1			1			2			1
Interest expense		—			—			—			1
Income tax expense (benefit)		3			(1	)		10			1
Income excluding net realized gains (losses)	$	89		$	67		$	255		$	219
Net realized gains (losses)		9			(23	)		36			(44	)
Tax effect of net realized gains (losses)		—			—			1			—
Net income	$	98		$	44		$	292		$	175
Loss and loss expense ratio		48.9	%		52.0	%		49.6	%		42.0	%
Policy acquisition cost ratio		20.4	%		19.2	%		19.3	%		18.1	%
Administrative expense ratio		5.7	%		5.2	%		5.7	%		5.6	%
Combined ratio		75.0	%		76.4	%		74.6	%		65.7	%

Gross premiums written for Global Reinsurance increased 48 percent and 40 percent for the three and nine months ended September 30, 2003, respectively, compared with the same periods in 2002. Over the past two years, the Global Reinsurance segment has expanded into a multi-line global reinsurer that offers a diversified portfolio of products to satisfy client demand. This shift has enabled it to take advantage of the improved P&C

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market, especially on the casualty side. Significant increases in production were recorded at ACE Tempest Re USA and ACE Tempest Re Europe as these units benefited from higher rates and increased volume for P&C lines first offered in 2002. ACE Tempest Re Bermuda is facing increased competition and lower rates on property catastrophe business following two years of rising prices, and additionally, the Terrorism Risk Insurance Act (TRIA) has reduced demand for its specialty catastrophe business.

Global Reinsurance’s net premiums written increased 66 percent and 47 percent for the three and nine months ended September 30, 2003, respectively, compared with the same periods in 2002. Retention ratios for this segment have increased to 79 percent and 93 percent for the three and nine months ended September 30, 2003, respectively, compared with 70 percent and 88 percent for the same periods in 2002. The increase in retention ratios reflects the decline in reinsurance purchased at ACE Tempest Re Europe and the increasing proportion of ACE Tempest Re USA business, which tends to be written at higher retention ratios than other business in this segment. ACE Tempest Re Europe increased its retention in order to take advantage of improved market conditions.

The table below shows net premiums earned by each of the Global Reinsurance segment’s key components for the three and nine months ended September 30, 2003 and 2002.

	Three Months Ended September 30				Nine Months Ended September 30
	2003		2002		2003		2002
	(in millions of U.S. dollars)
ACE Tempest Re USA	$	127	$	53	$	325	$	113
ACE Tempest Re Europe		55		38		187		97
ACE Tempest Re Bermuda		92		103		279		249
Net premiums earned	$	274	$	194	$	791	$	459

Net premiums earned increased 41 percent and 72 percent for the three and nine months ended September 30, 2003, respectively, compared with the same periods in 2002. The increase in net premiums earned in all components is primarily due to the increase in traditional non-catastrophe P&C business. For the nine months ended September 30, 2003, 64 percent of net premiums earned was from traditional non-catastrophe P&C business compared with 43 percent for the same period in 2002.

The loss and loss expense ratio decreased for the three months ended September 30, 2003 compared with the same period in 2002. The decline is due to lower catastrophe losses for the three months ended September 30, 2003 — $12 million, compared with $32 million for the same quarter in 2002. For the nine months ended September 30, 2003, the loss and loss expense ratio increased primarily due to the growth in non-catastrophe P&C business at ACE Tempest Re USA and ACE Tempest Re Europe. Non-catastrophe P&C business typically has higher loss ratios in comparison with property catastrophe business (except in periods with high catastrophe losses), which is mainly written at ACE Tempest Re Bermuda. As Global Reinsurance increases non-catastrophe P&C writing, we expect its loss and loss expense ratio to continue to increase in line with what would be expected from a traditional multi-line reinsurer. Global Reinsurance experienced $3 million of favorable prior period development for the three months ended September 30, 2003, compared with $1 million of adverse prior period development for the same quarter in 2002. For the nine months ended September 30, 2003 and 2002, Global Reinsurance had favorable prior period development of $16 million and $1 million, respectively. The development is related to property catastrophe business at ACE Tempest Re Bermuda, certain short-tail property lines at ACE Tempest Re USA and the aviation line at ACE Tempest Re Europe.

The policy acquisition cost ratio for Global Reinsurance increased due to higher volume for the segment and also the higher proportion of business generated from ACE Tempest Re USA. Business generated in the U.S. typically incurs higher brokerage commissions than business generated in Bermuda or Europe. The administrative expense ratio increased slightly due to increased staffing levels to support the growth in business.

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Global Reinsurance’s underwriting income increased 51 percent and 27 percent for the three and nine months ended September 30, 2003, respectively, compared with the same periods in 2002. The increases are primarily a result of higher net premiums earned in the current periods. We expect reduced underwriting margin initially (underwriting income divided by net premiums earned) for Global Reinsurance as its loss and loss expense ratio increases due to its shift of business towards non-catastrophe P&C. Over time, however, we expect income excluding net realized gains (losses) to increase reflecting growth in investment income due to higher average invested assets. Income excluding net realized gains (losses) for Global Reinsurance increased 33 percent and 16 percent for the three and nine months ended September 30, 2003, respectively. This increase is a result of higher underwriting income and net investment income, partially offset by higher income tax expense for the three and nine months ended September 30, 2003.

Life Reinsurance

Our strategic focus at ACE Life Re is to differentiate ourselves in this market, principally by providing reinsurance coverage to other life insurance companies, focusing on guarantees included in certain fixed and variable annuity products. We do not compete on a traditional basis for pure mortality business. The reinsurance transactions we undertake typically help clients — ceding companies — to manage mortality, morbidity, and/or lapse risks embedded in their book of business. We price life reinsurance using actuarial and investment models that incorporate a number of factors, including assumptions for mortality, morbidity, expenses, demographics, persistency, investment returns and inflation.

	Three Months Ended September 30					Nine Months Ended September 30
	2003		2002			2003			2002
	(in millions of U.S. dollars)
Gross premiums written	$	49	$	58		$	144		$	115
Net premiums written		47		57			138			112
Net premiums earned		46		57			136			112
Life and annuity benefits		45		60			137			106
Policy acquisition costs		5		3			11			15
Administrative expenses		—		2			2			5
Net investment income		10		7			25			19
Income (loss) excluding net realized gains (losses)	$	6	$	(1	)	$	11		$	5
Net realized gains (losses)		1		(4	)		(10	)		(13	)
Net income (loss)	$	7	$	(5	)	$	1		$	(8	)

ACE Life Re’s gross premiums written decreased 16 percent for the three months ended September 30, 2003 primarily because premiums from new variable annuity and life (mortality) business were partially offset by the discontinuation of long-term group disability business. The three months ended September 30, 2002 included $54 million of long-term group disability business, $30 million of which is non-recurring. For the nine months ended September 30, 2003, ACE Life Re reported a 25 percent increase in gross premiums written compared with the same period in 2002, including $10 million from a non-recurring variable annuity transaction, recorded in the first quarter of 2003. The nine months ended September 30, 2002 included $105 million of non-recurring, long-term group disability business. Income (loss) excluding net realized gains (losses) improved for the three and nine months ended September 30, 2003 due to higher investment income and reduced policy benefits for the three months ended September 30, 2003. Investment income is higher because of a higher invested asset base, due to increased production for the nine months ended September 30, 2003.

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Financial Services

The Financial Services segment consists of two broad categories: financial guaranty business and financial solutions business. The financial guaranty business provides insurance and reinsurance of financial guaranty exposures, including municipal and non-municipal obligations, credit default swaps (CDSs), mortgage guaranty reinsurance, title cover, and trade credit reinsurance. The financial solutions business includes insurance and reinsurance solutions to complex risks that generally cannot be adequately addressed in the traditional insurance marketplace. Most financial solutions contracts are unique and specifically tailored for an individual client, but generally they are multi-year and contain some form of client participation. Both units write structured finance transactions which are recorded at higher loss and loss expense ratios than other business. These transactions are typically longer-term contracts where profit emerges over the term of the contract and rely on investment income as a component of profitability. Due to the nature of the financial solutions business, premium volume can vary significantly from period to period and, therefore, premiums written in any one period are not indicative of premiums to be written in future periods.

We also write retroactive contracts, including LPTs, which indemnify ceding companies for events that have occurred in prior years. While these types of contracts are generally written in the Financial Services segment, they can also be written in other segments, including the life reinsurance group. These contracts, which meet the established criteria for reinsurance accounting under GAAP, are recorded in the statement of operations when written and generally result in large one-time written and earned premiums with comparable incurred losses. These contracts, when written, can cause significant variances in gross premiums written, net premiums written, net premiums earned, net incurred losses, the loss and loss expense ratio and the policy acquisition cost ratio. At the time one of these contracts is written, we make certain assumptions with respect to the ultimate amount and timing of payments in order to establish loss and loss expense reserves. As with most loss reserves, the actual amount and timing of payments may result in loss and loss expenses which are greater or less than the reserves initially provided.

It is generally expected that losses ultimately paid under retroactive contracts will exceed the premiums received, in some cases by large margins. Premiums are based in part on time-value-of-money concepts because loss payments may occur over lengthy time periods. However, retroactive contracts do not have a significant impact on reported earnings in the period of inception. When writing a retroactive contract, the excess of the estimated ultimate losses over the premiums received is established as a deferred charge and amortized against income over the estimated future claim settlement period. We expect that these contracts will produce significant underwriting losses over time, but we also expect that this business will be profitable due to expected investment earnings on the premiums received.

Certain products we issue in the Financial Services segment — mainly those related to credit protection — meet the definition of a derivative under Financial Accounting Standards (FAS) No. 133 “Accounting for Derivative Instruments and Hedging Activities” (FAS 133), and must be recorded at fair value. These products consist primarily of CDSs. We recorded, in net realized gains (losses), a gain of $76 million for the nine months ended September 30, 2003, due principally to changes in the market value of these instruments and the reclassification of losses from net realized gains (losses) to losses and loss expenses as a result of recording loss reserves on certain contracts. This compares with a loss of $97 million for the same period in 2002. The level of such gains and losses is dependent upon a number of factors including changes in credit spreads, probability of default and other market factors. Net premiums earned relating to CDS transactions for the nine months ended September 30, 2003 were $127 million compared with $104 million for the same period in 2002. Net losses incurred relating to CDSs for the nine months ended September 30, 2003 were $98 million compared with $92 million for the same period in 2002.

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	Three Months Ended September 30						Nine Months Ended September 30
	2003			2002			2003			2002
	(in millions of U.S. dollars)
Gross premiums written	$	107		$	493		$	757		$	1,299
Net premiums written		105			476			763			1,269
Net premiums earned		205			373			629			835
Losses and loss expenses		144			328			466			690
Policy acquisition costs		17			18			45			58
Administrative expenses		22			15			60			42
Underwriting income	$	22		$	12		$	58		$	45
Net investment income		49			46			149			141
Other income (expense)		(1	)		—			—			—
Interest expense		2			3			5			10
Income tax expense		11			7			28			24
Income excluding net realized gains (losses)	$	57		$	48		$	174		$	152
Net realized gains (losses)		29			(77	)		98			(127	)
Tax effect of net realized gains (losses)		(6	)		19			(26	)		27
Net income (loss)	$	80		$	(10	)	$	246		$	52
Loss and loss expense ratio		70.2	%		88.0	%		74.0	%		82.6	%
Policy acquisition cost ratio		8.7	%		4.6	%		7.2	%		6.9	%
Administrative expense ratio		10.6	%		4.2	%		9.6	%		5.1	%
Combined ratio		89.5	%		96.8	%		90.8	%		94.6	%

Gross premiums written decreased 78 percent and 42 percent for the three and nine months ended September 30, 2003, respectively, compared with the same periods in 2002. The Financial Services segment has significantly reduced guarantees of equity layer CDOs and experienced a sharp decline in LPT volume.

Gross premiums written for the financial guaranty operations decreased 24 percent to $112 million for the three months ended September 30, 2003, compared with $147 million for the same period in 2002. The decrease is primarily attributed to equity layer CDOs, which declined $110 million for the three months ended September 30, 2003 compared with the same period in 2002. We have significantly reduced writing this type of business due to presently unfavorable pricing terms. Municipal production increased as strong cession activity continued for the three months ended September 30, 2003. In addition, the financial guaranty operations continue to execute the strategy of writing direct business and recorded several transactions during the three months ended September 30, 2003. In the second quarter of 2003, the financial guaranty operations negotiated improved terms and reduced ceding commission costs on reinsurance treaty business, which positively impacted the policy acquisition cost ratio for the three months ended September 30, 2003. Underwriting income increased 14 percent to $16 million for the three months ended September 30, 2003, compared with $14 million for the same period in 2002. For the nine months ended September 30, 2003, financial guaranty gross premiums written increased 20 percent compared with the same period in 2002. Production increased across all lines except for the mortgage and equity layer CDO lines. Municipal business increased as low interest rates continue to drive strong issuance activity with volume in the new issue market reaching record levels. Additionally, the senior layer CDO business, non-municipal and trade credit lines posted strong production gains. The financial guaranty operations have ceased writing single name corporate credit default swaps due to current market conditions and in order to diversify its book of business. Mortgage production declined due to the higher level of refinancing activity in the U.S. mortgage market and additionally due to the natural run-off of older business. For the nine months ended September 30, 2003, the policy acquisition cost ratio increased due to a change in business mix whereby a greater portion of the business, specifically municipal, non-municipal and trade credit lines, incurs commission costs. Administrative expenses were greater as a result of an increase in staff needed to support the growing direct

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business in the financial guaranty operations. Underwriting income increased 15 percent to $46 million for the nine months ended September 30, 2003, compared with $40 million for the same period in 2002. The increase in underwriting income is primarily attributed to the increase in net premiums earned.

Gross premiums written for the financial solutions operations decreased to $(5) million and $405 million for the three and nine months ended September 30, 2003, respectively, compared with $346 million and $1 billion for the same periods in 2002. This unit wrote little new business in the three months ended September 30, 2003 and incurred negative premiums due to the assignment of an equity CDO. The three and nine months ended September 30, 2002 included gross premiums written attributed to LPTs of $187 million and $212 million, respectively, compared with $4 million for the current periods. Additionally, the prior year periods were bolstered by several large, multi-year prospective, structured programs sold. Net premiums earned for the three and nine months ended September 30, 2003 were $125 million and $389 million, respectively, compared with $327 million and $634 million for the same periods in 2002. The current year net premiums earned consist primarily of business written in prior periods. The financial solutions operations reported an increase in underwriting income of $8 million to $6 million and $7 million to $12 million for the three and nine months ended September 30, 2003, respectively, compared with the same periods in 2002. Underwriting income increased due to lower combined ratios in the current periods due to lower LPT business. The administrative expense ratio for the three and nine months ended September 30, 2003 increased as a result of lower net premiums earned and increased staffing costs.

The Financial Services segment experienced $2 million of favorable prior period development in the current quarter compared with $3 million of adverse prior period development for the same period in 2002. For the nine months ended September 30, 2003, this segment had $1 million of favorable prior period development, compared with $27 million of adverse prior period development for the same period in 2002. Financial Services’ reported an increase in income excluding realized gains (losses) for the three and nine months ended September 30, 2003, compared with the same period in 2002. The increase is a result of higher underwriting income and net investment income and also a reduction in interest expense. Net investment income increased due to higher average invested assets and interest expense decreased due to repayment of debt in the fourth quarter of 2002.

Net Investment Income

	Three Months Ended September 30						Nine Months Ended September 30
	2003			2002			2003			2002
	(in millions of U.S. dollars)
Insurance – North American	$	100		$	101		$	306		$	306
Insurance – Overseas General		40			28			113			77
Global Reinsurance – P&C		23			20			63			63
Global Reinsurance – Life		10			7			25			19
Financial Services		49			46			149			141
Corporate and other		(6	)		(3	)		(23	)		(6	)
Net investment income	$	216		$	199		$	633		$	600

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 nine percent and six percent for the three and nine months ended September 30, 2003, respectively, compared with the same periods in 2002. The increased net investment income is due to the positive operating cash flows during 2003 and 2002 that resulted in a higher average invested asset base. This positive impact on investment income was partially offset by a decline in the investment portfolio’s yield due to the impact of lower interest rates on investment of new cash and reinvestment of maturing securities. The average yield on fixed maturities declined to 4.0 percent at September 30, 2003 compared with 4.4 percent at December 31, 2002.

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Net Realized Gains (Losses)

Our investment strategy takes a long-term view, and our investment portfolio is actively managed to maximize total return within certain specific guidelines, designed to minimize risk. Our investment portfolio is reported at fair value. The effect of market movements on our investment portfolio impact income (through net realized gains (losses)) when securities are sold, when “other than temporary” impairments are recorded on invested assets or when derivatives, including financial futures and options, interest rate swaps and credit-default swaps, are marked to fair value or are settled. Changes in unrealized appreciation and depreciation, which result from the revaluation of securities held, are reported as a separate component of accumulated other comprehensive income in shareholders’ equity. The following table presents our pre-tax net realized gains (losses) for the three and nine months ended September 30, 2003 and 2002.

	Three Months Ended September 30				Nine Months Ended September 30
	2003		2002		2003		2002
	(in millions of U.S. dollars)
Fixed maturities and short-term investments	$16		$   (16	)	$  77		$   (54	)
Equity securities	1		(55	)	(53	)	(55	)
Financial futures, options and interest rate swaps	13		(113	)	19		(197	)
Fair value adjustment on credit derivatives	26		(51	)	76		(97	)
Currency	3		(2	)	18		(1	)
Other investments	(2	)	2		(13	)	3
Total net realized gains (losses)	$57		$(235	)	$124		$(401	)

Given our total return objective for our investment portfolio, we may sell securities at a loss due to changes in the investment environment, our expectation that fair value may deteriorate further, our desire to reduce our exposure to an issuer or an industry, and changes in the credit quality of the security.

FAS 133 requires us to recognize all derivatives as either assets or liabilities on our consolidated balance sheet, and measure them at fair value. We record the gains and losses resulting from the fair value measurement of derivatives in net realized gains (losses). Our involvement with derivative instruments and transactions is primarily to offer protection to others or to mitigate our own risk; we do not consider such transactions to be speculative. For the three and nine months ended September 30, 2003, we recorded net realized gains of $39 million and $95 million, respectively on derivative transactions, compared with net realized losses of $164 million and $294 million for the same periods in 2002.

For the three and nine months ended September 30, 2003, we recorded net realized gains of $13 million and $19 million, respectively on financial futures and option contracts and interest rate swaps, compared with net realized losses of $113 million and $197 million for the same periods in 2002. The interest rate swaps are designed to reduce the negative impact of increases in interest rates on our fixed maturity portfolio. We recorded gains of $8 million on our Standard and Poor’s (S&P) equity index futures contracts as the S&P 500 equity index increased two percent during the current 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, in accordance with FAS 133, we record all realized and unrealized gains and losses on these contracts as net realized gains (losses) in the period in which the currency values change.

We regularly review our investment portfolio for possible impairment based on criteria including economic conditions, credit loss experience and issuer-specific developments. If there is a decline in a security’s net realizable value, we must determine whether that decline is temporary or “other than temporary”. If we believe a decline in the value of a particular investment is temporary, we record it as an unrealized loss in our shareholders’ equity. If we believe the decline is “other than temporary”, we write down the carrying value of the investment and record a net realized loss in our statement of operations. The decision to recognize a decline in the value of a security carried at fair value as “other than temporary” rather than temporary has no impact on our book value.

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Our net realized gains (losses) for the three months ended September 30, 2003 included $6 million of write-downs of fixed maturity investments, $7 million of write-downs of equity securities and $4 million of write-downs of other investments 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 $33 million of write-downs of fixed maturity investments and $53 million of write-downs of equity securities in the same quarter last year. During the nine months ended September 30, 2003, we recognized losses for impairments of $25 million of fixed maturity investments, $61 million of equity securities and $20 million of other investments compared with $76 million of write-downs of fixed maturity investments and $54 million of write-downs of equity securities in the prior year. For the nine months ended September 30, 2003, we recorded net realized losses of $13 million on other investments, which included $20 million in impairments primarily on private equity partnerships.

The process of determining whether a decline in value is temporary or “other than temporary” is subjective and differs by type of security. In addition to issuer-specific financial information and general market or industry conditions, we also consider our ability and intent to hold the security to maturity or until market value recovers to a level in excess of cost. As a result of our periodic review process, we have determined that there currently is no need to sell any of these securities to fund anticipated payments. We have described below, by type of security, our process for reviewing our investments for possible impairment.

Fixed Maturities and Securities on Loan

We review all of our fixed income securities, including securities on loan, for potential impairment each quarter. Generally, we focus on those fixed-maturity securities with a market value of less than 80 percent of amortized cost for the previous nine months.

Outlined below are the main factors we use in evaluating a fixed income security for potential impairment:

• the degree to which any appearance of impairment is attributable to an overall change in market conditions such as interest rates rather than changes in the individual factual circumstances and risk profile of the issuer;

• the performance of the relevant industry sector;

• whether an issuer is current in making principal and interest payments on the debt securities in question;

• the issuer’s financial condition and our assessment (using available market information) of its ability to make future scheduled principal and interest payments on a timely basis; and

• current financial strength or debt rating, analysis and guidance provided by rating agencies and analysts.

Equity Securities and Securities on Loan

On a quarterly basis, these investments are also reviewed for impairment. In general, attention is focused on equity securities with a market value of less than 80 percent of cost for the previous nine months. Any equity that has been in a loss position for more than 12 months is considered impaired.

Outlined below are the main factors we use in evaluating an equity security for potential impairment:

• whether the decline appears to be related to general market or industry conditions or is issuer-specific; and

• the financial condition and near-term prospects of the issuer, including specific events that may influence the issuer’s operations.

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Other Investments

With respect to publicly and non-publicly traded venture capital investments, the portfolio managers, as well as our internal valuation committee, review and consider a variety of factors in determining the potential for loss impairment on a quarterly basis. Factors considered are:

• the issuer’s most recent financing events;

• an analysis of whether fundamental deterioration has occurred; and

• the issuer’s progress, and whether it has been substantially less than expected.

The following table summarizes, for all securities in an unrealized loss position at September 30, 2003 (including securities on loan), the aggregate fair value and gross unrealized loss by length of time the amounts have continuously been in an unrealized loss position.

	September 30, 2003 Gross Unrealized Loss
	Fair value		0-6 months		7-12 months		Over 12 months		Total
	(in millions of U.S. dollars)
Fixed maturities	$	2,858	$	40	$	11	$	2	$	53
Equities		70		2		1		1		4
Other investments		75		—		—		—		—
Total	$	3,003	$	42	$	12	$	3	$	57

Other Income and Expense Items

	Three Months Ended September 30						Nine Months Ended September 30
	2003			2002			2003			2002
	(in millions of U.S. dollars)
Other income (expense)	$	(3	)	$	(15	)	$	(8	)	$	(22	)
Interest expense	$	45		$	48		$	133		$	146
Income tax expense (benefit)	$	67		$	(8	)	$	207		$	36

The majority of the $8 million in other expense for the nine months ended September 30, 2003 relates to goodwill impairments during the first quarter. Goodwill was re-tested for impairment during the three months ended March 31, 2003. Based on a profitability review, we recognized goodwill impairments of $6 million pertaining to two majority-owned warranty program administration companies.

The decrease in interest expense is a result of a reduction in outstanding trust preferred securities and short-term debt for the three and nine months ended September 30, 2003 compared with the same periods in 2002. During the nine months ended September 30, 2002, we repaid $400 million of trust preferred securities.

The increase in income tax expense is attributable to the increase in income in taxable jurisdictions for the three and nine months ended September 30, 2003. We reported an income tax benefit for the three months ended September 30, 2002 due to our net loss for that quarter. Our effective tax rate on income excluding net realized gains (losses) for the nine months ended September 30, 2003, was 18 percent, compared with 13 percent for the same period in 2002. Our effective tax rate is dependent upon the mix of earnings from different jurisdictions with various tax rates; a different geographic mix of actual earnings would change the effective tax rate. For the remainder of 2003, we expect that our effective tax rate will be in the 18-20 percent range.

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Investments and Cash

Our principal investment objective is to ensure that funds are available to meet our insurance and reinsurance obligations. Within this broad liquidity constraint, the purpose of our investment portfolio’s structure is to maximize total return subject to specifically approved guidelines of overall asset classes; credit quality; and liquidity and volatility of expected returns. Our investment portfolio is invested primarily in fixed income securities with an average credit quality of AA, as rated by the independent investment rating service S&P. The portfolio is externally managed by independent, professional, investment managers. The average duration of our fixed income securities, including the effect of interest rate swaps, is 3.4 years at September 30, 2003 compared with 3.1 years at December 31, 2002. Our other investments principally comprise direct investments, investments in investment funds and investments in limited partnerships.

The following table identifies our invested assets at fair value and cost/amortized cost, by type held, at September 30, 2003 and December 31, 2002.

	September 30, 2003				December 31, 2002
	Fair Value		Cost/ Amortized Cost		Fair Value		Cost/ Amortized Cost
	(in millions of U.S. dollars)
Fixed maturities	$	17,413	$	16,713	$	14,420	$	13,791
Equity securities		460		371		411		442
Securities on loan		596		549		293		286
Short-term investments		2,520		2,520		1,885		1,885
Other investments		665		625		652		622
Cash		431		431		663		663
Total investments and cash	$	22,085	$	21,209	$	18,324	$	17,689

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 $565 million and $603 million at September 30, 2003 and December 31, 2002, respectively. The increase of $3.8 billion in total investments and cash is due to positive cash flows from operations due to strong premium volume, increased unrealized gains and the issuance of preferred shares. Offsetting these increases were dividends paid of $167 million during the nine months ended September 30, 2003.

The following tables show the market value of our fixed income portfolio, short-term investments, securities on loan and cash at September 30, 2003. The first table lists elements according to type, and the second according to S&P credit rating.

	Market Value		Percentage of Total
	(in millions of U.S. dollars)
Treasury	$	1,010	4.8	%
Agency		1,170	5.6	%
Corporate		7,718	36.8	%
Mortgage-backed securities		4,235	20.2	%
Asset-backed securities		519	2.5	%
Municipal		1,329	6.3	%
Non-U.S.		2,028	9.7	%
Cash and short-term investments		2,951	14.1	%
Total	$	20,960	100	%

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	Market Value		Percentage of Total
	(in millions of U.S. dollars)
AAA	$	10,376	49.5	%
AA		3,661	17.5	%
A		3,366	16.1	%
BBB		1,742	8.3	%
BB		764	3.6	%
B		973	4.6	%
Other		78	0.4	%
Total	$	20,960	100	%

At September 30, 2003, our fixed maturity investment portfolio included below-investment grade securities and non-rated securities which, in total, comprised approximately nine percent of our fixed income portfolio. Below-investment grade securities have different characteristics than investment grade corporate debt securities. Risk of loss from default by the borrower is significantly 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 attempt to 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 incurred but not reported (IBNR), and include estimates of expenses associated with processing and settling claims. The table below presents a rollforward of our unpaid losses and loss expenses for the nine months ended September 30, 2003.

	Gross Losses			Reinsurance Recoverable			Net Losses
	(in millions of U.S. dollars)
Balance at December 31, 2002	$	24,315		$	12,997		$	11,318
Losses and loss expenses incurred		7,453			3,192			4,261
Losses and loss expenses paid		(6,403	)		(3,204	)		(3,199	)
Other (including foreign exchange revaluation)		272			120			152
Balance at September 30, 2003	$	25,637		$	13,105		$	12,532

The process of establishing reserves for claims can be complex and imprecise as it requires the use of informed estimates and judgments. Our estimates and judgments may be revised as claims develop; as additional experience and other data become available; as new or improved methodologies are developed; and as current laws change. As part of our evaluation of loss reserves, we annually engage independent actuarial firms to review the methods and assumptions we use in estimating unpaid losses and loss expenses. These annual reviews cover different portions of our operating businesses on a rotating basis within each year and are an independent check on our loss reserves. In addition, the Pennsylvania Insurance Department requires a biennial, external actuarial review of liabilities residing in the various subsidiaries of Brandywine Holdings (Brandywine), which we acquired when we purchased the P&C business of CIGNA in 1999 (the ACE INA Acquisition). That review was completed during the first quarter of 2003. See Asbestos and Environmental Claims, below for more information.

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We continually evaluate our reserve estimates taking into account new information and discussion and negotiation with our insureds. While we believe our reserve for unpaid losses and loss expenses at September 30, 2003 is adequate, new information or trends may lead to future developments in ultimate losses and loss expenses significantly greater or less than the reserve provided, which could have a material adverse effect on future operating results. More information relating to our loss reserves is included in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2002.

Reinsurance

One of the ways we manage our loss exposure is through the use of reinsurance. While reinsurance agreements are designed to limit our losses from large exposures and permit recovery of a portion of direct unpaid losses, reinsurance does not relieve us of liability to our insureds. Accordingly, the loss 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 September 30, 2003 and December 31, 2002.

	September 30 2003			December 31 2002
	(in millions of U.S. dollars)
Reinsurance recoverable on paid losses and loss expenses	$	1,297		$	1,363
Bad debt reserve on paid losses and loss expenses		(385	)		(378	)
Reinsurance recoverable on future policy benefits		15			9
Reinsurance recoverable on unpaid losses and loss expenses		13,655			13,558
Bad debt reserve on unpaid losses and loss expenses		(550	)		(561	)
Net reinsurance recoverable	$	14,032		$	13,991

We evaluate the financial condition of our reinsurers and potential reinsurers on a regular basis and also monitor concentrations of credit risk with reinsurers. The provision for unrecoverable reinsurance is required principally due to the failure of reinsurers to indemnify us, primarily because of disputes under reinsurance contracts and insolvencies. Provisions have been established for amounts estimated to be uncollectible.

Following is a breakdown of our reinsurance recoverable on paid losses at September 30, 2003 and December 31, 2002:

	September 30, 2003						December 31, 2002
Category	Amount		Bad Debt Reserve		% of Total Reserve		Amount		Bad Debt Reserve		% of Total Reserve
	(in millions of U.S. dollars)
General collections	$	765	$	46	6.0	%	$	848	$	43	5.1	%
Other		532		339	63.7	%		515		335	65.0	%
Total	$	1,297	$	385	29.7	%	$	1,363	$	378	27.7	%

The general collections category represents amounts in the process of collection in the normal course of business. These are balances for which we have no indication of dispute or credit-related issues. We provide bad debt reserves based primarily on the application of historical loss experience to credit categories.

The other category includes amounts recoverable that are in dispute, or are from companies in supervision, rehabilitation or liquidation. Our estimation of this reserve takes into account the credit quality of the reinsurer, and whether we have received collateral or other credit protections such as parental guarantees.

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More information relating to reinsurance and our reinsurers is included in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2002.

Asbestos and Environmental Claims

Included in our liabilities for losses and loss expenses are liabilities for asbestos, environmental and latent injury damage claims and expenses (A&E). These claims are principally related to claims arising from remediation costs associated with hazardous waste sites and bodily-injury claims related to asbestos products and environmental hazards. These amounts include provision for both reported and IBNR claims. In January 2003, we completed an internal review of our A&E reserves. This review resulted in us increasing our gross A&E reserve, for the year ended December 31, 2002, by $2.2 billion, offset by $1.9 billion of reinsurance recoverable, including $533 million of reinsurance purchased from the National Indemnity Company (NICO) as part of the ACE INA Acquisition. After an addition to our bad debt provision of $145 million and our ten percent participation in the NICO cover, our net incurred loss was $516 million ($354 million after income tax) and was recorded in the fourth quarter of 2002. In addition to our internal review, the normal, biennial, reserve review by an independent, actuarial consulting firm, required by the Pennsylvania Insurance Department when Brandywine was established, was completed in February 2003. Our A&E reserves, taking into account the additions for the quarter ended December 31, 2002, represent the high end of our internal indication of range of liability and is consistent with the best estimate of the external actuary. We experienced no new A&E incurred losses for the nine months ended September 30, 2003.

In a lawsuit, filed in the state of California in December 1999, certain competitors of ACE USA have challenged the restructuring that resulted in the creation of Brandywine. The restructuring was previously upheld by the Pennsylvania Supreme Court in July 1999. The lawsuit alleges that the restructuring does not effectively relieve the insurance subsidiary that issued the policies prior to the restructuring (Insurance Company of North America) from liabilities for claims on those policies by California policyholders. The California trial court has held in response to a pre-trial motion that a California statute does prohibit the transfer of California policies to a subsequent legal entity without the consent of the policyholders and noted that consent was not received in the context of the Brandywine restructuring. ACE intends to appeal this decision. In addition, the liabilities that are the subject of this California lawsuit are included within our A&E reserves for Brandywine.

Congress has been working on possible legislation to move all U.S. asbestos bodily injury claims to a federal trust for compensation in accordance with an established set of medical criteria and claim values. The trust would be funded by asbestos defendants and their insurers. ACE would be one of the insurer participants and because the trust would avoid payments to unimpaired victims and obviate the need for extensive legal costs, we believe our ultimate funding obligation under the trust will be less than we would be required to pay under the current tort system. However, we cannot predict if any such proposed legislation will be modified or adopted.

The table below presents selected loss reserve data for A&E exposures at September 30, 2003 and December 31, 2002.

	September 30, 2003				December 31, 2002
	Gross		Net		Gross		Net
	(in millions of U.S. dollars)
Asbestos	$	3,027	$	356	$	3,192	$	446
Environmental and other latent exposures		1,196		297		1,352		403
Total A&E	$	4,223	$	653	$	4,544	$	849

Paid losses for the nine months ended September 30, 2003 for asbestos claims were $165 million on gross reserves and $90 million on net reserves. Environmental and other latent exposure claim payments were $156 million on gross reserves and $106 million on net reserves for the nine months ended September 30, 2003.

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More information relating to our A&E exposure, including our A&E reserving process is included in our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2002.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

Liquidity is a measure of a company’s ability to generate cash flows sufficient to meet short-term and long-term cash requirements of its business operations. As a holding company, ACE possesses assets that consist primarily of the stock of its subsidiaries, and of other investments. In addition to net investment income, our cash flows currently depend primarily on dividends or other statutorily permissible payments. Historically, these dividends and other payments have come from our Bermuda-based operating subsidiaries, which we refer to as our Bermuda subsidiaries. During the nine months ended September 30, 2003, 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 which are discussed below.

The payments of dividends or other statutorily permissible distributions from our operating companies are subject to the laws and regulations applicable to each jurisdiction, as well as the need to maintain capital levels adequate to support the insurance and reinsurance operations, including financial strength ratings issued by independent rating agencies, which are discussed later.

We assess which subsidiaries to draw dividends from based on a number of factors. Considerations such as regulatory and legal restrictions as well as the subsidiary’s financial condition are paramount to the dividend decision. The legal restrictions on the payment of dividends from retained earnings by our Bermuda subsidiaries are currently satisfied by the share capital and additional paid-in capital of each of the Bermuda subsidiaries. During the nine months ended September 30, 2003, ACE Bermuda declared and paid dividends of $281 million, compared with $260 million for the same period in 2002. We received dividends of $25 million from ACE Cap Re International Ltd. during the nine months ended September 30, 2003, compared with no dividends in 2002. We expect that a majority of our cash inflows for 2003 will be from our Bermuda subsidiaries.

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

We did not receive any dividends from ACE Global Markets or ACE INA during the nine months ended September 30, 2003 nor do we expect to receive dividends from these subsidiaries during the remainder of 2003. Under the Lloyd’s accounting model, syndicates in Lloyd’s operate each year as an annual venture. Each year of account is held open for three years. At the end of three years, the year of account purchases reinsurance from the next open year, which is known as reinsurance to close or RITC, and distributes the remaining funds to the investors in the syndicate. ACE Global Markets has historically retained these funds for operational purposes. ACE INA issued debt to provide partial financing for the ACE INA Acquisition and for other operating needs. This debt is serviced by dividends paid by ACE INA’s insurance subsidiaries to ACE INA as well as other group resources. ACE Financial Services’ U.S. insurance subsidiaries are limited in their dividend paying abilities due to their need to maintain their AA and AAA financial strength ratings.

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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. Our consolidated net cash flow from operating activities was $2.6 billion for the nine months ended September 30, 2003, compared with $1.6 billion for the same period last year. The positive operating cash flows were generated from an increase in net premiums written of $1.6 billion for the nine months ended September 30, 2003, offset by an increase in net losses and loss expenses paid of $474 million. Generally cash flows are affected by claim payments which, due to the nature of our operations, may comprise large loss payments on a limited number of claims and therefore can fluctuate significantly from year to year. The irregular timing of these loss payments can create significant variations in cash flows from operations between periods. Sources of liquidity include cash from operations, financing arrangements or routine sales of investments. 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 $503 million for the nine months ended September 30, 2003, compared with $415 million for the same period in 2002, primarily due to claim payments. The run-off book of business continues to require cash to meet its liabilities and cash flows are very dependent on the timing of claim settlements.

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, www.acelimited.com also contains some information about our ratings, which you can find under the “Investor Information” tab.

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

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

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

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Capital Resources

Capital resources consist of funds deployed or available to be deployed to support our business operations. The following table summarizes the components of our capital resources at September 30, 2003 and December 31, 2002.

	September 30			December 31
	2003			2002
	(in millions of U.S. dollars)
Short-term debt	$	146		$	146
Long-term debt		1,749			1,749
Total debt		1,895			1,895
Trust preferred securities		475			475
Mezzanine equity		—			311
Preferred Shares		557			—
Ordinary shareholders’ equity		7,789			6,389
Total shareholders’ equity		8,346			6,389
Total capitalization	$	10,716		$	9,070
Ratio of debt to total capitalization		17.7	%		20.9	%

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.

Shareholders’ Equity

In May 2003, we sold in a public offering 23 million depositary shares, each representing one-tenth of one of our 7.80 percent Cumulative Redeemable Preferred Shares for $25 per depositary share for net proceeds of $557 million. Gross proceeds from the sale of the Preferred Shares were $575 million and related expenses were $18 million. We used the net proceeds to make additional capital contributions to some of our subsidiaries and for general corporate purposes. This offering was made under our universal shelf registration statement with the SEC, which became effective in February 2003, allowing us to offer a number of different types of debt and equity securities up to a total offering price of $1.5 billion. 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 September 1, 2003 we paid dividends of $4.9292 per Preferred Share to shareholders of record on August 31, 2003. This translates to $0.49292 per depositary share. We also declared a dividend of $4.875 per Preferred Share payable on December 1, 2003 to shareholders of record at the close of business on November 30, 2003. This translates to $0.4875 per depositary share.

Our diluted book value per Ordinary Share increased to $27.76 at September 30, 2003 compared with $24.16 at December 31, 2002. In calculating our diluted book value per Ordinary Share, we include in the denominator in-the-money options together with the 11.8 million shares issued upon conversion of the FELINE PRIDES. The expected proceeds from the in-the-money options are included in the numerator. Shareholders’ equity increased by $2 billion during the nine months ended September 30, 2003. This increase is due to the issuance of the Preferred Shares; our net income, conversion of the FELINE PRIDES which increased shareholder’s equity by $311 million, and unrealized gains on our investment portfolio of $211 million. Partially offsetting these increases, were $172 million of dividends declared on Ordinary and Preferred Shares during the nine months ended September 30, 2003.

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 September 30, 2003, this authorization had not been utilized.

On January 10, 2003 and April 14, 2003, we paid dividends of 17 cents per Ordinary Share to shareholders of record on December 27, 2002 and March 31, 2003, respectively. On July 14, 2003 and October 14, 2003, we paid dividends of 19 cents per Ordinary Share to shareholders of record on June 30, 2003 and September 30, 2003,

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respectively. On November 13, 2003, we declared a dividend of 19 cents per Ordinary share payable on January 14, 2004 to shareholders of record on December 31, 2003. 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.

Mezzanine Equity

In 2000, we publicly offered and issued 6,221,000 FELINE PRIDES for aggregate net proceeds of $311 million. Each FELINE PRIDE initially consisted of a unit referred to as an Income PRIDE. Each Income PRIDE consisted of (i) one 8.25 percent Cumulative Redeemable Preferred Share, Series A, liquidation preference $50 per share, and (ii) a purchase contract pursuant to which the holder of the Income PRIDE agreed to purchase from us, on May 16, 2003, $311 million of Ordinary Shares at the applicable settlement rate. On May 16, 2003, we issued approximately 11.8 million Ordinary Shares, in satisfaction of the purchase contracts underlying our FELINE PRIDES. In consideration, on June 16, 2003, we redeemed all of our 8.25 percent Cumulative Redeemable Preferred Shares, Series A, at a rate representing an issuance of 1.8991 Ordinary Shares per preferred share.

Credit Facilities

The following table shows our credit facilities by credit line, usage, expiry date and purpose at September 30, 2003.

	Credit Line		Usage		Expiry Date	Purpose
Liquidity Facilities
ACE Limited1	$	500	$	—	April 2004	General Corporate
ACE Limited1,2		250		64	May 2005	General Corporate
ACE Guaranty Corp		140		—	May 2004	General Corporate
Secured Operational LOC Facilities
ACE Limited		500		283	Sept. 2006	General Corporate
Unsecured Operational LOC Facilities
ACE Limited		500		264	Sept. 2004	General Corporate
ACE Limited		100		84	Oct. 2004	General Corporate
ACE Global Markets		200		200	Oct. 2004	General Corporate
ACE Tempest Re		200		130	Dec. 2003	General Corporate
ACE International		19		19	Various	General Corporate
Unsecured Capital Facilities
ACE Guaranty Corp		175		—	Nov. 2009	Rating Agency Capital
ACE Global Markets3		635		635	Nov. 2007	Underwriting capacity for Lloyd’s Syndicate 2488-2004 capacity of £550 million (approximately $919 million)
Total	$	3,219	$	1,679

^1. Commercial paper back-up facility

^2. May also be used for LOCs

^3. Unsecured letters of credit are placed with Lloyds as capital on behalf of ACE’s corporate capital vehicles

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Some of the facilities noted above require that we maintain certain covenants, all of which have been met at September 30, 2003. These covenants include:

(i)    maintenance of a minimum consolidated net worth covenant of not less than $4.4 billion plus 25 per cent of Consolidated Net Income for each fiscal quarter ending on or after March 31, 2003 for which such Consolidated Net Income is positive, plus 50 percent of net proceeds of any issuance of equity interests (other than the net proceeds from any issuance of equity interests in substitution and replacement of other equity interests to the extent such net proceeds do not exceed the amount of a substantially contemporaneous redemption of equity interests) subsequent to March 31, 2003, and;

(ii)    maintenance of a maximum debt to total capitalization ratio of not greater than 0.35 to 1. Under this covenant, debt does not include trust preferred securities or mezzanine equity, except where the ratio of the sum of trust preferred securities and 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 September 30, 2003, (a) the minimum consolidated net worth requirement under the covenant described in (i) above was $5.1 billion and our actual consolidated net worth as calculated under that covenant was $7.7 billion; and (b) our ratio of debt to total capitalization was 0.18 to 1.

Certain facilities are guaranteed by either operating subsidiaries or ACE Limited.

In addition to these covenants, the ACE Global Markets capital facility requires that collateral be posted if the financial strength rating of ACE Bermuda 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.

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

New Accounting Pronouncements

In July 2003, the Accounting Standards Executive Committee issued Statement of Position 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts” (SOP 03-1). This Statement of Position provides guidance on accounting and reporting by insurance enterprises for certain nontraditional long-duration contracts and for separate accounts and is effective for financial statements for fiscal years beginning after December 15, 2003. At the date of initial application of this SOP, we are required to make various determinations, such as qualification for separate account treatment, classification of securities in separate account arrangements, significance of mortality and morbidity risk, adjustments to contract holder liabilities, and adjustments to estimated gross profits as defined in SFAS No. 97, “Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments”. We are currently evaluating the impact of adoption of SOP 03-1 on our financial condition and results of operations.

In May 2003, Financial Accounting Standards Board (FASB) issued FAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (FAS 150), which establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity. FAS 150 requires the classification of a financial instrument that is within its scope as a liability (or an asset in some circumstances). The adoption of FAS No. 150 did not impact our financial condition or our results of operations.

In April 2003, FASB issued FAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (FAS 149), which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as

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derivatives) and for hedging activities under FAS No. 133. FAS 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of FAS 149 did not have a material impact on our financial condition or our results of operations.

In January 2003, FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46), which requires consolidation of all variable interest entities (VIE) by the primary beneficiary, as these terms are defined in FIN 46. In addition, it requires expanded disclosure for all VIEs. FIN 46 is effective immediately for VIEs created after January 31, 2003. On October 9, 2003, FASB deferred the effective date of FIN 46 for VIEs that existed prior to February 1, 2003, until the end of the first interim or annual period ending after December 15, 2003. Based on the guidance and interpretations issued to date, we do not expect the adoption of FIN 46 to have a material impact on our financial condition or our results of operations.

In December 2002, FASB issued FAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (FAS 148). FAS 148 provides alternative methods of transitioning for a voluntary change to the fair-value based method of accounting for stock-based employee compensation. FAS 148 amends the disclosure requirements of FAS No. 123 (FAS 123) to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based compensation and the effect of the method used on reported results. We continue to account for stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25 (APB 25).

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Market Sensitive Instruments and Risk Management

Market risk represents the potential for loss due to adverse changes in the fair value of financial instruments. We are exposed to potential loss to various market risks, including changes in interest rates and foreign currency exchange rates. Our investment portfolio consists of both fixed income and equity securities, denominated in both U.S. and foreign currencies, which are sensitive to changes in interest rates, equity prices and foreign currency exchange rates. Therefore our net income is affected by changes in interest rates, equity prices and foreign currency exchange rates. We use investment derivative instruments such as futures, options, interest rate swaps, and foreign currency forward contracts to manage the duration of our investment portfolio and foreign currency exposures and also to obtain exposure to a particular financial market. These instruments are sensitive to changes in interest rates, foreign currency exchange rates and equity security prices. The portfolio includes other market sensitive instruments, which are subject to changes in market values with changes in interest rates.

Duration Management and Market Exposure Management

We use financial futures, options, interest rate swaps and foreign currency forward contracts for the purpose of managing certain investment portfolio exposures. These instruments are recognized as assets or liabilities in our consolidated financial statements and changes in market value are included in net realized gains or losses in the consolidated statements of operations.

Our exposure to interest rate risk is concentrated in our fixed income portfolio, and to a lesser extent, our debt obligations. A hypothetical adverse parallel shift in the yield curve of 100 basis points would have resulted in a decrease in total return of 3.4 percent on our fixed income portfolio at September 30, 2003 and 3.1 percent at December 31, 2002. This equates to a decrease in market value of approximately $647 million on a fixed income portfolio valued at $19.2 billion at September 30, 2003, and approximately $488 million on a fixed income portfolio valued at $15.7 billion at December 31, 2002. An immediate time horizon was used as this presents the worst case scenario.

Our portfolio of equity securities, which we carry on our balance sheet at fair value, has exposure to price risk. This risk is defined as the potential loss in fair value resulting from adverse changes in stock prices. In addition, we attain exposure to the equity markets through the use of derivative instruments which also have exposure to price risk. Our U.S. equity portfolio is highly correlated with the S&P 500 index and changes in that index would approximate the impact on our portfolio. Our international equity portfolio has exposure to a broad

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range of non-U.S. equity markets, primarily in those countries where we have insurance operations. This portfolio is correlated to movement in each of these countries’ broad equity market. The combined equity exposure through both our portfolios of equity securities and derivative instruments was valued at $565 million at September 30, 2003. A hypothetical 10 percent decline in the price of each stock in our portfolio of equity securities and the index correlated to the derivative instruments would have resulted in a $57 million decline in fair value. Changes in fair value of these derivative instruments are recorded as net realized gains (losses) in the consolidated statements of operations. Changes in the fair value of our equity portfolio are recorded as unrealized appreciation (depreciation) and are included as other comprehensive income in shareholders’ equity.

Our exposure to foreign exchange risk is concentrated in our net invested assets denominated in foreign currencies. Our international operations use cash flows to purchase investments to match insurance reserves and other liabilities denominated in the same currencies.

Derivatives

FAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities, and requires that an entity recognize all derivatives as either assets or liabilities on the consolidated balance sheet and measure those instruments at fair value.

We maintain investments in derivative instruments such as futures, options, interest rate swaps and foreign currency forward contracts for which the primary purposes are to manage duration and foreign currency exposure, yield enhancement or to obtain an exposure to a particular financial market. If certain conditions are met, a derivative may be specifically designated as a fair value cash flow or foreign currency hedge. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Upon application of FAS 133, hedging relationships must be designated and documented pursuant to the provisions of this statement. We had no derivatives that were designated as hedges at September 30, 2003 and December 31, 2002.

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. These products consist primarily of credit-default swaps. We record these products at their fair values, which are determined principally through the use of in-house developed financial models.

During the nine months ended September 30, 2003, we recorded in net realized gains (losses), a pretax gain of $76 million due principally to changes in the market value of these instruments and the reclassification of losses from net realized gains (losses) to losses and loss expenses as a result of recording loss reserves on certain contracts. This compares with a pretax loss of $97 million for the same period in 2002. The level of gains and losses resulting from changes in the fair value of derivatives on a prospective basis is dependent upon a number of factors including changes in probability of default, credit spreads and other market factors. Our involvement with derivative instruments and transactions is primarily to offer protection to others or to mitigate our own risk; we do not consider such transactions to be speculative.

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.

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ACE LIMITED

PART II OTHER INFORMATION

Item 1.    Legal Proceedings

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

Item 5.    Other Information

1. On November 13, 2003, the Company declared a quarterly dividend of $0.19 per Ordinary Share payable on January 14, 2004, to shareholders of record on December 31, 2003.

2. On November 13, 2003, the Company declared a dividend of $4.875 per Preferred Share, payable on December 1, 2003 to shareholders of record on November 30, 2003.

3. On October 14, 2003, the Company announced the appointment of Paul Medini, as Chief Accounting Officer of ACE Limited. Paul Medini was most recently a partner in the P&C insurance practice of PricewaterhouseCoopers. Mr. Medini’s position was previously held by Robert Blee, who became ACE Limited’s Chief Compliance Officer in March 2003.

Item 6.    Exhibits and Reports on Form 8-K

1.	Exhibits
10.1	Reimbursement agreement for $500,000,000 Letter of Credit Facility dated as of September 25, 2003, among ACE Limited, certain subsidiaries, various lenders and Wachovia Securities, Inc.
10.2	Reimbursement agreement for $500,000,000 secured Letter of Credit Facility dated as of September 25, 2003, among ACE Limited, certain subsidiaries, various lenders and Wachovia Securities, Inc.
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.
2.	Reports on Form 8-K

The Company filed a Form 8-K current report (date of earliest event reported: October 28, 2003) pertaining to ACE Limited’s press release reporting its third quarter 2003 results and the availability of its third quarter financial supplement.

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ACE LIMITED

SIGNATURES

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

	ACE LIMITED
November 13, 2003	/S/    BRIAN DUPERREAULT
	Brian Duperreault Chairman and Chief Executive Officer
November 13, 2003	/S/    PHILIP V. BANCROFT
	Philip V. Bancroft Chief Financial Officer

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ACE LIMITED

EXHIBITS

Exhibit Number	Description	Numbered Page
	Exhibits
10.1	Reimbursement agreement for $500,000,000 Letter of Credit Facility dated as of September 25, 2003, among ACE Limited, certain subsidiaries, various lenders and Wachovia Securities, Inc.
10.2	Reimbursement agreement for $500,000,000 secured Letter of Credit Facility dated as of September 25, 2003, among ACE Limited, certain subsidiaries, various lenders and Wachovia Securities, Inc.
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.

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