CB

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2008, for ACE Limited (referred to as "ACE" or the "Company"). ACE is a global insurance and reinsurance organization operating through four segments: Insurance – North American, Insurance – Overseas General, Global Reinsurance, and Life Insurance and Reinsurance. On April 1, 2008, ACE completed the acquisition of Combined Insurance Company of America for $2.56 billion. Additionally, on July 18, 2008, following shareholder approval, the Company completed its "Continuation," moving its jurisdiction of incorporation from the Cayman Islands to Zurich, Switzerland.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net premiums earned increased 14% for the three months and 5% for the six months ended June 30, 2008, compared to the prior year. This growth was primarily driven by the inclusion of Combined Insurance results (starting April 1, 2008) and favorable foreign exchange impacts.
• Investment Performance: Net investment income increased 13% (quarter) and 11% (six months) due to a higher average invested asset base. However, the Company recorded net realized losses of $126 million for the quarter and $479 million for the six months, compared to losses of $11 million and gains of $5 million in the prior year periods. These losses were driven by "other-than-temporary" impairments ($210 million for the quarter; $399 million for six months) and adverse market conditions affecting equity and fixed income portfolios.
• Profitability: Net income decreased 17% for the six months ended June 30, 2008 ($1,123 million) compared to the prior year ($1,350 million), largely due to the increase in net realized investment losses.
• Debt Levels: Total debt increased significantly to $4,058 million from $2,183 million at December 31, 2007. This increase was primarily due to new debt issuances and reverse repurchase agreements used to finance the Combined Insurance acquisition.
• Equity: Total shareholders' equity decreased to $16,327 million from $16,677 million at year-end 2007. This reduction was caused by the redemption of Preferred Shares ($575 million), dividends paid, and a decrease in accumulated other comprehensive income due to unrealized investment depreciation ($834 million).

Guidance, Outlook, and Risks

• Market Conditions: Management notes that the Property & Casualty (P&C) industry faces excess underwriting capacity and declining prices globally. The Company is declining business in areas where competitive pressures reduce prices to unreasonable levels while focusing on growth in specialty businesses and Accident & Health (A&H).
• Acquisition Integration: The Combined Insurance acquisition is expected to provide significant long-term growth opportunities, nearly doubling the Company's A&H franchise.
• Redomestication: The move to Switzerland is not expected to materially impact operations but introduces new regulatory requirements and capital management constraints, such as the need for shareholder approval to reduce par value if share prices fall below par.
• Investment Risks: The Company faces risks from global financial markets, including interest rate changes and equity market volatility. Unrealized losses on fixed maturities were primarily due to widening credit spreads and higher non-U.S. interest rates.
• Legal and Regulatory: The Company is subject to ongoing investigations regarding insurance industry practices (contingent commissions) by various state and federal authorities. While management believes ultimate liability will not have a material adverse effect on financial condition, it could impact results of operations in a specific period.
• Catastrophe Exposure: The modeled annual aggregate 1-in-100-year return period U.S. hurricane probable maximum loss is approximately $952 million (net of reinsurance).

Key Facts for Investor Verification

• Combined Insurance Acquisition: Verify the integration progress and the preliminary purchase price allocation of $723 million in goodwill and intangible assets.
• Investment Impairments: Review the $399 million in "other-than-temporary" impairments recorded in the first six months of 2008 and the composition of the fixed income portfolio in unrealized loss positions ($23.6 billion fair value with $785 million gross unrealized loss).
• Debt Financing: Confirm the terms of the new debt issued to fund the acquisition, including $300 million in senior notes (2018), $450 million in a term loan (2013), and $450 million in senior notes (2015), as well as the $705 million in reverse repurchase agreements.
• Preferred Share Redemption: Note the full redemption of $575 million in Preferred Shares in June 2008, funded by new debt and cash.
• Swiss Redomestication: Understand the implications of the July 18, 2008, continuation to Switzerland, specifically regarding dividend payment mechanics (par value reductions) and potential Swiss withholding tax exemptions.
• Legal Proceedings: Monitor the status of the consolidated federal class actions regarding contingent commissions and the outcome of regulatory investigations by the NYAG and other authorities.