S&P Revises ACE Ltd. Outlook to Stable from Negative; Affirms Ratings

November 30, 2005

Standard & Poor’s Ratings Services announced that it has revised its outlook on ACE Ltd. and its active operating insurance companies to stable from negative. S&P also affirmed its “A+” counterparty credit and financial strength ratings on ACE’s active operating insurance companies and its “BBB+” counterparty credit rating on ACE.

“The outlook was revised to stable following ACE’s recent $1.5 billion common equity issuance and our preliminary reserve review,” stated S&P credit analyst Damien Magarelli. S&P said the “issuance will improve ACE’s capital adequacy, which had decreased because of after-tax losses of $742 million related to Hurricane Katrina, Hurricane Rita, and other catastrophes.” It also noted that a “preliminary reserve review has not found any material difference between the company’s estimates and its own.”

S&P explained that the “negative outlook had been partly based on ACE’s aggressive pricing strategy in U.S. national accounts, D&O, and E&O, which are a small percentage of ACE’s overall business, but this concern has been lessened in 2005 upon further review of the company’s pricing and underwriting philosophy.

“The pricing strategy, though still a concern, is not as much of a risk as it has been historically, as the improved rates in many short-tail lines will mitigate ACE’s strategy to compete on price.

“Lastly, the investigations into finite reinsurance have not resulted in a sizeable charge or significant management turnover, and this supports the stable outlook. ACE is expected to use the funds from its equity issuance for growth as well as to further strengthen its capital adequacy ratio.

“Furthermore, ACE is expected to use these funds to grow, including writings in Poland, Russia, China, and Vietnam, where ACE has established operations in the last year.”

S&P warned, however that “if an aggressive price strategy is pursued, the outlook could be revised back to negative. The outlook could also be revised to negative if the combined ratio (with no adjustments) does not meet expectations of 95 percent in 2006, if the capital adequacy ratio drops below the high ‘A’ range, or if there is a sizeable reserve charge.”

On the other hand S&P indicated that the “outlook could be revised to positive if ACE significantly exceeds these expectations on a consistent multi-year basis, but only if the proportionate size of the reinsurance recoverables diminishes.”

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