S&P’s Places ACE Ltd., Subsidiaries Ratings on CreditWatch Neg

January 28, 2003

Standard & Poor’s has placed its ‘A-/A-2’ counterparty credit rating on ACE Ltd. on CreditWatch with negative implications because of ACE’s announcement that it will strengthen its asbestos reserves by $2.18 billion (gross) ($516 million net; $354 million after taxes) and the pervasive impact it will have on the ACE organization as a whole.

Standard & Poor’s also said that it placed on CreditWatch negative its
‘A+’ counterparty credit and financial strength ratings on the various members of the ACE Group and its ‘BBB’ counterparty credit and financial strength ratings on the members of the Brandywine Group.

“The reserve strengthening uses ACE’s remaining $533 million of adverse development reinsurance protection from National Indemnity Co. (AAA/Stable/ –) and leaves the group exposed to potential prospective additional adverse development on the asbestos exposures incurred with its acquisition of CIGNA Corp.’s property/casualty operations on July 2, 1999,” Standard & Poor’s
credit analyst Frederick Loeloff commented. “Although uncertainty with the adequacy of these reserves has historically been factored into the financial strength rating on the group, the magnitude of such a reserve strengthening was not.”

ACE has additional adverse development reinsurance protection for
asbestos reserves incurred with its 1996 acquisition of the Westchester Specialty Group. These specific reserves, which have $600 million of remaining reinsurance protection (also with National Indemnity Co.), were included in this recent reserve analysis and are presumed to be adequate. In aggregate, gross asbestos exposures and latent liabilities accounted for 29.7 percent of ACE’s capital base as of Sept. 30, 2002.

The CreditWatch action also encapsulates Standard & Poor’s concerns about the group’s capital adequacy, accumulated credit risk to reinsurance recoverables, and the managed run-off of historical liabilities associated with old CIGNA books of business and other discontinued business lines, which have been an inherent drag on ACE Ltd.’s earnings and cash flows since they were acquired in 1999.

Although management of these areas has progressed well, and bad debt reserves were increased as part of the current charge, Standard & Poor’s remains concerned with the rapid growth of reinsurance credit exposure on ACE’s balance sheet and the prior-year loss-estimate uncertainties that remain within certain business segments.

Standard & Poor’s is in the process of reviewing ACE Ltd.’s overall
operations and will continue to separately monitor each operating segment’s financial strength, capital adequacy, and ability to reduce exposure to prospective adverse loss development and credit risk.

Expectations are that ACE will take strategic initiatives to maintain at least a 145 percent capital adequacy ratio based on projected year-end 2002 results. ACE will remain in discussion with Standard & Poor’s regarding its prospective capital, operational, and risk-management strategies.

The review is expected to be completed by the end of February 2003.

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