analysts Standard & Poor's.

The ratings were applied to several strategically important members of the ACE Group as Standard & Poors adjusted its outlook on the companies from stable to positive.

The strategically important members of the ACE Group are Security Circle insurers, which means that they voluntarily underwent Standard & Poor's most comprehensive analysis and were assigned ratings in one of the top four categories for financial security.

Standard & Poor's expects ACE to achieve underwriting profits at the INA pooled companies, ACE International, and ACE Bermuda, with potentially higher short-term volatility at Tempest Reinsurance Co. and ACE Global Markets.

ACE's rate of return is expected to improve from its current 12 percent to as much as 15-20 percent in the next two years the analysts said.

Standard & Poor's found that ACE's business platform has been significantly enhanced since the integration of CIGNA Corp.'s property/casualty business, which includes members of the Insurance Co. of North America Intercompany Pool and ACE International (including ACE Insurance S.A. -- N.V.) (collectively, ACE INA), with adverse reserve risk mitigated by retrocession.

Other positive factors included the historically very strong operating performance of the ACE companies, a strong management team at the holding company, and the successful execution of a broad diversification strategy since 1995.

Offsetting these strengths are concerns that ACE has yet to demonstrate that improved performance at ACE INA is sustainable and that ACE has had an active capital management programme.

ACE Group ACE Group has realised a five-year average 29 percent rate of return through a period of significant organic growth and acquisition integration.

In the first two quarters of 2000, which were after the acquisition and integration of ACE INA, ACE has achieved underwriting profits in all of its operating segments.

The business position of the ACE group of companies is very strong, and it has been enhanced significantly since the mid-1999 acquisition. This acquisition followed the 1996 and 1997 purchases of Tempest Reinsurance Co. (property catastrophe reinsurance) and ACE Global Markets (Lloyd's) businesses, respectively, and dwarfs the pre-acquisition business with respect to size.

ACE INA has few peers with as broad an operating base, as demonstrated by its local presence in 47 countries.

ACE's capital adequacy ratio following the acquisition and integration of ACE INA is very strong at 156.8 percent. ACE has reduced its debt leverage to the post-acquisition levels (a debt-to-capital ratio of 25 percent) stipulated for the rating in mid-1999.

Successful diversification execution to date. ACE has pursued an aggressive diversification strategy since 1994 and 1995 to move its business mix away from high-severity liability lines and to broaden its product offerings with organic growth and growth through acquisitions.

Although the ACE INA integration is too recent to evaluate fully, ACE has demonstrated success in its diversification and acquisition growth strategy to date.

In addition, with its acquisition growth targets largely achieved, Standard & Poor's concerns about acquisition risk have been significantly reduced.

Continued integration risk. The acquisitions of ACE INA and Capital Re Corp.

are the last wave in the acquisition strategy that ACE employed in 1996-1999, which added significant operations at Lloyd's, the property catastrophe and financial guarantee reinsurance arenas, and in worldwide property /casualty insurance markets.

Because of the size and scale of the ACE INA acquisition, Standard & Poor's remains cautious about whether the excellent operating performance achieved so far is sustainable.

ACE acquired a large runoff operation with the acquisition of ACE INA, which will be a drag on cash flow for the next two to three years. ACE addressed the risk of adverse development in the environmental part of this book through third-party reinsurance.

Runoff operations also include the middle-market commercial insurance business of ACE INA, which has been discontinued but has not yet been sold.

The ACE management team is opportunistic and might upstream available funds to the holding company. These funds might be used for active capital management.