Bermuda-based ACE Ltd. said yesterday that it will take a $354 million charge and add $2 billion to its reserves in its fourth quarter to cover asbestos-related claims.

ACE issued a release ahead of their full fourth quarter results, due to be published on February 5, stating that after internal and external reviews of its asbestos and environmental reserves, it has decided to boost its reserves by $2.178 billion.

ACE said that this amount is offset by $1.860 billion of reinsurance, including $533 million from a reinsurance agreement with National Indemnity Company, a subsidiary of Berkshire Hathaway. ACE's net reserve addition will be $318 million, equivalent to a net after-tax charge of $354 million.

ACE joins Travelers Property Casualty Corp., Chubb Corp. and St. Paul Cos. in putting aside cash to pay for asbestos claims, after a string of large litigation settlements over the past 12 months.

ACE's stock rose as much as seven percent as investors welcomed the move to tackle the problem head-on. In late afternoon trading, ACE was up 5.5 percent or $1.54 at $29.25.

"Investors can have some confidence that this issue will be put to rest for a little while," Legg Mason analyst Michael Paisan said. "They've taken the absolutely worst-case scenario."

ACE picked up asbestos liabilities from its acquisition of CIGNA's property and casualty operations in 1999.

CIGNA had reinsurance associated with those risks, but partly due to the bankruptcy of other insurers, ACE has now had to reclassify a portion of its reinsurance recoverables as bad debts.

An internal task force carried out a detailed review on a case by case basis of past and potential lawsuits. The results indicated that the company should strengthen IBNR (incurred but not recorded) provisions for peripheral defendants.

ACE Limited chairman and chief executive officer, Brian Duperreault said: "ACE's total asbestos reserves are at the high end of the range calculated by our internal analysis and are consistent with the actuarial consulting firm's best estimate".

Mr. Duperreault also referred to "favourable trends in the judicial environment" and indicated that reserves had been set conservatively to cover the worst case scenario.

The liabilities will be ceded to ACE's operating subsidiaries and ACE said that it will raise $300 million in either debt or trust preferred securities to give capital support to those companies.

Standard & Poors altered the outlook for ACE, putting their A-/A-2 counterparty credit rating for ACE on CreditWatch with negative implications.

The rating agency said that there were concerns about capital adequacy, accumulated credit risk to reinsurance recoverables and the managed run-off of historical liabilities associated with the CIGNA book of business.

ACE said that it hoped the CreditWatch status would be short lived, pending completion of their $300 million financing.

In terms of book value, ACE said that there is no material change per share from September 30. Results for the fourth quarter before the above charge are predicted to be:

Estimated operating income of $0.92 per share, ahead of estimates by Wall Street analsysts;

Estimated net income of $0.67 per share;

Unrealised gains in the fourth quarter of approximately $150 million (after-tax)

Estimated shareholder equity as of December 31, 2002 of $6.7 billion; and

Estimated operating cash flow in the fourth quarter in excess of $800 million