<PAGE>
<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _____________ to _____________
Commission File No. 1-11778 I.R.S. Employer Identification No. N/A
ACE LIMITED
(Incorporated in the Cayman Islands)
The ACE Building
30 Woodbourne Avenue
Hamilton HM 08
Bermuda
Telephone 441-295-5200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES ____x___ NO _________
The number of registrant's Ordinary Shares ($0.125 par value) outstanding
as of May 12, 1997 was 55,803,100.
<PAGE>
ACE LIMITED
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION
- -------------------------------
Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets
March 31, 1997 (Unaudited) and September 30, 1996 1
Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, 1997 and March 31, 1996
Six Months Ended March 31, 1997 and March 31, 1996 2
Consolidated Statements of Shareholders' Equity (Unaudited)
Six Months Ended March 31, 1997 and March 31, 1996 3
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended March 31, 1997 and March 31, 1996 4
Notes to Interim Consolidated Financial Statements (Unaudited) 5
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 8
Part II. OTHER INFORMATION
- ---------------------------
Item 5. Other information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and September 30, 1996
March 31 September 30
1997 1996
---------------------------
(unaudited)
(in thousands of U.S. Dollars,
except share and per share data)
<S> <C> <C>
ASSETS
Investments and cash
Fixed maturities, at fair value
(amortized cost - $3,310,876 and $3,394,437) $3,264,759 $3,389,762
Equity securities, at fair value (cost - $435,859 and $257,049) 472,445 323,005
Short-term investments, at fair value (amortized cost - $371,199 and $376,680) 371,442 376,680
Other investments, at cost 12,453 12,453
Cash 87,581 53,374
------------- -------------
Total investments and cash 4,208,680 4,155,274
Goodwill on Tempest acquisition 199,204 201,742
Accrued investment income 42,451 42,728
Deferred acquisition costs 31,227 34,546
Premiums and insurance balances receivable 97,982 85,033
Prepaid reinsurance premiums 22,792 15,421
Other assets 110,955 39,614
------------- ------------
Total assets $4,713,291 $4,574,358
========== ==========
LIABILITIES
Unpaid losses and loss expenses $1,925,011 $1,836,113
Unearned premiums 382,973 398,731
Premiums received in advance 35,020 26,381
Accounts payable and other liabilities 86,561 54,913
Dividend payable 10,506 10,471
Reinsurance balances payable 1,172 3,471
-------------- --------------
Total liabilities 2,441,243 2,330,080
----------- -----------
Commitments and contingencies
SHAREHOLDERS' EQUITY
Ordinary Shares ($0.125 par value, 100,000,000 shares authorized;
56,796,129 and 58,170,755 shares issued and outstanding) 7,100 7,271
Additional paid-in capital 1,132,315 1,156,194
Unearned stock grant compensation (3,355) (1,299)
Net unrealized appreciation (depreciation) on investments (9,288) 61,281
Cumulative translation adjustment 1,210 131
Retained earnings 1,144,066 1,020,700
----------- -----------
Total shareholders' equity 2,272,048 2,244,278
----------- -----------
Total liabilities and shareholders' equity $4,713,291 $4,574,358
========== ==========
See accompanying notes to interim consolidated financial statements
1<PAGE>
<PAGE>
<CAPTION>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Six Months Ended March 31, 1997 and 1996
(Unaudited)
Three Months Ended Six Months Ended
March 31 March 31
1997 1996 1997 1996
----------- ---------- ---------- -----------
(in thousands of U.S. Dollars, except share and per share data)
<S> <C> <C> <C> <C>
REVENUES
Gross premiums written $ 203,333 $ 188,894 $ 335,845 $ 320,375
Reinsurance premiums ceded (14,745) (11,359) (36,643) (14,045)
------------ ------------ ------------ ------------
Net premiums written 188,588 177,535 299,202 306,330
Change in unearned premiums (29,947) (31,142) 23,839 (43,953)
------------- ------------ ------------ ------------
Net premiums earned 158,641 146,393 323,041 262,377
Net investment income 58,094 48,312 117,832 95,438
Net realized gains (losses) on investments (2,339) 5,261 39,384 49,863
------------- -------------- ------------ ------------
Total revenues 214,396 199,966 480,257 407,678
------------ ------------ ----------- -----------
EXPENSES
Losses and loss expenses 105,290 121,076 215,440 214,000
Acquisition costs 11,887 12,549 26,016 24,663
Administrative expenses 19,270 9,538 35,111 18,676
------------- ------------- ------------ -------------
Total expenses 136,447 143,163 276,567 257,339
------------ ------------ ----------- ------------
NET INCOME $ 77,949 $ 56,803 $ 203,690 $ 150,339
============ ============ ========== ===========
Earnings per share $ 1.34 $ 1.22 $ 3.48 $ 3.24
====== ====== ====== ======
Weighted average shares outstanding 58,112,439 46,459,621 58,600,898 46,462,323
========== ========== ========== ==========
See accompanying notes to interim consolidated financial statements
2
<PAGE>
<PAGE>
<CAPTION>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Six Months Ended March 31, 1997 and 1996
(Unaudited)
March 31 March 31
1997 1996
------------ --------------
(in thousands of U.S. Dollars)
<S> <C> <C>
Ordinary Shares
Balance - beginning of period $ 7,271 $ 5,764
Exercise of stock options 8 --
Issued under Employee Stock Purchase Plan 1 --
Issued under Stock Appreciation Right Replacement Plan 8 --
Repurchase of shares (188) (1)
--------------- ----------------
Balance - end of period 7,100 5,763
-------------- --------------
Additional paid-in capital
Balance - beginning of period 1,156,194 548,513
Exercise of options for Ordinary Shares 1,641 --
Issued under Employee Stock Purchase Plan 228 --
Issued under Stock Appreciation Right Replacement Plan 3,919 --
Cancellation of awards (87) --
Repurchase of Ordinary Shares (29,580) (72)
------------- ----------------
Balance - end of period 1,132,315 548,441
----------- ------------
Unearned stock grant compensation
Balance - beginning of period (1,299) (1,796)
Stock grants awarded (3,225) (272)
Stock grants forfeited 79 60
Amortization 1,090 488
--------------- ----------------
Balance - end of period (3,355) (1,520)
--------------- --------------
Net unrealized appreciation (depreciation) on investments
Balance - beginning of period 61,281 94,694
Net depreciation during period (70,569) (40,349)
-------------- --------------
Balance - end of period (9,288) 54,345
--------------- --------------
Cumulative translation adjustments
Balance - beginning of period 131 --
Net adjustment for period 1,079 (180)
--------------- ---------------
Balance - end of period 1,210 (180)
--------------- ---------------
Retained earnings
Balance - beginning of period 1,020,700 795,488
Net income 203,690 150,339
Dividends declared (20,665) (12,929)
Repurchase of Ordinary Shares (59,659) (96)
------------- ----------------
Balance - end of period 1,144,066 932,802
----------- ------------
TOTAL SHAREHOLDERS' EQUITY $2,272,048 $1,539,651
========== ==========
See accompanying notes to interim consolidated financial statements
3
<PAGE>
<PAGE>
<CAPTION>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended March 31, 1997 and 1996
(Unaudited)
March 31 March 31
1997 1996
------------- ------------
(in thousands of U.S. Dollars)
<S> <C> <C>
Cash flows from operating activities
Net income $ 203,690 $ 150,339
Adjustments to reconcile net income to net cash provided by
operating activities
Unearned premiums (15,758) 43,953
Unpaid losses and loss expenses 88,898 173,436
Prepaid reinsurance premiums (7,371) --
Net realized gains on investments (39,384) (49,863)
Amortization of premium/discount (2,511) (2,713)
Deferred acquisition costs 3,319 202
Insurance balances receivable (12,949) (11,779)
Premiums received in advance 8,639 12,640
Reinsurance balances payable (2,299) --
Accounts payable and other liabilities (8,531) 6,296
Accrued investment income 277 (6,401)
Other 728 (2,868)
---------------- --------------
Net cash flows from operating activities 216,748 313,242
------------- ------------
Cash flows from investing activities
Purchases of fixed maturities (3,255,722) (5,179,119)
Purchases of equity securities (402,393) (108,692)
Sales of fixed maturities 3,371,215 4,870,057
Sales of equity securities 224,781 101,492
Maturities of fixed maturities 5,000 32,580
Net realized gains on financial futures contracts 9,246 14,407
Acquisitions of subsidiaries, net of cash acquired (30,416) (11,572)
------------- -------------
Net cash used in investing activities (78,289) (280,847)
------------- ------------
Cash flows from financing activities
Repurchase of Ordinary Shares (89,427) (169)
Dividends paid (20,630) (12,911)
Proceeds from exercise of options for Ordinary Shares 1,649 --
Proceeds from shares issued under Stock Appreciation Right Replacement Plan 4,156 --
----------- -------------
Net cash used for financing activities (104,252) (13,080)
------------- --------------
Net increase in cash 34,207 19,315
Cash - beginning of period 53,374 16,929
-------------- --------------
Cash - end of period $ 87,581 $ 36,244
============= =============
See accompanying notes to interim consolidated financial statements
4
/TABLE
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The interim consolidated financial statements, which include the accounts
of the Company and its subsidiaries, have been prepared on the basis of
accounting principles generally accepted in the United States of America
and, in the opinion of management, reflect all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of results for
such periods. The results of operations and cash flows for any interim
period are not necessarily indicative of results for the full year. These
financial statements should be read in conjunction with the consolidated
financial statements, and related notes thereto, included in the Company's
1996 Annual Report on Form 10-K.
On November 26, 1996, the Company, through its wholly-owned subsidiary ACE
UK Limited, acquired ACE London Holdings Ltd. ("ACE London") (formerly
Ockham Worldwide Holdings PLC), a wholly owned subsidiary of Ockham
Holdings PLC. ACE London owns two Lloyd's of London ("Lloyd's") managing
agencies, ACE London Aviation Limited ("ALA") (formerly Ockham Sturge
Aviation Agency Ltd.) and ACE London Underwriting Limited ("ALU") (formerly
Ockham Worldwide Agency Ltd.). Together these two agencies manage six
syndicates with total underwriting capacity for the 1997 year of account of
(pound)361 million (approximately $591 million). ACE London also owns a
Lloyd's corporate member which provides funds at Lloyd's to support
underwriting on these syndicates. The Company is providing funds at Lloyd's
of approximately (pound)7.5 million (approximately $12 million), which is
primarily in the form of a letter of credit, supporting approximately
(pound)15 million (approximately $25 million) of premium writing capacity
to the syndicates managed by ALA and ALU for the 1997 year of account. The
acquisition has been recorded using the purchase method of accounting.
On November 26, 1996, the Company, through ACE UK Limited, also acquired
the remaining 49 percent interest in Methuen Group Limited ("Methuen"), the
holding company for Methuen Underwriting Limited, which it did not already
own. The Company had originally acquired a 51 percent interest in Methuen
on March 27, 1996. The acquisition of the remaining 49 percent interest has
been recorded using the purchase method of accounting.
Following the acquisition of ACE London in November 1996, the Company has
three managing agencies at Lloyd's. The Company is in the process of
merging these three agencies into two, with MUL becoming dormant, and have
established one central management and support team servicing both agencies
and all the syndicates. It is also proposed to merge specific syndicates to
create larger underwriting units with the size and competitive potential
appropriate to the changing marketplace.
In March 1997, the Company, together with two other insurance companies,
formed a managing general agency in Bermuda to provide underwriting
services to the three organizations for political risk insurance coverage.
The new company, Sovereign Risk Insurance Limited ("Sovereign") will issue
subscription policies on behalf of the three participants with the Company
underwriting 45 percent of each risk. Sovereign will initially offer limits
of up to $50 million per project and $100 million per country.
At March 31, 1997 approximately 58 percent of the Company's written
premiums came from insureds based in North America with approximately 36
percent coming from the United Kingdom and continental Europe and
approximately 6 percent from other countries.
2. Commitments and Contingencies
A number of the Company's insureds have given notice of claims relating to
breast implants or components or raw material thereof that had been
produced and/or sold by such insureds. Lawsuits including class actions,
involving thousands of implant recipients have been filed in both state and
federal courts throughout the United States. Most of the federal cases have
been consolidated pursuant to the rules for Multidistrict Litigation
("MDL") to a Federal District Court in Alabama.
On April 1, 1994, the judge presiding over the MDL proceeding gave
preliminary approval to a global settlement agreement in the approximate
amount of $4.2 billion and conditional certification to a settlement class
("Global I").
5
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
On May 15, 1995, the Dow Corning Corporation, a significant participant in
the Global I settlement, filed for protection under Chapter 11 of the U.S.
Bankruptcy Code.
As of June 1, 1995, over 440,000 registrations were received by the Global
I Claims Administrator. Approximately 248,500 of these were filed by
domestic class members by the September 16, 1994 deadline for making claims
under the Current Disease Compensation Program. Based on an analysis of
about 3,000 of these registrations, the judge concluded that a severe
racheting (or reduction) of the settlement amounts shown in the notice of
settlement would occur if current claims were evaluated under the existing
criteria and if funding of the Current Disease Compensation Program
remained at the $1.2 billion level.
Because of the anticipated racheting of benefit amounts and the defendants'
right to withdraw under the Global I settlement, the judge entered an order
on October 9, 1995 declaring that class members had new opt-out rights and
that, in general, class members and their attorneys should not expect to
receive any benefits under Global I.
On October 1, 1995, negotiators for three of the major defendants agreed on
the essential elements of a revised individual settlement plan for domestic
class members with at least one implant from any of those manufacturers
("Settlement II"). In general, under Settlement II, the amounts payable to
individual participants, and the manufacturers' obligations to make those
payments, would not be affected by the number of class members electing to
opt out from the new plan. Also, in general, the compensation would be
fixed rather than subject to potential further racheting, and the
manufacturers would not have a right to walk away because of the amount of
claims payable. Finally, each defendant agreed to be responsible only for
cases in which its implant was identified, and not for a percentage of all
claims.
By November 13, 1995, Settlement II was approved by the three major
defendants. In addition, two other defendants became part of Settlement II,
although certain of their settlement terms are different and more
restricted than the plan offered by the original three defendants.
On December 22, 1995, the judge approved Settlement II and the materials
for giving notice to claimants although an appeal concerning Settlement II
is pending with the Eleventh Circuit Court of Appeals. In mid-January 1996,
the three major defendants each made a payment of $125 million to a
court-established fund as an initial reserve for payments to be made under
Settlement II. The Claims Administrator continues to send out notifications
of status and advance payments to claimants who submitted implant
manufacturer proof. Although option one closed on December 16, 1996,
information on the estimated total cost of Settlement II and the number of
opt-out is not presently available.
Although the Company has underwritten the coverage for a number of the
defendant companies including four of the companies involved in the revised
Settlement II described above, the Company anticipates that insurance
coverage issued prior to the time the Company issued policies will be
available for a portion of the defendants' liability. In addition, the
Company's policies only apply when the underlying liability insurance
policies or per occurrence retentions are exhausted.
At June 30, 1994, the Company increased its then existing reserves relating
to breast implant claims. Although the reserve increase was partially
satisfied by an allocation from existing IBNR, it also required an increase
in the Company's total reserve for unpaid losses and loss expenses at June
30, 1994 of $200 million. The increase in reserves was based on information
made available in conjunction with Global I (including information relating
to opt-outs) and information made available from the Company's insureds and
was predicated upon an allocation between coverage provided before and
after the end of 1985 (when the Company commenced underwriting operations).
No additional reserves relating to breast implant claims have been added
since June 30, 1994.
6
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
The Company continually evaluates its reserves in light of developing
information and in light of discussions and negotiations with its insureds.
In August 1996, the Company settled with one of its policyholders, for a
sum of money to be paid out over a number of years. The first payment was
made in December 1996. The settlement is consistent with the Company's
belief that its reserves are adequate. In April 1997, the Company made a
payment to another policyholder in the amount of $100 million. Additional
limits remain for this insured. This payment was expected by the Company
and was included in previous reserves. Significant uncertainties continue
to exist with regard to the ultimate outcome and cost of Settlement II and
the number and value of the opt-out claims. While the Company is unable at
this time to determine whether additional reserves, which could have a
material adverse effect upon the financial condition, results of operations
and cash flows of the Company, may be necessary in the future, the Company
believes that its reserves for unpaid losses and loss expenses including
those arising from breast implant claims are adequate as at March 31, 1997.
3. Shares Issued and Outstanding
On February 7, 1997, the Board of Directors terminated the then existing
share repurchase program and authorized a new program for up to $100.0
million of the Company's Ordinary Shares. During the six month period ended
March 31, 1997, the Company repurchased 1,504,000 Ordinary Shares under the
share repurchase programs for an aggregate cost of $89.4 million. As at
March 31, 1997, approximately $69.0 million of the February 7, 1997 Board
authorization had not been utilized.
4. Restricted Stock Awards
During the quarter ended March 31, 1997, 5,000 restricted Ordinary Shares
were awarded to an officer of the Company. These shares vest at various
dates through November 1999. In addition, 5,028 restricted Ordinary Shares
were awarded to outside directors of the Company under the terms of the
1995 Outside Directors Plan. These shares vest in February 1998. Also
during the quarter, 2,500 restricted Ordinary Shares were forfeited due to
resignations by officers of the Company and its subsidiaries.
5. Credit Facilities
The Company has a committed line of credit provided by a syndicate of six
major international banks, led by Morgan Guaranty Trust Company of New York
("Morgan") which provides for unsecured borrowings up to an aggregate
amount of $50 million. The line of credit agreement requires the Company to
maintain consolidated tangible net worth of not less than $1.25 billion. At
March 31, 1997, there were no outstanding loans under this arrangement.
With effect from November 22, 1996, the same syndicate of banks has also
provided up to (pound)70.3 million (approximately $115 million) for a five
year, collateralized letter of credit ("LOC"), which is primarily used to
provide funds at Lloyd's to support underwriting capacity on Lloyd's
syndicates in which the Company participates. Certain assets, amounting to
115 percent of the value of the LOC, have been pledged as collateral for
the LOC. At March 31, 1997 there were no drawdowns on the LOC.
6. Reclassification
Certain items in the prior period financial statements have been
reclassified to conform with the current period presentation.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
General
The following is a discussion of the Company's results of operations,
financial condition, liquidity and capital resources as of and for the
three and six months ended March 31, 1997. The results of operations and
cash flows for any interim period are not necessarily indicative of results
for the full year. This discussion should be read in conjunction with the
consolidated financial statements, related notes thereto and the
Management's Discussion and Analysis of Results of Operations and Financial
Condition included in the Company's 1996 Annual Report on Form 10-K.
ACE Limited ("ACE") is a holding company which, through its Bermuda-based
operating subsidiaries, A.C.E. Insurance Company, Ltd. ("ACE Insurance"),
Corporate Officers & Directors Assurance Ltd. ("CODA") and Tempest
Reinsurance Company Limited ("Tempest"), provides insurance and reinsurance
for a diverse group of international clients. In addition, the Company
provides funds at Lloyd's of London ("Lloyd's") to support underwriting by
syndicates managed by Methuen Underwriting Limited ("MUL") ACE London
Aviation Limited ("ALA") and ACE London Underwriting Limited ("ALU"), each
indirect wholly owned subsidiaries of ACE. The term "the Company" refers to
ACE and its subsidiaries, excluding Methuen (as defined below) and ACE
London (as defined below).
On July 1, 1996, the Company completed the acquisition of Tempest, a
leading Bermuda-based property catastrophe reinsurer. Tempest underwrites
property catastrophe reinsurance on a worldwide basis, emphasizing excess
layer coverages, and has large aggregate exposures to man-made and natural
disasters. Property catastrophe loss experience is generally characterized
by low frequency but high severity short-tail claims which may result in
significant volatility in financial results.
On March 27, 1996, the Company acquired a controlling interest in Methuen
Group Limited ("Methuen"), the holding company for MUL, a leading Lloyd's
managing agency. On November 26, 1996, the Company acquired the remaining
49 percent interest in Methuen. MUL manages six syndicates with a total
underwriting capacity of (pound)366 million (approximately $555 million)
for the 1996 year of account and (pound)384 million (approximately $629
million) for the 1997 year of account. Total underwriting capacity is the
amount of gross premiums that a syndicate at Lloyd's can underwrite in a
given year of account. However, a syndicate is not required to fully
utilize all of the capacity and it is not unusual for capacity utilization
to be significantly lower than 100 percent. For the 1996 year of account,
the Company, through a corporate subsidiary, has participated in the
underwriting of these syndicates by providing funds at Lloyd's of
(pound)12.25 million (approximately $18 million), which was primarily
in the form of a letter of credit, supporting (pound)24.5 million
(approximately $37 million) of underwriting capacity. For the 1997 year of
account, the Company, through a corporate subsidiary, has provided funds at
Lloyd's of approximately (pound)64 million (approximately $105 million) to
support up to approximately (pound)128 million (approximately $209 million)
of premium writing capacity by syndicates managed by MUL. The syndicates
managed by MUL in which the Company participates underwrite aviation,
marine and non-marine risks.
On November 26, 1996, the Company acquired ACE London Holdings Ltd. ("ACE
London") (formerly Ockham Worldwide Holdings PLC), a wholly owned
subsidiary of Ockham Holdings PLC. ACE London owns two Lloyd's managing
agencies, ALA and ALU. Together these two agencies manage six syndicates
with total underwriting capacity for the 1997 year of account of (pound)361
million (approximately $591 million). ACE London also owns a Lloyd's
corporate member which provides funds at Lloyd's to support underwriting on
these syndicates. For the 1997 year of account the Company, through a
corporate subsidiary, is providing funds at Lloyd's of approximately
(pound)7.5 million (approximately $12 million), which is primarily in the
form of a letter of credit, supporting approximately (pound)15 million
(approximately $25 million) of premium writing capacity to the syndicates
managed by ALA and ALU. The syndicates managed by ALA and ALU in which the
Company participates underwrite aviation and non-marine risks.
Following the acquisition of ACE London in November 1996, the Company has
three managing agencies at Lloyd's. The Company is in the process of
merging these three agencies into two, with MUL becoming dormant, and have
established one central management and support team servicing both agencies
and all the syndicates. It is also proposed to merge specific syndicates to
create larger underwriting units with the size and competitive potential
appropriate to the changing marketplace.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
The Company's excess liability insurance policy generally provides limits
of up to a maximum of $200 million per occurrence and annual aggregate,
with a minimum attachment point generally of $100 million. For all new and
renewal business, effective December 15, 1994, the Company reduced the
maximum limits offered for integrated occurrences from $200 million to $100
million. The Company maintains excess of loss clash reinsurance to protect
it from losses arising from a single set of circumstances (occurrence)
covered by more than one excess liability insurance policy. The reinsurance
provides protection to a maximum of $150 million, and in the aggregate
excess of $225 million, for each and every loss occurrence involving three
or more insureds. Integrated occurrences are specifically excluded.
The Company offers up to $75 million of limits in directors and officers
liability coverage. The Company does not purchase reinsurance for its
directors and officers liability risks.
The Company began satellite insurance operations in February 1994. Until
February 15, 1996, the Company offered separate limits of up to $25 million
per risk for launch insurance, including ascent to orbit and initial
operations, and up to $25 million per risk for in-orbit insurance. This
risk was fully retained by the Company. Effective for all business written
on or after February 15, 1996, the Company entered into a surplus treaty
arrangement which provides for up to $25 million of reinsurance for each
risk. This reinsurance arrangement enabled the Company to raise the gross
limits offered for satellite insurance to $50 million per risk.
During fiscal 1995, the Company entered the following new lines of
business: aviation insurance, excess property insurance and financial
lines.
Aviation insurance provides coverage for various aviation products,
including aircraft manufacturers hull and liability, as well as airport
liability, aircraft refueling operations and associated aircraft liability
risks. The Company offers limits of up to $100 million per insured, with no
minimum attachment point. The Company reduces its net exposure to
approximately $50 million per insured with a dedicated reinsurance program.
The Company offers global excess property "all risk" insurance , providing
limits of up to a maximum of $50 million per occurrence with a minimum
attachment point generally of $25 million. Coverage includes such perils as
windstorm, earthquake and fire, as well as explosion. Consequential
business interruption coverage is also offered. In certain circumstances,
the Company uses reinsurance to establish the retained net limit per risk.
In addition, the Company has purchased catastrophe reinsurance to control
the possible effects of cumulative natural peril exposure.
The Company's financial lines product group offers specifically designed
financial, insurance and reinsurance solutions to address complex risk
management problems. The programs offered typically have the following
common characteristics: multi-year contract terms, broad coverage that
includes stable capacity and pricing for the insured, aggregate policy
limits and insured participation in the results of their own loss
experience. Each contract is unique because it is tailored to the insurance
or reinsurance needs, specific loss history and financial strength of the
insured. Premium volume, as well as the number of contracts written, can
vary significantly from period to period due to the nature of the contracts
being written. Profit margins may vary from contract to contract
depending on the amount of underwriting risk and investment risk assumed
on each contract.
With effect from November 20, 1996, the Company participates in the
reinsurance of Shipowners Insurance and Guaranty Company Ltd. ("SIGCo"),
a Bermuda-based company approved by the United States Coast Guard to
provide financial guarantees required by the United States Coast Guard
to allow them to issue Certificates of Financial Responsibility under
the Oil Pollution Act of 1990 to owners of vessels operating in U.S.
waters. SIGCo underwrites the risks previously written by the "First Line"
program in which the Company has participated since December 1994. The
Company has purchased excess of loss reinsurance to limit its exposure
in this line.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
In March 1997, the Company, together with two other insurance companies,
formed a managing general agency in Bermuda to provide underwriting
services to the three organizations for political risk insurance coverage.
The new company, Sovereign Risk Insurance Limited ("Sovereign") will issue
subscription policies on behalf of the three participants with the Company
underwriting 45 percent of each risk. Sovereign will initially offer limits
of up to $50 million per project and $100 million per country.
On April 23, 1997 the Company announced that it had signed a quota share
treaty reinsurance agreement with the Multilateral Investment Guarantee
Agency ("MIGA"), part of the World Bank Group. MIGA provides coverage for
foreign investments in developing countries. The agreement allows MIGA to
provide private investors and developing countries additional capacity to
support developmentally sound investment projects. The coverages offered
will be the same as those offered by MIGA's guarantee program, namely,
transfer restriction, expropriation, war and civil disturbance and breach
of contract. The quota share treaty offers limits up to $25 million per
contract with an aggregate of $100 million per country.
The Company will continue to evaluate potential new product lines and other
opportunities in the insurance and reinsurance markets.
Results of Operations - Three Months ended March 31, 1997
<TABLE>
<CAPTION>
Net Income Three Months ended % Change
March 31 from
1997 1996 prior year
----------------- -----------
(in millions)
<S> <C> <C> <C>
Income excluding net realized gains (losses)
on investments $80.3 $51.5 55.8%
Net realized gains (losses) on investments (2.3) 5.3 N.M.
------- ------- -----
Net income $78.0 $56.8 N.M.
===== ====== =====
(N.M. - Not meaningful)
</TABLE>
Higher net investment income and income from insurance operations were the
main contributors to the 55.8 percent increase in income excluding net
realized gains (losses) on investments for the second quarter of fiscal
1997, compared with the corresponding fiscal 1996 quarter. The increase in
investment income and income from insurance operations were primarily
attributable to the inclusion of the results of Tempest in the current
quarter. Tempest contributed $8.6 million to net investment income and
$29.9 million to income excluding net realized gains (losses) on
investments. These increases were partially offset by an increase in
general and administrative expenses.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of Operations - Three Months ended March 31, 1997
<TABLE>
<CAPTION>
Premiums Three Months ended % Change
March 31 from
1997 1996 prior year
----------------- -----------
(in millions)
<S> <C> <C> <C>
Gross premiums written:
Excess liability $36.8 $ 57.0 (35.5)%
Directors and officers liability 15.0 16.8 (10.1)
Satellite 22.7 23.8 (4.6)
Aviation 8.4 8.0 5.0
Excess property 8.9 6.0 46.8
Financial Lines 33.1 73.6 (55.1)
Lloyd's syndicates 4.3 -- N.M.
Property catastrophe (Tempest) 72.5 -- N.M.
Other 1.6 3.7 (56.1)
------ ------ ------
$203.3 $188.9 7.6%
===== ====== ======
Net premiums written:
Excess liability $34.1 $ 53.1 (35.6)%
Directors and officers liability 15.0 16.7 (10.1)
Satellite 14.3 20.1 (28.8)
Aviation 6.6 6.5 0.1
Excess property 8.9 5.1 72.6
Financial Lines 33.1 73.6 (55.1)
Lloyd's syndicates 2.7 -- N.M.
Property catastrophe (Tempest) 72.5 -- N.M.
Other 1.4 2.4 (41.9)
------ ------ ------
$188.6 $177.5 6.2%
====== ====== =====
<PAGE>
Net premiums earned:
Excess liability $46.1 $ 59.8 (22.9)%
Directors and officers liability 24.5 26.7 (8.5)
Satellite 16.7 19.1 (12.4)
Aviation 6.4 4.3 50.2
Excess property 5.0 2.8 77.8
Financial Lines 21.8 31.1 (29.9)
Lloyd's syndicates 4.6 -- N.M.
Property catastrophe (Tempest) 31.0 -- N.M.
Other 2.5 2.6 (3.8)
------ ------ ------
$158.6 $146.4 8.4%
====== ====== =====
(N.M. - Not meaningful)
</TABLE>
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of Operations - Three Months ended March 31, 1997 (continued)
For the three months ended March 31, 1997, gross premiums written increased
by 7.6 percent from $188.9 million to $203.3 million despite continuing
competitive pressures in most insurance markets. The growth in gross
premiums written is mainly attributable to the inclusion of Tempest
premiums in the second quarter of fiscal 1997. As Tempest was purchased on
July 1, 1996, there are no Tempest premiums in the comparable fiscal 1996
quarter. Tempest's written premiums during the quarter were down
approximately 5 percent over last year. This decrease was a result of real
rate reduction, increasing attachments and some cancellations due to
pricing which was offset somewhat by several new policies written in the
quarter. Growth in excess property premiums together with the participation
in the Lloyd's syndicates managed by MUL also contributed to the increase.
These factors together accounted for a $79.7 million increase in gross
written premiums in the quarter. This increase was offset mainly by
declines in excess liability and financial lines premiums. The decline in
excess liability premiums of $20.2 million was mainly the result of
continuing competitive pressures in that market which are expected to
continue in the near term. These pressures have adversely effected the
pricing of the excess liability business but have also led to a reduction
in the Company's exposure and an improved risk profile. Financial lines
premiums declined by $40.5 million in the second quarter of fiscal 1997
compared to the second quarter of fiscal 1996 primarily because the
opportunity to renew a large premium amount written in the second quarter
of fiscal 1996 was not available in the second quarter of fiscal 1997.
Directors and officers liability premiums also decreased by $1.8 million or
10.1 percent as this line still faces an extremely competitive environment
with its corresponding pressure on prices. However, the effects of
multi-year policies and changes in anniversary dates on renewal business
positively impacted directors and officers liability premiums
this quarter.
Net premiums written increased by 6.2 percent to $188.6 million for the
three months ended March 31, 1997, compared with $177.5 million for the
second quarter of fiscal 1996. As with gross premiums written, the increase
in net premiums written is primarily the result of the inclusion of Tempest
premiums in the second quarter of fiscal 1997. Growth in excess property
premiums together with the participation in the Lloyd's syndicates managed
by MUL also contributed to the increase. These increases were offset
somewhat by declines in excess liability, financial lines and satellite
premiums.
Net premiums earned increased by 8.4 percent to $158.6 million for the
quarter ended March 31, 1997 compared with $146.4 million for the quarter
ended March 31, 1996. The growth in net premiums earned was primarily the
result of the inclusion of earned premiums from Tempest and the Lloyd's
syndicates for the quarter which amounted to $35.6 million together with
contributions from aviation and excess property. These increases were
offset somewhat by declines in excess liability, directors and officers
liability, satellite and financial lines earned premiums.
<TABLE>
<CAPTION>
Net Investment Income Three Months ended % Change
March 31 from
1997 1996 prior year
----------------- -----------
(in millions)
<S> <C> <C> <C>
Net Investment Income $ 58.1 $ 48.3 20.2%
====== ====== =====
</TABLE>
The average yield earned on the investment portfolio was approximately the
same in the second quarter of fiscal 1997 as compared to the second quarter
of fiscal 1996 even with the change in the asset mix between periods.
During the quarter ended December 31, 1996, the Company increased the
equity exposure of the portfolio to 20 percent from 15 percent. The
remainder of the portfolio is comprised of fixed maturity securities. With
similar yields in each period, net investment income still increased by
$9.8 million or 20.2 percent in the current quarter, as compared with the
second quarter of fiscal 1996 primarily as a result of a larger investable
asset base due mainly to the inclusion of the Tempest portfolio in the
current quarter as well as positive cash flows from operations.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of Operations - Three Months ended March 31, 1997 (continued)
<TABLE>
<CAPTION>
Net Realized Gains (Losses) on Investments Three Months ended
March 31
1997 1996
------ ------
<S> <C> <C>
Fixed maturities and short-term investments $10.8 $ 6.5
Equity securities 5.3 0.2
Financial futures and option contracts (8.4) (0.4)
Currency (10.0) (1.0)
------- -------
$ (2.3) $ 5.3
======= =====
</TABLE>
The Company's investment strategy takes a long-term view and the portfolio
is actively managed to maximize total return within certain specific
guidelines which minimize risk. The portfolio is reported at fair value.
The effect of market movements on the investment portfolio will directly
impact net realized gains (losses) on investments when securities are sold.
Changes in unrealized gains and losses, which result from the revaluation
of securities held, are reported as a separate component of shareholders'
equity.
The Company uses foreign currency forward and option contracts to minimize
the effect of fluctuating foreign currencies on the value of non-U.S.
dollar holdings. The contracts used are not designated as specific hedges
and therefore, realized and unrealized gains and losses recognized on these
contracts are recorded as a component of net realized gains (losses) in the
period in which the fluctuations occur, together with net foreign currency
gains (losses) recognized when non-U.S. dollar securities are sold.
In the second quarter of fiscal 1997 the fair value of the Company's
investment portfolio was adversely impacted by a general decrease in prices
in the U.S. bond markets resulting from an increase in interest rates
during the period. However, sales proceeds for fixed maturity securities
were generally higher than their amortized cost during most of the quarter
which resulted in net realized gains of $10.8 million being recognized on
fixed maturities and short-term investments. In the second quarter of
fiscal 1996, net realized gains of $6.5 million were recognized on fixed
maturities and short-term investments.
The Company recognized net realized gains on sales of equity securities of
$5.3 million in the second quarter of fiscal 1997 compared with gains of
$0.2 million in the second quarter of fiscal 1996.
Net realized losses on financial futures and option contracts of $8.4
million recorded in the second quarter of fiscal 1997 were primarily
generated by futures and option contracts used by certain of the Company's
external managers of fixed income securities to manage duration and yield
curve exposures. These losses were a result of a rising interest rate
environment and were partially offset by gains on the equity index futures
contracts held. During the three month period ended March 31, 1996 an
increase in interest rates resulted in a market decline for fixed maturity
securities, and realized losses from U.S. Treasury futures contracts. These
losses were partially offset by realized gains on the S&P 500 index futures
contracts in the synthetic equity fund as a result of a rise in the S&P 500
stock index during the period.
Currency losses of $10.0 million in the second quarter of fiscal 1997 were
attributable to the strengthening of the U.S. dollar against most major
foreign currencies.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of Operations - Three Months ended March 31, 1997 (continued)
<TABLE>
<CAPTION>
Combined Ratio Three Months ended
March 31
1997 1996
------ ------
<S> <C> <C>
Loss and loss expense ratio 66.4% 82.7%
Acquisition cost ratio 7.5 8.6
Administrative expense ratio 12.1 6.5
----- -----
Combined ratio 86.0% 97.8%
======= =====
</TABLE>
The underwriting results of a property and casualty insurer are discussed
frequently by reference to its loss and loss expense ratio, acquisition
cost ratio, administrative expense ratio and combined ratio. Each ratio is
derived by dividing the relevant expense amounts by net premiums earned.
The combined ratio is the sum of the loss and loss expense ratio, the
acquisition cost ratio and the administrative expense ratio. A combined
ratio under 100 percent indicates underwriting profits and a combined ratio
exceeding 100 percent indicates underwriting losses. Property catastrophe
reinsurance companies generally expect to have overall lower combined
ratios as compared with other reinsurance companies with long-tail
exposures.
For the three months ended March 31, 1997, the loss and loss expense ratio
was 66.4 percent compared to 82.7 percent for the second quarter of fiscal
1996. The ratio for the current quarter is impacted by the inclusion of the
results of Tempest. Property catastrophe loss experience is generally
characterized by low frequency but high severity short-tail claims which
may result in significant volatility in results. For the current quarter,
Tempest's loss and loss expense ratio was 6.8 percent. Excluding Tempest,
the loss and loss expense ratio would have been 80.9 percent. Several
aspects of the Company's operations, including the low frequency and high
severity of losses in the high excess layers in certain lines of business
in which the Company provides insurance and reinsurance, complicate
the actuarial reserving techniques utilized by the Company. Management
believes, however, that the Company's reserves for unpaid losses and loss
expenses, including those arising from breast implant litigation,
are adequate to cover the ultimate cost of losses and loss expenses
incurred through March 31, 1997. Since such provisions are necessarily
based on estimates, future developments may result in ultimate losses and
loss expenses significantly greater or less than such amounts (see "Breast
Implant Litigation").
Acquisition costs decreased by $0.7 million and the acquisition cost ratio
decreased to 7.5 percent from 8.6 percent in the quarter compared to the
second quarter of fiscal 1996 due primarily to the continuing change in the
mix of business written by the Company. Administrative expenses increased
by $9.7 million in the current quarter compared to the second quarter of
fiscal 1996. These additional expenses are primarily due to the increased
cost base resulting from the strategic diversification by the Company over
the past two years, including the recent acquisitions of Tempest, Methuen
and ACE London as well as the development of the new insurance lines and
products. In addition, during the quarter, as a result of the increase in
the market value of the Company's stock, the Company again recorded
expenses related to stock appreciation rights. However, during the quarter,
all remaining stock appreciation rights were exercised in return for
options and cash and/or shares of the Company. In addition, certain stock
appreciation rights were forfeited in return for cash during the quarter.
Total expenses incurred in the quarter ended March 31, 1997 relating to
these transactions amounted to $3.0 million compared with $1.7 million for
the second quarter of fiscal 1996. There were no stock appreciation rights
outstanding at March 31, 1997.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of operations - Six Months ended March 31, 1997
<TABLE>
<CAPTION>
Net Income Six Months ended % Change
March 31 from
1997 1996 prior year
------ ------ ----------
(in millions)
<S> <C> <C> <C>
Income excluding net realized gains
(losses) on investments $ 164.3 $ 100.4 63.6%
Net realized gains (losses) on investments 39.4 49.9 N.M.
--------- -------- ------
Net income $ 203.7 $ 150.3 N.M.
======= ======= ======
</TABLE>
Higher net investment income and income from insurance operations were the
main contributors to the $63.9 million or 63.6 percent increase in income
excluding net realized gains (losses) on investments for the six months
ended March 31, 1997 compared with the corresponding period of fiscal 1996.
The increase in investment income and income from insurance operations were
primarily attributable to the inclusion of the results of Tempest in the
current period. Tempest contributed $17.9 million to net investment income
and $61.3 million to income excluding net realized gains (losses) on
investments. These increases were partially offset by an increase in
general and administrative expenses.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of operations - Six Months ended March 31, 1997
<TABLE>
<CAPTION>
Premiums Six Months ended % Change
March 31 from
1997 1996 prior year
------ ------ ----------
(in millions)
<S> <C> <C> <C>
Gross premiums written:
Excess liability $75.1 $113.4 (33.8)%
Directors and officers liability 49.9 51.4 (3.0)
Satellite 41.9 47.8 (12.2)
Aviation 13.6 11.1 21.9
Excess property 14.9 12.2 22.5
Financial Lines 52.9 73.6 (28.1)
Lloyd's syndicates 10.5 -- N.M.
Property catastrophe (Tempest) 74.2 -- N.M.
Other 2.8 10.9 (74.5)
------ ----- ------
$335.8 $320.4 4.8 %
====== ====== ======
Net premiums written:
Excess liability $72.9 $109.4 (33.3)%
Directors and officers liability 49.8 51.4 (3.0)
Satellite 28.0 43.5 (35.7)
Aviation 10.6 8.9 19.14
Excess Property 14.9 10.4 43.8
Financial lines 39.6 73.6 (46.2)
Lloyd's syndicates 6.5 -- N.M.
Property catastrophe (Tempest) 74.2 -- N.M.
Other 2.7 9.1 71.1
------ ----- ------
$299.2 $306.3 (2.3) %
====== ====== ======
Net premiums earned:
Excess liability $99.8 $121.5 (17.9)%
Directors and officers liability 48.1 53.8 (10.5)
Satellite 30.1 37.3 (19.3)
Aviation 12.7 6.4 99.21
Excess Property 9.2 4.1 125.2
Financial lines 43.4 33.0 31.5
Lloyd's syndicates 6.9 -- N.M.
Property catastrophe (Tempest) 67.1 -- N.M.
Other 5.7 6.3 (10.1)
------ ----- ------
$323.0 $262.4 23.1%
====== ====== ======
(N.M. - not meaningful)
</TABLE>
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of operations - Six Months ended March 31, 1997
Gross written premiums increased by 4.8 percent from $320.4 million to
$335.8 million despite continuing competitive pressures in most insurance
markets. The growth in gross premiums written is mainly attributable to the
inclusion of Tempest premiums of $74.2 million during the current six month
period. As Tempest was purchased on July 1, 1996, there are no Tempest
premiums in the comparable fiscal 1996 period. Growth in excess property
and aviation premiums, as these lines continue to penetrate their
respective markets, together with the participation in the Lloyd's
syndicates managed by MUL also contributed to the increase. These factors
together accounted for a $89.9 million increase in gross premiums written.
This increase was offset mainly by declines in excess liability, directors
and officers liability, satellite and financial lines premiums. The decline
in excess liability premiums of $38.3 million was mainly the result of
continuing competitive pressures in that market. Financial lines premiums
declined by $20.7 million in the six month period ended March 31, 1997
compared to the same period of fiscal 1996 primarily because the
opportunity to renew a large premium amount written in the second quarter
of fiscal 1996 was not available in the second quarter of fiscal 1997.
However, this decline was offset somewhat by a net increase in financial
lines premiums during the current period. The decline in satellite gross
premiums written of $5.9 million was the result of reduced launch activity
in the six month period ended March 31, 1997 compared with the
corresponding period in fiscal 1996, where launch activity was considered
high. The satellite market is also starting to experience increased
competitive pressures. Directors and officers liability still faces an
extremely competitive environment with its corresponding pressure on
prices. However, the effects of multi year policies and changes in
anniversary dates on renewal business positively impacted directors and
officers liability premiums this period.
Net premiums written decreased by 2.3 percent to $299.2 million for the six
months ended March 31, 1997, compared with $306.3 million for the same
period of fiscal 1996. The inclusion of Tempest premiums in fiscal 1997
together with growth in excess property premiums and our participation in
the Lloyd's syndicates managed by MUL partially offset declines in excess
liability, financial lines and satellite premiums as discussed above for
gross written premiums. A portion of the decline in net premiums written is
also a result of the Company's decision to purchase reinsurance for the
financial lines and satellite product lines.
Net premiums earned increased by $60.6 million or 23.1 percent to $323.0
million for the six months ended March 31, 1997 compared with $262.4
million for the six months ended March 31, 1996. The growth in net premiums
earned was primarily the result of the inclusion of earned premiums from
Tempest for the period which amounted to $67.1 million together with
contributions from financial lines, aviation, excess property and the
participation in the Lloyd's syndicates managed by MUL. These increases
were again offset somewhat by declines in excess liability, directors and
officers liability and satellite earned premiums.
<TABLE>
<CAPTION>
Net Investment Income Six Months ended % Change
March 31 from
1997 1996 prior year
------ ------ ----------
(in millions)
<S> <C> <C> <C>
Net investment income $117.8 $95.4 23.5%
====== ===== =====
</TABLE>
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of operations - Six Months ended March 31, 1997
The average yield earned on the investment portfolio was approximately the
same in the six month period ended March 31, 1997 as compared to the six
month period ended March 31, 1996 even with the change in the asset mix
between periods. During the quarter ended December 31, 1996, the Company
increased the equity exposure of the portfolio to 20 percent from 15
percent. The remainder of the portfolio is comprised of fixed maturity
securities. With similar yields in each period, net investment income still
increased by $22.4 million or 23.5 percent in the current period, as
compared with the similar period of fiscal 1996 primarily as a result of a
larger investable asset base due to the inclusion of the Tempest portfolio
in the current period as well as positive cash flows from operations.
<TABLE>
<CAPTION>
Net Realized Gains (Losses) on Investments Six Months ended
March 31
1997 1996
------ ------
(in millions)
<S> <C> <C>
Fixed maturities and short-term investments $ 32.3 $ 32.4
Equity securities 9.5 3.0
Financial futures and option contracts 9.2 14.4
Currency (11.6) 0.1
------- ------
$ 39.4 $ 49.9
</TABLE>
The Company's investment strategy takes a long-term view and the portfolio
is actively managed to maximize total return within certain specific
guidelines which minimize risk. The portfolio is reported at fair value.
The effect of market movements on the investment portfolio will directly
impact net realized gains (losses) on investments when securities are sold.
Changes in unrealized gains and losses, which result from the revaluation
of securities held, are reported as a separate component of shareholders'
equity.
The Company uses foreign currency forward and option contracts to minimize
the effect of fluctuating foreign currencies on the value of non-U.S.
dollar holdings. The contracts used are not designated as specific hedges
and therefore, realized and unrealized gains and losses recognized on these
contracts are recorded as a component of net realized gains (losses) in the
period in which the fluctuations occur, together with net foreign currency
gains (losses) recognized when non-U.S. dollar securities are sold.
In the six month period ended March 31, 1997 the fair value of the
Company's investment portfolio was adversely impacted by a general decrease
in prices in the U.S. bond markets resulting from an increase in interest
rates during the period. However, sales proceeds for fixed maturity
securities were generally higher than their amortized cost during most of
the period which resulted in net realized gains of $32.3 million being
recognized on fixed maturities and short-term investments compared to net
realized gains of $32.4 million for the same period last year.
With strong equity markets, net realized gains on sales of equity
securities were $9.5 million in the first six months of fiscal 1997
compared with gains of $3.0 million in the first six months of fiscal 1996.
Net realized gains on financial futures and option contracts of $9.2
million recorded in the six months ended March 31, 1997 were primarily
generated by the equity index futures contracts held, as a result of a rise
in the S&P 500 Stock Index during the period. For the six month period
ended March 31, 1996, the realized gains of $14.4 million on financial
futures and option contracts were generated from U.S. Treasury futures
contracts and from the equity index futures contracts held in the
synthetic equity fund as a result of broad market improvements during the
period.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of operations - Six Months ended March 31, 1997
<TABLE>
<CAPTION>
Combined Ratio Six Months ended
March 31
1997 1996
------ ------
<S> <C> <C>
Loss and loss expense ratio 66.7% 81.6%
Acquisition cost ratio 8.0 9.4
Administration expense ratio 10.9 7.1
----- -----
Combined ratio 85.6% 98.1%
===== =====
</TABLE>
For the six months ended March 31, 1997, the loss and loss expense ratio
was 66.7 percent compared to 81.6 percent for the six months ended March
31, 1996. The ratio for the current period is impacted by the inclusion of
the results of Tempest. Property catastrophe loss experience is generally
characterized by low frequency but high severity short-tail claims which
may result in significant volatility in results. For the current six month
period, Tempest's loss and loss expense ratio was 11.2 percent. Excluding
Tempest, the loss and loss expense ratio would have been 81.0 percent.
Several aspects of the Company's operations, including the low frequency
and high severity of losses in the high excess layers in certain lines of
business in which the Company provides insurance and reinsurance,
complicate the actuarial reserving techniques utilized by the Company.
Management believes, however, that the Company's reserves for unpaid losses
and loss expenses, including those arising from breast implant litigation,
are adequate to cover the ultimate cost of losses and loss expenses
incurred through March 31, 1997. Since such provisions are necessarily
based on estimates, future developments may result in ultimate losses and
loss expenses significantly greater or less than such amounts (see "Breast
Implant Litigation").
While acquisition costs increased by $1.4 million during the period, the
acquisition cost ratio actually decreased from 9.4 percent to 8.0 percent
in the current period compared to the same period of fiscal 1996 due
primarily to the continuing change in the mix of business written by the
Company. Administrative expenses increased by $16.4 million in the current
period compared to the six month period ended March 31, 1996. These
additional expenses are primarily due to the increased cost base resulting
from the strategic diversification by the Company over the past two years,
including the recent acquisitions of Tempest, Methuen and ACE London,
which account for $7.8 million of the increase, as well as the development
of the new insurance lines and products. In addition, during the period,
as a result of the increase in the market value of the Company's stock,
the Company again recorded expenses related to stock appreciation rights.
However, during the period, all remaining stock appreciation rights were
exercised in return for options and cash and/or shares of the Company. In
addition, certain stock appreciation rights were forfeited in return
for cash during the period. Total expenses incurred in the six month
period ended March 31, 1997 relating to these transactions amounted to
$5.5 million compared with $3.1 million for the six month period ended
March 31, 1996. There were no stock appreciation rights outstanding at
March 31, 1997.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
LIQUIDITY AND CAPITAL RESOURCES
As a holding company, ACE's assets consist primarily of the stock of its
subsidiaries as well as other investments. In addition to investment
income, its cash flows depend primarily on dividends or other statutorily
permissible payments from its Bermuda-based insurance and reinsurance
subsidiaries (the "Bermuda subsidiaries"). There are currently no legal
restrictions on the payment of dividends from retained earnings by the
Bermuda subsidiaries as the minimum statutory capital and surplus
requirements are satisfied by the share capital and additional paid-in
capital of each of the Bermuda subsidiaries. However, the payment of
dividends or other statutorily permissible distributions by the Bermuda
subsidiaries is subject to the need to maintain shareholder's equity at a
level adequate to support the levels of insurance and reinsurance
operations.
The Company's consolidated sources of funds consist primarily of net
premiums written, investment income, and proceeds from sales and maturities
of investments. Funds are used primarily to pay claims, operating expenses
and dividends and for the purchase of investments.
For the six months ended March 31, 1997, the Company's consolidated net
cash flow from operating activities was $216.7 million, compared with
$313.2 million for the six months ended March 31, 1996. Cash flows are
affected by claims payments, which due to the nature of the insurance and
reinsurance coverage provided by the Company, may comprise large loss
payments on a limited number of claims and can therefore fluctuate
significantly. The irregular timing of these large loss payments, for which
the source of cash can be from operations, available credit facilities or
routine sales of investments can create significant variations in cash
flow from operations between periods. For the six month periods ended March
31, 1997 and 1996, loss and loss expense payments amounted to $125.6
million and $40.6 million respectively. However, positive cash flows from
operating activities as well as the reinvestment of funds generated by the
portfolio did increase the level of investable assets during the period.
This increase was offset by unrealized depreciation in the portfolio due to
the general decline of both fixed income and equity markets during the
period as well as the outflow of funds with respect to the Company's share
repurchase program. Total loss and loss expense payments amounted to $101.4
million, $73.1 million and $126.6 million in fiscal years 1996, 1995 and
1994, respectively.
The Company's investment portfolio is structured to provide a high level of
liquidity to meet insurance related or other obligations. The consolidated
investment portfolio is externally managed by independent professional
investment managers and is invested in high quality investment grade
marketable fixed income and equity securities, the majority of which trade
in active, liquid markets. The Company believes that its cash balances,
cash flow from operations, routine sales of investments and the liquidity
provided under its committed line of credit (discussed below) are adequate
to allow the Company to pay claims within the time periods required under
its policies.
The Company has a $50 million committed unsecured line of credit provided
by a syndicate of six major international banks, led by Morgan Guaranty
Trust Company of New York ("Morgan"). In accordance with the Company's cash
management strategy, this facility is utilized when it is determined that
borrowing on a short-term basis is advantageous to the Company. The line of
credit agreement requires the Company to maintain consolidated tangible net
worth of not less than $1.25 billion. There were no draw-downs from the
line of credit during the six months ended March 31, 1997 and there were no
outstanding borrowings at March 31, 1997. The syndicate of banks have also
provided up to (pound)70.3 million (approximately $115 million) for a five
year, collateralized letter of credit ("LOC"), which is primarily used to
provide funds at Lloyd's to support underwriting capacity on Lloyd's
syndicates in which the Company participates. Certain assets, amounting to
115 percent of the value of the LOC, have been pledged as collateral for
the LOC. Morgan has served as the issuing bank for the letter of credit.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
The Board of Directors has authorized the repurchase from time to time of
the Company's Ordinary Shares in open market and private purchase
transactions. On February 7, 1997, the Board of Directors terminated the
then existing share repurchase program and authorized a new program for up
to $100.0 million of the Company's Ordinary Shares. During the six months
ended March 31, 1997, the Company repurchased 1,504,000 Ordinary Shares
under share repurchase programs for an aggregate cost of $89.4 million. As
at March 31, 1997, approximately $69.0 million of the Board authorization
had not been utilized. During the period April 1, 1997 through May 8, 1997,
the Company repurchased an additional 998,500 Ordinary Shares under the
share repurchase program for an aggregate cost of $61.0 million, leaving
approximately $8.0 million of the February 7, 1997 Board authorization not
utilized. On May 9, 1997, the Board of Directors terminated the existing
share repurchase program and authorized a new program for up to $300.0
million of the Company's Ordinary Shares.
On October 18, 1996, January 17, 1997 and April 18, 1997, the Company paid
quarterly dividends of 18 cents per share to shareholders of record on
September 30, 1996, December 29, 1996 and March 31, 1997. On May 9, 1997
the Board of Directors declared a quarterly dividend of 22 cents per share
payable on July 18, 1997 to shareholders of record on June 30, 1997. The
declaration and payment of future dividends is at the discretion of the
Board of Directors and will be dependent upon the profits and financial
requirements of the Company and other factors, including legal restrictions
on the payment of dividends and such other factors as the Board of
Directors deems relevant.
Fully diluted net asset value per share was $40.06 at March 31, 1997,
compared with $38.31 at September 30, 1996.
<PAGE>
Changes in shareholders' equity during the six months ended March 31, 1997
were (in millions):
Balance at September 30, 1996 $ 2,244
Net Income for period 204
Repurchase of Ordinary Shares (89)
Change in net unrealized appreciation
(depreciation) on investments (70)
Dividends declared (21)
Other 4
---------
Balance at March 31, 1997 $ 2,272
=======
The Company maintains loss reserves for the estimated unpaid ultimate
liability for losses and loss expenses under the terms of its policies and
agreements. The ultimate liability is estimated using actuarial and
statistical projections. The reserve for unpaid losses and loss expenses of
$1.9 billion at March 31, 1997, includes $956 million of case and loss
expense reserves. While the Company believes that its reserve for unpaid
losses and loss expenses at March 31, 1997 is adequate, future developments
may result in ultimate losses and loss expenses significantly greater or
less than the reserve provided. A number of the Company's insureds have
given notice of claims relating to breast implants or components or raw
material thereof that had been produced and/or sold by such insureds. The
Company does not have adequate data upon which to anticipate any funding
schedule for the payment of these liabilities, and it expects that the
amount of time required to determine the financial impact of the options
selected by claimants may extend well into 1997 and beyond. Payments may be
accelerated for some policyholders in 1997 as a result of settlement of
opt-out cases and as additional payments are required to fund
Settlement II (see "Breast Implant Litigation").
The Company's financial condition, results of operations and cash flow are
influenced by both internal and external forces. Claims settlements,
premium levels and investment returns may be impacted by changing rates of
inflation and other economic conditions. In many cases or in certain lines
of business written by the Company, significant periods of time, ranging up
to several years or more, may elapse between the occurrence of an insured
loss, the reporting of the loss to the Company and the settlement of the
Company's liability for that loss. The liquidity of its investment
portfolio, cash flows and the line of credit are, in management's opinion,
adequate to meet the Company's expected cash requirements.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Breast Implant Litigation
A number of the Company's insureds have given notice of claims relating to
breast implants or components or raw material thereof that had been
produced and/or sold by such insureds. Lawsuits, including class actions,
involving thousands of implant recipients have been filed in both state and
federal courts throughout the United States. Most of the federal cases have
been consolidated pursuant to the rules for Multidistrict Litigation
("MDL") to a Federal District Court in Alabama.
On April 1, 1994 the judge presiding over the MDL proceeding gave
preliminary approval to a global settlement agreement in the approximate
amount of $4.2 billion and conditional certification to a settlement class
("Global I").
On May 15, 1995, the Dow Corning Corporation, a significant participant in
the Global I settlement, filed for protection under Chapter 11 of the U.S.
Bankruptcy Code.
As of June 1, 1995, over 440,000 registrations were received by the Global
I Claims Administrator. Approximately 248,500 of these were filed by
domestic class members by the September 16, 1994 deadline for making claims
under the Current Disease Compensation Program. Based on an analysis of
about 3,000 of these registrations, the judge concluded that a severe
racheting (or reduction) of the settlement amounts shown in the notice of
settlement would occur if current claims were evaluated under the existing
criteria and if funding of the Current Disease Compensation Program
remained at the $1.2 billion level.
Because of the anticipated racheting of benefit amounts and the defendants'
right to withdraw under the Global I settlement, the judge entered an order
on October 9, 1995 declaring that class members had new opt-out rights and
that in general class members and their attorneys should not expect to
receive any benefits under Global I.
On October 1, 1995, negotiators for three of the major defendants agreed on
the essential elements of a revised individual settlement plan for domestic
class members with at least one implant from any of those manufacturers
("Settlement II"). In general, under Settlement II, the amounts payable to
individual participants, and the manufacturers' obligations to make those
payments, would not be affected by the number of class members electing to
opt out from the new plan. Also, in general, the compensation would be
fixed rather than subject to potential further racheting, and the
manufacturers would not have a right to walk away because of the amount of
claims payable. Finally, each settling defendant agreed to be responsible
only for cases in which its implant was identified, and not for a
percentage of all cases.
Participants with implants from one or more of those three defendants who
had submitted timely claims under Global I would have two options.
Option One: An amount based on disease criteria and severity levels in the
Global I settlement ranging from $10,000 to $100,000. Although
substantially less than the amounts shown in the initial notices for Global
I settlement, they are greater for many claimants than the amounts that,
after racheting, would have been offered under Global I and are not subject
to a "walkaway" by defendants because of such opt-outs.
Option Two: A potentially higher benefit based on having or developing
during a 15-year period certain diseases that meet more restrictive
criteria. The compensation range for persons qualifying under this option
is from $75,000 to $250,000. Qualifying claimants would also be eligible
for an advance payment of $1,000 under certain circumstances. In general,
the maximum total obligation under this 15-year program allocated among the
three defendants plus the additional defendants referred to below is $755
million.
Each Current Claimant, regardless of the option selected, would be paid an
advance payment of $5,000 and would also be eligible for an additional
payment of $3,000 to defray the costs of explantation during that 15-year
period should the person choose to do so without regard to the status of
any appeals. Current Claimants would be given an extended period of time to
identify manufacturers of their implants, to correct any deficiencies in
the documentation supporting their prior claims or to provide additional
support for claims under the more restrictive criteria.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Breast Implant Litigation (continued)
By November 13, 1995, Settlement II was approved by the three major
defendants. In addition, two other defendants became part of Settlement II,
although certain of their settlement terms are different and more
restricted than the plan offered by the original three defendants.
On December 22, 1995, the judge approved Settlement II and the materials
for giving notice to claimants although an appeal concerning Settlement II
is pending with the Eleventh Circuit Court of Appeals. In mid-January 1996,
the three major defendants each made a payment of $125 million to a
court-established fund as an initial reserve for payments to be made under
Settlement II. The Claims Administrator continues to send out notifications
of status and advance payments to claimants who submitted implant
manufacturer proof. Although Option One closed on December 16, 1996,
information on the estimated total cost of Settlement II and the number of
opt-outs is not presently available.
Although the Company has underwritten the coverage for a number of the
defendant companies including four of the companies involved in the revised
Settlement II described above, the Company anticipates that insurance
coverage issued prior to the time the Company issued policies will be
available for a portion of the defendants' liability. In addition, the
Company's policies only apply when the underlying liability insurance
policies or per occurrence retentions are exhausted.
Declaratory judgment lawsuits, involving four of the Company's insureds,
have been filed seeking guidance on the appropriate trigger for their
insurance coverage. None of the insureds have named the Company in such
lawsuits, although other insurers and third parties have sought to involve
the Company in those lawsuits. To date, one court has stayed a lawsuit
against the Company by other insurers; two courts have dismissed actions by
other insurers against the Company. Another court in Texas has ruled
against the Company's arguments that the court should dismiss the claims by
other insurers and certain doctors attempting to bring the Company into
coverage litigation there. On appeal in the Texas lawsuit, the appellate
court affirmed the lower court's order refusing to dismiss the claims
against the Company; further appellate review in the Texas Supreme Court is
pending. In addition, further efforts are contemplated to stay or dismiss
the doctor's claims against the Company in the Texas lawsuit.
At June 30, 1994, the Company increased its then existing reserves relating
to breast implant claims. Although the reserve increase was partially
satisfied by an allocation from existing IBNR, it also required an increase
in the Company's total reserve for unpaid losses and loss expenses at June
30, 1994 of $200 million. The increase in reserves was based on information
made available in conjunction with Global I (including information relating
to opt-outs) and information made available from the Company's insureds and
was predicated upon an allocation between coverage provided before and
after the end of 1985 (when the Company commenced underwriting operations).
No additional reserves relating to breast implant claims have been added
since June 30, 1994.
The Company continually evaluates its reserves in light of developing
information and in light of discussions and negotiations with its insureds.
In August 1996, the Company settled with one of its insureds for a sum of
money to be paid out over a number of years. The first payment was made in
December 1996. The settlement is consistent with the Company's belief that
its reserves are adequate. In April 1997, the Company made a payment to
another policyholder in the amount of $100 million. Additional limits
remain for this insured. This payment was expected by the Company and was
included in previous reserves. Significant uncertainties continue to exist
with regard to the ultimate outcome and cost of Settlement II and the
number and value of the opt-out claims. While the Company is unable at this
time to determine whether additional reserves, which could have a material
adverse effect upon the financial condition, results of operations and cash
flows of the Company, may be necessary in the future, the Company believes
that its reserves for unpaid losses and loss expenses including those
arising from breast implant claims are adequate as at March 31, 1997.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
New Accounting Pronouncements
In February 1997, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards No. 128 "Earnings per Share"
("FAS 128"), effective for financial statements issued for periods ending
after December 15, 1997. This statement establishes standards for computing
and presenting earnings per share ("EPS"). This Statement simplifies the
standards for computing EPS previously found in APB Opinion No. 15,
Earnings per Share, and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with a presentation
of basic EPS. It also requires dual presentation of basic and diluted EPS
on the face of the income statement for all entities with complex capital
structures, which the Company is considered to have, and requires a
reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation. This Statement requires restatement of all prior-period EPS
data presented. The Company anticipates presenting its EPS in compliance
with the dual presentation standards mandated by the Statement at
December 31, 1997.
The Company has calculated basic and diluted EPS, as defined in FAS 128 and
interpreted by the Company based on information currently available, and
has determined that such amount do not differ materially from primary EPS,
which is reflected in the Company's statement of operations, for the years
presented.
24
<PAGE>
ACE LIMITED
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
- --------------------------
1) On May 9, 1997 the Company declared a divided of $0.22 per Ordinary
Share payable on July 18, 1997 to shareholders of record on June 30, 1997.
2) The Board of Directors has authorized the repurchase from time to time
of the Company's Ordinary Shares in open market and private purchase
transactions. On May 9, 1997, the Board of Directors terminated the then
existing share repurchase program and authorized a new program for up to
$300.0 million of the Company's Ordinary Shares.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a) Exhibit 10.28 - Third Amendment to Equity Linked Incentive Plan
Stock Appreciation Rights Plan
Exhibit 11.1 - Statement regarding computation of earnings per Share.
Exhibit 27.1 - Financial Data Schedule
b) There were no reports on Form 8-K filed during the quarter.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACE LIMITED
--------------------------------------
May 13, 1997 Brian Duperreault
--------------------------------------
Chairman, President and Chief
Executive Officer
May 13, 1997 Christopher Z. Marshall
--------------------------------------
Executive Vice President and Chief
Financial Officer
26
<PAGE>
EXHIBIT INDEX
- --------------
Exhibit
Number Description Numbered Page
- -------- ------------ -------------
10.28 Third Amendment to Equity Linked Incentive
Plan Stock Appreciation Rights Plan 28
11.1 Computation of earnings per share 31
27.1 Financial Data Schedule 32
27
<PAGE>
<PAGE>
THIRD AMENDMENT TO
EQUITY LINKED INCENTIVE PLAN
STOCK APPRECIATION RIGHTS PLAN
WHEREAS, ACE Limited (the "Company") maintains the Equity
Linked Incentive Plan - Stock Appreciation Rights Plan (the
"Plan"); and
WHEREAS, the Company desires to amend the Plan;
NOW, THEREFORE, IT IS RESOLVED that, by virtue and in
exercise of the power reserved to the Company, and the
Compensation Committee of the Board of Directors of the Company
(the "Committee"), under Paragraph XVIII of the Plan, the Plan is
hereby amended in the following particulars:
1. By adding the following to the end of Paragraph X as a part
thereof:
"Notwithstanding the foregoing provisions of this Paragraph
X, the Committee may permit Options, including Replacement
Options, awarded under the Plan to be transferred to or for
the benefit of the participant's family (including, without
limitation, to a trust for the benefit of a participant's
family) subject to such limits as the Committee may
establish. In no event shall an Incentive Stock Option be
transferable to the extent that such transferability would
violate the requirements applicable to such Option under
section 422 of the Internal Revenue Code of 1986, as
amended."
2. By adding the following new Paragraph XIII-A after
Paragraph XIII:
"XIII-A. AWARD OF REPLACEMENT OPTIONS
The Committee may, in its discretion, modify any Right
outstanding as of March 31, 1997 to provide that in lieu of
continuing to hold the Right, a participant may elect to
exercise the Right and be awarded replacement options
covering the same number of shares of Company stock as are
covered by the Right being exercised, with a per-share
exercise price equal to the value of the Company's stock on
March 31, 1997 (the "Replacement Options"), subject to the
following:
(i) If a Replacement Option elects to have the Rights
replaced with Replacement Options, the Rights will
become fully vested and automatically exercised as of
March 31, 1997.
28
<PAGE>
(ii) A Replacement Option will become exercisable on the
same date or dates that the Rights would have become or
did become exercisable, in accordance with the vesting
schedule applicable to the Rights being exercised, as
in effect immediately prior to March 31, 1997.
(iii) A Replacement Option will expire on the second
anniversary of the Expiration Date applicable to
the related Rights being exercised, as in effect
immediately prior to March 31, 1997.
(iv) While a Replacement Option is outstanding, the
participant will be entitled to dividend awards equal
to the number of shares of Company stock subject to the
Replacement Option multiplied by the amount of any
dividend per ordinary share declared in the sole
discretion of the Board of Directors of the Company,
without regard to whether the Replacement Option is
fully vested; such dividend awards to be paid in cash
to the participant on the same date that ordinary share
dividends are paid. However, the Committee, in its
discretion, may permit a participant to elect receipt
of additional options in lieu of receipt of dividend
equivalents.
(v) A participant electing to exercise a Right and be
awarded a Replacement Option may, at the time such
election is made (the "Election Date"), also elect to
receive settlement of the Right in cash or shares of
Company stock.
(vi) A participant who is subject to United States taxation
and who elects to receive settlement of his Rights in
cash shall receive such settlement on the Expiration
Date of the Rights which would have applied but for his
election to exercise the Rights and be awarded
Replacement Options; provided however, that on the
Election Date, the participant may instead elect to
receive such settlement (a) as of the date of his
termination of employment or termination of service as
a director (regardless of whether such date is earlier
or later than the Expiration Date), or (b) as of a date
after the Expiration Date.
(vii) A participant who is not subject to United States
taxation and who elects to receive settlement of his
Rights in cash shall receive such settlement on (or as
soon as practicable after) March 31, 1997; provided
however, that on the Election Date, the participant may
instead elect to receive such settlement as of a date
after March 31, 1997.
(viii) If settlement in cash is payable as of a date other
than March 31, 1997, the amount of cash settlement
determined as of March 31, 1997 will have investment
returns elected by the participant, subject to the
choices similar to those available under the Company's
retirement plans.
29
<PAGE>
(ix) A participant electing to receive settlement of his
Rights in shares of Company stock shall have the cash
amount converted to shares (or share units, as
applicable) based on a per-share price of the stock as
of March 31, 1997 which is discounted 15% from market
value. The participant will be required to hold the
shares until the Expiration Date of the Rights being
replaced, during which period the participant will be
fully vested in the shares, though not permitted to
sell the shares.
(x) A participant electing settlement of his Rights in
shares of Company stock may defer receipt of such
shares, subject to the same rules applicable to
deferred receipt of cash settlement. Any dividends
payable with respect to stock the receipt of which has
been deferred by the participant will be deemed to be
reinvested in additional shares of Company stock during
the period of deferral, based on 100% of market value
of the shares at the time the dividends are paid."
30
<PAGE>
EXHIBIT - 11.1
<TABLE>
<CAPTION>
ACE LIMITED AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
Three Months Ended Six Months Ended
March 31 March 31
1997 1996 1997 1996
-------- -------- -------- ------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Earnings per share - Primary
Weighted average shares outstanding 57,332,309 46,105,114 57,885,112 46,107,816
Average stock options outstanding (net of repurchased
shares under the treasury stock method) 780,130 354,507 715,786 354,507
------------ ------------ ------------ ------------
Weighted average shares and share equivalents
outstanding 58,112,439 46,459,621 58,600,898 46,462,323
========== ========== ========== ==========
Net income $ 77,949 $ 56,803 $ 203,690 $ 150,339
============ =========== ========== ===========
Earnings per share $ 1.34 $ 1.22 $ 3.48 $ 3.24
============ =========== ========== ===========
Earnings per share - Assuming full dilution
Weighted average shares outstanding 57,332,309 46,105,114 57,885,112 46,107,816
Average stock options outstanding (net of repurchased
shares under the treasury stock method) 841,623 363,585 841,623 363,585
------------- ------------ ------------ ------------
Weighted average shares and share equivalents
outstanding 58,173,932 46,468,699 58,726,735 46,471,401
========== ========== ========== ==========
Net income $ 77,949 $ 56,803 $ 203,690 $ 150,339
============== ============ ============ ===========
Earnings per share $ 1.34 $ 1.22 $ 3.47 $ 3.24
================ ============== ============ ===========
</TABLE>
31
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 3,264,759
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 472,445
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,121,099
<CASH> 87,581
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 31,227
<TOTAL-ASSETS> 4,713,291
<POLICY-LOSSES> 1,925,011
<UNEARNED-PREMIUMS> 382,973
<POLICY-OTHER> 36,192
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 7,100
<OTHER-SE> 2,264,948
<TOTAL-LIABILITY-AND-EQUITY> 4,713,291
323,041
<INVESTMENT-INCOME> 117,832
<INVESTMENT-GAINS> 39,384
<OTHER-INCOME> 0
<BENEFITS> 215,440
<UNDERWRITING-AMORTIZATION> 26,016
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 203,690
<INCOME-TAX> 0
<INCOME-CONTINUING> 203,690
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 203,690
<EPS-PRIMARY> 3.48
<EPS-DILUTED> 3.47
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
