<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 Quarterly Period Ended December 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 February 6, 1998 was 54,203,651.
1
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ACE LIMITED
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION
Page No.
Item 1. Financial Statements:
Consolidated Balance Sheets
December 31, 1997 (Unaudited) and September 30, 1997 3
Consolidated Statements of Operations (Unaudited)
Three Months Ended December 31, 1997 and
December 31, 1996 4
Consolidated Statements of Shareholders' Equity (Unaudited)
Three Months Ended December 31, 1997 and December 31, 1996 5
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended December 31, 1997 and December 31, 1996 6
Notes to Interim Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 11
Part II. OTHER INFORMATION
Item 4. Submission of matters to a vote of security holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
2
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<TABLE>
<CAPTION>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31 September 30
1997 1997
------ ----
(unaudited)
(in thousands of U.S. dollars
except share and per share data)
<S> <C> <C>
Assets
Investments and cash
Fixed maturities available for sale,
at fair value (amortized cost - $2,978,403
and $3,226,511) $ 3,056,831 $ 3,290,336
Equity securities, at fair value
(cost - $509,719 and $502,481) 605,329 634,970
Short-term investments, at fair value
(amortized cost - $575,807 and $364,552) 576,071 364,432
Other investments, at cost 83,183 78,691
Cash 123,564 106,336
------- -------
Total investments and cash 4,444,978 4,474,765
Goodwill on Tempest acquisition 195,397 196,667
Premiums and insurance balances receivable 133,779 135,815
Accrued investment income 33,099 40,581
Deferred acquisition costs 24,165 27,018
Prepaid reinsurance premiums 35,814 22,196
Other assets 131,705 104,504
------- -------
Total assets $ 4,998,937 $ 5,001,546
========= =========
Liabilities
Unpaid losses and loss expenses $ 1,858,055 $ 1,869,995
Unearned premiums 369,206 400,689
Premiums received in advance 43,307 24,973
Reinsurance balances payable 23,459 11,245
Accounts payable and accrued liabilities 73,002 63,014
Dividend payable 13,356 12,436
------ ------
Total liabilities 2,380,385 2,382,352
--------- ---------
Commitments and Contingencies
Shareholders' equity
Ordinary Shares ($0.125 par value, 100,000,000
shares authorized;
54,471,452 and 55,293,218 shares issued
and outstanding) 6,809 6,911
Additional paid-in capital 1,086,802 1,102,824
Unearned stock grant compensation (4,250) (1,993)
Net unrealized appreciation on investments 174,302 196,194
Cumulative translation adjustments 709 855
Retained earnings 1,354,180 1,314,403
--------- ---------
Total shareholders' equity 2,618,552 2,619,194
--------- ---------
Total liabilities and shareholders' equity $ 4,998,937 $ 5,001,546
========= =========
See accompanying notes to interim consolidated financial statements
3
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<CAPTION>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended December 31, 1997 and 1996
(Unaudited)
1997 1996
---- ----
(in thousands of U.S. dollars
except per share data)
<S> <C> <C>
Revenues
Gross premiums written $ 170,245 $ 132,512
Reinsurance premiums ceded (43,268) (21,898)
-------- -------
Net premiums written 126,977 110,614
Change in unearned premiums 40,844 53,786
-------- ------
Net premiums earned 167,821 164,400
Net investment income 58,413 59,738
Net realized gains on investments 27,492 41,723
-------- ------
Total revenues 253,726 265,861
------- -------
Expenses
Losses and loss expenses 109,161 110,150
Acquisition costs 14,201 14,129
Administrative expenses 17,548 15,841
-------- ------
Total expenses 140,910 140,120
------- -------
Net income $ 112,816 $ 125,741
======= =======
Basic earnings per share $ 2.06 $ 2.16
==== ====
Diluted earnings per share $ 2.01 $ 2.14
==== ====
See accompanying notes to interim consolidated financial statements
4
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<CAPTION>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Three Months Ended December 31, 1997 and 1996
(Unaudited)
1997 1996
---- ----
(in thousands of U.S. dollars)
<S> <C> <C>
Ordinary Shares
Balance -- beginning of period $ 6,911 $ 7,271
Exercise of stock options 2 2
Repurchase of shares (104) (32)
------------ ------
Balance -- end of period 6,809 7,241
------------ -----
Additional paid-in capital
Balance -- beginning of period 1,102,824 1,156,194
Exercise of options for Ordinary Shares 424 393
Repurchase of Ordinary Shares (16,446) (5,015)
---------- ------
Balance -- end of period 1,086,802 1,151,572
--------- ---------
Unearned stock grant compensation
Balance -- beginning of period (1,993) (1,299)
Stock grants awarded (3,123) (2,626)
Amortization 866 401
------------ -------------
Balance -- end of period (4,250) (3,524)
----------- ------------
Net unrealized appreciation
on investments
Balance -- beginning of period 196,194 61,281
Net (depreciation) appreciation during (21,892) 25,719
period ---------- ------
Balance -- end of period 174,302 87,000
---------- -------
Cumulative translation adjustments
Balance -- beginning of period 855 131
Net adjustment for period (146) (449)
------------ -------
Balance -- end of period 709 (318)
------------ --------
Retained earnings
Balance -- beginning of period 1,314,403 1,020,700
Net income 112,816 125,741
Dividends declared (13,085) (10,430)
Repurchase of Ordinary Shares (59,954) (9,613)
---------- ------
Balance -- end of period 1,354,180 1,126,398
--------- ---------
Total shareholders' equity $ 2,618,552 $ 2,368,369
========= =========
See accompanying notes to interim consolidated financial statements
5
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<CAPTION>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended December 31, 1997 and 1996
(Unaudited)
1997 1996
------ ----
(in thousands of U.S. dollars)
Cash flows from operating activities
Net income $ 112,816 $ 125,741
Adjustments to reconcile net income to
net cash provided by
Operating activities
Unearned premiums (31,483) (43,938)
Unpaid losses and loss expenses (11,940) 34,506
Prepaid reinsurance premiums (13,618) (8,848)
Net realized gains on investments (27,492) (41,723)
Amortization of premium/discounts (867) (1,595)
Deferred acquisition costs 2,853 3,814
Insurance balances receivable 2,036 432
Premiums received in advance 18,334 22,720
Reinsurance balances payable 12,214 11,683
Accounts payable and accrued liabilities 10,973 (16,384)
Other (22,114) 353
----------- ----------
Net cash flows from operating activities 51,712 86,761
----------- ------
Cash flows from investing activities
Purchases of fixed maturities (1,299,104) (1,890,148)
Purchases of equity securities (89,533) (239,903)
Sales of fixed maturities 1,339,664 1,979,112
Sales of equity securities 85,537 141,500
Maturities of fixed maturities 13,000 --
Net realized gains on financial
futures contracts 8,687 17,688
Other investments (4,492) --
Acquisition of subsidiaries, net of cash
acquired -- (30,416)
------------ -------
Net cash from (used in) investing
activities 53,759 (22,167)
----------- -------
Cash flows from financing activities
Repurchase of Ordinary Shares (76,504) (14,658)
Proceeds from exercise of options for
Ordinary Shares 426 393
Dividends paid (12,165) (10,199)
---------- -------
Net cash used for financing activities (88,243) (24,464)
----------- -------
Net increase in cash 17,228 40,130
Cash -- beginning of period 106,336 53,374
---------- ------
Cash -- end of period $ 123,564 $ 93,504
========== ========
</TABLE>
See accompanying notes to interim consolidated financial statements
6
<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 1997 Annual Report on Form 10-K.
On January 2, 1998, the Company completed the acquisition of Westchester
Specialty Group, Inc. ("WSG"), through its newly-created U.S. holding
company, ACE US Holdings, Inc. WSG, through its insurance subsidiaries,
provides specialty commercial property and umbrella liability coverages
in the U.S. Under the terms of the agreement, the Company purchased all
of the outstanding capital stock of WSG for aggregate cash consideration
of $338 million. In connection with the acquisition, National Indemnity,
a subsidiary of Berkshire Hathaway, has provided $750 million (75 percent
quota share of $1 billion) of reinsurance protection to WSG with respect
to their loss reserves for the 1996 and prior accident years. The Company
financed the transaction with $250 million of bank debt (see note 7 -
Credit Facilities) and the remainder with available cash.
The acquisition will be recorded using the purchase method of accounting
and accordingly, the consolidated financial statements will include the
results of ACE US Holdings, Inc. and its subsidiaries from January 2,
1998, the date of acquisition.
At December 31, 1997 approximately 70 percent of the Company's written
premiums came from North America with approximately 18 percent coming
from the United Kingdom and continental Europe and approximately 12
percent from other countries.
2. Significant Accounting Policies
Earnings per share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share
is very similar to the previously reported primary earnings per share
which included the dilution effect of outstanding options calculated
using the treasury stock method using an average share price for the
period. All earnings per share amounts for all periods have been
presented, and where necessary, restated to conform to the Statement 128
requirements.
3. 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 to a Federal District Court in Alabama.
On May 15, 1995, the Dow Corning Corporation, a significant defendant,
filed for protection under Chapter 11 of the U.S. Bankruptcy Code and
claims against Dow Corning remain stayed subject to the Bankruptcy Code.
7
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ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. Commitments and Contingencies (cont'd.)
On October 1, 1995, negotiators for three of the major defendants agreed
on the essential elements of a revised individual settlement plan for
U.S. claimants with at least one implant from any of those manufacturers
("the Settlement"). In general, under the Settlement, the amounts payable
to individual participants, and the manufacturers' obligations to make
those payments, would not be affected by the number of claimants electing
to opt out from the new plan. Also, in general, the compensation would be
fixed and not affected by the number of participants, 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 claims.
By November 13, 1995, the Settlement was approved by the three major
defendants. In addition, two other defendants became part of the
Settlement, 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 multidistrict litigation judge approved the
Settlement and the materials for giving notice to claimants although an
appeal concerning the Settlement is pending with the Eleventh Circuit
Court of Appeals. Beginning in mid-January, 1996, the three major
defendants have each made payments to a court-established fund for use in
making payments under the Settlement. The Settlement Claims Office had
reported that as of October 31, 1997, it has sent out Notification of
Status Letters to more than 360,000 non-opt-out domestic implant
recipients who had registered with the Settlement Claims Office. As of
October 31, 1997, approximately $565 million had been distributed under
the Settlement to implant recipients of the three major defendants.
Certain potential payments to claimants relating to other implants remain
suspended because of the pending appeals. The Settlement Claims Office
has also reported that approximately 32,500 domestic registrants
exercised opt-out rights after receiving their status letters.
Previously, approximately 19,000 other domestic implant recipients had
exercised opt-out rights in 1994 and/or before receiving status letters.
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 the lawsuits 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. During fiscal 1997 and the first quarter of fiscal 1998, the
Company made payments of approximately $260 million with respect to
breast implant claims. These payments were included in previous reserves
and are consistent with the Company's belief that its reserves are
adequate. Significant uncertainties continue to exist with regard to the
ultimate outcome and cost of the Settlement 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 December 31, 1997.
8
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
4. Shares Issued and Outstanding
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 share program for
up to $300 million of the Company's Ordinary Shares. During the quarter
ended December 31, 1997, the Company repurchased 836,200 Ordinary Shares
under the share repurchase program for an aggregate cost of $76.5
million. As at December 31, 1997, approximately $191.2 million of the
Board authorization had not been utilized.
5. Restricted Stock Awards
Under the terms of the 1995 Long-Term Incentive Plan 34,500 restricted
Ordinary Shares were awarded during the current quarter, to officers of
the Company and its subsidiaries. These shares vest at various dates
through November 2002.
6. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share.
December 31,
1997 1996
---- ----
(in thousands of U.S. dollars
except share and per share data)
Numerator:
Net Income $ 112,816 $ 125,741
============ ==========
Denominator:
Denominator for basic earnings per share -
weighted average shares 54,883,826 58,139,648
Effect of dilutive securities 1,342,994 746,607
----------- ----------
Denominator for diluted earnings per
share - adjusted weighted average
shares and assumed conversions 56,226,820 58,886,255
========== ==========
Basic earnings per share $ 2.06 $ 2.16
==== ====
Diluted earnings per share $ 2.01 $ 2.14
==== ====
9
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
7. Credit Facilities
In December 1997 the Company put in place syndicated credit
facilities which replaced the exisiting facilities. J.P. Morgan
Securities, Inc. and Mellon Bank N.A. acted as co-arrangers in the
arranging, structuring and syndication of these credit
facilities. The new facilities provide:
. A $200 million 364 day revolving credit facility and a $200
million five year revolving credit facility which together make up
a combined $400 million committed, unsecured revolving credit
facility. This new five year revolving credit facility has a $50
million LOC sublimit.
. A five year LOC of approximately 154 million pounds ($260 million)
which is being used to fulfill the requirements of Lloyd's to
provide funds to support underwriting capacity on Lloyd's
syndicates in which the Company participates. The minimum
consolidated tangible net worth covenant for A.C.E. Insurance
Company, Ltd. under this LOC is $1.0 billion.
. A $250 million seven year Amortized Term Loan Facility which was
used on January 2, 1998 to partially finance the acquisition of
WSG. The interest rate on the term loan is LIBOR plus an
applicable spread.
The revolving credit and term loan facilities require that the Company
maintain a minimum consolidated tangible net worth of $1.4 billion.
8. Reclassification
Certain items in the prior period financial statements have been
reclassified to conform with the current period presentation.
10
<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 months ended December 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 1997 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 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 MUL, ALA and ALU.
For the 1996, 1997 and 1998 years of account, the Company, through
corporate subsidiaries, has or will participate in the underwriting of
these syndicates by providing funds at Lloyd's, primarily in the form of
a letter of credit, supporting approximately $37 million, $229 million
and $485 million, respectively, of underwriting capacity. The syndicates
managed by these agencies in which the Company participates underwrite
aviation, marine and non-marine risks. 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.
On January 2, 1998, the Company completed the acquisition of Westchester
Specialty Group, Inc. ("WSG"), through its newly-created U.S. holding
company, ACE US Holdings, Inc. ("ACE US"). WSG, through its insurance
subsidiaries, provides specialty commercial property and umbrella
liability coverages in the U.S. Under the terms of the agreement, the
Company purchased all of the outstanding capital stock of WSG for
aggregate cash consideration of $338 million. In connection with the
acquisition, National Indemnity, a subsidiary of Berkshire Hathaway, has
provided $750 million (75 percent quota share of $1 billion) of
reinsurance protection to WSG with respect to their loss reserves for the
1996 and prior accident years (see "Liquidity and Capital Resources").
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 December 31, 1997
Net Income
Three Months ended % Change
December 31 from
1997 1996 Prior year
----- ------ ----------
(in millions)
Income excluding net realized
gains on investments $ 85.3 $ 84.0 1.6%
Net realized gains on investments 27.5 41.7 N.M.
---- ---- -----
Net income $ 112.8 $125.7 N.M.
===== ===== ====
(N.M. -- Not meaningful)
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of Operations - Three Months ended December 31, 1997
(continued)
Income excluding net realized gains on investments for the first quarter
of fiscal 1998 increased by 1.6 percent, compared with the corresponding
fiscal 1997 quarter. This increase is a result of higher income from
insurance operations and was partially offset by a decrease in investment
income and an increase in general and administrative expenses.
Both net income for the current quarter and the first quarter of fiscal
1997 benefited from positive movements in the investment markets which
produced net realized gains on investments in each of these quarters.
Premiums
Three Months ended % Change
December 31 from
1997 1996 Prior year
----- ------ ---------
(in millions)
Gross premiums written:
ACE Insurance (including CODA) $ 127.5 $ 124.7 2.2%
Lloyd's syndicates 42.7 6.1 N.M.
Property catastrophe (Tempest) __ 1.7 N.M.
----- ------- -------
$ 170.2 $ 132.5 28.5%
===== ===== =======
Net premiums written:
ACE Insurance (including CODA) $ 94.8 $ 105.2 (9.9)%
Lloyd's syndicates 32.2 3.7 N.M.
Property catastrophe (Tempest) __ 1.7 N.M.
----- ------- ------
$ 127.0 $ 110.6 14.8%
===== ===== ======
Net premiums earned:
ACE Insurance (including CODA) $ 119.6 $ 126.0 (5.1)%
Lloyd's syndicates 19.8 2.3 N.M.
Property catastrophe (Tempest) 28.4 36.1 (21.1)
------ ------ ------
$ 167.8 $ 164.4 2.1%
===== ===== ======
(N.M. -- Not meaningful)
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of Operations - Three Months ended December 31, 1997
(continued)
Despite continuing competitive pressures in most insurance and
reinsurance markets, gross premiums written increased by 28.5 percent to
$170.2 million in the quarter ended December 31, 1997 compared with
$132.5 million in the quarter ended December 31, 1996. This increase is
primarily a result of the Company's diversification strategy undertaken
over the past several years. The Company recorded an increase of $36.6
million in gross premiums written with respect to the Company's
participation in the Lloyd's syndicates managed by ACE London at Lloyd's.
This growth, which was achieved despite continuing price competition in
the Lloyd's market, is a result of the Company's increased participation
in the syndicates under management. Gross premiums written in ACE
Insurance increased by 2.2 percent, or $2.8 million, in the quarter
compared with the comparable quarter last year. This increase was
primarily the result of growth in satellite premiums, which experienced
increased activity in both launch and in-orbit programs, offset by
continuing declines in the directors and officers liability and excess
liability lines of business. The decline in excess liability is mainly
the result of non-renewed accounts, premium adjustments and pricing
changes resulting primarily from increases in attachment points and
decreases in limits provided. While this has resulted in decreasing
premiums, it has also led to a reduction in the Company's exposure and an
improved risk profile. As Tempest renewals primarily fall in January and
July of each year premium transactions are minimal during the December
quarter. However, Tempest experienced continuing price pressures on its
January 1998 renewals with price reductions up to 20 percent in many
cases.
Net premiums written increased by $16.4 million to $127.0 million this
quarter from $110.6 million in the quarter ended December 31, 1996, an
increase of 14.8 percent. This increase was the result of increases in
the Company's participation in the Lloyd's syndicates managed by ACE
London at Lloyd's. Net premiums written in ACE Insurance declined by 9.9
percent in the quarter compared to the first quarter of fiscal 1997. The
decline is primarily the result of continuing declines in directors and
officers liability and excess liability premiums, offset somewhat by
growth in premiums from the satellite division. Net premiums written were
also affected by the increased purchase of reinsurance in several
divisions in ACE Insurance.
Net premiums earned were $167.8 million compared to $164.4 million last
year, an increase of 2.1 percent. This increase was a result of a $17.5
million increase in net premiums earned from our Lloyd's syndicate
participation, offset somewhat by declines in earned premiums in ACE
Insurance and in the property catastrophe business in Tempest.
Net Investment Income
Three Months ended % Change
December 31 from
1997 1996 Prior year
---- ---- ----------
(in millions)
Net investment income $ 58.4 $ 59.7 (2.2)%
==== ==== ======
Net investment income decreased to $58.4 million in the quarter compared to
$59.7 million in the quarter ended December 31, 1996. This decrease was
primarily due to the reduction in average yield on the portfolio caused by
downward movements in the yield curve as well as the movement from 15
percent equities to 20 percent equities during December 1996. In addition,
during fiscal 1997 and the first quarter of fiscal 1998, the investable
asset base remained relatively constant as cash flows from operations were
largely offset by share repurchases and dividend payments.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of Operations - Three Months ended December 31, 1997
(continued)
Net Realized Gains on Investment
Three Months ended
December 31,
1997 1996
----- ----
(in millions)
Fixed maturities and short-term investments $ 21.4 $ 21.4
Equity securities 7.3 4.2
Financial futures and option contracts 8.7 17.7
Currency (9.9) (1.6)
----- -----
$ 27.5 $ 41.7
===== ====
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) on investments in the period in which the fluctuations
occur, together with net foreign currency gains and losses recognized
when non-U.S. dollar securities are sold.
During the first quarter of fiscal 1998 the fair value of the Company's
investment portfolio was positively impacted by a general increase in
prices in the U.S. bond markets resulting from the decline in interest
rates during the period. The 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 $21.4 million being
recognized on fixed maturities and short-term investments.
With strong U.S. equity markets, net realized gains on sales of equity
securities were $7.3 million in the first quarter of fiscal 1998 compared
with gains of $4.2 million in the first quarter of fiscal 1997.
In the first quarter of fiscal 1998 the S&P 500 Stock Index rose
approximately 3 percent and generated net realized gains on the equity
index futures contracts of $4.4 million. The remainder of the net
realized gains on financial futures and option contracts in the first
quarter of fiscal 1998 arose from gains recognized on futures contracts
used by certain of the Company's external managers of fixed income
securities. Net realized gains on financial futures contracts of $17.7
million recorded in the first quarter of fiscal 1997 were primarily
generated by the equity index futures contracts held as a result of an
over 8 percent rise in the S&P 500 Stock Index during that quarter.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of Operations - Three Months ended December 31, 1997
(continued)
Combined Ratio
Three Months ended
December 31
1997 1996
------ ----
(in millions)
Loss and loss expense ratio 65.1% 67.0%
Underwriting and administrative expense ratio 18.9 18.2
------- ----
Combined ratio 84.0% 85.2%
==== ====
The underwriting results of a property and casualty insurer are discussed
frequently by reference to its loss and loss expense ratio, underwriting
and 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 and the
underwriting 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.
However, property catastrophe loss experience is generally characterized by
low frequency but high severity short-tail claims which may result in
significant volatility in results.
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 December 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").
For the quarter ended December 31, 1997, the loss and loss expense ratio
decreased to 65.1 percent from 67.0 percent for the first quarter of fiscal
1997. This decline is partly due to the fact that Tempest had very little
loss activity in the quarter, posting a loss and loss expense ratio of 1.8
percent compared to 15.0 percent for the 1997 quarter. The change in mix of
earned premiums in ACE Insurance has also contributed to the decrease in
the loss and loss expense ratio during the quarter.
Acquisition costs remained relatively flat during the current quarter
compared to the first quarter of fiscal 1997, despite a continuing change
in the mix of earned premiums. The additional acquisition costs generated
primarily by the increase in earned premiums from the Lloyd's
participation, were offset by a net decrease in acquisition costs
resulting from declines in earned premiums from ACE Insurance and
Tempest. Administrative expenses increased by $1.7 million in the current
quarter compared to the first quarter of fiscal 1997 due primarily to the
costs associated with our increased participation in the Lloyd's market.
15
<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 currently depend primarily on dividends or other
statutorily permissible payments from its Bermuda-based operating
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 level of insurance and reinsurance
operations. During December 1997 ACE received a dividend of $115 million
from Tempest.
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 and
for share repurchases.
For the three months ended December 31, 1997, the Company's consolidated
net cash flow from operating activities was $51.7 million, compared with
$86.8 million for the three months ended December 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 three
month periods ended December 31, 1997 and 1996, loss and loss expense
payments amounted to $120.8 million and $75.1 million respectively. Total
loss and loss expense payments amounted to $402.1 million, $101.4 million
and $73.1 million in fiscal years 1997, 1996 and 1995, respectively.
At December 31, 1997, total investments and cash amounted to
approximately $4.4 billion, compared to $4.5 billion at September 30,
1997.
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 by its credit facilities
(discussed below) are adequate to allow the Company to pay claims within
the time periods required under its policies.
During December 1997, the Company put in place syndicated credit
facilities which replaced the existing facilities. J.P. Morgan
Securities, Inc. and Mellon Bank N.A. acted as co-arrangers in the
arranging, structuring and syndication of these credit facilities. The
new facilities provide:
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
. A $200 million 364 day revolving credit facility and a $200
million five year revolving credit facility which together make up
a combined $400 million committed, unsecured revolving credit
facility. This new five year revolving credit facility has a $50
million LOC sublimit.
. A five year LOC of approximately 154 million pounds ($260 million)
which is being used to fulfill the requirements of Lloyd's to
provide funds to support underwriting capacity on Lloyd's
syndicates in which the Company participates. The minimum
consolidated tangible net worth covenant for ACE Insurance under
this LOC is $1.0 billion.
. A $250 million seven year Amortized Term Loan Facility which was
used on January 2, 1998 to partially finance the acquisition of
WSG. The interest rate on the term loan is LIBOR plus an
applicable spread.
The revolving credit and term loan facilities require that the Company
maintain a minimum consolidated tangible net worth of $1.4 billion.
On November 13, 1997, the Board of Directors approved a special resolution
to split each outstanding Ordinary Share of the Company into three Ordinary
Shares. The stock split was voted on and approved by the shareholders of the
Company on February 6, 1998. The record date for determining those
shareholders entitled to receive certificates representing additional
Ordinary Shares pursuant to the stock split shall be as of the close of
business on February 17, 1998. Certificates representing the additional
shares of stock will be mailed on March 2, 1998. (see Part II, Item 4
"Submission of Matters to a Vote of Security Holders").
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. During the quarter ended
December 31, 1997, the Company repurchased 836,200 Ordinary Shares under
the share repurchase program for an aggregate cost of $76.5 million.
During the period January 1, 1998 through February 6, 1998, the Company
repurchased an additional 337,500 Ordinary Shares under the share
repurchase program for an aggregate cost of $31.1 million, leaving
approximately $160.1 million of the Board authorization not utilized.
On October 18, 1997 and January 16, 1998, the Company paid quarterly
dividends of 22 cents and 24 cents per share, respectively to
shareholders of record on September 30, 1997 and December 13, 1997. On
February 6, 1998, following approval by the shareholders of the
three-for-one stock split, the Board of Directors declared a quarterly
dividend of 8 cents per share payable on April 18, 1998 to shareholders
of record on March 31, 1998. 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.
As previously discussed, on January 2, 1998, the Company completed the
acquisition of WSG, through its newly-created U.S. holding company, ACE
US, for an aggregate cash consideration of $338 million. ACE US was
capitalized by ACE Limited with $75 million and received $35 million from
an inter-company loan. ACE US financed the acquisition of WSG with $250
million of bank debt (see discussion of syndicated credit facilities
above) and the remaining $88 million came from available funds.
Fully diluted net asset value per share was $48.30 at December 31, 1997,
compared with $47.14 at September 30, 1997.
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 reserve for unpaid losses and loss expenses of $1.8
billion at December 31, 1997, includes $839 million of case and loss
expense reserves. While the Company believes that its reserve for unpaid
losses and loss expenses at December 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. During fiscal 1997 and 1998, the Company
made certain payments to policyholders with respect to these claims.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
However, the Company does not have adequate data upon which to anticipate
the timing of future payments relating to these liabilities, and it
expects that the amount of time required to determine the ultimate
financial impact of the options selected by claimants may extend well
into 1998 and beyond (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, 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 credit
facilities are, in management's opinion, adequate to meet the Company's
expected cash requirements.
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 to a Federal District Court in Alabama, although cases are in
the process of being transferred back to federal courts or remanded to
state courts.
On May 15, 1995, the Dow Corning Corporation, one of the major
defendants, filed for protection under Chapter 11 of the U.S. Bankruptcy
Code and claims against Dow Corning remain stayed subject to the
Bankruptcy Code.
On October 1, 1995, negotiators for three of the major defendants agreed
on the essential elements of an individual settlement plan for U.S.
claimants with at least one implant from any of those manufacturers ("
the Settlement"). In general, under the Settlement, the amounts payable
to individual participants, and the manufacturers' obligations to make
those payments, would not be affected by the number of participants
electing to opt out from the new plan. Also, in general, the compensation
would be fixed and not affected by the number of participants, 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. By November 13, 1995, the Settlement was
approved by the three major defendants. In addition, two other defendants
became part of the Settlement, 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 multidistrict litigation
judge approved the Settlement and the materials for giving notice to
claimants although an appeal concerning the Settlement is pending with
the Eleventh Circuit Court of Appeals.
Beginning in mid-January, 1996, the three major defendants have each made
payments to a court-established fund for use in making payments under the
Settlement. The Settlement Claims Office had reported that as of October
31, 1997, it has sent out Notification of Status Letters to more than
360,000 non-opt-out domestic implant recipients who had registered with
the Settlement Claims Office. As of October 31, 1997, approximately $565
million had been distributed under the Settlement to implant recipients
of the three major defendants. Certain potential payments to claimants
relating to other implants remain suspended because of the pending
appeals. The Settlement Claims Office has also reported that
approximately 32,500 domestic registrants exercised opt-out rights after
receiving their status letters. Previously, approximately 19,000 other
domestic implant recipients had exercised opt-out rights in 1994 and/or
before receiving status letters.
Although the Company has underwritten the coverage for a number of the
defendant companies including four of the companies involved in the
Settlement, 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.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Breast Implant Litigation (continued)
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 the pending lawsuits and
information 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. During fiscal 1997 and the first quarter of fiscal 1998 the
Company made payments of approximately $260 million with respect to
breast implant claims. These payments were included in previous reserves
and are consistent with the Company's belief that its reserves are
adequate. Significant uncertainties continue to exist with regard to the
ultimate outcome and cost of the Settlement 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 December 31, 1997.
IMPACT OF THE YEAR 2000 ISSUE
Management has initiated a Company wide program to prepare the Company's
various computer systems and selected applications for the Year 2000. The
Company has appointed individuals in each business segment to review all
systems to assess their ability to process transactions in the Year 2000.
Based on these assessments, the Company has determined that certain
business segments, particularly ACE USA and ACE London, need to modify or
replace significant portions of their computer systems so these systems
will properly utilize dates beyond December 31, 1999. The Company presently
believes that with these modifications and replacements the Year 2000 Issue
can be adequately addressed. The Company will utilize both internal and
external resources to reprogram or replace, and test these systems for Year
2000 modifications. The Company has initiated communications with its
significant business partners, including its business partners in the
Lloyd's markets, to determine the extent to which the Company is vulnerable
to those third parties' failure to remediate their own Year 2000 Issue. The
Company is also assessing its exposure to contingencies related to the Year
2000 Issue for the policies it issues. The total cost of this effort is
still being evaluated and the Company has not yet determined if the total
cost will be material.
19
<PAGE>
ACE LIMITED
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
1) The Annual General Meeting was held on February 6, 1998.
2) The following matters were voted on at the Annual General Meeting:
a) The following directors were elected.
Term Expiring Votes In Favour Votes Withheld
------------- --------------- --------------
Thomas J. Neff 2000 37,816,864 233,441
Brian Duperreault 2001 37,818,446 231,859
Robert M. Hernandez 2001 37,817,443 232,862
Peter Menikoff 2001 37,819,231 261,074
Glen M. Renfrew 2001 37,812,471 237,834
Robert Ripp 2001 37,819,549 230,756
Dermot F. Smurfit 2001 37,816,974 233,331
b) A resolution was voted on amending the Company's Memorandum of
Association and Articles of Association to split each outstanding
Ordinary Share of the Company into three Ordinary Shares.
The record date for determining those shareholders entitled to
receive certificates representing additional Ordinary Shares pursuant
pursuant to the stock split shall be as of the close of business on
February 17, 1998. Certificates representing the additional shares
of stock will be mailed on March 2, 1998.
The holders of 37,796,245 shares voted in favour, 21,530 shares
voted against and 232,530 shares abstained.
c) A special resolution was voted upon to amend Article 33 of the
Company's Articles to clarify the setting of record dates in respect
of shareholder meetings and payments of dividends.
The holders of 37,794,080 shares voted in favour, 13,754 shares
voted against and 242,471 shares abstained.
d) The appointment of Coopers & Lybrand L.L.P. as independent public
accountants for the Company for the year ended September 30, 1998
was ratified and approved.
The holders of 37,794,080 shares voted in favour, 13,754 shares
voted against and 242,471 shares abstained.
ITEM 5. OTHER INFORMATION
1) On February 6, 1998, following approval by the shareholders of the
three-for-one stock split, the Company declared a dividend of $0.08 per
Ordinary Share payable on April 18, 1998 to shareholders of record on
March 31, 1998.
20
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1) Exhibits
--------
10.1 ACE Limited Elective Deferred Compensation Plan
10.2 ACE Limited Rules of the Approved UK Stock Option Program
27 Financial Data Schedule
2) Reports on Form 8-K
The Company filed a Form-8K current report dated January 23, 1998
pertaining to the completion of the acquisition of Westchester Specialty
Group, Inc.
21
<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
---------------------------------
February 13, 1998 /s/ Brian Duperreault
----------------------------
Brian Duperreault
Chairman, President and Chief
Executive Officer
February 13, 1998 /s/ Christopher Z. Marshall
----------------------------
Christopher Z. Marshall
Chief Financial Officer
22
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Numbered Page
- ------- ------------ --------------
10.1 ACE Limited Elective Deferred
Compensation Plan
10.2 ACE Limited Rules of the Approved
UK Stock Option Programme
27 Financial Data Schedule
ACE LIMITED
ELECTIVE DEFERRED COMPENSATION PLAN
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<PAGE>
TABLE OF CONTENTS
SECTION 1.................................................................... 1
General ............................................................1
1.1. Purpose ..............................................1
1.2. Effective Date........................................1
1.3. Related Companies and Employers.......................1
1.4. Operation and Administration..........................1
1.5. Plan Year.............................................1
1.6. Gender and Number.....................................1
1.7. Notices ..............................................2
1.8. Form and Time of Elections............................2
1.9. Other Costs and Benefits..............................2
1.10. Evidence.............................................2
1.11. Action by Employers..................................2
SECTION 2.....................................................................2
Participation..........................................................2
2.1. Participant...........................................2
2.2. Deferral Election.....................................3
2.3. Eligible Compensation.................................3
2.4. Plan Not Contract of Employment.......................3
SECTION 3.....................................................................3
Plan Accounting......................................................3
3.1. Accounts..............................................3
3.2. Adjustment of Accounts................................3
3.3. Crediting Under Deferral Election.....................4
3.4. Investment Return Dates...............................4
3.5. Participant Selection of Investment Return Rate.......4
3.6. Statement of Accounts.................................4
SECTION 4.....................................................................5
Distributions........................................................5
4.1. General ..............................................5
4.2. Distribution Election.................................5
4.3. Beneficiary...........................................5
4.4. Distributions to Disabled Persons.....................5
4.5. Benefits May Not be Assigned..........................5
4.6. Offset ..............................................6
4.7. Unforeseeable Emergency...............................6
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SECTION 5....................................................................6
Source of Benefit Payments..........................................6
5.1. Liability for Benefit Payments.......................6
5.2. No Guarantee.........................................7
SECTION 6....................................................................7
Committee...........................................................7
6.1. Powers of Committee..................................7
6.2. Delegation by Committee..............................7
6.3. Information to be Furnished to Committee.............8
6.4. Liability and Indemnification of Committee...........8
SECTION 7....................................................................8
Amendment and Termination...........................................8
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ACE LIMITED
ELECTIVE DEFERRED COMPENSATION PLAN
SECTION 1
General
1.1. Purpose. The ACE Limited Elective Deferred Compensation Plan
(the "Plan") has been established by ACE Limited (the "Company") so that
it, and each of the Related Companies which, with the consent of the
Company, adopts the Plan may provide its eligible employees with an
opportunity to build additional financial security, thereby aiding such
companies in attracting and retaining employees of exceptional ability.
1.2. Effective Date. The "Effective Date" of the Plan is January 1, 1998.
1.3. Related Companies and Employers. For purposes of the Plan, the
term "Related Company" means any company during any period in which it is a
"subsidiary corporation,"as that term in defined in section 424(f) of the
United States Internal Revenue Code of 1986, as amended (the "Code") with
respect to the Company. The Company and each Related Company which adopts
the Plan for the benefit of its eligible employees are referred to below
collectively as the "Employers" and individually as an "Employer." A
Related Company may adopt the Plan by action of its Board of Directors;
provided that a Related Company will be considered to have adopted the Plan
for its Eligible Employees (without the need for action by its Board of
Directors) if an executive officer of the Related Company announces such
adoption to the Eligible Employees.
1.4. Operation and Administration. The authority to control and
manage the operation and administration of the Plan shall be vested in the
Compensation Committee (the "Committee") of the Board of Directors of the
Company (the "Board"). In controlling and managing the operation and
administration of the Plan, the Committee shall have the rights, powers and
duties set forth in Section 6. Capitalized terms in the Plan shall be
defined as set forth in the Plan.
1.5. Plan Year. The term "Plan Year" means the fiscal year of the
Company.
1.6. Gender and Number. Where the context admits, words in any gender
shall include any other gender, words in the singular shall include the
plural and the plural shall include the singular.
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1.7. Notices. Any notice or document required to be filed with the
Plan Administrator or the Committee under the Plan will be properly filed
if delivered or mailed to the Plan Administrator, in care of the Company,
at its principal executive offices. The Plan Administrator may, by advance
written notice to affected persons, revise such notice procedure from time
to time. Any notice required under the Plan may be waived by the person
entitled to notice.
1.8. Form and Time of Elections. Unless otherwise specified herein,
each election required or permitted to be made by any Participant or other
person entitled to benefits under the Plan, and any permitted modification
or revocation thereof, shall be in writing filed at such times, in such
form, and subject to such restrictions and limitations as the Plan
Administrator shall require. In addition to any other deferral elections
made under this Plan, an election to defer the receipt of an award under
the ACE Limited Annual Performance Incentive Plan will be made under this
Plan.
1.9. Other Costs and Benefits. The Plan is intended to defer, but not
to eliminate, payment of compensation to a Participant. Accordingly, if any
compensation or benefits that would otherwise be provided to a Participant
in the absence of the Plan are reduced or eliminated by reason of deferral
under the Plan, the Company shall equitably compensate the Participant for
such reduction or elimination. However, no reimbursement will be made for
increased taxes resulting from benefits under the Plan (whether resulting
from a change in individual income tax rates or otherwise).
1.10. Evidence. Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information which the person
acting on it considers pertinent and reliable, and signed, made or
presented by the proper party or parties.
1.11. Action by Employers. Any action required or permitted to be
taken by any Employer shall be by resolution of its board of directors, or
by a duly authorized officer of the Employer.
SECTION 2
Participation
2.1. Participant. Subject to the terms of the Plan, an individual
shall be eligible to make deferrals under the Plan during any period he or
she is an Eligible Employee. For purposes of the Plan, the term "Eligible
Employee" for any period shall mean any individual during any period he or
she is a Bermuda-based employee of an Employer;
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<PAGE>
provided that the Committee may designate any other employee of an Employer
or member of a group of employees of an Employer as an Eligible Employee.
2.2. Deferral Election. An Eligible Employee shall participate in the
Plan by electing to defer payment of all or a portion of his or her
Eligible Compensation pursuant to the terms of a "Deferral Election." An
individual's Deferral Election shall be filed with the Plan Administrator
prior to the period to which it relates. Except as otherwise provided by
the Committee, a Participant may not revoke any Deferral Elections. The
Committee may revoke a Participant's Deferral Election as of the date on
which the Participant ceases to be an Eligible Employee (provided that this
sentence shall not be construed to permit the Committee to revoke a
Distribution Election by reason of the Participant ceasing to be an
Eligible Employee).
2.3. Eligible Compensation. For purposes of the Plan, a Participant's
"Eligible Compensation" from any Employer for any Plan Year means (i)
salary otherwise payable to him by the Employer, (ii) amounts payable under
the ACE Limited Annual Performance Incentive Plan and (iii) amounts which
are designated by the Committee as compensation eligible for deferral in
accordance with the Plan.
2.4. Plan Not Contract of Employment. The Plan does not constitute a
contract of employment, and participation in the Plan will not give any
employee the right to be retained in the employ of any Employer nor any
right or claim to any benefit under the Plan, unless such right or claim
has specifically accrued under the terms of the Plan.
SECTION 3
Plan Accounting
3.1. Accounts. The Plan Administrator shall establish an Account for
each Participant who has filed a Deferral Election. If a Participant's
Eligible Compensation subject to a Deferral Election would otherwise be
payable from more than one Employer, a separate Account shall be
established for the Participant with respect to the Eligible Compensation
from each such Employer. The amount held in an Account established on
behalf of a Participant will be expressed in United States dollars.
3.2. Adjustment of Accounts. Each Account shall be adjusted in
accordance with this Section 3 in a uniform manner as of such periodic
"Accounting Dates" as may be determined by the Committee from time to time.
As of each Accounting Date, the balance of each Account shall be adjusted
as follows:
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(a) first, charge to the Account balance the amount of any distributions
under the Plan with respect to that Account that have not previously
been charged;
(b) then, adjust the Account balance for the applicable Investment Return
Rate(s); and
(c) then, credit to the Account balance the amount to be credited to that
Account in accordance with subsection 3.3 that have not previously
been credited.
3.3. Crediting Under Deferral Election. The balance of a
Participant's Account for any period shall be credited, in accordance with
the provisions of paragraph 3.2(c), with the amount by which his or her
Eligible Compensation for that period is reduced pursuant to a Deferral
Election. Such crediting shall occur as of the date on which such Eligible
Compensation would otherwise have been paid to the Participant by the
Employer were it not for the reduction made pursuant to the Deferral
Election or, if such date is not an Accounting Date, as of the first
Accounting Date occurring thereafter.
3.4. Investment Return Rates. The "Investment Return Rate(s)" with
respect to the Account(s), or portions of the Account(s), of any
Participant for any period shall be the Investment Return Rate(s) elected
by the individual in accordance with subsection 3.5 from among such
investment alternatives (if any) for that period which, in the discretion
of the Committee, are offered from time to time under this paragraph 3.4.
3.5. Participant Selection of Investment Return Rate. The Investment
Return Rate alternatives under the Plan, and a Participant's ability to
choose among Investment Return Rate alternatives, shall be determined in
accordance with rules established by the Committee from time; provided,
however, that the Company may not modify the Investment Return Rate with
respect to periods prior to the adoption of such modification.
3.6. Statement of Accounts. As soon as practicable after the end of
each Plan Year, and at such other times as determined by the Committee or
the Chief Executive Officer of the Company, the Company shall provide each
Participant having one or more Accounts under the Plan with a statement of
the transactions in his or her Accounts during that year and his or her
Account balances as of the end of the year.
-4-
<PAGE>
SECTION 4
Distributions
4.1. General. Subject to this Section 4, the balance of a
Participant's Account(s) with respect to any year shall be distributed in
accordance with the Participant's Distribution Election. In no event shall
the amount distributed with respect to any Participant's Account as of any
date exceed the amount of the Account balance as of that date.
4.2. Distribution Election. A Participant's Distribution Election
shall specify the manner (including the time and form of distribution) in
which the Participant's Account(s) shall be distributed, subject to such
restrictions and limitations as may be imposed by the Committee.
4.3. Beneficiary. Subject to the terms of the Plan, any benefits
payable to a Participant under the Plan that have not been paid at the time
of the Participant's death shall be paid at the time and in the form
determined in accordance with the foregoing provisions of the Plan, to the
beneficiary designated by the Participant in writing filed with the Plan
Administrator in such form and at such time as the Plan Administrator shall
require. A beneficiary designation form will be effective only when the
signed form is filed with the Plan Administrator while the Participant is
alive and will cancel all beneficiary designation forms filed earlier. If a
deceased Participant failed to designate a beneficiary, or if the
designated beneficiary of a deceased Participant dies before him or before
complete payment of the Participant's benefits, the amounts shall be paid
to the legal representative or representatives of the estate of the last to
die of the Participant and his or her designated beneficiary.
4.4. Distributions to Disabled Persons. Notwithstanding the
provisions of this Section 4, if, in the Plan Administrator's opinion, a
Participant or beneficiary is under a legal disability or is in any way
incapacitated so as to be unable to manage his or her financial affairs,
the Plan Administrator may direct that payment be made to a relative or
friend of such person for his or her benefit until claim is made by a
conservator or other person legally charged with the care of his or her
person or his or her estate, and such payment shall be in lieu of any such
payment to such Participant or beneficiary. Thereafter, any benefits under
the Plan to which such Participant or beneficiary is entitled shall be paid
to such conservator or other person legally charged with the care of his or
her person or his or her estate.
4.5. Benefits May Not be Assigned. Neither the Participant nor any
other person shall have any voluntary or involuntary right to commute, sell,
assign, pledge,
-5-
<PAGE>
anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey
in advance of actual receipt of the amounts, if any, payable hereunder, or
any part hereof, which are expressly declared to be unassignable and
non-transferable. No part of the amounts payable shall be, prior to actual
payment, subject to seizure or sequestration for payment of any debts,
judgements, alimony or separate maintenance owed by the Participant or any
other person, or be transferred by operation of law in the event of the
Participant's or any other person's bankruptcy or insolvency.
4.6. Offset. Notwithstanding the provisions of subsection 4.5, if, at
the time payments are to be made under the Plan, the Participant or
beneficiary or both are indebted or obligated to any Employer or Related
Company, then the payments remaining to be made to the Participant or the
beneficiary or both may, at the discretion of the Plan Administrator, be
reduced by the amount of such indebtedness, or obligation, provided,
however, that an election by the Plan Administrator not to reduce any such
payment shall not constitute a waiver of the claim for such indebtedness or
obligation.
4.7. Unforeseeable Emergency. Prior to the date otherwise scheduled
for distribution of his or her benefits under the Plan, upon a showing of
an unforeseeable emergency, a Participant may elect to accelerate payment
of an amount not exceeding the lesser of (a) the amount necessary to meet
the emergency or (b) the sum of his or her Account balance(s) under the
Plan. For purposes of the Plan, the term "unforeseeable emergency" shall
mean an unanticipated emergency that is caused by an event beyond the
control of the Participant (or the control of the beneficiary, if the
amount is payable to a beneficiary) and that would result in severe
financial hardship to the individual if early withdrawal were not
permitted. The determination of "unforeseeable emergency" shall be made by
the Plan Administrator, based on such information as the Plan Administrator
shall deem to be necessary.
SECTION 5
Source of Benefit Payments
5.1. Liability for Benefit Payments. Subject to the provisions of
this Section 5, an Employer shall be liable for payment of benefits under
the Plan with respect to any Participant to the extent that such benefits
are attributable to the deferral of compensation otherwise payable by that
Employer to the Participant. Any disputes relating to liability of
Employers for benefit payments shall be resolved by the Committee.
-6-
<PAGE>
5.2. No Guarantee. Neither a Participant nor any other person shall,
by reason of the Plan, acquire any right in or title to any assets, funds
or property of the Employers whatsoever, including, without limitation, any
specific funds, assets, or other property which the Employers, in their
sole discretion, may set aside in anticipation of a liability under the
Plan. A Participant shall have only a contractual right to the amounts, if
any, payable under the Plan, unsecured by any assets of the Employers.
Nothing contained in the Plan shall constitute a guarantee by any of the
Employers that the assets of the Employers shall be sufficient to pay any
benefits to any person.
SECTION 6
Committee
6.1. Powers of Committee. Responsibility for the day-to-day
administration of the Plan shall be vested in the Plan Administrator, which
shall be the Committee. The authority to control and manage all other
aspects of the operation and administration of the Plan shall also be
vested in the Committee. The Committee is authorized to interpret the Plan,
to establish, amend, and rescind any rules and regulations relating to the
Plan, to determine the terms and provisions of any agreements made pursuant
to the Plan, and to make all other determinations that may be necessary or
advisable for the administration of the Plan. Except as otherwise
specifically provided by the Plan, any determinations to be made by the
Committee under the Plan shall be decided by the Committee in its sole
discretion. Any interpretation of the Plan by the Committee and any
decision made by it under the Plan is final and binding on all persons.
6.2. Delegation by Committee. The Committee may allocate all or any
portion of its responsibilities and powers to any one or more of its
members and may delegate all or any part of its responsibilities and powers
to any person or persons selected by it. Any such allocation or delegation
may be revoked by the Committee at any time.
Until the Committee takes action to the contrary:
(a) The Chief Executive Officer of the Company shall be delegated the
power and responsibility to take all actions assigned to or permitted
to be taken by the Committee under Section 2, Section 3, and Section
4 (other than the powers and responsibility of the Plan
Administrator).
(b) The powers and responsibilities of the Plan Administrator shall be
delegated to the Chief Administration Officer (or his or her
delegate) of the Company, subject to such direction as may be
provided to the Chief Administration Officer or his or
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<PAGE>
her delegate from time to time by the Committee and the Chief
Executive Officer of the Company.
6.3. Information to be Furnished to Committee. The Employers and
Related Companies shall furnish the Committee with such data and
information as may be required for it to discharge its duties. The records
of the Employers and Related Companies as to an employee's or Participant's
employment, termination of employment, leave of absence, reemployment and
Eligible Compensation shall be conclusive on all persons unless determined
to be incorrect. Participants and other persons entitled to benefits under
the Plan must furnish the Committee such evidence, data or information as
the Committee considers desirable to carry out the Plan.
6.4. Liability and Indemnification of Committee. No member or
authorized delegate of the Committee shall be liable to any person for any
action taken or omitted in connection with the administration of the Plan
unless attributable to his or her own fraud or willful misconduct; nor
shall the Employers be liable to any person for any such action unless
attributable to fraud or willful misconduct on the part of a director or
employee of the Employers. The Committee, the individual members thereof,
and persons acting as the authorized delegates of the Committee under the
Plan, shall be indemnified by the Employers against any and all
liabilities, losses, costs and expenses (including legal fees and expenses)
of whatsoever kind and nature which may be imposed on, incurred by or
asserted against the Committee or its members or authorized delegates by
reason of the performance of a Committee function if the Committee or its
members or authorized delegates did not act dishonestly or in willful
violation of the law or regulation under which such liability, loss, cost
or expense arises. This indemnification shall not duplicate but may
supplement any coverage available under any applicable insurance.
SECTION 7
Amendment and Termination
The Committee may, at any time, amend or terminate the Plan
(including the rules for administration of the Plan), subject to the
following:
(a) Subject to the following provisions of this Section 7, no amendment
or termination may materially adversely affect the rights of any
Participant or beneficiary under the Plan.
(b) The Committee may revoke the right to defer Eligible Compensation
under the Plan.
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<PAGE>
(c) The Plan may not be amended to delay the date on which benefits are
otherwise payable under the Plan without the consent of each affected
Participant. The Committee may amend the Plan to accelerate the date
on which Plan benefits are otherwise payable under the Plan and
eliminate all future deferrals under the Plan, thereby terminating
the Plan.
(d) The Committee may amend the Plan to modify or eliminate any
Investment Return Rate alternative, except that any such amendment
may not modify the Investment Return Rate with respect to periods
prior to the adoption of the amendment.
(e) Notwithstanding any other provision of the Plan to the contrary,
neither the Committee nor the Board may delegate its rights and
responsibilities under this Section 7; provided, however, that, the
Board of Directors may, from time to time, substitute itself, or
another committee of the Board, for the Compensation Committee under
this Section 7.
IN WITNESS WHEREOF, ACE Limited has caused this Plan to be executed by its
duly authorized officer this ______, day of _________, 1997.
ACE Limited
By:___________________
-9-
ACE Limited
Rules of the
Approved UK Stock Option Programme
Approved by the Inland Revenue on 24 November 1997
(Reference No: X19095/RC)
Lovell White Durrant
65 Holborn Viaduct
London EC1A 2DY
Ref: A4/JCMcM/LLW
<PAGE>
CONTENTS
<TABLE>
<CAPTION>
Clause
Page No.
<S> <C> <C>
1. Establishment and purpose of the Programme 1
2. Definitions 1
3. Grant of Options 5
4. Limitations on Grant of Options 5
5. Exercise of Options 6
6. Time for Exercise of Options 6
7. Replacement of Options on a takeover or other change in Control of
the Company 7
8. Variations in the Share Capital of the Company 8
9. Administration of the Programme 8
10. Amendment of the Programme 8
11. Additional Provisions 8
12. Termination 9
</TABLE>
<PAGE>
- 1 -
ACE Limited
Approved UK Stock Incentive Programme
(An approved Company share option plan
pursuant to the provisions of Schedule 9
to the Income and Corporation Taxes Act 1988)
1. Establishment and Purpose of the Programme
1.1 On 12 November 1997 the Committee adopted, subject to the approval
of the Inland Revenue, the Programme as an addendum to the ACE
Limited 1995 Long-Term Incentive Plan (the "Plan") to enable
Eligible Employees of the Company and its Subsidiaries to
participate in the Plan and obtain the benefit of approval by the
Board of Inland Revenue pursuant to Schedule 9 to the Income and
Corporation Taxes Act 1988 ("Schedule 9").
1.2 On 24 November 1997 the Inland Revenue gave formal approval to the
Programme. The rules of the Programme (the "Programme Rules")
comply with the requirements of Schedule 9.
1.3 The rules of the Plan (the "Plan Rules") shall apply to the
Programme unless the Programme Rules expressly or by implication
provide to the contrary, but so that nothing in either the Plan or
the Programme Rules shall operate to prejudice the approval by the
Board of Inland Revenue of the Programme PROVIDED ALWAYS THAT in
the event of a conflict between the Plan Rules and the Programme
Rules whereby the status of the Plan is or will be prejudiced the
Plan Rules shall prevail.
1.4 For the avoidance of doubt rule 2.5 of the Plan shall not apply to
the Programme and the Company may only grant options pursuant the
Programme. Stock Appreciation Rights, Limited Stock Appreciation
Rights, Restricted Stock or a Stock Purchase Program may not be
granted pursuant the Programme Rules.
1.5 The Committee may designate whether or not an Option is to be
considered an incentive stock option as defined in Section 422(b)
of the US Internal Code 1986, as amended ("Incentive Stock
Option").
1.6 The Programme shall be governed and construed in accordance with the
laws of England.
2. Definitions
2.1 In the Programme the following words and expressions have the meanings
set opposite them:
"ACE Group" the Company and all of the
Subsidiaries and, in relation to
a New Option granted pursuant to
clause 7 the Acquiring Company
and the Controlling Company and
their Subsidiaries as defined in
Section 736 of the Companies Act
1985, and "member of the ACE
Group" shall be construed
accordingly;
"Act" the Securities Exchange Act 1934,
as amended;
<PAGE>
- 2 -
"Acquiring a company which for the purposes of
Company" clause 7 comes within the
definition of "the acquiring
company" in paragraph 15(1) of
Schedule 9;
"Affiliate" a person or entity that directly or
indirectly controls, is controlled
by or is under common control with
another person or entity;
"Any Other any scheme other than the Programme
Approved Scheme" established by the Company
or by any Associated Company and
approved in accordance with
Schedule 9 but excluding for the
purposes of this definition any
savings-related share option
scheme or profit sharing scheme
so established;
"Approval Date" the date on which the
Company receives written
notification from the Board of
Inland Revenue that the Programme
has received Revenue Approval;
"Associated any company which is an associated
Company" company of the Company
within the meaning of section
416(1) of the Taxes Act;
"Board" the board of directors for the
time being of the Company;
"Change in Control" shall for the purposes of clause
6.7 mean the occurrence of one of
the following events:
(i) the acquisition by any
Person of beneficial
ownership (within the
meaning of Rule 13d-3
promulgated under the
Act) of fifty percent
(50%) or more of the
Voting Stock;
(ii) the majority of the
Board consists of
individuals other than
Incumbent Directors;
(iii) the Company adopts any
plan of liquidation
providing for the
distribution of all or
substantially all of
its assets;
<PAGE>
- 3 -
(iv) all or substantially
all the assets or
business of the
Company is disposed of
pursuant to a merger,
consolidation or other
transaction (unless
the shareholders of
the Company
immediately prior to
such merger,
consolidation or other
transaction
beneficially own,
directly or
indirectly, in
substantially the same
proportion as they
owned Voting Stock of
the Company, all of
the Voting Stock or
other ownership
interests of the
entity or entities, if
any, that succeed to
the business of the
Company);
(v) the Company combines
with another company
and is the surviving
corporation but,
immediately after the
combination, the
shareholders of the
Company immediately
prior to the
combination hold,
directly or
indirectly, 50% or
less of the Voting
Stock of the combined
company (there being
excluded from the
number of shares held
by such shareholders,
but not from the
Voting Stock of the
combined company, any
shares received by
Affiliates of such
other company in
exchange for stock of
such other company);
"Committee" the Compensation Committee of the
Board or such other committee
as the Board shall designate to
administer the Plan;
"Company" ACE Limited, a Corporation
incorporated in the Cayman Islands;
"Control" for the purposes of clause 7, the
control of a company within the
meaning given to that expression by
section 840 of the Taxes Act;
"Controlling a company, other than the Company
Company" and an Acquiring Company,
which falls within sub-paragraphs
10(b) or 10(c) of Schedule 9;
<PAGE>
- 4 -
"Disability" a Participant shall be considered
to have a "Disability" during the
period in which he is unable by
reason of a medically
determinable physical or mental
impairment to engage in any
substantial gainful activity,
which condition, in the opinion
of a physician selected by the
Committee, is expected to have a
duration of not less than 120
days;
"Eligible Employee" any person whose terms
of employment require him to
devote substantially the whole of
his time to working for any
member or members of the ACE
Group, except for;
(i) any director of a
member or members of
the ACE Group who is
contracted to work for
less than 25 hours a
week (excluding meal
breaks) in that
capacity; and
(ii) any person who is
prohibited from partici-
pating in the Programme
by the provisions of
paragraph 8 of Schedule 9;
"Exercise Price" the price per Share
payable on the exercise of an
Option as determined by the
Committee but in no event less
than the greater of:
(i) the nominal value of a
Share (if the Shares are
to be subscribed); and
(ii) the Fair Market Value of a
Share on the day on which
the Option is granted;
"Fair Market Value" the value of a Share on any day being:
(i) if and for so long as
the Company's Shares
are admitted to the
official list of the
New York Stock
Exchange, the closing
market composite price
for Shares as reported
on the New York Stock
Exchange - Composite
Transactions on that
date or if the New
York Stock Exchange is
closed on that date,
the last preceding
date on which the New
York Stock Exchange
was open for trading
and on which the
Shares were traded
PROVIDED THAT such
date shall not be a
date which is more
than 30 days before
the date of grant of
an Option; or
<PAGE>
- 5 -
(ii) in all other cases, the
market value determined
in accordance with Part
VIII of the taxation of
Chargeable Gains Act
1992 and if and for so
long as the Programme
has Revenue Approval
agreed in advance with
the Shares Valuation
Division of the Inland
Revenue;
"Incumbent Directors" the individuals
constituting the Board as of the
date the Plan was adopted and any
subsequent directors whose
election or nomination for
election by the Company's
stockholders was approved by a
vote of three quarters (3/4) of
the individuals who are then
Incumbent Directors;
"Normal Retirement the voluntary termination of
Age" employment at a time when the
Participant has attained normal
retirement age under the ACE
Limited Employee Retirement Plan
or any other retirement benefits
scheme maintained by a company in
the ACE Group or such other age
as shall be determined by the
Committee in its sole discretion;
"Option" subject to clause 7, a right to
acquire Shares pursuant to the
provisions of the Programme;
"Option Period" subject to clause 6, the period
ending no later than ten years
from the date of an Option
during which an Option shall be
exercisable in accordance with
the provisions of the Programme
as determined by the Committee
at the date of grant of the
Option provided that the Option
may not be exercisable before
the Participant has completed
one year's service with the
Group;
"Participant" an Eligible Employee who has been
granted an Option or where
applicable, the personal represent-
ative(s) of any such person;
"Person" person for the purposes of the
definition of "Change in Control"
has the same meaning as set forth
in Sections 3(a)(9) and 13(d) of
the Act;
"Plan" the ACE Limited 1995 Long-Term
Incentive Plan approved by the
stockholders of the Company in
general meeting on 9 February
1996 and as subsequently amended;
<PAGE>
- 6 -
"Programme" the Programme adopted on 12 November
1997 as from time to
time amended in accordance with the
provisions hereof;
"Related Company" any company which is a subsidiary
corporation as defined in
Section 424(f) of the Internal
Revenue Code of 1986;
"Revenue Approval" approval of the Programme by the
Board of Inland Revenue under
Schedule 9;
"Schedule 9" Schedule 9 to the Taxes Act;
"Shares" subject to clause 7.3(a), Stock
which satisfies the requirements of
paragraphs 10 to 14 inclusive of
Schedule 9;
"Stock" shares of the common stock of the
Company;
Subsidiaries" those companies over which for
the time being the Company has
Control and which are
subsidiaries of the Company
within the meaning of Section 736
of the Companies Act 1985;
"Taxes Act" the Income and Corporation Taxes Act
1988;
"Voting Stock" capital stock if any class
or classes having general voting
power under ordinary
circumstances in the absence of
contingencies to elect the
directors of a company.
<PAGE>
- 7 -
2.2 Any reference herein to a statutory provision shall include a
reference to that provision as amended or re-enacted from time to
time. Where the context permits the singular shall include the
plural and vice versa and the masculine gender shall include the
feminine.
3. Grant of Options
3.1 Subject to the limits contained in clause 4, at any time after the
Approval Date, the Committee may, in its absolute discretion grant
an Option to an Eligible Employee in accordance with the
Programme. The Committee shall give notice in writing to the
Eligible Employee to specify:
(a) the number of Shares in respect of which the Option is
granted,
(b) the date on which it is granted,
(c) the Exercise Price,
(d) the objective performance target(s), if any, imposed by
the Committee, the terms of which must, at any time when
the Programme has Revenue Approval, be approved by the
Board of Inland Revenue; and
(e) the Option Period.
3.2 The grant of an Option shall be made on the basis that
participation in the Programme shall be deemed to constitute an
agreement to be bound by the Programme Rules and shall be
evidenced by an instrument in such form as the Committee may from
time to time prescribe. The instrument shall be issued as soon as
practicable after the date of grant.
3.3 An Option shall be personal to the Participant and may not be
transferred except as designated by the Participant by will or by
the laws of descent, or, subject to the provisions of clause 6.2,
exercised by any other person. In no event shall an Incentive
Stock Option be transferable to the extent that such
transferability would violate the requirements of the Inland
Revenue Code 1986 Section 422. Any attempt to so transfer or sell
an Option shall cause the Option to lapse forthwith.
4. Limitations on Grant of Options
4.1 No Option shall be granted pursuant to clause 3 if such grant
would exceed the limits imposed on the grant of rights under the
Plan pursuant to section 6 of the Plan with respect to the number
of Shares which may be made the subject of Options and other
rights under the Plan.
4.2 No Option shall be granted to an Eligible Employee pursuant to the
Programme if as a result the total Option Price of the Shares
issuable on the exercise of such Option when aggregated with the
total market price at the relevant date of grant of shares still
capable of being issued on the exercise of options previously
granted to him under the Programme and Any Other Approved Scheme
would exceed (pound)30,000 (or its equivalent in any other
currency, taking as the rate of exchange the spot rate for the
currency in question on the date of grant of the Option as quoted
by any of the Company's bankers from time to time).
<PAGE>
- 8 -
5. Exercise of Options
5.1 Subject to clause 6, an Option shall only be exercised by a
Participant within the Option Period by his giving to the
Secretary of the Company at its corporate headquarters, written
notice, which shall be in such form as may be prescribed by the
Committee and shall be signed by the Participant. An Option may be
exercised in whole or in part. Such notice shall specify the
number of Shares in respect of which the Option is being exercised
and shall be accompanied by payment in full of the total Exercise
Price for the said Shares and the instrument evidencing the grant
of the relevant Option for cancellation or amendment.
5.2 Payment for the Option exercised shall be in cash, or cheque, bank
draft or money order to the order of the Company, for an amount in
United States dollars equal to the total Exercise Price for the
number of Shares in respect of which an Option is exercised.
5.3 The Committee shall transfer the appropriate number of Shares to
the Participant at their Exercise Price as soon as possible but in
any event not later than one month after the date of exercise of
the Option and shall deliver where appropriate to the Participant
a definitive share certificate in respect thereof. Any Shares
issued pursuant to this clause 5.3 shall rank pari passu in all
respects and form a uniform class with Shares already in issue.
While an Option is unexercised, a Participant shall have no voting
rights or any other rights of stockholders with respect to the
Shares which are subject to his Option. Furthermore, no cash
dividends shall accrue or be payable with respect to any such
Shares. Shares subject to unexercised Options shall have no
subscription rights.
6. Time for Exercise of Options
6.1 Subject to clauses 6.2 to 6.4 inclusive, an Option may only be
exercised during its Option Period. An Option which is not so
exercised shall lapse PROVIDED THAT, at the time of exercise of
his Option a Participant is not prohibited from doing so by the
provisions of paragraph 8 of Schedule 9.
6.2 If a Participant dies his Option may be exercised in full by his
personal representative(s) at any time before the expiry of its
Option Period and within but not later than 12 months of his
death.
Any such Option which is not so exercised shall lapse.
6.3 If a Participant ceases to be employed by the Company or a Related
Company by reason of Disability, he may exercise his Option in
full at any time before the expiry of its Option Period and within
12 months after the date of cessation of his employment. Any such
Option which is not so exercised shall lapse.
6.4 If a Participant ceases to be employed by the Company or a Related
Company by reason of retirement on or after Normal Retirement Age
or earlier retirement with consent of his employer, he may
exercise his option to the extent exercisable by him at the time
of such cessation at any time before the expiry of its Option
Period or his death if earlier.
6.5 If a Participant ceases to be employed by the Company or a Related
Company otherwise than by reason of the events specified in
clauses 6.2 to 6.4, he may exercise his option to the extent
exercisable by him at the time of such cessation at any time
before the expiry of its Option Period and within three months
after the date of cessation of his employment. Any such Option
which is not so exercised shall lapse.
6.6 For the purposes of this paragraph where a Participant's
employment is terminated without notice or on terms in lieu of
notice it shall be deemed to cease on the date on which the
termination takes effect and where the said employment is
terminated with notice it shall cease on the date when the notice
period expires.
<PAGE>
- 9 -
6.7 If a Change in Control of the Company shall occur a Participant
may exercise his Option in full at any time before the expiry of
its Option Period PROVIDED THAT this clause 6.7 shall not apply
where a Participant by agreement with an Acquiring Company,
releases his Option in consideration of the grant to him of a New
Option pursuant to clause 7 before the expiry of the appropriate
period referred to in clause 7.4.
7. Replacement of Options on a takeover or other change in Control of
the Company
7.1 Clause 7.2 below shall apply where an Acquiring Company obtains
Control of the Company as a result of making:
(a) a general offer to acquire the whole of the issued share
capital of the Company (other than that which is already
owned by it and/or by any of its subsidiaries) made on a
condition such that if it is satisfied the Acquiring
Company will have Control of the Company; or
(b) a general offer to acquire all the Shares (or such Shares
as are not already owned by the Acquiring Company and/or
by any of its subsidiaries).
7.2 A Participant may at any time within the appropriate period as
defined in clause 7.4, by agreement with the Acquiring Company,
release any of his Options (the "Old Option" for the purposes of
this clause) in consideration of the grant to him of a new option
(the "New Option" for the purposes of this clause) PROVIDED THAT
any New Option satisfies the conditions set out in clause 7.3.
7.3 The New Option must:
(a) be over shares in the Acquiring Company or a Controlling
Company which shares satisfy the conditions specified in
paragraphs 10 to 14 inclusive of Schedule 9 (references
to the term "Shares" in this Programme shall thereafter
be construed accordingly);
(b) be a right to acquire such number of shares which on
acquisition of the New Option have an aggregate market
value (determined in accordance with Part VIII of the
Taxation of Chargeable Gains Act 1992) equal to the
aggregate market value of the Shares the subject of the
Old Option immediately before its release;
(c) have an exercise price per share such that the aggregate
price payable on complete exercise of the New Option
equals the aggregate price which would have been payable
on complete exercise of the Old Option at the time of its
release.
7.4 The appropriate period referred to in clause 7.2 is the period of
six months commencing on the date when the Acquiring Company
making the offer has obtained Control of the Company and any
condition subject to which the offer is made is satisfied.
7.5 The New Option shall be exercisable in the same manner as the Old
Option and in accordance with the provisions of the Programme as
it had effect in relation to the Old Option immediately before its
release (references to the term "Option" in the Programme
thereafter being construed accordingly), and the New Option shall,
for all purposes of the Programme other than clause 7.6, be
treated as having been granted on the date when the corresponding
Old Option was granted.
7.6 With effect from the grant of a New Option hereunder clause 5,
this clause 7, and clauses 8, 9 and 11 shall, in relation to the
New Option, be construed as if references to the Company were
references to the Acquiring Company, or as the case may be, the
Controlling Company.
<PAGE>
- 10 -
8. Variations in the Share Capital of the Company
8.1 If at any time after the date of grant of an Option and before it
ceases to be exercisable, there is a variation or reorganisation
of Stock or other capital of the Company, including, without
limitation, any subdivision or consolidation of shares or stock or
other capital readjustment, stock split, payment of stock
dividend, combination of shares or recapitalisation or other
increase or reduction of the number of shares or stock
outstanding, without receiving compensation therefor in money,
services or property or otherwise with respect to its common
stock, the number of Shares available under the Programme shall be
adjusted and the number then subject to Options and the Exercise
Price therefor shall be proportionately and appropriately adjusted
all as the Committee shall deem appropriate PROVIDED THAT:
(a) the aggregate Exercise Price payable on the exercise of an
Option previously granted hereunder shall not be increased;
(b) the Option Price shall not be reduced below the nominal value
of a Share thereby;
(c) all such adjustments shall be subject to prior approval by
the Board of Inland Revenue.
8.2 All Participants shall be notified in writing of any such
adjustments as soon as practicable thereafter and the Committee
shall be entitled to call in the instruments evidencing the grant
of the Options affected by such adjustments for endorsement or
replacement, as may appear appropriate.
9. Administration of the Programme
9.1 The Programme shall be administered by the Committee.
9.2 Subject as herein otherwise expressly provided the Committee's
decision on any matter concerning the Programme shall be final and
binding.
10. Amendment of the Programme
10.1 Subject to clause 10.2, the Board or the Committee shall at any
time be entitled to amend by resolution all or any of the
provisions of the Programme provided that no amendment may
adversely affect the rights of any participant already acquire by
him under the Programme.
10.2 No amendment to the Programme shall be effective unless and until
approved by the Board of Inland Revenue and subject to clause 1.3
nothing shall be done to the Programme which would prejudice the
obtaining of Revenue Approval or cause it to be withdrawn.
11. Additional Provisions
11.1 Every Option shall be subject to the condition that no Shares
shall be issued to a Participant following the exercise of an
Option if such issuance would be contrary to any enactment or
regulation for the time being in force of the United States or of
any other country having jurisdiction in relation thereto. The
Company shall not be bound to take any action to obtain the
consent of any governmental authority to such issue or to take any
action to ensure that any such issuance shall be in accordance
with any such enactment or regulation if such action could in the
opinion of the Committee be unduly onerous.
11.2 Every Option shall be subject to the requirement that if at any
time the Board shall determine, in its discretion, that the
listing, registration or qualification of the Shares subject to an
Option upon any securities exchange or under any state or federal
law, or that the consent or approval
<PAGE>
- 11 -
of any governmental authority, is necessary or desirable as a
condition of, or in connection with, the issuance or purchase of
shares under an Option such Option may not be exercised in whole
or in part, unless such listing, registration, qualification,
consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Board. Any Option may be
exercised only in accordance with the provisions of all applicable
law.
11.3 The rights and obligations of a Participant under his terms of
employment with any member of the ACE Group shall not be affected
by his participation in the Programme and the Programme shall not
afford to a Participant any right to continued employment or any
additional right to compensation in consequence of the termination
of his employment for any reason whatsoever.
12. Termination
the Committee may at any time resolve to cease making further
grants of Options under the Programme but in such event the
subsisting rights of Participants shall not thereby be affected.
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