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 June 30, 1998
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 ($0.041666667 par value) outstanding
as of August 10, 1998 was 193,557,819.
<PAGE>
ACE LIMITED
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION
- ------------------------------
Page No.
--------
Item 1. Financial Statements:
Consolidated Balance Sheets
June 30, 1998 (Unaudited) and September 30, 1997 1
Consolidated Statements of Operations (Unaudited)
Three Months Ended June 30, 1998 and 1997
Nine Months Ended June 30, 1998 and 1997 2
Consolidated Statements of Shareholders' Equity (Unaudited)
Nine Months Ended June 30, 1998 and 1997 3
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended June 30, 1998 and 1997 4
Notes to Interim Consolidated Financial Statements
(Unaudited) 5
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 11
Part II. OTHER INFORMATION
- ---------------------------
Item 2. Change in Securities and Use of Proceeds 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 27
<PAGE>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30 September 30
1998 1997
(unaudited)
(in thousands of U.S. dollars
except share and per share data)
Assets
Investments and cash
Fixed maturities available for sale,
at fair value (amortized cost -
$4,727,538 and $3,226,511) $ 4,811,763 $ 3,290,336
Equity securities, at fair value
(cost - $242,471 and $502,481) 268,509 634,970
Short-term investments, at fair value
(amortized cost - $626,597 and $ 364,552) 626,820 364,432
Other investments, at fair value
(cost - $88,018 and $78,691) 88,181 78,691
Cash 245,139 106,336
----------- ----------
Total investments and cash 6,040,412 4,474,765
Goodwill 497,548 263,606
Premiums and insurance balances receivable 256,564 135,815
Accrued investment income 50,694 40,581
Deferred acquisition costs 37,495 27,018
Reinsurance recoverables 775,290 -
Prepaid reinsurance premiums 91,913 22,196
Deferred income taxes 69,609 -
Other assets 151,929 37,565
----------- ----------
Total assets $ 7,971,454 $ 5,001,546
========= =========
Liabilities
Unpaid losses and loss expenses $ 3,404,165 $ 1,869,995
Unearned premiums 616,157 400,689
Premiums received in advance 42,285 24,973
Reinsurance balances payable 41,696 11,245
Accounts payable and accrued liabilities 93,179 63,014
Dividend payable 16,399 12,436
Bank debt 250,000 -
---------- -----------
Total liabilities 4,463,881 2,382,352
--------- ---------
Commitments and Contingencies
Shareholders' equity
Ordinary Shares ($0.041666667 par value,
300,000,000 shares authorized;
179,199,809 and 165,879,654 shares issued
and outstanding) 7,467 6,911
Additional paid-in capital 1,688,938 1,102,824
Unearned stock grant compensation (7,161) (1,993)
Net unrealized appreciation on investments 109,243 196,194
Cumulative translation adjustments 836 855
Retained earnings 1,708,250 1,314,403
--------- ---------
Total shareholders' equity 3,507,573 2,619,194
--------- ---------
Total liabilities and shareholders' equity $ 7,971,454 $5,001,546
========= =========
See accompanying notes to interim consolidated financial statements
1
<PAGE>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended June 30, 1998 and 1997
(Unaudited)
Three Months Ended Nine Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
(in thousands of U.S. dollars, except per share data)
Revenues
Gross premiums written $ 372,465 $ 223,390 $ 785,567 $ 559,235
Reinsurance premiums ceded (91,299) (27,937) (180,775) (64,580)
-------- -------- ---------- ---------
Net premiums written 281,166 195,453 604,792 494,655
Change in unearned premiums (68,040) (31,848) (39,099) (8,009)
-------- -------- ---------- ---------
Net premiums earned 213,126 163,605 565,693 486,646
Net investment income 88,151 59,545 219,693 177,377
Net realized gains on investments 68,791 45,786 241,899 85,170
-------- --------- ---------- ---------
Total revenues 370,068 268,936 1,027,285 749,193
------- -------- --------- -------
Expenses
Losses and loss expenses 134,305 111,380 359,731 326,820
Acquisition costs 19,871 10,748 50,883 36,764
Administrative expenses 30,620 15,211 72,398 47,469
Amortization of goodwill 3,823 1,559 6,998 4,412
Loan interest expense 4,971 - 8,829 -
-------- ---------- ---------- -------
Total expenses 193,590 138,898 498,839 415,465
------- -------- ---------- ---------
Income before income taxes 176,478 130,038 528,446 333,728
Income taxes 5,015 - 7,962 -
-------- --------- --------- -------
Net income $ 171,463 $ 130,038 $ 520,484 $ 333,728
======= ========= ========= =======
Basic earnings per share $ 0.97 $ 0.78 $ 3.10 $ 1.95
==== ==== ==== ====
Diluted earnings per share $ 0.95 $ 0.77 $ 3.02 $ 1.92
==== ==== ==== ====
See accompanying notes to interim consolidated financial statements
2
<PAGE>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Nine Months Ended June 30, 1998 and 1997
(Unaudited)
June 30 June 30
1998 1997
------- -------
(in thousands of U.S. dollars)
Ordinary Shares
Balance - beginning of period $ 6,911 $ 7,271
Ordinary Shares issued 688 -
Exercise of stock options 14 8
Issued under Employee Stock Purchase Plan 1 1
Issued under Stock Appreciation Right
Replacement Plan - 8
Repurchase of shares (147) (378)
--------- --------
Balance - end of period 7,467 6,910
--------- --------
Additional paid-in capital
Balance - beginning of period 1,102,824 1,156,194
Ordinary Shares issued 605,211 -
Exercise of options for Ordinary Shares 3,032 1,984
Issued under Employee Stock Purchase Plan 954 228
Issued under Stock Appreciation Right
Replacement Plan - 3,919
Cancellation of awards - (87)
Repurchase of Ordinary Shares (23,083) (59,612)
---------- -----------
Balance - end of period 1,688,938 1,102,626
--------- ---------
Unearned stock grant compensation
Balance - beginning of period (1,993) (1,299)
Stock grants awarded (8,113) (3,225)
Stock grants forfeited - 79
Amortization 2,945 1,789
------------- ----------
Balance - end of period (7,161) (2,656)
------------ ------------
Net unrealized appreciation on investments
Balance - beginning of period 196,194 61,281
Net appreciation (depreciation) during period (85,545) 73,459
Change in deferred income taxes (1,406) -
--------- --------
Balance - end of period 109,243 134,740
---------- ----------
Cumulative translation adjustments
Balance - beginning of period 855 131
Net adjustment for period (19) 538
--------- ----------
Balance - end of period 836 669
--------- ----------
Retained earnings
Balance - beginning of period 1,314,403 1,020,700
Net income 520,484 333,728
Dividends declared (42,223) (32,828)
Repurchase of Ordinary Shares (84,414) (122,659)
----------- ----------
Balance - end of period 1,708,250 1,198,941
--------- ---------
Total shareholders' equity $ 3,507,573 $ 2,441,230
========= =========
See accompanying notes to interim consolidated financial statements
3
<PAGE>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended June 30, 1998 and 1997
(Unaudited)
June 30 June 30
1998 1997
-------- --------
(in thousands of U.S. dollars)
Cash flows from operating activities
Net income $ 520,484 $ 333,728
Adjustments to reconcile net income to net
cash provided by Operating activities
Unearned premiums 47,945 10,181
Unpaid losses and loss expenses, net
of reinsurance recoverables 48,276 85,124
Prepaid reinsurance premiums (25,182) (1,106)
Net realized gains on investments (241,899) (85,170)
Amortization of premium/discounts (10,316) (4,333)
Amortization of goodwill 6,998 4,412
Deferred acquisition costs 6,752 5,430
Premiums and insurance balances receivable (35,597) (79,304)
Premiums received in advance 17,312 8,381
Reinsurance balances payable 27,951 3,739
Accounts payable and accrued liabilities (126,749) (25,381)
Other (48,050) 1,690
---------- ----------
Net cash flows from operating activities 187,925 257,391
----------- --------
Cash flows from investing activities
Purchases of fixed maturities (5,480,464) (4,763,015)
Purchases of equity securities (214,624) (494,782)
Sales of fixed maturities 5,122,934 4,955,457
Sales of equity securities 621,396 295,199
Maturities of fixed maturities 81,811 5,000
Net realized gains on financial futures
contracts 63,595 46,204
Other investments 9,992 (20,091)
Acquisition of subsidiaries, net of cash
acquired (967,758) (30,416)
---------- ----------
Net cash used for investing activities (763,118) (6,444)
----------- --------
Cash flows from financing activities
Repurchase of Ordinary Shares (107,644) (182,649)
Dividends paid (38,260) (30,864)
Repayment of bank debt (385,000) -
Net proceeds from issuance of Ordinary Shares 605,899 -
Proceeds from bank debt 635,000 -
Proceeds from exercise of options
for Ordinary Shares 3,046 1,992
Proceeds from shares issued under Employee
Stock Purchase Plan 955 229
Proceeds from shares issued under Stock
Appreciation Right Replacement Plan - 3,927
--------- ----------
Net cash from (used for) financing activities 713,996 (207,365)
------------ ----------
Net increase in cash 138,803 43,582
Cash - beginning of period 106,336 53,374
---------- -----------
Cash - end of period $ 245,139 $ 96,956
============ ===========
See accompanying notes to interim consolidated financial statements
4
<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 ACE USA, Inc.
(formerly Westchester Specialty Group, Inc.) ("ACE USA"), through its
newly-created U.S. holding company, ACE US Holdings, Inc ("ACE US"). ACE
USA, 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 ACE USA 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 ACE USA with respect to its 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 total purchase price is allocated to the
acquired assets and liabilities based on their fair values and accordingly,
the consolidated financial statements of the company include the results of
ACE US and its subsidiaries from January 2, 1998, the date of acquisition.
On April 1, 1998, the Company completed the acquistion of CAT Limited, a
privately held, Bermuda-based property catastrophe reinsurer, for an
aggregate cash consideration of approximately $641 million. The acquisition
was financed with $385 million of short-term bank debt (see note 7 - Credit
Facilities) and the remainder from available cash. The acquisition was
recorded using the purchase method of accounting. The total purchase price
is allocated to the acquired assets and liabilities based on their fair
values and accordingly, the consolidated financial statements of the
company include the results of CAT Limited from April 1, 1998, the date of
acquisition. Approximately $223 million of goodwill was generated as a
result of the acquisition.
On June 16, 1998, the Company announced that it had signed a definitive
agreement for the acquisition of Tarquin Limited ("Tarquin") by the
Company. Tarquin is a UK-based holding company which owns Lloyd's managing
agency Charman Underwriting Agencies Ltd. ("Charman") and Tarquin
Underwriting Limited, its corporate capital provider. The Charman managed
syndicates, 488 and 2488, are leading international underwriters of
short-tail marine, aviation, political risk and specialty property-casualty
insurance and reinsurance. On July 9, 1998, the Company announced that it
had completed the acquisition and had issued approximately 14.3 million
Ordinary Shares to the shareholders of Tarquin. The acquisition will be
accounted for on a pooling-of-interest basis.
At June 30, 1998 approximately 64 percent of the Company's written premiums
came from North America with approximately 12 percent coming from the
United Kingdom and continental Europe and approximately 24 percent from
other countries.
5
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
2. Significant Accounting Policies
a) Earnings per share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS
128 replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Basic earnings per share
are calculated utilising weighted average shares outstanding and exclude
any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share include the effect of dilutive securities
outstanding. All earnings per share amounts for all periods presented,
where necessary, have been restated to conform to the SFAS 128
requirements.
b) Reinsurance
Reinsurance recoverables include the balances due from reinsurance
companies for paid and unpaid losses and loss expenses that will be
recovered from reinsurers, based on reinsurance policies in force. A
reserve for uncollectible reinsurance has been determined based upon a
review of the financial condition of the reinsurers and an assessment of
other available information.
c) Income Taxes
Income taxes have been provided in accordance with the provisions of SFAS
No. 109, "Accounting for Income Taxes" on those operations which are
subject to income taxes (see - Note 9). Deferred tax assets and liabilities
result from temporary differences between the amounts recorded in the
consolidated financial statements and the tax bases of the Company's assets
and liabilities. Such temporary differences are primarily due to the tax
basis discount on unpaid losses, adjustment for unearned premiums,
uncollectible reinsurance, and tax benefits of net operating loss
carryforwards. Additionally, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the income in the
period that includes the enactment date. A valuation allowance against
deferred tax assets is recorded if it is more likely than not, that all or
some portion of the benefits related to deferred tax assets will not be
realized.
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, although cases are in the process of
being transferred back to federal courts or remanded in state courts.
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.
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.
6
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
3. Commitments and Contingencies (cont'd.)
On December 22, 1995, the multidistrict litigation judge approved the
Settlement and the materials for giving notice to claimants. 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 April 29, 1998 approximately $757 million had been
distributed under the Settlement to implant recipients of the three major
defendants. Distribution has begun on certain additional payments to
claimants relating to other implants since all appeals on the Settlement
have been dismissed. In addition, the multidistrict litigation judge has
approved the detailed terms of a settlement program being offered by the
three major defendants to eligible foreign claimants. 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.
The Company has made payments to date of approximately $370 million with
respect to breast implant claims, which include a payment of approximately
$100 million made in July 1998. These payments were included in previous
reserves and are consistent with the Company's belief that its reserves are
adequate. 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 June 30, 1998.
4. Shares Issued and Outstanding
The Board of Directors had 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 three months
ended June 30, 1998, the Company did not repurchase any shares under the
share repurchase program. During the nine month period ended June 30, 1998,
the Company repurchased 3,521,100 Ordinary Shares under the share
repurchase program for an aggregate cost of $107.6 million. On July 6,
1998 the Executive Committee of the Board of Directors rescinded all
existing authorizations for the repurchase of the Company's Ordinary Shares.
On March 2, 1998 the Company effected a three for one split of the
Company's Ordinary Shares.
On April 14, 1998, the Company sold 16.5 million Ordinary Shares for net
proceeds of approximately $606 million (For further discussions, see
"Management's Discussion and Analysis - Liquidity and Capital Resources").
5. Restricted Stock Awards
Under the terms of the 1995 Long-Term Incentive Plan 264,000 restricted
Ordinary Shares were awarded during the nine months ended June 30, 1998, to
officers of the Company and its subsidiaries. These shares vest at various
dates through November 2002. In addition, during the period, 14,952
restricted Ordinary Shares were awarded to outside directors under the
terms of the 1995 Outside Directors Plan. These shares vest in February 1999.
7
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
6. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share. All share and per share amounts have been restated to
reflect the three for one split of the Company's Ordinary Shares effected
on March 2, 1998.
- -------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
(In thousands of U.S. dollars, except share
and per share data)
Numerator:
Net Income $ 171,463 $ 130,038 $ 520,484 $ 333,728
========= ========= ========= ==========
Denominator:
Denominator for basic
earnings per share -
Weighted average shares
outstanding 176,425,058 167,084,544 167,985,491 171,125,475
Effect of dilutive securities 4,580,092 2,474,979 4,181,646 2,308,623
----------- ----------- ----------- -----------
Denominator for diluted
earnings per share
Adjusted weighted average
shares outstanding and
assumed conversions 181,005,150 169,559,523 172,167,137 173,434,098
=========== =========== =========== ===========
Basic earnings per share $ 0.97 $ 0.78 $ 3.10 $ 1.95
====== ====== ====== ======
Diluted earnings per share $ 0.95 $ 0.77 $ 3.02 $ 1.92
====== ====== ====== ======
- --------------------------------------------------------------------------------
7. Credit Facilities
In 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 of these credit facilities. The new facilities
provide:
o 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 five year
revolving credit facility has a $50 million LOC sublimit. As discussed
in note 1, the Company drew down on this facility to finance the
acquisition of CAT Limited on April 1, 1998. The debt was subsequently
repaid on April 17, 1998 from a portion of the proceeds from the sale
of 16.5 million new Ordinary Shares of the Company. The revolving
credit facilities require that the Company maintain certain covenants
which include a minimum consolidated tangible net worth covenant.
o Five year LOC's totalling approximately (pound)154 million ($257 million)
which are being used to fulfill the requirements of Lloyd's to
support underwriting capacity on Lloyd's syndicates in which
the Company participates. The LOC facility requires that A.C.E.
Insurance Company, Ltd. maintain certain covenants which include a
minimum consolidated tangible net worth covenant.
o A $250 million seven year Amortizing Term Loan Facility which was used
on January 2, 1998 to partially finance the acquisition of ACE USA.
The interest rate on the term loan is LIBOR plus an applicable spread.
As of June 30, 1998, $250 million was outstanding under this facility.
The interest rate for the period April 2, 1998 through July 2, 1998
was 6.25%. The term loan facility requires that the Company and ACE US
Holdings, Inc. maintain certain covenants. Under these covenants the
Company is required to maintain a minimum consolidated tangible net
worth.
8
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
8. Reinsurance
The Company purchases reinsurance to manage various exposures including
catastrophic risks. Although reinsurance agreements contractually obligate
the Company's reinsurers to reimburse it for the agreed upon portion of its
gross paid losses, they do not discharge the primary liability of the
Company. Net premiums written and net premiums earned, reported in the
statements of operations, are net of reinsurance. Direct, assumed and ceded
amounts for these items for the three months and nine months ended June 30,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
(in thousands of U.S. Dollars) (in thousands of U.S. Dollars)
<S> <C> <C> <C> <C>
Premiums written
Direct $ 150,094 $ 200,223 $ 428,833 $ 457,618
Assumed 222,371 23,167 356,734 101,617
Ceded (91,299) (27,937) (180,775) (64,580)
-------- -------- -------- --------
Net premiums written $ 281,166 $ 195,453 $ 604,792 $ 494,655
========== =========== ========= ========
Premiums earned
Direct $ 157,333 $ 153,013 $ 447,034 $ 432,253
Assumed 122,036 34,315 273,121 108,424
Ceded (66,243) (23,723) (154,462) (54,031)
-------- -------- -------- --------
Net premiums earned $ 213,126 $ 163,605 $ 565,693 $ 486,646
========= ========== ========== ==========
- --------------------------------------------------------------------------------
</TABLE>
The Company's provision for reinsurance recoverables at June 30, 1998 and
September 30, 1997 are as follows:
- --------------------------------------------------------------------------------
June 30 September 30
1998 1997
(In thousands of U.S. dollars)
Reinsurance recoverables on paid losses
and loss expenses $ 25,563 $ -
Reinsurance recoverables on unpaid losses
and loss expenses 833,183 -
Provision for uncollectible balances on
unpaid losses and loss expenses (83,456) -
------- -----
Total Reinsurance recoverables $775,290 $ -
======== ==========
- --------------------------------------------------------------------------------
9. Taxation
Under current Cayman Islands law, the Company is not required to pay any
taxes on its income or capital gains. The Company has received an
undertaking that, in the event of any taxes being imposed, the Company will
be exempted from taxation in the Cayman Islands until the year 2013. Under
current Bermuda law, the Company and its Bermuda subsidiaries are not
required to pay any taxes on their income or capital gains. The Company and
its Bermuda subsidiaries will be exempt from taxation in Bermuda
until March 2016.
Income from the Company's operations at Lloyd's are subject to United
Kingdom corporation taxes. ACE USA is subject to income taxes imposed by
U.S. authorities.
9
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
9. Taxation (cont'd.)
The provision for income taxes detailed below represents the Company's
estimate of tax liability in respect of the Company's operations at Lloyd's
and at ACE USA and is calculated at a rate equal to the statutory income
tax rate.
The income tax provision for the three months and nine months ended June
30, 1998 and 1997 is as follows:
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
Current tax expense $ (86) $ - $ 779 $ -
Deferred tax expense 5,101 - 7,183 -
-------- ---------- ------- -----
Provision for income taxes $ 5,015 $ - $ 7,962 $ -
===== ===== ===== =====
- --------------------------------------------------------------------------------
The components of the net deferred tax asset as of June 30, 1998 and
September 30, 1997 is as follows:
- --------------------------------------------------------------------------------
June 30 September 30
1998 1997
---- ----
(In thousands of U.S. dollars)
Deferred tax assets
Loss reserve discount $ 55,569 $ -
Unearned premium adjustment 3,369 -
Uncollectable reinsurance 2,786 -
Other 18,824 -
------ -----
Total deferred tax assets 80,548 -
------ -----
Deferred tax liabilities
Deferred policy acquisition costs 3,107 -
Other 7,832 -
------- -----
Total deferred tax liabilities 10,939 -
------ -----
Net deferred tax asset $ 69,609 $ -
========== ========
- --------------------------------------------------------------------------------
10. 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 and nine months ended June 30, 1998. 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"), Tempest Reinsurance
Company Limited ("Tempest") and CAT Limited ("CAT") provides insurance and
reinsurance for a diverse group of international clients. Through its U.S.
based subsidiary, ACE USA, Inc. (formerly Westchester Speciality Group,
Inc.) ("ACE USA"), the Company provides commercial and umbrella coverages
to a broad range of clients in the United States. In addition, the Company
provides funds at Lloyd's to support underwriting by Lloyd's 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. The operations of the Company
in the Lloyd's market is collectively referred to as "ACE London at Lloyd's".
The Lloyd's syndicates managed by these agencies in which the Company
participates, underwrite aviation, marine and non-marine risks. For the
1996, 1997 and 1998 years of account, the Company, through corporate
subsidiaries, participates 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. 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 ACE USA,
through its newly-created U.S. holding company, ACE US Holdings, Inc. ("ACE
US"). Under the terms of the acquisition agreement, the Company purchased
all of the outstanding capital stock of ACE USA for aggregate cash
consideration of $338 million. In connection with the acquisition, National
Indemnity, a subsidiary of Berkshire Hathaway, provided $750 million (75
percent quota share of $1 billion) of reinsurance protection to ACE USA
with respect to their loss reserves for the 1996 and prior accident years
(see "Liquidity and Capital Resources"). ACE USA, through its insurance
subsidiaries, provides specialty commercial property and umbrella liability
coverages in the U.S. During the quarter ended June 30, 1998 four new
divisions, warranty, E&O, directors and officers and a captive management
reinsurance facility, were established at ACE USA.
On March 11, 1998, the Company announced the formation of a joint venture,
ACE Capital Re Limited, with Capital Re Corporation ("Capital Re"). ACE
Capital Re Limited, a Bermuda-domiciled professional insurance company,
will write both traditional and custom-designed programs covering financial
guaranty, mortgage guaranty and a broad range of financial risks.
Operations will be underwritten and managed in Bermuda by a joint venture
managing agency, ACE Capital Re Managers Ltd. The Company and Capital Re
each have a 50 percent economic interest in ACE Capital Re Limited and ACE
Capital Re Managers Ltd.
On April 1, 1998 the Company completed the acquisition of CAT Limited
("CAT"), a privately held, Bermuda-based property catastrophe reinsurer.
Under the terms of the acquisition agreement, the Company purchased all of
the outstanding capital stock of CAT, for cash consideration of
approximately $641 million. CAT is being integrated with ACE's existing
property catastrophe subsidiary, Tempest and the combined property
catastrophe reinsurance operations will operate under the Tempest name.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
---------------------------------------------------------
General (continued)
On June 16, 1998, the Company announced that it had signed a definitive
agreement for the acquisition of Tarquin Limited ("Tarquin") by the
Company. Tarquin is a UK-based holding company which owns Lloyd's managing
agency Charman Underwriting Agencies Ltd. ("Charman") and Tarquin
Underwriting Limited, its corporate capital provider. The Charman managed
syndicates, 488 and 2488, are leading international underwriters of
short-tail marine, aviation, political risk and specialty property-casualty
insurance and reinsurance. On July 9, 1998, the Company announced that it
had completed the acquisition and issued approximately 14.3 million
Ordinary Shares to the shareholders of Tarquin.
The Company will continue to evaluate potential new product lines
and other opportunities in the insurance and reinsurance markets. In
addition, the Company regularly evaluates potential acquisitions of other
companies and businesses and holds discussions with potential acquisition
candidates. As a general rule, the Company publicly announces such
acquisitions only after a definitive agreement has been reached.
Safe Harbor Disclosure
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. This Form 10-Q or any other written
or oral statements made by or on behalf of the Company may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are subject to certain uncertainties and other factors that
could cause actual results to differ materially from such statements. These
uncertainties and other factors (which are described in more detail
elsewhere in documents filed by the Company with the Securities and
Exchange Commission) include, but are not limited to, (i) uncertainties
relating to government and regulatory policies (such as subjecting the
Company to insurance regulation or taxation in additional jurisdictions),
(ii) the occurrence of catastrophic events with a frequency or severity
exceeding the Company's estimates, (iii) the legal environment, (iv) the
uncertainties of the reserving process, (v) loss of the services of any of
the Company's executive officers, (vi) changing rates of inflation and
other economic conditions, (vii) losses due to foreign currency exchange
rate fluctuations, (viii) ability to collect reinsurance recoverables and
(ix) the competitive environment in which the Company operates. The words
"believe", "anticipate", "project", "plan", "expect", "intend", "will
likely result" or "will continue" and similar expressions identify
forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information,
future events or otherwise.
Results of Operations - Three Months ended June 30, 1998
- --------------------------------------------------------------------------------
Net Income
Three Months ended % Change
June 30 from
1998 1997 Prior year
------ ------ ----------
(in millions)
Income excluding net realized
gains on investments $ 102.7 $ 84.2 21.9%
Net realized gains on investments 68.8 45.8 N.M.
---- ----- -------
Net income $ 171.5 $ 130.0 N.M.
===== ===== =======
(N.M. - Not meaningful)
- --------------------------------------------------------------------------------
Income excluding net realized gains on investments for the third quarter of
fiscal 1998 increased by $18.5 million or 21.9 percent, compared with the
corresponding fiscal 1997 quarter. This increase is predominantly the
result of the inclusion of the results of ACE USA following its acquisition
on January 2, 1998 and the inclusion of the results of CAT following its
acquisition on April 1, 1998. Net income for the current quarter benefited
from net realized gains on investments of $68.8 million in the quarter
produced primarily by realized gains in the equity securities portfolio.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
---------------------------------------------------------
Results of Operations - Three Months ended June 30, 1998 (continued)
- --------------------------------------------------------------------------------
Premiums
Three Months ended % Change
June 30 from
1998 1997 Prior year
---- ---- -----------
(in millions)
Gross premiums written:
ACE Insurance (including CODA) $ 194.1 $ 169.1 14.8%
Lloyd's syndicates 85.1 33.9 N.M.
Tempest (including CAT) 39.3 20.4 92.6
ACE USA 54.0 - N.M.
---- -------
$ 372.5 $ 223.4 66.7%
===== =====
Net premiums written:
ACE Insurance (including CODA) $ 154.2 $ 154.5 (0.2)%
Lloyd's syndicates 59.6 25.0 N.M.
Tempest (including CAT) 38.9 16.0 143.1
ACE USA 28.5 - N.M.
---- -------
$ 281.2 $ 195.5 43.9%
===== ======
Net premiums earned:
ACE Insurance (including CODA) $ 99.4 $ 124.9 (20.4)%
Lloyd's syndicates 34.2 7.8 N.M.
Tempest (including CAT) 55.6 30.9 80.0
ACE USA 23.9 - N.M.
---- -------
$ 213.1 $ 163.6 30.3%
===== ======
(N.M. - Not meaningful)
- --------------------------------------------------------------------------------
Gross premiums written increased by $149.1 million to $372.5 million in the
quarter ended June 30, 1998 compared with $223.4 million in the quarter
ended June 30, 1997. This increase was the result of contributions from ACE
USA and CAT during the quarter. ACE USA and CAT were both acquired during
the current fiscal year. There was an increase of $51.2 million in gross
premiums written with respect to the Company's participation in the Lloyd's
syndicates managed by ACE London at Lloyd's during the quarter. The growth
in ACE London premiums is a result of the Company's increased participation
in the syndicates under management. The Company continues to face
competitive pressures in most of the markets in which it operates. Gross
premiums written by ACE Insurance increased by $25.0 million compared to
the comparable quarter last year. The growth in gross premiums written in
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
---------------------------------------------------------
Results of Operations - Three Months ended June 30, 1998 (continued)
ACE Insurance was mainly a result of new business written by financial
lines, although the aviation line and the joint ventures in which ACE
Insurance participates also contributed to the increase. This increase was
offset by declines in the excess liability, satellite and directors and
officers lines of business. The decline in excess liability premiums is the
result of non-renewed accounts, premium adjustments and pricing changes
resulting primarily from increases in attachment points and decreases in
limits provided. The increases in attachment points and decreases in
limits, while reducing premium levels, also reduce the Company's exposure
and improve its risk profile in the excess liability area. Satellite gross
written premiums decreased due to lower aggregate launch exposures which
were partially offset by new in-orbit business. The decline in directors
and officers gross premiums written was the result of deposit premium
adjustments during the quarter, additionally ACE Insurance wrote a large
non-recurring multi-year policy in the third quarter of 1997. Market
conditions remain very competitive in the property catastrophe reinsurance
business as rates continue to decline in the absence of major loss
activity. The combined Tempest and CAT operations recorded gross premiums
written of $39.3 million compared to $20.4 million for Tempest alone in the
third quarter of 1997. However, both companies on an individual basis
showed declines in gross written premiums compared to the 1997 quarter.
Net premiums written increased by $85.7 million or 43.9 percent to $281.2
million compared to $195.5 million in the third quarter of 1997. This
increase, as with the increase in gross written premiums, was the result of
increases in the Company's participation in the Lloyd's syndicates managed
by ACE London at Lloyd's as well as the contributions of ACE USA and CAT in
the quarter. Net premiums written in ACE Insurance were flat compared to
the third quarter of fiscal 1997. Financial lines experienced growth this
quarter as a result of new business. However, this growth was offset by
declines in the excess liability, satellite and directors and officers
lines of business as well as the purchase of additional reinsurance across
several lines of business.
Net premiums earned increased by $49.5 million or 30.3 percent to $213.1
million compared to $163.6 million last year. The increase in net premiums
earned resulted from the Company's increased participation in the Lloyds
syndicates as well as contributions from ACE USA and CAT. These three areas
contributed an additional $75.0 million in net premiums earned for the
current quarter compared to the 1997 quarter. This increase was offset
somewhat by a decline in net earned premiums in ACE Insurance,
predominantly in the excess liability and satellite lines.
- --------------------------------------------------------------------------------
Net Investment Income
Three Months ended % Change
June 30 from
1998 1997 Prior year
---- ---- ----------
(in millions)
Net investment income $ 88.2 $ 59.5 48.2%
==== ==== =====
- --------------------------------------------------------------------------------
Net investment income increased to $88.2 million in the quarter compared
to $59.5 million in the quarter ended June 30, 1997. This increase is
primarily due to a larger investable asset base. The larger investable
asset base is primarily due to the consolidation of the ACE USA and CAT
portfolios, funds received from the April 1998 sale of ordinary shares of
the Company, positive cash flows from operations and the reinvestment of
funds generated by the portfolio. The average yield on the investment
portfolio remained relatively unchanged in the quarter ended June 30, 1998
compared to the prior year.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
---------------------------------------------------------
Results of Operations - Three Months ended June 30, 1998 (continued)
- --------------------------------------------------------------------------------
Net Realized Gains (Losses) on Investments
Three Months ended
June 30
1998 1997
---- ----
(in millions)
Fixed maturities and short-term investments $ 1.5 $ 8.1
Equity securities 74.5 10.7
Financial futures and option contracts 4.4 37.0
Currency (11.6) (10.0)
---- ----
$ 68.8 $ 45.8
==== =====
- --------------------------------------------------------------------------------
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.
The sales proceeds for fixed maturity securities were generally higher than
their amortized cost during the quarter which resulted in net realized
gains of $1.5 million being recognized on fixed maturities and short-term
investments.
The sale of a portion of the non-U.S. dollar equity securities held during
the quarter, contributed significantly to net realized gains on sales of
equity securities of $74.5 million in the third quarter of fiscal 1998,
compared with gains of $10.7 million in the third quarter of fiscal 1997.
Net realized gains on financial futures and option contracts in the third
quarter of 1998 were generated primarily by gains recognized on futures
contracts used by certain of the Company's external managers of fixed
income securities. Net realized gains on financial futures and option
contracts of $37.0 million recorded in the third quarter of fiscal 1997
were primarily generated by the futures contracts used by certain of the
Company's external managers of fixed income securities to manage duration
and yield curve exposures.
- --------------------------------------------------------------------------------
Combined Ratio
Three Months ended
June 30
1998 1997
---- ----
(in millions)
Loss and loss expense ratio 63.0% 68.1%
Underwriting and administrative expense ratio 23.7 15.8
----- -----
Combined ratio 86.7% 83.9%
==== ====
- --------------------------------------------------------------------------------
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of Operations - Three Months ended June 30, 1998 (continued)
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 June 30, 1998. 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 June 30, 1998, the loss and loss expense ratio
decreased to 63.0 percent from 68.1 percent for the third quarter of fiscal
1997. The decrease is the result of the changing mix of premiums written
and earned by the Company, highlighted by the inclusion of ACE USA and CAT
this quarter whose businesses are predominantly in the property market.
Acquistion cost increased by $9.1 million during the period compared to the
three months ended June 30, 1997 mainly due to the increase in earned premiums
and acqusition costs from the Lloyd's participation in the quarter.
Administrative expenses increased by $15.4 million in the current quarter
compared to the third quarter of fiscal 1997. This was due primarily to the
costs associated with our increased participation in the Lloyd's market and the
inclusion of administrative costs from ACE USA. The underwriting and
administrative expense ratio increased compared to the previous year primarily
because the underwriting and administrative expense ratios generated by
ACE USA and ACE UK are generally higher than the traditional book of business.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of operations - Nine Months ended June 30, 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Net Income
Nine Months ended % Change
June 30 from
1998 1997 Prior year
---- ---- ----------
(in millions)
<S> <C> <C> <C>
Income excluding net realized gains
on investments $ 278.6 $ 248.5 12.1%
Net realized gains on investments 241.9 85.2 N.M.
----- -----
Net income $ 520.5 $ 333.7 N.M.
===== =====
(N.M. - not meaningful)
- ---------------------------------------------------------------------------------------------
</TABLE>
Income excluding net realized gains on investments for the nine months
ended June 30, 1998 increased by 12.1 percent compared with the
corresponding period of fiscal 1997. This increase is predominantly the
result of the inclusion of the results of ACE USA and CAT following their
acquisitions on January 2, 1998 and April 1, 1998, respectively. Net income
for the period also benefited from positive movements in the investment
markets, the liquidation of two domestic stock portfolios during the second
quarter and the sale of a portion of the non-US dollar equity securites
during the third quarter which contributed to net realized gains on
investments of $241.9 million for the nine month period.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
Premiums
Nine Months ended % Change
June 30 from
1998 1997 Prior year
---- ---- ----------
(in millions)
<S> <C> <C> <C>
Gross premiums written:
ACE Insurance (including CODA) $ 445.0 $ 420.2 5.9%
Lloyd's syndicates 156.7 44.4 N.M.
Tempest (including CAT) 91.2 94.6 (3.6)
ACE USA 92.7 - N.M.
----- -----
$ 785.6 $ 559.2 40.5%
===== =====
Net premiums written:
ACE Insurance (including CODA) $ 357.8 $ 373.0 (4.2)%
Lloyd's syndicates 111.4 31.5 N.M.
Tempest (including CAT) 86.5 90.2 (4.2)%
ACE USA 49.1 - N.M.
----- -----
$ 604.8 $ 494.7 22.2%
===== =====
Net premiums earned:
ACE Insurance (including CODA) $ 331.1 $ 374.0 (11.5)%
Lloyd's syndicates 80.8 14.7 N.M.
Tempest (including CAT) 105.1 97.9 7.4
ACE USA 48.7 - N.M.
----- -----
$ 565.7 $ 486.6 16.2%
===== =====
(N.M. - Not meaningful)
- ---------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of operations - Nine Months ended June 30, 1998 (continued)
Gross premiums written increased by $226.4 million or 40.5 percent to
$785.6 million for the nine months ended June 30, 1998 compared to gross
premiums written of $559.2 million for the nine months ended June 30, 1997.
This increase was the result of contributions from all business segments
including ACE USA and CAT which contributed $92.7 million and $14.4
million, respectively in the period. ACE USA and CAT were both acquired
during the current fiscal year. There was also an increase of $112.3
million in gross premiums written with respect to the Company's
participation in the Lloyd's syndicates managed by ACE London at Lloyd's
during the period. The growth in ACE London premiums is a result of the
Company's increased participation in the syndicates under management. Gross
written premiums in ACE Insurance also increased by $24.8 million,
primarily as a result of new business in financial lines, increased
activity in the satellite line during 1998 and contributions from the joint
ventures in which ACE Insurance participates. However, the Company
continues to face competitive pressures in most of the markets in which it
operates. The increase in ACE Insurance premiums was somewhat offset by
continuing declines in the excess liability and directors and officers
lines of business. The decline in excess liability premiums is mainly the
result of the non-renewal of several accounts due to soft market conditions
and reduced premiums and pricing changes. The increases in attachment
points and decreases in limits provided has resulted in decreased premiums
but also a reduction in the Company's exposure and an improved risk
profile. The decline in the directors and officers gross premiums is due
primarily to reduced premiums as a result of the continuing market
pressures in this market. Tempest and CAT experienced continuing price
pressures during the nine month period (although CAT was not acquired until
April 1, 1998), including their January 1998 renewals which is their
largest renewal period. Tempest did not renew several of its accounts due
to inadequate pricing. Both Tempest and CAT show declines in premiums over
the comparable period last year. Both companies are also experiencing rate
declines of approximately 20 percent with their July 1998 renewals.
Net premiums written increased by $110.1 million to $604.8 million in the
nine month period ended June 30, 1998 compared to $494.7 million for the
nine month period ended June 30, 1997. This increase was the result of a
siginificant increase in the Company's participation in the Lloyd's
syndicates managed by ACE London at Lloyd's and the contribution of ACE USA
and CAT in the period. Net premiums written in ACE Insurance declined by
$15.2 million in the period compared to the same period last year. This
decline is primarily the result of continuing declines in directors and
officers liability and excess liability premiums, as described above in the
discussion of gross written premiums, offset somewhat by growth in net
premiums written from the satellite and financial lines divisions and in
the joint ventures business written by ACE Insurance. Net premiums written
were also affected by an increase in the use of reinsurance during the
period, predominantly in ACE Insurance. In particular, during the second
quarter, the excess liability division of ACE Insurance purchased a 25
percent quota share reinsurance treaty and also put in place an excess of
loss treaty that limits the retained risk on a single occurrence to $100
million. In addition, the satellite division of ACE Insurance and Tempest
purchased additional reinsurance in the second quarter to cover
catastrophic events.
Net premiums earned increased by $79.1 million to $565.7 million compared
to $486.6 million last year, an increase of 16.2 percent. This increase was
a result of the contribution of ACE USA in the second quarter and the
contribution of CAT Limited in the third quarter as well as a $66.1 million
increase in net premiums earned from the Company's Lloyd's syndicate
participation. This increase was partially offset by declines in earned
premiums in ACE Insurance.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of operations - Nine Months ended June 30, 1998 (continued)
- -------------------------------------------------------------------------------
Net Investment Income
Nine Months ended % Change
June 30 from
1998 1997 Prior year
---- ---- ----------
(in millions)
Net investment income $ 219.7 $ 177.4 23.9%
===== ===== ====
- -------------------------------------------------------------------------------
Net investment income increased 23.9 percent to $219.7 million, an increase
of $42.3 million, as compared with net investment income of $177.4 million
in the similar period of fiscal 1997. This is as a result of an increase in
the asset base due to the inclusion of the ACE USA and CAT portfolio's in
the current period as well as positive cash flows from operations.
- -------------------------------------------------------------------------------
Net Realized Gains(Losses) on Investments
Nine Months ended
June 30
1998 1997
---- ----
(in millions)
Fixed maturities and short-term investments $ 35.0 $ 40.4
Equity securities 169.3 20.2
Financial futures and option contracts 63.6 46.2
Currency (26.0) (21.6)
------ ------
$ 241.9 $ 85.2
===== ====
- -------------------------------------------------------------------------------
The Company's investment strategy takes a long-term view and the portfolio
is actively managed to maximize total return within certain specific
guidelines which minimize risk. The portfolio is reported at fair value.
The effect of market movements on the investment portfolio will directly
impact net realized gains (losses) on investments when securities are sold.
Changes in unrealized gains and losses, which result from the revaluation
of securities held, are reported as a separate component of shareholders'
equity.
The Company uses foreign currency forward and option contracts to minimize
the effect of fluctuating foreign currencies on the value of non-U.S.
dollar holdings. The contracts used are not designated as specific hedges
and therefore, realized and unrealized gains and losses recognized on these
contracts are recorded as a component of net realized gains (losses) in the
period in which the fluctuations occur, together with net foreign currency
gains (losses) recognized when non-U.S. dollar securities are sold.
Sales proceeds for fixed maturity securities were generally higher than
their amortized cost during most of the period which resulted in net
realized gains of $35.0 million being recognized on fixed maturities and
short-term investments compared to net realized gains of $40.4 million for
the same period last year.
The liquidation of two domestic stock portfolios and the sale of a portion
of the non-U.S. dollar equity securities held during the period,
contributed significantly to net realized gains on sales of equity
securities of $169.3 million in the first nine months of fiscal 1998,
compared with gains of $20.2 million in the first nine months of 1997.
Proceeds from the liquidated stock portfolios were placed in synthetic
equity funds, increasing the Company's use of equity index futures
contracts during the period. Increases in the equity stock indices and the
use of equity index futures contracts during the period, generated net
realized gains of $48.4 million on the financial futures and option
contracts. The remainder of the net realized gains on financial futures and
option contracts during the period, arose from gains recognized on futures
contracts used by certain of the Company's external managers of fixed
income securities.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Results of operations - Nine Months ended June 30, 1998 (continued)
- -------------------------------------------------------------------------------
Combined Ratio
Nine Months ended
June 30
1998 1997
---- ----
(in millions)
Loss and loss expense ratio 63.6% 67.2%
Underwriting and administrative expense ratio 21.8 17.3
---- ----
Combined Ratio 85.4% 84.5
===== =====
- -------------------------------------------------------------------------------
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 June 30, 1998. 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 nine months ended June 30, 1998, the loss and loss expense ratio
was 63.6 percent compared with 67.2 percent for the nine months ended June
30, 1997. The decrease is the result of the changing mix of premiums
written and earned by the Company, highlighted by the inclusion of ACE USA
and CAT in this fiscal year whose businesses are predominantly in the
property market.
Acquisition costs increased by $14.1 million during the period, due
primarily to the continuing change in the mix of business written by the
Company. Administrative expenses increased by $24.9 million in the current
period, compared to the nine month period ended June 30, 1997. This was due
primarily to the costs associated with our increased participation in the
Lloyd's market and the inclusion of administrative costs from ACE USA. The
underwriting and administrative expense ratio in ACE USA and ACE UK is
generally higher than the Company's traditional book of business and thus
contributed to the increase in the underwriting and administrative expense
ratio.
20
<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. ACE received a dividend of $115 million from Tempest in
December 1997 and a dividend of $250 million from ACE Insurance in April
1998.
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 nine months ended June 30, 1998, the Company's consolidated net
cash flow from operating activities was $187.9 million, compared with
$257.4 million for the nine months ended June 30, 1997. 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 nine month periods ended June
30, 1998 and 1997, loss and loss expense payments amounted to $334.8
million and $240.9 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 June 30, 1998, total investments and cash amounted to approximately $6.0
billion, compared to $4.5 billion at September 30, 1997. The increase in
total cash and investments of $1.5 billion since September 30, 1997 is
primarily the result of the inclusion of the ACE USA and CAT investment
portfolios following the acquisitions of these companies by ACE during the
current fiscal year.
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 of these credit facilities. The new
facilities provide:
o $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 five year
revolving credit facility has a $50 million LOC sublimit. As discussed
below, the Company drew down $385 million on this facility to finance
the acquisition of CAT Limited on April 1, 1998. The debt was
subsequently repaid from a portion of the proceeds from the sale of
16.5 million new Ordinary Shares of the Company (discussed below). The
revolving credit facilities require that the Company maintain certain
covenants which include a minimum consolidated tangible net worth
covenant.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
o Five year LOC's totalling approximately (pound)154 million ($257 million)
which are being used to fulfill the requirements of Lloyd's
to support underwriting capacity on Lloyd's syndicates in which
the Company participates. The LOC facility requires that A.C.E.
Insurance Company, Ltd. maintain certain covenants which include a
minimum consolidated tangible net worth covenant.
o $250 million seven year Amortizing Term Loan Facility which was used
on January 2, 1998 to partially finance the acquisition of ACE USA.
The interest rate on the term loan is LIBOR plus an applicable spread.
At June 30, 1998, $250 million remains outstanding under this
facility. The interest rate for the period April 2, 1998 through July 2,
1998 was 6.25%. The term loan facility requires that the Company
and ACE US Holdings, Inc. maintain certain covenants. Under these
covenants the Company is required to maintain a minimum consolidated
tangible net worth.
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
shares pursuant to the Stock Split was as of close of business on February
17, 1998. Certificates representing the additional shares of stock were
mailed on March 2, 1998.
The Board of Directors had 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 three months
ended June 30, 1998, the Company did not repurchase any shares under the
share repurchase program. During the nine month period ended June 30, 1998,
the Company repurchased 3,521,100 Ordinary Shares under the share
repurchase program for an aggregate cost of $107.6 million. On July 6,
1998 the Executive Committee of the Board of Directors rescinded all
existing authorizations for the repurchase of the Company's Ordinary Shares.
On April 14, 1998, the Company sold 16.5 million Ordinary Shares for net
proceeds of approximately $606 million after deducting expenses related to
the offering. A portion of the proceeds were used to repay $385.0 million
of indebtedness incurred by the Company in connection with the acquisition
of CAT on April 1, 1998. The remaining proceeds will be used for general
corporate purposes, which may include acquisitions.
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. Following the
approval by the shareholders of the three-for-one stock split, the Company
paid quarterly dividends on April 18, 1998 and July 17, 1998 of 8 cents and
9 cents per share, respectively to shareholders of record on March 31, 1998
and June 30, 1998. On August 7, 1998 the Board of Directors declared a
quarterly dividend of 9 cents per share payable on October 16, 1998 to
shareholders of record on September 30, 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.
On January 2, 1998, the Company completed the acquisition of ACE USA,
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 ACE USA with $250 million of bank debt (see
discussion of syndicated credit facilities above) and the remaining $88
million came from available funds.
As previously discussed, on April 1, 1998 the Company completed the
acquistion of CAT for an aggregate cash consideration of approximately $641
million. The acquisition was financed with $385 million of short-term bank
debt (see discussion of credit facilities above) and the remainder from
available funds.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
LIQUIDITY AND CAPITAL RESOURCES (continued)
As previously discussed, the Company announced on July 9, 1998 that it had
completed the acquisition of Tarquin and had issued approximately 14.3
million Ordinary Shares to the shareholders of Tarquin. The acquisition
will be accounted for on a pooling-of-interests basis and, as a result, the
consolidated shareholders' equity of the Company will increase by the book
value of Tarquin.
Fully diluted net asset value per share was $19.51 at June 30, 1998,
compared with $15.71 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 is $3.4 billion
at June 30, 1998. Included in the reserve for unpaid losses and loss
expenses is $1.4 billion of case and loss expense reserves. While the
Company believes that its reserve for unpaid losses and loss expenses at
June 30, 1998 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 has made certain payments to policyholders with respect to
these claims. 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 through
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.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
Breast Implant Litigation (continued)
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 April 29, 1998 approximately $757 million
had been distributed under the Settlement to implant recipients of the
three major defendants. Distribution has also begun on certain additional
payments to claimants relating to other implants since all appeals on the
Settlement have been dismissed. In addition, the multidistrict litigation
judge has approved the detailed terms of a settlement program being offered
by the three major defendants to eligible foreign claimants. 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.
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.
The Company has made payments to date of approximately $370 million with
respect to breast implant claims, which include a payment of approximately
$100 million made in July 1998. These payments were included in previous
reserves and are consistent with the Company's belief that its reserves are
adequate. 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 June 30, 1998.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
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 established an oversight committee that meets regularly to
review progress towards Year 2000 compliance. 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 at
a cost that is not expected to be material to the Company's financial
results. The Company has initiated communications with its significant
business partners to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own Year 2000
Issue. The Company may also have exposure to claims that may be asserted in
the future for coverage under certain currently existing insurance policies
for damages caused by the failure of insured companies to effectively
address their Year 2000 computer problem. The questions of the extent of
such possible future claims on current insurance policies and whether or
not such claims are covered by the Company's current insurance policies are
still being evaluated and the Company has not yet determined if the total
costs will be material. In addition, the Company continues to evaluate its
options with regard to issuing future policies that may lead to claims of
coverage for Year 2000 related losses.
25
<PAGE>
ACE LIMITED
PART II - OTHER INFORMATION
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------
(c) On July 9, 1998, the Company issued 14,328,010 Ordinary Shares, par
value $0.041666667 per share, as consideration for its acquisition of all
of the outstanding share capital of Tarquin Limited. All of such Ordinary
Shares were issued directly to the former shareholders of Tarquin Limited.
The offer and sale of the foregoing Ordinary Shares were made pursuant to
a transaction not involving any public offering and in reliance upon the
exemption from the registration requirements of the Securities Act of 1933,
as amended (the "Securities Act"), afforded by Section 4(2) thereof. Based
upon representations made by such shareholders, the Company believes that
(i) such Ordinary Shares were acquired not with a view toward the public
resale or distribution thereof in violation of the Securities Act, (ii)
such shareholders had such knowledge and experience in financial and
business matters that they were capable of evaluating the merits and risks
of an investment in the Ordinary Shares and (iii) such shareholders had
been furnished with all material which they considered relevant to an
investment in the Ordinary Shares and had a full opportunity to ask
questions of and receives answers from the Company. In addition, the
certificates representing such Ordinary Shares bear an appropriate legend
restricting the transfer of such securities, and stop transfer instructions
have been provided to the Company's transfer agent in accordance therewith.
ITEM 5. OTHER INFORMATION
- --------------------------
1) On August 7, 1998, the Company declared a dividend of $0.09 per Ordinary
Share payable on October 16, 1998 to shareholders of record on
September 30, 1998.
2) Shareholder Proposals
Shareholder proposals intended to be presented at the Company's 1999
annual general meeting must be received at the Company's principal
executive offices not later than August 26, 1998 and otherwise comply
with the requirements of the U.S. Securities and Exchange Commission
in order to be included in the Company's proxy statement and form of
proxy relating to the 1999 annual general meeting.
The Company's Articles of Association provide that if a shareholder
desires to submit a proposal for consideration at an annual general
meeting, or to nominate persons for election as directors, written
notice of such shareholder's intent to make such a proposal or
nomination must be given and received by the Secretary of the Company
at the principal executive offices of the Company not later than 60
days prior to the anniversary date of the immediately preceding annual
general meeting. With respect to the 1999 annual general meeting, such
written notice must be received on or prior to December 9, 1998. The
notice must describe the proposal or nomination in sufficient detail
for a proposal or nomination to be summarized on the agenda for the
meeting and must set forth (i) the name and address of the
shareholder, (ii) a representation that the shareholder is a holder of
record of shares of the Company entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to present such
proposal or nomination and (iii) the class and number of shares of the
Company which are beneficially owned by the shareholder. In addition,
26
<PAGE>
the notice must set forth the reasons for conducting such
proposed business at the meeting and any material
interest of the shareholder in such business. In the case of
a nomination of any person for election as a director, the notice
shall set forth: (i) the name and address of any person to be
nominated; (ii) a description of all arrangements or understandings
between the shareholder and each nominee and any other person or
persons; (iii) such other information regarding such nominee proposed
by such shareholder as would be required to be included in a proxy
statement filed pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), whether or not
the Company is then subject to such Regulation; and (iv) the consent
of each nominee to serve as a director of the Company, if so elected.
The presiding officer of the annual general meeting or extraordinary
general meeting shall, if the facts warrant, refuse to acknowledge a
proposal or nomination not made in compliance with the foregoing
procedure. Under the circumstances described in, and upon compliance
with, Rule 14a-4 (c) under the Exchange Act, management proxies would
be allowed to use their discretionary voting authority to vote on any
proposal with respect to which the foregoing requirements have been met.
The Company currently expects that its 1999 annual general meeting
will be held during the first week of February 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
1) Exhibits
27 Financial Data Schedule
2) Reports on Form 8-K
The Company filed a Form 8-K current report (date of
earliest event reported: June 16, 1998) pertaining to its
agreement to acquire Tarquin Limited.
The Company filed a Form 8-K current report (date of
earliest event reported: July 6, 1998) pertaining to the
termination of the authorization for the repurchase of the
Company's Ordinary Shares.
The Company filed a Form 8-K current report (date of
earliest event reported: July 9, 1998) pertaining to the
completion of the acquisition of Tarquin Limited.
27
<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
---------------------------------------
/s/ Brian Duperreault
August 12, 1998 ---------------------------------------
Brian Duperreault
Chairman, President and Chief
Executive Officer
/s/ Christopher Z. Marshall
August 12, 1998 ---------------------------------------
Christopher Z. Marshall
Chief Financial Officer
28
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description Numbered Page
- ------- ------------ -------------
27 Financial Data Schedule
29
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<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 4,811,763
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 268,509
<MORTGAGE> 0
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<TOTAL-INVEST> 5,795,273
<CASH> 245,139
<RECOVER-REINSURE> 25,563
<DEFERRED-ACQUISITION> 37,492
<TOTAL-ASSETS> 7,971,454
<POLICY-LOSSES> 3,404,165
<UNEARNED-PREMIUMS> 616,157
<POLICY-OTHER> 83,981
<POLICY-HOLDER-FUNDS> 0
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0
0
<COMMON> 7,467
<OTHER-SE> 3,500,106
<TOTAL-LIABILITY-AND-EQUITY> 7,971,454
565,693
<INVESTMENT-INCOME> 219,693
<INVESTMENT-GAINS> 241,899
<OTHER-INCOME> 0
<BENEFITS> 359,731
<UNDERWRITING-AMORTIZATION> 50,883
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 528,446
<INCOME-TAX> 7,962
<INCOME-CONTINUING> 520,484
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 349,021
<EPS-PRIMARY> 3.10
<EPS-DILUTED> 3.02
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