<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-11778
----------------
ACE LIMITED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CAYMAN ISLANDS NOT APPLICABLE
(JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
THE ACE BUILDING
30 WOODBOURNE AVENUE
HAMILTON HM 08
BERMUDA
(441) 295-5200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
<S> <C>
Ordinary Shares, par value $0.041666667 per share New York Stock Exchange
</TABLE>
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
----------------
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 periods 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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference into Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
As of December 15, 1998, there were 193,656,476 Ordinary Shares par value
$0.041666667 of the Registrant outstanding and the aggregate market value of
voting stock held by non-affiliates at such date was approximately $5.35
billion. For the purposes of this computation, shares held by directors (and
shares held by any entities in which they serve as officers) and officers of
the registrant have been excluded. Such exclusion is not intended, nor shall
it be deemed, to be an admission that such persons are affiliates of the
registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of registrant's definitive proxy statement relating to its
Annual General Meeting of Shareholders scheduled to be held on February 5,
1999, are incorporated by reference into Part III of this report and certain
portions of the 1998 Annual Report to Shareholders are incorporated by
reference into Parts II and IV of this report.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
ACE LIMITED
INDEX TO 10-K
<TABLE>
<CAPTION>
PAGE
-------------------------------------------------------------------------------------- ----
PART I
<S> <C> <C>
Item 1. Business.............................................................................. 1
Item 2. Properties............................................................................ 24
Item 3. Legal Proceedings..................................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders................................... 24
PART II
Item 5. Market for the Registrant's Ordinary Shares and Related Stockholder Matters........... 25
Item 6. Selected Financial Data............................................................... 26
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition. 26
Item 7A Quantitative and Qualitative Disclosures about Market Risk............................ 27
Item 8. Financial Statements and Supplementary Data........................................... 27
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 27
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 27
Item 11. Executive Compensation................................................................ 27
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 27
Item 13. Certain Relationships and Related Transactions........................................ 27
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K..................... 27
</TABLE>
<PAGE>
PART I
ITEM 1. BUSINESS
Certain terms used below are defined in the "Glossary of Selected Insurance
Terms" appearing on page 23.
SAFE HARBOR DISCLOSURE
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Any 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, (ix) the
competitive environment in which the Company operates, (x) the impact of
mergers and acquisitions, (xi) the impact of Year 2000 related issues, (xii)
developments in global financial markets which could affect the Company's
investment portfolio, and (xiii) risks associated with the introduction of new
products and services. 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.
GENERAL
ACE Limited ("ACE") is a holding company incorporated with limited liability
under the Cayman Islands Companies Law and maintains its principal business
office in Bermuda. The Company, through its Bermuda-based operating
subsidiaries, A.C.E. Insurance Company, Ltd. ("ACE Bermuda"), Corporate
Officers & Directors Assurance Ltd. ("CODA"), Tempest Reinsurance Company
Limited ("Tempest Re") and CAT Limited ("CAT") and its Dublin, Ireland based
subsidiaries, ACE Bermuda Company Europe Limited ("AICE") and ACE Reinsurance
Company Europe Limited ("ARCE"), provides a broad range of insurance and
reinsurance products for a diverse group of international clients. Through its
U.S. based subsidiary, ACE USA, Inc. (formerly Westchester Specialty Group,
Inc.) ("ACE USA"), the Company provides commercial property, umbrella
liability, specialty program business, warranty, errors and omissions and
directors and officers coverages as well as a captive management reinsurance
facility 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"), ACE London Underwriting Limited ("ALU") and Charman
Underwriting Agencies Ltd. ("CUAL"), each indirect wholly owned subsidiaries
of ACE. Unless the context otherwise indicates, the term "Company" refers to
one or more of ACE and its consolidated subsidiaries. The operations of the
Company in the Lloyd's market are collectively referred to herein as "ACE
Global Markets."
The Company's long-term business strategy focuses on achieving underwriting
profits and providing value to its clients and shareholders through the
utilization of its growing capital base within the insurance and reinsurance
markets. As part of this strategy, the Company acquired CODA in 1993, and
diversified its product portfolio in ACE Bermuda from excess liability
insurance and directors and officers liability insurance to accommodate the
needs of its expanding, global client base of multinational corporations by
adding satellite insurance, aviation insurance, excess property insurance and
financial lines products during 1994 and 1995. This diversification added
balance to the risk of the existing portfolio of insurance products and
enhanced the Company's overall profit potential while utilizing its existing
capital base. The Company continued its strategic
1
<PAGE>
diversification with the acquisition in March 1996 of Methuen Group Limited
("Methuen"), the holding company for MUL, and in July 1996 of Tempest Re, a
leading Bermuda-based property catastrophe reinsurer. The short-tail nature of
the property catastrophe business and shorter loss payout patterns
complemented the generally longer-tail nature of the Company's other product
lines.
Also in November 1996, the Company acquired Ockham Worldwide Holdings plc
which was renamed ACE London Holdings Limited ("ACE London"). ACE London owns
two Lloyd's managing agencies, ALA and ALU.
In March 1997, the Company, together with two other insurance companies,
formed Sovereign Risk Insurance Limited ("Sovereign"), a Bermuda-based
managing general agency, to provide underwriting services to the three
organizations for political risk insurance coverage. Sovereign issues
subscription policies with the Company assuming 50 percent of each risk
underwritten.
On September 30, 1997, the Company announced the incorporation of AICE, as
part of the International Financial Services Centre in Dublin, Ireland. AICE
has been granted a license to write all 18 classes of non-life insurance in
all member states of the European Union. The Company also operates ARCE, a
Dublin-based reinsurance company. ARCE provides flexibility mainly to European
corporations that wish to access the Company's products using different
structures.
On January 2, 1998, the Company acquired ACE USA, through its newly-created
U.S. holding company, ACE US Holdings, Inc ("ACE US"). 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 its loss reserves for the 1996 and prior accident
years.
On April 1, 1998, the Company acquired CAT Limited, a privately held,
Bermuda-based property catastrophe reinsurer. This acquisition increased the
Company's already significant participation in the international property
catastrophe reinsurance market.
On July 9, 1998, the Company completed the acquisition of Tarquin Limited
("Tarquin"), a UK-based holding company which owns Lloyd's managing agency
CUAL and Tarquin Underwriting Limited, its corporate capital provider. The
CUAL managed syndicates, 488 and 2488, are leading international underwriters
of short-tail marine, aviation, political risk and specialty property-casualty
insurance and reinsurance.
The following table sets forth an analysis of gross premiums written by
subsidiary for each of the years ended September 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
--------------------------------------------------
GROSS GROSS GROSS
1998 1997 1996
PREMIUMS PREMIUMS PREMIUMS
WRITTEN PERCENT WRITTEN PERCENT WRITTEN PERCENT
-------- ------- -------- ------- -------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ACE Bermuda............... $ 521.6 42% $523.2 55% $581.6 68%
ACE Global Markets (1).... 436.3 35% 316.5 33% 243.6 28%
Tempest Re (2)............ 124.1 10% 119.6 12% 34.8 4%
ACE USA (3)............... 160.2 13% -- -- -- --
-------- ---- ------ ---- ------ ----
$1,242.2 100% $959.3 100% $860.0 100%
======== ==== ====== ==== ====== ====
</TABLE>
- --------
(1) On July 9, 1998, the Company completed the acquisition of Tarquin. All
amounts included for ACE Global Markets for 1998, 1997 and 1996 have been
restated to reflect the gross written premiums of Tarquin as the
transaction has been accounted for on a pooling-of-interests basis.
2
<PAGE>
(2) Tempest Re was acquired on July 1, 1996 and thus gross premiums written
for Tempest Re in fiscal 1996 only relate to the three month period since
acquisition. CAT was acquired on April 1, 1998 and thus gross premiums
written for Tempest Re in fiscal 1998 include gross premiums written for
CAT for the six month period since acquisition.
(3) ACE USA was acquired on January 2, 1998 and thus gross premiums written
for ACE USA in fiscal 1998 only relate to the nine month period since
acquisition.
ACE Bermuda
ACE Bermuda primarily provides property and casualty insurance coverage,
including excess liability insurance, directors and officers liability
insurance, satellite insurance, aviation insurance, excess property insurance
and financial lines products, to a diverse group of industrial, commercial and
other enterprises. The nature of the insurance coverages provided by ACE
Bermuda are generally expected to result in low frequency but high severity of
individual losses. ACE Bermuda uses the reinsurance market as an integral part
of its risk management process and has secured reinsurance on all of its major
lines of business.
At September 30, 1998 approximately 66 percent of written premiums in ACE
Bermuda came from companies headquartered in North America with approximately
14 percent coming from companies headquartered in the United Kingdom and
continental Europe and approximately 20 percent from companies headquartered
in other countries.
Excess Liability
ACE Bermuda seeks to provide the highest layer of excess liability coverage
in the insurance programs of the world's major corporations and requires that
at least a portion of its coverage be the highest layer in a policyholder's
insurance program. ACE Bermuda writes excess liability coverage, on an
occurrence first reported stand alone form, generally in excess of a minimum
attachment point of $100 million per occurrence and with a minimum limit of
$10 million and a maximum limit of $200 million per occurrence and in the
aggregate for all covered occurrences of which notice is given during such
year. Such limit is subject to reinstatement at the insureds election for
incidents post reinstatement. ACE Bermuda imposes an annual aggregate sublimit
of $100 million for integrated occurrences for all business that purchases
limits greater than $100 million. For certain classes of non-U.S. domiciled
excess liability risks, the minimum attachment point is $50 million (or the
foreign currency equivalent). In this instance, ACE Bermuda offers limits up
to twice the reduced attachment point. ACE Bermuda maintains quota-share and
excess of loss reinsurance to reduce net exposures to a maximum of $100
million.
Directors and Officers Liability
ACE Bermuda offers up to $75 million of directors and officers liability
insurance with a maximum of $50 million being provided for corporate
reimbursement coverage. The directors and officers liability insurance is
written on a claims made form and is provided to large industrial
corporations, not-for-profit corporations, financial institutions and others.
Satellite
ACE Bermuda's satellite insurance operations offer separate gross limits of
up to $80 million per risk for launch insurance, including ascent to orbit
and/or initial testing and up to $80 million per risk for in-orbit insurance.
The Company has entered into a surplus treaty arrangement which provides for
up to $40 million of reinsurance on each risk. Satellite insurance falls
within a small, well defined market characterized by a limited number of
brokers, underwriters and international clients. There are also a limited
number of satellite and launch vehicle manufacturers in the world. The growing
worldwide demand for satellite communications capabilities by both governments
and private enterprises has resulted in an increase in the number of
satellites per annum
3
<PAGE>
requiring launch and/or in-orbit insurance coverage. The typical satellite
insurance policy is written on a quota-share basis, rather than on an excess
of loss basis. The insured value of a commercial satellite now ranges from
approximately $150 million to $300 million.
Financial Lines
Financial lines utilizes transactions which combine the concepts of finance
with the principles of insurance. Typically, clients purchasing these products
are seeking insurance or reinsurance for exposures which are difficult to
place because of limited or nonexistent capacity, ineffective terms, or
inefficient pricing being provided by traditional insurance markets.
Alternatively, they may use these insurance or reinsurance products to cover
loss exposures which are not appropriately addressed by current products
available.
Unlike certain traditional insurance, each financial lines contract is
individually tailored to meet the needs of the insured. Financial lines
programs typically have the following common characteristics: multi-year
contract terms; broad coverage that includes stable capacity and pricing for
the insured; insured participation in the results of their own loss
experience; and aggregate limits. The specific product types offered by
financial lines include the various forms of finite risk insurance. Examples
of finite risk products include the combination of self-insurance with an
excess program, the combination of various coverages subject to a single
retention and insured limit or programs that insure large loss exposure or a
portfolio of losses over a period of years. Other product types offered are
specialty insurance that cover financial exposures or involve financial
instruments.
ACE Bermuda believes it has a competitive advantage in the marketplace
because of its financial strength and its ability to offer significant risk
transfer while still allowing the insured to retain some of its own exposures.
Risk transfer is important to the insured thereby enabling it to meet the
accounting and regulatory requirements related to the purchase of insurance or
reinsurance.
Financial lines has a flexible approach to limits offered, attachment points
and coverages provided primarily due to the risk sharing feature and use of
funding mechanisms which are generally included in the contract. Each contract
is unique because it is tailored to the insurance needs, specific loss history
and financial strength of the client. Premium volume, as well as the number of
contracts written, can vary significantly from period to period due to the
nature of the contracts being written. Profit margins may vary from contract
to contract depending on the amount of underwriting risk and investment risk
assumed on each contract.
Aviation
ACE Bermuda's aviation insurance group offers limits of up to $150 million
per insured, with no minimum attachment point. ACE Bermuda reduces its net
exposure per policy to approximately $50 million with a dedicated reinsurance
program. Classes of business written include aviation product liability,
aviation manufacturers (including hull and all risks and products liability);
aviation refuellers; and airport and airport contractors, together with
certain aircraft risks. Generally, ACE Bermuda will write aircraft liability
in conjunction with one or more of the other aviation products, and where the
aircraft (owned or non-owned) is used for corporate purposes.
Excess Property
ACE Bermuda also offers excess property insurance. Its primary target
markets are chemical, energy, electronics, mineral, oil and gas, and
utilities. Property insurance coverage is offered with limits of up to $50
million per risk, typically above an attachment point of $25 million. In
certain circumstances, ACE Insurance uses reinsurance to establish the
retained net limit per risk.
Other
In March 1997, ACE Bermuda, together with two other insurance companies,
formed Sovereign Risk Insurance Limited ("Sovereign"), a Bermuda-based
managing general agency, to provide underwriting services
4
<PAGE>
to these three organizations for political risk insurance coverage. Sovereign
issues subscription policies with ACE Bermuda assuming 50 percent of each risk
underwritten.
On March 11, 1998, ACE Bermuda formed a joint venture, ACE Capital Re
Limited, with Capital Re Corporation ("Capital Re"). ACE Capital Re Limited, a
Bermuda-domiciled insurance company, writes both traditional and custom-
designed programs covering financial guaranty, mortgage guaranty and a broad
range of financial risks. Operations are underwritten and managed in Bermuda
by a joint venture managing agency, ACE Capital Re Managers Ltd. ACE Bermuda
and Capital Re each have a 50 percent economic interest in ACE Capital Re
Limited and ACE Capital Re Managers Ltd.
ACE Global Markets
The Company's participation in the Lloyd's market is twofold. The Company
owns four managing agencies at Lloyd's, having completed its acquisitions of
MUL, ALA and ALU during calendar 1996 and CUAL in 1998. These managing
agencies receive fees and profit commissions in respect of the underwriting
and administrative services they provide to the syndicates. For the calendar
1998 year of account, these managing agencies manage 11 syndicates with total
capacity under management of $1.55 billion.
For calendar 1998, the Company, through six corporate members, participated
on ten of the ACE managed syndicates with an underwriting capacity of
approximately $935 million out of the $1.55 billion of the ACE managed
capacity referred to above. Included in the ten syndicates is Syndicate 2488,
a dedicated corporate syndicate whose capital is provided solely by the
Company, which underwrites in parallel with Syndicate 488 which comprises
names and other corporate members.
For the 1999 year of account, the ACE Global Markets operations have been
reorganized with the result that four ACE managed syndicates will be active in
1999. This reorganization is part of ACE Global Market's strategy to combine
all its underwriting operations into a single capital base in 2000. These
syndicates, which will focus on broad classes of business, are Syndicates 219
(Non-Marine) managed by ALU; 960 (Aviation) managed by ALA; and 488/2488
(Marine) managed by CUAL. As a consequence, MUL will not have any active
syndicates for the 1999 year of account.
In addition, following a de-emption in managed capacity (a process whereby
unutilized underwriting capacity is removed from the syndicates), the Company
will participate on all four of the ongoing ACE managed syndicates for 1999
with an anticipated underwriting capacity of approximately $700 million, out
of an anticipated $1 billion of ACE managed capacity.
Tempest Re
The Company's reinsurance activities are principally conducted through
Tempest Re, which was acquired in July 1996. On April 1, 1998, the Company
acquired CAT, another Bermuda-based property catastrophe reinsurer.
Underwriting operations have been combined with the group's existing
catastrophe reinsurance subsidiary, Tempest Re, and going forward the combined
entity will operate under the Tempest Re name. CAT specialized in providing
customized coverages, particularly multi-year contracts, to regional accounts.
Two thirds of CAT's business was non-traditional versus one third at Tempest
Re. Due to the different marketing focus there is only a limited overlap of
clients and programs between Tempest Re and CAT.
Tempest Re provides property catastrophe reinsurance worldwide to insurers
of commercial and personal property, typically under treaties having a
duration of one year. Property catastrophe reinsurance protects a ceding
company against an accumulation of losses covered by the insurance policies it
has issued arising from a common event or "occurrence." Ceding companies may
purchase reinsurance to achieve a number of results, including: reduction of
net exposure on individual risks or groups of risks, which enables the ceding
company to underwrite larger risks, or accept more business than its own
capital resources would ordinarily support;
5
<PAGE>
diversification of risks; protection against the effect of major catastrophic
losses, such as losses involving an accumulation of single retentions;
stabilization of a ceding company's operating results by smoothing its loss
experience to protect its financial position; and maintenance by a ceding
company of acceptable surplus, reserve and other financial ratios.
Tempest Re's property catastrophe reinsurance contracts cover unpredictable
natural or man-made disasters, such as hurricanes, windstorms, hail storms,
earthquakes, volcanic eruptions, conflagrations, freezes, floods, fires and
explosions. The predominant exposure under such coverage is to property
damage. However, other risks, such as business interruption may also be
covered when arising from a covered peril. In accordance with market practice,
Tempest Re's property catastrophe reinsurance contracts generally exclude
certain risks such as war, nuclear contamination, and radiation.
Tempest Re underwrites reinsurance principally on an excess of loss basis.
Other property reinsurance written by Tempest Re on a limited basis for select
clients, includes proportional property and per risk excess of loss treaty
reinsurance.
Tempest Re underwrites a substantial portion of its business in currencies
other than U.S. dollars and may from time to time experience exchange gains
and losses and incur significant underwriting losses in currencies other than
U.S. dollars. The following table sets forth the amount of Tempest Re's gross
premiums written allocated by territory of coverage:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
United States........................................ 79.1% 68.4% 64.0%
United Kingdom....................................... 8.9% 12.8% 13.3%
Australia & New Zealand.............................. 4.6% 6.3% 6.0%
Asia................................................. 4.0% 3.6% 3.8%
Other................................................ 3.4% 8.9% 12.9%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
ACE USA
ACE USA's insurance subsidiaries are Westchester Fire Insurance Company,
Westchester Surplus Lines Insurance Company and Industrial Underwriters
Insurance Company (collectively, "US Insurance Subsidiaries"). The US
Insurance Subsidiaries write property and casualty insurance primarily within
the US commercial specialty lines market. ACE USA's non-insurance subsidiaries
are Westchester Specialty Insurance Services, Inc. and Industrial Excess and
Surplus Insurance Brokers, both brokerage companies. In addition, ACE USA owns
60 percent of automobile warranty administrator, CRC Creditor Resources Canada
Limited and other affiliated companies, which it purchased in June 1998.
The acquisition of ACE USA provides the Company with the opportunity to
continue its strategic diversification by gaining access to the U.S. direct
insurance market through an established company with a solid distribution
network. The Company believes that prior to the acquisition, uncertainty
regarding ACE USA's ownership and loss reserve adequacy adversely affected
that company's premium volume. The elimination of ownership uncertainty,
combined with ACE USA's reduced net exposure to reserve uncertainty as a
result of the National Indemnity reinsurance protection, has enhanced ACE
USA's market profile in the competitive US operating environment. Management
believes ACE USA's association with the Company following the acquisition has
increased its ability to attract staff with the requisite experience to gain
immediate access to these new markets.
To maintain the quality of its insured profile, ACE USA sets strict
underwriting and pricing guidelines and has established a structure that
ensures control of risk quality and conservative use of policy limits, terms,
and conditions. ACE USA's niche is highly cyclical and as a result, management
emphasizes the continual review of market conditions to identify trends and
opportunities to underwrite attractive coverages.
6
<PAGE>
During 1998, ACE USA primarily wrote specialty property, umbrella, and
excess casualty business coverages. ACE USA's principal focus has been on
excess and surplus lines business which are either difficult to place or have
complex risk profiles which require greater underwriting and claims expertise
than that generally found in the standard market.
Property Division
ACE USA's property business, which encompasses both the catastrophe and non-
catastrophe market segments, includes coverages for fire, allied lines, inland
marine, and commercial multi-peril. The catastrophe segment focuses on
customers whose primary purpose in obtaining coverage is to secure financial
protection against the perils of hurricane or earthquake. ACE USA employs
catastrophe management tools to optimize the geographic spread of catastrophe
exposures and determine adequate product pricing levels. The non-catastrophe
segment focuses on unique and difficult to place risks by developing coverages
for specific industry groups through tailored products. During 1998, the non-
catastrophe segment's areas of concentration included lumber products, low
value dwellings, railroad and builders' risk. Property business accounted for
72 percent of ACE USA's total gross premium volume for the nine months ended
September 30, 1998.
Casualty Division
Within its casualty business, ACE USA specializes in writing umbrella and
excess liability products. These products provide coverage over an underlying
insurance program of at least $1 million on both a per occurrence and
aggregate basis. The focus is on medium to large accounts with a moderate risk
profile, primarily in manufacturing, construction and service/retail
businesses.
New Divisions
Since the acquisition of ACE USA on January 2, 1998, ACE USA has established
and staffed five new operating divisions and opened a new marketing and
underwriting office in New York City. The new divisions are the Specialty
Division, the Warranty Division, the Directors' and Officers' Liability
Division, the Errors and Omissions Division and the Captive Reinsurance
Division. To date, these new divisions have focused on the hiring of
experienced industry professionals to staff the new divisions, developing
business plans and strategies, identifying of business partners, developing of
policy forms and language and various state regulatory filings and other
requirements.
Specialty Division--The program business requires more up front investment
of time and development costs than other property and casualty business lines
as it must establish distribution networks with desirable program
administrators and managing general agents. Thus a longer period of operation
is required to achieve profitability on any particular program when compared
to other areas of the property and casualty business. The specialty division's
strategy is to focus on selected general agents or brokers with a specialty or
distinguishable advantage. In order to keep transaction costs lower, business
associated with low frequency and moderate to high severity losses is being
targeted. Additional opportunities are also under review from both reinsurers
and close coordination with other divisions of the Company.
Warranty Division--The Warranty division offers extended service contracts
for a broad range of products. This division intends to provide warranty
administrative services as well as underwriting, to gain greater access to the
marketplace. This division has the advantage of being able to obtain business
directly through large retailers and buying group networks, or through forming
strategic alliances with large independent third party administrators. In June
1998, ACE USA purchased a controlling interest in CRC Creditor Resources
Canada Limited Group of Companies, in order to enter the Canadian automobile
warranty business through a well-established marketing and administrative
service organization.
7
<PAGE>
Directors' and Officers' Liability Division--This division offers directors
and officers liability ("D&O") and associated coverages to specific segments
of the Fortune 1000 group of companies in the U.S. The primary method of
product distribution is through major retail brokers in the D&O market. The
D&O division is also targeting business through wholesale brokers that
specialize in the D&O business.
Errors and Omissions Division--This division offers miscellaneous errors and
omissions ("E&O") products for certain selected segments of the market. The
E&O market is currently very competitive and this book of business is expected
to grow slowly. The division is initially targeting distribution through
wholesale brokers as the division's strategy is to capitalize on current
relationships ACE USA has with the wholesale market.
Captive Reinsurance Division--The captive reinsurance division offers
insurance and reinsurance products to clients who are willing to assume some
amount of risk in order to benefit from underwriting gain. As the trend
towards self insurance in the U.S. over the past several years has expanded,
ACE USA believes there is a growing market demand for this division's
products. Potential sources of business include captive insurers, risk
retention groups, rent-a-captives, agency captives, public entity risk pools,
charitable trusts, policyholder owned mutual insurers and self insured
organizations. The division will focus on casualty exposures and seek to take
lead positions in order to control terms and conditions. The primary
distribution network is through reinsurance intermediaries.
MARKETING AND UNDERWRITING
ACE Bermuda
ACE Bermuda markets its insurance products through brokers and seeks to
maintain a competitive advantage by providing insurance coverages which
require utilization of technical skills to underwrite individual risks,
emphasizing quality rather than volume of business to obtain a suitable spread
of risk. This enables the company to operate with a relatively small number of
employees and, together with the reduced costs of operating in favorable
regulatory and tax environments, results in significantly lower administrative
expenses relative to other companies in the industry.
Policyholders are obtained through non-U.S. insurance brokers who generally
receive a brokerage commission on any business accepted and bound by the
Company. ACE Bermuda is not committed to accept any business from any
particular broker and brokers do not have the authority to bind the Company.
All policy applications to ACE Bermuda and CODA (both for renewals and new
policies) are subject to approval and acceptance by ACE Bermuda in its Bermuda
office. A substantial number of policyholders meet with the Company outside of
the United States each year to discuss their insurance coverage. ACE Bermuda
does not believe that conducting its operations through its offices in Bermuda
has materially affected its underwriting and marketing activities to date.
Policy applications may also be approved and accepted by the Company through
the Dublin-based insurance and reinsurance subsidiaries. AICE undertakes
marketing and underwriting activities with particular emphasis on the European
Union.
ACE Bermuda receives business from approximately 150 non-U.S. brokers of
which seven produced approximately 72 percent of the Company's business in
1998. The following table sets forth the percentage of the Company's insurance
business placed through each broker and its affiliates placing more than 10
percent of the Company's business.
<TABLE>
<CAPTION>
YEAR ENDED
NAME SEPTEMBER 30,
---- ----------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
J&H, Marsh & McLennan, Incorporated (1) (3)................ 35% 42% 42%
Aon Corporation (2) (3).................................... 19% 16% 16%
</TABLE>
8
<PAGE>
(1) During 1997, Marsh & McLennan, Incorporated acquired Johnson & Higgins.
For fiscal 1996, the percentage of business placed by Marsh & McLennan,
Incorporated was 31 percent and the percentage of business placed by
Johnson & Higgins was 11 percent.
(2) During 1997, Aon Corporation acquired Alexander & Alexander Services, Inc.
For fiscal 1996, the percentage of business placed by Aon Corporation was
10 percent and the percentage of business placed by Alexander & Alexander
Services, Inc. was 6 percent.
(3) The percentages shown in the table for fiscal 1997 reflect the business
placed by the combined entities and their affiliates for the entire year.
ACE Bermuda employs underwriting staff with substantial industry experience.
The underwriter's primary objective is to assess the potential for an
underwriting profit, a process complicated in some cases by the limited amount
of data for claims which would have been covered by the company's policy form
and which would have exceeded its policy's attachment point.
The risk assessment process undertaken by ACE Bermuda involves a
comprehensive analysis of historical data and estimates of future value of
losses which may not be evident in the historical data. The factors which ACE
Insurance considers include the type of risk, the attachment point and
coverage limits, the type, size, complexity and location of the potential
insureds operations, financial data, the industry in which the potential
insured operates, details of the underlying insurance coverage provided, loss
history and future corporate plans.
ACE Global Markets
In the ordinary course of events, Lloyd's syndicates may only access
business through Lloyd's brokers. However, for certain lines of business, it
is possible to utilize a service company to access and service business from
both Lloyd's and non-Lloyd's brokers.
ACE Underwriting Services Limited ("AUS") was established in 1998 as such a
Lloyd's service company to market and service, on behalf of ACE managed
syndicates, a broad range of products in the small business, industrial and
commercial markets. AUS deals predominantly with Lloyd's brokers but also
accesses business from regional (non-Lloyd's) brokers.
Tempest Re
Tempest Re markets its reinsurance products worldwide through reinsurance
brokers. Tempest Re's underwriting team builds relationships with key brokers
and clients by explaining Tempest Re's approach and demonstrating
responsiveness to customer needs. Tempest Re's approach to the business of
reinsurance takes a long-term perspective. Management believes that continual
strengthening of the relationships between Tempest Re, its producing brokers
and their clients will continue to contribute to a stable portfolio necessary
to achieve continuity. By retaining clients, Tempest Re seeks to build up
extensive knowledge of them and gain additional insight to enable a more
accurate assessment of their exposures.
Tempest Re receives business from approximately 34 brokers. The following
table sets forth the percentage of Tempest Re's business written through each
broker and its affiliates placing more than 10 percent of Tempest Re's
business:
<TABLE>
<CAPTION>
TEN MONTHS
YEAR ENDED YEAR ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------- ------------- -------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
J&H, Marsh & McLennan,
Incorporated (1).............. 31% 34% 30%
E.W. Blanch Co. ............... 16% 15% 7%
Sedgwick....................... 16% 8% 7%
</TABLE>
9
<PAGE>
(1) During 1997, Marsh & McLennan, Incorporated acquired Johnson & Higgins.
For 1996, the percentage of business placed by Marsh & McLennan,
Incorporated was 26 percent and the percentage of business placed by
Johnson & Higgins was 4 percent. The percentage shown in the table for
fiscal 1997 reflect the business placed by the combined entity and its
affiliates for the entire fiscal 1997 year.
Rates, limits, retention and other reinsurance terms and conditions are
generally established in a worldwide competitive market that evaluates
exposure and balances demand for property catastrophe coverage against the
available supply. Tempest Re believes it is perceived by the market as being a
"lead" reinsurer and is typically involved in the negotiation and quotation of
the terms and conditions of the majority of the contracts in which it
participates.
Because Tempest Re underwrites property catastrophe reinsurance and has
large aggregate exposures to natural and man-made disasters, Tempest Re's
claims experience generally will involve infrequent events of great severity.
Tempest Re seeks to diversify its reinsurance portfolio to moderate the impact
of this severity. The principal means of diversification are by geographic
coverage and by varying attachment points and imposing coverage limits per
program. Tempest Re also establishes zonal accumulation limits to avoid
concentrations of risk within particular geographic areas.
Tempest Re applies an underwriting process based on models that use exposure
data submitted by prospective reinsureds in accordance with requirements set
by Tempest Re's underwriters. The client data is then analysed using a
selection from several available catastrophe analysis tools, including
externally developed event based models licensed from leading vendors as well
as proprietary models developed in house.
The output from the catastrophe analysis tools is also used for portfolio
risk management, enabling Tempest Re to extensively simulate possible
combinations of events affecting the portfolio. This analysis also supports
the decision making with regard to purchasing retrocession. During 1998,
Tempest Re has significantly increased its use of retrocessional coverages.
ACE USA
ACE USA primarily distributes its insurance products through a limited group
of wholesale brokers with whom long-term relationships have been forged. ACE
USA's management believes the match between its expertise and that of its
wholesalers is one of the key reasons wholesalers place business with it. ACE
USA currently utilizes approximately 207 wholesale brokers across the U.S. The
majority of premium volume is currently derived from a limited number of
wholesalers with whom ACE USA has established mutually significant
relationships. For the nine-month period ending September 30, 1998, the top
ten producers accounted for 62 percent of direct premium volume.
Operating in a market in which capacity and price adequacy for its products
can change dramatically, ACE USA's underwriting strategy is to employ
consistent, disciplined pricing and risk selection in order to maintain an
attractive book of business. Management's priority is to ensure that criteria
for risk selection are closely adhered to by its underwriting professionals
and to maintain sufficient experience and expertise in its underwriting staff.
ACE USA has the ability to write business on an admitted basis using forms
and rates as filed with state insurance regulators and on a non-admitted, or
surplus lines basis using flexible forms and rates not filed with state
insurance regulators. Having access to a non-admitted carrier provides the
flexibility to write non-standard coverage.
COMPETITION
Competitive forces in the international property and casualty insurance and
reinsurance business are substantial. Results are a function of underwriting
and investment performance, direct costs associated with the
10
<PAGE>
delivery of insurance products, including the costs of regulation, the
frequency and severity of both natural and man-made disasters, as well as
inflation (actual, social and judicial), which impact loss costs. Decisions
made by insurers concerning their mix of business (offering certain types of
coverage but declining to write other types), their methods of operations and
the quality and allocation of their assets (including any reinsurance
recoverable balances) will all affect their competitive position. The relative
size and reputation of insurers may influence purchasing decisions of present
and prospective customers and will contribute to both geographic and
industrial sector market penetration. Oversupply of available capital has
historically had the effect of encouraging competition and depressing prices.
The Company's competitive position in the property and casualty insurance
industry is influenced by all of these factors.
All of the Company's operating subsidiaries have received ratings from A.M.
Best Company ("A.M. Best") and Standard & Poors Corporation ("S&P") except for
AICE and ARCE which have an A.M. Best rating only. The Lloyd's market has also
received ratings from A.M. Best and S&P. These ratings are based upon factors
relevant to policyholders, agents and intermediaries and are not directed
toward the protection of investors. Such ratings are not recommendations to
buy, sell or hold securities.
ACE Bermuda
ACE Bermuda operates in a highly competitive worldwide market and competes
with most major U.S. and non-US insurers which may differ across product
lines. ACE Bermuda utilizes its experienced underwriting staff, its strong
capital base, its ability to market a number of insurance products to its
existing client and potential client base and its ability to be flexible in
providing contracts which extend coverages for periods in excess of one year
to compete in the worldwide insurance markets.
ACE Bermuda has received a group rating of A+ from A.M. Best. The most
current rating covers ACE, together with its operating subsidiaries, ACE
Bermuda and CODA. ACE Insurance and CODA have also received A+ claims paying
ratings from S&P. AICE and ARCE have a rating of A+ from A.M. Best.
ACE Global Markets
There remains significant competition in all classes of business transacted
by the syndicates emanating from a number of different markets world-wide.
Depending on the class of business concerned, competition comes from the
London market, other Lloyd's syndicates and ILU Companies (Institute of London
Underwriters), major international insurers and reinsurers. On international
risks, competition also comes from the domestic insurers in the country of
origin of the insured. The syndicates are able to compete successfully by
developing and maintaining close, long term relationships with clients through
a high quality service and an ability to deliver innovative solutions tailored
to the client's needs. The establishment of AUS as described above is an
example of this.
The Lloyd's market has received a rating of A from A.M. Best and a claims
paying ability rating of A+ from S&P.
Tempest Re
The property catastrophe reinsurance industry is highly competitive. Tempest
Re competes worldwide with major U.S. and non-U.S. property catastrophe
reinsurers, including other Bermuda-based property catastrophe reinsurers, as
well as reinsurance departments of numerous multi-line insurance
organizations. Tempest Re competes effectively because of its strong capital
position, the quality of service provided to customers, the leading role
Tempest Re plays in setting the terms, pricing and conditions in negotiating
contracts and its customised approach to risk selection.
11
<PAGE>
Tempest Re has received a rating of A from A.M. Best and a claims paying
ability rating of A+ from S&P.
ACE USA
ACE USA operates in a highly competitive industry and faces competition from
both domestic and foreign insurers, many of which are larger and have greater
financial, marketing and management resources. Competition in the U.S.
property and casualty market is based on many factors including financial
strength of the insurer, ratings assigned by rating companies, premiums
charged, policy terms and conditions, reputation, services offered and broker
commissions. The markets in which ACE USA competes are subject to significant
cycles of fluctuating capacity and wide disparities in price adequacy. ACE
USA's strategy in its competitive environment has been to grow when conditions
are favorable for a particular product line and to reduce writings and
preserve capital when competitive pricing prevents adequate returns.
During 1998, the ratings issued by A.M. Best, to the US Insurance
Subsidiaries were raised from A- to A following the acquisition by the
Company. In addition, in June 1998, ACE USA's S&P claims paying ability rating
was raised two increment levels from A- to A+.
CLAIMS ADMINISTRATION
ACE Bermuda
Claims arising under policies issued by ACE Bermuda and CODA are managed in
Bermuda by ACE Bermuda's claims department. This department maintains a claims
database into which all notices of loss are entered. If the claims department
determines that a loss is of sufficient severity, it makes a further inquiry
of the facts surrounding the loss and, if deemed necessary, retains outside
claims counsel to monitor claims. Based upon its evaluation of the claim, the
claims department may recommend that a case reserve in a specified amount be
established or that all or part of a claim be paid. The claims department
monitors all claims and, where appropriate, will recommend the establishment
of a new case reserve or the increase or decrease of an existing case reserve
with respect to a claim.
AICE subscribes to the group claims database and interacts with the ACE
Bermuda legal and claims department, and where appropriate, with outside
counsel. Case reserves are established using the same criteria as ACE Bermuda.
With the exception of certain aviation coverages, ACE Bermuda does not
undertake to defend its insureds. It has, in certain instances, provided
advice to insureds with respect to the management of claims. ACE Bermuda
believes that its experience in resolving large claims and its proactive
approach to claims management has contributed to the favourable resolution of
several cases.
Because ACE Bermuda does not do business in the U.S., it must often rely on
U.S. counsel to assist it in evaluating liability and damages confronting its
insureds in the U.S. ACE Bermuda does not believe that the information
received or the procedures followed have materially or adversely affected its
ability to identify, review or settle claims.
ACE Global Markets
With respect to claims arising in Lloyd's syndicates, each syndicate
maintains a claims database into which all notices of loss are entered. These
are primarily notified by the Lloyd's Claims Office ("LCO") through a daily
electronic data interchange message. Where a syndicate is a "leading"
syndicate on a Lloyd's policy, then it acts through its underwriters and
claims adjusters, on its own behalf and with the LCO for the following
12
<PAGE>
market, in dealing with the broker and/or insured for any particular claim.
This may involve the appointment of attorneys and/or loss adjusters. The
leading syndicates, together with the LCO, advise movements in case reserves
to all syndicates participating on the risk.
All information received with respect to case reserves, whether on "lead
business' or on "following business,' screened and recorded by the syndicates.
The syndicates' claims department can vary the case reserves carried from
those advised by the LCO and can carry reserves for claims not processed by
the LCO. Any such adjustments and entries are specifically identifiable within
the claims system.
Tempest Re
Claims arising under contracts written by Tempest Re are managed in Bermuda
by Tempest Re. Tempest Re also maintains a claims database into which all
notices of loss are entered. Loss notices are received from brokers. They are
reviewed and case reserves are established for Tempest Re's portion of the
loss. Case reserves are then adjusted based on receipt of further
notifications from brokers.
ACE USA
The claims handling process is critical to ACE USA given that its specialty
property and umbrella coverages are written on an excess coverage basis. As a
result, losses arise from significant events that tend to present complex
claim issues. Although the claims volume of the US Insurance Subsidiaries has
been historically low compared to premium volume, individual casualty claims
usually involve injuries or damages that amount to more than $1 million. ACE
USA's claims professionals average over 19 years of claims handling
experience. Management believes that this level of experience provides ACE USA
with stability and consistency in its claims handling process.
Recognizing the unique claim handling characteristics of construction defect
claims, ACE USA has a dedicated unit to manage them. The asbestos and
environmental claims arising from policies issued by the US Insurance
Subsidiaries had been subcontracted to Envision Claims Management Corporation
("Envision"), a separate service company that is part of The Resolution Group,
Inc., a former affiliate of ACE USA. Subsequent to September 30, 1998, this
arrangement was discontinued and these claims are now directed by in-house
claim handlers trained to manage specialized coverage and coordination issues
that arise in asbestos and environmental claims.
UNPAID LOSSES AND LOSS EXPENSES
The Company is required to make provisions in its financial statements for
the estimated unpaid liability for losses and loss expenses for claims made
against it under the terms of its policies and agreements. Estimating the
ultimate liability for losses and loss expenses is an imprecise science
subject to variables that are influenced by both internal and external
factors. This is true because claim settlements to be made in the future may
be impacted by changing rates of inflation and other economic conditions,
changing legislative, judicial and social environments and changes in the
Company's claims handling procedures. In many liability 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.
Several aspects of the Company's operations exacerbate the inherent
uncertainties in estimating its losses as compared to more conventional
insurance companies. Primary among these aspects are the limited amount of
statistically significant historical data regarding losses, particularly of
the type intended to be covered by the Company's excess liability policies and
the expectation that losses in excess of the attachment level of the policies
will be characterized by low frequency and high severity, limiting the utility
of claims experience of other insurers for similar claims. Accordingly, the
ultimate claims experience of the Company cannot be as reliably predicted as
may be the case with more traditional insurance companies, and there can be no
assurance that losses and loss expenses will not exceed the reserves.
13
<PAGE>
After a claim is reported to the Company, a case reserve is established for
the estimated ultimate losses and loss expenses, if any, with respect to the
reported claim. The amount and timing of the reserve reflects the judgement of
the claims personnel based upon general corporate reserving practices and on
the experience and knowledge of the claims personnel (including, where
appropriate, outside counsel and claim consultants) regarding the nature and
value of the specific type of claim.
A number of the Company's insureds have given notice of claims relating to
breast implants or components or raw material thereof that had been produced
and/or sold by such insureds. Lawsuits, including class actions, involving
thousands of implant recipients have been filed in both state and federal
courts throughout the United States. Most of the federal cases have been
consolidated pursuant to the rules for Multidistrict Litigation ("MDL") to a
Federal District Court in Alabama, although cases are in the process of being
transferred back to federal courts or remanded to state courts. 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.
Significant uncertainties continue to exist with regard to the ultimate
outcome and cost of the breast implant litigation and value of the opt-out
claims related to it. 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 reserve for
unpaid losses and loss expenses including those arising from breast implant
claims are adequate as at September 30, 1998. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition--Breast Implant
Litigation" in the 1998 Annual Report to Shareholders filed with this Form 10-
K.
The Company engages an independent actuarial firm to review the methods and
assumptions used by the Company in estimating the unpaid loss and loss
expenses. As stated in its actuarial review, such firm believes that the
methods and assumptions used by the Company are reasonable and appropriate for
use in setting loss reserves at September 30, 1998.
Losses and loss expenses are charged to income as incurred. The reserve for
unpaid losses and loss expenses represents the estimated ultimate losses and
loss expenses less paid losses and loss expenses and is composed of case
reserves, loss expense reserves and IBNR loss reserves. During the loss
settlement period, which can be many years in duration, additional facts
regarding individual claims and trends often will become known. As these
become apparent, case reserves may be adjusted by allocation from the IBNR
loss reserve without any change in the overall reserve. In addition,
application of statistical and actuarial methods may require the adjustment of
the overall reserves upward or downward from time to time. The final liability
nonetheless may be significantly greater than or less than the prior
estimates.
At September 30, 1998, the reserve for unpaid losses including IBNR loss
reserves was $2,484.6 million and the reserve for loss expenses was $193.7
million. The Company believes that its reserves for unpaid losses and loss
expenses including those arising from breast implant claims are adequate as of
September 30, 1998.
The "Analysis of Loss and Loss Expense Development" shown on page 15
presents the subsequent development of the estimated year-end liability for
unpaid losses and loss expenses at the end of each of the years in the eleven-
year period ended September 30, 1998. The top line of the table shows the
estimated liability for unpaid losses and loss expenses recorded at the
balance sheet date for each of the indicated years. This liability represents
the estimated amount of losses and loss expenses for claims arising from all
prior years' policies and agreements that were unpaid at the balance sheet
date, including IBNR loss reserves. The upper
14
<PAGE>
(paid) portion of the table presents the amounts paid as of subsequent years
on those claims for which reserves were carried as of each specified year. The
lower portion of the table shows the re-estimated amount of the previously
recorded liability as of the end of each succeeding year. Several aspects of
the Company's operations, including the low frequency and high severity of
losses in the high excess layers in which the Company provides insurance,
complicate the actuarial reserving techniques utilized by the Company.
Accordingly, the Company expects that ultimate losses and loss expenses
attributable to any single underwriting year will be either more or less than
the incremental changes in the lower portion of the following table.
Management believes, however, that the losses and loss expenses which have
been recorded through September 30, 1998, are adequate to cover the ultimate
cost of losses and loss expenses incurred through September 30, 1998 under the
terms of the company's policies and agreements. Since such provisions are
necessarily based on estimates, the ultimate losses and loss expenses may be
significantly greater or less than such amounts. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition--Breast Implant
Litigation" in the 1998 Annual Report to Shareholders filed with this Form 10-
K.
ANALYSIS OF LOSS AND LOSS EXPENSE DEVELOPMENT
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------------------------------
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
--------- -------- -------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unpaid........... $ 22,500 $ 78,009 $319,230 $ 470,832 $ 813,849 $ 766,402 $1,176,215 $1,489,293 $1,892,302 $2,006,873
Paid (Cumulative)
As Of:
1 year later.... 431 26,190 181,525 149,493 340,836 126,566 66,888 80,080 358,713 337,422
2 years later... 1,195 82,715 207,587 490,116 465,074 183,439 121,628 414,419 663,087
3 years later... 21,307 108,689 531,502 590,847 517,366 228,638 451,746 696,470
4 years later... 42,450 432,541 601,811 611,133 551,887 558,625 725,799
5 years later... 182,110 459,183 622,097 627,691 881,198 837,515
6 years later... 182,110 476,570 631,371 764,607 1,150,628
7 years later... 195,939 484,549 641,060 843,283
8 years later... 196,207 493,326 664,896
9 years later... 196,861 505,976
10 years later.. 201,588
Liability Re-
estimated
As Of:
End of year..... $ 22,500 $ 78,009 $319,230 $ 470,832 $ 813,849 $ 766,402 $1,176,215 $1,489,293 $1,892,302 $2,006,873
1 year later.... 57,682 267,674 475,647 706,960 813,849 966,402 1,177,292 1,489,293 1,892,302 1,989,744
2 years later... 105,503 346,022 665,533 706,960 1,085,012 1,067,987 1,227,538 1,489,293 1,881,403
3 years later... 134,227 516,783 665,533 874,368 1,234,462 1,211,424 1,386,571 1,480,426
4 years later... 333,869 516,783 663,480 888,387 1,412,495 1,429,990 1,401,329
5 years later... 333,869 487,911 680,119 940,513 1,666,770 1,442,523
6 years later... 185,332 489,556 711,671 1,113,662 1,703,103
7 years later... 176,889 479,306 768,935 1,099,102
8 years later... 179,837 484,041 771,018
9 years later... 177,624 488,646
10 years later.. 181,147
Cumulative
Redundancy/
(deficiency).... (158,647) (410,637) (451,788) (628,270) (889,254) (676,121) (225,114) 8,867 10,899 17,129
Net unpaid losses
and loss
expenses........
Reinsurance
recoverables on
unpaid losses...
Gross unpaid
losses and loss
expenses........
<CAPTION>
1998
----------
<S> <C>
Unpaid........... $2,678,341
Paid (Cumulative)
As Of:
1 year later....
2 years later...
3 years later...
4 years later...
5 years later...
6 years later...
7 years later...
8 years later...
9 years later...
10 years later..
Liability Re-
estimated
As Of:
End of year..... $2,678,341
1 year later....
2 years later...
3 years later...
4 years later...
5 years later...
6 years later...
7 years later...
8 years later...
9 years later...
10 years later..
Cumulative
Redundancy/
(deficiency).... 0
Net unpaid losses
and loss
expenses........ 2,678,341
Reinsurance
recoverables on
unpaid losses... 1,059,528
----------
Gross unpaid
losses and loss
expenses........ 3,737,869
----------
</TABLE>
15
<PAGE>
- --------
(1) The Company does not consider it appropriate to extrapolate future
deficiencies or redundancies based upon the above tables, as conditions
and trends that have affected development of liability in the past may not
necessarily occur in the future.
(2) In 1994, the Company recorded an additional reserve of $200 million,
related primarily to developments in breast implant litigation, in respect
of years prior to 1994.
(3) In 1992, the Company began applying actuarial and statistical methods to
estimate ultimate expected losses and loss expenses for all of the
Company's business since inception. As at September 30, 1994 the Company
changed its method of allocating IBNR to accident and balance sheet years.
This allocation assigns IBNR to years based upon various risk factors
including immaturity of year, amount of earned premium in that year, and
development of known claims. As the Company's loss experience is
characterized as low frequency and high severity, IBNR is considered a
bulk reserve, and is therefore available for loss development from
whichever year it may arise. Prior to 1994, the allocation of IBNR to
accident and balance sheet years was based upon a loss distribution
indicated by the expected loss method employed by the Company. Losses paid
for the year ending September 30, 1988 include an amount of $26.0 million,
which is expected to be recovered from an insured.
(4) It should be noted that on November 1, 1993, the Company acquired CODA, on
July 1, 1996, the Company acquired Tempest Re and on July 9, 1998, the
Company acquired Tarquin. The table has been re-stated to include CODA's,
Tempest Re's and Tarquin's loss experience as if each of these companies
had been wholly-owned subsidiaries of the Company from their inception. On
January 2, 1998, the Company acquired ACE USA, and on April 1, 1998, the
Company acquired CAT Limited. The unpaid loss information for these
companies has been included in the table only for the period ending
September 30, 1998. For the period through September 30, 1997, reinsurance
recoverables were not material to the Company's financials, and the table
was prepared on a net basis. For the year ended September 30, 1998, gross,
ceded and net unpaid liabilities are shown at the bottom of the table.
(5) The "cumulative redundancy/(deficiency)" shown in the table represents the
aggregate change in the reserve estimates over all subsequent years. The
amounts noted are cumulative in nature; that is, an increase in loss
estimate for prior year losses generates a deficiency in each intermediate
year. For instance, a deficiency recognized in 1994 relating to losses
incurred during the year ending September 30, 1992 would be included in
the cumulative deficiency amount for each year from 1992 to 1994, the year
the loss was recognized, yet the deficiency would be reflected in
operating results only in 1994. An analysis of the changes in aggregate
reserves for losses and loss expenses under GAAP is presented below. Since
reserves are necessarily based upon estimates, the ultimate net costs may
vary from the original estimates. As adjustments to these estimates become
necessary, they are reflected in current operations.
RECONCILIATION OF UNPAID LOSSES AND LOSS EXPENSES
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross unpaid losses and loss expenses at
beginning of year......................... $2,111,670 $1,977,680 $1,455,342
Reinsurance recoverable.................... (104,797) (85,378) (3,043)
---------- ---------- ----------
Net unpaid losses and loss expenses at
beginning of year......................... 2,006,873 1,892,302 1,452,299
Unpaid losses and loss expenses assumed in
respect of acquired companies............. 731,949 -- 34,735
Unpaid losses and loss expenses assumed in
respect of reinsurance business acquired.. 6,403 50,326 --
---------- ---------- ----------
Total.................................. 2,745,225 1,942,628 1,487,034
---------- ---------- ----------
Losses and loss expenses incurred in
respect of losses incurring in:
Current year............................. 534,021 486,140 520,277
Prior years.............................. (17,129) -- --
---------- ---------- ----------
Total.................................. 516,892 486,140 520,277
---------- ---------- ----------
Losses and loss expenses paid in respect of
losses incurred in:
Current year............................. 246,354 63,182 41,602
Prior years.............................. 337,422 358,713 73,407
---------- ---------- ----------
Total.................................. 583,776 421,895 115,009
---------- ---------- ----------
Net unpaid losses and loss expenses at end
of year................................... 2,678,341 2,006,873 1,892,302
Reinsurance recoverable on unpaid losses... 1,059,528 104,797 85,378
---------- ---------- ----------
Gross unpaid losses and loss expenses at
end of year............................... $3,737,869 $2,111,670 $1,977,680
========== ========== ==========
</TABLE>
16
<PAGE>
INVESTMENTS
The Finance Committee of the Board of Directors is responsible for the
establishment of the Company's investment policy consistent with the company's
strategies, goals and objectives. The investment policy is reviewed with, and
approved by, the Board of Directors.
The Company's primary investment objectives are to ensure that funds will be
available to meet its insurance and reinsurance obligations and then, to
maximize its rate of return on invested funds within specifically approved
constraints as to credit quality, liquidity and volatility. Accordingly, the
Company's investment portfolio is invested primarily in fixed income
instruments of high credit quality.
The consolidated investment portfolio is divided into three segments. Assets
which are required to match and offset certain specifically identified
liabilities are segregated in an asset-liability management ("ALM") segment.
The second segment, the core portfolio, supports the current general insurance
exposures and is structured to have low to moderate investment risk. The
remainder of the portfolio, the discretionary segment, is invested to enhance
total return and return on equity by taking on additional investment risks
within prudent limits. The core and discretionary portfolios are managed by
professional outside managers whose performance is measured against certain
recognized broad market indices. Written investment guidelines, approved by
the Finance Committee, document standards to ensure portfolio liquidity and
diversification, maintain credit quality, and limit volatility within approved
asset allocation guidelines. The use of financial futures, forwards and
options contracts, as well as certain mortgage derivative securities which do
not provide a planned stable structure of principal and interest payments,
require prior approval from the Finance Committee.
Funds are invested in both U.S. and non-U.S. dollar denominated high-quality
fixed maturity and equity securities. The approved asset allocation targets 20
percent of the consolidated investment portfolio to have an exposure to
equities, with international equities limited to no more than 35 percent of
total equities. This represents an increase from the period January 1995 to
May 1996, when the target equity allocation was 15 percent, with international
equities limited to no more than 20 percent of total equities. The remainder
of the consolidated portfolio is to be invested predominantly in U.S. dollar
fixed income securities. Prior to January 1, 1998, the portfolio had a 5
percent allocation to international bonds. Currency hedging is permitted and
used at the discretion of the investment managers. Prior to the first quarter
of fiscal 1995, all investments were denominated in U.S. dollars, and total
equity exposure was limited to 10 percent of the consolidated investment
portfolio.
The fixed maturity portion of the Company's investment portfolio includes
U.S. and non-U.S. government obligations, corporate bonds, mortgage-backed
securities, and other investment grade securities. Those fixed income
investment managers with authorization to invest a portion of their portfolios
in non-U.S. dollar securities are required to hedge a minimum of 75 percent of
their total non-U.S. dollar exposure. Previously, currency hedging of fixed
income securities was permitted at the discretion of the manager. The
Company's investment guidelines limit investments in high yield and
convertible bonds rated B or better to 5 percent each of the consolidated
investment portfolio. To ensure diversity and limit concentrations of credit
risk, no more than 5 percent of the portfolio may be invested in the
obligations of any one issuer (other than the U.S. government).
The asset allocation target allows 5 percent of the consolidated investment
portfolio to be invested in alternative investments.
For additional information regarding the investment portfolio, including
breakdowns of the sector and maturity distributions, see note 5 to the
consolidated financial statements included in the 1998 Annual Report to
Shareholders.
The trading status of underwriters at Lloyd's in the U.S. is supported by a
unique trust fund structure. The trust funds were reviewed and restructured in
August 1995 in consultation with the New York Insurance Department ("NYID"),
which acts as the domiciliary commissioner for Lloyd's US trust funds held in
the state of New York.
17
<PAGE>
REGULATION
Bermuda
In Bermuda, the businesses of ACE Bermuda, CODA, Tempest Re and CAT are
regulated by the Insurance Act 1978 (as amended by the Insurance Amendment Act
1995) and related regulations (the "Act"). The Act imposes on Bermuda
insurance companies solvency and liquidity standards and auditing and
reporting requirements and grants the Minister of Finance (the "Minister")
powers to supervise, investigate and intervene in the affairs of insurance
companies. Under the Act, ACE Bermuda, Tempest Re and CAT are required to
maintain capital and surplus in excess of $100 million. CODA requires capital
and surplus in excess of $1 million. Each registered insurer must appoint an
independent auditor to audit and report on the Statutory Financial Statements
and Statutory Financial Return on an annual basis. Each company must also
appoint a loss reserve specialist to review and report on the loss reserves of
the insurer on an annual basis.
United Kingdom
United Kingdom and Lloyd's Regulation
The Company has established for marketing purposes, a representative office
in London, England. However, all underwriting operations continue to be
conducted in Bermuda.
The Company, certain of its UK subsidiaries and substantially all staff
employed within the Lloyd's operations are currently subject to the regulatory
jurisdiction of the Council of Lloyd's (the "Council"). This jurisdiction
arises by virtue of the Company's being a controller of each of the four
Lloyd's managing agencies referred to above and the six Corporate Members in
which it has an interest. Certain other subsidiaries have also been approved
as controllers, and are similarly subject to Lloyd's jurisdiction.
Under English law, there are restrictions on the interests Lloyd's brokers
or their holding companies may have in Lloyd's managing agents or their
holding companies.
The UK government has announced the establishment of the Financial Services
Authority ("FSA") as a single regulator to supervise securities, banking and
insurance business, including Lloyd's. The FSA will have wide powers to make
rules, and it is envisaged these will replace the existing statutory and self
regulatory arrangements relevant to these areas. A consultation process has
commenced in relation to Lloyd's regulatory framework. The Company and the
appropriate subsidiaries will seek any necessary authorizations and
permissions in relation to its Lloyd's operations.
Regulation of Lloyd's Entities in the United States
Direct business can be written on either a licensed or a non-admitted (which
includes surplus lines) basis. Licensed insurers are subject to regulation of
both solvency margin and business practices such as premium rate and policy
form control. Non-admitted insurers are not subject to rate and form control
in most states, but regulators manage the entry to the surplus lines market by
imposing minimum solvency and trust requirements for insurers wishing to be
deemed "eligible" surplus lines insurers.
Insurer licensing requirements do not apply to reinsurers and as a result
both licensed and non-admitted reinsurers may write reinsurance in the U.S.
Lloyd's underwriters operate as licensed insurers in Illinois, Kentucky and
the U.S. Virgin Islands and as eligible surplus lines insurers in all states
except Kentucky and the U.S. Virgin Islands. Underwriters are approved for
credit for reinsurance purposes in all states except Michigan, Kansas and
Arizona. Cedents in these states may require underwriters to provide
alternative funding (such as a letter of credit) to enable them to take credit
for reinsurance placed with underwriters at Lloyd's. Similarly, life, accident
and health cedents domiciled in New York may require such funding in order to
allow them to take credit for reinsurance ceded.
18
<PAGE>
Prior to August 1995, all US dollar premiums were deposited and held in the
Lloyd's American Trust Fund ("LATF"), regardless of the actual of the risk.
The LATF continues to support risks for US business incepting prior to August
1995, but the trust fund and accounting arrangements have changed for US
dollar business incepting after August 1, 1995. These include the creation of
a Lloyd's Dollar Trust Fund in the UK and a series of deposit trust funds in
the US. There are additional trust fund arrangements in certain US states.
United States of America
Non-U.S. Operations
The Company and its non-U.S. insurance subsidiaries, excluding its Lloyd's
operations, are not admitted to do business as insurers in any jurisdiction in
the U.S. Each state in the U.S. licenses insurers and prohibits, with some
exceptions, the sale of insurance products by non-admitted insurers within
their applicable jurisdictions.
The Company conducts its insurance business from its offices in Bermuda. All
of the Company's insurance clients are obtained through non-U.S. insurance
brokers and non-U.S. affiliates of U.S. insurance brokers. All insurance
policies are issued and delivered and premiums are received in Bermuda. Based
on, among other things, the foregoing, the Company does not believe it is in
violation of the insurance laws of any state in the U.S.
Many states impose a premium tax (typically 2 percent to 4 percent of gross
premiums) on insureds obtaining insurance from nonadmitted foreign insurers,
such as ACE Bermuda and CODA. The premiums charged by the Company do not
include any American state premium tax. Each insured is responsible for
determining whether it is subject to any such tax and for paying such tax as
may be due.
The U.S. also imposes on policyholders an excise tax on insurance and
reinsurance premiums paid to foreign insurers or reinsurers with respect to
risks located in the United States. The rates of tax applicable to premiums
paid to ACE Bermuda and CODA are 4 percent for insurance premiums and 1
percent for reinsurance premiums.
The Company has from time to time received inquiries from certain U.S. state
insurance regulators regarding the Company's activities in a particular
jurisdiction. To date only the State of Nevada Department of Insurance has
formally challenged the insurance activities of the Company and that challenge
was resolved in favor of the Company by legislation. There can be no assurance
that additional challenges will not be raised in the future or that the
Company will be able to successfully defend against such challenges. Such
challenges may arise, among other things, in connection with actions seeking
the payment of state premium taxes from insureds.
In the event that the Company is not able to successfully defend against
challenges by certain U.S. jurisdictions, the Company's business could be
adversely affected in the short term. However, should this occur, the Company
could elect to qualify as a surplus lines insurer in such U.S. jurisdictions
as were necessary. Were it necessary to do so, the Company believes that
generally it could meet and comply with the prescribed legislative
requirements, and such compliance would not have a material impact on the
ability of the Company to conduct its business or its results of operations.
If the Company is unable to defend successfully against challenges of U.S.
jurisdiction, it is possible that a policyholder could attempt to sue the
Company in a U.S. court. The Company's primary defense to such action is that
it's policies have a mandatory arbitration clause for coverage disputes.
Courts in some states can impose damages in excess of policy limits if an
insurer is found to have improperly and in bad faith declined coverage. If a
U.S. court took jurisdiction of such a claim, it is possible that the
Company's exposure could be significantly greater than policy limits. It is
also possible that an arbitration panel, if the issues were properly
presented, could make an extra-contractual award for bad faith damage.
There can be no assurance that new or additional legislation will not be
proposed and enacted that has the effect of subjecting the Company to
regulation in the U.S.
19
<PAGE>
U.S. Operations
Although at the present time there is limited federal regulation of the
insurance business in the US, the US insurance subsidiaries are subject to
extensive regulation in the states in which they do business. The laws of the
various states establish supervisory agencies with broad authority to
regulate, among other things, licenses to transact business, insurance rates
for certain business, policy language, underwriting and claims practices,
transactions with affiliates, reserve adequacy, dividends and insurer
solvency. In addition, the US insurance subsidiaries are subject to
legislative measures and judicial decisions that define the risks and benefits
for which insurance is sought and provided. These include redefinitions of
insured risk in such areas as product liability and environmental coverages.
The US Insurance Subsidiaries are required to file detailed annual reports
with state insurance regulators in each of the states in which they do
business. Such annual reports are required to be prepared on a calendar year
basis. In addition, the US Insurance Subsidiaries' operations and accounts are
subject to examination at regular intervals by state regulators. The
respective reports made referring to the most recent periodic examinations of
the US Insurance Subsidiaries, contained no material adverse findings. The US
Insurance Subsidiaries are domiciled in the states of New York, Georgia and
Texas.
Statutory surplus is an important measure utilized by the regulators and
rating agencies to assess the Company's US Insurance Subsidiaries' ability to
support business operations and provide dividend capacity. The Company's US
Insurance Subsidiaries are subject to various state statutory and regulatory
restrictions that limit the amount of dividends that may be paid without prior
approval from regulatory authorities. These restrictions differ by state, but
are generally based on calculations incorporating statutory surplus, statutory
net income, and/or investment income.
Insurance company state regulators have adopted Risk Based Capital ("RBC")
requirements for the US Insurance Subsidiaries. These RBC requirements are
designed to monitor capital adequacy and to raise the level of protection that
statutory surplus provides for policyholders. The RBC formula provides a
mechanism for the calculation of an insurance company's Authorized Control
Level (the "ACL") RBC amount. The initial RBC level which triggers regulatory
action is known as the Company Action Level. Failure to achieve this level of
RBC, which occurs if policyholders' surplus falls below 200 percent of the
ACL, requires the insurance company to submit a plan of corrective action to
the relevant insurance commissioner. There are several additional progressive
RBC failure levels, which trigger more stringent regulatory action. Based on
the RBC formula, at December 31, 1997, which is the most recent RBC
calculation, the policyholders' surplus of each of the US Insurance
Subsidiaries was higher than the Company Action Level and, as a result, no
regulatory action or response is required.
Ireland
The Companies were established and operate as limited liability companies
under the Laws of Ireland. The relevant Irish Company Law applies to both
companies. ACE Bermuda Company Europe Limited must also comply with European
Union Insurance Regulations in respect of the 18 Classes of Insurance it is
authorised to provide as supervised by the Irish Department of Enterprise,
Trade and Employment.
20
<PAGE>
TAX MATTERS
United States of America
Corporate Income Tax
ACE is a Cayman Islands corporation and has never paid U.S. corporate income
taxes (other than withholding taxes on dividend income) on the basis that it
is not engaged in a trade or business in the U.S.; however, there can be no
assurance that the Internal Revenue Service ("IRS") will not contend to the
contrary. If the Company were subject to U.S. income tax, there could be a
material adverse effect on the Company's shareholders' equity and earnings.
The Company and its Bermuda-based insurance and reinsurance subsidiaries do
not file U.S. income tax returns reporting income subject to U.S. income tax
since they do not conduct business within the U.S. except that the Company and
its Bermuda-based insurance and reinsurance subsidiaries have filed protective
tax returns reporting no U.S. income to preserve their ability to deduct their
ordinary and necessary business expenses should the IRS successfully challenge
the Company's contention that none of its income is subject to a net income
tax in the U.S.
Related Person Insurance Income
Each U.S. person who beneficially owns Ordinary Shares of the Company
(directly or through foreign entities) on the last day of an insurance company
subsidiary's fiscal year will have to include in such person's gross income
for U.S. tax purposes a proportionate share (determined as described herein)
of the related person insurance income ("RPII") of such insurance company
subsidiary if the RPII of such insurance company subsidiary, determined on a
gross basis, is 20 percent or more of that insurance company subsidiary's
gross insurance income in such fiscal year. RPII is income attributable to
insurance policies where the direct or indirect insureds are U.S. shareholders
or are related to U.S. shareholders of the Company. RPII may be includible in
a U.S. shareholder's gross income for U.S. tax purposes regardless of whether
or not such shareholder is an insured. For the fiscal year ended September 30,
1998, the Company believes that gross RPII of each of its insurance company
subsidiaries was below 20 percent for the year. Although no assurances can be
given, the Company anticipates that gross RPII of each of its insurance
company subsidiaries will be less than 20 percent of each such subsidiary's
gross insurance income for subsequent years and the Company will endeavor to
take such steps as it determines to be reasonable to cause its gross RPII to
remain below such level.
The RPII provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), have never been interpreted by the courts. Regulations interpreting
the RPII provisions of the Code exist only in proposed form, having been
proposed on April 16, 1991. It is not certain whether these regulations will
be adopted in their proposed form or what changes or clarifications might
ultimately be made thereto or whether any such changes, as well as any
interpretation or application of RPII by the IRS, the courts, or otherwise,
might have retroactive effect. For a more detailed discussion of RPII and
other tax matters pertaining to an investment in the Company's shares,
reference is hereby made to the section entitled "Taxation of Ace and its
Shareholders" in the Company's Registration Statement on Form S-4 (No. 333-
04153), which section is incorporated by reference herein.
United Kingdom
Lloyd's is required to pay U.S. income tax on U.S. connected income ("U.S.
income") written by Lloyd's syndicates. Lloyd's has a closing agreement with
the IRS whereby the amount of tax due on this business is calculated by
Lloyd's and remitted directly to the IRS. These amounts are then charged to
the personal accounts of the Names/Corporate Members in proportion to their
participation in the relevant syndicates.
21
<PAGE>
The Company's Corporate Members are subject to this arrangement but, as UK
domiciled companies, will receive UK corporation tax credits for any U.S.
income tax incurred up to the value of the equivalent UK corporation income
tax charge on the U.S. income.
All the subsidiaries of the Company, which are registered in the UK are
subject to UK corporation tax, Value Added Tax and capital gains tax. In
addition, the respective Managing Agents are required, on behalf of
underwriting members participating on ACE managed syndicates, to account, via
Lloyd's, to the UK Tax Authorities for Insurance Premium Taxes.
Bermuda
Under current Bermuda law, the Company and its Bermuda subsidiaries are not
required to pay any taxes on its income or capital gains. The Company has
received an undertaking from the Minister of Finance in Bermuda that, in the
event of any taxes being imposed, the Company will be exempt from taxation in
Bermuda until March 2016.
Ireland
Both companies have received approval from the Irish Government to operate
their facilities in the International Financial Services Centre, Dublin (IFSC)
and have obtained clearance to have their income arising from trading
activities covered under their tax license taxed at 10 percent. This
concession is scheduled to apply to both companies until December 31, 2005.
Corporation Tax will be levied at the standard rate in Ireland on January 1,
2006 and thereafter to all IFSC companies.
Cayman Islands
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.
EMPLOYEES
At September 30, 1998, the Company employed a total of 642 persons, 208 of
whom were located in Bermuda, 199 in London, 233 in the United States and 2 in
Dublin. None of these employees are represented by a labor union.
22
<PAGE>
GLOSSARY OF SELECTED INSURANCE TERMS
<TABLE>
<S> <C>
Catastrophe Excess of Loss Reinsurance....... Catastrophe excess of loss reinsurance
provides coverage to a primary insurer when
aggregate claims and claim expenses from a
single occurrence of a peril covered under
a portfolio of primary insurance contracts
written by the insurer exceed the
attachment point specified in the
reinsurance contract with the insurer.
Claims made form............................. Insurance coverage which is dependent upon
the filing of a claim, which must normally
fall within the policy period.
IBNR loss reserves........................... The reserves included in the Company's
financial statements under the caption
"Unpaid Losses and Loss Expenses" for the
estimated ultimate unpaid liability which
the Company has incurred under the terms of
the Company's policies and agreements, less
case reserves.
Integrated occurrence........................ All losses attributable directly or
indirectly to the same event, condition,
cause, defect or hazard or failure to warn
of such which are added together and
treated as one occurrence under an
insured's policy.
Occurrence first reported.................... Manuscripted form of stand-alone insurance
coverage offered by the Company, which
generally ties the limits available and
other policy terms to the date on which an
occurrence is first reported to the
Company.
Proportional Property Reinsurance............ Proportional property reinsurance treaties
assume a specified percentage of the risk
exposure under a portfolio of primary
insurance contracts written by the ceding
insurer and receive an equal percentage of
the premium received by the ceding insurer.
Risk Excess of Loss Reinsurance.............. Property per risk excess of loss
reinsurance responds to a loss of the
reinsured in excess of its retention level
on a single "risk," rather than to
aggregate losses for all covered risks. A
risk in this context might mean the
insurance coverage on one building or a
group of buildings.
Stand alone basis............................ A term referring to an insurance policy
which is governed by its own terms,
conditions, exclusions and retention and
does not incorporate the terms, conditions
or exclusions of underlying policies.
</TABLE>
23
<PAGE>
ITEM 2. PROPERTIES
The Company operates from offices in Bermuda, the United Kingdom, the United
States and Ireland. In Bermuda, the Company leases its principal offices from
a joint venture company in which the Company has a 40 percent interest and
there is an agreement with the joint venture partner which ensures the
Company's ability to occupy a portion of the building until 2011. The Company
is currently building new corporate headquarters in Bermuda that will house
its Bermuda-based operations. It is expected that this facility will be
available by the end of 2000.
All other office facilities, including those occupied by Tempest in Bermuda,
ACE USA in Atlanta, Georgia; New York, New York; Los Angeles and San
Francisco, California; ACE Global Markets in London, England and ACE Europe in
Dublin, Ireland are leased. During 1998, ACE Global Markets consolidated the
operations of Methuen and ACE London into its current office space and
disposed of the two existing leases.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries, in common with the insurance industry in
general, are subject to litigation in the normal course of its business.
Although the policies issued by the Company's Bermuda-based insurance
subsidiaries generally provide for resolution of disputes by arbitration in
Bermuda or London, one of these subsidiaries has been sued by insureds several
times in the United States and, with one exception which is currently on
appeal, has been successful in either being dismissed from such suits or in
having such suits dismissed on procedural grounds or stayed pending the
results of arbitration. In addition, that same Bermuda subsidiary is
occasionally named as a party in Louisiana "direct action" suits by insureds.
That subsidiary has sought dismissal of these actions as well and decisions
are pending in these actions. At September 30, 1998, the Company and its
subsidiaries were not party to any material litigation other than as
encountered in claims activity and none of such litigation is expected by
management to have a materially adverse effect on the Company's financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE COMPANY
The table below sets forth the names, ages, positions and business
experience of the executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Brian Duperreault 51 Chairman, President and Chief Executive Officer &
Director
Donald Kramer 61 Vice Chairman and Director; President and Chief
Executive Officer of Tempest Reinsurance Company
Limited
John Charman 46 Chief Executive Officer of ACE UK Limited
Dominic J. Frederico 45 President of A.C.E. Insurance Company, Ltd.
William J. Loschert 59 Chairman of ACE UK Limited
Dennis B. Reding 50 President and Chief Executive Officer of ACE USA
Christopher Z. Marshall 42 Chief Financial Officer
Peter N. Mear 54 General Counsel & Secretary
John C. Burville 51 Chief Actuary
Robin J.W. Masters 43 Chief Investment Officer
Keith P. White 55 Chief Administration Officer
</TABLE>
24
<PAGE>
Brian Duperreault has been a director and Chairman, President and Chief
Executive Officer of the Company since October 1994. Prior to joining the
Company, Mr. Duperreault had been employed with American International Group
("AIG") since 1973 and served in various senior executive positions with AIG
and its affiliates from 1978 until September 1994, most recently as Executive
Vice President, Foreign General Insurance and, concurrently, as Chairman and
Chief Executive Officer of American International Underwriters Inc., a
subsidiary of AIG, from April 1994 to September 1994. Mr. Duperreault was
President of American International Underwriters Inc. from 1991 to April 1994,
and chief executive officer of AIG affiliates in Japan and Korea from 1989
until 1991.
Donald Kramer has been a director and Vice Chairman of the Company and
President of Tempest Reinsurance Company Limited ("Tempest") since July 1996.
Mr. Kramer served as Chairman or Co-Chairman of the Board of Tempest from its
formation in September 1993 until July 1996. Tempest was acquired by the
Company on 1 July 1996. Prior to the formation of Tempest, he was President of
Kramer Capital Corporation (venture capital investments) from March to
September 1993, President of Carteret Federal Savings Bank (banking) from
August 1991 to March 1993, Chairman of the Board of NAC Re Corporation
(reinsurance) from June 1985 to June 1993, Chairman of the Board and Chief
Executive Officer of KCP Holding Company (insurance) from July 1986 to August
1991 and of its affiliates, KCC Capital Managers (insurance investments) and
Kramer Capital Consultants, Inc. (insurance investments), as well as Chairman
of the Board of its subsidiary, National American Insurance Company of
California (insurance) from September 1988 to August 1991.
John Charman has served as Chief Executive Officer of ACE UK Limited since
July 1998, and continues to act as Active Underwriter to Lloyd's Syndicate
488/2488. Mr. Charman has been the Active Underwriter of Syndicate 488 since
July 1986. Mr. Charman previously served as Managing Director of Charman
Underwriting Agencies Limited, and since 1994, as Chief Executive of Tarquin
Underwriters Limited, the corporate capital provider of Syndicate 2488.
Dominic J. Frederico has served as President of A.C.E. Insurance Company,
Ltd. since July 1997. Mr. Frederico previously served as Executive Vice
President, Underwriting since December 1, 1996, and as Executive Vice
President, Financial Lines from January 1995 to December 1, 1996. Mr.
Frederico served in various capacities at AIG in Europe and the U.S. from 1982
to January 1995, most recently as Senior Vice President and Chief Financial
Officer of an AIG subsidiary, with multi-regional general management
responsibilities.
William J. Loschert was appointed as Chairman of ACE UK Limited with effect
from December 1, 1996 to oversee the Company's insurance operations at
Lloyd's. Mr. Loschert previously served as Executive Vice President,
Underwriting of the Company since January 1986.
Dennis B. Reding has served as President and Chief Executive Officer of ACE
USA since January 1998. Mr. Reding previously served as President and Chief
Executive Officer of Westchester Specialty Group, Inc. ("WSG"), a position he
held since July 1993. Prior to joining WSG, Mr. Reding served in various
senior positions at Fireman's Fund Insurance Company.
Christopher Z. Marshall has served as Chief Financial Officer of the Company
since November 1992 and as Senior Vice President, Finance of the Company from
January 1990 to November 1992.
Peter N. Mear has served as General Counsel and Secretary of the Company
since April 1996. Mr. Mear served as Vice President and Claims Counsel of
Aetna Casualty and Surety Company from February 1991 to April 1996 and Counsel
and Litigation Section Head of Aetna Life & Casualty from September 1977 to
February 1991.
John C. Burville has served as Chief Actuary of the Company since January
1992. Mr. Burville served as managing actuarial consultant with Tillinghast,
Nelson & Warren (Bermuda) Ltd. (management consulting and actuaries) from
March 1986 to December 1991.
25
<PAGE>
Robin J. W. Masters has served as Chief Investment Officer since July 1,
1997. Ms. Masters previously served as Senior Vice President since February
1995 and as Treasurer of the Company since October 1992.
Keith P. White has served as Chief Administration Officer since July 1,
1997. Mr. White previously served as Senior Vice President, Administration of
the Company since January 1990.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S ORDINARY SHARES AND RELATED STOCKHOLDER
MATTERS
(a) The Company's Ordinary Shares, par value $0.041666667 per share, have
been listed on the New York Stock Exchange since March 25, 1993, under the
symbol ACL. On November 13, 1997, the Company declared a three-for-one split
of the Company's stock. 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 following table sets forth the high and low closing sales prices of the
Company's Ordinary Shares per fiscal quarters, as reported on the New York
Stock Exchange Composite Tape for the periods indicated:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997
----------------- -----------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
<S> <C> <C> <C> <C>
First Quarter......................... 33 31/64 29 43/64 20 3/64 17 29/64
Second Quarter........................ 40 15/16 30 27/64 22 5/64 18 7/8
Third Quarter......................... 40 5/16 34 7/16 24 7/8 19 27/64
Fourth Quarter........................ 42 1/8 26 15/16 32 11/64 24 1/2
</TABLE>
The last reported sale price of the Ordinary Shares on the New York Stock
Exchange Composite Tape on December 15, 1998 was $27 11/16.
(b) The approximate number of record holders of Ordinary Shares as of
December 15, 1998 was 439.
(c) The Company paid quarterly dividends of $0.06 per share to shareholders
of record on December 29, 1996 and March 31, 1997, quarterly dividends of
$0.0733 per share to shareholders of record on June 30, 1997 and September 30,
1997 and a quarterly dividend of $0.08 per share to shareholders of record on
December 13, 1997. Following the approval by the shareholders of the three-
for-one stock split the Company paid quarterly dividends of $0.08 per share to
shareholders of record on March 31, 1998 and $0.09 per share to shareholders
of record on June 30, 1998 and September 30, 1998. On November 13, 1998 the
Company declared a quarterly dividend of $0.09 per Ordinary Share, payable on
January 16, 1999 to shareholders of record on December 15, 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 first two quarters
of fiscal 1998, the Company repurchased 3,521,100 Ordinary Shares under the
share repurchase program for an aggregate cost of $107.6 million. No shares
were repurchased after March 31, 1998. 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. During 1997 the Company
repurchased 9,093,000 Ordinary Shares under share repurchase programs for an
aggregate cost of $182.6 million.
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").
26
<PAGE>
ACE is a holding company whose principal source of income is investment
income and dividends from its operating subsidiaries. The ability of the
operating subsidiaries to pay dividends to ACE and the Company's ability to
pay dividends to its shareholders are each subject to legal and regulatory
restrictions. The declaration and payment of future dividends will be 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. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition--Liquidity and Capital
Resources" in the 1998 Annual Report to Shareholders filed with this Form 10-
K.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the five years ended September 30, 1998 is
incorporated by reference to page 16 of the 1998 Annual Report to Shareholders
filed with this Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
This item is incorporated by reference to pages 18 through 38 of the 1998
Annual Report to Shareholders filed with this Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This item is incorporated by reference to page 35 and 36 of the 1998 Annual
Report to Shareholders filed with this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
This item is incorporated by reference to pages 40 through 76 of the 1998
Annual Report to Shareholders filed with this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in nor any disagreements with accountants on
accounting and financial disclosure within the 24 months ended September 30,
1998.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This item is incorporated by reference to the sections entitled "Election of
Directors--Nominees for Election to Terms Expiring in 2000," "Election of
Directors--Nominees for Election to Terms Expiring in 2001" and "Election of
Directors--Directors Whose Terms of Office Will Continue After This Meeting"
of the definitive proxy statement for the Annual General Meeting of
Shareholders to be held on February 5, 1999, which involves the election of
directors and will be filed with the Securities and Exchange Commission not
later than 120 days after the close of the fiscal year pursuant to regulation
14A.
ITEM 11. EXECUTIVE COMPENSATION
This item is incorporated by reference to the section entitled "Executive
Compensation" of the definitive proxy statement for the Annual General Meeting
of Shareholders to be held on February 5, 1999, which will be filed with the
Securities and Exchange Commission not later than 120 days after the close of
the fiscal year pursuant to regulation 14A.
27
<PAGE>
ITEM 12. SECURITY OWNERSHIP AND CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This item is incorporated by reference to the section entitled "Beneficial
Ownership of Ordinary Shares" of the definitive proxy statement for the Annual
General Meeting of Shareholders to be held on February 5, 1999, which will be
filed with the Securities and Exchange Commission not later than 120 days
after the close of the fiscal year pursuant to regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This item is incorporated by reference to the section entitled "Election of
Directors--Certain Business Relationships" of the definitive proxy statement
for the Annual General Meeting of Shareholders to be held on February 5, 1999,
which will be filed with the Securities and Exchange Commission not later than
120 days after the close of the fiscal year pursuant to regulation 14A.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
1. Financial Statements
The following is a list of financial statements filed as part of
this Report, all of which have been incorporated by reference to the
material in the 1998 Annual Report to Shareholders as described
under item 8 of this Report:
--Report of Independent Accountants
--Consolidated Balance Sheets at September 30, 1998 and 1997
--Consolidated Statements of Operations for the years ended
September 30, 1998, 1997 and 1996
--Consolidated Statements of Shareholders' Equity for the years
ended September 30, 1998, 1997 and 1996
--Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1997 and 1996
--Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
Included in Part IV of this report.
<TABLE>
<CAPTION>
SCHEDULE
NUMBER PAGE
-------- ----
<S> <C> <C>
--Report of Independent Accountants on financial
statement schedules included in Form 10-K 32
--Summary of Investments I 33
--Condensed financial information of the Registrant as
of September 30, 1998 and 1997 and for the years ended
September 30, 1998, 1997 and 1996 II 34
--Supplemental information concerning Property/Casualty
Insurance Operations VI 37
</TABLE>
Other schedules have been omitted as they are not applicable to the Company,
or the required information has been included in the financial statements and
related notes.
3. Exhibits
<TABLE>
<C> <S>
2.1 Agreement and Plan of Amalgamation, dated as of March 14, 1996,
by and among ACE Limited, TRCL Acquisition Limited and Tempest
Reinsurance Company Limited (incorporated by reference to
Exhibit 2.1 to Form S-4 of the Company (No. 333-04153)).
2.2 Stock Purchase Agreement, dated September 18, 1997 by and
between ACE Limited and Talagen Holdings, Inc.
</TABLE>
28
<PAGE>
<TABLE>
<C> <S>
2.3 Tax Allocation and Indemnification Agreement, dated September
18, 1997 by and among Xerox Financial Services, Inc., Talagen
Holdings, Inc., Westchester Specialty Group and ACE Limited.
2.4 Stock Purchase Agreement dated as of March 25, 1998, by and
among ACE Limited, CAT Limited and the selling shareholders
named therein (incorporated by reference to Exhibit 2.1 to the
Registration Statement on Form S-3 of the Company (No. 333-
49257)).
2.5 Share Purchase Agreement dated June 15, 1998, by and among J.R.
Charman & Others, Chairman Group Limited, Tarquin Limited and
ACE Limited (incorporated by reference to Exhibit 2.1 to Form 8-
K current report (date of earliest event reported: July 9, 1998)
pertaining to the completion of the acquisition of Tarquin
Limited).
3.1 Memorandum of Association of the Company.
3.2 Articles of Association of the Company.
4.1 Memorandum of Association of the Company (see Exhibit 3.1).
4.2 Articles of Association of the Company (see Exhibit 3.2).
4.3 Specimen certificate representing Ordinary Shares, (incorporated
by reference to Exhibit 3.1 to the Registration Statement on
Form S-1 of the Company (No. 33-57206)).
10.1* Employment Agreement dated December 23, 1985, between ACE
Limited, A.C.E. Insurance Company Ltd., and William J. Loschert,
(incorporated by reference to Exhibit 10.8 to the Registration
Statement on Form S-1 of the Company (No. 33-57206)).
10.2* Employment Agreement dated January 1, 1986, between ACE Limited,
A.C.E. Insurance Company Ltd., and Christopher Z. Marshall,
(incorporated by reference to Exhibit 10.9 to the Registration
Statement on Form S-1 of the Company (No. 33-57206)).
10.3* ACE Limited Annual Performance Incentive Plan, (incorporated by
reference to Exhibit 10.13 to the Registration Statement on Form
S-1 of the Company (No. 33-57206)).
10.4* ACE Limited Equity Linked Incentive Plan, (incorporated by
reference to Exhibit 10.14 to the Registration Statement on Form
S-1 of the Company (No. 33-57206)).
10.5* Amendment to ACE Limited Equity Linked Incentive Plan,
(incorporated by reference to Exhibit 10.15 to the Registration
Statement on Form S-1 of the Company (No. 33-57206)).
10.6* ACE Limited Employee Retirement Plan, (incorporated by reference
to Exhibit 10.21 to the Registration Statement on Form S-1 of
the Company (No. 33-57206)).
10.7* First Amendment to ACE Limited Employee Retirement Plan,
(incorporated by reference to Exhibit 10.22 to the Registration
Statement on Form S-1 of the Company (No. 33-57206)).
10.8* Second Amendment to ACE Limited Employee Retirement Plan,
(incorporated by reference to Exhibit 10.23 to the Registration
Statement on Form S-1 of the Company (No. 33-57206)).
10.9* Third Amendment to ACE Limited Employee Retirement Plan,
(incorporated by reference to Exhibit 10.24 to the Registration
Statement on Form S-1 of the Company (No. 33-57206)).
10.10* ACE Limited Supplement Retirement Plan, (incorporated by
reference to Exhibit 10.25 to the Registration Statement on Form
S-1 of the Company (No. 33-57206)).
10.11* First Amendment to ACE Limited Supplement Retirement Plan,
(incorporated by reference to Exhibit 10.26 to the Registration
Statement on Form S-1 of the Company (No. 33-57206)).
10.12* Second Amendment to ACE Limited Supplement Retirement Plan,
(incorporated by reference to Exhibit 10.27 to the Registration
Statement on Form S-1 of the Company (No. 33-57206)).
</TABLE>
29
<PAGE>
<TABLE>
<C> <S>
10.13* Form of restricted stock award dated August 24, 1993 to ACE
Limited Directors, (incorporated by reference to Exhibit 10.39
to Form 10-K of the Company for the year ended September 30,
1993).
10.14* Employment Agreement, dated October 1, 1994, between ACE Limited
and Brian Duperreault, (incorporated by reference to Exhibit
10.42 to Form 10-K of the Company for the year ended September
30, 1994).
10.15* Option and Restricted Share Agreement, dated October 1, 1994,
between ACE Limited and Brian Duperreault, (incorporated by
reference to Exhibit 10.43 to Form 10-K of the Company for the
year ended September 30, 1994).
10.16* Consulting Agreement, effective October 1, 1994, between ACE
Limited and Walter A. Scott, (incorporated by reference to
Exhibit 10.44 to Form 10-K of the Company for the year ended
September 30, 1994).
10.17* Employment Agreement, dated January 9, 1995, between ACE Limited
and Dominic J. Frederico, (incorporated by reference to Exhibit
10.45 to Form 10-K of the Company for the year ended September
30, 1995).
10.18* Second amendment to ACE Limited Equity Linked Incentive Plan,
(incorporated by reference to Exhibit 10.45 to Form 10-K of the
Company for the year ended September 30, 1995).
10.20* Employment Agreement, dated April 1, 1996, between ACE Limited
and Peter N. Mear, (incorporated by reference to Exhibit 10.48
to Form 10-Q of the Company for the quarter ended June 30,
1996).
10.21* ACE Limited 1995 Long Term Incentive Plan, (incorporated by
reference to Exhibit 10.35 to Form 10-Q of the Company for the
quarter ended March 31, 1996).
10.22* Employee Stock Purchase Plan, (incorporated by reference to
Exhibit 10.36 to Form 10-Q of the Company for the quarter ended
March 31, 1996).
10.23* 1995 Outside Directors Plan, (incorporated by reference to
Exhibit 10.37 to Form 10-Q of the Company for the quarter ended
March 31, 1996).
10.24* ACE Limited 1996 Tempest Replacement Option Plan, (incorporated
by reference to Exhibit 10.24 to Form 10-K of the Company for
the year ended September 30, 1996).
10.25 Credit Agreement between the Company and a syndicate of banks
dated November 15, 1996.
10.26 Reimbursement Agreement and Pledge Agreement between the Company
and a syndicate of banks dated November 22, 1996.
10.27* First Amendment of ACE Limited 1995 Long Term Incentive Plan,
(incorporated by reference to Exhibit 10.27 to Form 10-K of the
Company for the year ended September 30, 1996).
10.28* Third Amendment to Equity Linked Incentive Plan--Stock
Appreciation Right Plan, (incorporated by reference to Exhibit
10.28 to Form 10-Q of the Company for the quarter ended March
31, 1997).
10.29* First Amendment of ACE Limited 1995 Outstanding Directors Plan,
(incorporated by reference to Exhibit 10.29 to Form 10-Q of the
Company for the quarter ended June 30, 1997).
10.30 364 day Credit Agreement dated as of December 11, 1997 among ACE
Limited, A.C.E. Insurance Company Ltd., Corporate Officers &
Directors Assurance Ltd, and Tempest Reinsurance Company
Limited, the Banks listed on the signature pages hereof and
Morgan Guaranty Trust Company of New York, as Administrative
Agent, (incorporated by reference to exhibit 10.30 to form 10-K
of the Company for the year ended September 30, 1997).
</TABLE>
30
<PAGE>
<TABLE>
<C> <S>
10.31 Five year Credit Agreement dated as of December 11, 1997 among
ACE Limited, A.C.E. Insurance Company Ltd., Corporate Officers &
Directors Assurance Ltd, and Tempest Reinsurance Company
Limited, the Banks listed on the signature pages hereof and
Morgan Guaranty Trust Company of New York, as Administrative
Agent, (incorporated by reference to exhibit 10.31 to form 10-K
of the Company for the year ended September 30, 1997).
10.32 Amended and Restated Reimbursement Agreement dated as of
December 11, 1997 among A.C.E. Insurance Company Ltd., the Banks
listed on the signature pages hereof and Morgan Guaranty Trust
Company of New York, as Issuing Bank and Administrative Agent,
(incorporated by reference to exhibit 10.32 to form 10-K of the
Company for the year ended September 30, 1997).
10.33 Term Loan Agreement dated as of December 11, 1997 among ACE US
Holdings, Inc., ACE Limited, the Banks listed on the signature
pages hereof and Morgan Guaranty Trust Company of New York, as
Administrative Agent, (incorporated by reference to exhibit
10.33 to form 10-K of the Company for the year ended September
30, 1997).
10.34* ACE Limited Elective Deferred Compensation Plan, (incorporated
by reference to Exhibit 10.1 to Form 10-Q of the Company for the
quarter ended December 31, 1997).
10.35* ACE Limited Rules of the Approved U.K. Stock Option Program,
(incorporated by reference to Exhibit 10.1 to Form 10-Q of the
Company for the quarter ended December 31, 1997).
10.36* ACE Limited 1998 Long-Term Incentive Plan.
10.37 ACE US Holdings, Inc. Credit Sensitive Senior Notes due 2008
Indenture dated as of October 27, 1998.
13.1 Pages 16 through 76 of the 1998 Annual Report to Shareholders.
21.1 Subsidiaries of the Company.
23.1 Consent of PricewaterhouseCoopers LLP.
27.1 Financial Data Schedule.
99.1 Summary of taxation of ACE, its subsidiaries and shareholders.
</TABLE>
- --------
*Management Contract or Compensation Plan
(b) REPORTS ON FORM 8-K
Other than as previously reported in the Form 10-Q of the Company for the
quarter ended June 30, 1998, there were no reports on Form 8-K filed
during the quarter.
31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT
SCHEDULES INCLUDED IN FORM 10-K
Our report on the consolidated financial statements of ACE LIMITED AND
SUBSIDIARIES has been incorporated by reference in this Form 10-K from page 43
of the 1998 Annual Report to Shareholders of ACE Limited. In connection with
our audits of such financial statements, we have also audited the related
financial statement schedules listed in item 14 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as whole,
present fairly, in all material respects, the information required to be
included therein.
PricewaterhouseCoopers llp
New York, New York
November 4, 1998
32
<PAGE>
SCHEDULE I
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
ACE LIMITED AND SUBSIDIARIES
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
AMOUNT AT
COST OR WHICH SHOWN
AMORTIZED IN THE
COST FAIR VALUE BALANCE SHEET
---------- ---------- -------------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C>
FIXED MATURITIES:
Bonds:
U.S. Treasury and agency............... $ 771,678 $ 796,535 $ 796,535
Non-U.S. governments................... 122,233 126,998 126,998
Corporate securities................... 2,265,755 2,339,786 2,339,786
Mortgage-backed securities............. 1,710,591 1,751,769 1,751,769
States, municipalities and political
subdivision........................... 40,535 41,719 41,719
---------- ---------- ----------
Total fixed maturities............... 4,910,792 5,056,807 5,056,807
---------- ---------- ----------
EQUITY SECURITIES:
Common stock:
Public utilities....................... 7,248 5,753 5,753
Banks, trust and insurance companies... 33,531 30,490 30,490
Industrial, miscellaneous and all
other................................. 157,422 153,349 153,349
Non redeemable preferred stock........... 246 125 125
---------- ---------- ----------
Total equity securities.............. 198,447 189,717 189,717
---------- ---------- ----------
Other investments........................ 156,758 156,646 156,646
Short-term investments and cash.......... 797,950 797,904 797,904
---------- ---------- ----------
Total investments and cash........... $6,063,947 $6,201,074 $6,201,074
========== ========== ==========
</TABLE>
33
<PAGE>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACE LIMITED AND SUBSIDIARIES
BALANCE SHEETS (PARENT COMPANY ONLY)
SEPTEMBER 30, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(IN THOUSANDS OF U.S.
DOLLARS)
<S> <C> <C>
ASSETS
Investments and cash
Investments in subsidiaries and affiliate on equity
basis............................................... $3,635,641 $2,850,585
Other investments, at cost........................... 33,465 33,151
Cash................................................. 6,057 17,770
---------- ----------
Total investments and cash......................... 3,675,163 2,901,506
Due from subsidiaries and affiliates, net.............. 56,857 14,272
Other assets........................................... 6,719 10,891
---------- ----------
Total assets....................................... $3,738,739 $2,926,669
========== ==========
LIABILITIES
Advances from affiliate................................ $ -- $ 122,270
Accounts payable and accrued liabilities............... 6,776 6,807
Dividend payable....................................... 17,693 12,436
Due to subsidiaries and affiliates, net................ -- --
---------- ----------
Total liabilities.................................. 24,169 141,513
---------- ----------
SHAREHOLDERS' EQUITY
Ordinary Shares........................................ 8,066 7,508
Additional paid-in capital............................. 1,765,261 1,177,954
Unearned stock grant compensation...................... (6,181) (1,993)
Net unrealized appreciation on investments............. 127,845 196,655
Cumulative translation adjustment...................... (275) 1,568
Retained earnings...................................... 1,819,554 1,403,464
---------- ----------
Total shareholders' equity......................... 3,714,270 2,785,156
---------- ----------
Total liabilities and shareholders' equity......... $3,738,739 $2,926,669
========== ==========
</TABLE>
34
<PAGE>
SCHEDULE II--(CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACE LIMITED AND SUBSIDIARIES
STATEMENTS OF OPERATIONS (PARENT COMPANY ONLY)
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(IN THOUSANDS OF U.S.
DOLLARS)
<S> <C> <C> <C>
Revenues
Management fees................................ $ -- $ 26,601 $ 21,081
Investment income, including intercompany
interest income............................... (12,514) (17,348) (6,881)
Equity in net income of subsidiaries and
affiliate..................................... 616,658 522,368 351,245
Net realized losses on investments............. (6) (16) --
-------- -------- --------
604,138 531,605 365,445
Expenses
Administrative expenses........................ (43,987) (28,880) (37,826)
-------- -------- --------
Net income................................... $560,151 $502,725 $327,619
======== ======== ========
</TABLE>
35
<PAGE>
SCHEDULE II--(CONTINUED)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ACE LIMITED AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY)
FOR THE YEARS ENDED SEPTEMBER 30, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net income.................................. $ 560,151 $ 502,725 $ 327,619
Adjustments to reconcile net income to net
cash provided by operation activities
Equity in net income of subsidiaries and
affiliate................................ (616,658) (522,368) (351,245)
Realized losses on investments............ 6 16 --
Amounts due to subsidiaries and affiliate,
net...................................... (41,585) (6,944) (4,036)
Accounts payable and accrued liabilities.. (33) (10,004) 6,625
Accrued interest on advance to affiliate.. (18,250) 3,978 (9,729)
Other..................................... 2,405 (6,804) (3,957)
--------- --------- ---------
Net cash flows used for operating
activities............................. (114,966) (39,401) (34,723)
--------- --------- ---------
Cash flow from investing activities
Dividends received from subsidiaries........ 365,000 190,000 135,000
Capitalization of subsidiary................ (856,477) -- 74,123
Advances to affiliate....................... -- (241,000) (284,620)
Repayment of advances to affiliate.......... -- (19,817) --
Other....................................... (314) -- --
--------- --------- ---------
Net cash used for investing activities.. (491,791) (70,817) (75,497)
--------- --------- ---------
Cash flows from financing activities
Repurchase of Ordinary Shares............... (107,644) (182,648) (57,931)
Dividends paid.............................. (54,389) (43,028) (27,685)
Net proceeds from issuance of Ordinary
Shares..................................... 605,899 -- --
Proceeds from bank debt..................... 635,000 -- --
Repayment of bank debt...................... (385,000) -- --
Proceeds from exercise of options for
shares..................................... 4,243 2,191 28
Proceeds from shares issued under ESPP...... 955 -- --
Proceeds from shares issued under SAR Plan.. -- 4,156 --
Advances from affiliate..................... 504,600 525,020 198,050
Loan Repayments............................. (608,620) (180,000) --
--------- --------- ---------
Net cash from financing activities...... 595,044 125,691 112,462
--------- --------- ---------
Net increase (decrease) in cash............... (11,713) 15,473 2,242
Cash--beginning of year....................... 17,770 2,297 55
--------- --------- ---------
Cash--end of year............................. $ 6,057 $ 17,770 $ 2,297
========= ========= =========
</TABLE>
36
<PAGE>
SCHEDULE VI
ACE LIMITED AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY/CASUALTY OPERATIONS
<TABLE>
<CAPTION>
LOSSES AND LOSS
RESERVES EXPENSES
FOR UNPAID INCURRED RELATED TO AMORTIZATION PAID
DEFERRED LOSSES NET ------------------- OF DEFERRED LOSSES NET
ACQUISITION AND LOSS UNEARNED EARNED INVESTMENT CURRENT PRIOR ACQUISITION AND LOSS PREMIUMS
COSTS EXPENSES PREMIUM PREMIUM INCOME YEAR YEAR COSTS EXPENSES WRITTEN
----------- ---------- -------- -------- ---------- ------------------- ------------ -------- --------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998............ $76,445 $2,678,341 $773,702 $894,303 $324,254 $ 534,021 $ (17,129) $105,654 $583,776 $880,973
1997............ $51,191 $2,006,873 $510,231 $805,372 $253,440 $ 486,140 -- $ 85,762 $421,895 $789,773
1996............ $56,313 $1,892,302 $515,962 $755,840 $213,701 $ 520,277 -- $ 96,518 $115,009 $781,884
</TABLE>
37
<PAGE>
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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/ Christopher Z. Marshall
By: _________________________________
Christopher Z. Marshall
Chief Financial Officer
December 17, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Brian Duperreault
- ------------------------------------
Brian Duperreault Chairman, President and
Chief Executive Officer;
Director December 17, 1998
/s/ Christopher Z. Marshall
- ------------------------------------
Christopher Z. Marshall Chief Financial Officer
(Principal Financial and
Accounting Officer) December 17, 1998
/s/ Donald Kramer
- ------------------------------------
Donald Kramer Vice Chairman; Director December 17, 1998
/s/ Michael G. Atieh
- ------------------------------------
Michael G. Atieh Director December 17, 1998
/s/ Bruce L. Crockett
- ------------------------------------
Bruce L. Crockett Director December 17, 1998
/s/ Jeffrey W. Greenberg
- ------------------------------------
Jeffrey W. Greenberg Director December 17, 1998
/s/ Meryl D. Hartzband
- ------------------------------------
Meryl D. Hartzband Director December 17, 1998
/s/ Robert M. Hernandez
- ------------------------------------
Robert M. Hernandez Director December 17, 1998
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Peter Menikoff
- ------------------------------------
Peter Menikoff Director December 17, 1998
/s/ Thomas J. Neff
- ------------------------------------
Thomas J. Neff Director December 17, 1998
/s/ Glen M. Renfrew
- ------------------------------------
Glen M. Renfrew Director December 17, 1998
/s/ Robert Ripp
- ------------------------------------
Robert Ripp Director December 17, 1998
/s/ Walter A. Scott
- ------------------------------------
Walter A. Scott Director December 17, 1998
/s/ Dermot F. Smurfit
- ------------------------------------
Dermot F. Smurfit Director December 17, 1998
/s/ Robert W. Staley
- ------------------------------------
Robert W. Staley Director December 17, 1998
/s/ Gary M. Stuart
- ------------------------------------
Gary M. Stuart Director December 17, 1998
/s/ Sidney F. Wentz
- ------------------------------------
Sidney F. Wentz Director December 17, 1998
</TABLE>
39
<PAGE>
THE COMPANIES LAW
-----------------
COMPANY LIMITED BY SHARES
-------------------------
MEMORANDUM OF ASSOCIATION
OF
ACE LIMITED
(as amended by Special Resolution on 14th January, 1993)
(as amended by Special Resolution on 6th February, 1998
with effect from 2nd March, 1998)
1. The name of the Company is ACE Limited.
2. The Registered Office of the Company shall be the offices of Messrs. Maples
and Calder, P.O. Box 309, George Town, Grand Cayman, Cayman Islands, British
West Indies or at such other place as the Directors may from time to time
decide.
3. The objects for which the Company is established are as follows:
(i) (a) To own, hold, purchase or otherwise acquire equity or debt
securities in companies, firms or other persons engaged in all or any
forms of insurance or reinsurance business and to promote the
establishment of such entities.
(b) To act as consultants, managers, advisers, agents and brokers in
connection with all forms of insurance and reinsurance business.
<PAGE>
(c) To carry on all forms of investment, financial holding company and
other such activities.
(d) To purchase, lease, develop, charge or mortgage or otherwise
acquire or dispose of interests in real property in any part of the
world either directly or indirectly through subsidiaries or joint
ventures.
(ii) To exercise and enforce all rights and powers conferred by or
incidental to the ownership of any shares, stock, obligations, or other
securities including without prejudice to the generality of the foregoing
all such powers of veto or control as may be conferred by virtue of the
holding by the Company of some special proportion of the issued or nominal
amount thereof, to provide managerial and other executive supervisory and
consultant services for or in relation to any company in which the Company
is interested upon such terms as may be thought fit.
(iii) To stand surety for or to guarantee, support or secure the
performance of all or any of the obligations of any person, firm or company
whether or not related or affiliated to the Company in any manner and
whether by personal covenant or by mortgage, charge or lien upon the
-2-
<PAGE>
whole or any part of the undertaking, property and assets of the Company,
both present and future, including its uncalled capital or by any such
method whether or not the Company shall receive valuable consideration
therefor.
(iv) To engage in or carry on any other lawful trade, business or
enterprise which may at any time appear to the Directors or the Company
capable of being conveniently carried on in conjunction with any of the
aforementioned businesses or activities or which may appear to the
Directors or the Company likely to be profitable to the Company, IT BEING
HEREBY DECLARED that in the interpretation of this Memorandum of
Association in general and of this Clause 3 in particular no object,
business or power specified or mentioned shall be limited or restricted by
reference to or inference from any other object, business or power, or the
name of the Company, or by the juxtaposition of two or more objects,
businesses or powers and that in the event of any ambiguity in this clause
or elsewhere in this Memorandum of Association, the same shall be resolved
by such interpretation and construction as will widen and enlarge and not
restrict the objects, businesses and powers of and exercisable by the
Company.
-3-
<PAGE>
4. Expect as prohibited or limited by the Companies Law (Cap. 22), the Company
shall have full power and authority to carry out any object and shall have and
be capable of from time to time and at all times exercising any and all of the
powers at any time or from time to time exercisable by a natural person or body
corporate in doing in any part of the world whether as principal, agent,
contractor, or otherwise whatever may be considered by it necessary for the
attainment of its objects and whatever else may be considered by it as
incidental or conducive thereto or consequential thereof, including, but without
in any way restricting the generality of the foregoing, the power to make any
alterations or amendments to this Memorandum of Association and the Articles of
Association of the Company considered necessary or convenient in the manner set
out in the Articles of Association of the Company, and the power to do any of
the following acts or things, viz: to pay all expenses of and incidental to the
promotion, formation and incorporation of the Company; to sell, lease or dispose
of any property of the Company; to draw, make, accept, endorse, discount,
execute and issue promissory notes, debentures, bills of exchange, bills of
lading, warrants and other negotiable or transferable instruments; to lend money
or other assets and to act as guarantors; to borrow or raise money on the
-4-
<PAGE>
security of the undertaking or on all or any of the assets of the Company
including uncalled capital or without security; to invest monies of the Company
in such manner as the directors determine; to promote other companies; to sell
the undertaking of the Company for cash or any other consideration; to
distribute assets in specie to members of the Company; to carry on any trade or
business and generally to do all acts and things which, in the opinion of the
Company or the Directors, may be conveniently or profitably or usefully acquired
and dealt with, carried on, executed or done by the Company in connection with
the business aforesaid provided that the Company shall only carry on the
businesses for which licenses are required under the laws of the Cayman Islands
when so licensed under the terms of such laws.
5. The liability of each member is limited to the amount from time to time
unpaid on such member's shares.
6. The share capital of the Company is U.S.$22,500,000, divided into
300,000,000 Ordinary Shares, par value of U.S.$.041666667 per share, 10,000,000
other Shares, par value of U.S.$1.00 per share, which may be issued in series,
all of such shares with power for the Company insofar as is permitted by law, to
redeem, call or purchase any of its shares and to increase or reduce the said
capital subject to the provisions of the Companies Law (Cap. 22)
-5-
<PAGE>
and the Articles of Association and to issue any part of its capital, whether
original, redeemed, called or increased with or without any preference, priority
or special privilege or subject to any postponement of rights or to any
conditions or restrictions and so that unless the conditions of issue shall
otherwise expressly declare every issue of shares whether declared to be
preference or otherwise shall be subject to the powers hereinabove contained.
7. The operations of the Company will be carried on subject to the provisions
of Section 190 of the Companies Law Cap. 22.
-6-
<PAGE>
THE COMPANIES LAW
-----------------
COMPANY LIMITED BY SHARES
-------------------------
AMENDED AND RESTATED
ARTICLES OF ASSOCIATION
OF
ACE LIMITED
(as amended by Special Resolution on 14th January, 1993)
(as amended by Special Resolution on 6th February, 1998
with effect from 2nd March, 1998)
1. In these Articles Table A in the Schedule to the Statute does not apply
and, unless there be something in the subject or context inconsistent therewith,
"Articles" means these Articles as originally framed or as from time to
time altered by Special Resolution.
"The Auditors" means the persons for the time being performing the duties
of auditors of the Company.
"The Company" means the above named Company.
"Controlled Shares" in reference to any person means:
(a) all shares of the Company directly, indirectly or constructively
owned by such person within the meaning of Section 958 of the Internal
Revenue Code of 1986, as amended from time to time, of the United States of
America; or
(b) all shares of the Company directly, indirectly or beneficially
owned by such person within the meaning of Section 13(d) of the Securities
Exchange Act of 1934, as amended from time to time, of the United States of
America (including any shares beneficially owned by any group of persons as
so defined and including any shares that would otherwise be excluded by the
provisions of Section 13(d)(6)
<PAGE>
thereof) and the rules and regulations thereunder, as amended from time to
time (including any shares that would otherwise be excluded by the
provisions of Rule 13d-4 thereof);
(c) notwithstanding anything contained in these Articles to the
contrary, the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66 2/3%) of the outstanding shares entitled to vote,
voting together as a single class, shall be required to amend or repeal, or
adopt any provision inconsistent with, the definition of Controlled Shares
contained in this Article 1.
"Debenture" means debenture stock, mortgages, bonds and any other such
securities of the Company whether constituting a charge on the assets of
the Company or not.
"The Directors" means the directors for the time being of the Company.
"Dividend" includes bonus.
"Member" shall bear the meaning ascribed to it in Section 37 of the
Statute.
"Month" means calendar month.
"Paid-up" means paid-up and/or credited as paid-up.
"The Registered Office" means the registered office for the time being of
the Company.
"Seal" means the common seal of the Company and includes every official
seal.
"Secretary" includes an Assistant Secretary and any person appointed to
perform the duties of Secretary of the Company.
"Special Resolution" has the same meaning as in the Statute.
"Statute" means The Companies Law (Revised) of the Cayman Islands as
amended and every statutory modification or re-enactment thereof for the
time being in force.
-2-
<PAGE>
"Written" and "In Writing" include all modes of representing or reproducing
words in visible form.
Words importing the singular number shall also include the plural number
and vice-versa.
Words importing the masculine gender shall also include the feminine
gender.
Words importing persons shall also include corporations.
CERTIFICATE FOR SHARES
----------------------
2. Certificates representing shares of the Company shall be in such form
and may bear such legends (reflecting the terms of issue of the shares thereby
represented, or any of these Articles or other relevant matters) as shall be
determined by the Directors. Such certificates shall be under seal signed by a
Director and countersigned by the Secretary or another Director or other
authorised person. All certificates for shares shall be consecutively numbered
or otherwise identified and shall specify the shares to which they relate. The
name and address of the person to whom the shares represented thereby are
issued, with the number of shares and date of issue, shall be entered in the
register of Members of the Company. All certificates surrendered to the Company
for transfer shall be cancelled and no new certificate shall be issued until the
former certificate for a like number of shares has been surrendered and
cancelled. The Directors may authorise certificates to be issued with the seal
and authorised signatures affixed by some method or system of mechanical
process.
3. Notwithstanding Article 2 of these Articles, if a share certificate be
defaced, lost or destroyed, it may be renewed on such terms (if any) as to
evidence and indemnity and the payment of the expenses incurred by the Company
in investigating evidence, as the Directors may prescribe.
ISSUE OF SHARES
---------------
4. (a) The authorised share capital shall be represented by Ordinary
Shares with respective rights as set forth in Part I below, and other classes or
series of Shares with respective rights
-3-
<PAGE>
to be determined upon the creation thereof by action of the Directors from time
to time as set forth in Part II below.
PART I
ORDINARY SHARES
(1) Dividends. The holders of Ordinary Shares shall be entitled to receive
dividends declared in accordance with the Articles set forth under the caption
"Dividends and Reserve."
(2) Liquidation. In the event of any dissolution, liquidation or winding
up of the Company, whether voluntary or involuntary, after there shall have been
paid or set aside for payment to the holders of any outstanding shares ranking
senior to the Ordinary Shares as to distribution on liquidation, distribution or
winding up, the full amounts to which they shall be entitled, the holders of the
then outstanding Ordinary Shares shall be entitled to receive, pro rata
according to the number of Ordinary Shares registered in the names of such
Members, any remaining assets of the Company available for distribution to its
Members; provided, if, at such time, the holder of Ordinary Shares has any
outstanding debts, liabilities or engagements to or with the Company (whether
presently payable or not), either alone or jointly with any other person,
whether a Member or not, (including, without limitation, any liability
associated with the unpaid purchase price of such Ordinary Shares), the
liquidator appointed to oversee the liquidation of the Company shall deduct from
the amount payable in respect of such Ordinary Shares the aggregate amount of
such debts, liabilities and engagements and apply such amount to any of such
holder's debts, liabilities or engagements to or with the Company (whether
presently payable or not). The liquidator may distribute, in kind, to the
holders of the Ordinary Shares remaining assets of the Company or may sell,
transfer or otherwise dispose of all or any part of such remaining assets to any
other corporation, trust or entity and receive payment therefor in cash, shares
or obligations of such other corporation, trust or entity or any combination
thereof, and may sell all or any part of the consideration so received, and may
distribute the consideration received or any balance or proceeds thereof to
holders of the Ordinary Shares.
-4-
<PAGE>
(3) Voting. Each outstanding Ordinary Share of the Company shall be
entitled to one vote per share (subject to Article 46) and the holder thereof
shall be entitled to notice of, to attend, and to vote at, General Meetings of
the Company in accordance with the Articles set forth under the captions
"Notices of General Meetings," "General Meetings," "Proceedings at General
Meetings," "Votes of Members" and "Proxies".
(4) Reservation of Ordinary Shares. Such numbers of Ordinary Shares as may
from time to time be required for such purpose shall be reserved for issuance
upon exercise of any options or warrants to purchase Ordinary Shares.
(5) Preemptive Rights. No holder of Ordinary Shares of the Company shall,
by reason of such holding, have any preemptive right to subscribe to any
additional issue of shares of any class or series nor to any security
convertible into such shares.
(6) Redemption. Any issued and outstanding Ordinary Shares shall be
redeemable in such circumstances and on such terms as shall be agreed by the
Directors and the holder thereof, subject always to the laws of the Cayman
Islands, and the Directors may deduct from the redemption price for such shares
the aggregate amount of any outstanding debts, liabilities and engagements to or
with the Company (whether presently payable or not) by the holder of such
shares, either alone or jointly with any other person, whether a Member or not.
Without limiting the foregoing, the Company may, from time to time, purchase or
redeem all or part of the Ordinary Shares of any Member, whether or not the
Company has made a similar offer to all or any of the other Members.
PART II
OTHER CLASSES OR SERIES OF SHARES
The Directors are authorized, without obtaining any vote or consent of the
holders of any class or series of shares of the Company unless expressly
provided by the terms of issue of such class or series, subject to any
limitations prescribed by law, to provide from time to time for the issuance of
other classes or series of Shares, and in accordance with applicable procedures
of the Statute, to establish the characteristics of each class or series
including, without limitation, the following:
-5-
<PAGE>
(1) the number of shares of that class or series, which may subsequently be
increased or decreased (but not below the number of shares of that class or
series then outstanding) by resolution of the Directors, and the distinctive
designation thereof;
(2) the voting powers, full or limited, if any, of the shares of that class
or series;
(3) the rights in respect of dividends on the shares of that class or
series, whether dividends shall be cumulative and, if so, from which date or
dates and the relative rights or priority, if any, of payment of dividends on
shares of that class or series and any limitations, restrictions or conditions
on the payment of dividends;
(4) the relative amounts, and the relative rights or priority, if any, of
payment in respect of shares of that class or series, which the holders of the
shares of that class or series shall be entitled to receive upon any
liquidation, dissolution or winding up of the Company;
(5) the terms and conditions (including the price or prices, which may vary
under different conditions and at different redemption dates), if any, upon
which all or any part of the shares of that class or series may be redeemed, and
any limitations, restrictions or conditions on such redemption;
(6) the terms, if any, of any purchase, retirement or sinking fund to be
provided for the shares of that class or series;
(7) the terms, if any, upon which the shares of that class or series shall
be convertible into or exchangeable for shares of any other class, classes or
series, or other securities, whether or not issued by the Company;
(8) the restrictions, limitations and conditions, if any, upon issuance of
indebtedness of the Company so long as any shares of that class or series are
outstanding; and
(9) any other preferences and relative, participating, optional or other
rights and limitations not inconsistent with applicable law or the provisions of
this Article 4.
-6-
<PAGE>
(b) In the event of any conflict, the provisions of this Article 4
shall override the provisions of any other Article of these presents.
(c) Subject as aforesaid, the Directors may allot, issue, grant
options over or otherwise dispose of any shares of the Company at such times and
on such terms as they think proper.
(d) Unless otherwise specified by the Board of Directors, any shares
which have been called, redeemed or otherwise repurchased by the Company shall,
unless otherwise specified by the Directors, have the status of authorised but
unissued shares and may be subsequently issued for valid consideration.
(e) The Directors shall have the fullest powers permitted by law to
pay all or any redemption monies in respect of any shares out of the Company's
share capital and share premium accounts.
5. The Company shall maintain a register of its Members and every person
whose name is entered as a Member in the register of Members shall be entitled
without payment to receive within two (2) months after allotment or lodgement of
transfer (or within such other period as the conditions of issue shall provide)
one certificate for all his shares or several certificates each for one or more
of his shares provided that in respect of a share or shares held jointly by
several persons the Company shall not be bound to issue more than one
certificate and delivery of a certificate for a share to one of the several
joint holders shall be sufficient delivery to all such holders.
TRANSFER OF SHARES
------------------
6. The instrument of transfer of any share shall be in writing and shall
be executed by or on behalf of the transferor (and, in the case of a partly paid
share, by the transferee) and the transferor shall be deemed to remain the
holder of a share until the name of the transferee is entered in the register in
respect thereof.
7. (a) The Directors shall have absolute discretion to decline to
register a transfer of shares:
-7-
<PAGE>
(i) unless a registration statement under the Securities Act of 1933, as
amended, of the United States of America is in effect with respect to
such shares or a written opinion from counsel acceptable to the
Directors is obtained to the effect that no such registration is
required; or
(ii) if it appears to the Directors that the effect of such transfer would
be to increase the number of the Controlled Shares of any person to
ten percent (10%) or any higher percentage of any class or series of
the issued shares of the Company.
In any other case, the Directors shall also have absolute discretion to
decline to register any transfer of shares. If the Directors refuse to register
a transfer they shall notify the transferee within two (2) months of such
refusal.
(b) Notwithstanding anything contained in these Articles to the contrary,
the affirmative vote of the holders of at least sixty-six and two-thirds percent
(66 2/3%) of the outstanding shares entitled to vote, voting together as a
single class, shall be required to amend or repeal, or adopt any provision
inconsistent with, this Article 7.
8. The holder of any redeemable shares for which the Company has issued a
notice of call in accordance with these Articles may not transfer such shares,
whether or not the Company has yet paid the call price to the Member.
9. The registration of transfers may be suspended at such time and for
such periods as the Directors may from time to time determine, provided always
that such registration shall not be suspended for more than forty-five (45) days
in any year.
VARIATION OF RIGHTS OF SHARES
-----------------------------
10. (a) If at any time the share capital of the Company is divided into
different classes or series of shares, the rights attached to any class or
series (unless otherwise provided by the terms of issue of the shares of that
class) may, whether or not the Company is being wound-up, be varied with the
consent in writing of the holders of three-fourths of the issued shares of that
class or
-8-
<PAGE>
series, or with the sanction of a Special Resolution passed at a general meeting
of the holders of the shares of that class or series.
(b) The provisions of these Articles relating to general meetings shall
apply to every such general meeting of the holders of one class or series of
shares except that the necessary quorum shall be one person holding or
representing by proxy at least one-third of the issued shares of the class or
series and that any holder of shares of the class or series present in person or
by proxy may demand a poll.
(c) Class or series meetings and class or series votes may only be called
at the direction of the Directors. Nothing in this Article 10 gives any Member
or group of Members the right to call a class or series meeting or demand a
class or series vote.
11. The rights conferred upon the holders of the shares of any class or
series issued with preferred or other rights shall not, unless otherwise
expressly provided by the terms of issue of the shares of that class or series,
be deemed to be varied by the creation or issue of further shares ranking in any
respect prior to or pari passu therewith. The rights of the holders of Ordinary
Shares shall not be deemed to be varied by the creation or issue of shares with
preferred or other rights, which may be effected by the Directors as provided in
these Articles without any vote or consent of the holders of Ordinary Shares.
NON-RECOGNITION OF TRUSTS
-------------------------
12. No person shall be recognised by the Company as holding any share upon
any trust and the Company shall not be bound by or be compelled in any way to
recognise (even when having notice thereof) any equitable, contingent, future,
or partial interest in any share, or any interest in any fractional part of a
share, or (except only as is otherwise provided by these Articles or the
Statute) any other rights in respect of any share except an absolute right to
the entirety thereof in the registered holder.
-9-
<PAGE>
LIEN ON SHARES
--------------
13. The Company shall have a first and paramount lien and charge on
all shares (whether fully paid-up or not) registered in the name of a Member
(whether solely or jointly with others) for all debts, liabilities or
engagements to or with the Company (whether presently payable or not) by such
Member or his estate, either alone or jointly with any other person, whether a
Member or not, but the Directors may at any time declare any share to be wholly
or in part exempt from the provisions of this Article. The registration of a
transfer of any such share shall operate as a waiver of the Company's lien (if
any) thereon. The Company's lien (if any) on a share shall extend to all
dividends, redemptions or other monies payable in respect thereof.
14. The Company may sell, in such manner as the Directors deem fit,
any shares on which the Company has a lien, except as set forth in this Article
14. Unless otherwise permitted in the instrument creating such lien, no such
sale shall be made unless a sum in respect of which the lien exists is presently
payable. Unless otherwise permitted in the instrument creating such lien, no
such sale shall be made until the expiration of fourteen (14) days after a
notice in writing stating and demanding payment of such part of the amount in
respect of which the lien exists as is presently payable, has been given to the
registered holder or holders for the time being of the shares, or the person, of
which the Company has notice, entitled thereto by reason of his death or
bankruptcy.
15. To give effect to any such sale the Directors may authorise some
person to transfer the shares sold to the purchaser thereof. The purchaser
shall be registered as the holder of the shares comprised in any such transfer,
and he shall not be bound to see to the application of the purchase money, nor
shall his title to the shares be affected by any irregularity or invalidity in
the proceedings in reference to the sale.
16. The proceeds of such sale shall be received by the Company and
applied in payment of such part of the amount in respect of which the lien
exists as is presently payable and the residue, if any, shall (subject to a like
lien for sums not
-10-
<PAGE>
presently payable as existed upon the shares before the sale) be paid to the
person entitled to the shares at the date of the sale.
CALL ON SHARES
--------------
17. (a) The Directors may from time to time make calls upon the
Members in respect of any monies unpaid on their shares (whether on account of
the nominal value of the shares or by way of premium or otherwise) and not by
the conditions of allotment thereof made payable at fixed terms; and each Member
shall, subject to receiving at least fourteen (14) days notice (or such shorter
period of notice as may have been authorised by the terms of issue of the
shares) specifying the time or times of payment, pay to the Company at the time
or times so specified the amount called on the shares. A call may be revoked or
postponed as the Directors may determine. A call may be made payable by
installments.
(b) A call shall be deemed to have been made at the time when the
resolution of the Directors authorising such call was passed.
(c) The joint holders of a share shall be jointly and severally liable to
pay all calls in respect thereof.
18. If a sum called in respect of a share is not paid before or on a
day appointed for payment thereof, the persons from whom the sum is due shall
pay interest on the sum from the day appointed for payment thereof to the time
of actual payment at such rate not exceeding ten percent (10%) per annum as the
Directors may determine, but the Directors shall be at liberty to waive payment
of such interest either wholly or in part.
19. Any sum which by the terms of issue of a share becomes payable on
allotment or at any fixed date, whether on account of the nominal value of the
share or by way of premium or otherwise, shall for the purposes of these
Articles be deemed to be a call duly made, notified and payable on the date on
which by the terms of issue the same becomes payable, and in the case of non-
payment all the relevant provisions of these Articles as to payment of interest
forfeiture or otherwise shall apply as if such sum had become payable by virtue
of a call duly made and notified.
-11-
<PAGE>
20. The Directors may, on the issue of shares, differentiate between
the holders as to the amount of calls or interest to be paid and the times of
payment.
21. (a) The Directors may, if they think fit, receive from any
Member willing to advance the same, all or any part of the monies uncalled and
unpaid upon any shares held by him, and upon all or any of the monies so
advanced may (until the same would but for such advances, become payable) pay
interest at such rate not exceeding (unless the Company in general meeting shall
otherwise direct) seven percent (7%) per annum, as may be agreed upon between
the Directors and the Member paying such sum in advance.
(b) No such sum paid in advance of calls shall entitle the Member
paying such sum to any portion of a dividend declared in respect of any period
prior to the date upon which such sum would, but for such payment, become
presently payable.
FORFEITURE OF SHARES
--------------------
22. (a) If a Member fails to pay any call or instalment of a call or
to make any payment required by the terms of issue on the day appointed for
payment thereof, the Directors may, at any time thereafter during such time as
any part of the call, instalment or payment remains unpaid, give notice
requiring payment of so much of the call, instalment or payment as is unpaid,
together with any interest which may have accrued and all expenses that have
been incurred by the Company by reason of such non-payment. Such notice shall
name a day (not earlier than the expiration of fourteen (14) days from the date
of giving of the notice) on or before which the payment required by the notice
is to be made, and shall state that, in the event of non-payment at or before
the time appointed the shares in respect of which such notice was given will be
liable to be forfeited.
(b) If the requirements of any such notice as aforesaid are not
complied with, any share in respect of which the notice has been given may at
any time thereafter, before the payment required by the notice has been made, be
forfeited by a resolution of the Directors to that effect. Such forfeiture
shall include all
-12-
<PAGE>
dividends declared in respect of the forfeited share and not actually paid
before the forfeiture.
(c) A forfeited share may be sold or otherwise disposed of on such
terms and in such manner as the Directors deem fit and at any time before a sale
or disposition the forfeiture may be cancelled on such terms as the Directors
think fit.
23. A person whose shares have been forfeited shall cease to be a
Member in respect of the forfeited shares, but shall, notwithstanding, remain
liable to pay to the Company all monies which, at the date of forfeiture were
payable by him to the Company in respect of the shares together with interest
thereon, but his liability shall cease if and when the Company shall have
received payment in full of all monies whenever payable in respect of the
shares.
24. A certificate in writing under the hand of one Director and the
Secretary of the Company that a share in the Company has been duly forfeited on
a date stated in the declaration shall be conclusive evidence of the fact
therein stated as against all persons claiming to be entitled to the share. The
Company may receive the consideration given for the share on any sale or
disposition thereof and may execute a transfer of the share in favour of the
person to whom the share is sold or disposed of and he shall thereupon be
registered as the holder of the share and shall not be bound to see to the
application of the purchase money, if any, nor shall his title to the share be
affected by any irregularity or invalidity in the proceedings in reference to
the forfeiture, sale or disposal of the share.
25. The provisions of these Articles as to forfeiture shall apply in
the case of non-payment of any sum which, by the terms of issue of a share,
becomes payable at a fixed time, whether on account of the nominal value of the
share or by way of premium as if the same had been payable by virtue of a call
duly made and notified.
TRANSMISSION OF SHARES
----------------------
26. In case of the death of a Member who is a natural person, the
survivor or survivors where the deceased was a joint holder, and the legal
personal representatives of the deceased where he was
-13-
<PAGE>
a sole holder, shall be the only persons recognised by the Company as having any
title to his interest in the shares, but nothing herein contained shall release
the estate of any such deceased holder from any liability in respect of any
shares which had been held by him solely or jointly with other persons.
27. (a) Any person becoming entitled to a share in consequence of
the death or bankruptcy of a Member (or in any other way than by transfer) may,
upon such evidence being produced as may from time to time be required by the
Directors and subject as hereinafter provided, elect either to be registered
himself as holder of the share or to make such transfer of the share to such
other person nominated by him as the deceased or bankrupt person could have made
and to have such person registered as the transferee thereof, but the Directors
shall, in either case, have the same right to decline or suspend registration as
they would have had in the case of a transfer of the share by that Member before
his death or bankruptcy as the case may be.
(b) If the person so becoming entitled shall elect to be registered
himself as holder he shall deliver or send to the Company a notice in writing
signed by him stating that he so elects.
28. A person becoming entitled to a share by reason of the death or
bankruptcy of the holder (or in any other case than by transfer) shall be
entitled to the same dividends and other advantages to which he would be
entitled if he were the registered holder of the share, except that he shall
not, before being registered as a Member in respect of the share, be entitled in
respect of it to exercise any right conferred by membership in relation to
meetings of the Company; provided, however, that the Directors may at any time
give notice requiring any such person to elect either to be registered himself
or to transfer the share and if the notice is not complied with within ninety
(90) days the Directors may thereafter withhold payment of all dividends,
bonuses or other monies payable in respect of the share until the requirements
of the notice have been complied with.
-14-
<PAGE>
AMENDMENT OF MEMORANDUM OF ASSOCIATION, CHANGE OF
LOCATION OF REGISTERED OFFICE & ALTERATION OF CAPITAL
-----------------------------------------------------
29. (a) Subject to and insofar as permitted by the provisions of the
Statute, the Company may from time to time by Special Resolution alter or amend
its Memorandum of Association and may, without restricting the generality of the
foregoing:
(i) increase the share capital by such sum to be divided into shares
of such amount or without nominal or par value as the resolution shall
prescribe and with such rights, priorities and privileges annexed thereto,
as the Company in general meeting may determine;
(ii) consolidate and divide all or any of its share capital into
shares of larger amount than its existing shares;
(iii) by subdivision of its existing shares or any of them divide the
whole or any part of its share capital into shares of smaller amount than
is fixed by the Memorandum of Association;
(iv) cancel any shares which at the date of the passing of the
resolution have not been taken or agreed to be taken by any person.
(b) All new shares created hereunder shall be subject to the same
provisions with reference to the payment of calls, liens, transfer,
transmission, forfeiture and otherwise as the shares in the original share
capital.
(c) Subject to the provisions of the Statute the Company may by Special
Resolution reduce its share capital, any capital redemption reserve fund, or any
share premium account.
30. Subject to the provisions of the Statute the Company may by Special
Resolution change its name or alter its objects.
-15-
<PAGE>
31. Subject to the provisions of the Statute the Company may by resolution
of the Directors change the location of its registered office.
CLOSING REGISTER OF MEMBERS OR FIXING RECORD DATE
-------------------------------------------------
32. For the purpose of determining Members entitled to notice of or to
vote at any meeting of Members or any adjournment thereof, or Members entitled
to receive payment of any dividend, or in order to make the determination of
Members for any other proper purpose, the Directors of the Company may provide
that the register of Members shall be closed for transfers for a stated period
but not to exceed in any case forty (40) days. If the register of Members shall
be so closed for the purpose of determining Members entitled to notice of or to
vote at a meeting of Members such register shall be so closed for at least ten
(10) days immediately preceding such meeting and the record date for such
determination shall be the date of the closure of the register of Members.
33. In lieu of or apart from closing the register of Members, the
Directors may fix in advance a date as the record date for any such
determination of Members entitled to notice of or to vote at a meeting of the
Members and for the purpose of determining the Members entitled to receive
payment of any dividend.
34. If the register of Members is not so closed and no record date is
fixed for the determination of Members entitled to notice of or to vote at a
meeting of Members or Members entitled to receive payment of a dividend, the
date on which notice of the meeting is mailed or the date on which the
resolution of the Directors declaring such dividend is adopted, as the case may
be, shall be the record date for such determination of Members. When a
determination of Members entitled to vote at any meeting of Members has been
made as provided in this section, such determination shall apply to any
adjournment thereof.
GENERAL MEETING
---------------
35. (a) The Company shall in each year of its existence hold a general
meeting as its Annual General Meeting and shall specify
-16-
<PAGE>
the meeting as such in the notices calling it. The Annual General Meeting shall
be held at such time and place as the Directors shall appoint.
(b) At these meetings the financial statements of the Company and the
reports of the Directors and Auditors shall be presented and the Directors to be
elected at that meeting and Auditors shall be elected for the ensuing year or
until their respective successors have been elected and have qualified.
36. (a) Except as otherwise required by law, and subject to the terms of
any class or series of shares issued by the Company having a preference over the
Ordinary Shares as to dividends or upon liquidation to elect directors in
specified circumstances, extraordinary general meetings of the Members of the
Company may be called only by (i) the Directors or (ii) at the request in
writing of Members owning at least twenty-five percent (25%) of the outstanding
shares generally entitled to vote.
(b) Any action required or permitted to be taken by the Members of the
Company must be taken at a duly called annual or extraordinary general meeting
of the Members of the Company and may not be taken by consent in writing or
otherwise.
(c) Notwithstanding anything contained in these Articles to the contrary,
the affirmative vote of the holders of at least sixty-six and two-thirds percent
(66 2/3%) of the outstanding shares generally entitled to vote, voting together
as a single class, shall be required to amend or repeal, or adopt any provision
inconsistent with, this Article 36.
NOTICE OF GENERAL MEETINGS
--------------------------
37. Written notice of each meeting of the Members stating the place, date
and time of the meeting shall be given not less than ten (10) nor more than
sixty (60) days before the date of the meeting, to each Member entitled to vote
at such meeting. The notice of any extraordinary meeting of Members shall state
the purpose or purposes for which the meeting is called.
38. The accidental omission to give notice of a general meeting to, or the
non-receipt of notice of a meeting by any person
-17-
<PAGE>
entitled to receive notice shall not invalidate the proceedings of that meeting.
PROCEEDINGS AT GENERAL MEETINGS
-------------------------------
39. (a) No business shall be transacted at any general meeting unless a
quorum of Members is present at the time when the meeting proceeds to business.
Not less than six (6) Members present in person or by proxy holding at least
fifty percent (50%) of the issued and outstanding shares of the Company entitled
to vote at such meeting shall be a quorum; provided, however, that no quorum
shall exist for the purpose of considering or passing any Special Resolution
unless the Members present in person or by proxy shall hold at least sixty-six
and two-thirds percent (66-2/3%) of the issued and outstanding shares of the
Company entitled to vote at such meeting.
(b) An Ordinary Resolution shall require the vote of a majority of such
shares as, being entitled to do so, vote in person or by proxy at any general
meeting at which the required quorum is present in person or by proxy, voting
together as a single class.
40. (a) If a Member desires to submit a proposal for consideration at an
annual general meeting or extraordinary general meeting, or to nominate persons
for election as Directors at any general meeting duly called for the election of
Directors, written notice of such Member'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 (i) with respect to an
annual general meeting of Members, sixty (60) days prior to the anniversary date
of the immediately preceding annual general meeting, and (ii) with respect to a
extraordinary general meeting, the close of business on the tenth (10th) day
following the date on which notice of such meeting is first sent or given to
Members. Each notice shall describe the proposal or nomination in sufficient
detail for a proposal or nomination to be summarized on the agenda for the
meeting and shall set forth (i) the name and address, as it appears on the books
of the Company, of the Member who intends to make the proposal or nomination;
(ii) a representation that the Member 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
-18-
<PAGE>
of shares of the Company which are beneficially owned by the Member. In
addition, in the case of a Member's proposal, the notice shall set forth the
reasons for conducting such proposed business at the meeting and any material
interest of the Member in such business.
(b) 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
Member and each nominee and any other person or persons (naming such person or
persons pursuant to which the nomination or nominations are to be made by the
Member; (iii) such other information regarding such nominee proposed by such
Member 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 from
time to time, of the United States of America, 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 Chairman 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, and any such proposal or nomination not properly brought before the
meeting shall not be considered.
(c) Notwithstanding anything contained in these Articles to the contrary,
the affirmative vote of the holders of at least sixty-six and two-thirds percent
(66 2/3%) of the outstanding shares entitled to vote, voting together as a
single class, shall be required to amend or repeal, or adopt any provision
inconsistent with, this Article 40.
41. If within one hour after the time appointed for the meeting a quorum
is not present, the meeting shall be dissolved.
42. The Chairman, if any, of the Board of Directors shall preside as
Chairman at every general meeting of the Company, or if there is no such
Chairman, or if he shall not be present within thirty (30) minutes after the
time appointed for the holding of the meeting, or is unwilling to act, the
Directors present shall elect one of their number to be Chairman of the meeting.
-19-
<PAGE>
43. If at any general meeting no Director is willing to act as Chairman or
if no Director is present within thirty (30) minutes after the time appointed
for holding the meeting, the Members present shall choose one of their number to
be Chairman of the meeting.
44. The Chairman may, with the consent of any general meeting duly
constituted hereunder, and shall if so directed by the meeting, adjourn the
meeting from time to time and from place to place, but no business shall be
transacted at any adjourned meeting other than the business left unfinished at
the meeting from which the adjournment took place. When a general meeting is
adjourned for thirty (30) days or more, notice of the adjourned meeting shall be
given as in the case of an original meeting; save as aforesaid it shall not be
necessary to give any notice of an adjournment or of the business to be
transacted at an adjourned general meeting.
45. At any general meeting a resolution put to the vote at the meeting
shall be decided on a poll taken in such manner as the Chairman directs.
VOTES OF MEMBERS
----------------
46. (a) Subject to Article 4, every Member of record present in person or
by proxy shall have one vote for each issued and outstanding Ordinary Share
registered in his name in the register; provided that if and so long as the
Controlled Shares of any person constitute ten percent (10%) or more of the
issued and outstanding Ordinary Shares of the Company, each issued and
outstanding Ordinary Share comprised in such Controlled Shares shall confer only
a fraction of a vote according to the following formula:
[(T divided by 10) - 1] divided by C.
Where: "T" is the aggregate number of votes conferred by all the issued
and outstanding Ordinary Shares of the Company;
"C" is the number of the Controlled Shares of such person.
(b) Except as may be otherwise provided by the Directors in connection
with the authorization of any class or series of shares,
-20-
<PAGE>
the limitation of the foregoing Section (a) shall apply on an aggregate basis to
all classes or series of shares entitled to vote that the Company may issue from
time to time.
(c) Notwithstanding anything contained in these Articles to the contrary,
the affirmative vote of the holders of at least sixty-six and two-thirds percent
(66 2/3%) of the outstanding shares entitled to vote, voting together as a
single class, shall be required to amend or repeal, or adopt any provision
inconsistent with, this Article 46.
47. In the case of joint holders of record the vote of the senior who
tenders a vote, whether in person or by proxy, shall be accepted to the
exclusion of the votes of the other joint holders, and for this purpose
seniority shall be determined by the order in which the names stand in the
register of Members.
48. A Member of unsound mind, or in respect of whom an order has been made
by any court, having jurisdiction in lunacy, may vote, whether on a show of
hands or on a poll, by his committee, receiver, curator bonis, or other person
in the nature of a committee, receiver or curator bonis appointed by that court,
and any such committee, receiver, curator bonis or other persons may vote by
proxy.
49. No Member shall be entitled to vote at any general meeting unless he
is registered as a Member of the Company on the record date for such meeting nor
unless all calls or other sums presently payable in respect of the shares to be
voted have been paid.
50. No objection shall be raised to the qualification of any voter except
at the general meeting or adjourned general meeting at which the vote objected
to is given or tendered and every vote not disallowed at such general meeting
shall be valid for all purposes. Any such objection made in due time shall be
referred to the Chairman of the general meeting whose decision shall be final
and conclusive.
51. Votes may be given either personally or by proxy.
-21-
<PAGE>
PROXIES
-------
52. The instrument appointing a proxy shall be in writing and shall
be executed under the hand of the appointor or of his attorney duly authorised
in writing, or, if the appointor is a corporation under the hand of an officer
or attorney duly authorised in that behalf. A proxy need not be a Member of the
Company.
53. The instrument appointing a proxy shall be deposited at the
Registered Office of the Company or at such other place as is specified for that
purpose in the notice convening the meeting no later than the time for holding
the meeting, or adjourned meeting provided that the Chairman of the Meeting may
at his discretion direct that an instrument of proxy shall be deemed to have
been duly deposited upon receipt of facsimile transmission of the signed proxy
or upon receipt of telex or cable confirmation from the appointor that the
instrument of proxy duly signed is in the course of transmission to the Company.
54. The instrument appointing a proxy may be in any usual or common
form and may be expressed to be for a particular meeting or any adjournment
thereof or generally until revoked.
55. A vote given in accordance with the terms of an instrument of
proxy shall be valid notwithstanding the previous death or insanity of the
principal or revocation of the proxy or of the authority under which the proxy
was executed, or the transfer of the share in respect of which the proxy is
given provided that no intimation in writing of such death, insanity, revocation
or transfer as aforesaid shall have been received by the Company at the office
before the commencement of the general meeting, or adjourned meeting at which it
is sought to use the proxy.
56. Any corporation which is a Member of record of the Company may in
accordance with its Articles or in the absence of such provision by resolution
of its Directors or other governing body authorise such person as it thinks fit
to act as its representative at any meeting of the Company or of any class of
Members of the Company, and the person so authorised shall be entitled to
exercise the same powers on behalf of the corporation which he represents as the
corporation could exercise if it were an individual Member of record of the
Company.
-22-
<PAGE>
DIRECTORS
---------
57. (a) There shall be a Board of Directors consisting of not less
than three (3) or more than twenty (20) persons, provided, however, that the
Company may from time to time by ordinary resolution increase or decrease the
limits in the number of Directors. The Directors shall have the exclusive power
and right to set the exact number of Directors within that range from time to
time by resolution adopted by the vote of a majority of the Directors present at
a meeting at which a quorum is present, or by unanimous written consent. The
Directors shall be divided into three classes, designated by Class I, Class II
and Class III. At the 1993 annual general meeting of Members, Class I Directors
shall be elected for a term expiring at the 1994 annual general meeting of
Members, Class II Directors for a term expiring at the 1995 annual general
meeting of Members and Class III Directors for a term expiring at the 1996
annual general meeting of Members. At each succeeding annual general meeting of
Members, successors to Directors whose terms expire at that annual general
meeting shall be of the same class as the Directors they succeed and shall be
elected for three-year terms. If the number of Directors is decreased by
resolution of the Board of Directors pursuant to this Article 57, in no case
shall that decrease shorten the term of any incumbent Director.
(b) A Director shall hold office until the annual general meeting for
the year in which his or her term expires and until his or her successor shall
be elected and shall qualify, subject, however, to prior death, resignation,
retirement or removal from office. Any newly created directorship resulting
from an increase in the number of Directors and any other vacancy on the Board
of Directors, however caused, may be filled by a majority of the Directors then
in office, although less than a quorum, or by a sole remaining Director. Any
Director elected by one or more Directors to fill a newly created directorship
or other vacancy shall, without regard to the class in which the vacancy
occurred, hold office until the next succeeding annual general meeting of
Members and until his or her successor shall have been elected and qualified.
The term of a Director elected by Members to fill a newly created directorship
or other vacancy shall expire at the same time as the terms of the other
Directors of the same class.
-23-
<PAGE>
(c) One or more or all of the Directors of the Company may be removed
(i) with cause, by Ordinary Resolution, and (ii) without cause, by the
affirmative vote of the holders of at least sixty-six and two-thirds percent (66
2/3%) of the outstanding shares generally entitled to vote, voting together as a
single class, at a meeting of Members for which proper notice of the proposed
removal has been given.
(d) Advance notice of nominations for the election of Directors,
other than nominations by the Board of Directors or a committee thereof, shall
be given to the Company in the manner provided in Article 40 of these Articles.
(e) Notwithstanding the foregoing, whenever the holders of any one or
more classes or series of shares issued by the Company shall have the right,
voting separately by class or series, to elect Directors at an annual general
meeting or extraordinary general meeting of Members, the election, term of
office, filling of vacancies and other features of such directorships shall be
governed by the provisions of these Articles, including any applicable
resolutions of the Directors adopted pursuant to Article 4 hereof. Directors so
elected shall not be divided into classes and shall be elected by such holders
annually unless expressly provided otherwise by those provisions or resolutions,
and, during the prescribed terms of office of those Directors, the Board of
Directors shall consist of a number of Directors equal to the number of those
Directors plus the number of Directors determined as provided in the first
paragraph of this Article 57.
(f) Notwithstanding anything contained in these Articles to the
contrary, the affirmative vote of the holders of at least sixty-six and two-
thirds percent (66 2/3%) of the outstanding shares generally entitled to vote,
voting together as a single class, shall be required to amend or repeal, or
adopt any provision inconsistent with, this Article 57.
58. The Directors shall have the authority to fix the compensation of
Directors, which may include their expenses, if any, of attendance at each
meeting of the Directors or of a committee.
59. A Director may hold any other office or place of profit under the
Company (other than the office of Auditor) in conjunction
-24-
<PAGE>
with his office of Director for such period and on such terms as to remuneration
and otherwise as the Directors may determine.
60. A Director may act by himself or his firm in a professional
capacity for the Company and he or his firm shall be entitled to remuneration
for professional services as if he were not a Director.
61. A membership qualification for Directors may be fixed by the
Company in general meeting, but unless and until so fixed no qualification shall
be required.
62. A Director of the Company may be or become a Director or other
Officer of or otherwise interested in any company promoted by the Company or in
which the Company may be interested as shareholder, member or otherwise and no
such Director shall be accountable to the Company for any remuneration or other
benefits received by him as a Director or Officer of, or from his interest in,
such other company.
63. No person shall be disqualified from the office of Director or
prevented by such office from contracting with the Company, either as vendor,
purchaser or otherwise, nor shall any such contract or any contract or
transaction entered into by or on behalf of the Company in which any Director
shall be in any way interested or be liable to be avoided, nor shall any
Director so contracting or being so interested be liable to account to the
Company for any profit realised by any such contract or transaction by reason of
such Director holding office or of the fiduciary relation thereby established.
A Director shall be at liberty to vote in respect of any contract or transaction
in which he is so interested as aforesaid; provided, however, that the nature of
the interest of any Director in any such contract or transaction shall be
disclosed by him at or prior to its consideration and any vote thereon.
64. A general notice that a Director is a shareholder or member of
any specified firm or company and is to be regarded as interested in any
transaction with such firm or company shall be sufficient disclosure under
Article 63 and after such general notice it shall not be necessary to give
special notice relating to any particular transaction.
-25-
<PAGE>
POWERS AND DUTIES OF DIRECTORS
------------------------------
65. The business of the Company shall be managed by the Directors who
may exercise all such powers of the Company as are not, from time to time by the
Statute, or by these Articles, or such regulations, being not inconsistent with
the aforesaid, as may be prescribed by the Company in general meeting required
to be exercised by the Company in general meeting; provided, however, that no
regulations made by the Company in general meeting shall invalidate any prior
act of the Directors which would have been valid if that regulation had not been
made.
66. The Directors may from time to time and at any time by powers of
attorney appoint any company, firm, person or body of persons, whether nominated
directly or indirectly by the Directors, to be the attorney or attorneys of the
Company for such purpose and with such powers, authorities and discretions (not
exceeding those vested in or exercisable by the Directors under these Articles)
and for such period and subject to such conditions as they may think fit, and
any such powers of attorney may contain such provisions for the protection and
convenience of persons dealing with any such attorneys as the Directors may deem
fit and may also authorise any such attorney to delegate all or any of the
powers, authorities and discretions vested in him.
67. All cheques, promissory notes, drafts, bills of exchange and
other negotiable instruments and all receipts for monies paid to the Company
shall be signed, drawn, accepted, endorsed or otherwise executed as the case may
be in such manner as the Directors shall from time to time by resolution
determine.
68. The Directors shall cause Minutes to be made in books provided for the
purpose:
(a) of all appointments of Officers made by the Directors;
(b) of the names of the Directors present at each meeting of the
Directors and of any committee of the Directors;
-26-
<PAGE>
(c) of all resolutions and proceedings at all meetings of the Company
and of the Directors and of Committees of Directors.
69. The Directors on behalf of the Company may pay a gratuity or pension
or allowance on retirement to any Director who has held any other salaried
office or place of profit with the Company or to his widow or dependents and may
make contributions to any fund and pay premiums for the purchase or provision of
any such gratuity, pension or allowance.
70. The Directors may exercise all the powers of the Company to borrow
money and to mortgage or charge its undertaking, property and uncalled capital
or any part thereof and to issue debentures, debenture stock and other
securities whether outright or as security for any debt, liability or obligation
of the Company or of any third party.
COMMITTEES
----------
71. (a) The Board of Directors, by resolution adopted by a majority of
the whole Board, may designate one or more Directors to constitute an Executive
Committee.
(b) Except as expressly limited by the Statute, the Memorandum of
Association, these Articles of Association or as determined from time to time by
the Directors, the Executive Committee shall have and may exercise all the
powers and authority of the Board of Directors in the management of the business
and affairs of the Company. The Executive Committee shall keep a record of its
acts and proceedings, which shall form a part of the records of the Company in
the custody of the Secretary and all actions of the Executive Committee shall be
reported to the Board of Directors at the next meeting of the Board.
72. The Board of Directors, or any committee thereunto expressly
authorized by the Board of Directors, by resolution adopted by a majority of the
whole Board or committee, as the case may be, may designate one or more other
committees, each such committee to consist of such person or persons as may be
designated by the Directors or appointing committee. Except as expressly
limited by law or by these Articles or by resolution of the Directors or
appointing committee, any such committee shall have
-27-
<PAGE>
and may exercise such powers and adopt such procedures as the Directors or
appointing committee, as the case may be, may determine and specify in the
resolution designating such committee.
PROCEEDINGS OF DIRECTORS
------------------------
73. Except as otherwise provided by these Articles, the Directors shall
meet together for the dispatch of business, convening, adjourning and otherwise
regulating their meetings as they think fit. Questions arising at any meeting
shall be decided by a majority of votes of the Directors present at a meeting at
which there is a quorum.
74. A Director may, and the Secretary on the requisition of a Director
shall, at any time summon a meeting of the Directors by at least seven (7) days'
notice in writing to every Director which notice shall set forth the general
nature of the business to be considered unless notice is waived by all the
Directors either at, before or after the meeting is held; provided further if
notice is given in person, by air courier, telegram, facsimile transmission,
telex, cablegram or wireless the same shall be deemed to have been given on the
day it is delivered to the Directors or transmitting organisation as the case
may be. The provisions of Article 37 shall apply mutatis mutandis with respect
to notices of meetings of Directors.
75. The quorum necessary for the transaction of the business of the
Directors may be fixed by the Directors and unless so fixed shall a majority of
the Board; provided, however, that if there shall be at any time only a sole
Director the quorum shall be one.
76. The continuing Directors may act notwithstanding any vacancy in their
body, but if and so long as their number is reduced below the number fixed by or
pursuant to these Articles as the necessary quorum of Directors the continuing
Directors or Director may act for the purpose of increasing the number of
Directors to that number, or of summoning a general meeting of the Company, but
for no other purpose.
77. The Directors may elect a Chairman of their Board and determine the
period for which he is to hold office; but if no such Chairman is elected, or if
at any meeting the Chairman is not present within thirty (30) minutes after the
time appointed for
-28-
<PAGE>
holding the same, the Directors present may choose one of their number to be
Chairman of the meeting.
78. All acts done by any meeting of the Directors or of a committee of
Directors shall, notwithstanding that it be afterwards discovered that there was
some defect in the appointment of any Director, or that they or any of them were
disqualified, be as valid as if every such person had been duly appointed and
qualified to be a Director.
79. Members of the Board of Directors or of any committee thereof may
participate in a meeting of the Board or of such committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other and participation in a
meeting pursuant to this provision shall constitute presence in person at such
meeting. A resolution in writing (in one or more counterparts), signed by all
the Directors for the time being or all the members of a committee of Directors
shall be as valid and effectual as if it had been passed at a meeting of the
Directors or committee as the case may be duly convened and held.
VACATION OF OFFICE OF DIRECTOR
------------------------------
80. The office of a Director shall be vacated:
(a) If he gives notice in writing to the Company that he resigns the
office of Director;
(b) If he dies, becomes bankrupt or makes any arrangement or
composition with his creditors generally;
(c) If he is found a lunatic or becomes of unsound mind; or
(d) In the circumstances described in Article 57.
-29-
<PAGE>
PRESUMPTION OF ASSENT
---------------------
81. A Director of the Company who is present at a meeting of the Board of
Directors at which action on any Company matter is taken shall be presumed to
have assented to the action taken unless his dissent shall be entered in the
Minutes of the meeting or unless he shall file his written dissent from such
action with the person acting as the Secretary of the meeting before the
adjournment thereof or shall forward such dissent by registered mail to the
Secretary of the Company immediately after the adjournment of the meeting. Such
right to dissent shall not apply to a Director who voted in favour of such
action.
CERTAIN BUSINESS COMBINATIONS
-----------------------------
82. (a) In addition to any approval by Members required by the
Statute or any other law of the Cayman Islands, the approval of the holders of
at least sixty-six and two-thirds percent (66 2/3%) of the outstanding shares
entitled to vote, voting together as a single class, at a meeting called for
such purpose, shall be required in order for the Company:
(i) to merge, consolidate or amalgamate with another company;
(ii) to reorganize or reconstruct itself pursuant to a plan sanctioned
by the Cayman Islands courts; or
(iii) to sell, lease or exchange all or substantially all of the assets
of the Company;
provided that the foregoing approval by Members shall not apply to any such
transaction of the Company with any entity which the Company, directly or
indirectly, controls, as defined in Rule 405 under the Securities Act of 1933,
as amended from time to time, of the United States of America.
(b) Notwithstanding anything contained in these Articles to the contrary,
the affirmative vote of the holders of at least sixty-six and two-thirds percent
(66 2/3%) of the outstanding
-30-
<PAGE>
shares entitled to vote, voting together as a single class, shall be required to
amend or repeal, or adopt any provision inconsistent with, this Article 82.
SEAL
----
83. Subject to the provisions of Article 2 hereof, the Seal shall only be
used by the authority of the Directors or of a committee of the Directors
authorised by the Directors in that behalf and every instrument to which the
Seal has been affixed shall be signed by one person who shall be either a
Director or the Secretary or Secretary-Treasurer or some person appointed by the
Directors for the purpose; provided that the Company may have for use in any
territory, district or place not situated in the Cayman Islands, an official
seal which shall be a facsimile of the Common Seal of the Company with the
addition on its face of the name of every territory, district or place where it
is to be used; provided further that a Director, Secretary or other officer or
representative or attorney may without further authority of the Directors affix
the Seal of the Company over his signature alone to any document of the Company
required to be authenticated by him under Seal or to be filed with the Registrar
of Companies in the Cayman Islands or elsewhere wheresoever.
OFFICERS
--------
84. The Company may have a Chairman of the Board, Chairman of the
Executive Committee and/or President and shall have a Secretary or Secretary-
Treasurer appointed by the Directors who may also from time to time appoint such
other Officers as they consider necessary, all for such terms, at such
remuneration and to perform such duties, and subject to such provisions as to
disqualification and removal as the Directors from time to time prescribe.
85. A provision of the Statute or these Articles requiring or authorising
a thing to be done by a Director and an Officer shall not be satisfied by its
being done by the one person acting in the dual capacity of Director and
Officer.
-31-
<PAGE>
DIVIDENDS AND RESERVE
---------------------
86. Subject to the Statute, the Directors may from time to time
declare dividends on shares of the Company outstanding and authorise payment of
the same out of the profits of the Company, share premium account, or any other
account permitted by the Statute, and may from time to time pay to the Members
such interim dividends, as appears to the Directors to be justified by the
financial condition of the Company.
87. The Directors may deduct from any dividend payable to any Member
all sums of money (if any) presently payable by him to the Company on account of
calls or otherwise.
88. The Directors may declare that any dividend be paid wholly or
partly by the distribution of specific assets and in particular of paid up
shares, debentures, or debenture stock of any other company or in any one or
more of such ways and where any difficulty arises in regard to such
distribution, the Directors may settle the same as they think expedient and in
particular may issue fractional certificates and fix the value for distribution
of such specific assets or any part thereof and may determine that cash payments
shall be made to any Members upon the footing of the value so fixed in order to
adjust the rights of all Members and may vest any such specific assets in
trustees as may seem expedient to the Directors.
89. No dividend shall bear interest against the Company.
CAPITALISATION
--------------
90. The Company may upon the recommendation of the Directors by
ordinary resolution authorise the Directors to capitalise any sum standing to
the credit of any of the Company's reserve accounts (including share premium
account and capital redemption reserve fund) or any sum standing to the credit
of profit and loss account or otherwise available for distribution and to
appropriate such sum to Members in the proportions in which such sum would have
been divisible amongst them had the same been a distribution of profits by way
of dividend and to apply such sum on their behalf in paying up in full unissued
shares (not being redeemable shares) for allotment and distribution credited as
fully paid up to and amongst them in the proportion aforesaid. In such
-32-
<PAGE>
event the Directors shall do all acts and things required to give effect to such
capitalisation, with full power to the Directors to make such provisions as they
think fit for the case of shares becoming distributable in fractions (including
provisions whereby the benefit of fractional entitlements accrue to the Company
rather than to the Members concerned). The Directors may authorise any person
to enter on behalf of all of the Members interested into an agreement with the
Company providing for such capitalisation and matters incidental thereto and any
agreement made under such authority shall be effective and binding on all
concerned.
AUDIT
-----
91. The Company shall at each Annual General Meeting appoint an
Auditor or Auditors of the Company who shall hold office until the next Annual
General Meeting and may fix his or their remuneration.
92. The Directors shall fill any casual vacancy in the office of
Auditor but while any such vacancy continues the surviving or continuing Auditor
or Auditors, if any, may act. The remuneration of any Auditor, unless fixed by
the Company in General Meeting, shall be fixed by the Directors.
93. Every Auditor of the Company shall have a right of access at all
times to the books and accounts and vouchers of the Company and shall be
entitled to require from the Directors and Officers of the Company such
information and explanation as may be necessary for the performance of the
duties of the auditors.
94. Auditors shall at the next Annual General Meeting following their
appointment and at any other time during their term of office, upon request of
the Directors or any general meeting of the Members make a report on the
accounts of the Company in general meeting during their tenure of office.
NOTICES
-------
95. Notices shall be in writing and may be given by the Company to
any Member either personally or by sending it by post, air courier, cable,
facsimile transmission or telex to him or to his address as shown in the
register of Members, such notice, if mailed, to be forwarded airmail where
practicable.
-33-
<PAGE>
96. (a) Where a notice is sent by post, service of the notice shall be
deemed to be effected by properly addressing, pre-paying and posting a letter
containing the notice, and to have been effected at the expiration of five (5)
days after the letter containing the same is posted as aforesaid.
(b) Where a notice is sent by air courier, cable, facsimile transmission
or telex, service of the notice shall be deemed to be effected by properly
addressing pre-paying and sending through a transmitting organisation the
notice, and to have been effected at the expiration of forty-eight (48) hours
after the same is sent as aforesaid.
97. A notice may be given by the Company to the joint holders of record of
a share by giving the notice to the joint holder first named on the register of
Members in respect of the share.
98. A notice may be given by the Company to the person or persons which
the Company has been advised are entitled to a share or shares in consequence of
the death or bankruptcy of a Member by sending it through the post as aforesaid
in a pre-paid letter addressed to them by name, or by the title of
representatives of the deceased, or trustee of the bankruptcy, or by any like
description at the address supplied for that purpose by the persons claiming to
be so entitled, or at the option of the Company by giving the notice in any
manner in which the same might have been given if the death or bankruptcy had
not occurred.
99. Notice of every general meeting shall be given in any manner
hereinbefore authorised to:
(a) every holder of voting shares as shown in the register of Members
as of the record date for such meeting except that in the case of joint holders
the notice shall be sufficient if given to the joint holder first named in the
register of Members.
(b) every person upon whom the ownership of a voting share devolves by
reason of his being a legal personal representative or a trustee in bankruptcy
of a holder of voting shares of record where such holder but for his death or
bankruptcy would be entitled to receive notice of the meeting; and
-34-
<PAGE>
Except as otherwise required by law or these Articles, no other person shall be
entitled to receive notices of general meetings.
INDEMNITY AND LIMITATION OF LIABILITY
-------------------------------------
100. (a) The Company shall indemnify, in accordance with and to the
full extent now or hereafter permitted by law, any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (including, without limitation, an action by or in the right of
the Company), by reason of his acting as a director, officer, employee or agent
of, or his acting in any other capacity for or on behalf of, the Company,
against any liability or expense actually and reasonably incurred by such person
in respect thereof. The Company may advance the expenses of defending any such
act, suit or proceeding in accordance with and to the full extent now or
hereafter permitted by law. Such indemnification and advancement of expenses
are not exclusive of any other right to indemnification or advancement of
expenses provided by law or otherwise.
(b) The Board of Directors may authorise the Company to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Company, or is or was serving at the request of the
Company as a director, officer, employee or agent of another company,
partnership, joint venture, trust or other enterprise, or in a fiduciary or
other capacity with respect to any employee benefit plan maintained by the
Company, against any liability asserted against him and incurred by him in any
such capacity, or arising out of his status as such, whether or not the Company
would have the power to indemnify him against such liability under the
provisions of this Article 101.
(c) Directors of the Company shall have no personal liability to the
Company or its Members for monetary damages for breach of fiduciary or other
duties as a director, except (i) for any breach of a director's duty of loyalty
to the Company or its Members, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) a
payment of a dividend on stock of the Company or a purchase or redemption of
stock of the Company in violation of law, or (iv) for any transaction from which
a director derived an improper personal benefit.
-35-
<PAGE>
BOOKS AND RECORDS
-----------------
101. Without prejudice to Article 35(b), no Member shall be entitled to
review the books and records of the Company, including without limitation, the
Company's register of Members, without the approval of the Directors.
FISCAL YEAR
-----------
102. Each Fiscal Year shall commence on 1st of October and end on the 30th
September next following. At any time or times the Directors may prescribe some
other period for any Fiscal Year.
AMENDMENTS OF ARTICLES
----------------------
103. Subject to the Statute, except as otherwise provided in these
Articles, the Company may at any time and from time to time by Special
Resolution alter or amend these Articles in whole or in part.
-36-
<PAGE>
ACE LIMITED 1998
LONG-TERM INCENTIVE PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
GENERAL..................................................................... 1
Purpose................................................................... 1
Participation............................................................. 1
Operation, Administration, and Definitions................................ 1
OPTIONS AND SARS............................................................ 1
Definitions............................................................... 1
Exercise Price............................................................ 1
Exercise.................................................................. 2
Payment of Option Exercise Price.......................................... 2
Settlement of Award....................................................... 2
OTHER STOCK AWARDS.......................................................... 2
Definitions............................................................... 2
Restrictions on Awards.................................................... 2
OPERATION AND ADMINISTRATION................................................ 3
Effective Date............................................................ 3
Shares Subject to Plan.................................................... 3
General Restrictions...................................................... 4
Use of Shares............................................................. 5
Dividends and Dividend Equivalents........................................ 5
Payments.................................................................. 5
Transferability........................................................... 5
Form and Time of Elections................................................ 5
Agreement With Company.................................................... 5
Action by Company or Subsidiary........................................... 5
Gender and Number......................................................... 5
Limitation of Implied Rights.............................................. 6
Benefits Under Qualified Retirement Plans................................. 6
Evidence.................................................................. 6
CHANGE IN CONTROL........................................................... 6
COMMITTEE................................................................... 6
Administration............................................................ 6
Powers of Committee....................................................... 7
Delegation by Committee................................................... 7
Information to be Furnished to Committee.................................. 7
AMENDMENT AND TERMINATION................................................... 7
DEFINED TERMS............................................................... 7
</TABLE>
i
<PAGE>
ACE LIMITED 1998
LONG-TERM INCENTIVE PLAN
SECTION 1
GENERAL
1.1. Purpose. The ACE Limited Long-Term Incentive Plan (the "Plan") has been
established by ACE Limited (the "Company") to (i) attract and retain persons
eligible to participate in the Plan; (ii) motivate Participants, by means of
appropriate incentives, to achieve long-range goals; (iii) provide incentive
compensation opportunities that are competitive with those of other similar
companies; and (iv) further identify Participants' interests with those of the
Company's other shareholders through compensation that is based on the
Company's ordinary shares of stock; and thereby promote the long-term
financial interest of the Company and the Subsidiaries, including the growth
in value of the Company's equity and enhancement of long-term shareholder
return.
1.2. Participation. Subject to the terms and conditions of the Plan, the
Committee shall determine and designate, from time to time, from among the
Eligible Individuals (including transferees of Eligible Individuals to the
extent the transfer is permitted by the Plan and the applicable Award
Agreement), those persons who will be granted one or more Awards under the
Plan, and thereby become "Participants" in the Plan. In the discretion of the
Committee, a Participant may be granted any Award permitted under the
provisions of the Plan, and more than one Award may be granted to a
Participant. Awards may be granted as alternatives to or replacement of awards
granted or outstanding under the Plan, or any other plan or arrangement of the
Company or a Subsidiary (including a plan or arrangement of a business or
entity, all or a portion of which is acquired by the Company or a Subsidiary).
1.3. Operation, Administration, and Definitions. The operation and
administration of the Plan, including the Awards made under the Plan, shall be
subject to the provisions of Section 4 (relating to operation and
administration). Capitalized terms in the Plan shall be defined as set forth
in the Plan (including the definition provisions of Section 8 of the Plan).
SECTION 2
OPTIONS AND SARS
2.1. Definitions.
(a) The grant of an "Option" entitles the Participant to purchase shares of
Stock at an Exercise Price established by the Committee. Any Option granted
under this Section 2 may be either an incentive stock option (an "ISO") or a
non-qualified option (an "NQO"), as determined in the discretion of the
Committee. An "ISO" is an Option that is intended to satisfy the requirements
applicable to an "incentive stock option" described in section 422(b) of the
Code. An "NQO" is an Option that is not intended to be an "incentive stock
option" as that term is described in section 422(b) of the Code.
(b) A stock appreciation right (an "SAR") entitles the Participant to
receive, in cash or Stock (as determined in accordance with subsection 2.5),
value equal to (or otherwise based on) the excess of: (a) the Fair Market
Value of a specified number of shares of Stock at the time of exercise; over
(b) an Exercise Price established by the Committee.
2.2. Exercise Price. The "Exercise Price" of each Option and SAR granted
under this Section 2 shall be established by the Committee or shall be
determined by a method established by the Committee at the time the Option or
SAR is granted; except that the Exercise Price shall not be less than 100% of
the Fair Market Value of a share of Stock on the date of grant (or, if
greater, the par value of a share of Stock).
<PAGE>
2.3. Exercise. An Option and an SAR shall be exercisable in accordance with
such terms and conditions and during such periods as may be established by the
Committee.
2.4. Payment of Option Exercise Price. The payment of the Exercise Price of
an Option granted under this Section 2 shall be subject to the following:
(a) Subject to the following provisions of this subsection 2.4, the full
Exercise Price for shares of Stock purchased upon the exercise of any
Option shall be paid at the time of such exercise (except that, in the case
of an exercise arrangement approved by the Committee and described in
paragraph 2.4(c), payment may be made as soon as practicable after the
exercise).
(b) The Exercise Price shall be payable in cash or by tendering, by
either actual delivery of shares or by attestation, shares of Stock
acceptable to the Committee, and valued at Fair Market Value as of the day
of exercise, or in any combination thereof, as determined by the Committee.
(c) The Committee may permit a Participant to elect to pay the Exercise
Price upon the exercise of an Option by irrevocably authorizing a third
party to sell shares of Stock (or a sufficient portion of the shares)
acquired upon exercise of the Option and remit to the Company a sufficient
portion of the sale proceeds to pay the entire Exercise Price and any tax
withholding resulting from such exercise.
2.5. Settlement of Award. Shares of Stock delivered pursuant to the exercise
of an Option or SAR shall be subject to such conditions, restrictions and
contingencies as the Committee may establish in the applicable Award
Agreement. Settlement of SARs may be made in shares of Stock (valued at their
Fair Market Value at the time of exercise), in cash, or in a combination
thereof, as determined in the discretion of the Committee. The Committee, in
its discretion, may impose such conditions, restrictions and contingencies
with respect to shares of Stock acquired pursuant to the exercise of an Option
or an SAR as the Committee determines to be desirable.
SECTION 3
OTHER STOCK AWARDS
3.1. Definitions.
(a) A "Stock Unit" Award is the grant of a right to receive shares of Stock
in the future.
(b) A "Performance Share" Award is a grant of a right to receive shares of
Stock or Stock Units which is contingent on the achievement of performance or
other objectives during a specified period.
(c) A "Performance Unit" Award is a grant of a right to receive a designated
dollar value amount of Stock which is contingent on the achievement of
performance or other objectives during a specified period.
(d) A "Restricted Stock" Award is a grant of shares of Stock, and a
"Restricted Stock Unit" Award is the grant of a right to receive shares of
Stock in the future, with such shares of Stock or right to future delivery of
such shares of Stock subject to a risk of forfeiture or other restrictions
that will lapse upon the achievement of one or more goals relating to
completion of service by the Participant, or achievement of performance or
other objectives, as determined by the Committee.
3.2. Restrictions on Awards. Each Stock Unit Award, Restricted Stock Award,
Restricted Stock Unit Award, Performance Share Award and Performance Unit
Award shall be subject to the following:
(a) Any such Award shall be subject to such conditions, restrictions and
contingencies as the Committee shall determine.
(b) The Committee may designate whether any such Award being granted to
any Participant is intended to be "performance-based compensation" as that
term is used in section 162(m) of the Code. Any such Awards designated as
intended to be "performance-based compensation" shall be conditioned on the
achievement of one or more Performance Measures, to the extent required by
Code section 162(m). The
2
<PAGE>
Performance Measures that may be used by the Committee for such Awards
shall be based on any one or more of the following Company, Subsidiary,
operating unit or division performance measures, as selected by the
Committee: gross premiums written; net premiums written; net premiums
earned; net investment income; losses and loss expenses; underwriting and
administrative expenses; operating expenses; cash flow(s); operating
income; earnings before interest and taxes; net income; stock price;
dividends; strategic business objectives, consisting of one or more
objectives based on meeting specified cost targets, business expansion
goals, and goals relating to acquisitions or divestitures; or any
combination thereof. Each goal may be expressed on an absolute and/or
relative basis, may be based on or otherwise employ comparisons based on
internal targets, the past performance of the Company and/or the past or
current performance of other companies, and in the case of earnings-based
measures, may use or employ comparisons relating to capital, shareholders'
equity and/or shares outstanding, investments or to assets or net assets.
For Awards under this Section 3 intended to be "performance-based
compensation," the grant of the Awards and the establishment of the
Performance Measures shall be made during the period required under Code
section 162(m).
(c) If the right to become vested in a Restricted Stock Award or
Restricted Stock Unit Award granted under this Section 3 is conditioned on
the completion of a specified period of service with the Company or the
Subsidiaries, without achievement of Performance Measures or other
performance objectives being required as a condition of vesting, and
without it being granted in lieu of other compensation, then the required
period of service for vesting shall be not less than three years (subject
to acceleration of vesting, to the extent permitted by the Committee, in
the event of the Participant's death, disability, retirement, change in
control or involuntary termination).
SECTION 4
OPERATION AND ADMINISTRATION
4.1. Effective Date. Subject to the approval of the shareholders of the
Company at the Company's 1999 annual meeting of its shareholders, the Plan
shall be effective as of November 13, 1998 (the "Effective Date"); provided,
however, that to the extent that Awards are granted under the Plan prior to
its approval by shareholders, the Awards shall be contingent on approval of
the Plan by the shareholders of the Company at such annual meeting. The Plan
shall be unlimited in duration and, in the event of Plan termination, shall
remain in effect as long as any Awards under it are outstanding; provided,
however, that no Awards may be granted under the Plan after the ten-year
anniversary of the Effective Date.
4.2. Shares Subject to Plan. The shares of Stock for which Awards may be
granted under the Plan shall be subject to the following:
(a) The shares of Stock with respect to which Awards may be made under
the Plan shall be currently authorized but unissued shares, or shares
purchased in the open market by a direct or indirect wholly-owned
subsidiary of the Company (as determined by the Chairman or any Executive
Vice President of the Company). The Company may contribute to the
subsidiary an amount sufficient to accomplish the purchase in the open
market of the shares of Stock to be so acquired (as determined by the
Chairman or any Executive Vice President of the Company).
(b) The number of shares of Stock available for Awards under the Plan
during any fiscal year of the Company shall equal (i) five percent of the
adjusted average of the outstanding Stock, as that number is determined by
the Company to calculate fully diluted earnings per share for the preceding
fiscal year; reduced by (ii) any shares of Stock granted pursuant to Awards
under the Plan, and any shares of Stock subject to any outstanding award
under the Plan.
(c) To the extent provided by the Committee, any Award may be settled in
cash rather than Stock. To the extent any shares of Stock covered by an
Award are not delivered to a Participant or beneficiary because the Award
is forfeited or canceled, or the shares of Stock are not delivered because
the Award is settled in
3
<PAGE>
cash or used to satisfy the applicable tax withholding obligation, such
shares shall not be deemed to have been delivered for purposes of
determining the maximum number of shares of Stock available for delivery
under the Plan.
(d) If the exercise price of any Option granted under the Plan is
satisfied by tendering shares of Stock to the Company (by either actual
delivery or by attestation), only the number of shares of Stock issued net
of the shares of Stock tendered shall be deemed delivered for purposes of
determining the maximum number of shares of Stock available for delivery
under the Plan.
(e) Subject to paragraph 4.2(f), the following additional maximums are
imposed under the Plan:
(i) The maximum number of shares of Stock that may be issued by
Options intended to be ISOs shall be 8,000,000 shares.
(ii) The maximum number of shares that may be covered by Awards
granted to any one individual pursuant to Section 2 (relating to
Options and SARs) shall be 6,000,000 shares during any one-calendar-
year period.
(iii) The maximum number of shares of Stock that may be issued in
conjunction with Awards granted pursuant to Section 3 (relating to
Other Stock Awards) shall be 2,000,000 shares.
(iv) For Stock Unit Awards, Restricted Stock Awards, Restricted Stock
Unit Awards and Performance Share Awards that are intended to be
"performance-based compensation" (as that term is used for purposes of
Code section 162(m)), no more than 2,000,000 shares of Stock may be
subject to such Awards granted to any one individual during any one-
calendar-year period (regardless of when such shares are deliverable).
(v) For Performance Unit Awards that are intended to be "performance-
based compensation" (as that term is used for purposes of Code section
162(m)), no more than $5,000,000 may be subject to such Awards granted
to any one individual during any one-calendar-year period (regardless
of when such amounts are deliverable).
(f) In the event of a corporate transaction involving the Company
(including, without limitation, any stock dividend, stock split,
extraordinary cash dividend, recapitalization, reorganization, merger,
consolidation, split-up, spin-off, combination or exchange of shares), the
Committee may adjust Awards to preserve the benefits or potential benefits
of the Awards. Action by the Committee may include: (i) adjustment of the
number and kind of shares which may be delivered under the Plan; (ii)
adjustment of the number and kind of shares subject to outstanding Awards;
(iii) adjustment of the Exercise Price of outstanding Options and SARs; and
(iv) any other adjustments that the Committee determines to be equitable.
4.3. General Restrictions. Delivery of shares of Stock or other amounts
under the Plan shall be subject to the following:
(a) Notwithstanding any other provision of the Plan, the Company shall
have no liability to deliver any shares of Stock under the Plan or make any
other distribution of benefits under the Plan unless such delivery or
distribution would comply with all applicable laws (including, without
limitation, the requirements of the United States Securities Act of 1933),
and the applicable requirements of any securities exchange or similar
entity.
(b) To the extent that the Plan provides for issuance of stock
certificates to reflect the issuance of shares of Stock, the issuance may
be effected on a non-certificated basis, to the extent not prohibited by
applicable law or the applicable rules of any stock exchange.
4.4. Tax Withholding. All distributions under the Plan are subject to
withholding of all applicable taxes, and the Committee may condition the
delivery of any shares or other benefits under the Plan on satisfaction of the
applicable withholding obligations. The Committee, in its discretion, and
subject to such requirements as the Committee may impose prior to the
occurrence of such withholding, may permit such withholding obligations to
4
<PAGE>
be satisfied through cash payment by the Participant, through the surrender of
shares of Stock which the Participant already owns, or through the surrender
of shares of Stock to which the Participant is otherwise entitled under the
Plan.
4.5. Use of Shares. Subject to the overall limitation on the number of
shares of Stock that may be delivered under the Plan, the Committee may use
available shares of Stock as the form of payment for compensation, grants or
rights earned or due under any other compensation plans or arrangements of the
Company or a Subsidiary, including the plans and arrangements of the Company
or a Subsidiary assumed in business combinations.
4.6. Dividends and Dividend Equivalents. An Award (including without
limitation an Option or SAR Award) may provide the Participant with the right
to receive dividend payments or dividend equivalent payments with respect to
Stock subject to the Award (both before and after the Stock subject to the
Award is earned, vested, or acquired), which payments may be either made
currently or credited to an account for the Participant, and may be settled in
cash or Stock as determined by the Committee. Any such settlements, and any
such crediting of dividends or dividend equivalents or reinvestment in shares
of Stock, may be subject to such conditions, restrictions and contingencies as
the Committee shall establish, including the reinvestment of such credited
amounts in Stock equivalents.
4.7. Payments. Awards may be settled through cash payments, the delivery of
shares of Stock, the granting of replacement Awards, or combination thereof as
the Committee shall determine. Any Award settlement, including payment
deferrals, may be subject to such conditions, restrictions and contingencies
as the Committee shall determine. The Committee may permit or require the
deferral of any Award payment, subject to such rules and procedures as it may
establish, which may include provisions for the payment or crediting of
interest, or dividend equivalents, including converting such credits into
deferred Stock equivalents. Each Subsidiary shall be liable for payment of
cash due under the Plan with respect to any Participant to the extent that
such benefits are attributable to the services rendered for that Subsidiary by
the Participant. Any disputes relating to liability of a Subsidiary for cash
payments shall be resolved by the Committee.
4.8. Transferability. Except as otherwise provided by the Committee, Awards
under the Plan are not transferable except as designated by the Participant by
will or by the laws of descent and distribution.
4.9. Form and Time of Elections. Unless otherwise specified herein, each
election required or permitted to be made by any Participant or other person
entitled to benefits under the Plan, and any permitted modification, or
revocation thereof, shall be in writing filed with the Committee at such
times, in such form, and subject to such restrictions and limitations, not
inconsistent with the terms of the Plan, as the Committee shall require.
4.10. Agreement With Company. An Award under the Plan shall be subject to
such terms and conditions, not inconsistent with the Plan, as the Committee
shall, in its sole discretion, prescribe. The terms and conditions of any
Award to any Participant shall be reflected in such form of written document
as is determined by the Committee. A copy of such document shall be provided
to the Participant, and the Committee may, but need not require that the
Participant sign a copy of such document. Such document is referred to in the
Plan as an "Award Agreement" regardless of whether any Participant signature
is required.
4.11. Action by Company or Subsidiary. Any action required or permitted to
be taken by the Company or any Subsidiary shall be by resolution of its board
of directors, or by action of one or more members of the board (including a
committee of the board) who are duly authorized to act for the board, or
(except to the extent prohibited by applicable law or applicable rules of any
stock exchange) by a duly authorized officer of such company.
4.12. Gender and Number. Where the context admits, words in any gender shall
include any other gender, words in the singular shall include the plural and
the plural shall include the singular.
5
<PAGE>
4.13. Limitation of Implied Rights.
(a) Neither a Participant nor any other person shall, by reason of
participation in the Plan, acquire any right in or title to any assets, funds
or property of the Company or any Subsidiary whatsoever, including, without
limitation, any specific funds, assets, or other property which the Company or
any Subsidiary, in their sole discretion, may set aside in anticipation of a
liability under the Plan. A Participant shall have only a contractual right to
the Stock or amounts, if any, payable under the Plan, unsecured by any assets
of the Company or any Subsidiary, and nothing contained in the Plan shall
constitute a guarantee that the assets of the Company or any Subsidiary shall
be sufficient to pay any benefits to any person.
(b) The Plan does not constitute a contract of employment, and selection as
a Participant will not give any participating employee or other individual the
right to be retained in the employ of the Company or any Subsidiary or the
right to continue to provide services to the Company or any Subsidiary, nor
any right or claim to any benefit under the Plan, unless such right or claim
has specifically accrued under the terms of the Plan. Except as otherwise
provided in the Plan, no Award under the Plan shall confer upon the holder
thereof any rights as a shareholder of the Company prior to the date on which
the individual fulfills all conditions for receipt of such rights.
4.14. Benefits Under Qualified Retirement Plans. Except as otherwise
provided by the Committee, Awards to a Participant (including the grant and
the receipt of benefits) under the Plan shall be disregarded for purposes of
determining the Participant's benefits under any Qualified Retirement Plan and
other plans maintained by the Participant's employer. The term "Qualified
Retirement Plan" means any plan of the Company or a Subsidiary that is
intended to be qualified under section 401(a) of the Code.
4.15. Evidence. Evidence required of anyone under the Plan may be by
certificate, affidavit, document or other information which the person acting
on it considers pertinent and reliable, and signed, made or presented by the
proper party or parties.
SECTION 5
CHANGE IN CONTROL
Subject to the provisions of paragraph 4.2(f) (relating to the adjustment of
shares), and except as otherwise provided in the Plan or the Award Agreement
reflecting the applicable Award, upon the occurrence of a Change in Control:
(a) All outstanding Options (regardless of whether in tandem with SARs)
shall become fully exercisable.
(b) All outstanding SARs (regardless of whether in tandem with Options)
shall become fully exercisable.
(c) All Stock Units, Restricted Stock, Restricted Stock Units,
Performance Shares, and Performance Units shall become fully vested.
SECTION 6
COMMITTEE
6.1. Administration. The authority to control and manage the operation and
administration of the Plan shall be vested in a committee (the "Committee") in
accordance with this Section 6. The Compensation Committee of the Board shall
serve as the "Committee" under the Plan, except as otherwise determined by the
Board. If the Committee does not exist, or for any other reason determined by
the Board, the Board may take any action under the Plan that would otherwise
be the responsibility of the Committee.
6
<PAGE>
6.2. Powers of Committee. The Committee's administration of the Plan shall
be subject to the following:
(a) Subject to the provisions of the Plan, the Committee will have the
authority and discretion to select from among the Eligible Individuals
those persons who shall receive Awards, to determine the time or times of
receipt, to determine the types of Awards and the number of shares covered
by the Awards, to establish the terms, conditions, performance criteria,
restrictions, and other provisions of such Awards, and (subject to the
restrictions imposed by Section 7) to cancel or suspend Awards.
(b) To the extent that the Committee determines that the restrictions
imposed by the Plan preclude the achievement of the material purposes of
the Awards in jurisdictions outside the United States, the Cayman Islands,
and Bermuda, the Committee will have the authority and discretion to modify
those restrictions as the Committee determines to be necessary or
appropriate to conform to applicable requirements or practices of
jurisdictions outside of the United States, the Cayman Islands, and
Bermuda.
(c) The Committee will have the authority and discretion to interpret the
Plan, to establish, amend, and rescind any rules and regulations relating
to the Plan, to determine the terms and provisions of any Award Agreement
made pursuant to the Plan, and to make all other determinations that may be
necessary or advisable for the administration of the Plan.
(d) Any interpretation of the Plan by the Committee and any decision made
by it under the Plan is final and binding on all persons.
(e) In controlling and managing the operation and administration of the
Plan, the Committee shall take action in a manner that conforms to the
Memorandum and Articles of Association of the Company, and applicable
corporate law.
6.3. Delegation by Committee. Except to the extent prohibited by applicable
law or the applicable rules of a stock exchange, the Committee may allocate
all or any portion of its responsibilities and powers to any one or more of
its members and may delegate all or any part of its responsibilities and
powers to any person or persons selected by it. Any such allocation or
delegation may be revoked by the Committee at any time.
6.4. Information to be Furnished to Committee. The Company and Subsidiaries
shall furnish the Committee with such data and information as it determines
may be required for it to discharge its duties. The records of the Company and
Subsidiaries as to an employee's or Participant's employment (or other
provision of services), termination of employment (or cessation of the
provision of services), leave of absence, reemployment and compensation shall
be conclusive on all persons unless determined to be incorrect. Participants
and other persons entitled to benefits under the Plan must furnish the
Committee such evidence, data or information as the Committee considers
desirable to carry out the terms of the Plan.
SECTION 7
AMENDMENT AND TERMINATION
The Board may, at any time, amend or terminate the Plan, provided that no
amendment or termination may, in the absence of written consent to the change
by the affected Participant (or, if the Participant is not then living, the
affected beneficiary), adversely affect the rights of any Participant or
beneficiary under any Award granted under the Plan prior to the date such
amendment is adopted by the Board; provided that adjustments pursuant to
subject to paragraph 4.2(f) shall not be subject to the foregoing limitations
of this Section 7.
SECTION 8
DEFINED TERMS
In addition to the other definitions contained herein, the following
definitions shall apply:
(a) Award. The term "Award" shall mean any award or benefit granted under
the Plan, including, without limitation, the grant of Options, SARs, Stock
Unit Awards, Restricted Stock Awards, Restricted Stock Unit Awards,
Performance Share Awards, and Performance Unit Awards.
7
<PAGE>
(b) Board. The term "Board" shall mean the Board of Directors of the
Company.
(c) Change in Control. The term "Change in Control" shall mean the
occurrence of any one of the following events:
(i) any "person," as such term is used in Sections 3(a)(9) and 13(d)
of the United States Securities Exchange Act of 1934, becomes a
"beneficial owner," as such term is used in Rule 13d-3 promulgated
under that act, of 50% or more of the Voting Stock (as defined below)
of the Company;
(ii) the majority of the Board consists of individuals other than
Incumbent Directors, which term means the members of the Board on the
Effective Date; provided that any person becoming a director subsequent
to such date whose election or nomination for election was supported by
three-quarters of the directors who then comprised the Incumbent
Directors shall be considered to be an Incumbent Director;
(iii) the Company adopts any plan of liquidation providing for the
distribution of all or substantially all of its assets;
(iv) all or substantially all of the assets or business of the
Company is disposed of pursuant to a merger, consolidation or other
transaction (unless the shareholders of the Company immediately prior
to such merger, consolidation or other transaction beneficially own,
directly or indirectly, in substantially the same proportion as they
owned the Voting Stock of the Company, all of the Voting Stock or other
ownership interests of the entity or entities, if any, that succeed to
the business of the Company); or
(v) the Company combines with another company and is the surviving
corporation but, immediately after the combination, the shareholders of
the Company immediately prior to the combination hold, directly or
indirectly, 50% or less of the Voting Stock of the combined company
(there being excluded from the number of shares held by such
shareholders, but not from the Voting Stock of the combined company,
any shares received by Affiliates (as defined below) of such other
company in exchange for stock of such other company).
For the purpose of this definition of "Change in Control," (I) an
"Affiliate" of a person or other entity shall mean a person or other
entity that directly or indirectly controls, is controlled by, or is
under common control with the person or other entity specified and (II)
"Voting Stock" shall mean capital stock of any class or classes having
general voting power under ordinary circumstances, in the absence of
contingencies, to elect the directors of a corporation.
(d) Code. The term "Code" means the United States Internal Revenue Code
of 1986, as amended. A reference to any provision of the Code shall include
reference to any successor provision of the Code.
(e) Dollars. As used in the Plan, the term "dollars" or numbers preceded
by the symbol "$" shall mean amounts in United States dollars.
(f) Eligible Individual. For purposes of the Plan, the term "Eligible
Individual" shall mean any employee of the Company or a Subsidiary, and any
consultant, director, or other person providing services to the Company or
a Subsidiary. An Award may be granted to an employee or other individual
providing services, in connection with hiring, retention or otherwise,
prior to the date the employee or service provider first performs services
for the Company or the Subsidiaries, provided that such Awards shall not
become vested prior to the date the employee or service provider first
performs such services.
(g) Fair Market Value. Except as otherwise provided by the Committee, the
"Fair Market Value" of a share of Stock as of any date shall be the closing
market composite price for such Stock as reported for the New York Stock
Exchange--Composite Transactions on that date or, if Stock is not traded on
that date, on the next preceding date on which Stock was traded.
(h) Subsidiaries. For purposes of the Plan, the term "Subsidiary" means
any corporation, partnership, joint venture or other entity during any
period in which at least a fifty percent voting or profits interest is
8
<PAGE>
owned, directly or indirectly, by the Company (or by any entity that is a
successor to the Company), and any other business venture designated by the
Committee in which the Company (or any entity that is a successor to the
Company) has a significant interest, as determined in the discretion of the
Committee.
(i) Stock. The term "Stock" shall mean ordinary shares of stock of the
Company.
9
<PAGE>
Exhibit 10.37
================================================================================
ACE US HOLDINGS, INC.
Credit Sensitive Senior Notes due 2008
__________
INDENTURE
Dated as of October 27, 1998
__________
UNITED STATES TRUST COMPANY OF NEW YORK,
Trustee
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE 1
------------------------------------------
SECTION 1.01. Definitions.....................................................................................1
SECTION 1.02. Other Definitions..............................................................................21
SECTION 1.03. Trust Indenture Act............................................................................21
SECTION 1.04. Rules of Construction..........................................................................21
ARTICLE 2 THE SECURITIES 22
--------------
SECTION 2.01. Form and Dating................................................................................22
SECTION 2.02. Execution and Authentication...................................................................22
SECTION 2.03. Registrar and Paying Agent.....................................................................23
SECTION 2.04. Paying Agent To Hold Money in Trust............................................................23
SECTION 2.05. Securityholder Lists...........................................................................24
SECTION 2.06. Transfer and Exchange..........................................................................24
SECTION 2.07. Replacement Securities.........................................................................25
SECTION 2.08. Outstanding Securities.........................................................................25
SECTION 2.09. Temporary Securities...........................................................................25
SECTION 2.10. Cancellation...................................................................................26
SECTION 2.11. Defaulted Interest.............................................................................26
SECTION 2.12. CUSIP Numbers..................................................................................26
ARTICLE 3 REDEMPTION 26
----------
SECTION 3.01. Notices to Trustee.............................................................................26
SECTION 3.02. Selection of Securities To Be Redeemed.........................................................27
SECTION 3.03. Notice of Redemption...........................................................................27
SECTION 3.04. Effect of Notice of Redemption.................................................................28
SECTION 3.05. Deposit of Redemption Price....................................................................28
SECTION 3.06. Securities Redeemed in Part....................................................................28
ARTICLE 4 COVENANTS 28
---------
SECTION 4.01. Payment of Securities..........................................................................28
SECTION 4.02. Certain Reports and Certificates...............................................................28
SECTION 4.03. Limitation on Indebtedness.....................................................................30
SECTION 4.04. Limitation on Restricted Payments..............................................................32
SECTION 4.05. Limitation on Restrictions on Distributions from Restricted Subsidiaries.......................34
SECTION 4.06. Limitation on Sales of Assets and Subsidiary Stock.............................................35
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SECTION 4.07. Limitation on Transactions with Affiliates.....................................................38
SECTION 4.08. Change of Control..............................................................................39
SECTION 4.09. Compliance Certificate.........................................................................40
SECTION 4.10. Further Instruments and Acts...................................................................40
SECTION 4.11. Future Subsidiary Guarantors...................................................................40
SECTION 4.12. Limitation on Lines of Business................................................................41
SECTION 4.13. Limitation on the Sale or Issuance of Capital Stock or Restricted Subsidiaries.................41
SECTION 4.14. Limitation on Liens............................................................................41
SECTION 4.15. USE OF PROCEEDS................................................................................41
---------------
SECTION 4.16. FINANCIAL STRENGTH RATING......................................................................41
-------------------------
SECTION 4.17. MAINTENANCE OF SUBORDINATED LOAN AGREEMENT.....................................................41
------------------------------------------
ARTICLE 5 SUCCESSOR COMPANY, ETC. 42
-----------------------
SECTION 5.01. When Company AND SUBSIDIARY GUARANTORS May Merge or Transfer Assets............................42
-------------------------
ARTICLE 6 DEFAULTS AND REMEDIES 43
---------------------
SECTION 6.01. Events of Default..............................................................................43
SECTION 6.02. Acceleration...................................................................................45
SECTION 6.03. Other Remedies.................................................................................46
SECTION 6.04. Waiver of Past Defaults........................................................................46
SECTION 6.05. Control by Majority............................................................................46
SECTION 6.06. Limitation on Suits............................................................................46
SECTION 6.07. Rights of Holders to Receive Payment...........................................................47
SECTION 6.08. Collection Suit by Trustee.....................................................................47
SECTION 6.09. Trustee May File Proofs of Claim...............................................................47
SECTION 6.10. Priorities.....................................................................................47
SECTION 6.11. Undertaking for Costs..........................................................................48
SECTION 6.12. Waiver of Stay or Extension Laws...............................................................48
ARTICLE 7 TRUSTEE 48
-------
SECTION 7.01. Duties of Trustee..............................................................................48
SECTION 7.02. Rights of Trustee..............................................................................49
SECTION 7.03. Individual Rights of Trustee...................................................................50
SECTION 7.04. Trustee's Disclaimer...........................................................................50
SECTION 7.05. Notice of Defaults.............................................................................51
SECTION 7.06. Reports by Trustee to Holders..................................................................51
SECTION 7.07. Compensation and Indemnity.....................................................................51
SECTION 7.08. Replacement of Trustee.........................................................................52
SECTION 7.09. Successor Trustee by Merger....................................................................52
SECTION 7.10. Eligibility; Disqualification..................................................................53
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
SECTION 7.11. Preferential Collection of Claims Against Company..............................................53
ARTICLE 8 DISCHARGE OF INDENTURE; DEFEASANCE 53
----------------------------------
SECTION 8.01. Discharge of Liability on Securities; Defeasance...............................................53
SECTION 8.02. Conditions to Defeasance.......................................................................54
SECTION 8.03. Application of Trust Money.....................................................................55
SECTION 8.04. Repayment to Company...........................................................................55
SECTION 8.05. Indemnity for Government Obligations...........................................................56
SECTION 8.06. Reinstatement..................................................................................56
ARTICLE 9 AMENDMENTS 56
----------
SECTION 9.01. Without Consent of Holders.....................................................................56
SECTION 9.02. With Consent of Holders........................................................................57
SECTION 9.03. Revocation and Effect of Consents and Waivers..................................................57
SECTION 9.04. Notation on or Exchange of Securities..........................................................58
SECTION 9.06. Trustee to Sign Amendments.....................................................................58
SECTION 9.06. Payment for Consent............................................................................58
ARTICLE 10 SUBSIDIARY GUARANTEES 59
---------------------
ARTICLE 11 MISCELLANEOUS 59
-------------
SECTION 11.01. Trust Indenture Act Controls..................................................................59
SECTION 11.02. Notices.......................................................................................59
SECTION 11.03. Communication by Holders with Other Holders...................................................59
SECTION 11.04. Certificate and Opinion as to Conditions Precedent............................................60
SECTION 11.05. Statements Required in Certificate or Opinion.................................................60
SECTION 11.06. When Securities Disregarded...................................................................60
SECTION 11.07. Rules by Trustee, Paying Agent, Registrar and Calculation Agent...............................60
SECTION 11.08. Legal Holidays................................................................................60
SECTION 11.09. Governing Law.................................................................................61
SECTION 11.10. No Recourse Against Others....................................................................61
SECTION 11.11. Successors....................................................................................61
SECTION 11.12. Multiple Originals............................................................................61
SECTION 11.13. Table of Contents; Headings...................................................................61
</TABLE>
Appendix A - Provisions Relating to Securities
Exhibit A - Form of Security
iii
<PAGE>
Exhibit B - Form of Supplemental Indenture
Exhibit C - Reference Swap Transaction
Exhibit D - Form of Quarterly Certificate
Exhibit E - Form of Ratings Certificate
iv
<PAGE>
INDENTURE, dated as of October 27, 1998, between ACE US Holdings, Inc., a
Delaware corporation (the "Company"), and United States Trust Company of New
York, as trustee (the "Trustee").
Each party agrees as follows for the benefit of the other parties and for
the equal and ratable benefit of the Holders of the Company's Credit Sensitive
Senior Notes due 2008 issued on the date hereof (the "Securities"). Except as
otherwise provided herein, the Securities will be limited to $250,000,000 in
aggregate principal amount outstanding, all of which $250,000,000 aggregate
principal amount will be initially issued on the date hereof.
ARTICLE 1
DEFINITIONS AND INCORPORATION BY REFERENCE
------------------------------------------
SECTION 1.01. Definitions.
-----------
"ACE Insurance" means A.C.E. Insurance Company, Ltd., a Bermuda limited
liability company.
"ACE USA Insurance Group" means any group of two or more Insurance
Subsidiaries of the Company that are rated in the aggregate as a group, by
Moody's or S&P, provided that if no such group exists, but one or more Insurance
--------
Subsidiaries of the Company is rated individually by Moody's or S&P, "ACE USA
Insurance Group" shall refer to each such Insurance Subsidiary that is Material.
"Material" means, with respect to any Subsidiary, that such Subsidiary would be
a "significant subsidiary" as defined in Article I, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such regulation is in effect on
the Closing Date.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) to be used by the Company or a Restricted
Subsidiary in a Related Business including Investments by Insurance Subsidiaries
in Investment Securities; (ii) the Capital Stock of a Person that becomes a
Restricted Subsidiary as a result of the acquisition of such Capital Stock by
the Company or another Restricted Subsidiary; or (iii) Capital Stock
constituting a minority interest in any Person that at such time is a Restricted
Subsidiary; provided, however, that any such Restricted Subsidiary described in
-------- -------
clauses (ii) or (iii) above is primarily engaged in a Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of Sections 4.06 and 4.07 only, "Affiliate" shall also mean any
beneficial owner of shares representing 10% or more of the total voting power of
the Voting Stock (on a fully diluted basis) of the Company or of rights or
warrants to purchase such Voting Stock (whether or not currently
<PAGE>
exercisable) and any Person who would be an Affiliate of any such beneficial
owner pursuant to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares or shares
required by applicable law to be held by a Person other than the Company or a
Restricted Subsidiary), (ii) all or substantially all the assets of any division
or line of business of the Company or any Restricted Subsidiary or (iii) any
other assets of the Company or any Restricted Subsidiary outside of the ordinary
course of business of the Company or such Restricted Subsidiary (other than, in
the case of (i), (ii) and (iii) above, (u) a disposition of property of the
Company or any of its Subsidiaries that, in the reasonable judgment of the
Company, has become uneconomic, obsolete or worn out, (v) the sale of Temporary
Cash Equivalents or Investment Securities or any disposition of cash, (w) a
disposition by a Restricted Subsidiary to the Company or by the Company or a
Restricted Subsidiary to a Wholly Owned Subsidiary, (x) for purposes of Section
4.06 only, a disposition that constitutes a Restricted Payment or Permitted
Investment permitted by Section 4.04, (y) any reinsurance or retrocession
arrangements (other than bulk reinsurance or retrocession arrangements) and (z)
any disposition of assets, or one or more related dispositions of assets, with a
fair market value in the aggregate of less than $2,500,000).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of the numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Balance Sheet Indebtedness" means Indebtedness that is reflected on the
face of the Consolidated balance sheet of the Company and the Restricted
Subsidiaries.
"Bank Indebtedness" means any and all amounts payable under or in respect
of Credit Facilities and any Refinancing Indebtedness with respect thereto, as
amended from time to time, including principal, premium (if any), interest
(including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not a claim
for post-filing interest is allowed in such proceedings), fees, charges,
expenses, reimbursement obligations, guarantees and all other amounts payable
thereunder or in respect thereof.
"Base Redemption Price" has the meaning set forth in paragraph 5 of the
Securities.
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person or, except for purposes of the definition of "Change of
Control", any committee thereof duly authorized to act on behalf of such Board.
Unless otherwise specified, "Board of Directors" means the Board of Directors of
the Company.
"Business Day" means each day which is not a Legal Holiday.
2
<PAGE>
"Calculation Agent" means the calculation agent who will determine the
applicable interest rate pursuant to paragraph 1 of the Securities, or any
successor person thereto, who shall initially be the Trustee.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Capitalized Lease Obligations" means an obligation that is required to be
classified and accounted for as a capitalized lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be prepaid by the lessee without payment of a
penalty.
"Change of Control" means the occurrence of any of the following events:
(i) Parent ceases to be the direct or indirect beneficial owner (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act) of 70% of the
total voting power of the Voting Stock of the Company, whether as a result
of issuance of securities of the Company, any merger, consolidation,
liquidation or dissolution of Parent or the Company, or otherwise; or
(ii) any "person" (as such term is used in Sections 13(d) and 14(d)
of the Exchange Act) is or becomes the beneficial owner (as defined in
clause (i) above, except that for purposes of this clause (ii) such person
shall be deemed to have "beneficial ownership" of all shares that any such
person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of
more than 30% of the total voting power of the Voting Stock of Parent; or
(iii) during any one year period, individuals who at the beginning of
such period constituted the Board of Directors of Parent or the Company
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the shareholders of Parent or the
Company was approved by a vote of 66-2/3% of the directors of Parent or the
Company then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors of Parent or the Company then in office; or
(iv) the adoption of a plan relating to the liquidation or
dissolution of the Company; or
(v) the merger or consolidation of Parent with or into another
Person and the securities of Parent that are outstanding immediately prior
to such transaction and which represent 100% of the aggregate voting power
of the Voting Stock of Parent are changed
3
<PAGE>
into or exchanged for cash, securities or property, unless pursuant to such
transaction such securities are changed into or exchanged for, in addition
to any other consideration, securities of the surviving Person or
transferee that represent immediately after such transaction, at least a
majority of the aggregate voting power of the Voting Stock of the surviving
Person or transferee.
"Closing Date" means October 27, 1998.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means the party named as such in this Indenture until a successor
replaces it and, thereafter, means the successor and, for purposes of any
provision contained herein.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending prior to the date of such determination
for which financial statements are available to (ii) Consolidated Interest
Expense for such four fiscal quarters; provided, however, that (A) if the
-------- -------
Company or any Restricted Subsidiary has Incurred any Indebtedness since the
beginning of such period that remains outstanding on such date of determination
or if the transaction giving rise to the need to calculate the Consolidated
Coverage Ratio is an Incurrence of Indebtedness, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving effect on a
pro forma basis to such Indebtedness as if such Indebtedness had been Incurred
on the first day of such period and the discharge of any other Indebtedness
repaid, repurchased, defeased or otherwise discharged with the proceeds of such
new Indebtedness as if such discharge had occurred on the first day of such
period, (B) if the Company or any Restricted Subsidiary has repaid, repurchased,
defeased or otherwise discharged any Indebtedness since the beginning of such
period or if any Indebtedness is to be repaid, repurchased, defeased or
otherwise discharged (in each case other than Indebtedness Incurred under any
revolving credit facility unless such Indebtedness has been permanently repaid
and has not been replaced) on the date of the transaction giving rise to the
need to calculate the Consolidated Coverage Ratio, EBITDA and Consolidated
Interest Expense for such period shall be calculated on a pro forma basis as if
such discharge had occurred on the first day of such period, (C) if since the
beginning of such period the Company or any Restricted Subsidiary shall have
made any Asset Disposition, the EBITDA for such period shall be reduced by an
amount equal to the EBITDA (if positive) directly attributable to the assets
that are the subject of such Asset Disposition for such period or increased by
an amount equal to the EBITDA (if negative) directly attributable thereto for
such period and Consolidated Interest Expense for such period shall be reduced
by an amount equal to the Consolidated Interest Expense directly attributable to
any Indebtedness of the Company or any Restricted Subsidiary repaid,
repurchased, defeased or otherwise discharged with respect to the Company and
its continuing Restricted Subsidiaries in connection with such Asset Disposition
for such period (or, if the Capital Stock of any Restricted Subsidiary is sold,
the Consolidated Interest Expense for such period directly attributable to the
Indebtedness of such Restricted Subsidiary to the extent the Company and its
continuing Restricted Subsidiaries are no longer liable for such Indebtedness
after such sale), (D) if since the beginning of such period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an Investment in
any Restricted Subsidiary (or any Person that becomes a Restricted Subsidiary)
or an
4
<PAGE>
acquisition of assets, including any acquisition of assets occurring in
connection with a transaction causing a calculation to be made hereunder, which
constitutes all or substantially all of an operating unit of a business, EBITDA
and Consolidated Interest Expense for such period shall be calculated after
giving pro forma effect thereto (including the Incurrence of any Indebtedness)
as if such Investment or acquisition occurred on the first day of such period
and (E) if since the beginning of such period any Person (that subsequently
became a Restricted Subsidiary or was merged with or into the Company or any
Restricted Subsidiary since the beginning of such period) shall have made any
Asset Disposition or any Investment or acquisition of assets that would have
required an adjustment pursuant to clause (C) or (D) above if made by the
Company or a Restricted Subsidiary during such period, EBITDA and Consolidated
Interest Expense for such period shall be calculated after giving pro forma
effect thereto as if such Asset Disposition, Investment or acquisition of assets
occurred on the first day of such period. For purposes of this definition,
whenever pro forma effect is to be given to an acquisition of assets, the amount
of income or earnings relating thereto and the amount of Consolidated Interest
Expense associated with any Indebtedness Incurred in connection therewith, the
pro forma calculations shall be determined in good faith by a responsible
financial or accounting Officer of the Company. If any Indebtedness bears a
floating rate of interest and is being given pro forma effect, the interest
expense on such Indebtedness shall be calculated as if the rate in effect on the
date of determination had been the applicable rate for the entire period (taking
into account any Interest Rate Agreement applicable to such Indebtedness if such
Interest Rate Agreement has a remaining term as at the date of determination in
excess of 12 months). Interest on Indebtedness that may optionally be determined
at an interest rate based upon a factor of a prime or similar rate, a
eurocurrency interbank offered rate, or other rate, shall be deemed to have been
based upon the rate actually chosen, or, if none, then based upon such optional
rate chosen as the Company may designate.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent Incurred by the Company and its Subsidiaries in such period but not
included in such interest expense, (i) interest expense attributable to
Capitalized Lease Obligations, (ii) amortization of debt discount and debt
issuance cost, (iii) capitalized interest, (iv) non-cash interest expense, (v)
commissions, discounts and other fees and charges attributable to letters of
credit and bankers' acceptance financing, (vi) interest actually paid on any
Indebtedness of any other Person pursuant to a Guarantee by the Company or any
Restricted Subsidiary; (vii) net costs associated with Hedging Obligations
(including amortization of fees but excluding any net costs associated with
"marking to market" of such Hedging Obligations), and (viii) dividends in
respect of (A) all Preferred Stock of the Company and any of the Subsidiaries of
the Company and (B) Disqualified Stock of the Company, in the case of each of
(A) and (B) to the extent held by Persons other than the Company or a Wholly
Owned Subsidiary.
"Consolidated Net Income" means, for any period, the net income of the
Company and its Consolidated Subsidiaries for such period; provided, however,
-------- -------
that there shall not be included in such Consolidated Net Income:
(i) any net income of any Person (other than the Company) if such
Person is not a Restricted Subsidiary, except that subject to the
limitations contained in clause (iv)
5
<PAGE>
below, the Company's equity in the net income of any such Person for such
period shall be included in such Consolidated Net Income up to the
aggregate amount of cash actually distributed by such Person during such
period to the Company or a Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution made
to a Restricted Subsidiary, to the limitations contained in clause (iii)
below);
(ii) any net income (or loss) of any Person acquired by the Company
or a Subsidiary in a pooling of interests transaction for any period prior
to the date of such acquisition;
(iii) any net income of any Restricted Subsidiary:
(A) for purposes of determining limitations on Indebtedness
under Section 4.03 only, to the extent that such net income exceeds
the sum (without duplication) of (v) the maximum aggregate amount of
cash that such Restricted Subsidiary is permitted to pay as a dividend
or other distribution to the Company or another Restricted Subsidiary
at the date of determination without any prior governmental approval
(which has not been obtained) and payment which is not prohibited,
directly or indirectly, by the terms of such Restricted Subsidiary's
charter or any agreement, instrument, judgment, decree, order, writ,
injunction, certificate, statute, rule, law, code, ordinance or
governmental regulation applicable to such Restricted Subsidiary or
its shareholders (each such restriction or prohibition, a "Payment
Restriction"); (w) the amount of any dividend or distribution declared
or paid during such period by such Restricted Subsidiary to the
Company or another Restricted Subsidiary to the extent that such
dividend or distribution reduces the amount described in clause (w)
that could be distributed at the date of determination; (x) the
maximum aggregate amount of cash that the Company is permitted to draw
under the Subordinated Loan Agreement during such period at the date
of determination; (y) the amount actually drawn by the Company under
the Subordinated Loan Agreement to the extent that such amount drawn
reduces the amount described in clause (x) that could be drawn at the
date of determination; and (z) the amount of cash payments made by
such Restricted Subsidiary to the Company or another Restricted
Subsidiary during such period under tax sharing agreements, surplus
debentures or other intercompany agreements, but only without
duplication and only to the extent that the making of such payment
when made was permitted by the Payment Restrictions, subject, in the
case of dividends, distributions or payments to another Restricted
Subsidiary under any of clause (v), (w) or (z), to the limitations in
this clause (iii); provided, however, that the Company's equity in net
-------- -------
loss of any such Restricted Subsidiary for such period to the extent
of any contributions or advances made by the Company or any Restricted
Subsidiary to such Restricted Subsidiary shall be included in
determining such Consolidated Net Income; and
(B) for all other purposes of this Indenture (including
determining limitations on Restricted Payments under Section 4.04), to
the extent that such net income exceeds the amount of any dividend or
distribution declared and paid
6
<PAGE>
during such period by such Restricted Subsidiary to the Company or,
subject to this clause (iii), another Restricted Subsidiary;
(iv) any gain (or loss) realized upon the sale or other disposition
of any asset of the Company or its Consolidated Subsidiaries (including
pursuant to any Sale/Leaseback Transaction) that is not sold or otherwise
disposed of in the ordinary course of business and any gain (or loss)
realized upon the sale or other disposition of any Capital Stock of any
Person;
(v) any extraordinary or non-recurring gain or loss as well as the
tax effects thereof;
(vi) any restoration to income of any contingency reserve (not
including insurance and reinsurance reserves and reserves for reinsurance
recoverables), except to the extent that provision for such reserve reduced
Consolidated Net Income for any period following the first day of the four
fiscal quarter period ending prior to the Closing Date;
(vii) the cumulative effect of a change in accounting principles;
and
(viii) any unrealized gains and losses on Investment Securities to
the extent such gains and losses affect such net income (loss); provided,
---------
further, however, that the net income (loss) shall include upon any
------- -------
disposition of any Investment Security referred to in this clause (viii),
the then realized gain or loss on any such Investment Security (after
excluding the effect of any unrealized gains and losses on such Investment
Security which affected such net income (loss)).
Notwithstanding the foregoing, for the purposes of Section 4.04 only, there
shall be excluded from Consolidated Net Income any dividends, repayments of
loans or advances or other transfers of assets from Unrestricted Subsidiaries to
the Company or a Restricted Subsidiary to the extent such dividends, repayments
or transfers increase the amount of Restricted Payments permitted under such
Section pursuant to clause (a)(3)(D) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its Restricted Subsidiaries, determined on a
Consolidated basis, as of the end of the most recent fiscal quarter of the
Company ending prior to the taking of any action for the purpose of which the
determination is being made for which financial statements are available, as (i)
the par or stated value of all outstanding Capital Stock of the Company plus
(ii) paid-in capital or capital surplus relating to such Capital Stock plus
(iii) any retained earnings or earned surplus less (A) any accumulated deficit
and (B) any amounts attributable to Disqualified Stock.
"Consolidation" means the consolidation of the amounts of each of the
Restricted Subsidiaries with those of the Company in accordance with GAAP
consistently applied; provided, however, that "Consolidation" shall not include
-------- -------
consolidation of the accounts of any Unrestricted Subsidiary, but the interest
of the Company or any Restricted Subsidiary in an
7
<PAGE>
Unrestricted Subsidiary shall be accounted for as an investment. The term
"Consolidated" has a correlative meaning.
"Corporate Trust Office" means the principal office of the Trustee at which
at any particular time its corporate trust business shall be administered which
office at the date of the execution of this agreement is located at 114 West
47th Street - 25th floor, New York, New York 10036-1532, Attention: Corporate
Trust Office or at any other time at such other address as the Trustee may
designate from time to time by notice to the Company.
"Credit Facilities" means, with respect to the Company or its Restricted
Subsidiaries, one or more debt facilities or commercial paper facilities with
banks, insurance companies or other institutional lenders providing for
revolving credit loans, term loans, synthetic lease financing, notes or other
financing (including through the sale of receivables to such lenders or to
special purpose entities formed to borrow from or issue securities to such
lenders against such receivables) or letters of credit or other credit
facilities, in each case, as amended, restated, modified, renewed, refunded,
replaced or refinanced in whole or in part from time to time.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement to which the Company or any
Restricted Subsidiary is a party or of which it is a beneficiary.
"Current Maturities of Funded Indebtedness" means, at any time and with
respect to any item of Funded Indebtedness, the portion of such Funded
Indebtedness outstanding at such time which by the terms of such Funded
Indebtedness or the terms of any instrument or agreement relating thereto is due
on demand or within one year from such time (whether by sinking fund, other
required prepayment or final payment at maturity) and is not directly or
indirectly renewable, extendible or refundable at the option of the obligor
under an agreement or firm commitment in effect at such time to a date one year
or more from such time.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable or exercisable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the Stated Maturity of the
Securities provided, however, that any Capital Stock that would not constitute
-------- -------
Disqualified Stock but for provisions thereof giving holders thereof the right
to require such Person to repurchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
Stated Maturity of the Securities shall not constitute Disqualified Stock if the
"asset sale" or "change of control" provisions applicable to such Capital Stock
are not more favorable to the holders of such Capital Stock than the provisions
of Sections 4.06 and 4.08.
8
<PAGE>
"EBITDA" for any period means the Consolidated Net Income for such period,
plus the following to the extent deducted in calculating such Consolidated Net
Income: (i) income tax expense of the Company and its Consolidated Restricted
Subsidiaries, (ii) Consolidated Interest Expense, (iii) depreciation expense of
the Company and its Consolidated Restricted Subsidiaries and (iv) amortization
expense of the Company and its Consolidated Restricted Subsidiaries including
amortization of debt issuance costs (excluding amortization expense attributable
to a prepaid cash item that was paid in a prior period) and (v) all other non-
cash charges of the Company and its Consolidated Restricted Subsidiaries
(excluding any such non-cash charge to the extent that it represents an accrual
of or reserve for cash expenditures in any future period), in each case for such
period. Notwithstanding the foregoing, the provision for taxes based on the
income or profits of, and the depreciation and amortization and non-cash charges
of, a Restricted Subsidiary of the Company shall be added to Consolidated Net
Income to compute EBITDA only to the extent (and in the same proportion) that
the net income of such Restricted Subsidiary was included in calculating
Consolidated Net Income and only if a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Restricted
Subsidiary without prior approval (that has not been obtained), pursuant to the
terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to such
Restricted Subsidiary or its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Funded Indebtedness" means, with respect to any Person, all Indebtedness
of such Person that is reflected on the face of the Consolidated balance sheet
of the Company and the Restricted Subsidiaries which by its terms or by the
terms of any instrument or agreement relating thereto matures, or which is
otherwise payable or unpaid, one year or more from, or is directly or indirectly
renewable or extendible at the option of the obligor in respect thereof to a
date one year or more (including, without limitation, an option of such obligor
under a revolving credit or similar agreement obligating the lender or lenders
to extend credit over a period of one year or more) from, the date of the
creation thereof, provided, however, that Funded Indebtedness shall include, as
-------- -------
at any date of determination, Current Maturities of Funded Indebtedness.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, including those set forth in (i) the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants, (ii) statements and pronouncements of
the Financial Accounting Standards Board, (iii) such other statements by such
other entity as approved by a significant segment of the accounting profession
and (iv) the rules and regulations of the SEC governing the inclusion of
financial statements (including pro forma financial statements) in periodic
reports required to be filed pursuant to Section 13 of the Exchange Act,
including opinions and pronouncements in staff accounting bulletins and similar
written statements from the accounting staff of the SEC. All ratios and
computations based on GAAP contained in this Indenture shall be computed in
conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply
9
<PAGE>
funds for the purchase or payment of) such Indebtedness of such other Person
(whether arising by virtue of partnership arrangements, or by agreement to keep-
well, to purchase assets, goods, securities or services, to take-or-pay, or to
maintain financial statement conditions or otherwise) or (ii) entered into for
purposes of assuring in any other manner the obligee of such Indebtedness of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); provided, however, that the term "Guarantee" shall not
-------- -------
include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning. The
term "Guarantor" shall mean any Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
under any Interest Rate Agreement or Currency Agreement.
"Holder" or "Securityholder" means the Person in whose name a Security is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
-------- -------
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning. Neither the accretion of principal
of a non-interest bearing or other discount security nor the accrual of interest
(or the addition of accrued interest to principal) shall be deemed to be an
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication),
(i) the principal of and premium (if any) in respect of
indebtedness of such Person for borrowed money;
(ii) the principal of and premium (if any) in respect of obligations
of such Person evidenced by bonds, debentures, notes or other similar
instruments;
(iii) all obligations of such Person in respect of letters of credit
or other similar instruments (including reimbursement obligations with
respect thereto);
(iv) all obligations of such Person to pay the deferred and unpaid
purchase price of property or services (except Trade Payables), which
purchase price is due more than six months after the date of placing such
property in service or taking delivery and title thereto or the completion
of such services;
(v) all Capitalized Lease Obligations;
(vi) the amount of all obligations of such Person with respect to
the redemption, repayment or other repurchase of any Disqualified Stock or,
with respect to any Subsidiary of such Person, any Preferred Stock (but
excluding, in each case, any accrued dividends);
10
<PAGE>
(vii) to the extent not otherwise included in this definition,
Hedging Obligations of such Person;
(viii) all obligations of the type referred to in clauses (i) through
(ii) of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee; or
(ix) all Indebtedness of other Persons secured by a Lien on any
asset of such Person, whether or not such Indebtedness is assumed by such
Person; provided, however, that the amount of Indebtedness of such Person
-------- -------
shall be the lesser of (A) the fair market value of such asset at such date
of determination and (B) the amount of such Indebtedness of such other
Persons;
provided, however, that Indebtedness shall not include obligations arising from
- -------- -------
the honoring by a bank or other financial institution of a check, draft or
similar instrument inadvertently (except in the case of day-light overdrafts)
drawn against insufficient funds in the ordinary course of business unless such
obligations are not extinguished within three Business Days of incurrence. The
amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"Indebtedness/Total Capital Ratio" means, as of any date, the quotient
expressed as a percentage of (i) Balance Sheet Indebtedness divided by (ii) the
sum of Funded Indebtedness plus Consolidated Net Worth, in each case determined
on a Consolidated basis in accordance with GAAP.
"Indenture" means this Indenture as amended or supplemented from time to
time.
"Insurance Subsidiary" means any Restricted Subsidiary, whether now owned
or hereafter acquired, that is authorized or admitted to carry on or transact
the business of selling, issuing or underwriting insurance or reinsurance, in
any state.
"Interest Rate Agreement" means with respect to any Person any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement as to which such Person is party or is a beneficiary.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extension of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by
11
<PAGE>
such Person. For purposes of the definition of "Unrestricted Subsidiary" and
Section 4.04, (i) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of any Subsidiary of the Company at the time that such Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that upon a
-------- -------
redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall
be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary in an amount (if positive) equal to (x) the Company's "Investment" in
such Subsidiary at the time of such redesignation less (y) the portion
(proportionate to the Company's equity interest in such Subsidiary) of the fair
market value of the net assets of such Subsidiary at the time of such
redesignation; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors.
"Investment Securities" means securities invested in by the Insurance
Subsidiaries in the ordinary course of their insurance business.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Moody's" means Moody's Investor Service, Inc. and its successors.
"Moody's Rating" means, as at any date, the financial strength rating of a
specific Person or group of Persons as most recently published by Moody's.
"NAIC" means the National Association of Insurance Commissioners or any
successor.
"Net Available Cash" from an Asset Disposition means cash payments received
(including any cash payments received by way of deferred payment of principal
pursuant to a note or installment receivable or otherwise and proceeds from the
sale or other disposition of any securities received as consideration, but only
as and when received, but excluding any other consideration received in the form
of assumption by the acquiring Person of Indebtedness or other obligations
relating to the properties or assets that are the subject of such Asset
Disposition or received in any other non-cash form) therefrom, in each case net
of (i) all legal, title and recording tax expenses, commissions and other fees
and expenses incurred, and all Federal, state, provincial, foreign and local
taxes required to be paid or accrued as a liability under GAAP, as a consequence
of such Asset Disposition, (ii) all payments made on any Indebtedness which is
secured by any assets subject to such Asset Disposition, in accordance with the
terms of any Lien upon or other security agreement of any kind with respect to
such assets, or which must by its terms, or in order to obtain a necessary
consent to such Asset Disposition, or by applicable law be repaid out of the
proceeds from such Asset Disposition, (iii) all distributions and other payments
required to be made to minority interest holders in Subsidiaries or joint
ventures as a result of such Asset Disposition and (iv) appropriate amounts to
be provided by the seller as a reserve, in accordance with GAAP, against any
liabilities associated with the property or other assets disposed of in such
Asset Disposition and retained by the Company or any Restricted Subsidiary after
such Asset Disposition.
12
<PAGE>
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Non-Recourse Debt" shall mean Indebtedness (i) as to which neither the
Company nor any of its Restricted Subsidiaries (a) provides credit support of
any kind (including any undertaking, agreement or instrument that would
constitute Indebtedness), (b) is directly or indirectly liable (as a Guarantor
or otherwise) or (c) constitutes the lender; (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness (other than
the Securities) of the Company or any of its Restricted Subsidiaries to declare
a default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and (iii) as to which the
lenders have been notified in writing that they will not have any recourse to
the stock or assets of the Company or any of its Restricted Subsidiaries.
"Officer" means the Chairman of the Board, the Chief Executive Officer, the
Chief Financial Officer, the President, any Vice President, the Treasurer or the
Secretary of the Company.
"Officers' Certificate" means a certificate signed by two Officers.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Company or the Trustee.
"Parent" means ACE Limited, a limited liability company formed under the
laws of the Cayman Islands.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) the Company, a Restricted Subsidiary or a Person that will,
upon the making of such Investment, become a Restricted Subsidiary; provided,
--------
however, that the primary business of such Restricted Subsidiary is a Related
- -------
Business; (ii) another Person if as a result of such Investment such other
Person is merged or consolidated with or into, or transfers or conveys all or
substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Related Business;
- -------- -------
(iii) Temporary Cash Investments; (iv) receivables (other than receivables
referred to in any other clauses of this definition) owing to the Company or any
Restricted Subsidiary, if created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms; provided,
--------
however, that such trade terms may include such concessionary trade terms as the
- -------
Company or any such Restricted Subsidiary deems reasonable under the
circumstances; (v) payroll, travel and similar advances to cover matters that
are expected at the time of such advances ultimately to be treated as expenses
for accounting purposes and that are made in the ordinary course of business;
(vi) loans or advances to employees made in the ordinary course of business
consistent with past practices of the Company or such Restricted Subsidiary;
(vii) stock, obligations or securities
13
<PAGE>
received in settlement of debts created in the ordinary course of business and
owing to the Company or any Restricted Subsidiary or in satisfaction of
judgments or in bankruptcy proceedings, (viii) any Person to the extent such
Investment represents the non-cash portion of the consideration received for an
Asset Disposition or other disposition of assets that was made pursuant to and
in compliance with Section 4.06, (ix) Investments by the Insurance Subsidiaries
in Investment Securities made in accordance with applicable insurance investment
laws and the investment guidelines established by the Company's Board of
Directors from time to time, (x) any Investment (other than Investments by
Insurance Subsidiaries) existing on the Closing Date or made pursuant to legally
binding written commitments in existence on the Closing Date; (xi) Investments
in Interest Rate Agreements or Currency Agreements otherwise permitted under the
Indenture; (xii) receivables (including, but not limited to, accrued investment
income, premiums in process of collection and reinsurance recoverables on paid
and unpaid losses) owing to the Company or any Restricted Subsidiary, if created
or acquired in the ordinary course of business; (xiii) deposits established in
connection or under insurance and reinsurance contracts; (xiv) Strategic
Investments having an aggregate fair market value, taken together with all other
Investments made pursuant to this clause (xiv) that are at that time
outstanding, not to exceed 15% of Total Assets at the time of such Investment
(with the fair market value of each Investment being measured at the time made
and without giving effect to subsequent changes in value); and (xv) additional
Investments having an aggregate fair market value, taken together with all other
Investments made pursuant to this clause (xv) that are at that time outstanding,
not to exceed 10% of Total Assets at the time of such Investment (with the fair
market value of each Investment being measured at the time made and without
giving effect to subsequent changes in value).
"Permitted Liens" means, with respect to any Person, (a) pledges or
deposits by such Person under worker's compensation laws, unemployment insurance
laws or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness), including
insurance and reinsurance contracts, or with or for the benefit of regulatory
authorities, insureds or reinsureds, or leases to which such Person is a party,
or deposits to secure public or statutory obligations of such Person or deposits
of cash or United States government bonds to secure surety or appeal bonds to
which such Person is a party, or deposits as security for contested taxes or
import duties or for the payment of rent, in each case Incurred in the ordinary
course of business; (b) Liens imposed by law, such as carriers', warehousemen's
and mechanics' Liens, in each case for sums not yet due or being contested in
good faith by appropriate proceedings or other Liens arising out of judgments or
awards against such Person with respect to which such Person shall then be
proceeding with an appeal or other proceedings for review; (c) Liens for taxes
or other governmental charges not yet due or payable or subject to penalties for
non-payment or which are being contested in good faith by appropriate
proceedings; (d) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such Person in the
ordinary course of its business; provided, however, that such letters of credit
-------- -------
do not constitute Indebtedness; (e) minor survey exceptions, minor encumbrances,
easements or reservations of, or rights of others for, licenses, rights-of-way,
sewers, electric lines, telegraph and telephone lines and other similar
purposes, or zoning or other restrictions as to the use of real property or
Liens incidental to the conduct of the business of such Person or to the
ownership of its properties which were not Incurred in connection with
14
<PAGE>
Indebtedness and which do not in the aggregate materially adversely affect the
value of said properties or materially impair their use in the operation of the
business of such Person; (f) Liens securing Indebtedness Incurred to finance the
construction, purchase or lease of, or repairs, improvements or additions to,
property of such Person; provided, however, that the Lien may not extend to any
-------- -------
other property owned by such Person or any of its Subsidiaries at the time the
Lien is Incurred, and the Indebtedness (other than any interest thereon) secured
by the Lien may not be Incurred more than 180 days after the later of the
acquisition, completion of construction, repair, improvement, addition or
commencement of full operation of the property subject to the Lien; (g) Liens
existing on the Closing Date; (h) Liens on property or shares of Capital Stock
of another Person at the time such other Person becomes a Subsidiary of such
Person; provided, however, that such Liens are not created, Incurred or assumed
-------- -------
in connection with, or in contemplation of, such other Person becoming such a
Subsidiary; provided further, however, that such Liens may not extend to any
---------------- -------
other property owned by such Person or any of its Subsidiaries; (i) Liens on
property at the time such Person or any of its Subsidiaries acquires the
property, including any acquisition by means of a merger or consolidation with
or into such Person or a Subsidiary of such Person; provided, however, that such
-------- -------
Liens are not created, Incurred or assumed in connection with, or in
contemplation of, such acquisition; provided further, however, that the Liens
-------- ------- --------
may not extend to any other property owned by such Person or any of its
Subsidiaries; (j) Liens securing Indebtedness or other obligations of a
Subsidiary of such Person owing to such Person or a wholly owned Subsidiary of
such Person; (k) Liens securing Hedging Obligations so long as such Hedging
Obligations relate to Indebtedness that is, and is permitted to be under this
Indenture, secured by a Lien on the same property securing such Hedging
Obligations; (l) Liens to secure any Refinancing (or successive Refinancings) as
a whole, or in part, of any Indebtedness secured by any Lien referred to in the
foregoing clauses (f), (g), (h) and (i); provided, however , that (x) such new
--------- -------
Lien shall be limited to all or part of the same property that secured the
original Lien (plus improvements to or on such property) and (y) the
Indebtedness secured by such Lien at such time is not increased to any amount
greater than the sum of (A) the outstanding principal amount or, if greater,
committed amount of the Indebtedness described under clauses (f), (g), (h) or
(i) at the time the original Lien became a Permitted Lien under this Indenture
and (B) an amount necessary to pay any fees and expenses, including premiums,
related to such Refinancing; and (m) Liens Incurred in the ordinary course of
business of such Person with respect to obligations that do not exceed
$5,000,000 at any one time outstanding and that (a) do not secure Indebtedness,
(b) are not Incurred in connection with the borrowing of money or the obtaining
of advances or credit, and (c) do not in the aggregate materially detract from
the value of the property or materially impair the use thereof in the operation
of business by such Person. For purposes of this definition, the term
"Indebtedness" shall be deemed to include interest on such Indebtedness.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) that is preferred as
to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over shares
of Capital Stock of any other class of such Person.
15
<PAGE>
"principal" of a Security means the principal of the Security plus the
premium, if any, payable on the Security that is due or overdue or is to become
due at the relevant time.
"Purchase Money Indebtedness" means Indebtedness (i) consisting of the
deferred purchase price of an asset, conditional sale obligations, obligations
under any title retention agreement and other purchase money obligations, in
each case where the maturity of such Indebtedness does not exceed the
anticipated useful life of the asset being financed, and (ii) incurred to
finance the acquisition by the Company or a Restricted Subsidiary of such asset,
including additions and improvements; provided, however, that such Indebtedness
-------- -------
is incurred within 180 days after the acquisition by the Company or such
Restricted Subsidiary of such asset.
"Qualified Subordinated Debt'' means any subordinated loan made to the
Company or any Restricted Subsidiary by, and at all time held by, the Parent or
ACE Insurance that
(i) by its terms (A) does not (including upon the happening of any
event) mature and is not (including upon the happening of any event)
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise,
or redeemable at the option of the holder, in whole or in part, and does
not include any provision requiring prepayment or repurchase by the Company
or any of its Restricted Subsidiaries (including upon the happening of any
event), in each case prior to the date that is 91 days after the final
maturity date of the Securities, (B) does not (including upon the happening
of any event) require or provide for the payment, in cash or otherwise, of
interest or any other amounts prior to its stated maturity (provided that
interest may accrue while such loan is outstanding and any interest may be
satisfied at any time by the issue to the holders thereof of further
Qualified Subordinated Debt or by adding accrued interest to principal),
(C) does not provide (including upon the happening of any event) for the
acceleration of its maturity (other than following the winding up or
bankruptcy of the Company, but only if the maturity of the Securities has
been accelerated) or the exercise of remedies prior to the date that is 91
days after the final maturity date of the Securities, (D) is not secured by
a Lien on any assets of the Company or any of its Restricted Subsidiaries
and is not Guaranteed by any Subsidiary of the Company, (E) is not
transferable by the holder thereof except to the Company, (F) does not
(including upon the happening of any event) restrict the payment of amounts
due in respect of the Securities or compliance by the Company with its
obligations under the Securities and the Indenture, and (G) is not
(including upon the happening of any event) mandatorily convertible or
exchangeable, or convertible or exchangeable at the option of the holder,
in whole or in part, prior to the date that is 91 days after the final
maturity date of the Securities other than into or for common equity of the
Company, and
(ii) is contractually subordinated (pursuant to a binding agreement
with the Trustee for the benefit of the Holders) and junior in right of
payment to the prior payment in full in cash of all obligations of the
Company under the Securities and the Indenture (including principal,
interest, and premium (if any)) such that (A) the Company shall make no
payment in respect of such loan (whether in cash, securities or otherwise,
except as permitted by clause (i) (B)) and may not acquire, purchase,
prepay or redeem such loan, except as permitted by Section 4.04(a) until
the prior payment in full in cash of all
16
<PAGE>
obligations in respect of the Securities and the Indenture, (B) upon any
total or partial liquidation, dissolution or winding up of the Company or
in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to the Company or its property, the Securityholders
will be entitled to receive payment in full in cash of the obligations
under the Indenture and the Securities before the holder of such loan will
be entitled to receive any payment in respect of such loan, (C) such loan
may not be amended such that it would cease to qualify as Qualified
Subordinated Debt until the date that is 91 days after the prior payment in
full in cash of all obligations in respect of the Securities and the
Indenture, and (D) the holder of such loan shall assign any rights to vote,
including by way of proxy, in a bankruptcy, insolvency or similar
proceeding to the Trustee.
"Redemption Price" has the meaning set forth in paragraph 5 of the
Securities.
"Reference Swap Transaction" means the transaction described in Exhibit C
attached hereto.
"Reference Swap Transaction Value" means, as of any day, (i) an amount
(which may be positive or negative) determined in good faith on such day by The
Chase Manhattan Bank to be the present mark-to-market value of the Reference
Swap Transaction, based on its mid-market quotation for transactions on
substantially the same terms as the Reference Swap Transaction, (ii) divided by
the aggregate principal amount of all Securities outstanding on such day,
expressed as a percentage. If the amount in clause (i) in the preceding sentence
is (a) a positive number, it is subtracted from the Base Redemption Price or (b)
a negative number, it is added to the Base Redemption Price. Mark-to-market
value shall be determined from the perspective of the Fixed Rate Payer (as
defined in Exhibit C).
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced"
and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that is Incurred to refund,
refinance, replace, renew, repay or extend (including pursuant to any defeasance
or discharge mechanism) any Indebtedness of the Company or any Restricted
Subsidiary existing on the date of this Indenture or Incurred in compliance with
this Indenture including Indebtedness of the Company that Refinances Refinancing
Indebtedness; provided, however, that (i) the Refinancing Indebtedness has a
-------- -------
Stated Maturity no earlier than the Stated Maturity of the Indebtedness being
Refinanced, (ii) the Refinancing Indebtedness has an Average Life at the time
such Refinancing Indebtedness is Incurred that is equal to or greater than the
Average Life of the Indebtedness being Refinanced, (iii) such Refinancing
Indebtedness is Incurred in an aggregate principal amount (or if issued with
original issue discount, an aggregate issue price) that is equal to or less than
the aggregate principal amount (or if issued with original issue discount, the
aggregate accreted value) then outstanding of the Indebtedness being Refinanced
(plus any premiums, accrued interest, fees and expenses) and (iv) if the
Indebtedness being refinanced is subordinated in right of payment to the
Securities, such Refinancing Indebtedness is subordinated in right of payment to
the Securities at least to the same extent as the Indebtedness being Refinanced;
17
<PAGE>
provided further, however, that Refinancing Indebtedness shall not include (x)
- -------- ------- -------
Indebtedness of a Restricted Subsidiary that Refinances Indebtedness of the
Company or (y) Indebtedness of the Company or a Restricted Subsidiary that
Refinances Indebtedness of an Unrestricted Subsidiary.
"Related Business" means any business related, ancillary or complementary
to the businesses of the Company and the Restricted Subsidiaries on the Closing
Date.
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired by the Company or a Restricted Subsidiary whereby
the Company or a Restricted Subsidiary transfers such property to a Person and
the Company or such Restricted Subsidiary leases it from such Person, other than
leases between the Company and a Wholly Owned Subsidiary or between Wholly Owned
Subsidiaries.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien. "Secured Indebtedness" of a Subsidiary Guarantor has a correlative
meaning.
"Securities" means the Securities issued under this Indenture.
"Securities Act" means the Securities Act of 1933, as amended.
"S&P" means Standard & Poor's Ratings Service, a division of the McGraw
Hill Companies, Inc., and its successors.
"S&P Rating" means, as at any date, the financial strength rating of a
specific Person or group of Persons as most recently published by S&P.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Strategic Investment" means an Investment in any Person (other than an
Unrestricted Subsidiary of the Company) whose primary business is a Related
Business and such Investment is determined in good faith by the Board of
Directors (or senior officers of the Company to whom the Board of Directors has
delegated the authority to make such a determination), whose determination shall
be conclusive and evidenced by a Board resolution (or Officer's Certificate
delivered to the Trustee), to promote or significantly benefit the business of
the Company and its Restricted Subsidiaries on the date of such Investment.
18
<PAGE>
"Subordinated Loan Agreement" means the subordinated loan agreement dated
as of the Closing Date among the Company, ACE Insurance, and the Trustee.
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Closing Date or thereafter Incurred), including Qualified
Subordinated Debt, that is subordinate or junior in right of payment to the
Securities pursuant to a written agreement. "Subordinated Obligation" of a
Subsidiary Guarantor has a correlative meaning.
"Subsidiary" of any Person means any corporation, association, partnership
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock or other interests (including partnership interests)
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by (i) such Person, (ii) such Person and one
or more Subsidiaries of such Person or (iii) one or more Subsidiaries of such
Person.
"Subsidiary Guarantee" means each Guarantee of the obligations with respect
to the Securities issued by a Subsidiary of the Company pursuant to the terms of
this Indenture.
"Subsidiary Guarantor" means any Subsidiary that has issued a Subsidiary
Guarantee. As of the date hereof, there are no Subsidiary Guarantors.
"Temporary Cash Investments" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or obligations
Guaranteed by the United States of America or any agency thereof maturing within
360 days of the date of acquisition thereof, (ii) time deposit accounts,
certificates of deposit and money market deposits maturing within 360 days of
the date of acquisition thereof issued by a bank or trust company that is
organized under the laws of the United States of America, any state thereof or
any foreign country recognized by the United States of America having capital,
surplus and undivided profits aggregating in excess of $50,000,000 (or the
foreign currency equivalent thereof) and whose long-term debt is rated "A" (or
such similar equivalent rating) or higher by at least one nationally recognized
statistical rating organization (as defined in Rule 436 under the Securities
Act), (iii) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (i) above entered into
with a bank meeting the qualifications described in clause (ii) above, (iv)
commercial paper, maturing not more than 270 days after the date of acquisition,
issued by a corporation (other than an Affiliate of the Company) organized and
in existence under the laws of the United States of America or any foreign
country recognized by the United States of America with a rating at the time as
of which any investment therein is made of "P-1" (or higher) according to
Moody's or "A-1" (or higher) according to S&P, (vi) investments in securities
with maturities of 360 days or less from the date of acquisition issued or fully
guaranteed by any state, commonwealth or territory of the United States of
America, or by any political subdivision or taxing authority thereof, and rated
at least "A" by S&P or "A" by Moody's Investors Service, Inc. and (vi) funds
that do not utilize Indebtedness in order to make investments and that invest
solely in any of the Investments described in clauses (i) through (v) above.
"Total Assets" means, at any time, the total Consolidated assets of the
Company and its Restricted Subsidiaries at such time.
19
<PAGE>
"Trade Payables" means, with respect to any Person, any accounts payable or
any indebtedness or monetary obligation to trade creditors created, assumed or
Guaranteed by such Person arising in the ordinary course of business in
connection with the acquisition of goods or services.
"Trustee" means the party named as such in this Indenture until a successor
replaces it and, thereafter, means the successor.
"Trust Officer" means when used with respect to the Trustee any officer
within the Corporate Trust Office, including any Vice President, Managing
Director, Assistant Vice President, Secretary, Assistant Secretary, Treasurer or
Assistant Treasurer, Senior Trust Officer, Trust Officer or any other officer of
the Trustee customarily performing functions similar to those performed by any
of the above designated officers and also, with respect to a particular matter,
any other officer to whom such matter is referred because of such officer's
knowledge and familiarity with the particular subject.
"Uniform Commercial Code" means the New York Uniform Commercial Code as in
effect from time to time.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Subsidiary unless such Subsidiary or any of its
Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any
Lien on any property of, the Company or any other Subsidiary of the Company that
is not a Subsidiary of the Subsidiary to be so designated; provided, however,
-------- -------
that either (A) the Subsidiary to be so designated has total consolidated assets
of $1,000 or less or (B) if such Subsidiary has Consolidated assets greater than
$1,000, then such designation would be permitted under Section 4.04. The Board
of Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided, however, that immediately after giving effect to such
-------- -------
designation (x) the Company could Incur $1.00 of additional Indebtedness under
Section 4.03(a) and (y) no Default shall have occurred and be continuing. Any
such designation of a Subsidiary as a Restricted Subsidiary or Unrestricted
Subsidiary by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the resolution of the Board of
Directors giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to
20
<PAGE>
the occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary of the Company all
the Capital Stock of which (other than directors' qualifying shares) is owned by
the Company or another Wholly Owned Subsidiary.
SECTION 1.02. Other Definitions.
-----------------
<TABLE>
<CAPTION>
Term Defined in Section
---- ------------------
<S> <C>
"Affiliate Transaction"................................................. 4.07
"Bankruptcy Law"........................................................ 6.01
"covenant defeasance option"............................................ 8.01(b)
"Custodian"............................................................. 6.01
"Definitive Securities"................................................. 2.09
"Event of Default"...................................................... 6.01
"legal defeasance option"............................................... 8.01(b)
"Legal Holiday"......................................................... 11.08
"Offer"................................................................. 4.06(b)
"Offer Amount".......................................................... 4.06(c)(2)
"Offer Period".......................................................... 4.06(c)(2)
"Notice of Default"..................................................... 6.01
"Paying Agent".......................................................... 2.03
"protected purchaser"................................................... 2.07
"Registrar"............................................................. 2.03
"Successor Company"..................................................... 5.01
</TABLE>
SECTION 1.03. Trust Indenture Act. On the date hereof, the parties agree
-------------------
that this Indenture is not subject to the mandatory provisions of the TIA and
that each provision of the TIA which imposes obligations on the Company under
the TIA are not applicable.
SECTION 1.04. Rules of Construction. Unless the context otherwise
---------------------
requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) "including" means including without limitation;
(5) words in the singular include the plural and words in the plural
include the singular;
21
<PAGE>
(6) unsecured Indebtedness shall not be deemed to be subordinate or
junior to Secured Indebtedness merely by virtue of its nature as unsecured
Indebtedness;
(7) the principal amount of any non-interest bearing or other
discount security at any date shall be the principal amount thereof that
would be shown on a balance sheet of the issuer dated such date prepared in
accordance with GAAP;
(8) the principal amount of any Preferred Stock shall be (i) the
maximum liquidation value of such Preferred Stock or (ii) the maximum
mandatory redemption or mandatory repurchase price with respect to such
Preferred Stock, whichever is greater.
ARTICLE 2
THE SECURITIES
--------------
SECTION 2.01. Form and Dating. Provisions relating to the Securities are
---------------
set forth in Appendix A which is hereby incorporated in and expressly made a
part of this Indenture. The Securities and the Trustee's certificate of
authentication shall be substantially in the form of Exhibit A hereto, which is
hereby incorporated in and expressly made a part of this Indenture. The
Securities may have notations, legends or endorsements required by law, stock
exchange rule, agreements to which the Company or any Subsidiary Guarantor is
subject, if any, or usage (provided that any such notation, legend or
endorsement is in a form acceptable to the Company). Each Security shall be
dated the date of its authentication. The Securities shall be issuable only in
registered form without interest coupons and only in denominations of $1,000 and
integral multiples thereof.
SECTION 2.02. Execution and Authentication. One or more Officers shall
----------------------------
sign the Securities for the Company by manual or facsimile signature.
If an Officer whose signature is on a Security no longer holds that office
at the time the Trustee authenticates the Security, the Security shall be valid
nevertheless.
A Security shall not be valid until an authorized signatory of the Trustee
manually signs the certificate of authentication on the Security. The signature
shall be conclusive evidence that the Security has been authenticated under this
Indenture.
The Trustee shall authenticate and make available for delivery Securities
as set forth in Appendix A.
The Trustee may appoint an authenticating agent reasonably acceptable to
the Company to authenticate the Securities. Any such appointment shall be
evidenced by an instrument signed by a Trust Officer, a copy of which shall be
furnished to the Company. Unless limited by the terms of such appointment, an
authenticating agent may authenticate Securities whenever the Trustee may do so.
Each reference in this Indenture to authentication by the Trustee includes
authentication by such agent. An authenticating agent has the same rights as
any Registrar, Paying Agent or agent for service of notices and demands.
22
<PAGE>
SECTION 2.03. Registrar, Paying Agent and Calculation Agent. The Company
---------------------------------------------
shall maintain an office or agency where Securities may be presented for
registration of transfer or for exchange (the "Registrar") and an office or
agency where Securities may be presented for payment (the "Paying Agent"). The
Registrar shall keep a register of the Securities and of their transfer and
exchange. The Company may have one or more co-registrars and one or more
additional paying agents. The term "Paying Agent" includes any additional
paying agent, and the term "Registrar" includes any co-registrars. The Company
initially appoints the Trustee as (i) Registrar and Paying Agent in connection
with the Securities and (ii) the Securities Custodian (as defined in Appendix A)
with respect to any Global Securities (as defined in Appendix A).
The Company shall enter into an appropriate agency agreement with any
Registrar, Paying Agent and Calculation Agent not a party to this Indenture.
The agreement shall implement the provisions of this Indenture that relate to
such agent. The Company shall notify in writing the Trustee of the name and
address of any such agent. If the Company fails to maintain a Registrar, Paying
Agent or Calculation Agent, the Trustee shall act as such and shall be entitled
to appropriate compensation therefor pursuant to Section 7.07. The Company or
any of its domestically organized Wholly Owned Subsidiaries may act as Paying
Agent or Registrar. Any Calculation Agent shall either be the Trustee or any
U.S. bank, trust company or investment bank with combined capital and surplus of
at least $100,000,000 as set forth in its most recent published annual report of
condition.
The Company may remove any Registrar or Paying Agent upon written notice to
such Registrar or Paying Agent and to the Trustee; provided, however, that no
-------- -------
such removal shall become effective until (1) acceptance of an appointment by a
successor as evidenced by an appropriate agreement entered into by the Company
and such successor Registrar or Paying Agent, as the case may be, and delivered
to the Trustee or (2) notification to the Trustee that the Trustee shall serve
as Registrar or Paying Agent until the appointment of a successor in accordance
with clause (1) above. The Registrar, Paying Agent or Calculation Agent may
resign at any time upon written notice; provided, however, that no such
-------- -------
resignation shall become effective until (1) acceptance of an appointment by a
successor as evidenced by an appropriate agreement entered into by the Company
and such successor agent, as the case may be, and delivered to the Trustee or
(2) notification to the Trustee that the Trustee shall serve as Registrar,
Paying Agent or Calculation Agent until the appointment of a successor in
accordance with clause (1) above.
SECTION 2.04. Paying Agent To Hold Money in Trust. Prior to each due date
-----------------------------------
of the principal and interest on any Security, the Company shall deposit with
the Paying Agent (or if the Company or a Subsidiary is acting as Paying Agent,
segregate and hold in trust for the benefit of the Persons entitled thereto) a
sum sufficient to pay such principal and interest when so becoming due. The
Company shall require each Paying Agent (other than the Trustee) to agree in
writing that the Paying Agent shall hold in trust for the benefit of
Securityholders or the Trustee all money held by the Paying Agent for the
payment of principal of or interest on the Securities and shall notify the
Trustee of any Default by the Company in making any such payment. If the
Company or a Subsidiary of the Company acts as Paying Agent, it shall segregate
the money held by it as Paying Agent and hold it as a separate trust fund. The
Company at any time may require a Paying Agent to pay all money held by it to
the Trustee and to account for any funds disbursed
23
<PAGE>
by the Paying Agent. Upon complying with this Section, the Paying Agent shall
have no further liability for the money delivered to the Trustee.
SECTION 2.05. Securityholder Lists. The Trustee shall preserve in as
--------------------
current a form as is reasonably practicable the most recent list available to it
of the names and addresses of Securityholders. If the Trustee is not the
Registrar, the Company shall furnish, or cause the Registrar to furnish, to the
Trustee, in writing at least five Business Days before each interest payment
date and at such other times as the Trustee may request in writing, a list in
such form and as of such date as the Trustee may reasonably require of the names
and addresses of Securityholders.
SECTION 2.06. Transfer and Exchange. The Securities shall be issued in
---------------------
registered form and shall be transferable only upon the surrender of a Security
for registration of transfer and in compliance with Appendix A. When a Security
is presented to the Registrar with a request to register a transfer, the
Registrar shall register the transfer as requested if the requirements of
Section 8-401(a)(1) of the Uniform Commercial Code are met. When Securities are
presented to the Registrar with a request to exchange them for an equal
principal amount of Securities of other denominations, the Registrar shall make
the exchange as requested if the same requirements are met. To permit
registration of transfers and exchanges, the Company shall execute and the
Trustee shall authenticate Securities at the Registrar's request. The Company
may require payment of a sum sufficient to pay all taxes, assessments or other
governmental charges in connection with any transfer or exchange pursuant to
this Section. The Company shall not be required to make and the Registrar need
not register transfers or exchanges of Securities selected for redemption
(except, in the case of Securities to be redeemed in part, the portion thereof
not to be redeemed) or any Securities for a period of 15 days before a selection
of Securities to be redeemed.
Prior to the due presentation for registration of transfer of any Security,
the Company, the Subsidiary Guarantors, the Trustee, the Paying Agent, and the
Registrar may deem and treat the Person in whose name a Security is registered
as the absolute owner of such Security for the purpose of receiving payment of
principal of and interest, if any, on such Security and for all other purposes
whatsoever, whether or not such Security is overdue, and none of the Company,
any Subsidiary Guarantor, the Trustee, the Paying Agent, or the Registrar shall
be affected by notice to the contrary.
Any Holder of a Global Security shall, by acceptance of such Global
Security, agree that transfers of beneficial interest in such Global Security
may be effected only through a book-entry system maintained by (i) the Holder of
such Global Security (or its agent) or (ii) any Holder of a beneficial interest
in such Global Security, and that ownership of a beneficial interest in such
Global Security shall be required to be reflected in a book entry.
All Securities issued upon any transfer or exchange pursuant to the terms
of this Indenture will evidence the same debt and will be entitled to the same
benefits under this Indenture as the Securities surrendered upon such transfer
or exchange.
24
<PAGE>
SECTION 2.07. Replacement Securities. If a mutilated Security is
----------------------
surrendered to the Registrar or if the Holder of a Security claims that the
Security has been lost, destroyed or wrongfully taken, the Company shall issue
and the Trustee shall authenticate a replacement Security if the requirements of
Section 8-405 of the Uniform Commercial Code are met, such that the Holder (i)
satisfies the Company or the Trustee within a reasonable time after he has
notice of such loss, destruction or wrongful taking and the Registrar does not
register a transfer prior to receiving such notification, (ii) makes such
request to the Company or the Trustee prior to the Security being acquired by a
protected purchaser as defined in Section 8-303 of the Uniform Commercial Code
(a "protected purchaser") and (iii) satisfies any other reasonable requirements
of the Trustee. If required by the Trustee or the Company, such Holder shall
furnish an indemnity bond sufficient, in their respective judgment, to protect
the Company, the Trustee, the Paying Agent and the Registrar from any loss that
any of them may suffer if a Security is replaced. The Company and the Trustee
may charge the Holder for their expenses in replacing a Security. In the event
any such mutilated, lost, destroyed or wrongfully taken Security has become or
is about to become due and payable, the Company in its discretion may pay such
Security instead of issuing a new Security in replacement thereof.
Every replacement Security is an additional obligation of the Company.
The provisions of this Section 2.07 are exclusive and shall preclude (to
the extent lawful) all other rights and remedies with respect to the replacement
or payment of mutilated, lost, destroyed or wrongfully taken Securities.
SECTION 2.08. Outstanding Securities. Securities outstanding at any time
----------------------
are all Securities authenticated by the Trustee except for those canceled by it,
those delivered to it for cancellation and those described in this Section as
not outstanding. Subject to Section 11.06, a Security does not cease to be
outstanding because the Company or an Affiliate of the Company holds the
Security.
If a Security is replaced pursuant to Section 2.07, it ceases to be
outstanding unless the Trustee and the Company receive proof satisfactory to
them that the replaced Security is held by a protected purchaser.
If the Paying Agent segregates and holds in trust, in accordance with this
Indenture, on a redemption date or maturity date money sufficient to pay all
principal and interest payable on that date with respect to the Securities (or
portions thereof) to be redeemed or maturing, as the case may be, then on and
after that date such Securities (or portions thereof) cease to be outstanding
and interest on them ceases to accrue.
SECTION 2.09. Temporary Securities. In the event that Definitive
--------------------
Securities (as defined in Appendix A) are to be issued under the terms of this
Indenture, until such Definitive Securities are ready for delivery, the Company
may prepare and the Trustee shall authenticate temporary Securities. Temporary
Securities shall be substantially in the form of Definitive Securities but may
have variations that the Company considers appropriate for temporary Securities.
Without unreasonable delay, the Company shall prepare and the Trustee shall
authenticate Definitive
25
<PAGE>
Securities and deliver them in exchange for temporary Securities upon surrender
of such temporary Securities at the office or agency of the Company, without
charge to the Holder.
SECTION 2.10. Cancellation. The Company at any time may deliver Securities
------------
to the Trustee for cancellation. The Registrar and the Paying Agent shall
forward to the Trustee any Securities surrendered to them for registration of
transfer, exchange or payment. The Trustee and no one else shall cancel all
Securities surrendered for registration of transfer, exchange, payment or
cancellation and deliver canceled Securities to the Company pursuant to written
direction by an Officer. The Company may not issue new Securities to replace
Securities it has redeemed, paid or delivered to the Trustee for cancellation.
The Trustee shall not authenticate Securities in place of canceled Securities
other than pursuant to the terms of this Indenture.
SECTION 2.11. Defaulted Interest. If the Company defaults in a payment of
------------------
interest on the Securities, the Company shall pay the defaulted interest (plus
interest on such defaulted interest to the extent lawful) in any lawful manner.
The Company may pay the defaulted interest to the Persons who are
Securityholders on a subsequent special record date. The Company shall fix or
cause to be fixed any such special record date and payment date to the
reasonable satisfaction of the Trustee and shall promptly mail or cause to be
mailed to each Securityholder a notice that states the special record date, the
payment date and the amount of defaulted interest to be paid.
SECTION 2.12. CUSIP Numbers. The Company in issuing the Securities may
-------------
use "CUSIP" numbers (if then generally in use) and, if so, the Trustee shall use
"CUSIP" numbers in notices of redemption as a convenience to Holders; provided,
--------
however, that any such notice may state that no representation is made as to the
- -------
correctness of such numbers either as printed on the Securities or as contained
in any notice of a redemption and that reliance may be placed only on the other
identification numbers printed on the Securities, and any such redemption shall
not be affected by any defect in or omission of such numbers.
ARTICLE 3
REDEMPTION
----------
SECTION 3.01. Notices to Trustee. If the Company elects to redeem
------------------
Securities pursuant to paragraph 5 of the Securities, it shall notify the
Trustee in writing of the redemption date and the principal amount of Securities
to be redeemed.
The Company shall give each notice to the Trustee provided for in this
Section at least 60 days before the redemption date unless the Trustee consents
to a shorter period (which consent shall not be unreasonably withheld). Such
notice shall be accompanied by an Officers' Certificate and an Opinion of
Counsel from the Company to the effect that such redemption will comply with the
conditions herein. If fewer than all the Securities are to be redeemed, the
record date relating to such redemption shall be selected by the Company and
given to the Trustee, which record date shall be not fewer than 15 days after
the date of notice to the Trustee. Any such notice may be canceled at any time
prior to notice of such redemption being mailed to any Holder and shall thereby
be void and of no effect.
26
<PAGE>
SECTION 3.02. Selection of Securities To Be Redeemed. If fewer than all
--------------------------------------
the Securities are to be redeemed, the Trustee shall select the Securities to be
redeemed pro rata or by lot or by a method that complies with applicable legal
and securities exchange requirements, if any, and that the Trustee in its sole
discretion shall deem to be fair and appropriate and in accordance with methods
generally used at the time of selection by fiduciaries in similar circumstances.
The Trustee shall make the selection from outstanding Securities not previously
called for redemption. The Trustee may select for redemption portions of the
principal of Securities that have denominations larger than $1,000. Securities
and portions of them the Trustee selects shall be in amounts of $1,000 or a
whole multiple of $1,000. Provisions of this Indenture that apply to Securities
called for redemption also apply to portions of Securities called for
redemption. The Trustee shall notify the Company promptly of the Securities or
portions of Securities to be redeemed.
SECTION 3.03. Notice of Redemption. At least 10 days but not more than 60
--------------------
days before a date for redemption of Securities, the Company shall mail a notice
of redemption by first-class mail to each Holder of Securities to be redeemed at
such Holder's registered address.
The notice shall identify the Securities to be redeemed and shall state:
(1) the redemption date;
(2) the redemption price and the amount of accrued interest to the
redemption date;
(3) the name and address of the Paying Agent;
(4) that Securities called for redemption must be surrendered to the
Paying Agent to collect the redemption price;
(5) if fewer than all the outstanding Securities are to be redeemed,
the certificate numbers and principal amounts of the particular Securities
to be redeemed;
(6) that, unless the Company defaults in making such redemption
payment or the Paying Agent is prohibited from making such payment pursuant
to the terms of this Indenture, interest on Securities (or portion thereof)
called for redemption ceases to accrue on and after the redemption date;
(7) the CUSIP number, if any, printed on the Securities being
redeemed; and
(8) that no representation is made as to the correctness or accuracy
of the CUSIP number, if any, listed in such notice or printed on the
Securities.
At the Company's written request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense. In such event,
the Company shall provide the Trustee with the information required by this
Section.
27
<PAGE>
SECTION 3.04. Effect of Notice of Redemption. Once notice of redemption
------------------------------
is mailed, Securities called for redemption become due and payable on the
redemption date and at the redemption price stated in the notice. Upon
surrender to the Paying Agent, such Securities shall be paid at the redemption
price stated in the notice, plus accrued interest, if any, to the redemption
date; provided, however, that if the redemption date is after a regular record
-------- -------
date and on or prior to the interest payment date, the accrued interest shall be
payable to the Securityholder of the redeemed Securities registered on the
relevant record date. Failure to give notice or any defect in the notice to any
Holder shall not affect the validity of the notice to any other Holder.
SECTION 3.05. Deposit of Redemption Price. Prior to 10:00 a.m. on the
---------------------------
redemption date, the Company shall deposit with the Paying Agent (or, if the
Company or a Subsidiary is the Paying Agent, shall segregate and hold in trust)
money sufficient to pay the redemption price of and accrued interest on all
Securities to be redeemed on that date other than Securities or portions of
Securities called for redemption that have been delivered by the Company to the
Trustee for cancellation.
SECTION 3.06. Securities Redeemed in Part. Upon surrender of a Security
---------------------------
that is redeemed in part, the Company shall execute and the Trustee shall
authenticate for the Holder (at the Company's expense) a new Security equal in
principal amount to the unredeemed portion of the Security surrendered.
ARTICLE 4
COVENANTS
---------
SECTION 4.01. Payment of Securities. The Company shall promptly pay the
---------------------
principal of and interest on the Securities on the dates and in the manner
provided in the Securities and in this Indenture. Principal and interest shall
be considered paid on the date due if on such date the Trustee or the Paying
Agent holds in accordance with this Indenture money sufficient to pay all
principal and interest then due and the Trustee or the Paying Agent, as the case
may be, is not prohibited from paying such money to the Securityholders on that
date pursuant to the terms of this Indenture.
The Company shall pay interest on overdue principal at the rate specified
therefor in the Securities, and it shall pay interest on overdue installments of
interest at the same rate to the extent lawful.
SECTION 4.02. Certain Reports and Certificates. At any time while any
--------------------------------
Securities are outstanding:
(a) Within 90 days after the end of each fiscal year, the Company shall
provide to the Trustee and Securityholders a Consolidated balance sheet of the
Company and the Restricted Subsidiaries as of the end of such fiscal year and
the related Consolidated statements of income, stockholders' equity and cash
flow of the Company and the Restricted Subsidiaries for such fiscal year,
setting forth in each case in comparative form the Consolidated figures for the
previous
28
<PAGE>
fiscal year, all in reasonable detail and accompanied by (i) a report thereon of
independent certified public accountants of recognized national standing
selected by the Company stating that such Consolidated financial statements
fairly present the Consolidated financial position of the Company and the
Restricted Subsidiaries as of the date indicated and their results of operations
and cash flows for the periods indicated in conformity with GAAP (except as
otherwise stated therein) and that the examination by such accountants in
connection with such Consolidated financial statements has been made in
accordance with generally accepted auditing standards and (ii) a management's
discussion and analysis of financial condition and results of operations
substantially as would be required to be included in an annual report on Form
10-K if the Company were subject to the reporting requirements of Section 13 or
15(d) of the Exchange Act;
(b) within 45 days after the end of each fiscal quarter (other than the
last fiscal quarter of any fiscal year) the Company shall provide to the Trustee
and Securityholders an unaudited Consolidated balance sheet of the Company and
the Restricted Subsidiaries as of the end of such quarter and the related
unaudited Consolidated statements of income, stockholders' equity and cash flow
for such quarter and the portion of the fiscal year ended at the end of such
quarter, setting forth in each case in comparative form the Consolidated figures
for the corresponding periods of the prior fiscal year, all in reasonable detail
and certified by the Company's chief financial officer as fairly presenting the
Consolidated financial condition of the Company and the Restricted Subsidiaries
as of the dates indicated, and their Consolidated results of operations and cash
flows for the periods indicated, in conformity with GAAP, subject to normal
year-end adjustments and the absence of footnotes;
(c) The Company and the Subsidiary Guarantors shall furnish to the Holders
and prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act;
(d) The Company shall deliver to the Trustee, the Calculation Agent and
the Securityholders, no later than the 45th day following the last day of each
fiscal quarter, a certificate signed by two Officers of the Company (the
"Quarterly Certificate") in the form attached hereto as Exhibit D setting forth
the following information: (i) the calculation of the Company's
Indebtedness/Total Capital Ratio as of the last day of such preceding fiscal
quarter, measured in accordance with GAAP on a Consolidated basis, (ii) the
current S&P Rating or Moody's Rating for each ACE USA Insurance Group as of the
date of such Quarterly Certificate, and (iii) based upon the calculation and
rating set forth respectively in (i) and (ii) above, the applicable interest
rate in effect for the next Pricing Period; and
(e) If, following delivery of a Quarterly Certificate during any fiscal
quarter pursuant to Section 4.02(d) and before the last day of such fiscal
quarter, any ACE USA Insurance Group is notified of any change in its S&P Rating
or Moody's Rating, the Company shall deliver to the Trustee, the Calculation
Agent and the Securityholders a certificate signed by two Officers of the
Company notifying the Trustee of such change in the S&P Rating or Moody's Rating
for such ACE USA Insurance Group (the "Ratings Certificate"), which certificate
shall be in the form of Exhibit E attached hereto and shall be delivered within
3 days of such ACE USA Insurance Group being notified by S&P or Moody's of the
same. Such Ratings Certificate shall set forth the
29
<PAGE>
applicable interest rate in effect for the next Pricing Period taking into
account such change in the S&P Rating or Moody's Rating.
SECTION 4.03. Limitation on Indebtedness.
--------------------------
(a) The Company shall not, and shall not permit any Restricted Subsidiary
to, Incur, directly or indirectly, any Indebtedness; provided, however, that the
-------- -------
Company may Incur Indebtedness if after giving pro forma effect to the
Incurrence of such Indebtedness and the receipt and application of the proceeds
therefrom, the Consolidated Coverage Ratio would be greater than 1.2 to 1.
(b) Notwithstanding Section 4.03(a), the Company and its Restricted
Subsidiaries may Incur the following Indebtedness:
(i) working capital Indebtedness of the Company or any Restricted
Subsidiary under any revolving credit facility in an aggregate principal
amount not to exceed $10,000,000 at any time outstanding;
(ii) Indebtedness of the Company owed to and held by any Restricted
Subsidiary or Indebtedness of a Restricted Subsidiary owed to and held by
the Company or any Restricted Subsidiary; provided, however, that (i) any
-------- -------
subsequent issuance or transfer of any Capital Stock or any other event
that results in any such Restricted Subsidiary ceasing to be a Restricted
Subsidiary or any subsequent transfer of any such Indebtedness (except to
the Company or a Restricted Subsidiary) shall be deemed, in each case, to
constitute the Incurrence of such Indebtedness by the issuer thereof and
(ii) if the Company is the obligor on such Indebtedness, such Indebtedness
is expressly subordinated to the prior payment in full of all obligations
with respect to the Securities;
(iii) Indebtedness (A) represented by the Securities and the
Subsidiary Guarantees (if any), (B) consisting of Refinancing Indebtedness
Incurred in respect of any Indebtedness described in this clause (iii)
(including Indebtedness Refinancing Refinancing Indebtedness) or Section
4.03(a) and (C) of the Company under the terms of the Subordinated Loan
Agreement, as in effect on the date hereof (without regard to any
amendments, supplements or other modifications not permitted by Section
4.17);
(iv) (A) Indebtedness of a Restricted Subsidiary Incurred and
outstanding on or prior to the date on which such Restricted Subsidiary was
acquired by the Company (other than Indebtedness Incurred as consideration
in, or to provide all or any portion of the funds or credit support
utilized to consummate, the transaction or series of related transactions
pursuant to which such Restricted Subsidiary became a Subsidiary or was
otherwise acquired by the Company); provided, however, that on the date
-------- -------
that such Restricted Subsidiary is acquired by the Company, the Company
would have been able to Incur $1.00 of additional Indebtedness pursuant to
Section 4.03(a) after giving effect to the Incurrence of such Indebtedness
pursuant to this clause (iv) and (B) Refinancing Indebtedness Incurred by a
Restricted Subsidiary in respect of Indebtedness Incurred by such
Restricted Subsidiary pursuant to this clause (iv);
30
<PAGE>
(v) Indebtedness (A) of any Restricted Subsidiary evidenced by
letters of credit or performance, surety or appeal bonds (and related
reimbursement obligations) provided in the ordinary course of such
Restricted Subsidiary's insurance and reinsurance business, and (B) under
Interest Rate Agreements or Currency Agreements entered into for bona fide
hedging purposes of the Company in the ordinary course of business;
provided, however, that any such Interest Rate Agreements or Currency
-------- -------
Agreements do not increase the Indebtedness of the Company outstanding at
any time other than as a result of fluctuations in interest rates or by
reason of fees, indemnities and compensation payable thereunder;
(vi) Purchase Money Indebtedness and Capitalized Lease Obligations,
and Refinancing Indebtedness with respect thereto, in an aggregate
principal amount not in excess of $3,000,000 at any time outstanding;
(vii) Indebtedness of the Company (other than Indebtedness permitted
to be Incurred pursuant to Section 4.03(a) or any other clause of this
Section 4.03(b)) in an aggregate principal amount at any time outstanding
not to exceed $3,000,000;
(viii) Indebtedness of the Company, to the extent that the net
proceeds thereof are promptly deposited to defease all of the Securities as
provided in Article 8;
(ix)(A) Guarantees of the Securities and (B) Guarantees of
Indebtedness of the Company by any Restricted Subsidiary, in the case of
(B) if the Restricted Subsidiary or the Company, respectively, is permitted
to Incur such Indebtedness hereunder, provided that simultaneously with any
such Guarantee of Indebtedness by any Restricted Subsidiary, a Subsidiary
Guarantee shall be made to each Holder and to the Trustee in accordance
with Section 4.11 and Article 10 hereof;
(x) Non-Recourse Debt of any Unrestricted Subsidiary; provided,
--------
however, that if any such Non-Recourse Debt ceases to be Non-Recourse Debt
-------
of an Unrestricted Subsidiary, such event shall be deemed to constitute an
Incurrence of Indebtedness by a Restricted Subsidiary of the Company that
was not permitted by this clause (x); and
(xi) Qualified Subordinated Debt of the Company; provided, however,
-------- -------
that if any such Indebtedness ceases to be Qualified Subordinated Debt,
such event shall be deemed to constitute an Incurrence of Indebtedness by
the Company that was not permitted by this clause (xi).
(c) Notwithstanding the foregoing, the Company shall not, and shall not
permit any Restricted Subsidiary to Incur any Indebtedness pursuant to Section
4.03(b) above if the proceeds thereof are used, directly or indirectly, to
repay, prepay, redeem, defease, retire, refund or refinance any Subordinated
Obligations unless such Indebtedness shall be subordinated to the Securities to
at least the same extent as such Subordinated Obligations.
(d) Notwithstanding any other provision of this Section 4.03, the maximum
amount of Indebtedness that the Company or any Restricted Subsidiary may Incur
pursuant to this
31
<PAGE>
Section shall not be deemed to be exceeded solely as a result of fluctuations in
the exchange rates of currencies. For purposes of determining the outstanding
principal amount of any particular Indebtedness Incurred pursuant to this
Section 4.03, (i) Indebtedness permitted by this Section 4.03 need not be
permitted solely by reference to one provision permitting such Indebtedness but
may be permitted in part by one such provision and in part by one or more other
provisions of this Section permitting such Indebtedness and (ii) in the event
that Indebtedness meets the criteria of more than one of the types of
Indebtedness described in this Section, the Company, in its sole discretion,
shall classify such Indebtedness and only be required to include the amount of
such Indebtedness in one of such clauses.
SECTION 4.04. Limitation on Restricted Payments. (a) The Company shall
---------------------------------
not, and shall not permit any Restricted Subsidiary, directly or indirectly, to
(i) declare or pay any dividend or make any distribution on or in respect of its
Capital Stock (including any payment in connection with any merger or
consolidation involving the Company) or similar payment to the direct or
indirect holders of its Capital Stock except dividends or distributions payable
solely in its Capital Stock (other than Disqualified Stock) and except dividends
or distributions payable to the Company or another Restricted Subsidiary (and,
if such Restricted Subsidiary has shareholders other than the Company or other
Restricted Subsidiaries, to its other shareholders on a pro rata basis), (ii)
purchase, redeem, retire or otherwise acquire for value any Capital Stock of the
Company or any Restricted Subsidiary held by Persons other than the Company or
another Restricted Subsidiary (except in the case of the Company or any
Restricted Subsidiary acquiring (1) all of the remaining Capital Stock of any
Restricted Subsidiary listed on Schedule 4.04 not owned by the Company or any
Restricted Subsidiary or (2) Capital Stock of a Restricted Subsidiary pursuant
to an agreement listed on Schedule 4.04), (iii) purchase, repurchase, redeem,
defease or otherwise acquire or retire for value, prior to scheduled maturity,
scheduled repayment or scheduled sinking fund payment any Subordinated
Obligations (other than the purchase, repurchase or other acquisition of
Subordinated Obligations (other than Qualified Subordinated Debt) purchased in
anticipation of satisfying a sinking fund obligation, principal installment or
final maturity, in each case due within one year of the date of acquisition), or
(iv) make any Investment (other than a Permitted Investment) in any Person (any
such dividend, distribution, purchase, redemption, repurchase, defeasance, other
acquisition, retirement or Investment being herein referred to as a "Restricted
Payment") if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment:
(1) a Default shall have occurred and be continuing (or would result
therefrom);
(2) the Company could not Incur at least $1.00 of additional
Indebtedness under Section 4.03(a); or
(3) the aggregate amount of such Restricted Payment and all other
Restricted Payments (the amount so expended, if other than in cash, to be
determined in good faith by the Board of Directors, whose determination
shall be conclusive and evidenced by a resolution of the Board of
Directors) declared or made subsequent to the Closing Date would exceed the
sum of:
32
<PAGE>
(A) 50% of the Consolidated Net Income accrued during the period
(treated as one accounting period) from the beginning of the fiscal
quarter during which the Closing Date occurs to the end of the most
recent fiscal quarter ending at least 45 days prior to the date of
such Restricted Payment and for which financial statements are
available (or, in case such Consolidated Net Income shall be a
deficit, minus 100% of such deficit);
(B) the aggregate Net Cash Proceeds received by the Company from
the issue or sale of its Capital Stock (other than Disqualified Stock)
subsequent to the Closing Date (other than an issuance or sale to (x)
a Subsidiary of the Company or (y) an employee stock ownership plan or
other trust established by the Company or any of its Subsidiaries);
(C) the amount by which Indebtedness of the Company or its
Restricted Subsidiaries is reduced on the Company's balance sheet upon
the conversion or exchange (other than by a Subsidiary of the Company
subsequent to the Closing Date) of any Indebtedness of the Company or
its Restricted Subsidiaries convertible or exchangeable for Capital
Stock (other than Disqualified Stock) of the Company (less the amount
of any cash or the fair market value of other property distributed by
the Company or any Restricted Subsidiary upon such conversion or
exchange); and
(D) the amount equal to the net reduction in Investments in
Unrestricted Subsidiaries resulting from (i) payments of dividends,
repayments of the principal of loans or advances or other transfers of
assets to the Company or any Restricted Subsidiary from Unrestricted
Subsidiaries or (ii) the redesignation of Unrestricted Subsidiaries as
Restricted Subsidiaries (valued in each case as provided in the
definition of "Investment") not to exceed, in the case of any
Unrestricted Subsidiary, the amount of Investments previously made by
the Company or any Restricted Subsidiary in such Unrestricted
Subsidiary, which amount was included in the calculation of the amount
of Restricted Payments.
(b) The provisions of Section 4.04(a) shall not prohibit:
(i) any Restricted Payment made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Capital Stock of the
Company (other than Disqualified Stock and other than Capital Stock issued
or sold to a Subsidiary of the Company or an employee stock ownership plan
or other trust established by the Company or any of its Subsidiaries);
provided, however, that (A) such Restricted Payment shall be excluded in
-------- -------
the calculation of the amount of Restricted Payments and (B) the Net Cash
Proceeds from such sale applied in the manner set forth in this clause (i)
shall be excluded from the calculation of amounts under clause (3)(B) of
Section 4.04(a);
(ii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations (other than
Qualified Subordinated Debt) of the Company made by exchange for, or out of
the proceeds of the substantially
33
<PAGE>
concurrent sale of, Indebtedness of the Company that is permitted to be
Incurred pursuant to Section 4.03; provided, however, that such purchase
-------- -------
repurchase, redemption, defeasance or other acquisition or retirement for
value shall be excluded in the calculation of the amount of Restricted
Payments;
(iii) any purchase or redemption of Subordinated Obligations (other
than Qualified Subordinated Debt) from Net Available Cash to the extent
permitted by Section 4.06; provided, however, that such purchase or
-------- -------
redemption shall be excluded in the calculation of the amount of Restricted
Payments;
(iv) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have complied
with Section 4.04(a); provided, however, that such dividend shall be
-------- -------
included (without duplication) in the calculation of the amount of
Restricted Payments;
(v) the repurchase or other acquisition of shares of, or options to
purchase shares of, common stock of the Company or any of its Subsidiaries
from employees, former employees, directors or former directors of the
Company or any of its Subsidiaries (or permitted transferees of such
employees, former employees, directors or former directors), pursuant to
the terms of the agreements (including employment agreements) or plans (or
amendments thereto) approved by the Board of Directors under which such
individuals purchase or sell or are granted the option to purchase or sell,
shares of such common stock; provided, however, that the aggregate amount
-------- -------
of such repurchases shall not exceed $500,000 in any calendar year;
provided further, however, that such repurchases and other acquisitions
---------------- -------
shall be excluded in the calculation of the amount of Restricted Payments;
or
(vi) Restricted Payments in an aggregate amount not in excess of
$5,000,000.
SECTION 4.05. Limitation on Restrictions on Distributions from Restricted
-----------------------------------------------------------
Subsidiaries. The Company shall not, and shall not permit any Restricted
- ------------
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (i) pay dividends or make any other distributions on its Capital
Stock or pay any Indebtedness or other obligations owed to the Company, (ii)
make any loans or advances to the Company or (iii) transfer any of its property
or assets to the Company, except:
(1) any encumbrance or restriction pursuant to an agreement in effect
at or entered into on the Closing Date;
(2) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness Incurred
by such Restricted Subsidiary prior to the date on which such Restricted
Subsidiary was acquired by the Company (other than Indebtedness Incurred as
consideration in, in contemplation of, or to provide all or any portion of
the funds or credit support utilized to consummate, the transaction or
series of related transactions pursuant to which such Restricted Subsidiary
34
<PAGE>
became a Restricted Subsidiary or was otherwise acquired by the Company)
and outstanding on such date;
(3) any encumbrance or restriction pursuant to an agreement effecting
a Refinancing of Indebtedness Incurred pursuant to an agreement referred to
in clause (1) or (2) of this Section 4.05 or this clause (3) or contained
in any amendment to an agreement referred to in clause (1) or (2) of this
Section 4.05 or this clause (3); provided, however, that the encumbrances
-------- -------
and restrictions contained in any such refinancing agreement or amendment
are no less favorable to the Securityholders than the encumbrances and
restrictions contained in such predecessor agreements;
(4) in the case of clause (iii), any encumbrance or restriction (A)
that restricts in a customary manner the subletting, assignment or transfer
of any property or asset that is subject to a lease, license or similar
contract, (B) that is or was created by virtue of any transfer of,
agreement to transfer, option or right with respect to, or Lien on, any
property or assets of the Company or any Restricted Subsidiary not
otherwise prohibited by this Indenture or (C) contained in security
agreements securing Indebtedness of a Restricted Subsidiary to the extent
such encumbrance or restriction restricts the transfer of the property
subject to such security agreements;
(5) with respect to a Restricted Subsidiary, any restriction imposed
pursuant to an agreement entered into for the sale or disposition of all or
substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition; and
(6) any encumbrance or restriction imposed after the Closing Date by
any applicable insurance or any other law or regulation or imposed by order
of or agreement with any governmental authority; provided, however, that
-------- -------
the Company and its Subsidiaries have used all reasonable efforts to have
any such order or agreement diminished or removed by the relevant
governmental authority with authority to effect such diminishing or removal
and to obtain any exemptive order from the relevant governmental authority
with authority to issue, or effect the issuance of, such an exemptive order
with respect to any such encumbrance or restriction to the extent such an
exemptive order is reasonably suitable under applicable laws and
regulations.
SECTION 4.06. Limitation on Sales of Assets and Subsidiary Stock. (a) The
--------------------------------------------------
Company shall not, and shall not permit any Restricted Subsidiary to, make any
Asset Disposition unless (i) the Company or such Restricted Subsidiary receives
consideration (including by way of relief from, or by any other Person assuming
sole responsibility for, any liabilities, contingent or otherwise) at the time
of such Asset Disposition at least equal to the fair market value (as determined
in good faith by the Company's Board of Directors) of the shares and assets
subject to such Asset Disposition, (ii) at least 75% of the consideration
thereof received by the Company or such Restricted Subsidiary is in the form of
cash and (iii) an amount equal to 100% of the Net Available Cash from such Asset
Disposition is applied by the Company (or such Restricted Subsidiary, as the
case may be) (A) first, within 360 days after the later of the date of such
-----
Asset Disposition or the receipt of such Net Available Cash, to, at the
Company's or such Restricted
35
<PAGE>
subsidiary's option, (1) prepay, repay, redeem or purchase unsubordinated
Indebtedness of the Company or Indebtedness (other than any Disqualified Stock)
of a Restricted Subsidiary (in each case other than Indebtedness owed to the
Company or an Affiliate of the Company) or (2) reinvest in Additional Assets
(including by means of an Investment in Additional Assets by a Restricted
Subsidiary with Net Available Cash received by the Company or another Restricted
Subsidiary); (B) second, to the extent of the balance of such Net Available Cash
after application in accordance with clauses (A) and (B), to make an Offer to
purchase Securities pursuant to and subject to the conditions of Section
4.06(b), provided, however, that if the Company elects (or is required by the
-------- -------
terms of any unsubordinated Indebtedness), such Offer may be made ratably to
purchase the Securities and other unsubordinated Indebtedness of the Company,
and (C) third, to the extent of the balance of such Net Available Cash after
-----
application in accordance with clauses (A), (B) and (C), to (x) acquire
Additional Assets (other than Indebtedness and Capital Stock) or (y) prepay,
repay or purchase Indebtedness of the Company (other than Indebtedness owed to
an Affiliate of the Company and other than Disqualified Stock of the Company) or
Indebtedness of any Restricted Subsidiary (other than Indebtedness owed to the
Company or an Affiliate of the Company), in each case described in this clause
(C) within 450 days from the receipt of such Net Available Cash or, if the
Company has made an Offer pursuant to Section 4.06(b), six months from the date
such Offer is consummated; provided, however, that in connection with any
-------- -------
prepayment, repayment or purchase of Indebtedness pursuant to clause (A), (B) or
(C) above, the Company or such Restricted Subsidiary shall permanently retire
such Indebtedness and shall cause the related loan commitment (if any) to be
permanently reduced in an amount equal to the principal amount so prepaid,
repaid or purchased. Notwithstanding the foregoing provisions of this Section
4.06, the Company and the Restricted Subsidiaries shall not be required to apply
any Net Available Cash in accordance with this Section 4.06(a) except to the
extent that the aggregate Net Available Cash from all Asset Dispositions that is
not applied in accordance with this Section 4.06(a) exceeds $10,000,000. For the
purposes of this Section 4.06, the following are deemed to be cash: (x) the
assumption of unsubordinated Indebtedness of the Company (other than
Disqualified Stock of the Company) or any Restricted Subsidiary and the release
of the Company or such Restricted Subsidiary from all liability on such
Indebtedness in connection with such Asset Disposition and (y) securities
received by the Company or any Restricted Subsidiary from the transferee that
are converted by the Company or such Restricted Subsidiary into cash within 60
days of the issuance thereof.
(b) In the event of an Asset Disposition that requires the purchase of
Securities (and other unsubordinated Indebtedness) pursuant to Section
4.06(a)(iii)(B), the Company shall be required to purchase Securities (and other
unsubordinated Indebtedness) tendered pursuant to an offer by the Company for
the Securities (and other unsubordinated Indebtedness) (the "Offer") at a
purchase price of 100% of their principal amount plus accrued and unpaid
interest, if any, to the date of purchase in accordance with the procedures
(including prorationing in the event of oversubscription) set forth in Section
4.06(c). If the aggregate purchase price of Securities (and other
unsubordinated Indebtedness) tendered pursuant to the Offer is less than the
Net Available Cash allotted to the purchase of the Securities (and other
unsubordinated Indebtedness), the Company shall apply the remaining Net
Available Cash in accordance with Section 4.06(a)(iii)(C). The Company shall
not be required to make an Offer for Securities (and other unsubordinated
Indebtedness) pursuant to this Section 4.06 if the Net Available Cash
36
<PAGE>
available therefor (after application of the proceeds as provided in clause (A)
of Section 4.06(a)(iii)) is less than $2,500,000 for any particular Asset
Disposition (which lesser amount shall be carried forward for purposes of
determining whether an Offer is required with respect to the Net Available Cash
from any subsequent Asset Disposition).
(c) (1) Promptly, and in any event within 10 days after the Company
becomes obligated to make an Offer, the Company shall be obligated to deliver to
the Trustee and send, by first-class mail to each Holder, a written notice
stating that the Holder may elect to have his Securities purchased by the
Company either in whole or in part (subject to prorationing as hereinafter
described in the event the Offer is oversubscribed) in integral multiples of
$1,000 of principal amount, at the applicable purchase price. The notice shall
specify a purchase date not less than 30 days nor more than 60 days after the
date of such notice (the "Purchase Date") and shall contain such information
concerning the business of the Company which the Company in good faith believes
will enable such Holders to make an informed decision (which at a minimum shall
include (i) the most recent annual and quarterly financial statements and
management's discussion and analysis of financial condition and results of
operation required to be delivered to the Securityholders pursuant to Section
4.02, (ii) a description of material developments in the Company's business
subsequent to the date of the latest of such financial statements, and (iii) if
material, appropriate pro forma financial information) and all instructions and
materials necessary to tender Securities pursuant to the Offer, together with
the address referred to in clause (3).
(2) Not later than the date upon which written notice of an Offer is
delivered to the Trustee as provided above, the Company shall deliver to the
Trustee an Officers' Certificate as to (i) the amount of the Offer (the "Offer
Amount"), (ii) the allocation of the Net Available Cash from the Asset
Dispositions pursuant to which such Offer is being made and (iii) the compliance
of such allocation with the provisions of Section 4.06(a). On such date, the
Company shall also irrevocably deposit with the Trustee or with a paying agent
(or, if the Company is acting as its own paying agent, segregate and hold in
trust) an amount equal to the Offer Amount to be invested in Temporary Cash
Investments and to be held for payment in accordance with the provisions of this
Section. Upon the expiration of the period for which the Offer remains open (the
"Offer Period"), the Company shall deliver to the Trustee for cancellation the
Securities or portions thereof that have been properly tendered to and are to be
accepted by the Company. The Trustee (or the Paying Agent, if not the Trustee)
shall, on the date of purchase, mail or deliver payment to each tendering Holder
in the amount of the purchase price. In the event that the aggregate purchase
price of the Securities (and other unsubordinated Indebtedness) delivered by the
Company to the Trustee is less than the Offer Amount applicable to the
Securities (and other unsubordinated Indebtedness), the Trustee shall deliver
the excess to the Company immediately after the expiration of the Offer Period
for application in accordance with this Section 4.06.
(3) Holders electing to have a Security purchased shall be required
to surrender the Security, with an appropriate form duly completed, to the
Company at the address specified in the notice at least three Business Days
prior to the Purchase Date. Holders shall be entitled to withdraw their election
if the Trustee or the Company receives not later than one Business Day prior to
the Purchase Date, a telegram, telex, facsimile transmission or letter setting
37
<PAGE>
forth the name of the Holder, the principal amount of the Security which was
delivered by the Holder for purchase and a statement that such Holder is
withdrawing his election to have such Security purchased. If at the expiration
of the Offer Period the aggregate principal amount of Securities (and other
unsubordinated Indebtedness) included in the Offer surrendered by holders
thereof exceeds the Offer Amount, the Company shall select the Securities (and
other unsubordinated Indebtedness) to be purchased on a pro rata basis (with
such adjustments as may be deemed appropriate by the Company so that only
Securities (and other unsubordinated Indebtedness) in denominations of $1,000,
or integral multiples thereof, shall be purchased). Holders whose Securities are
purchased only in part will be issued new Securities equal in principal amount
to the unpurchased portion of the Securities surrendered.
(4) At the time the Company delivers Securities to the Trustee which
are to be accepted for purchase, the Company shall also deliver an Officers'
Certificate stating that such Securities are to be accepted by the Company
pursuant to and in accordance with the terms of this Section. A Security shall
be deemed to have been accepted for purchase at the time the Trustee, directly
or through an agent, mails or delivers payment therefor to the surrendering
Holder.
(d) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Securities pursuant to this
Section. To the extent that the provisions of any securities laws or regulations
conflict with provisions of this Section, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under this Section by virtue thereof.
SECTION 4.07. Limitation on Transactions with Affiliates.
------------------------------------------
(a) The Company shall not, and shall not permit any Restricted Subsidiary
to, directly or indirectly, enter into or conduct any transaction (including,
the purchase, sale, lease or exchange of any property employee compensation
arrangements or the rendering of any service) with any Affiliate of the Company
(an "Affiliate Transaction") on terms (i) that are less favorable to the Company
or such Restricted Subsidiary, as the case may be, than those that could be
obtained at the time of such transaction in arm's-length dealings with a Person
who is not such an Affiliate, (ii) if such Affiliate Transaction involves an
aggregate amount in excess of $3,000,000, (1) are set forth in writing and (2)
have been approved by a majority of the members of the Board of Directors having
no personal stake in such Affiliate Transaction and (iii) if such Affiliate
Transaction involves an amount in excess of $15,000,000 have been determined by
a nationally recognized appraisal or investment banking firm to be fair, from a
financial standpoint, to the Company and its Restricted Subsidiaries; provided
that clause (iii) shall not apply to reinsurance transactions with any Affiliate
of the Company in the ordinary course of business.
(b) The provisions of Section 4.07(a) shall not prohibit (i) any
Restricted Payment permitted to be paid pursuant to Section 4.04, (ii) any
issuance of securities, or other payments, awards or grants in cash, securities
or otherwise pursuant to, or the funding of, employment arrangements, stock
options and stock ownership plans approved by the Board of Directors, (iii) the
grant of stock options or similar rights to employees and directors of the
Company
38
<PAGE>
pursuant to plans approved by the Board of Directors, (iv) loans or advances to
employees in the ordinary course of business in accordance with past practices
of the Company, (v) the payment of reasonable fees to directors of the Company
and its Subsidiaries who are not employees of the Company or its Subsidiaries or
(vi) any transaction between the Company and a Restricted Subsidiary or between
Restricted Subsidiaries.
SECTION 4.08. Change of Control.
-----------------
(a) Upon a Change of Control, each Holder shall have the right to require
that the Company repurchase all or any part of such Holder's Securities at a
purchase price in cash equal to 101% of the principal amount thereof plus
accrued and unpaid interest, if any, to the date of purchase (subject to the
right of Holders of record on the relevant record date to receive interest due
on the relevant interest payment date), in accordance with the terms
contemplated in Section 4.08(b); provided, however, that notwithstanding the
-------- -------
occurrence of a Change in Control, the Company shall not be obligated to
purchase the Securities pursuant to this Section 4.08 in the event that it has
exercised its right to redeem all the Securities under paragraph 5 of the
Securities. In the event that at the time of such Change of Control the terms
of any Bank Indebtedness restrict or prohibit the repurchase of Securities
pursuant to this Section 4.08, then prior to the mailing of the notice to
Holders provided for in Section 4.08(b) below but in any event within 30 days
following any Change of Control, the Company shall (i) repay in full all Bank
Indebtedness or offer to repay in full all Bank Indebtedness and repay the Bank
Indebtedness of each lender who has accepted such offer or (ii) obtain the
requisite consent under the agreements governing the Bank Indebtedness to permit
the repurchase of the Securities as provided for in Section 4.08(b).
(b) Within 30 days following any Change of Control (except as provided in
the proviso to the first sentence of Section 4.08(a)), the Company shall mail a
notice to each Holder with a copy to the Trustee (the "Change of Control Offer")
stating:
(1) that a Change of Control has occurred and that such Holder has
the right to require the Company to purchase such Holder's Securities at a
purchase price in cash equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of purchase (subject to
the right of Holders of record on the relevant record date to receive
interest due on the relevant interest payment date);
(2) the circumstances and relevant facts and financial information
regarding such Change of Control;
(3) the repurchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and
(4) the instructions determined by the Company, consistent with this
Section, that a Holder must follow in order to have its Securities
purchased.
(c) Holders electing to have a Security purchased shall be required to
surrender the Security, with an appropriate form duly completed, to the Company
at the address specified in
39
<PAGE>
the notice at least three Business Days prior to the purchase date. Holders
shall be entitled to withdraw their election if the Trustee or the Company
receives not later than one Business Day prior to the purchase date a telegram,
telex, facsimile transmission or letter setting forth the name of the Holder,
the principal amount of the Security which was delivered for purchase by the
Holder and a statement that such Holder is withdrawing his election to have such
Security purchased.
(d) On the purchase date, all Securities purchased by the Company under
this Section shall be delivered to the Trustee for cancellation, and the Company
shall pay the purchase price plus accrued and unpaid interest, if any, to the
Holders entitled thereto.
(e) Notwithstanding the foregoing provisions of this Section, the Company
will not be required to make a Change of Control Offer upon a Change of Control
if a third party makes the Change of Control Offer in the manner, at the times
and otherwise in compliance with the requirements set forth in Section 4.08(b)
applicable to a Change of Control Offer made by the Company and purchases all
Securities validly tendered and not withdrawn under such Change of Control
Offer.
(f) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Securities pursuant to this
Section. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this Section, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this Section by virtue thereof.
SECTION 4.09. Compliance Certificate. The Company shall deliver to the
----------------------
Trustee within 120 days after the end of each fiscal year of the Company an
Officers' Certificate stating that in the course of the performance by the
signers of their duties as Officers of the Company they would normally have
knowledge of any Default and whether or not the signers know of any Default that
occurred during such period. If they do, the certificate shall describe the
Default, its status and what action the Company is taking or proposes to take
with respect thereto.
SECTION 4.10. Further Instruments and Acts. Upon request of the Trustee,
----------------------------
the Company shall execute and deliver such further instruments and do such
further acts as may be reasonably necessary or proper to carry out more
effectively the purpose of this Indenture.
SECTION 4.11. Future Subsidiary Guarantors. The Company shall cause each
----------------------------
Restricted Subsidiary (other than a Subsidiary Guarantor) not to Guarantee any
Indebtedness of the Company, unless such Restricted Subsidiary, simultaneously
therewith, becomes a Subsidiary Guarantor, and executes and delivers to the
Trustee a supplemental indenture substantially in the form of Exhibit B pursuant
to which such Restricted Subsidiary will Guarantee payment of the Securities.
Concurrently with the execution and delivery of such supplemental indenture, the
Company shall deliver to the Trustee an Opinion of Counsel and an Officers'
Certificate to the effect that such supplemental indenture has been duly
authorized, executed and delivered by such Subsidiary and that, subject to the
application of bankruptcy, insolvency, moratorium, fraudulent conveyance or
transfer and other similar laws relating to creditors' rights generally and to
the
40
<PAGE>
principles of equity, whether considered in a proceeding at law or in equity,
the Subsidiary Guarantee of such Subsidiary Guarantor is a legal, valid and
binding obligation of such Subsidiary Guarantor, enforceable against such
Subsidiary Guarantor in accordance with its terms. Each Subsidiary Guarantee
shall be limited to an amount not to exceed the maximum amount that can be
Guaranteed by that Restricted Subsidiary without rendering the Subsidiary
Guarantee, as it relates to such Restricted Subsidiary, voidable under
applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally.
SECTION 4.12. Limitation on Lines of Business. The Company shall not, and
-------------------------------
shall not permit any Restricted Subsidiary to, engage in any business, other
than a Related Business.
SECTION 4.13. Limitation on the Sale or Issuance of Capital Stock of
------------------------------------------------------
Restricted Subsidiaries. The Company shall not sell or otherwise dispose of any
- -----------------------
shares of Capital Stock of a Restricted Subsidiary, and shall not permit any
Restricted Subsidiary, directly or indirectly, to issue or sell or otherwise
dispose of any shares of its Capital Stock except: (i) to the Company or a
Wholly Owned Subsidiary; (ii) if, immediately after giving effect to such
issuance, sale or other disposition, neither the Company nor any of its
Subsidiaries own any Capital Stock of such Restricted Subsidiary or (iii) if,
immediately after giving effect to such issuance or sale, such Restricted
Subsidiary would no longer constitute a Restricted Subsidiary and any Investment
in such Person remaining after giving effect thereto would have been permitted
to be made under Section 4.04 if made on the date of such issuance, sale or
other disposition. The proceeds of any sale of such Capital Stock permitted
hereby shall be treated as Net Available Cash from an Asset Disposition and
shall be applied in accordance with Section 4.06.
SECTION 4.14. Limitation on Liens. The Company shall not, and shall not
-------------------
permit any Restricted Subsidiary to, directly or indirectly, Incur or permit to
exist any Lien of any nature whatsoever on any of its property or assets
(including Capital Stock of a Restricted Subsidiary), whether owned at the
Closing Date or thereafter acquired, other than Permitted Liens, without
effectively providing that the Securities shall be secured equally and ratably
with (or prior to) the obligations so secured equally and ratably with (or prior
to) the obligations so secured for so long as such obligations are so secured.
SECTION 4.15. Use of Proceeds. On the Closing Date, the Company shall
---------------
apply the net proceeds from the issuance of the Securities to the repayment of
all amounts outstanding under the credit agreement dated as of December 11, 1997
among the Company, Parent, the Banks listed therein and Morgan Guaranty Trust
Company of New York, as administrative agent, and J.P. Morgan Securities, Inc.
and Mellon Bank N.A. acting as co-arrangers.
SECTION 4.16. Financial Strength Rating. The Company shall cause the ACE
--------------------------
USA Insurance Group to maintain at all times either a S&P Rating or a Moody's
Rating.
SECTION 4.17. Maintenance of Subordinated Loan Agreement. (a) The
-------------------------------------------
Company shall maintain in full force and effect at all times the Subordinated
Loan Agreement, and shall not amend, supplement or otherwise modify (i) Section
2 of the Subordinated Loan Agreement or (ii) any other provision of the
Subordinated Loan Agreement in any manner that has the effect of
41
<PAGE>
decreasing the amount of the Commitment (as defined in the Subordinated Loan
Agreement), increasing the interest rate or cash payment portion of the
interest, changing the terms of subordination, advancing the time for payment of
any payment owing under the Subordinated Loan Agreement including without
limitation any principal or interest due thereunder, shortening the term of the
Commitment or the Subordinated Loan Agreement or is otherwise adverse to
Securityholders in any material respect.
(b) The Company shall not make any payment of principal of or interest on
any loans under the Subordinated Loan Agreement, except as permitted by Section
4 thereof.
ARTICLE 5
Successor Company, Etc.
-----------------------
SECTION 5.01. When Company and Subsidiary Guarantors May Merge or Transfer
------------------------------------------------------------
Assets.
- ------
(a) The Company shall not consolidate with or merge with or into, or
convey, transfer or lease all or substantially all its assets to, any Person,
unless:
(i) the resulting, surviving or transferee Person (the "Successor
Company") shall be a corporation organized and existing under the laws of
the United States of America, any State thereof or the District of Columbia
and the Successor Company (if not the Company) shall expressly assume, by
an indenture supplemental hereto, executed and delivered to the Trustee, in
form satisfactory to the Trustee, all the obligations of the Company under
the Securities and this Indenture;
(ii) immediately after giving effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor
Company or any Restricted Subsidiary as a result of such transaction as
having been Incurred by the Successor Company or such Restricted Subsidiary
at the time of such transaction), no Default shall have occurred and be
continuing;
(iii) immediately after giving effect to such transaction, the
Successor Company would be able to Incur an additional $1.00 of
Indebtedness pursuant to Section 4.03(a);
(iv) immediately after giving effect to such transaction, the
Successor Company shall have Consolidated Net Worth in an amount which is
not less than the Consolidated Net Worth of the Company immediately prior
to such transaction; and
(v) the Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with this Indenture.
The Successor Company shall succeed to, and be substituted for, and may
exercise every right and power of, the Company under this Indenture, but the
predecessor Company in the case
42
<PAGE>
of a conveyance, transfer or lease of all or substantially all its assets shall
not be released from the obligation to pay the principal of and interest on the
Securities.
(b) The Company shall not permit any Subsidiary Guarantor to consolidate
with or merge with or into, or convey, transfer or lease, in one transaction or
series of transactions, all or substantially all of its assets to any Person
unless: (i) the resulting, surviving or transferee Person (if not such
Subsidiary Guarantor) shall be a Person organized and existing under the laws of
the jurisdiction under which such Subsidiary was organized or under the laws of
the United States of America, or any State hereof or the District of Columbia,
and such Person shall expressly assume, by an amendment to this Indenture, in a
form acceptable to the Trustee, all the obligations of such Subsidiary
Guarantor, if any, under its Subsidiary Guarantee; (ii) immediately after giving
effect to such transaction or transactions on a pro forma basis (and treating
any Indebtedness which becomes an obligation of the resulting, surviving or
transferee Person as a result of such transaction as having been issued by such
Person at the time of such transaction), no Default shall have occurred and be
continuing; and (iii) the Company delivers to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such consolidation,
merger or transfer and such amendment to this Indenture, if any, complies with
this Indenture.
(c) Notwithstanding the foregoing clauses (iii) and (iv) of paragraph (a)
above, (i) any Restricted Subsidiary may consolidate with, merge into or
transfer all or part of its properties and assets to the Company and (ii) the
Company may merge with an Affiliate incorporated solely for the purpose of
reincorporating the Company in another jurisdiction to realize tax or other
benefits.
ARTICLE 6
Defaults And Remedies
---------------------
SECTION 6.01. Events of Default. An "Event of Default" occurs if:
-----------------
(1) the Company defaults in any payment of interest on any Security
when the same becomes due and payable, and such default continues for a
period of 30 days;
(2) the Company (i) defaults in the payment of the principal of any
Security when the same becomes due and payable at its Stated Maturity, upon
redemption, upon declaration or otherwise, or (ii) fails to redeem or
purchase Securities when required pursuant to this Indenture or the
Securities;
(3) the Company or any Subsidiary Guarantor fails to comply with
Section 5.01;
(4) the Company or any Subsidiary Guarantor fails to comply with
Section 4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.11, 4.12, 4.13, 4.14,
4.15 or 4.17 (other than a failure to purchase Securities when required
under Section 4.06 or 4.08) and such failure continues for 30 days after
the notice specified below;
43
<PAGE>
(5) the Company or any Subsidiary Guarantor fails to comply with any
of its agreements in the Securities or this Indenture (other than those
referred to in (1), (2), (3) or (4) above) and such failure continues for
60 days after the notice specified below;
(6) Indebtedness of the Company or any Restricted Subsidiary is not
paid within any applicable grace period after final maturity or the
acceleration by the holders thereof because of a default and the total
amount of such Indebtedness unpaid or accelerated exceeds $10.0 million or
its foreign currency equivalent at the time and such failure continues for
10 days after the notice specified below;
(7) the Company or any Restricted Subsidiary pursuant to or within
the meaning of any Bankruptcy Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief against it in
an involuntary case;
(C) consents to the appointment of a Custodian of it or for any
substantial part of its property; or
(D) makes a general assignment for the benefit of its creditors;
or takes any comparable action under any foreign laws relating to insolvency;
(8) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:
(A) is for relief against the Company or any Restricted
Subsidiary in an involuntary case;
(B) appoints a Custodian of the Company or any Restricted
Subsidiary or for any substantial part of its property; or
(C) orders the winding up or liquidation of the Company or any
Restricted Subsidiary;
or any similar relief is granted under any foreign laws and the order or decree
remains unstayed and in effect for 60 days;
(9) any judgment or decree for the payment of money in excess of
$10.0 million or its foreign currency equivalent at the time is entered
against the Company or any Restricted Subsidiary and is not discharged,
waived or stayed and either (A) an enforcement proceeding has been
commenced by any creditor upon such judgment or decree or (B) there is a
period of 60 days following the entry of such judgment or decree during
which such judgment or decree is not discharged, waived or the execution
thereof stayed;
44
<PAGE>
(10) any Subsidiary Guarantee shall cease to be in full force and
effect (except as contemplated by the terms thereof) or any Subsidiary
Guarantor or Person acting by or on behalf of such Subsidiary Guarantor
shall deny or disaffirm its obligations under this Indenture or any
Subsidiary Guarantee and such Default continues for 10 days after the
notice specified below; or
(11) any failure of the Company to comply with its covenants and
obligations under the Subordinated Loan Agreement and such failure
continues for 30 days after the notice specified below.
The foregoing shall constitute Events of Default whatever the reason for
any such Event of Default and whether it is voluntary or involuntary or is
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body.
The term "Bankruptcy Law" means Title 11, United States Code, or any
------------------
similar Federal or state law for the relief of debtors. The term "Custodian"
means any receiver, trustee, assignee, liquidator, custodian or similar official
under any Bankruptcy Law.
A Default under clause (4), (5), (6) or (11) above is not an Event of
Default until the Trustee or the Holders of at least 25% in principal amount of
the outstanding Securities notify the Company of the Default and the Company
does not cure such Default within the time specified after receipt of such
notice. Such notice must specify the Default, demand that it be remedied and
state that such notice is a "Notice of Default" (a "Notice of Default"). Upon
receipt by the Trustee of written notice of a Default under clause (4), (5), (6)
or (11) above from the Company or any Securityholder, or upon any Trust Officer
obtaining actual knowledge of such event, the Trustee shall send a Notice of
Default to the Company.
The Company shall deliver to the Trustee, within 30 days after the
occurrence thereof, written notice in the form of an Officers' Certificate of
any Event of Default under clause (3), (7) or (8) and any event which with the
giving of notice or the lapse of time would become an Event of Default under any
other clause of this Section 6.01, its status and what action the Company is
taking or proposes to take with respect thereto.
SECTION 6.02. Acceleration. If an Event of Default (other than an Event
------------
of Default specified in Section 6.01(7) or (8) with respect to the Company)
occurs and is continuing, the Trustee by notice to the Company, or the Holders
of at least 25% in principal amount of the outstanding Securities by notice to
the Company, may declare the principal of and accrued but unpaid interest on all
the Securities to be due and payable. Upon such a declaration, such principal
and interest shall be due and payable immediately. If an Event of Default
specified in Section 6.01(7) or (8) with respect to the Company occurs, the
principal of and interest on all the Securities shall ipso facto become and be
---- -----
immediately due and payable without any declaration or other act on the part of
the Trustee or any Securityholders. The Holders of a majority in principal
amount of the Securities by written notice to the Trustee may rescind an
acceleration and its consequences if the rescission would not conflict with any
judgment or decree and if all existing Events of Default have been cured or
waived except nonpayment of principal or interest
45
<PAGE>
that has become due solely because of acceleration. No such rescission shall
affect any subsequent Default or impair any right consequent thereto.
SECTION 6.03. Other Remedies. If an Event of Default occurs and is
--------------
continuing, the Trustee may pursue any available remedy to collect the payment
of principal of or interest on the Securities or to enforce the performance of
any provision of the Securities or this Indenture. In addition, if an Event of
Default occurs and is continuing, the Trustee will, unless otherwise directed by
written request by the Holders of a majority in principal amount of the
outstanding Securities, request subordinated loans to made by the lender under
the Subordinated Loan Agreement to be applied as specified in Section 6.10.
The Trustee may maintain a proceeding even if it does not possess any of
the Securities or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Securityholder in exercising any right or remedy
accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative.
SECTION 6.04. Waiver of Past Defaults. The Holders of a majority in
-----------------------
principal amount of the Securities by notice to the Trustee may waive an
existing Default and its consequences except (i) a Default in the payment of the
principal of or interest on a Security, (ii) a Default arising from the failure
to redeem or purchase any Security when required pursuant to the terms of this
Indenture or (iii) a Default in respect of a provision that under Section 9.02
cannot be amended without the consent of each Securityholder affected. When a
Default is waived, it is deemed cured, but no such waiver shall extend to any
subsequent or other Default or impair any consequent right.
SECTION 6.05. Control by Majority. The Holders of a majority in principal
-------------------
amount of the Securities may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or of exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or this Indenture or, subject to Section 7.01,
that the Trustee or any Trust Officer determines is unduly prejudicial to the
rights of other Securityholders or would involve the Trustee in personal
liability; provided, however, that the Trustee may take any other action deemed
-------- -------
proper by the Trustee that is not inconsistent with such direction. Prior to
taking any action hereunder, the Trustee shall be entitled to indemnification
satisfactory to it in its sole discretion against all losses and expenses caused
by taking or not taking such action.
SECTION 6.06. Limitation on Suits. Except to enforce the right to receive
-------------------
payment of principal, premium (if any) or interest when due, no Securityholder
may pursue any remedy with respect to this Indenture or the Securities unless:
(1) the Holder gives to the Trustee written notice stating that an
Event of Default is continuing;
(2) the Holders of at least 25% in principal amount of the Securities
make a written request to the Trustee to pursue the remedy;
46
<PAGE>
(3) such Holder or Holders offer to the Trustee reasonable security
or indemnity against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer of security or indemnity; and
(5) the Holders of a majority in principal amount of the Securities
do not give the Trustee a direction inconsistent with the request during
such 60-day period.
A Securityholder may not use this Indenture to prejudice the rights of
another Securityholder or to obtain a preference or priority over another
Securityholder.
SECTION 6.07. Rights of Holders to Receive Payment. Notwithstanding any
------------------------------------
other provision of this Indenture, the right of any Holder to receive payment of
principal of and liquidated damages and interest on the Securities held by such
Holder, on or after the respective due dates expressed in the Securities, or to
bring suit for the enforcement of any such payment on or after such respective
dates, shall not be impaired or affected without the consent of such Holder.
SECTION 6.08. Collection Suit by Trustee. If an Event of Default
--------------------------
specified in Section 6.01(1) or (2) occurs and is continuing, the Trustee may
recover judgment in its own name and as trustee of an express trust against the
Company for the whole amount then due and owing (together with interest on any
unpaid interest to the extent lawful) and the amounts provided for in Section
7.07.
SECTION 6.09. Trustee May File Proofs of Claim. The Trustee may file such
--------------------------------
proofs of claim and other papers or documents as may be necessary or advisable
in order to have the claims of the Trustee and the Securityholders allowed in
any judicial proceedings relative to the Company, any Subsidiary or Subsidiary
Guarantor, their creditors or their property and, unless prohibited by law or
applicable regulations, may vote on behalf of the Holders in any election of a
trustee in bankruptcy or other Person performing similar functions, and any
Custodian in any such judicial proceeding is hereby authorized by each Holder to
make payments to the Trustee and, in the event that the Trustee shall consent to
the making of such payments directly to the Holders, to pay to the Trustee any
amount due it for the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and its counsel, and any other amounts due
the Trustee under Section 7.07.
SECTION 6.10. Priorities. If the Trustee collects any money or property
----------
pursuant to this Article 6, it shall pay out the money or property in the
following order:
FIRST: to the Trustee for amounts due under Section 7.07;
SECOND: to Securityholders for amounts due and unpaid on the
Securities for principal and interest, ratably, and any liquidated damages
without preference or priority of any kind, according to the amounts due
and payable on the Securities for principal, any liquidated damages and
interest, respectively; and
47
<PAGE>
THIRD: to the Company.
The Trustee may fix a record date and payment date for any payment to
Securityholders pursuant to this Section. At least 15 days before such record
date, the Trustee shall mail to each Securityholder and the Company a notice
that states the record date, the payment date and amount to be paid.
SECTION 6.11. Undertaking for Costs. In any suit for the enforcement of
---------------------
any right or remedy under this Indenture or in any suit against the Trustee for
any action taken or omitted by it as Trustee, a court in its discretion may
require the filing by any party litigant in the suit of an undertaking to pay
the costs of the suit, and the court in its discretion may assess reasonable
costs, including reasonable attorneys' fees, against any party litigant in the
suit, having due regard to the merits and good faith of the claims or defenses
made by the party litigant. This Section does not apply to a suit by the
Trustee, a suit by a Holder pursuant to Section 6.07 or a suit by Holders of
more than 10% in principal amount of the Securities.
SECTION 6.12. Waiver of Stay or Extension Laws. Neither the Company nor
--------------------------------
any Subsidiary Guarantor (to the extent it may lawfully do so) shall at any time
insist upon, or plead, or in any manner whatsoever claim or take the benefit or
advantage of, any stay or extension law wherever enacted, now or at any time
hereafter in force, which may affect the covenants or the performance of this
Indenture; and the Company and each Subsidiary Guarantor (to the extent that it
may lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and shall not hinder, delay or impede the execution of any power herein
granted to the Trustee, but shall suffer and permit the execution of every such
power as though no such law had been enacted.
ARTICLE 7
Trustee
-------
SECTION 7.01. Duties of Trustee. (a) If an Event of Default has occurred
-----------------
and is continuing of which a Trust Officer has actual knowledge, the Trustee
shall exercise the rights and powers vested in it by this Indenture and use the
same degree of care and skill in their exercise as a prudent Person would
exercise or use under the circumstances in the conduct of such Person's own
affairs.
(b) Except during the continuance of an Event of Default:
(1) the Trustee undertakes to perform such duties and only such
duties as are specifically set forth in this Indenture and no implied
covenants or obligations shall be read into this Indenture against the
Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions furnished to
the Trustee and conforming to the requirements
48
<PAGE>
of this Indenture. However, the Trustee shall examine the certificates and
opinions to determine whether or not they conform to the requirements of
this Indenture.
(c) The Trustee may not be relieved from liability for its own negligent
action, its own negligent failure to act or its own willful misconduct, except
that:
(1) this paragraph does not limit the effect of paragraph (b) of this
Section;
(2) the Trustee shall not be liable for any error of judgment made in
good faith by a Trust Officer unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts; and
(3) the Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05.
(d) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b)and (c) of this Section.
(e) The Trustee shall not be liable for interest on any money received by
it except as the Trustee may agree in writing with the Company.
(f) Money held in trust by the Trustee need not be segregated from other
funds except to the extent required by law.
(g) No provision of this Indenture shall require the Trustee to expend or
risk its own funds or otherwise incur financial liability in the performance of
any of its duties hereunder or in the exercise of any of its rights or powers,
if it shall have reasonable grounds to believe that repayment of such funds or
indemnity satisfactory to it against such risk or liability is not reasonably
assured to it.
(h) Every provision of this Indenture relating to the conduct or affecting
the liability of or affording protection to the Trustee shall be subject to the
provisions of this Section.
(i) In the event that the Trustee is also acting as Calculation Agent,
Paying Agent, Transfer Agent, Registrar or Securities Custodian hereunder, the
protections of this Article 7 shall also be afforded to the Paying Agent,
Transfer Agent, Registrar or Securities Custodian hereunder.
SECTION 7.02. Rights of Trustee.
-----------------
(a) The Trustee may conclusively rely on any document believed by it to be
genuine and to have been signed or presented by the proper person. The Trustee
need not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require and
shall be entitled to receive an Officers' Certificate or an Opinion of Counsel.
The Trustee shall not be liable for
49
<PAGE>
any action it takes or omits to take in good faith in reliance on the Officers'
Certificate or Opinion of Counsel.
(c) The Trustee may execute any of the trusts or powers hereunder or
perform any duties either directly or by or through agents, attorneys,
custodians or nominees and shall not be responsible for the misconduct or
negligence of any agent, attorney, custodian or nominee appointed with due care.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith which it believes to be authorized or within its rights or
powers; provided, however, that the Trustee's conduct does not constitute
-------- -------
willful misconduct or negligence.
(e) The Trustee may consult with counsel, and the advice or opinion of
counsel with respect to legal matters relating to this Indenture and the
Securities shall be full and complete authorization and protection from
liability in respect to any action taken, omitted or suffered by it hereunder in
good faith and in accordance with the advice or opinion of such counsel.
(f) The Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent, order, approval, bond, debenture,
note or other paper or document unless requested in writing to do so by the
Holders of not less than a majority in principal amount of the Securities at the
time outstanding, but the Trustee, in its discretion, may make such further
inquiry or investigation into such facts or matters as it may see fit, and, if
the Trustee shall determine to make such further inquiry or investigation, it
shall be entitled to examine the books, records and premises of the Company,
personally or by agent or attorney.
(g) The Trustee shall be under no obligation to exercise any of the rights
or powers vested in it by this Indenture at the request or direction of any of
the Securityholders pursuant to this Indenture, unless such Securityholders
shall have offered to the Trustee security or indemnity satisfactory to it
against the cost, expenses (including reasonable legal fees and expenses) and
liabilities that might be incurred by it in compliance with such request or
direction.
(h) The Trustee shall not be charged with knowledge of an Event of Default
unless a Trust Officer obtains actual knowledge of such event or the Trustee
receives written notice of such event from the Company or any Securityholder.
SECTION 7.03. Individual Rights of Trustee. The Trustee in its individual
----------------------------
or any other capacity may become the owner or pledgee of Securities and may
otherwise deal with the Company or its Affiliates with the same rights it would
have if it were not Trustee. Any Paying Agent, Registrar or co-paying agent may
do the same with like rights. However, the Trustee must comply with Sections
7.10 and 7.11.
SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be responsible
--------------------
for and makes no representation as to the validity or adequacy of this Indenture
or the Securities, it shall not be accountable for the Company's use of the
proceeds from the Securities, and it shall not be responsible for any statement
of the Company in this Indenture or in any document issued in
50
<PAGE>
connection with the sale of the Securities or in the Securities other than the
Trustee's certificate of authentication. The Trustee shall have no obligation
or liability on respect of monitoring the compliance by the Company of the
provisions of this Indenture.
SECTION 7.05. Notice of Defaults. If a Default occurs and is continuing
------------------
and if it is actually known to any Trust Officer or the Trustee has received
written notice of such event from the Company or any Securityholder, the Trustee
shall mail to each Securityholder notice of the Default within the earlier of 90
days after it occurs or 30 days after it is known to a Trust Officer or the
receipt of such notice, as the case may be. Except in the case of a Default in
payment of principal of or interest on any Security (including payments pursuant
to the mandatory redemption provisions of such Security, if any), the Trustee
may withhold the notice if and so long as a committee of its Trust Officers in
good faith determines that withholding the notice is in the interests of
Securityholders.
SECTION 7.06. Reports by Trustee to Holders. As promptly as practicable
-----------------------------
after receipt, the Trustee shall mail to each Securityholder a copy of any
Quarterly Certificate or Ratings Certificate which has been received by the
Trustee.
SECTION 7.07. Compensation and Indemnity. The Company shall pay to the
--------------------------
Trustee from time to time reasonable compensation for its services. The
Trustee's compensation shall not be limited by any law on compensation of a
trustee of an express trust. The Company shall reimburse the Trustee upon
request for all reasonable out-of-pocket expenses incurred or made by it,
including costs of collection, in addition to the compensation for its services.
Such expenses shall include the reasonable compensation and expenses,
disbursements and advances of the Trustee's agents, counsel, accountants and
experts. The Company and each Subsidiary Guarantor, jointly and severally shall
indemnify the Trustee against any and all loss, liability or expense (including
reasonable attorneys' fees and expenses) incurred by or in connection with the
administration of this trust and the performance of its their duties hereunder.
The Trustee shall notify the Company of any claim for which it may seek
indemnity promptly upon obtaining actual knowledge thereof, provided, however,
-------- -------
that any failure so to notify the Company shall not relieve the Company or any
Subsidiary Guarantor of its indemnity obligations hereunder. The Company shall
defend the claim and the indemnified party shall provide reasonable cooperation
at the Company's expense in the defense. Such indemnified parties may have
separate counsel and the Company and the Subsidiary Guarantors, as applicable
shall pay the reasonable fees and expenses of such counsel; provided, however,
-------- -------
that the Company shall not be required to pay such fees and expenses if it
assumes such indemnified parties' defense and, in such indemnified parties'
reasonable judgment, there is no conflict of interest between the Company and
the Subsidiary Guarantors, as applicable, and such parties in connection with
such defense. The Company need not reimburse any expense or indemnify against
any loss, liability or expense incurred by an indemnified party (including the
Trustee) through such party's own willful misconduct, negligence or bad faith.
To secure the Company's payment obligations in this Section, the Trustee
shall have a lien prior to the Securities on all money or property held or
collected by the Trustee other than money or property held in trust to pay
principal of and interest and any liquidated damages on particular Securities.
51
<PAGE>
The Company's payment obligations pursuant to this Section shall survive
the satisfaction or discharge of this Indenture, any rejection or termination of
this Indenture under any bankruptcy law or the resignation or removal of the
Trustee. When the Trustee incurs expenses after the occurrence of a Default
specified in Section 6.01(7) or (8) with respect to the Company, the expenses
are intended to constitute expenses of administration under the Bankruptcy Law.
SECTION 7.08. Replacement of Trustee. The Trustee may resign at any time
----------------------
by so notifying the Company. The Holders of a majority in principal amount of
the Securities may remove the Trustee by so notifying the Trustee and may
appoint a successor Trustee. The Company shall remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes charge of the Trustee or
its property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns, is removed by the Company or by the Holders of a
majority in principal amount of the Securities and such Holders do not
reasonably promptly appoint a successor Trustee, or if a vacancy exists in the
office of Trustee for any reason (the Trustee in such event being referred to
herein as the retiring Trustee), the Company shall promptly appoint a successor
Trustee.
A successor Trustee shall deliver a written acceptance of its appointment
to the retiring Trustee and to the Company. Thereupon the resignation or
removal of the retiring Trustee shall become effective, and the successor
Trustee shall have all the rights, powers and duties of the Trustee under this
Indenture. The successor Trustee shall mail a notice of its succession to
Securityholders. The retiring Trustee shall promptly transfer all property held
by it as Trustee to the successor Trustee, subject to the lien provided for in
Section 7.07.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee or the Holders of
10% in principal amount of the Securities may petition any court of competent
jurisdiction for the appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any Securityholder may
petition any court of competent jurisdiction for the removal of the Trustee and
the appointment of a successor Trustee.
Notwithstanding the replacement of the Trustee pursuant to this Section,
the Company's obligations under Section 7.07 shall continue for the benefit of
the retiring Trustee.
SECTION 7.09. Successor Trustee by Merger. If the Trustee consolidates
---------------------------
with, merges or converts into, or transfers all or substantially all its
corporate trust business or assets to,
52
<PAGE>
another corporation or banking association, the resulting, surviving or
transferee corporation without any further act shall be the successor Trustee.
In case at the time such successor or successors by merger, conversion or
consolidation to the Trustee shall succeed to the trusts created by this
Indenture any of the Securities shall have been authenticated but not delivered,
any such successor to the Trustee may adopt the certificate of authentication of
any predecessor trustee, and deliver such Securities so authenticated; and in
case at that time any of the Securities shall not have been authenticated, any
successor to the Trustee may authenticate such Securities either in the name of
any predecessor hereunder or in the name of the successor to the Trustee; and in
all such cases such certificates shall have the full force which it is anywhere
in the Securities or in this Indenture provided that the certificate of the
Trustee shall have.
SECTION 7.10. Eligibility; Disqualification. Notwithstanding that the TIA
-----------------------------
does not apply to this Indenture, the Trustee shall have a combined capital and
surplus of at least $100,000,000 as set forth in its most recent published
annual report of condition. Notwithstanding that the TIA does not apply to this
Indenture, the Trustee shall comply with TIA Section 310(b); provided, however,
-------- -------
that there shall be excluded from the operation of TIA Section 310(b)(1) any
indenture or indentures under which other securities or certificates of interest
or participation in other securities of the Company are outstanding if the
requirements for such exclusion set forth in TIA Section 310(b)(1) are met.
SECTION 7.11. Preferential Collection of Claims Against Company
-------------------------------------------------
Notwithstanding that the TIA does not apply to this Indenture, the Trustee shall
comply with TIA Section 311(a), excluding any creditor relationship listed in
TIA 311(b). A Trustee who has resigned or been removed shall be subject to TIA
Section 311(a) to the extent indicated.
ARTICLE 8
Discharge of Indenture; Defeasance
----------------------------------
SECTION 8.01. Discharge of Liability on Securities; Defeasance. (a) When
------------------------------------------------
(i) the Company delivers to the Trustee all outstanding Securities (other than
Securities replaced pursuant to Section 2.08) for cancellation or (ii) all
outstanding Securities have become due and payable, whether at maturity or as a
result of the mailing of a notice of redemption pursuant to Article 3 hereof,
and the Company irrevocably deposits with the Trustee funds or U.S. Government
Obligations on which payment of principal and interest when due will be
sufficient to pay at maturity or upon redemption all outstanding Securities,
including interest thereon to maturity or such redemption date (other than
Securities replaced pursuant to Section 2.08), and if in either case the Company
pays all other sums payable hereunder by the Company, then this Indenture shall,
subject to Section 8.01(c), cease to be of further effect. The Trustee shall
acknowledge satisfaction and discharge of this Indenture on demand of the
Company accompanied by an Officers' Certificate and an Opinion of Counsel
stating that all conditions precedent to such satisfaction and discharge have
been complied with and at the cost and expense of the Company.
53
<PAGE>
(b) Subject to Sections 8.01(c) and 8.02, the Company at any time may
terminate (i) all of its and any Subsidiary Guarantor's obligations under the
Securities, the Subsidiary Guarantee and this Indenture ("legal defeasance
option") or (ii) its obligations under Sections 4.02, 4.03, 4.04, 4.05, 4.06,
4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16, and 4.17 and the
operation of Section 5.01(a)(iii), 5.01(a)(iv), 6.01(4), 6.01(6), 6.01(7) (with
respect to Subsidiaries of the Company only), 6.01(8) (with respect to
Subsidiaries of the Company only), 6.01(9), 6.01(10) and 6.01(11) ("covenant
defeasance option"). The Company may exercise its legal defeasance option
notwithstanding its prior exercise of its covenant defeasance option. In the
event that the Company terminates all of its obligations under the Securities
and this Indenture by exercising its legal defeasance option, the obligations
under the Subsidiary Guarantees shall each be terminated simultaneously with the
termination of such obligations.
If the Company exercises its legal defeasance option, payment of the
Securities may not be accelerated because of an Event of Default. If the
Company exercises its covenant defeasance option, payment of the Securities may
not be accelerated because of an Event of Default specified in Section 6.01(4),
6.01(6), 6.01(7) (with respect to Subsidiaries of the Company only), 6.01(8)
(with respect to Subsidiaries of the Company only), 6.01(9), 6.01(10) and
6.01(11) or because of the failure of the Company to comply with clauses (iii)
and (iv) of Section 5.01 (a).
Upon satisfaction of the conditions set forth herein and upon request of
the Company, the Trustee shall acknowledge in writing the discharge of those
obligations that the Company terminates.
(c) Notwithstanding clauses (a) and (b) above, the Company's obligations
in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 2.08, 7.07, 7.08 and in this Article 8
shall survive until the Securities have been paid in full. Thereafter, the
Company's obligations in Sections 7.07, 8.04 and 8.05 shall survive.
SECTION 8.02. Conditions to Defeasance. The Company may exercise its
------------------------
legal defeasance option or its covenant defeasance option only if:
(1) the Company irrevocably deposits in trust with the Trustee money
or U.S. Government Obligations for the payment of principal, premium (if
any) and interest on the Securities to maturity or redemption, as the case
may be;
(2) the Company delivers to the Trustee a certificate from a
nationally recognized firm of independent accountants expressing their
opinion that the payments of principal and interest when due and without
reinvestment on the deposited U.S. Government Obligations plus any
deposited money without investment will provide cash at such times and in
such amounts as will be sufficient to pay principal and interest when due
on all the Securities to maturity or redemption, as the case may be;
(3) 91 days pass after the deposit is made and during the 91-day
period no Default specified in Section 6.01(7) or (8) with respect to the
Company occurs which is continuing at the end of the period;
54
<PAGE>
(4) the deposit does not constitute a default under any other
agreement binding on the Company;
(5) the Company delivers to the Trustee an Opinion of Counsel to the
effect that the trust resulting from the deposit does not constitute, or is
qualified as, a regulated investment company under the Investment Company
Act of 1940;
(6) in the case of the legal defeasance option, the Company shall
have delivered to the Trustee an Opinion of Counsel stating that (i) the
Company has received from, or there has been published by, the Internal
Revenue Service a ruling, or (ii) since the date of this Indenture there
has been a change in the applicable Federal income tax law, in either case
to the effect that, and based thereon such Opinion of Counsel shall confirm
that, the Securityholders will not recognize income, gain or loss for
Federal income tax purposes as a result of such defeasance and will be
subject to Federal income tax on the same amounts, in the same manner and
at the same times as would have been the case if such defeasance had not
occurred;
(7) in the case of the covenant defeasance option, the Company shall
have delivered to the Trustee an Opinion of Counsel to the effect that the
Securityholders will not recognize income, gain or loss for Federal income
tax purposes as a result of such covenant defeasance and will be subject to
Federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such covenant defeasance had not
occurred; and
(8) the Company delivers to the Trustee an Officers' Certificate and
an Opinion of Counsel, each stating that all conditions precedent to the
defeasance and discharge of the Securities as contemplated by this Article
8 have been complied with.
Before or after a deposit, the Company may make arrangements satisfactory
to the Trustee for the redemption of Securities at a future date in accordance
with Article 3.
SECTION 8.03. Application of Trust Money. The Trustee shall hold in trust
--------------------------
money or U.S. Government Obligations deposited with it pursuant to this Article
8. It shall apply the deposited money and the money from U.S. Government
Obligations through the Paying Agent and in accordance with this Indenture to
the payment of principal of and interest on the Securities.
SECTION 8.04. Repayment to Company. The Trustee and the Paying Agent
--------------------
shall promptly turn over to the Company upon request any excess money or
securities held by them at any time.
Subject to any applicable abandoned property law, the Trustee and the
Paying Agent shall pay to the Company upon written request any money held by
them for the payment of principal or interest that remains unclaimed for two
years, and, thereafter, Securityholders entitled to the money must look to the
Company for payment as general creditors.
55
<PAGE>
SECTION 8.05. Indemnity for Government Obligations. The Company shall pay
------------------------------------
and shall indemnify the Trustee against any tax, fee or other charge imposed on
or assessed against deposited U.S. Government Obligations or the principal and
interest received on such U.S. Government Obligations.
SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is unable to
-------------
apply any money or U.S. Government Obligations in accordance with this Article 8
by reason of any legal proceeding or by reason of any order or judgment of any
court or governmental authority enjoining, restraining or otherwise prohibiting
such application, the Company's and the Subsidiary Guarantors' obligations under
this Indenture, the Subsidiary Guarantee and the Securities shall be revived and
reinstated as though no deposit had occurred pursuant to this Article 8 until
such time as the Trustee or Paying Agent is permitted to apply all such money or
U.S. Government Obligations in accordance with this Article 8; provided,
--------
however, that, if the Company has made any payment of interest on or principal
- -------
of any Securities because of the reinstatement of its obligations, the Company
shall be subrogated to the rights of the Holders of such Securities to receive
such payment from the money or U.S. Government Obligations held by the Trustee
or Paying Agent.
ARTICLE 9
Amendments
----------
SECTION 9.01. Without Consent of Holders. The Company, the Subsidiary
--------------------------
Guarantors and the Trustee may amend this Indenture or the Securities without
notice to or consent of any Securityholder:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to comply with Article 5;
(3) to provide for uncertificated Securities in addition to or
in place of certif icated Securities; provided, however, that the
-------- -------
uncertificated Securities are issued in registered form for purposes of
Section 163(f) of the Code or in a manner such that the uncertificated
Securities are described in Section 163(f)(2)(B) of the Code;
(4) to enter into a supplemental indenture substantially in the
form of Exhibit B hereto, add additional Guarantees with respect to the
Securities or to secure the Securities;
(5) to add to the covenants of the Company for the benefit of
the Holders or to surrender any right or power herein conferred upon the
Company;
(6) to comply with any requirements of the SEC in connection
with qualifying, or maintaining the qualification of, this Indenture under
the TIA; or
(7) to make any change that does not adversely affect the rights
of any Securityholder.
56
<PAGE>
After an amendment under this Section becomes effective, the Company shall
mail to Securityholders a notice briefly describing such amendment. The failure
to give such notice to all Securityholders, or any defect therein, shall not
impair or affect the validity of an amendment under this Section.
SECTION 9.02. With Consent of Holders. The Company, the Subsidiary
-----------------------
Guarantors and the Trustee may amend this Indenture or the Securities without
notice to any Securityholder but with the written consent of the Holders of at
least a majority in principal amount of the Securities then outstanding
(including consents obtained in connection with a tender offer or exchange for
the Securities). However, without the consent of each Securityholder affected,
an amendment may not:
(1) reduce the amount of Securities whose Holders must consent
to an amendment;
(2) reduce the rate of or extend the time for payment of
interest or any liquidated damages on any Security;
(3) reduce the principal of or extend the Stated Maturity of any
Security;
(4) reduce the premium payable upon the redemption of any
Security or change the time at which any Security may be redeemed in
accordance with Article 3;
(5) make any Security payable in money other than that stated in
the Security;
(6) make any change in Section 6.04 or 6.07 or the second
sentence of this Section 9.02; or
(7) modify or affect in any manner adverse to the Holders the
terms and conditions of the obligation of any Subsidiary Guarantor for the
due and punctual payment of the principal of or interest on the Securities.
It shall not be necessary for the consent of the Holders under this Section
to approve the particular form of any proposed amendment, but it shall be
sufficient if such consent approves the substance thereof.
After an amendment under this Section becomes effective, the Company shall
mail to Securityholders a notice briefly describing such amendment. The failure
to give such notice to all Securityholders, or any defect therein, shall not
impair or affect the validity of an amendment under this Section.
SECTION 9.03. Revocation and Effect of Consents and Waivers. A consent to
---------------------------------------------
an amendment or a waiver by a Holder of a Security shall bind the Holder and
every subsequent Holder of that Security or portion of the Security that
evidences the same debt as the consenting Holder's Security, even if notation of
the consent or waiver is not made on the Security. However, any such Holder or
subsequent Holder may revoke the consent or waiver as to such Holder's Security
or portion of the Security if the Trustee receives the notice of revocation
before
57
<PAGE>
the date the amendment or waiver becomes effective. After an amendment or
waiver becomes effective, it shall bind every Securityholder. An amendment or
waiver becomes effective once both (i) the requisite number of consents have
been received by the Company or the Trustee and (ii) such amendment or waiver
has been executed by the Company and the Trustee.
The Company may, but shall not be obligated to, fix a record date for the
purpose of determining the Securityholders entitled to give their consent or
take any other action described above or required or permitted to be taken
pursuant to this Indenture. If a record date is fixed, then notwithstanding the
immediately preceding paragraph, those Persons who were Securityholders at such
record date (or their duly designated proxies), and only those Persons, shall be
entitled to give such consent or to revoke any consent previously given or to
take any such action, whether or not such Persons continue to be Holders after
such record date. No such consent shall be valid or effective for more than 120
days after such record date.
SECTION 9.04. Notation on or Exchange of Securities. If an amendment
-------------------------------------
changes the terms of a Security, the Trustee may require the Holder of the
Security to deliver it to the Trustee. The Trustee may place an appropriate
notation on the Security regarding the changed terms and return it to the
Holder. Alternatively, if the Company or the Trustee so determines, the Company
in exchange for the Security shall issue and the Trustee shall authenticate a
new Security that reflects the changed terms. Failure to make the appropriate
notation or to issue a new Security shall not affect the validity of such
amendment.
SECTION 9.06. Trustee to Sign Amendments. The Trustee shall sign any
--------------------------
amendment authorized pursuant to this Article 9 if the amendment does not
adversely affect the rights, duties, liabilities or immunities of the Trustee.
If it does, the Trustee may but need not sign it. In signing such amendment the
Trustee shall be entitled to receive indemnity reasonably satisfactory to it and
to receive, and (subject to Section 7.01) shall be fully protected in relying
upon, an Officers' Certificate and an Opinion of Counsel stating that (a) such
amendment is authorized or permitted by this Indenture, (b) all conditions
precedent to such amendment have been complied with, (c) in the case of
amendment pursuant to Section 9.01 hereof that such amendment will not adversely
affect the rights of any Holders, and (d) that such amendment is the legal,
valid and binding obligation of the Company and the Subsidiary Guarantors
enforceable against them in accordance with its terms, subject to customary
exceptions, and complies with the provisions hereof.
SECTION 9.06. Payment for Consent. Neither the Company nor any Affiliate
-------------------
of the Company shall, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee or otherwise, to any Holder for
or as an inducement to any consent, waiver or amendment of any of the terms or
provisions of this Indenture or the Securities unless such consideration is
offered to be paid to all Holders that so consent, waive or agree to amend in
the time frame set forth in solicitation documents relating to such consent,
waiver or agreement.
58
<PAGE>
ARTICLE 10
Subsidiary Guarantees
---------------------
[Intentionally omitted unless and until added pursuant to a supplemental
indenture substantially in the form of Exhibit B]
ARTICLE 11
Miscellaneous
-------------
SECTION 11.01. Trust Indenture Act Controls [Intentionally Omitted.]
----------------------------
SECTION 11.02. Notices. Any notice, direction, order, demand or
-------
communication shall be in writing and delivered in person or mailed by first-
class mail or courier addressed as follows:
if to the Company:
ACE US Holdings, Inc.
Six Concourse Parkway
Suite 2500
Atlanta, Georgia 30328
Attn: Chief Financial Officer
if to the Trustee, the address set forth in the definition of
Corporate Trust Office.
The Company or the Trustee by notice to the other may designate additional
or different addresses for subsequent notices or communications.
Any notice or communication mailed to a Securityholder shall be mailed to
the Securityholder at the Securityholder's address as it appears on the
registration books of the Registrar and shall be sufficiently given if so mailed
within the time prescribed.
Failure to mail a notice or communication to a Securityholder or any defect
in it shall not affect its sufficiency with respect to other Securityholders.
If a notice or communication is mailed in the manner provided above, it is duly
given, whether or not the addressee receives it.
SECTION 11.03. Communication by Holders with Other Holders. Whether or
-------------------------------------------
not this Indenture is subject to the TIA, (a) Securityholders may communicate
pursuant to TIA (S) 311(b) with other Securityholders with respect to their
rights under this Indenture or the Securities, and (b) the Company, the Trustee,
the Registrar and anyone else shall have the protection of TIA (S) 311(c).
59
<PAGE>
SECTION 11.04. Certificate and Opinion as to Conditions Precedent. Upon
--------------------------------------------------
any written request or application by the Company to the Trustee to take or
refrain from taking any action under this Indenture, the Company shall furnish
to the Trustee:
(1) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of the signers,
all conditions precedent, if any, provided for in this Indenture relating
to the proposed action have been complied with; and
(2) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of such counsel,
all such conditions precedent have been complied with.
SECTION 11.05. Statements Required in Certificate or Opinion. Each
---------------------------------------------
certificate or opinion with respect to compliance with a covenant or condition
provided for in this Indenture shall include:
(1) a statement that the individual making such certificate or opinion
has read such covenant or condition;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of such individual, he has made
such examination or investigation as is necessary to enable him to express
an informed opinion as to whether or not such covenant or condition has
been complied with; and
(4) a statement as to whether or not, in the opinion of such
individual, such covenant or condition has been complied with.
SECTION 11.06. When Securities Disregarded. In determining whether the
---------------------------
Holders of the required principal amount of Securities have concurred in any
direction, waiver or consent, Securities owned by the Company, any Subsidiary
Guarantor or by any Person directly or indirectly controlling or controlled by
or under direct or indirect common control with the Company or any Subsidiary
Guarantor shall be disregarded and deemed not to be outstanding, except that,
for the purpose of determining whether the Trustee shall be protected in relying
on any such direction, waiver or consent, only Securities which the Trustee
knows are so owned shall be so disregarded. Subject to the foregoing, only
Securities outstanding at the time shall be considered in any such
determination.
SECTION 11.07. Rules by Trustee, Paying Agent, Registrar and Calculation
---------------------------------------------------------
Agent. The Trustee may make reasonable rules for action by or a meeting of
- -----
Securityholders. The Registrar, the Paying Agent and the Calculation Agent may
make reasonable rules for their functions.
SECTION 11.08. Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday
--------------
or a day on which banking institutions are not required to be open in the State
of New York, United States of
60
<PAGE>
America or London, United Kingdom. If a payment date is a Legal Holiday,
payment shall be made on the next succeeding day that is not a Legal Holiday,
and no interest shall accrue for the intervening period. If a regular record
date is a Legal Holiday, the record date shall not be affected.
SECTION 11.09. Governing Law. THIS INDENTURE AND THE SECURITIES SHALL BE
-------------
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
(WITHOUT REGARD TO THE CHOICE OF LAW PROVISIONS THEREOF THAT WOULD REQUIRE THE
APPLICATION OF ANY OTHER LAWS).
SECTION 11.10. NO RECOURSE AGAINST OTHERS. A director, officer, employee
--------------------------
or stockholder, as such, of the Company or any Subsidiary Guarantor shall not
have any liability for any obligations of the Company under the Securities or
this Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Security, each Securityholder
shall waive and release all such liability. The waiver and release shall be
part of the consideration for the issue of the Securities.
SECTION 11.11. Successors. All agreements of the Company and each
----------
Subsidiary Guarantor in this Indenture and the Securities shall bind its
successors. All agreements of the Trustee in this Indenture shall bind its
successors.
SECTION 11.12. Multiple Originals. The parties may sign any number of
------------------
copies of this Indenture. Each signed copy shall be an original, but all of
them together represent the same agreement. One signed copy is enough to prove
this Indenture.
SECTION 11.13. Table of Contents; Headings. The table of contents, cross-
---------------------------
reference sheet and headings of the Articles and Sections of this Indenture have
been inserted for convenience of reference only, are not intended to be
considered a part hereof and shall not modify or restrict any of the terms or
provisions hereof.
61
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Indenture to be duly
executed as of the date first written above.
ACE US HOLDINGS, INC.
by ________________________
Name:
Title:
UNITED STATES TRUST COMPANY OF
NEW YORK, as Trustee
by ________________________
Name:
Title:
<PAGE>
APPENDIX A
PROVISIONS RELATING TO SECURITIES
---------------------------------
1.0 Definitions
1.1 Definitions
For the purposes of this Appendix A the following terms shall have the
meanings indicated below:
"Definitive Security" means a certificated Security (bearing the
Restricted Securities Legend if the transfer of such Security is restricted by
applicable law) that does not include the Global Securities Legend.
"Depositary" means The Depository Trust Company, its nominees and
their respective successors.
"Global Securities Legend" means the legend set forth under that
caption in Exhibit A to this Indenture.
"Initial Purchaser" means Woodbourne LLC.
"Purchase Agreement" means the Purchase Agreement dated October 27,
1998, among the Company and the Initial Purchaser
"QIB" means a "qualified institutional buyer" as defined in Rule 144A.
"Restricted Securities Legend" means the legend set forth in Section
2.3(e)(i) herein.
"Rule 501" means Rule 501(a)(1), (2), (3) or (7) under the Securities
Act.
"Rule 144" means Rule 144 under the Securities Act.
"Rule 144A" means Rule 144A under the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Custodian" means the custodian with respect to a Global
Security (as appointed by the Depositary) or any successor person thereto, who
shall initially be the Trustee.
"Transfer Restricted Securities" means Definitive Securities and any
other Securities that bear or are required to bear the Restricted Securities
Legend.
1.2 Other Definitions
-----------------
Term: Defined in Section:
----- -------------------
1
<PAGE>
"Agent Members".................................... 2.1(b)
"Global Security".................................. 2.1(a)
2.0 The Securities
--------------
2.1 Form and Dating
---------------
The Securities issued on the date hereof will be offered and sold to the
Initial Purchaser by the Company pursuant to the Purchase Agreement.
Notwithstanding anything herein to the contrary, the Initial Purchaser may
resell the Securities from time to time after the Closing Date only to QIBS in
reliance on Rule 144A, unless the Company otherwise agrees.
(a) Definitive Securities. The Securities shall be issued initially
---------------------
in the form of one or more Definitive Securities in fully registered form
without interest coupons.
(b) Global Securities. At the request and option of the Holder of a
-----------------
Definitive Security, the Securities may be exchanged for one or more permanent
global Securities in definitive, fully registered form (collectively, the
"Global Security") without interest coupons and bearing the Global Securities
Legend and Restricted Securities Legend, which shall be deposited on behalf of
the Holders of the Securities represented thereby with the Securities Custodian,
and registered in the name of the Depositary or a nominee of the Depositary,
duly executed by the Company and authenticated by the Trustee as provided in
this Indenture. The aggregate principal amount of the Global Securities may
from time to time be increased or decreased by adjustments made on the records
of the Trustee and the Depositary or its nominee as hereinafter provided.
Except as provided in Section 2.3 or 2.4, owners of beneficial interests in
Global Securities will not be entitled to receive physical delivery of
certificated Securities.
(c) Book-Entry Provisions. This Section 2.1(c) shall apply only to a
---------------------
Global Security deposited with or on behalf of the Depositary.
The Company shall execute and the Trustee shall, in accordance with
this Section 2.1(c) and pursuant to an order of the Company, authenticate and
deliver initially one or more Global Securities that (a) shall be registered in
the name of the Depositary for such Global Security or Global Securities or the
nominee of such Depositary and (b) shall be delivered by the Trustee to such
Depositary or pursuant to such Depositary's instructions or held by the Trustee
as Securities Custodian.
Members of, or participants in, the Depositary ("Agent Members") shall
have no rights under this Indenture with respect to any Global Security held on
their behalf by the Depositary or by the Trustee as Securities Custodian or
under such Global Security, and the Depositary may be treated by the Company,
the Trustee and any agent of the Company or the Trustee as the absolute owner of
such Global Security for all purposes whatsoever. Notwithstanding the
foregoing, nothing herein shall prevent the Company, the Trustee or any agent of
the Company or the Trustee from giving effect to any written certification,
proxy or other authorization furnished by the Depositary or impair, as between
the Depositary and its Agent
2
<PAGE>
Members, the operation of customary practices of such Depositary governing the
exercise of the rights of a holder of a beneficial interest in any Global
Security.
2.2 Authentication. The Trustee shall authenticate and make available for
--------------
delivery, upon a written order of the Company signed by two Officers, Securities
for original issue on the date hereof in an aggregate principal amount of
$250,000,000. Such order shall specify the amount of the Securities to be
authenticated and the date on which the original issue of Securities is to be
authenticated. The aggregate principal amount of Securities outstanding at any
time may not exceed $250,000,000.
2.3 Transfer and Exchange. (a) Transfer and Exchange of Definitive
--------------------- -----------------------------------
Securities. When Definitive Securities are presented to the Registrar with a
- ----------
request:
(x) to register the transfer of such Definitive Securities; or
(y) to exchange such Definitive Securities for an equal principal
amount of Definitive Securities of other authorized denominations,
the Registrar shall register the transfer or make the exchange as requested if
its reasonable requirements for such transaction are met; provided, however,
-------- -------
that the Definitive Securities surrendered for transfer or exchange:
(i) shall be duly endorsed or accompanied by a written instrument of
transfer in form reasonably satisfactory to the Company and the Registrar,
duly executed by the Holder thereof or his attorney duly authorized in
writing; and
(ii) are accompanied by the following additional information and
documents, as applicable:
(A) if such Definitive Securities are being delivered to the
Registrar by a Holder for registration in the name of such Holder,
without transfer, a certification from such Holder to that effect (in
the form set forth on the reverse side of the Security); or
(B) if such Definitive Securities are being transferred to the
Company, a certification to that effect (in the form set forth on the
reverse side of the Security); or
(C) if such Definitive Securities are being transferred pursuant
to an exemption from registration in accordance with Rule 144 under
the Securities Act or in reliance upon another exemption from the
registration requirements of the Securities Act, (i) a certification
to that effect (in the form set forth on the reverse side of the
Security) and (ii) except if such certification states that such
transfer is being made pursuant to Rule 144A, if the Company so
requests, an opinion of counsel or other evidence reasonably
satisfactory to it as to the compliance with the restrictions set
forth in the legend set forth in Section 2.3(e)(i).
3
<PAGE>
(b) Restrictions on Transfer of a Definitive Security for a
-------------------------------------------------------
Beneficial Interest in a Global Security. A Definitive Security may not be
- ----------------------------------------
exchanged for a beneficial interest in a Global Security except upon
satisfaction of the requirements set forth below. Upon receipt by the Trustee of
a Definitive Security, duly endorsed or accompanied by a written instrument of
transfer in form reasonably satisfactory to the Company and the Registrar,
together with:
(i) certification (in the form set forth on the reverse side of
the Security) that such Definitive Security is being exchanged for a
Global Security by or transferred to a QIB in accordance with Rule
144A; and
(ii) written instructions directing the Trustee to make, or to
direct the Securities Custodian to make, an adjustment on its books
and records with respect to such Global Security to reflect an
increase in the aggregate principal amount of the Securities
represented by the Global Security, such instructions to contain
information regarding the Depositary account to be credited with such
increase,
then the Trustee shall cancel such Definitive Security and cause, or direct the
Securities Custodian to cause, in accordance with the standing instructions and
procedures existing between the Depositary and the Securities Custodian, the
aggregate principal amount of Securities represented by the Global Security to
be increased by the aggregate principal amount of the Definitive Security to be
exchanged and shall credit or cause to be credited to the account of the Person
specified in such instructions a beneficial interest in the Global Security
equal to the principal amount of the Definitive Security so canceled. If no
Global Securities are then outstanding and the Global Security has not been
previously exchanged for certificated securities pursuant to Section 2.4, the
Company shall issue and the Trustee shall authenticate, upon written order of
the Company in the form of an Officers' Certificate, a new Global Security in
the appropriate principal amount.
(c) Transfer and Exchange of Global Securities.
------------------------------------------
(i) The transfer and exchange of Global Securities or beneficial
interests therein shall be effected through the Depositary, in
accordance with this Indenture (including applicable restrictions on
transfer set forth herein, if any) and the procedures of the
Depositary therefor. A transferor of a beneficial interest in a
Global Security shall deliver a written order given in accordance with
the Depositary's procedures containing information regarding the
participant account of the Depositary to be credited with a beneficial
interest in such Global Security or another Global Security and such
account shall be credited in accordance with such order with a
beneficial interest in the applicable Global Security and the account
of the Person making the transfer shall be debited by an amount equal
to the beneficial interest in the Global Security being transferred.
(ii) If the proposed transfer is a transfer of a beneficial
interest in one Global Security to a beneficial interest in another
Global Security, the Registrar shall reflect on its books and records
the date and an increase in the principal amount of the Global
Security to which such interest is being transferred in an
4
<PAGE>
amount equal to the principal amount of the interest to be so
transferred, and the Registrar shall reflect on its books and records
the date and a corresponding decrease in the principal amount of
Global Security from which such interest is being transferred.
(iii) Notwithstanding any other provisions of this Appendix
(other than the provisions set forth in Section 2.4), a Global
Security may not be transferred as a whole except by the Depositary to
a nominee of the Depositary or by a nominee of the Depositary to the
Depositary or another nominee of the Depositary or by the Depositary
or any such nominee to a successor Depositary or a nominee of such
successor Depositary.
(iv) In the event that a Global Security is exchanged for
Definitive Securities pursuant to Section 2.4, such Securities may be
exchanged only in accordance with such procedures as are substantially
consistent with the provisions of this Section 2.3 (including the
certification requirements set forth on the reverse of the Securities
intended to ensure that such transfers comply with Rule 144A or such
other applicable exemption from registration under the Securities Act,
as the case may be) and such other procedures as may from time to time
be adopted by the Company.
(e) Legend.
------
(i) Except as permitted by the following paragraphs (ii), (iii)
or (iv), each Security certificate evidencing the Global Securities
and the Definitive Securities (and all Securities issued in exchange
therefor or in substitution thereof) shall bear a legend in
substantially the following form (each defined term in the legend
being defined as such for purposes of the legend only):
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE
SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. NEITHER
THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY
BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED,
ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH
REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR
NOT SUBJECT TO, SUCH REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF
AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY,
PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION
DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL
ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR
ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY
(OR
5
<PAGE>
ANY PREDECESSOR OF SUCH SECURITY), ONLY (A) TO THE COMPANY,
(B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN
DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG
AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE
144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT
REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS
DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR
FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM
NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE
ON RULE 144A, OR (D) PURSUANT TO ANY OTHER AVAILABLE
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S
RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO
CLAUSE (D) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL,
CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH
OF THEM. NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN,
THE INITIAL PURCHASER (AS DEFINED IN THE INDENTURE) MAY
TRANSFER THIS SECURITY ONLY PURSUANT TO CLAUSE (C), UNLESS
THE COMPANY OTHERWISE AGREES. THIS LEGEND WILL BE REMOVED
UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION
TERMINATION DATE.
Each Definitive Security shall bear the following additional legend:
"IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO
THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER
INFORMATION AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO
CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING
RESTRICTIONS."
(ii) Upon any sale or transfer of a Transfer Restricted
Security that is a Definitive Security, the Registrar shall permit the
Holder thereof to exchange such Transfer Restricted Security for a
Definitive Security that does not bear the legends set forth above and
rescind any restriction on the transfer of such Transfer Restricted
Security if the Holder certifies in writing to the Registrar that its
request for such exchange was made in reliance on Rule 144 (such
certification to be in the form set forth on the reverse of the
Security).
(iii) Upon the lapsing of the two-year period under Rule 144(k)
of a Transfer Restricted Security that is a Definitive Security, the
Registrar shall permit the Holder thereof to exchange such Transfer
Restricted Security for a Definitive Security that does not bear the
legends set forth above.
6
<PAGE>
(f) Cancellation or Adjustment of Global Security. At such time as
---------------------------------------------
all beneficial interests in a Global Security have either been exchanged for
Definitive Securities, transferred, redeemed, repurchased or canceled, such
Global Security shall be returned by the Depositary to the Trustee for
cancellation or retained and canceled by the Trustee. At any time prior to such
cancellation, if any beneficial interest in a Global Security is exchanged for
Definitive Securities, transferred in exchange for an interest in another Global
Security, redeemed, repurchased or canceled, the principal amount of Securities
represented by such Global Security shall be reduced and an adjustment shall be
made on the books and records of the Trustee (if it is then the Securities
Custodian for such Global Security) with respect to such Global Security, by the
Trustee or the Securities Custodian, to reflect such reduction.
(g) Obligations with Respect to Transfers and Exchanges of Securities.
-----------------------------------------------------------------
(i) To permit registrations of transfers and exchanges, the
Company shall execute and the Trustee shall authenticate, Definitive
Securities and Global Securities at the Registrar's request.
(ii) No service charge shall be made for any registration of
transfer or exchange, but the Company may require payment of a sum
sufficient to cover any transfer tax, assessments, or similar
governmental charge payable in connection therewith (other than any
such transfer taxes, assessments or similar governmental charge
payable upon exchange or transfer pursuant to Sections 3.06, 4.06,
4.08 and 9.05 of this Indenture).
(iii) Prior to the due presentation for registration of transfer
of any Security, the Company, the Trustee, the Paying Agent or the
Registrar may deem and treat the person in whose name a Security is
registered as the absolute owner of such Security for the purpose of
receiving payment of principal of and interest on such Security and
for all other purposes whatsoever, whether or not such Security is
overdue, and none of the Company, the Trustee, the Paying Agent or the
Registrar shall be affected by notice to the contrary.
(iv) All Securities issued upon any transfer or exchange
pursuant to the terms of this Indenture shall evidence the same debt
and shall be entitled to the same benefits under this Indenture as the
Securities surrendered upon such transfer or exchange.
(h) No Obligation of the Trustee.
----------------------------
(i) The Trustee shall have no responsibility or obligation to any
beneficial owner of a Global Security, a member of, or a participant
in the Depositary or any other Person with respect to the accuracy of
the records of the Depositary or its nominee or of any participant or
member thereof, with respect to any ownership interest in the
Securities or with respect to the delivery to any participant, member,
beneficial owner or other Person (other than the Depositary) of any
notice (including any notice of redemption or repurchase) or the
payment
7
<PAGE>
of any amount, under or with respect to such Securities. All notices
and communications to be given to the Holders and all payments to be
made to Holders under the Securities shall be given or made only to
the registered Holders (which shall be the Depositary or its nominee
in the case of a Global Security). The rights of beneficial owners in
any Global Security shall be exercised only through the Depositary
subject to the applicable rules and procedures of the Depositary. The
Trustee may rely and shall be fully protected in relying upon
information furnished by the Depositary with respect to its members,
participants and any beneficial owners.
(ii) The Trustee shall have no obligation or duty to monitor,
determine or inquire as to compliance with any restrictions on
transfer imposed under this Indenture or under applicable law with
respect to any transfer of any interest in any Security (including any
transfers between or among Depositary participants, members or
beneficial owners in any Global Security) other than to require
delivery of such certificates and other documentation or evidence as
are expressly required by, and to do so if and when expressly required
by, the terms of this Indenture, and to examine the same to determine
substantial compliance as to form with the express requirements
hereof.
2.4 Definitive Securities
---------------------
(a) A Global Security deposited with the Depositary or with the
Trustee as Securities Custodian pursuant to Section 2.1 shall be transferred to
the beneficial owners thereof in the form of Definitive Securities in an
aggregate principal amount equal to the principal amount of such Global
Security, in exchange for such Global Security, only if such transfer complies
with Section 2.3 and (i) the Depositary notifies the Company that it is
unwilling or unable to continue as a Depositary for such Global Security or if
at any time the Depositary ceases to be a "clearing agency" registered under the
Exchange Act, and a successor depositary is not appointed by the Company within
90 days of such notice, or (ii) an Event of Default has occurred and is
continuing or (iii) the Company, in its sole discretion, notifies the Trustee in
writing that it elects to cause the issuance of certificated Securities under
this Indenture.
(b) Any Global Security that is transferable to the beneficial owners
thereof pursuant to this Section 2.4 shall be surrendered by the Depositary to
the Trustee, to be so transferred, in whole or from time to time in part,
without charge, and the Trustee shall authenticate and deliver, upon such
transfer of each portion of such Global Security, an equal aggregate principal
amount of Definitive Securities of authorized denominations. Any portion of a
Global Security transferred pursuant to this Section shall be executed,
authenticated and delivered only in denominations of $1,000 and any integral
multiple thereof and registered in such names as the Depositary shall direct.
Any certificated Initial Security in the form of a Definitive Security delivered
in exchange for an interest in the Global Security shall, except as otherwise
provided by Section 2.3(e), bear the Restricted Securities Legend.
(c) Subject to the provisions of Section 2.4(b), the registered Holder
of a Global Security may grant proxies and otherwise authorize any Person,
including Agent
8
<PAGE>
Members and Persons that may hold interests through Agent Members, to take any
action which a Holder is entitled to take under this Indenture or the
Securities.
(d) In the event of the occurrence of any of the events specified in
Section 2.4(a)(i), (ii) or (iii), the Company will promptly make available to
the Trustee a reasonable supply of Definitive Securities in fully registered
form without interest coupons.
9
<PAGE>
EXHIBIT A
FORM OF FACE OF SECURITY
[Global Securities Legend, if applicable]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO
THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND
ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER
NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS
MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE,
BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE
INDENTURE REFERRED TO ON THE REVERSE HEREOF.
[Restricted Securities Legend, if applicable]
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE OR OTHER
JURISDICTION. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN
MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL
OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE RESTRICTION
TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE
HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY
WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY), ONLY (A)
TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED
EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE
ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE
144A"), TO A PERSON IT REASONABLY
1
<PAGE>
BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT
PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL
BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON
RULE 144A, OR (D) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND
THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE
(D) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER
INFORMATION SATISFACTORY TO EACH OF THEM. NOTWITHSTANDING ANYTHING TO THE
CONTRARY HEREIN, THE INITIAL PURCHASER (AS DEFINED IN THE INDENTURE) MAY
TRANSFER THIS SECURITY ONLY PURSUANT TO CLAUSE (C), UNLESS THE COMPANY OTHERWISE
AGREES. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE
RESALE RESTRICTION TERMINATION DATE.
Each Definitive Security shall bear the following additional legend:
"IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND
TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER AGENT
MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING
RESTRICTIONS."
2
<PAGE>
No. $__________
CREDIT SENSITIVE SENIOR NOTE DUE 2008
CUSIP No. _____
ACE US Holdings, Inc., a Delaware corporation, promises to pay to
___________, or registered assigns, the principal sum of _______________ Dollars
[listed on the Schedule of Increases or Decreases in Global Security attached
hereto]/1/ on October 1, 2008.
Interest Payment Dates: April 1 and October 1.
Record Dates: March 15 and September 15.
Additional provisions of this Security are set forth on the other side of
this Security.
__________________
/1/ Use the Schedule of Increases and Decreases language if Security is in
Global Form.
1
<PAGE>
IN WITNESS WHEREOF, the parties have caused this instrument to be duly
executed.
ACE US HOLDINGS, INC.,
by
_______________________________________
Name:
Title:
by
_______________________________________
Name:
Title:
Dated:
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
UNITED STATES TRUST COMPANY OF
NEW YORK,
as Trustee, certifies
that this is one of
the Securities referred
to in the Indenture.
By:__________________________________
Authorized Signatory
2
<PAGE>
FORM OF REVERSE SIDE OF SECURITY
CREDIT SENSITIVE SENIOR NOTE DUE 2008
1. Interest
--------
ACE US Holdings, Inc., a Delaware corporation (such corporation, and its
successors and assigns under the Indenture hereinafter referred to, being herein
called the "Company"), promises to pay interest on the principal amount of this
Security at the rate per annum equal to the rate set forth below in the
applicable row under the applicable column for each Pricing Period:
<TABLE>
<CAPTION>
============================================================================================================
INDEBTEDNESS/TOTAL CAPITAL S&P RATING HIGHER THAN OR S&P Rating lower than "A-"
RATIO OF THE COMPANY AS OF EQUAL TO "A-" OR
THE END OF THE SECOND OR MOODY'S RATING LOWER THAN
PRECEDING PRICING PERIOD MOODY'S RATING HIGHER THAN "A3",
OR EQUAL TO "A3", EACH AS OF THE LAST DAY OF THE
EACH AS OF THE LAST DAY OF THE IMMEDIATELY PRECEDING PRICING
IMMEDIATELY PRECEDING PERIOD
PRICING PERIOD
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Less than 50% 8.13% 8.63%
- ------------------------------------------------------------------------------------------------------------
Greater than or equal to 50% 8.63% 9.13%
and less than 80%
- ------------------------------------------------------------------------------------------------------------
Greater than or equal to 80% 9.13% 9.63%
============================================================================================================
</TABLE>
For purposes of determining the interest rate applicable under the chart
above, in the event that any ACE USA Insurance Group is rated by both S&P and
Moody's, then the lower of the S&P Rating or the Moody's Rating will apply. In
the event that more than one ACE USA Insurance Group is rated by S&P and/or
Moody's, then the lowest rating received by any such ACE USA Insurance Group
will apply.
"Pricing Period" means any period from and including the first day of a
fiscal quarter to and including the last day of such fiscal quarter.
The applicable row and applicable column for calculating the interest rate
in effect for each Pricing Period will be determined by the Calculation Agent
according to (i) the actual Indebtedness/Total Capital Ratio of the Company as
of the end of the second preceding Pricing Period, as set forth in the Quarterly
Certificate required to be delivered pursuant to Section 4.02(d) of the
Indenture during the immediately preceding Pricing Period, and (ii) the S&P
Rating or Moody's Rating as of the last day of the immediately preceding Pricing
Period, which shall be determined based upon the ratings set forth in such
Quarterly Certificate or, if delivered after such Quarterly Certificate, the
last Rating Certificate delivered during such immediately preceding Pricing
Period. The Calculation Agent may assume that the ratings as of the last day
3
<PAGE>
of any Pricing Period are equal to those set forth in the Quarterly Certificate
or in the most recent Rating Certificate delivered during such period, as the
case may be.
Notwithstanding the foregoing, (i) the interest rate applicable during the
period from the Closing Date until the end of the Pricing Period during which
the Closing Date occurs shall be equal to 8.63% per annum, and (ii) if no
Quarterly Certificate is delivered to the Trustee during any Pricing Period
showing the Indebtedness/Total Capital Ratio of the Company and either the S&P
Rating or Moody's Rating for the ACE USA Insurance Group, the interest rate
applicable during the immediately succeeding Pricing Period shall be equal to
that rate set forth in the box corresponding to the row for Indebtedness/Total
Capital Ratio greater than or equal to 80% and the column corresponding to the
S&P Rating less than "A-" or the Moody's Rating less than "A3".
In the absence of manifest error, all calculations made by the Calculation
Agent shall be conclusive for all purposes and binding on the Company, the
Subsidiary Guarantor and the Securityholders. The Calculation Agent shall cause
the applicable rate of interest determined by it to be notified to the Paying
Agent as soon as practicable after such determination, but in no event later
than the second Business Day of each Calculation Period. Upon request of any
Securityholder, the Calculation Agent shall provide the interest rate in effect
with respect to the Securities from time to time.
The Company shall pay interest semiannually on April 1 and October 1 of
each year, commencing April 1, 1999. Interest on the Securities shall accrue
from the most recent date to which interest has been paid or, if no interest has
been paid, from the Closing Date. Interest shall be computed on the basis of a
360-day year of twelve 30-day months; accordingly, interest for each Pricing
Period shall be computed on the basis of three 30-day months. The Company shall
pay interest on overdue principal at the rate borne by the Securities plus 1%
per annum, and it shall pay interest on overdue installments of interest at the
same rate to the extent lawful.
2. Method of Payment
-----------------
The Company shall pay interest on the Securities (except defaulted
interest) to the Persons who are registered Holders of Securities at the close
of business on the March 15 or September 15 next preceding the interest payment
date even if Securities are canceled after the record date and on or before the
interest payment date. Holders must surrender Securities to a Paying Agent to
collect principal payments. The Company shall pay principal, premium,
liquidated damages and interest in money of the United States of America that at
the time of payment is legal tender for payment of public and private debts.
Payments in respect of the Securities represented by a Global Security
(including principal, premium, liquidated damages and interest) shall be made by
wire transfer of immediately available funds to the accounts specified by The
Depository Trust Company. The Company will make all payments in respect of a
certificated Security (including principal, premium and interest), by mailing a
check to the registered address of each Holder thereof; provided, however, that
-------- -------
payments on the Securities may also be made, in the case of a Holder of at least
$5,000,000 aggregate principal amount of Securities, by wire transfer to a U.S.
dollar account maintained by the payee with a bank in the United States if such
Holder elects payment by wire transfer by giving written notice to the
4
<PAGE>
Trustee or the Paying Agent to such effect designating such account no later
than 30 days immediately preceding the relevant due date for payment (or such
other date as the Trustee may accept in its discretion).
3. Paying Agent and Registrar
--------------------------
Initially, United States Trust Company of New York (the "Trustee"), will
act as Paying Agent and Registrar. The Company may appoint and change any
Paying Agent, Registrar or co-registrar without notice. The Company or any of
its domestically incorporated Wholly Owned Subsidiaries may act as Paying Agent,
Registrar or co-registrar.
4. Indenture
---------
The Company issued the Securities under an Indenture dated as of October
27, 1998 (the "Indenture"), among the Company and the Trustee. The terms of the
Securities include those stated in the Indenture. Terms defined in the
Indenture and not defined herein have the meanings ascribed thereto in the
Indenture. The Securities are subject to all terms and provisions of the
Indenture, and Securityholders are referred to the Indenture for a statement of
such terms and provisions.
The Securities are senior unsecured obligations of the Company limited to
$250,000,000 aggregate principal amount at any one time outstanding (subject to
Sections 2.01 and 2.08 of the Indenture). This Security is one of the
Securities referred to in the Indenture issued in an aggregate principal amount
of $250,000,000. The Indenture imposes certain limitations on the ability of
the Company and its Restricted Subsidiaries to, among other things, make certain
Investments and other Restricted Payments, pay dividends and other
distributions, incur Indebtedness, enter into consensual restrictions upon the
payment of certain dividends and distributions by such Restricted Subsidiaries,
issue or sell shares of capital stock of such Restricted Subsidiaries, enter
into or permit certain transactions with Affiliates, create or incur Liens and
make asset sales. The Indenture also imposes limitations on the ability of the
Company to consolidate or merge with or into any other Person or convey,
transfer or lease all or substantially all of the property of the Company.
Under the circumstances set forth in Section 4.11 of the Indenture, certain
Restricted Subsidiaries of the Company will be required to become Subsidiary
Guarantors and jointly and severally unconditionally guarantee the Guaranteed
Obligations pursuant to the terms of the Indenture.
5. Optional Redemption
-------------------
The Securities shall be redeemable at the option of the Company, at any
time and from time to time, in whole or in part, on not less than 10 nor more
than 60 days prior notice, at the following base redemption prices (expressed as
percentages of principal amount) (the "Base Redemption Price"), plus accrued and
unpaid interest (if any) to the redemption date (subject to the right of holders
of record on the relevant record date to receive interest due on the relevant
interest payment date), plus the Reference Swap Transaction Value allocable to
such Securities
5
<PAGE>
(collectively, the "Redemption Price"), if redeemed during the 12-month period
commencing on October 1 (or, with respect to 1998, the Closing Date) of the
years set forth below:
<TABLE>
<CAPTION>
BASE
YEAR REDEMPTION
PRICE
----------------------------------------------------------------
<S> <C>
1998 107.10%
1999 106.30%
2000 105.70%
2001 105.20%
2002 104.50%
2003 104.00%
2004 103.20%
2005 102.50%
2006 101.70%
2007 100.90%
</TABLE>
6. Sinking Fund
------------
The Securities are not subject to any sinking fund.
7. Notice of Redemption
--------------------
Notice of redemption will be mailed by first-class mail at least 10 days
but not more than 60 days before the redemption date to each Holder of
Securities to be redeemed at his or her registered address. Securities in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000. If money sufficient to pay the redemption price of and
accrued and unpaid interest on all Securities (or portions thereof) to be
redeemed on the redemption date is deposited with the Paying Agent on or before
the redemption date and certain other conditions are satisfied, on and after
such date interest ceases to accrue on such Securities (or such portions
thereof) called for redemption.
8. Repurchase of Securities at the Option of Holders upon Change of Control
------------------------------------------------------------------------
Upon a Change of Control, any Holder of Securities will have the right,
subject to certain conditions specified in the Indenture, to cause the Company
to repurchase all or any part of the Securities of such Holder at a purchase
price equal to 101% of the principal amount of the Securities to be repurchased
plus accrued and unpaid interest, if any, to the date of repurchase (subject to
the right of Holders of record on the relevant record date to receive interest
due on the relevant interest payment date that is on or prior to the date of
purchase) as provided in, and subject to the terms of, the Indenture.
9. Denominations; Transfer; Exchange
---------------------------------
The Securities are in registered form without coupons in denominations of
$1,000 and whole multiples of $1,000. A Holder may transfer or exchange
Securities in accordance with the
6
<PAGE>
Indenture. Upon any transfer or exchange, the Registrar and the Trustee may
require a Holder, among other things, to furnish appropriate endorsements or
transfer documents and to pay any taxes required by law or permitted by the
Indenture. The Registrar need not register the transfer of or exchange any
Securities selected for redemption (except, in the case of a Security to be
redeemed in part, the portion of the Security not to be redeemed) or to transfer
or exchange any Securities for a period of 15 days prior to a selection of
Securities to be redeemed.
10. Persons Deemed Owners
---------------------
The registered Holder of this Security may be treated as the owner of it
for all purposes.
11. Unclaimed Money
---------------
If money for the payment of principal or interest remains unclaimed for two
years, the Trustee or Paying Agent shall pay the money back to the Company at
its written request unless an abandoned property law designates another Person.
After any such payment, Holders entitled to the money must look only to the
Company and not to the Trustee for payment.
12. Discharge and Defeasance
------------------------
Subject to certain conditions, the Company at any time may terminate some
of or all its obligations under the Securities and the Indenture if the Company
deposits with the Trustee money or U.S. Government Obligations for the payment
of principal and interest on the Securities to redemption or maturity, as the
case may be.
13. Amendment, Waiver
-----------------
Subject to certain exceptions set forth in the Indenture, (i) the Indenture
or the Securities may be amended without prior notice to any Securityholder but
with the written consent of the Holders of at least a majority in aggregate
principal amount of the outstanding Securities and (ii) any default or
noncompliance with any provision may be waived with the written consent of the
Holders of at least a majority in principal amount of the outstanding
Securities. Subject to certain exceptions set forth in the Indenture, without
the consent of any Holder of Securities, the Company and the Trustee may amend
the Indenture or the Securities (i) to cure any ambiguity, omission, defect or
inconsistency; (ii) to comply with Article 5 of the Indenture; (iii) to provide
for uncertificated Securities in addition to or in place of certificated
Securities; (iv) to add Subsidiary Guarantees with respect to the Securities;
(v) to secure the Securities; (vi) to add additional covenants or to surrender
rights and powers conferred on the Company; or (vii) to make any change that
does not adversely affect the rights of any Securityholder.
14. Defaults and Remedies
---------------------
If an Event of Default occurs (other than an Event of Default relating to
certain events of bankruptcy, insolvency or reorganization of the Company) and
is continuing, the Trustee or the Holders of at least 25% in principal amount of
the outstanding Securities may declare the principal of and accrued but unpaid
interest on all the Securities to be due and payable. If an Event of Default
relating to certain events of bankruptcy, insolvency or reorganization of the
7
<PAGE>
Company occurs, the principal of and interest on all the Securities shall become
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holders. Under certain circumstances, the Holders of a
majority in principal amount of the outstanding Securities may rescind any such
acceleration with respect to the Securities and its consequences.
If an Event of Default occurs and is continuing, the Trustee shall be under
no obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the Holders unless such Holders have offered to
the Trustee reasonable indemnity or security against any loss, liability or
expense. Except to enforce the right to receive payment of principal, premium
(if any) or interest when due, no Holder may pursue any remedy with respect to
the Indenture or the Securities unless (i) such Holder has previously given the
Trustee notice that an Event of Default is continuing, (ii) Holders of at least
25% in principal amount of the outstanding Securities have requested the Trustee
in writing to pursue the remedy, (iii) such Holders have offered the Trustee
reasonable security or indemnity against any loss, liability or expense, (iv)
the Trustee has not complied with such request within 60 days after the receipt
of the request and the offer of security or indemnity and (v) the Holders of a
majority in principal amount of the outstanding Securities have not given the
Trustee a direction inconsistent with such request within such 60-day period.
Subject to certain restrictions, the Holders of a majority in principal amount
of the outstanding Securities are given the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
Holder or that would involve the Trustee in personal liability. Prior to taking
any action under the Indenture, the Trustee shall be entitled to indemnification
satisfactory to it in its sole discretion against all losses and expenses caused
by taking or not taking such action.
15. Trustee Dealings with the Company
---------------------------------
The Trustee under the Indenture, in its individual or any other capacity,
may become the owner or pledgee of Securities and may otherwise deal with and
collect obligations owed to it by the Company or its Affiliates and may
otherwise deal with the Company or its Affiliates with the same rights it would
have if it were not Trustee.
16. No Recourse Against Others
--------------------------
A director, officer, employee or stockholder, as such, of the Company or
any Subsidiary Guarantor shall not have any liability for any obligations of the
Company under the Securities or the Indenture or for any claim based on, in
respect of or by reason of such obligations or their creation. By accepting a
Security, each Securityholder waives and releases all such liability. The
waiver and release are part of the consideration for the issue of the
Securities.
17. Authentication
--------------
This Security shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Security.
8
<PAGE>
18. Abbreviations
-------------
Customary abbreviations may be used in the name of a Securityholder or an
assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
19. Governing Law THIS SECURITY AND THE INDENTURE SHALL BE GOVERNED BY AND
-------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD
TO THE CHOICE OF LAW PROVISIONS THEREOF THAT WOULD REQUIRE THE APPLICATION OF
ANY OTHER LAWS).
THE COMPANY WILL FURNISH TO ANY HOLDER OF SECURITIES UPON WRITTEN REQUEST
AND WITHOUT CHARGE TO THE HOLDER A COPY OF THE INDENTURE WHICH HAS IN IT THE
TEXT OF THIS SECURITY.
9
<PAGE>
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint __________ agent to transfer this Security on the books
of the Company. The agent may substitute another to act for him.
________________________________________________________________________
Date: _______________ Your Signature: __________________________________
________________________________________________________________________
Sign exactly as your name appears on the other side of this Security.
Signature Guarantee:
10
<PAGE>
CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR REGISTRATION OF
TRANSFER RESTRICTED SECURITIES
This certificate relates to $__________ principal amount of Securities held in
(check applicable space) ____ book-entry or _____ definitive form by the
undersigned.
The undersigned (check one box below):
[_] has requested the Trustee by written order to deliver in exchange for its
beneficial interest in the Global Security held by the Depositary a
Security or Securities in definitive, registered form of authorized
denominations and an aggregate principal amount equal to its beneficial
interest in such Global Security (or the portion thereof indicated above);
[_] has requested the Trustee by written order to exchange or register the
transfer of a Security or Securities.
In connection with any transfer of any of the Securities evidenced by this
certificate occurring prior to the expiration of the period referred to in Rule
144(k) under the Securities Act, the undersigned confirms that such Securities
are being transferred in accordance with its terms:
CHECK ONE BOX BELOW
(1) [_] to the Company; or
(2) [_] pursuant to an effective registration statement under the
Securities Act of 1933; or
(3) [_] inside the United States to a "qualified institutional
buyer" (as defined in Rule 144A under the Securities Act of
1933) that purchases for its own account or for the account
of a qualified institutional buyer to whom notice is given
that such transfer is being made in reliance on Rule 144A,
in each case pursuant to and in compliance with Rule 144A
under the Securities Act of 1933; or
(4) [_] pursuant to another available exemption from registration
provided by Rule 144 under or any other provision of the
Securities Act of 1933.
Unless one of the boxes is checked, the Trustee will refuse to
register any of the Securities evidenced by this certificate in the
name of any Person other than the registered holder thereof; provided,
--------
however, that if box (4) is checked, the Trustee may require, prior to
-------
registering any such transfer of the Securities, such legal opinions,
certifications and other information as the Company has reasonably
requested to confirm that such transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act of 1933.
11
<PAGE>
_____________________________________
Your Signature
Signature Guarantee:
Date:__________________ _____________________________________
Signature must be guaranteed Signature of Signature Guarantee
by a participant in a recognized
signature guaranty medallion
program or other signature
guarantor acceptable to the
Trustee
TO BE COMPLETED BY PURCHASER IF (3) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this Security
for its own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, and is aware that the sale to it is being made in reliance on Rule 144A
and acknowledges that it has received such information regarding the Company as
the undersigned has requested pursuant to Rule 144A or has determined not to
request such information and that it is aware that the transferor is relying
upon the undersigned's foregoing representations in order to claim the exemption
from registration provided by Rule 144A.
Date:_____________ ______________________________
NOTICE: To be executed by
an executive
12
<PAGE>
[TO BE ATTACHED TO GLOBAL SECURITIES]
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL SECURITY
The initial principal amount of this Global Security is $_____. The
following increases or decreases in this Global Security have been made:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Amount of decrease Amount of increase Principal amount of Signature of
in Principal Amount in Principal Amount this Global Security authorized signatory
Date of of this Global of this Global following such of Trustee or
Exchange Security Security decrease or increase Securities Custodian
</TABLE>
13
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
IF YOU WANT TO ELECT TO HAVE THIS SECURITY PURCHASED BY THE COMPANY
PURSUANT TO SECTION 4.06 (ASSET SALE) OR 4.08 (CHANGE OF CONTROL) OF THE
INDENTURE, CHECK THE BOX:
ASSET SALE [_] CHANGE OF CONTROL [_]
IF YOU WANT TO ELECT TO HAVE ONLY PART OF THIS SECURITY PURCHASED BY THE
COMPANY PURSUANT TO SECTION 4.06 OR 4.08 OF THE INDENTURE, STATE THE AMOUNT:
$
DATE: _________________ YOUR SIGNATURE: _________________________
(SIGN EXACTLY AS YOUR NAME APPEARS ON THE OTHER SIDE OF THE SECURITY)
SIGNATURE GUARANTEE: _______________________________________
SIGNATURE MUST BE GUARANTEED BY A PARTICIPANT IN A
RECOGNIZED SIGNATURE GUARANTY MEDALLION PROGRAM OR OTHER
SIGNATURE GUARANTOR ACCEPTABLE TO THE TRUSTEE
14
<PAGE>
EXHIBIT B
FORM OF SUPPLEMENTAL INDENTURE
SUPPLEMENTAL INDENTURE, among [GUARANTOR] (the "New Guarantor"), a
subsidiary of ACE US Holdings, Inc. (or its successor), a Delaware corporation
(the "Company"), [EXISTING GUARANTORS] and UNITED STATES TRUST COMPANY OF NEW
YORK, as trustee under the indenture referred to below (the "Trustee").
WITNESSETH:
WHEREAS the Company [and each of the OLD GUARANTORS (the "Existing
Guarantors")] has heretofore executed and delivered to the Trustee an Indenture
(the "Indenture") dated as of October 27, 1998, providing for the issuance of an
aggregate principal amount of up to $250,000,000 of Credit Sensitive Senior
Notes due 2008 (the "Securities");
WHEREAS Section 4.11 of the Indenture provides that under certain
circumstances the Company is required to cause the New Guarantor to execute and
deliver to the Trustee a supplemental indenture pursuant to which the New
Guarantor shall unconditionally guarantee all the Company's obligations under
the Securities pursuant to a Subsidiary Guarantee on the terms and conditions
set forth herein; and
WHEREAS pursuant to Section 9.01 of the Indenture, the Trustee, the Company
and the Existing Guarantors are authorized to execute and deliver this
Supplemental Indenture;
NOW THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the New
Guarantor, the Company, the Existing Guarantors and the Trustee mutually
covenant and agree for the equal and ratable benefit of the holders of the
Securities as follows:
1. Agreement to Guarantee. [Article 10 of the Indenture, as set forth in
----------------------
Annex 1 hereto, is hereby added to the Indenture.]/2/ The New Guarantor hereby
agrees, jointly and severally with all the Existing Guarantors, to
unconditionally guarantee the Company's obligations under the Securities and to
be bound by all other applicable provisions of the Indenture and the Securities.
2. Ratification of Indenture; Supplemental Indentures Part of Indenture.
--------------------------------------------------------------------
Except as expressly amended hereby, the Indenture is in all respects ratified
and confirmed and all the terms, conditions and provisions thereof shall remain
in full force and effect. This Supplemental Indenture shall form a part of the
Indenture for all purposes, and every holder of Securities heretofore or
hereafter authenticated and delivered shall be bound hereby.
_______________
/2/ Include only in first supplemental indenture executed pursuant to Section
4.11.
1
<PAGE>
3. Governing Law. THIS SUPPLEMENTAL INDENTURE AND THE SECURITIES SHALL BE
-------------
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK
(WITHOUT REGARD TO THE CHOICE OF LAW PROVISIONS THEREOF THAT WOULD REQUIRE THE
APPLICATION OF ANY OTHER LAWS).
4. Trustee Makes No Representation. The Trustee makes no representation
-------------------------------
as to the validity or sufficiency of this Supplemental Indenture.
5. Counterparts. The parties may sign any number of copies of this
------------
Supplemental Indenture. Each signed copy shall be an original, but all of them
together represent the same agreement.
6. Effect of Headings. The Section Headings herein are for convenience
------------------
only and shall not effect the construction thereof.
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed as of the date first above written.
[NEW GUARANTOR],
by
________________________
Name:
Title:
ACE US HOLDINGS, INC.
by
________________________
Name:
Title:
[EXISTING GUARANTORS],
by
________________________
Name:
Title
UNITED STATES TRUST COMPANY OF
NEW YORK, as Trustee,
2
<PAGE>
by:_____________________
Name:
Title:
3
<PAGE>
ANNEX 1
SECTION 10.01. Subsidiary Guarantees. Each Subsidiary Guarantor hereby
---------------------
jointly and severally unconditionally and irrevocably guarantees, as a primary
obligor and not merely as a surety, to each Holder and to the Trustee and its
successors and assigns (a) the full and punctual payment of principal of and
interest on the Securities when due, whether at Stated Maturity, by
acceleration, by redemption, upon repurchase or otherwise, and all other
monetary obligations of the Company under this Indenture (including obligations
to the Trustee) and the Securities and (b) the full and punctual performance
within applicable grace periods of all other obligations of the Company whether
for expenses, indemnification or otherwise under this Indenture and the
Securities (all the foregoing being hereinafter collectively called the
"Guaranteed Obligations"). Each Subsidiary Guarantor further agrees that the
Guaranteed Obligations may be extended or renewed, in whole or in part, without
notice or further assent from each such Subsidiary Guarantor, and that each such
Subsidiary Guarantor shall remain bound under this Article 10 notwithstanding
any extension or renewal of any Guaranteed Obligation.
Each Subsidiary Guarantor waives presentation to, demand of, payment from
and protest to the Company of any of the Guaranteed Obligations and also waives
notice of protest for nonpayment. Each Subsidiary Guarantor waives notice of
any default under the Securities or the Guaranteed Obligations. The obligations
of each Subsidiary Guarantor hereunder shall not be affected by (a) the failure
of any Holder or the Trustee to assert any claim or demand or to enforce any
right or remedy against the Company or any other Person under this Indenture,
the Securities or any other agreement or otherwise; (b) any extension or renewal
of any thereof, (c) any rescission, waiver, amendment or modification of any of
the terms or provisions of this Indenture, the Securities or any other
agreement; (d) the release of any security held by any Holder or the Trustee for
the Guaranteed Obligations or any of them; (e) the failure of any Holder or
Trustee to exercise any right or remedy against any other guarantor of the
Guaranteed Obligations; or (f) any change in the ownership of such Subsidiary
Guarantor, except as provided in Section 10.02(b).
Each Subsidiary Guarantor hereby waives any right to which it may be
entitled to have its obligations hereunder divided among the Subsidiary
Guarantors, such that such Subsidiary Guarantor's obligations would be less than
the full amount claimed. Each Subsidiary Guarantor hereby waives any right to
which it may be entitled to have the assets of the Company first be used and
depleted as payment of the Company's or such Subsidiary Guarantor's obligations
hereunder prior to any amounts being claimed from or paid by such Subsidiary
Guarantor hereunder. Each Subsidiary Guarantor hereby waives any right to which
it may be entitled to require that the Company be sued prior to an action being
initiated against such Subsidiary Guarantor.
Each Subsidiary Guarantor further agrees that its Subsidiary Guarantee
herein constitutes a guarantee of payment, performance and compliance when due
(and not a guarantee of collection) and waives any right to require that any
resort be had by any Holder or the Trustee to any security held for payment of
the Guaranteed Obligations.
1
<PAGE>
Except as expressly set forth in Sections 8.01(b), 10.02 and 10.06, the
obligations of each Subsidiary Guarantor hereunder shall not be subject to any
reduction, limitation, impairment or termination for any reason, including any
claim of waiver, release, surrender, alteration or compromise, and shall not be
subject to any defense of setoff, counterclaim, recoupment or termination
whatsoever or by reason of the invalidity, illegality or unenforceability of the
Guaranteed Obligations or otherwise. Without limiting the generality of the
foregoing, the obligations of each Subsidiary Guarantor herein shall not be
discharged or impaired or otherwise affected by the failure of any Holder or the
Trustee to assert any claim or demand or to enforce any remedy under this
Indenture, the Securities or any other agreement, by any waiver or modification
of any thereof, by any default, failure or delay, willful or otherwise, in the
performance of the obligations, or by any other act or thing or omission or
delay to do any other act or thing which may or might in any manner or to any
extent vary the risk of any Subsidiary Guarantor or would otherwise operate as a
discharge of any Subsidiary Guarantor as a matter of law or equity.
Each Subsidiary Guarantor agrees that its Subsidiary Guarantee shall remain
in full force and effect until payment in full of all the Guaranteed
Obligations. Each Subsidiary Guarantor further agrees that its Subsidiary
Guarantee herein shall continue to be effective or be reinstated, as the case
may be, if at any time payment, or any part thereof, of principal of or interest
on any Guaranteed Obligation is rescinded or must otherwise be restored by any
Holder or the Trustee upon the bankruptcy or reorganization of the Company or
otherwise.
In furtherance of the foregoing and not in limitation of any other right
which any Holder or the Trustee has at law or in equity against any Subsidiary
Guarantor by virtue hereof, upon the failure of the Company to pay the principal
of or interest on any Guaranteed Obligation when and as the same shall become
due, whether at maturity, by acceleration, by redemption or otherwise, or to
perform or comply with any other Guaranteed Obligation, each Subsidiary
Guarantor hereby promises to and shall, upon receipt of written demand by the
Trustee, forthwith pay, or cause to be paid, in cash, to the Holders or the
Trustee an amount equal to the sum of (i) the unpaid principal amount of such
Guaranteed Obligations, (ii) accrued and unpaid interest on such Guaranteed
Obligations (but only to the extent not prohibited by law) and (iii) all other
monetary obligations of the Company to the Holders and the Trustee.
Each Subsidiary Guarantor agrees that, as between it, on the one hand, and
the Holders and the Trustee, on the other hand, (x) the maturity of the
Guaranteed Obligations guaranteed hereby may be accelerated as provided in
Article 6 for the purposes of any Subsidiary Guarantee herein, notwithstanding
any stay, injunction or other prohibition preventing such acceleration in
respect of the Guaranteed Obligations guaranteed hereby, and (y) in the event of
any declaration of acceleration of such Guaranteed Obligations as provided in
Article 6, such Guaranteed Obligations (whether or not due and payable) shall
forthwith become due and payable by such Subsidiary Guarantor for the purposes
of this Section 10.01.
Each Subsidiary Guarantor also agrees to pay any and all costs and expenses
(including reasonable attorneys' fees and expenses) incurred by the Trustee or
any Holder in enforcing any rights under this Section 10.01.
2
<PAGE>
Upon request of the Trustee, each Subsidiary Guarantor shall execute and
deliver such further instruments and do such further acts as may be reasonably
necessary or proper to carry out more effectively the purpose of this Indenture.
SECTION 10.02. Limitation on Liability. (a) Any term or provision of this
-----------------------
Indenture to the contrary notwithstanding, the maximum aggregate amount of the
Guaranteed Obligations guaranteed hereunder by any Subsidiary Guarantor shall
not exceed the maximum amount that can be hereby guaranteed without rendering
this Indenture, as it relates to such Subsidiary Guarantor, voidable under
applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally.
(b) This Subsidiary Guarantee as to any Subsidiary Guarantor shall
terminate and be of no further force or effect and such Subsidiary Guarantor
shall be deemed to be released from all obligations under this Article 10 upon
(i) the merger or consolidation of such Subsidiary Guarantor with or into any
Person other than the Company or a Subsidiary or Affiliate of the Company where
such Subsidiary Guarantor is not the surviving entity of such consolidation or
merger or (ii) the sale by the Company or any Subsidiary of the Company (or any
pledgee of the Company) of the Capital Stock of such Subsidiary Guarantor,
where, after such sale, such Subsidiary Guarantor is no longer a Subsidiary of
the Company; provided, however, that each such merger, consolidation or sale
-------- -------
(or, in the case of a sale by such a pledgee, the disposition of the proceeds of
such sale) shall comply with Section 4.06 and Section 5.01(b). At the request
of the Company, the Trustee shall execute and deliver an appropriate instrument
evidencing such release.
SECTION 10.03. Successors and Assigns. This Article 10 shall be binding
----------------------
upon each Subsidiary Guarantor and its successors and assigns and shall inure to
the benefit of the successors and assigns of the Trustee and the Holders and, in
the event of any transfer or assignment of rights by any Holder or the Trustee,
the rights and privileges conferred upon that party in this Indenture and in the
Securities shall automatically extend to and be vested in such transferee or
assignee, all subject to the terms and conditions of this Indenture.
SECTION 10.04. No Waiver. Neither a failure nor a delay on the part of
---------
either the Trustee or the Holders in exercising any right, power or privilege
under this Article 10 shall operate as a waiver thereof, nor shall a single or
partial exercise thereof preclude any other or further exercise of any right,
power or privilege. The rights, remedies and benefits of the Trustee and the
Holders herein expressly specified are cumulative and not exclusive of any other
rights, remedies or benefits which either may have under this Article 10 at law,
in equity, by statute or otherwise.
SECTION 10.05. Modification. No modification, amendment or waiver of any
------------
provision of this Article 10, nor the consent to any departure by any Subsidiary
Guarantor therefrom, shall in any event be effective unless the same shall be in
writing and signed by the Trustee, and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which given. No
notice to or demand on any Subsidiary Guarantor in any case shall entitle such
Subsidiary Guarantor to any other or further notice or demand in the same,
similar or other circumstances.
3
<PAGE>
SECTION 10.06. Execution of Supplemental Indenture for Future Subsidiary
---------------------------------------------------------
Guarantors. Each Subsidiary which is required to become a Subsidiary Guarantor
- ----------
pursuant to Section 4.11 shall promptly execute and deliver to the Trustee a
supplemental indenture in the form of Exhibit B hereto pursuant to which such
Subsidiary shall become a Subsidiary Guarantor under this Article 10 and shall
guarantee the Guaranteed Obligations.
4
<PAGE>
EXHIBIT D
ACE US HOLDINGS, INC.
FORM OF
QUARTERLY CERTIFICATE
TO THE TRUSTEE AND CALCULATION AGENT
We, ____________ and _____________, the ___________________ and
____________________, respectively, of ACE US Holdings, Inc., a Delaware
corporation (the "Company"), do hereby certify on behalf of the Company pursuant
to Section 4.02(d) of the Indenture (the "Indenture") for the Company's Credit
Sensitive Senior Notes due 2008 (the "Securities") between the Company and
United States Trust Company of New York, as Trustee (the "Trustee"), that the
following information is true and correct as of the date hereof :
(i) The Company's Indebtedness/Total Capital Ratio as of the last day of
the fiscal quarter most recently ended, measured in accordance with GAAP on a
Consolidated basis was ___%, calculated as follows:
(1) Balance Sheet Indebtedness as of ___________: $________
(2) Funded Indebtedness as of ________________: $_________
(3) Consolidated Net Worth as of ______________: $________
Indebtedness/Total Capital Ratio ((1)/((2)+(3))): __________
(ii) The current S&P Ratings and Moody's Ratings for each ACE USA
Insurance Group as of the date of this Certificate are: [set forth ratings for
each such group].
(iii) Based upon the calculation and rating set forth respectively in (i)
and (ii) above, the applicable interest rate in effect for the Pricing Period
beginning ________ and ending ____________ will be ______.
Capitalized terms used but not defined herein shall have their respective
meanings as set forth in the Indenture and the Securities.
[Signature on following page]
1
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed and delivered this
certificate on behalf of Company.
Dated: __, ____ACE US HOLDINGS, INC.
By:_____________________________
Name:
Title:
By:_____________________________
Name:
Title:
2
<PAGE>
EXHIBIT E
ACE US HOLDINGS, INC.
FORM OF
RATINGS CERTIFICATE
TO THE TRUSTEE TO THE TRUSTEE AND CALCULATION AGENT
We, ____________ and _____________, the ___________________ and
____________________, respectively, of ACE US Holdings, Inc., a Delaware
corporation (the "Company"), do hereby certify on behalf of the Company pursuant
to Section 4.02(e) of the Indenture (the "Indenture") for the Company's Credit
Sensitive Senior Notes due 2008 (the "Securities") between the Company and
United States Trust Company of New York, as Trustee (the "Trustee"), that the
following information is true and correct as of the date hereof :
(i) The current S&P Ratings and Moody's Ratings for each ACE USA Insurance
Group as of the date of this Certificate are: [set forth ratings for each such
group].
(ii) Taking into account the rating set forth in (i) above and the
Indebtedness/Total Capital Ratio set forth in the Quarterly Certificate most
recently delivered pursuant to Section 4.02(d) of the Indenture, the applicable
interest rate in effect for the Pricing Period beginning ________ and ending
____________ is ______.
Capitalized terms used but not defined herein shall have their respective
meanings as set forth in the Indenture and the Securities.
[Signature on following page]
1
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed and delivered this
certificate on behalf of Company.
Dated: __, ____ ACE US HOLDINGS, INC.
By:_____________________________
Name:
Title:
By:_____________________________
Name:
Title:
2
<PAGE>
Selected Financial Data
The following table sets forth selected consolidated financial data of the
Company as of and for each of the years in the five year period ended September
30, 1998. These selected financial and other data should be read in conjunction
with the consolidated financial statements and related notes and with
"Management's Discussion and Analysis of Results and Operations and Financial
Condition" presented on pages 39 to 74 and 18 to 38 respectively, of this annual
report. On July 9, 1998, the Company completed the acquisition of Tarquin
Limited which was accounted for on a pooling-of-interests basis. All prior
financial information presented has been restated to include the results of
operations and financial position of the combined entities. On March 2, 1998,
the Company effected a three-for-one split of the Company's Ordinary Shares. All
share and per share data has been adjusted, where necessary, to reflect the
stock split.
<TABLE>
<CAPTION>
For the years ended September 30
1998 1997 1996 1995 1994
(in thousands except share and per share data and selected other data)
<S> <C> <C> <C> <C> <C>
Operations data:
Net premiums written $ 880,973 $ 780,773 $ 781,884 $ 644,880 $ 385,926
================================ ================================================================================
Net premiums earned 894,303 805,372 755,840 473,133 391,117
Net investment income 324,254 252,440 213,701 184,041 142,677
Net realized gain on investments 188,385 127,702 56,229 50,765 3,717
Losses and loss expenses/1/ 616,892 486,140 620,277 366,322 620,556
Acquisition costs
and administration expenses 271,566 153,486 138,343 81,976 63,459
Amortization of goodwill 12,834 7,325 1,507 (437) (826)
Interest expense 25,459 11,667 10,481 6,036 --
Income taxes 20,040 25,181 26,543 7,673 --
- -------------------------------- --------------------------------------------------------------------------------
Net income (loss)/1/ $ 660,151 $ 602,728 $ 327,619 $ 247,360 $ (45,678)
================================ ================================================================================
Earnings (loss) per share/1/ $ 2.96 $ 2.69 $ 2.00 $ 1.59 $ (0.32)
================================ ================================================================================
Weighted average shares
outstanding-diluted 69,281,176 186,809,023 163,768,894 155,505,028 144,607,635
Cash dividends per share $0.34 $0.27 $0.21 $0.17 $0.14
Balance sheet data
(at end of period):
Total investments and cash $ 6,201,074 $ 4,787,916 $ 4,342,791 $ 3,225,786 $ 2,538,321
Total assets 8,788,753 5,647,596 5,077,780 3,514,946 2,632,361
Net unpaid losses
and loss expenses/1/ 2,678,341 2,006,873 1,892,302 1,452,299 1,160,392
Total shareholders' equity/1/ 3,714,270 2,785,155 2,367,063 1,524,123 1,088,745
Book value per share/1/ $ 19.19 $ 15.46 $ 12.53 $ 9.98 $ 7.65
Fully diluted book value
per share/1/ $ 19.14 $ 15.40 $ 12.46 $ 9.96 $ 7.65
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Selected other data: 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Loss and loss expense ratio/1/ 57.8% 60.4% 58.8% 77.4% 133.1%
Underwriting and
administrative expense ratio 30.4% 19.0% 18.3% 17.2% 16.0%
Combined ratio/1/ 88.2% 79.4% 87.1% 94.6% 149.1%
Loss reserves to capital
and surplus ratio/2/ 72.1% 72.1% 79.9% 95.3% 106.6%
Ratio of net premiums written
to capital and surplus 0.24:1 0.28:1 0.33:1 0.36:1 0.35:1
</TABLE>
/1/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 (see "Management's Discussion and Analysis--Breast
Implant Litigaton").
/2/The earnings per share amounts prior to 1998 have been restated as required
to comply with Statement of Financial Accounting Standards No. 128, Earnings
Per Share. For further discussion of earnings per share and the impact of
Statement No. 128, see the notes to the consolidated financial statements
beginning on page 48.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
---------------------------------------------
The following is a discussion of the Company's financial condition, results of
operations, liquidity and capital resources. This discussion should be read in
conjunction with the consolidated financial statements, and related notes
thereto, presented on pages 39 to 74 of this annual report.
On March 2, 1998, the Company effected a three-for-one split of the Company's
Ordinary Shares. All share and per share data has been adjusted, where
necessary, to reflect the stock split.
General
ACE Limited ("ACE") is a holding company which, through its Bermuda-based
operating subsidiaries, A.C.E. Insurance Company, Ltd. ("ACE Bermuda"),
Corporate Officers & Directors Assurance Ltd. ("CODA"), Tempest Reinsurance
Company Limited ("Tempest Re") and CAT Limited ("CAT") and its Dublin, Ireland
based subsidiaries, ACE Bermuda Company Europe Limited and ACE Reinsurance
Company Europe Limited provides a broad range of insurance and reinsurance
products to 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 insurance products to a broad range of clients in
the United States. In addition, since 1996 the Company has provided funds at
Lloyd's, primarily in the form of letters of credit, to support underwriting
capacity for Lloyd's syndicates managed by Lloyd's managing agencies which are
indirect wholly owned subsidiaries of ACE. Underwriting capacity is the maximum
amount of gross premiums that a syndicate at Lloyd's can underwrite in a given
year of account. Unless the context otherwise indicates, the term "Company"
refers to one or more of ACE and its consolidated subsidiaries. The operations
of the Company in the Lloyd's market are collectively referred to herein as "ACE
Global Markets".
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 commercial
property, umbrella liability, specialty program business, warranty, errors and
omissions, directors and officers liability coverages as well as a captive
management reinsurance facility.
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 insurance company, writes both traditional and
custom-designed programs covering financial guaranty, mortgage guaranty and a
broad range of financial risks. Operations are 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
Re, and going forward the combined property catastrophe reinsurance operations
will operate under the Tempest Re name.
On July 9, 1998, the Company completed the acquisition of Tarquin Limited
("Tarquin"), 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.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
---------------------------------------------------------
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. Any 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, (ix) the competitive environment in which the
Company operates, (x) the impact of mergers and acquisitions, (xi) the impact
of Year 2000 related issues, (xii) developments in global financial markets
which could affect the Company's investment portfolio, and (xiii) risks
associated with the introduction of new products and services. 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 - Years ended September 30, 1998, 1997 and 1996
As previously noted, the Company completed the acquisition of Tarquin on July 9,
1998. This acquisition has been accounted for as a pooling-of-interests and
thus, information for all years presented has been restated to reflect the
results of the combined companies. Included in the results of fiscal 1998, 1997
and 1996 are certain non-recurring and transaction related expenses (hereinafter
referred to as the "non-recurring expenses") amounting to $46.6 million, $6.1
million and $5.0 million, respectively. These expenses include interest expense
and payments to employees as well as transaction costs including legal,
accounting and investment banking fees.
Net Income
<TABLE>
<CAPTION>
1998 1997 1996
(IN MILLIONS)
<S> <C> <C> <C>
Income excluding net realized gains on investments and non-recurring
expenses.................................................................... $418.4 $381.1 $277.4
Non-recurring expenses (net of income taxes)................................ (46.6) (6.1) (5.0)
Net realized gains on investments........................................... 188.4 127.7 55.2
------ ------ ------
Net income.................................................................. $560.2 $502.7 $327.6
====== ====== ======
</TABLE>
For the year ended September 30, 1998, income excluding net realized gains on
investments and non-recurring expenses increased by $37.3 million or 9.8
percent, compared with fiscal 1997. 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.
2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
---------------------------------------------------------
During 1997, the Company experienced strong growth in income from insurance
operations and net investment income. The increase was partially offset by an
increase in general and administrative expenses. In fiscal 1997, Tempest Re
contributed $119.8 million to income excluding net realized gains on investments
and non-recurring expenses compared to $23.8 million for 1996. A full year of
operations for Tempest Re is included in the results for fiscal 1997 versus one
quarter of operations in 1996 as Tempest Re was purchased on July 1, 1996.
Premiums
<TABLE>
<CAPTION>
Percentage Percentage
1998 Change 1997 Change 1996
-------- ------ ------ ------- -------
<S> <C> <C> <C> <C> <C>
(In millions)
Gross premiums written:
ACE Bermuda (including CODA) $ 521.6 (0.3)% $523.2 (10.0)% $581.6
ACE Global Markets 436.3 37.9 316.5 29.9 243.6
Tempest Re (including CAT) 124.1 3.8 119.6 243.7 34.8
ACE USA 160.2 - - - -
-------- ------ ------
$1,242.2 29.5% $959.3 12.0% $860.0
======== ====== ======
Net premiums written:
ACE Bermuda (including CODA) $ 396.9 (11.3)% $447.6 (17.6)% $543.2
ACE Global Markets 312.0 37.6 226.8 11.2 203.9
Tempest Re (including CAT) 93.6 (18.8) 115.3 231.3 34.8
ACE USA 78.5 - - - -
-------- ------ ------
$ 881.0 11.6% $789.7 1.0% $781.9
======== ====== ======
Net premiums earned:
ACE Bermuda (including CODA) $ 393.5 (17.0)% $474.3 (11.9)% $538.1
ACE Global Markets 278.3 34.4 207.1 13.8 182.0
Tempest Re (including CAT) 151.7 22.4 123.9 247.1 35.7
ACE USA 70.8 - - - -
-------- ------ ------
$ 894.3 11.1% $805.3 6.6% $755.8
======== ====== ======
</TABLE>
During 1998 and 1997, most insurance markets faced significant competitive
pressures as a result of relatively low loss activity and excess capital in
these markets. This has resulted in continuing price pressure in most insurance
and reinsurance lines. However, the Company's ability to make strategic
acquisitions, increase its participation on the syndicates in Lloyd's managed by
the Company, develop new and expand existing product lines and maintain a high
level of policy renewals on existing business, while maintaining its focus on
underwriting and pricing discipline, has resulted in increases in gross and net
premiums written and net premiums earned for the years ended September 30, 1998
and 1997.
During 1998, gross premiums written increased to $1,242.2 million compared with
$959.3 million in 1997, an increase of $282.9 million. The growth in gross
premiums written is mainly a result of the inclusion of nine months of premiums
from ACE USA and six months of premiums from CAT, following their acquisitions
on January 2, 1998 and April 1, 1998, respectively. The growth is also due to
the increased participation in the Lloyd's syndicates managed by the Company.
As previously noted, the Company continues to face competitive pressures in most
of the markets in which it operates. Gross premiums written by ACE Bermuda
decreased by $1.6 million compared with 1997. Within ACE Bermuda, increased
premium volume resulted from new business in financial lines, increased activity
in the satellite line and contributions from the joint ventures in which ACE
Bermuda participates. These increases were 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 from pricing
changes. Increases in attachment points and decreases in limits provided have
resulted in decreased premiums but have led to a reduction in the Company's
exposure and an improved risk profile. The decline in the directors and officers
gross premiums is primarily a result of the continuing competitive pressures in
this market.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
---------------------------------------------------------
Market conditions remain very competitive in the property catastrophe
reinsurance business as rates continue to decline in the absence of major loss
activity over the last several years. Tempest Re and CAT experienced continuing
price pressures during the year (although CAT was not acquired until April 1,
1998), including their January 1998 renewals which is their largest renewal
period. Tempest Re did not renew several of its accounts due to inadequate
pricing. While the combined Tempest Re and CAT operations recorded gross
premiums written of $124.1 million compared to $119.6 million for Tempest Re
alone in 1997, each company on an individual basis showed declines in gross
written premiums compared to the 1997 year.
ACE Global Markets continues to experience competitive conditions in the Lloyd's
market where rates continue to soften in most lines of business. This has
affected the writing of new business. In addition, the Company managed
syndicates have declined certain renewal business where prices or policy terms
were not considered adequate. However, as already noted, the Company's gross
premiums written have increased this year as a result of the Company's increased
participation in these syndicates.
ACE USA has also been impacted by significant competitive market forces during
the year. During this period, ACE USA has focused on maintaining its
underwriting and pricing discipline as well as developing its new product
divisions which were introduced during the year.
The Company expects that the current competitive market conditions will continue
and does not believe that recent loss activity in certain markets in which the
Company operates will significantly affect insurance and reinsurance prices in
the near term.
Gross premiums written increased by $99.3 million to $959.3 million in 1997 from
$860.0 million in 1996. The growth in gross premiums written is primarily
attributable to the inclusion of a full year of premiums for Tempest Re and the
increased participation in the Lloyd's syndicates managed by the Company. As
Tempest Re was purchased on July 1, 1996, the 1996 comparative only includes
three months of Tempest Re premiums. Tempest Re's gross premiums written for
1997 are down by approximately 17 percent compared to their full year 1996
premiums primarily due to rate reductions, increasing attachment points and some
cancellations due to pricing. The Company's portion of gross premiums written by
the Lloyd's syndicates in which the Company participates increased as a result
of the Company's increased participation in these syndicates. Satellite,
aviation, excess property and financial lines also contributed to the increase.
These increases in gross premiums written were offset by declines in excess
liability and directors and officers liability gross premiums written. The
decline in excess liability premiums is mainly the result of continuing
competitive pressures in that market which have adversely affected the pricing
of the excess liability business. This market pressure has caused ACE Bermuda,
in certain instances, to increase its average attachment points, lower its
average policy limits or decline business, which has had the effect of reducing
the Company's exposure and improving its risk profile. Directors and officers
liability premiums declined as a result of continuing competitive conditions.
Net premiums written increased by $91.3 million to $881.0 million in 1998
compared with $789.7 million in 1997. This increase, as with the increase in
gross premiums written, is the result of increases in the Company's
participation in the Lloyd's syndicates managed by ACE Global Markets as well as
the contributions of ACE USA and CAT during the year. Net premiums written in
ACE Bermuda decreased from $447.6 million in 1997 to $396.9 million in 1998.
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 premiums written, offset somewhat by growth in net premiums
written from the satellite and financial lines divisions and in the joint
ventures business written by ACE Bermuda.
Net premiums written were also affected by an increase in the use of reinsurance
during 1998, predominantly in ACE Bermuda. In particular, during the second
quarter, the excess liability division of ACE Bermuda 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, during 1998, the satellite division of ACE Bermuda and Tempest Re each
purchased additional reinsurance to cover catastrophic events.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
---------------------------------------------------------
Net premiums written increased in 1997 to $789.7 million compared to $781.9
million for 1996. The inclusion of a full year of net premiums written for
Tempest Re, the increased participation in the Lloyd's syndicates managed by the
Company and growth in excess property premiums contributed to the increase in
net premiums written. These increases were partially offset by declines in
excess liability and directors and officers liability premiums as discussed
above.
A portion of the decline in net premiums written is also the result of the
Company's use of reinsurance for the satellite and financial lines product lines
in 1997. Net premiums written for Tempest Re were also reduced as a result of
the purchase of a modest amount of retrocessional cover during 1997.
For the year ended September 30, 1998, net premiums earned increased by $89.0
million to $894.3 million compared with $805.3 million last year, an increase of
11.1 percent. This increase was a result of the contributions from ACE USA and
CAT during the year following their acquisitions as well as an increase in net
premiums earned resulting from the Company's participation in the Lloyd's
syndicates under management. This increase was partially offset by declines in
net premiums earned in ACE Bermuda as a result of declines in net premiums
written.
For 1997, net premiums earned increased by $49.5 million to $805.3 million from
$755.8 million in 1996. The growth in net premiums earned was primarily the
result of the inclusion of a full year of premiums earned for Tempest Re in 1997
compared to three months in 1996 and the Company's increased participation in
the Lloyd's syndicates managed by the Company. At ACE Bermuda, aviation, excess
property and financial lines also experienced growth during the year. These
increases were offset by declines in excess liability, directors and officers
liability and satellite premiums earned.
Net Investment Income
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Percentage Percentage
1998 Change 1997 Change 1996
(in millions)
<S> <C> <C> <C> <C> <C>
Net investment income............. $324.3 27.9% $253.4 18.6% $213.7
===================================================================
- -------------------------------------------------------------------------------------------------------
</TABLE>
Net investment income increased by $70.9 million or 27.9 percent in 1998
compared with 1997. This increase is primarily due to an increase in the
investable asset base resulting from the inclusion of the ACE USA and CAT
portfolios in the current year as well as positive cash flows from operations
and the reinvestment of funds generated by the portfolio. Consistent with the
overall decline in U.S. interest rates during the year, the average yield earned
on the investment portfolio in 1998 was down when compared with the yield
generated in 1997.
The average yield earned on the investment portfolio in 1997 was down slightly
compared to the yield generated in 1996. This is largely due to the fact that
during the first quarter of fiscal 1997 the Company increased the equity
exposure of the externally managed investment portfolio to 20 percent from 15
percent. The remainder of the portfolio is comprised of fixed maturity
securities. Despite the decreases in yield, net investment income increased by
$39.7 million in 1997 compared to 1996 primarily as a result of a larger
investable asset base. The increase in the investable asset base in 1997 and
1996 was due to positive cash flows from insurance operations, the reinvestment
of funds generated by the portfolio and the fact that the consolidated
investment portfolio included the Tempest Re portfolio for the entire period of
fiscal 1997 and for three months during fiscal 1996.
Net Realized Gains (Losses) on Investments
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1998 1997 1996
(in millions)
<S> <C> <C> <C>
Fixed maturities and short-term investments........... $ 58.3 $ 58.7 $14.4
Equity securities..................................... 168.5 38.1 15.8
Financial futures and option contracts................ (9.3) 57.1 26.7
Currency.............................................. (29.1) (26.2) (1.7)
------ ------ -----
$188.4 $127.7 $55.2
====== ====== =====
- --------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
--------------------------------------------------------
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 (for further discussion see "Market Sensitive Instruments and Risk
Management").
Sales proceeds for fixed maturity securities were generally higher than their
amortized costs during 1998 and 1997 which resulted in net realized gains on
sale of fixed maturities and short-term investments of $58.3 million in 1998 and
$58.7 million in 1997.
The liquidation of two domestic stock portfolios and the sale of a portion of
the non-U.S. dollar equity securities held during the year, contributed
significantly to net realized gains on sales of equity securities of $168.5
million in fiscal 1998. This compares with net realized gains on sales of equity
securities of $38.1 million in 1997 and $15.8 million in 1996.
Realized gains or losses on financial futures and option contracts are generated
from U.S. Treasury futures contracts and from equity index futures contracts
held in the synthetic equity fund. Gains and losses on these instruments are
closely linked to fluctuations in the U.S. Treasury and equity markets and
therefore, realized gains would be expected during periods of broad market
improvements while losses are realized during periods of market declines. Net
realized losses in financial futures and option contracts of $9.3 million in
1998 arose from net movements on fixed income and equity index futures contracts
held during the year. Net realized gains on financial futures and option
contracts of $57.1 million recorded in 1997 were primarily generated by the
equity index futures contracts held, as a result of the rise in the S&P 500
Stock Index of nearly 40 percent during the fiscal year. The realized gains of
$26.7 million in 1996 were generated from U.S. Treasury futures contracts and
from the equity index futures contracts held in the synthetic equity fund as a
result of broad market improvements during the year.
Currency losses were $29.1 million in 1998 compared with currency losses of
$26.2 million in 1997 and losses of $1.7 million for 1996. Currency markets
generally suffered declines against the U.S. dollar during 1998 and 1997. During
1998, the Company eliminated its 5 percent strategic allocation to non-U.S.
dollar fixed income securities. The Company maintained its 7 percent allocation
to non-U.S. dollar equities which it added in 1997. At September 30, 1998 there
were unrealized currency losses of $2.1 million on securities held in the
portfolio compared to $20.0 million as at September 30, 1997. Unrealized
currency losses are reflected in net unrealized appreciation on investments in
shareholders' equity.
The Company's externally managed investment portfolio contains certain market
sensitive instruments which may be adversely effected by changes in interest
rates and foreign currency exchange rates (for further discussion see "Market
Sensitive Instruments and Risk Management").
Combined Ratio
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Loss and loss expense ratio.............................. 57.8% 60.4% 68.8%
Underwriting and administrative expense ratio............ 30.4% 19.0% 18.3%
-------------------------
Combined ratio........................................... 88.2% 79.4% 87.1%
=========================
- ----------------------------------------------------------------------------------------
</TABLE>
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
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
---------------------------------------------------------
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.
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 are
adequate to cover the ultimate cost of losses and loss expenses incurred through
September 30, 1998. Since such reserves 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").
Losses and Loss Expenses
<TABLE>
<CAPTION>
Percentage Percentage
1998 Change 1997 Change 1996
-----------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C> <C>
Losses and loss expenses.............................. $516.9 6.3% $486.1 (6.6)% $520.3
=================================================================
</TABLE>
Losses and loss expenses have increased for the year ended September 30, 1998
compared to 1997 due to the inclusion of losses and loss expenses from ACE USA
and CAT since their acquisition as well as the Company's increased participation
in the Lloyd's syndicates under management. However, the loss and loss expense
ratio has decreased to 57.8 percent in 1998 compared with 60.4 percent in 1997.
This 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 loss ratios are lower than the Company's traditional book of
business.
For the year ended September 30, 1997, the loss and loss expense ratio was 60.4
percent compared with 68.8 percent in 1996. This ratio was favorably impacted by
the results of Tempest Re.
Underwriting and Administrative Expenses
<TABLE>
<CAPTION>
Percentage Percentage
1998 Change 1997 Change 1996
---------------------------------------------------------------
(in millions)
<S> <C> <C> <C> <C> <C>
Underwriting and administrative expenses.............. $271.6 76.9% $153.5 11.0% $138.3
===============================================================
</TABLE>
Underwriting and administrative expenses have increased for the year ended
September 30, 1998 compared to 1997 primarily due to the inclusion of the non-
recurring expenses previously described as well as the inclusion of underwriting
and administrative expenses from ACE USA and CAT since their acquisition. The
increase is also partly due to the increased underwriting and administrative
expenses generated by the Company's increased participation in Lloyd's. The
underwriting and administrative expense ratio also increased in the year from
19.0 percent in 1997 to 30.4 percent in 1998. Again, this increase is due
primarily to the inclusion of the non-recurring expenses. Excluding the non-
recurring expenses, the underwriting and administrative expense ratio would have
been 25.0 percent compared to 18.3 percent in 1997. The remaining increase is
primarily due to the costs associated with the Company's 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 Global
Markets is generally higher than the Company's traditional book of business and
thus contributed to the increase in the underwriting and administrative expense
ratio.
The underwriting and administrative expense ratio increased to 19.0 percent in
1997 compared to 18.3 percent in 1996. This increase is due to an increase in
administrative expenses in 1997 over 1996, which is partially offset by a
decrease in acquisition costs. The increase in administrative expenses in
primarily due to the increased cost base resulting from the strategic
diversification by the Company over the past two years, including the
acquisitions of Tempest Re, the Lloyd's managing agencies as well as the
development of the newer insurance lines and products.
7
<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 Re in December 1997 and a
dividend of $250 million from ACE Bermuda in April 1998.
At September 30, 1998, ACE US Holdings, Inc. ("ACE US") and ACE Global Markets
had shareholder's equity of approximately $115 million and $225 million,
respectively. The payment of any dividends from the Company's UK subsidiaries
would be subject to applicable United Kingdom insurance law including those
promulgated by the Society of Lloyd's. Under various U.S. insurance laws to
which ACE US's insurance subsidiaries are subject, ACE US's insurance
subsidiaries may pay a dividend only from earned surplus subject to the
maintenance of a minimum capital requirement, without prior regulatory approval.
No dividends were received from ACE US or ACE Global Markets during fiscal 1998
and the Company does not anticipate receiving dividends from them during fiscal
1999.
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.
The Company's insurance and reinsurance operations provide liquidity in that
premiums are normally received substantially in advance of the time claims are
paid. For the years ended September 30, 1998, 1997 and 1996, the Company's
consolidated net cash flows from operating activities were $66.8 million, $423.5
million and $724.1 million respectively. Cash flows are affected by claim
payments, which due to the nature of the Company's operations, may comprise
large loss payments on a limited number of claims and therefore can fluctuate
significantly from year to year. The irregular timing of these loss payments,
for which the source of cash can be from operations, available net credit
facilities or routine sales of investments, can create significant variations in
cash flows from operations between periods. Total loss and loss expense payments
amounted to $583.8 million, $421.9 million and $115.0 million in fiscal 1998,
1997 and 1996, respectively.
The Company maintains loss reserves for the estimated unpaid ultimate liability
for losses and loss expenses under the terms of its policies and agreements. The
reserve for unpaid losses and loss expenses of $3.7 billion at September 30,
1998, includes $1.4 billion of case and loss expense reserves. While the Company
believes that its reserve for unpaid losses and loss expenses at September 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. 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.
At September 30, 1998, total investments and cash amounted to approximately $6.2
billion, compared with $4.8 billion at September 30, 1997. The increase in total
cash and investments of $1.4 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
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
---------------------------------------------------------
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.
In December 1997, the Company arranged certain syndicated credit facilities.
J.P. Morgan Securities, Inc. and Mellon Bank N.A. acted as co-arrangers in the
arranging, structuring and syndication of these credit facilities. Each facility
requires that the Company and/or certain of its subsidiaries comply with
specific covenants, including a consolidated tangible net worth covenant and a
maximum leverage covenant. The facilities provide:
. A $200 million 364 day revolving credit facility and a $200 million five year
revolving credit facility which together make up a combined $400 million
committed, unsecured syndicated revolving credit facility. At September 30,
1998, the five-year revolving credit facility has a $150 million letter of
credit ("LOC") sub-limit (increased from $50 million during September 1998).
As discussed below, the Company drew down $385 million on the revolving
credit facilities 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).
. A syndicated fully secured five year LOC facility totaling approximately 154
million ($262 million) which was used to fulfill the requirements of Lloyd's
to support underwriting capacity on Lloyd's syndicates in which the Company
participates. Certain assets totalling approximately $300 million are pledged
as security for this facility.
. A syndicated $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 was LIBOR plus an applicable spread. As of
September 30, 1998, $250 million was outstanding under this facility. The
average interest rate for the period January 2, 1998 through October 5, 1998
was 6.24 percent.
On October 27, 1998, ACE US refinanced the outstanding $250 million term loan
with the proceeds from the issuance of $250 million in aggregate principal
amount of unsecured credit sensitive senior notes maturing in October 2008.
Interest payments, based on the initial fixed rate coupon on these notes of 8.63
percent, are due semi-annually in arrears. Total interest expense to be recorded
by ACE US including amortized fees and hedging costs, will initially be $23.3
million per year. The indenture related to these notes include certain
restrictive covenants applicable to ACE US. The senior notes are callable
subject to certain breakage costs, however, ACE US has no current intention of
calling the debt. Simultaneously, the Company has entered into a notional $250
million credit default swap transaction that has the economic effect of reducing
the cost of debt to the consolidated group, excluding fees and expenses, to 6.47
percent for 10 years. Certain assets totaling approximately $90 million are
pledged as security in connection with the swap transaction. In the event that
the Company terminates the credit default swap prematurely, the Company would be
liable for certain transaction costs. However, the Company has no current
intention of terminating the swap. The swap counter-party is a major financial
institution with a long-term S&P Senior Debt Rating of AA- and the Company does
not anticipate non-performance.
The Company also maintains an unsecured, syndicated revolving credit facility in
the amount of $72.5 million. This facility was put in place by CAT prior to its
acquisition by the Company and in September 1998, was assigned to Tempest Re. At
September 30, 1998, no amounts have been drawn down under this facility. The
facility requires that Tempest Re comply with specific covenants.
On November 27, 1998, the Company arranged a new syndicated partially secured
five year LOC facility in the amount of 270 million (approximately $450 million)
to fulfill the requirements of Lloyd's for the 1999 year of account. This new
facility was arranged by Citibank N.A., with ING Barings and Barclays Bank PLC
acting as co-arrangers, and will replace the facility arranged in December 1997.
This new LOC facility requires that the Company continue to maintain certain
covenants, including a minimum consolidated tangible net worth covenant and a
maximum leverage covenant. Certain assets totaling approximately $201 million
are pledged as partial security for this facility, replacing the security
pledged in connection with the December 1997 facility.
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
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued
--------------------------------------------------------
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 first two quarters of fiscal 1998, the
Company repurchased 3,521,100 Ordinary Shares under the share repurchase program
for an aggregate cost of $107.6 million. No shares were repurchased after March
31, 1998. 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. During 1997, the Company repurchased 9,093,000 Ordinary Shares
under share repurchase programs for an aggregate cost of approximately $182.6
million.
On October 18, 1997 and January 16, 1998, the Company paid quarterly dividends
of 7.33 cents and 8 cents per share, respectively to shareholders of record on
September 30, 1997 and December 13, 1997. 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
October 16, 1998, the Board of Directors paid a quarterly dividend of 9 cents
per share to shareholders of record on September 30, 1998. On November 13, 1998,
the Board of Directors declared a quarterly dividend of 9 cents per share
payable on January 15, 1999 to shareholders of record on December 15, 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.
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.
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 were added to the Company's investment
portfolio to be used for general corporate purposes, which may include
acquisitions.
On July 9, 1998, the Company completed the acquisition of Tarquin and issued
approximately 14.3 million Ordinary Shares to the shareholders of Tarquin. The
acquisition was accounted for on a pooling-of-interests basis and, as a result,
the consolidated financial statements of the Company have been restated to
include the historical shareholders' equity and results of operations of Tarquin
for all periods presented.
Fully diluted net asset value per share was $19.14 at September 30, 1998,
compared with $15.40 at September 30, 1997.
Changes in shareholders' equity for the years ended September 30, 1998 and 1997
were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------
(in millions)
<S> <C> <C>
Balance, beginning of year....................................................... $2,785 $2,367
Net income....................................................................... 560 503
Change in net unrealized appreciation (depreciation) on investments.............. (69) 135
Repurchase of Ordinary Shares.................................................... (108) (183)
Dividends declared............................................................... (60) (45)
Value of Ordinary Shares issued in share offering................................ 606 -
Other............................................................................ - 8
------- -------
Balance, end of year............................................................. $3,714 $2,785
======= =======
</TABLE>
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued
--------------------------------------------------------
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 line of credit 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.
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. Distribution has begun on 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. 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
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued
--------------------------------------------------------
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. 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 September
30, 1998.
Market Sensitive Instruments and Risk Management
In accordance with the Securities and Exchange Commission's Financial Reporting
Release No. 48, the following analysis presents hypothetical losses in cash
flows, earnings and fair values of derivative instruments and other market
sensitive instruments used in the Company's portfolio as at September 30, 1998.
The Company uses investment derivative instruments such as futures, options and
foreign currency forward and option contracts for duration management and
management of foreign currency exposures. These instruments are sensitive to
changes in interest rates and foreign currency exchange rates. The portfolio
includes other market sensitive instruments which are subject to changes in
market values, with changes in interest rates.
Duration Management and Market Exposure Management
The Company uses financial futures and option contracts for the purpose of
managing certain investment portfolio exposures. Futures contracts are not
recognized in the financial statements as assets or liabilities and any changes
in fair value of these instruments due to changes in market interest rates would
be recognized in the statement of operations as realized gains or losses in
accordance with the Company's accounting policy. Option contracts are utilized
in the portfolio for the purposes of duration management and to provide
protection against any unexpected shifts in interest rates. At September 30,
1998, the fair value of the option contracts held and written was $1,517,000 and
$(677,000) respectively, compared with $178,000 and $(222,000) at September 30,
1997. The market value of mortgage-backed securities, another category of market
sensitive instruments, was $1,752 million, or approximately 30 percent of the
total investment portfolio, compared with $1,342 million or 31 percent at
September 30,1997. Mortgage-backed securities include pass through mortgage
bonds and collateralized mortgage obligations.
The aggregate hypothetical loss generated from an immediate adverse parallel
shift in the treasury yield curve of 100 basis points would be a decrease in
total return of 4.2 percent which equates to a decrease in market value of
approximately $230 million on a portfolio valued at $5.7 billion at September
30, 1998. An immediate time horizon was used as this presents the worse case
scenario.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
---------------------------------------------------------
Impact of the Year 2000 Issue
General
The management of ACE Limited, recognizing that the Year 2000 problem, if left
untreated, could have a material effect on the Company's business, results of
operations or financial condition, has in progress a project to address this
issue. It is the expectation of ACE's management that this project will reduce
the impact of the Year 2000 problem to an immaterial level, although not all
risks can be eliminated.
The Year 2000 problem stems from the inability, in some cases, of computer
programs and embedded microchips to correctly process certain data. The problem
is most evident because dates which fall in the year 2000 and in later years may
not be properly distinguished from those which fell in the corresponding years
of the present century.
Although all ACE group companies had individually taken steps earlier towards
alleviating the Year 2000 problem, a formal group-wide project was established
in March 1998. At that time, an executive steering committee was formed to
oversee the project. This committee meets on a monthly basis to review progress
and take corrective action if necessary. In each of the ACE subsidiary
companies, a senior member of the management has been appointed as Year 2000
coordinator. Each Year 2000 coordinator has responsibility for ensuring the
success of that part of the Year 2000 plan relevant to its company. A detailed
quarterly report on the status of the Year 2000 project is delivered to the
audit committee of the Board of Directors.
A consultant who is an experienced project manager has been retained to assist
the Year 2000 coordinator. In addition, certain subsidiaries have engaged
external consultants to assist in monitoring their plans.
The project is substantially on schedule, though some components have been
finished earlier than expected and some are taking more time than originally
estimated. It is expected that by the end of 1998 all ACE group companies will
be running Year 2000 compliant versions of most of the information technology
systems that are critical to the business. The replacement or remedy of the
remaining critical systems and some residual testing will continue during the
first and possibly the second quarter of calendar year 1999.
The Company's Year 2000 project is divided into four sections: Underwriting;
Information Technology; Trading Partners; and Physical Plant.
Underwriting
Underwriting teams within each ACE group subsidiary have considered the risks
with respect to the Year 2000 problem that might be associated with underwriting
their various lines of business and have developed internal guidelines which
seek to minimize these risks. Compliance with these guidelines is the subject of
internal audits and/or peer reviews. These guidelines are under regular review.
In some cases, exclusionary language has been added to policies and in all cases
there is a requirement for underwriters to consider information about our
clients and potential clients that is relevant to the Year 2000 problem and,
based on this to underwrite risks prudently or to decline them.
Information Technology
Each ACE subsidiary has a plan to ensure that all information technology
components such as hardware, software and network equipment that will be in use
in the Year 2000 (and beyond) for use by any business-critical function will not
suffer from the Year 2000 problem. Inventories have been prepared of all such
components, and appropriate action decided.
Most application software (such as insurance processing and accounting systems)
which is in use within the ACE group has been supplied as packages (often
tailored to meet ACE's needs) from various vendors. Several application software
packages have already been replaced with Year 2000 compliant versions. Testing
of these is complete in some cases, in progress for some systems and is
scheduled for others. Remaining software packages will be replaced, or, in a few
cases, remedied to free them of Year 2000 problems.
Testing of hardware and network components has commenced and is scheduled for
completion before the end of March 1999. Testing of other software, such as
operating systems and PC desktop applications is in progress or scheduled,
though in a few cases we are relying on assurances from major software
manufacturers that their systems will operate correctly.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
---------------------------------------------------------
Trading Partners and Physical Plant
Examples of the Company's trading partners are: insurance brokers, banks,
reinsurance companies, vendors and service providers in information technology
and general suppliers.
The Physical Plant section of the project focuses on items such as elevators,
fire suppression systems, security systems, building management systems (which
may control air-conditioning, heating and lighting systems) which may be
controlled by software programs or embedded chips, and may thus fail or act
unpredictably in, or after the year 2000. Furthermore, supply of electrical
power and telecommunications services are considered here.
All material trading partners and those vendors and service providers connected
with physical plant have been inventoried and questionnaires sent to them
soliciting information about their Year 2000 readiness. Responses have not been
provided in all cases, despite follow-up letters. ACE has made significant
progress in assessing those responses which have been forthcoming. Some of these
responses appear to give evidence of satisfactory progress and others do not. In
those cases where additional follow-up fails to provide satisfactory responses,
contingency plans will be drawn up in early 1999 to minimize the effect of
potential failure of a Trading Partner.
Costs
The total cost of the Year 2000 project is not expected to be material to the
Company's financial position. The total estimated cost is approximately $4
million, of which just over $2 million is for the information technology
component of the project. Total expenditure to date on the whole project is
approximately $1 million.
Risks
It is not feasible to assign probabilities to many of the events associated with
the Year 2000. The arrival of January 1, 2000 presents novel problems about
which there is no body of evidence upon which to base statistical predictions.
Furthermore, world infrastructure in areas such as telecommunications, banking,
law enforcement, energy production and distribution, manufacturing,
transportation and government and military systems are inextricably linked in
such a manner that a small failure in one area could produce large and
unexpected effects in others. Each business has a dependence upon its customers
and suppliers and through them (or directly) upon many or all of the
infrastructural areas noted above.
ACE management believes that the risks associated with its own information
technology project component are small. For reasons noted above, it is
impossible to quantify all risks associated with trading partners and physical
plant. Possibly the greatest risk for the Company lies in the possibility of
unpredictable events affecting insureds producing a number of claims (valid or
otherwise) which, if valid, are expensive to pay, or if not, expensive in
defense litigation costs.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for years
beginning after December 15, 1997. SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The company will adopt the new
requirements retroactively in 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments of fair value.
SFAS 133 is effective beginning in the first quarter of fiscal 2000. The
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued)
---------------------------------------------------------
Company is currently assessing the effect of adopting this statement on its
financial position and operating results, which as yet, has not been determined.
15
<PAGE>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation, integrity and objectivity of the
consolidated financial statements and other financial information presented in
this annual report. The accompanying consolidated financial statements were
prepared in accordance with generally accepted accounting principles, applying
certain estimates and judgments as required.
The Company's internal controls are designed to provide reasonable assurance as
to the integrity and reliability of the financial statements and to adequately
safeguard, verify and maintain accountability of assets. Such controls are based
on established policies and procedures and are implemented by trained, skilled
personnel with an appropriate segregation of duties. The Company's internal
audit department performs independent audits on the Company's internal controls.
The Company's policies and procedures prescribe that the Company and all its
employees are to maintain the highest ethical standards and that its business
practices are to be conducted in a manner, which is above reproach.
PricewaterhouseCoopers LLP, independent accountants, are retained to audit the
Company's financial statements. Their accompanying report is based on audits
conducted in accordance with generally accepted auditing standards, which
includes the consideration of the Company's internal controls to establish a
basis for reliance thereon in determining the nature, timing and extent of audit
tests to be applied.
The Board of Directors exercises its responsibility for these financial
statements through its Audit Committee, which consists entirely of independent
non-management Board members. The Audit Committee meets periodically with the
independent accountants, both privately and with management present, to review
accounting, auditing, internal controls and financial reporting matters.
_______________________________________ _____________________________________
Brian Duperreault Christopher Z. Marshall
Chairman, President and Chief Executive Chief Financial Officer
Officer
2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of ACE Limited
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and cash flows
present fairly, in all material respects, the financial position of ACE Limited
and its subsidiaries at September 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
November 4, 1998
<PAGE>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
(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 - $4,910,792 and $3,412,975) $5,056,807 $3,477,046
Equity securities, at fair value (cost - $198,447 and $518,852) 189,717 651,556
Short-term investments, at fair value (amortized cost -
$480,236 and $364,552) 480,190 364,432
Other investments, at fair value (cost-$156,758 and $78,691) 156,646 78,691
Cash 317,714 216,191
---------- ----------
Total investments and cash 6,201,074 4,787,916
Goodwill 540,355 301,953
Premiums and insurance balances receivable 377,307 239,446
Reinsurance recoverable 1,116,753 104,797
Accrued investment income 57,153 40,682
Deferred acquisition costs 76,445 51,191
Prepaid reinsurance premiums 205,022 49,299
Deferred income taxes 25,264 --
Other assets 189,380 72,312
---------- ----------
Total assets $8,788,753 $5,647,596
========== ==========
Liabilities
Unpaid losses and loss expenses $3,737,869 $2,111,670
Unearned premiums 773,702 510,231
Premiums received in advance 53,794 24,973
Insurance and reinsurance balances payable 75,898 11,245
Accounts payable and accrued liabilities 165,527 154,390
Dividend payable 17,693 12,436
Bank debt 250,000 --
Deferred income taxes -- 37,496
---------- ----------
Total liabilities 5,074,483 2,862,441
---------- ----------
Commitments and contingencies
Shareholders' equity
Ordinary Shares ($0.041666667 par value, 300,000,000 shares authorized;
193,592,519 and 180,207,664 shares issued and outstanding) 8,066 7,508
Additional paid-in capital 1,765,261 1,177,954
Unearned stock grant compensation (6,181) (1,993)
Net unrealized appreciation on investments (net of deferred 127,845 196,655
income tax)
Cumulative translation adjustment (275) 1,568
Retained earnings 1,819,554 1,403,463
---------- ----------
Total shareholders' equity 3,714,270 2,785,155
---------- ----------
Total liabilities and shareholders' equity $8,788,753 $5,647,596
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ----------
(in thousands of U.S. dollars, except
per share data)
<S> <C> <C> <C>
Revenues
Gross premiums written $ 1,242,159 $ 959,349 $ 859,989
Reinsurance premiums ceded (361,186) (169,576) (78,105)
----------- ----------- ----------
Net premiums written 880,973 789,773 781,884
Change in unearned premiums 13,330 15,599 (26,044)
----------- ----------- ----------
Net premiums earned 894,303 805,372 755,840
Net investment income 324,254 253,440 213,701
Net realized gains on investments 188,385 127,702 55,229
----------- ----------- ----------
Total revenues 1,406,942 1,186,514 1,024,770
----------- ----------- ----------
Expenses
Losses and loss expenses 516,892 486,140 520,277
Acquisition costs 105,654 85,762 96,518
Administrative expenses 165,912 67,724 41,825
Amortization of goodwill 12,834 7,325 1,507
Interest expense 25,459 11,657 10,481
----------- ----------- ----------
Total expenses 826,751 658,608 670,608
----------- ----------- ----------
Income before income taxes 580,191 527,906 354,162
Income taxes 20,040 25,181 26,543
----------- ----------- ----------
Net income $ 560,151 $ 502,725 $ 327,619
=========== =========== ==========
Basic earnings per share $ 3.03 $ 2.73 $ 2.02
=========== =========== ==========
Diluted earnings per share $ 2.96 $ 2.69 $ 2.00
=========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
(in thousands of U.S. dollars)
Ordinary Shares
<S> <C> <C> <C>
Balance--beginning of year, as previously
reported $ 7,508 $ 7,868 $ 5,764
Pooling-of-interests with Tarquin - - 597
---------- ---------- ----------
Balance--beginning of year, as restated 7,508 7,868 6,361
Shares issued in Tempest transactions - - 1,666
Ordinary Shares issued 688 - -
Issued under Employee Stock Purchase Plan (ESPP) 1 1 -
Issued under Stock Appreciation Right (SAR) Plan - 9 -
Exercise of stock options 16 8 -
Repurchase of shares (147) (378) (159)
---------- ---------- ----------
Balance--end of year 8,066 7,508 7,868
---------- ---------- ----------
Additional paid-in capital
Balance--beginning of year, as previously
reported 1,177,954 1,231,324 548,513
Pooling-of-interests with Tarquin - - 75,130
---------- ---------- ----------
Balance--beginning of year, as restated 1,177,954 1,231,324 623,643
Shares issued in Tempest transactions - - 620,552
Options issued in Tempest transactions - - 12,124
Ordinary Shares used 605,211 - -
Cancellation of restricted stock awards - (87) -
Issued under ESPP 954 228 -
Issued under SAR Plan - 3,919 -
Exercise of stock options 4,225 2,182 27
Repurchase of Ordinary Shares (23,083) (59,612) (25,022)
---------- ---------- ----------
Balance--end of year 1,765,261 1,177,954 1,231,324
---------- ---------- ----------
Unearned stock grant compensation
Balance--beginning of year (1,993) (1,299) (1,796)
Stock grants awarded (8,551) (3,244) (708)
Stock grants forfeited - 79 60
Amortization 4,363 2,471 1,145
---------- ---------- ----------
Balance--end of year (6,181) (1,993) (1,299)
---------- ---------- ----------
Net unrealized appreciation (depreciation) on
Investments
Balance--beginning of year 196,655 61,281 94,694
Net appreciation (depreciation) during year (59,528) 135,374 (33,413)
Change in deferred income taxes (9,282) - -
---------- ---------- ----------
Balance--end of year 127,845 196,655 61,281
---------- ---------- ----------
Cumulative translation adjustments
Balance--beginning of year, as previously
reported 1,568 (560) -
Pooling-of-interests with Tarquin - - (324)
---------- ---------- ----------
Balance--beginning of year, as restated 1,568 (560) (324)
Net adjustment for year (1,843) 2,128 (236)
---------- ---------- ----------
Balance--end of year (275) 1,568 (560)
---------- ---------- ----------
Retained earnings
Balance--beginning of year, as previously
reported 1,403,463 1,068,389 795,488
Pooling-of-interests with Tarquin - - 9,803
---------- ---------- ----------
Balance--beginning of year, as restated 1,403,463 1,068,389 805,291
Net income 560,151 502,725 327,619
Dividends declared (59,646) (44,993) (31,699)
Repurchase of Ordinary Shares (84,414) (122,658) (32,822)
---------- ---------- ----------
Balance--of year 1,819,554 1,403,463 1,068,389
---------- ---------- ----------
Total shareholders' equity $3,714,270 $2,785,155 $2,367,003
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
(in thousands of U.S. dollars)
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 560,151 $ 502,725 $ 327,619
Adjustments to reconcile net income to net cash provided by operating
activities:
Unearned premiums 18,168 (5,731) 32,195
Unpaid losses and loss expenses, net of reinsurance
Recoverables (96,361) 114,571 405,268
Prepaid reinsurance premiums (111,188) (2,881) (18,633)
Deferred income taxes 52,240 17,494 19,612
Net realized gains on investments (188,385) (127,702) (55,229)
Amortization of premium/discounts (22,530) (6,104) (7,847)
Amortization of goodwill 12,834 7,325 1,507
Deferred acquisition costs (8,025) 5,122 9,274
Premiums and insurance balances receivable (52,709) (49,977) (17,915)
Premiums received in advance 28,823 6,366 5,976
Insurance and reinsurance balances payable 62,153 11,245 -
Accounts payable and accrued liabilities (145,872) (42,078) 33,707
Other (42,529) (6,892) (11,423)
----------- ----------- -----------
Net cash flows from operating activities $ 66,770 $ 423,483 $ 724,111
----------- ----------- -----------
Cash flows from investing activities
Purchases of fixed maturities (7,865,794) (6,796,843) (8,781,390)
Purchases of equity securities (221,952) (603,598) (222,382)
Sales of fixed maturities 7,625,861 6,817,944 8,220,230
Sales of equity securities 688,261 385,552 209,350
Maturities of fixed maturities 147,093 5,000 59,830
Net realized gains (losses) on financial future contracts (9,287) 57,076 26,678
Other investments (60,735) (52,080) (2,676)
Acquisitions of subsidiaries, net of cash acquired (967,758) (27,098) (49,050)
----------- ----------- -----------
Net cash used for investing activities $ (664,311) $ (214,047) $ (539,410)
----------- ----------- -----------
Cash flows from financing activities
Repurchase of Ordinary Shares (107,644) (182,648) (58,003)
Dividends paid (54,389) (43,028) (27,684)
Net proceeds from issuance of Ordinary Shares 605,899 - 16,527
Proceeds from bank debt 635,000 - -
Repayment of bank debt (385,000) - -
Proceeds from exercise of options for ordinary shares 4,243 2,191 28
Proceeds from shares issued under Employee Stock Purchase Plan 955 - -
Proceeds from shares issued under Stock Appreciation Rights Plan - 4,156 -
----------- ----------- -----------
Net cash from (used for) financing activities $ 699,064 $ (219,329) $ (69,132)
----------- ----------- -----------
Net increase (decrease) in cash 101,523 (9,893) 115,569
Cash -- beginning of year 216,191 226,084 110,515
----------- ----------- -----------
Cash -- end of year $ 317,714 $ 216,191 $ 226,084
=========== =========== ===========
Supplemental cash flow information
Taxes paid (received) $ (48,848) $ 3,975 $ 67
Interest paid $ 41,513 $ 5,700 $ 5,139
</TABLE>
See accompanying notes to consolidated financial statements
7
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
ACE Limited ("ACE") is a holding company incorporated with limited liability
under the Cayman Islands Companies Law and maintains its principal business
office in Bermuda. The Company, through its Bermuda-based operating
subsidiaries, A.C.E. Insurance Company, Ltd. ("ACE Bermuda"), Corporate Officers
& Directors Assurance Ltd. ("CODA"), Tempest Reinsurance Company Limited
("Tempest Re") and CAT Limited ("CAT") and its Dublin, Ireland based
subsidiaries ACE Bermuda Company Europe Limited ("AICE") and ACE Reinsurance
Company Europe Limited ("ARCE") provides insurance and reinsurance for a diverse
group of international clients. Through its U.S. based subsidiary, ACE USA, Inc.
(formerly Westchester Specialty Group, Inc.) ("ACE USA"), the Company provides
insurance 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 Lloyd's managing agencies, which are indirect wholly owned
subsidiaries of ACE. Unless the context otherwise indicates, the term "Company"
refers to one or more of ACE and its consolidated subsidiaries. The operations
of the Company in the Lloyd's market are collectively referred to herein as "ACE
Global Markets".
2. Operations
a) ACE Bermuda
ACE Bermuda primarily writes excess liability insurance, directors and officers
liability insurance, satellite insurance, aviation insurance, excess property
insurance and financial lines products. In addition, through certain joint
ventures, ACE Bermuda writes financial guaranty and political risk insurance.
At September 30, 1998 approximately 66 percent of the written premiums in ACE
Bermuda with respect to these lines of business came from North America with
approximately 14 percent coming from the United Kingdom and continental Europe
and approximately 20 percent from other countries.
Two insurance brokers produced approximately 54 percent, 59 percent and 42
percent of the insurance business for ACE Bermuda in 1998, 1997 and 1996,
respectively.
b) Tempest Re
The Company's reinsurance activities are principally conducted through Tempest
Re, which was acquired in July 1996. On April 1, 1998, ACE Limited purchased
CAT Limited, another Bermuda based property catastrophe reinsurer. Underwriting
operations are being combined with the group's existing catastrophe reinsurance
subsidiary, Tempest Re, and going forward the combined entity will operate under
the Tempest Re name. Tempest Re underwrites property catastrophe reinsurance on
a worldwide basis. For the year ended September 30, 1998, approximately 79
percent of Tempest Re's written premiums came from the United States,
approximately 9 percent came from United Kingdom, 5 percent from Australia and
New Zealand and 7 percent from other countries.
Three reinsurance brokers produced approximately 63 percent, 56 percent and 44
percent of Tempest Re's reinsurance business for the years ended September 30,
1998 and 1997 and the ten month period ended September 30, 1996.
c) ACE Global Markets
The Company, through corporate subsidiaries, participates in the underwriting of
Lloyd's syndicates managed by Methuen Underwriting Limited, ACE London Aviation
Limited, ACE London Underwriting Limited and Charman Underwriting Agencies Ltd.
("Charman") by providing funds at Lloyd's, primarily in the form of a letter of
credit, supporting underwriting capacity. The syndicates in which the Company
participates underwrite aviation, marine and non-marine risks.
8
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
2. Operations (cont'd.)
d) ACE USA
ACE USA, through its insurance subsidiaries, Westchester Fire Insurance Company,
Westchester Surplus Lines Insurance Company and Industrial Underwriters
Insurance Company writes property and casualty insurance, primarily within the
commercial specialty lines market to a broad range of clients in the US. These
subsidiaries specialize in providing property, umbrella and excess casualty
coverages. Premiums are written throughout the US mainly through a network of
US wholesale brokers. During 1998, ACE USA expanded its products offering and
has commenced writing specialty program business, warranty, errors and
omissions, directors and officers coverages and also set up a captive management
reinsurance facility.
3. Significant accounting policies
a) Basis of presentation
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") and include the accounts of the Company and its subsidiaries.
The Company accounted for the acquisition of Tarquin on a pooling-of-interests
basis and accordingly, the Company's financial statements have been restated to
include the results of Tarquin for all periods presented. The Company records
its proportionate share of the results of the Lloyd's syndicates in which it
participates. All significant intercompany balances and transactions have been
eliminated. Certain items in the prior year financial statements have been
reclassified to conform with the current year presentation.
b) Investments
The Company's investments are considered to be "available for sale" under the
definition included in the Financial Accounting Standard Board's ("FASB")
Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities". Except for certain "other
investments" where there is no quoted market value, the Company's investment
portfolio is reported at fair value, being the quoted market price of these
securities provided by either independent pricing services, or when such prices
are not available, by reference to broker or underwriter bid indications.
Realized gains or losses on sales of investments are determined on a first-in,
first-out basis and include adjustments to the net realizable value of
investments for declines in value that are considered to be other than
temporary. Unrealized gains and losses are reported as a separate component of
shareholders' equity.
Short-term investments comprise securities due to mature within one year of date
of issue.
A portion of the other investments comprise investments in entities for which
there is no quoted market value. In such cases, the investments are carried at
no more than original cost which is considered to be fair value.
The Company utilizes financial futures and option contracts and foreign currency
forward and option contracts for the purpose of managing certain investment
portfolio exposures (see note 8(a) for additional discussion of the objectives
and strategies employed). Futures contracts are not recognized as assets or
liabilities in the accompanying consolidated financial statements. Changes in
the market value of futures contracts produce daily cash flows, which are
included in net realized gains or losses on investments in the statements of
operations. Collateral held by brokers equal to a percentage of the total value
of open futures contracts is included in short-term investments.
Option contracts that are designated as hedges of securities are marked-to-
market. Unrealized gains and losses on forward currency and option contracts
which are designated as specific hedges are recognized in the financial
statements as a component of shareholders' equity. Gains and losses resulting
from currency fluctuations on transactions which are not designated as specific
hedges against any single security or group of securities are recognized as a
component of income in the period in which the fluctuations occur. Premiums
paid or received on option contracts that have expired, been closed out or
exercised, are recognized as realized gains and losses on investments in the
statements of operations.
9
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
3. Significant accounting policies (cont'd.)
b) Investments (cont'd)
Net investment income includes interest and dividend income together with
amortization of market premiums and discounts and is net of investment
management and custody fees. For mortgage-backed securities, and any other
holdings for which there is a prepayment risk, prepayment assumptions are
evaluated and revised as necessary. Any adjustments required due to the
resultant change in effective yields and maturities are recognized in current
income.
c) Premiums
Premiums are generally recognized as written upon inception of the policy. For
multi-year policies written which are payable in annual installments, due to the
ability of the insured/reinsured to commute or cancel coverage within the term
of the policy, only the annual premium is included as written at policy
inception. The remaining annual premiums are included as written at each
successive anniversary date within the multi-year term.
Premiums written are primarily earned on a daily pro rata basis over the terms
of the policies to which they relate. Accordingly, unearned premiums represent
the portion of premiums written which is applicable to the unexpired portion of
the policies in force. Premium estimates for retrospectively rated policies are
recognized within the periods in which the related losses are incurred.
Property catastrophe reinsurance premiums written are estimated based on
information provided by ceding companies. The information used in establishing
these estimates is reviewed and subsequent adjustments are recorded in the
period in which they are determined. These premiums are earned over the terms
of the related reinsurance contracts.
d) 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.
e) Acquisition costs
Acquisition costs, consisting primarily of commissions, are deferred and
amortized over the period in which the related premiums are earned. Deferred
acquisition costs are reviewed to determine that they do not exceed recoverable
amounts after considering investment income.
f) Losses and loss expenses
A reserve is established for the estimated unpaid losses and loss expenses of
the Company under the terms of, and with respect to, its policies and
agreements. The methods of determining such estimates and establishing the
resulting reserve are reviewed continuously and any adjustments are reflected in
operations in the period in which they become known. Future developments may
result in losses and loss expenses significantly greater or less than the
reserve provided.
g) Goodwill
Goodwill represents the excess of the cost of acquisitions over the tangible net
assets acquired. The Company amortizes goodwill recorded in connection with its
business combinations on a straight-line basis over the estimated useful lives
which range from twenty-five to forty years.
10
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
3. Significant accounting policies (cont'd.)
h) Reinsurance
In the ordinary course of business, the Company's insurance subsidiaries assume
and cede reinsurance with other insurance companies. These arrangements provide
greater diversification of business and minimize the net loss potential arising
from large risks. Ceded reinsurance contracts do not relieve the Company of its
obligation to its insureds.
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 contracts 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.
Prepaid reinsurance premiums represent the portion of premiums ceded to
reinsurers applicable to the unexpired terms of the reinsurance contracts in
force.
i) Translation of foreign currencies
Financial statements of subsidiaries expressed in foreign currencies are
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52 "Foreign Currency Translation" ("SFAS 52"). Under
SFAS 52, functional currency assets and liabilities are translated into U.S.
dollars generally using period end rates of exchange and the related translation
adjustments are recorded as a separate component of shareholders' equity.
Functional currencies are generally the currencies of the local operating
environment. Statement of operations amounts expressed in functional currencies
are translated using average exchange rates. Gains and losses resulting from
foreign currency transactions are recorded in current income.
j) Accounting estimates
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company's principal estimates include
property and casualty loss and loss expense reserves and estimated premiums for
situations where the Company has not received ceding company reports. Actual
results may differ from these estimates.
k) 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 12). Deferred tax assets and liabilities result from
temporary differences between the amounts recorded in the consolidated financial
statements and the tax basis 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
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.
l) Stock split
On March 2, 1998, the Company effected a three for one split of the Company's
Ordinary Shares. The par value of the Company's Ordinary Shares and all per
share data presented in the consolidated financial statements and the notes
thereto have been retroactively adjusted to reflect the effects of the stock
split.
11
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
3. Significant accounting policies (cont'd.)
m) Cash flow information
Purchases and sales or maturities of short-term investments are recorded net for
purposes of the statements of cash flows and are included with fixed maturities.
n) New accounting pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which is effective for years
beginning after December 15, 1997. SFAS 131 establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company will adopt the new
requirements retroactively in 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS 133 is effective beginning in the first quarter of fiscal 2000. The
Company is currently assessing the effect of adopting this statement on its
financial position and operating results, which as yet, has not been determined.
4. Acquisitions
On March 27, 1996, the Company acquired a controlling interest in Methuen Group
Limited ("Methuen"), the holding company for Methuen Underwriting Limited
("MUL"), a leading Lloyd's managing agency. This acquisition has been recorded
using the purchase method of accounting and accordingly, the accompanying
consolidated financial statements include the results of Methuen since March 27,
1996, the date of acquisition. On November 26, 1996, the Company, also acquired
the remaining interest in Methuen. The acquisition of the remaining interest
has been recorded using the purchase method of accounting.
On July 1, 1996, the Company completed the acquisition of Tempest Re, a leading
Bermuda-based property catastrophe reinsurer (the "Tempest Re Acquisition").
Under the terms of the Agreement and Plan of Amalgamation, Tempest Re shares
outstanding at the time of the acquisition were cancelled and converted into the
right to receive 39,999,741 Ordinary Shares of the Company. These shares were
capitalized at a value of $15 5/9 per share, which was determined in accordance
with the EITF 95-19 consensus that deals with the value of equity securities
issued to effect a purchase combination. In addition, options to acquire
Tempest Re shares were converted into 1,338,267 Company options at a total cost
of $12.1 million. The total value of the acquisition amounted to $638.7
million, which includes the value of the shares and options issued as well as
other transaction expenses, which amounted to $4.4 million. This acquisition
has been recorded using the purchase method of accounting and accordingly, the
accompanying consolidated financial statements include the results of Tempest Re
since July 1, 1996, the date of acquisition.
On November 26, 1996, the Company acquired Ockham Worldwide Holdings plc which
subsequently changed its name to ACE London Holdings Ltd. ("ACE London"). The
acquisition has been recorded using the purchase method of accounting and
accordingly, the accompanying consolidated financial statements include the
results of ACE London since November 26, 1996, the date of acquisition.
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 agreement, the Company purchased all of the outstanding capital
stock of ACE USA for aggregate cash consideration of $338 million.
12
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
4. Acquisitions (cont'd.)
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 8c Credit Facilities) and the remainder
with available cash. The acquisition was recorded using the purchase method of
accounting. Under this method, 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 USA
and its subsidiaries from January 2, 1998, the date of acquisition (see note 15
for pro forma financial information with respect to the ACE USA acquisition).
On April 1, 1998, the Company completed the acquisition of CAT, 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 8c - 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 from
April 1, 1998, the date of acquisition (see note 15 for pro forma financial
information with respect to the CAT acquisition). Approximately $224 million of
goodwill was generated as a result of the acquisition.
On July 9, 1998, the Company completed the acquisition of Tarquin Limited
("Tarquin"), a UK-based holding company which owns Lloyd's managing agency
Charman Underwriting 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. Under the terms
of the acquisition, the Company issued approximately 14.3 million Ordinary
Shares to the shareholders of Tarquin. The acquisition has been accounted for
on a pooling-of-interests basis. Accordingly, all prior period consolidated
financial statements presented have been restated to include the combined
results of operations, financial position and cash flows of Tarquin as though it
had always been a part of the Company.
Prior to the acquisition, Tarquin's fiscal year ended on December 31. In
recording the business combination, Tarquin's prior period financial statements
have been restated to conform with the Company's fiscal year end. Certain
reclassifications were also made to the Tarquin financial statements to conform
to the Company's presentations.
The results of operations for the separate companies and the combined amounts
presented in the consolidated financial statements for the years ended September
30, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Total Revenues
ACE $1,246,794 $1,010,643 $ 848,998
Tarquin 160,148 175,871 175,772
---------- ---------- ----------
Total Revenue $1,406,942 $1,186,514 $1,024,770
========== ========== ==========
Net Income
ACE $ 554,672 $ 461,354 $ 289,733
Tarquin 5,479 41,371 37,886
---------- ---------- ----------
Net Income $ 560,151 $ 502,725 $ 327,619
========== ========== ==========
</TABLE>
Included in the results of fiscal 1998, 1997 and 1996 are certain non-recurring
and transaction related expenses (hereinafter referred to as the "non-recurring
expenses") amounting to $46.6 million, $6.1 million and $5.0 million,
respectively. These expenses include interest expense and payments to employees
as well as transaction costs including legal, accounting and investment banking
fees.
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.
13
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
5. Investments
a) Fixed maturities
The fair values and amortized costs of fixed maturities at September 30, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
Fair Amortized Fair Amortized
Value Cost Value Cost
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(in thousands)
U.S. Treasury and agency $ 796,535 $ 771,678 $ 565,003 $ 548,328
Non-U.S. governments 126,998 122,233 198,126 196,799
Corporate securities 2,339,786 2,265,755 1,342,767 1,314,635
Mortgage-backed securities 1,751,769 1,710,591 1,370,647 1,352,710
States, municipalities and
Political subdivisions 41,719 40,535 503 503
---------- ---------- ---------- ----------
Fixed maturities $5,056,807 $4,910,792 $3,477,046 $3,412,975
========== ========== ========== ==========
</TABLE>
The gross unrealized gains and losses related to fixed maturities at September
30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------ -------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
(in thousands)
U.S. Treasury and agency $ 25,211 $ (354) $17,769 $(1,094)
Non-U.S. governments 5,447 (682) 4,051 (2,724)
Corporate securities 77,711 (3,680) 30,309 (2,177)
Mortgage-backed securities 43,742 (2,564) 21,691 (3,754)
States, municipalities and
political subdivisions 1,335 (151) - -
-------- ------- ------- --------
$153,446 $(7,431) $73,820 $(9,749)
======== ======= ======= ========
</TABLE>
Mortgage-backed securities issued by U.S. government agencies are combined with
all other mortgage derivatives held and are included in the category "mortgage-
backed securities". Approximately 79 percent of the total mortgage holdings at
September 30, 1998 and 67 percent at September 30, 1997 are represented by
investments in GNMA, FNMA and FHLMC bonds. The remainder of the mortgage
exposure consists of CMO's (Collaterialized Mortgage Obligations) and non-
government mortgage-backed securities, the majority of which provide a planned
structure for principal and interest payments and carry a "AAA" rating by the
major credit rating agencies. Fixed maturities at September 30, 1998, by
contractual maturity, are shown below. Expected maturities could differ from
contractual maturities because borrowers may have the right to call or prepay
obligations, with or without call or prepayment penalties.
14
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
5. Investments (cont'd.)
a) Fixed maturities (cont'd.)
<TABLE>
<CAPTION>
Fair Amortized
Value Cost
---------- ----------
(in thousands)
<S> <C> <C>
Maturity period
- ---------------
Less than 1 year $ 237,277 $ 239,589
1 - 5 years 1,314,027 1,287,270
5 - 10 years 735,258 712,422
Greater than 10 years 1,018,479 960,920
---------- ----------
3,305,041 3,200,201
Mortgage-backed securities 1,751,766 1,710,591
---------- ----------
Total fixed maturities $5,056,807 $4,910,792
========== ==========
</TABLE>
b) Equity Securities
The gross unrealized gains and losses on equity securities at September 30, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Equity securities -- cost $198,447 $518,852
Gross unrealized gains 457 152,621
Gross unrealized losses (9,187) (19,917)
-------- --------
Equity securities -- fair value $189,717 $651,556
======== ========
</TABLE>
15
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
5. Investments (cont'd.)
c) Net realized gains and change in net unrealized appreciation (depreciation)
on investments.
The analysis of net realized gains on investments and the change in net
unrealized appreciation (depreciation) on investments for the years ended
September 30, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Fixed Maturities
Gross realized gains $ 78,825 $ 83,957 $ 63,416
Gross realized losses (20,512) (25,200) (48,963)
--------- -------- --------
58,313 58,757 14,453
Equity securities
Gross realized gains 210,512 70,453 39,768
Gross realized losses (42,037) (32,379) (23,985)
--------- -------- --------
168,475 38,074 15,783
Currency losses (29,116) (26,204) (1,685)
Financial futures and option contract-net realized
(losses) gains (9,287) 57,075 26,678
--------- -------- --------
Net realized gains on investments 188,385 127,702 55,229
--------- -------- --------
Change in net unrealized appreciation (depreciation)
on investments
Fixed maturities 81,944 68,397 (56,226)
Equity securities (141,434) 67,097 22,813
Short-term investments 74 (120) -
Other investments (112) - -
Deferred income taxes (9,282) - -
--------- -------- --------
Change in net unrealized appreciation
(depreciation) on investments (68,810) 135,374 (33,413)
--------- -------- --------
Total net realized gains and change in net
unrealized appreciation (depreciation) on
investments $ 119,575 $263,076 $ 21,816
========= ======== ========
</TABLE>
d) Net investment income
Net investment income for the years ended September 30, 1998, 1997 and 1996 was
derived from the following sources:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Fixed maturities and short-term investments $325,308 $251,570 $217,149
Equity securities 5,920 7,385 2,029
Other investments 2,954 2,300 1,840
Other 1,853 2,364 156
-------- -------- --------
Gross investment income 336,035 263,619 221,174
Investment expenses (11,781) (10,179) (7,473)
-------- -------- --------
Net investment income $324,254 $253,440 $213,701
======== ======== ========
</TABLE>
16
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
5. Investments (cont'd.)
e) Securities on deposit
Fixed maturity securities carried at fair value and cash totalling $141 million
at September 30, 1998 were on deposit with various regulatory authorities to
comply with various state (U.S.) and Lloyd's (UK) requirements.
6. Losses and loss expenses
The reserve for unpaid losses and loss expenses represents estimated ultimate
losses and loss expenses less paid losses and loss expenses and is comprised of
the following at September 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(in thousands)
<S> <C> <C>
Case and loss expense reserves $1,406,358 $ 995,262
IBNR loss reserves 2,331,511 1,116,408
---------- ----------
Total unpaid losses and loss expenses $3,737,869 $2,111,670
========== ==========
</TABLE>
The Company uses statistical and actuarial methods to reasonably estimate
ultimate expected losses and loss expenses using the Company's loss development
history, data obtained from underwriting applications, actuarial evaluations
and, in the case of excess liability reserves, research of large liability
losses. In many cases, significant periods of time, ranging up to several years
or more, may lapse between the occurrence of an insured loss, the reporting of
the loss to the Company and the settlement of the Company's liability for the
loss. During the loss settlement period, additional facts regarding individual
claims and trends usually will become known. As these become apparent, case
reserves may be adjusted by allocation from IBNR loss reserves without any
change in the overall reserve. In addition, application of the statistical and
actuarial methods may require the adjustment of the overall reserves from time
to time.
The reconciliation of unpaid losses and loss expenses for the years ended
September 30, 1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(in thousands)
<S> <C> <C> <C>
Gross unpaid losses and loss expenses at beginning
of year $2,111,670 $1,977,680 $1,455,342
Reinsurance recoverable (104,797) (85,378) (3,043)
---------- ---------- ----------
Net unpaid losses and loss expenses at beginning
of year 2,006,873 1,892,302 1,452,299
Unpaid losses and loss expenses assumed in respect
of acquired companies 731,949 - 34,735
Unpaid losses and loss expenses assumed in respect
of reinsurance business acquired 6,403 50,326 -
---------- ---------- ----------
Total 2,745,225 1,942,628 1,487,034
---------- ---------- ----------
Losses and loss expenses incurred in respect
of losses occurring in:
Current year 534,021 486,140 520,277
Prior years (17,129) - -
---------- ---------- ----------
Total 516,892 486,140 520,277
---------- ---------- ----------
Losses and loss expenses paid in respect
of losses occurring in:
Current year 246,354 63,182 41,602
Prior years 337,422 358,713 73,407
---------- ---------- ----------
Total 583,776 421,895 115,009
---------- ---------- ----------
Net unpaid losses and loss expenses at end of year 2,678,341 2,006,873 1,892,302
Reinsurance recoverable on unpaid losses 1,059,528 104,797 85,378
---------- ---------- ----------
Gross unpaid losses and loss expenses at end of year $3,737,869 $2,111,670 $1,977,680
========== ========== ==========
</TABLE>
17
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
6. Losses and loss expenses (cont'd)
The Company has considered asbestos and environmental claims and claims expenses
in establishing the liability for unpaid losses and loss expenses. The
estimation of ultimate losses arising from asbestos and environmental exposures
has presented a challenge because traditional actuarial reserving methods, which
primarily rely on historical experience, are inadequate for such estimation.
The problem of estimating reserves for asbestos and environmental exposures
resulted in the development of reserving methods which incorporate new sources
of data with historical experience. The Company believes that the reserves
carried for these claims are adequate based on known facts and current law.
The following table presents selected data on asbestos and environmental claims
and claims expenses as at September 30, 1998.
<TABLE>
<CAPTION>
Gross Net
----- ---
<S> <C> <C>
(in thousands)
Asbestos $114,032 $ 46,201
Environmental 104,113 70,140
-------- --------
$218,145 $116,341
======== ========
</TABLE>
During the nine month period to September 30, 1998 (since the acquisition of ACE
USA), the Company has made payments with respect to latent claims of $11.2
million. For calendar 1997, 1996 and 1995, ACE USA made average annual claim
payments of $9.8 million.
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 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 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 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. 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. Distribution has begun on
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. 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.
18
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
6. Losses and loss expenses (cont'd)
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. 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 September 30, 1998.
7. 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. The
amounts for net premiums written and net premiums earned in the statements of
operations are net of reinsurance. Direct, assumed and ceded amounts for these
items for the years ended September 30, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ----------- ------------
(in thousands)
Premiums written
<S> <C> <C> <C>
Direct $ 864,529 $ 849,328 $ 825,365
Assumed 377,630 110,021 34,624
Ceded (361,186) (169,576) (78,105)
------------ ----------- ------------
Net $ 880,973 $ 789,773 $ 781,884
============ =========== ============
Premiums earned
Direct $ 875,154 $ 754,577 $ 734,888
Assumed 303,586 121,842 40,601
Ceded (284,437) (71,047) (19,649)
------------ ----------- ------------
Net $ 894,303 $ 805,372 $ 755,840
============ =========== ============
</TABLE>
The Company's provision for reinsurance recoverables at September 30, 1998 and
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
------------ -----------
(in thousands)
<S> <C> <C>
Reinsurance recoverable on paid losses and loss expenses $ 57,225 $ --
Reinsurance recoverable on unpaid losses and loss expenses 1,143,121 104,797
Provision for uncollectable balances on unpaid losses and loss
expenses (83,593) --
------------ -----------
Reinsurance recoverable $ 1,116,753 $ 104,797
============ ===========
</TABLE>
19
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
8. Commitments and contingencies
a) Financial instruments with off-balance sheet risk
The Company's investment guidelines permit, subject to specific approval,
investments in derivative instruments such as futures, options and foreign
currency forward contracts for purposes other than trading. Their use is
limited to yield enhancement, duration management, foreign currency exposure
management or to obtain an exposure to a particular financial market.
(i) Foreign currency exposure management
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
securities currently held in the portfolio. Approximately $178 million is
invested in non-U.S. dollar fixed maturity and equity securities. The forward
currency contracts purchased are not specifically identifiable against any
single security or group of securities denominated in those currencies and
therefore do not qualify as hedges for financial reporting purposes. All
contract gains and losses, realized and unrealized, are reflected in the
statements of operations. At September 30, 1998, no foreign currency forward
contract had a maturity of more than six months. The table below summarizes
the notional amounts, the current fair values and the unrealized gain or loss
of the Company's foreign currency forward contracts as at September 30, 1998.
<TABLE>
<CAPTION>
Contractual/
Notional Unrealized
Amount Fair Value Gain/(Loss)
----------------- ----------------- -----------------
(in thousands)
<S> <C> <C> <C>
Forward contracts $ 50 $ (735) $ (785)
</TABLE>
The fair value of the forward contracts represents the estimated cost to the
Company at September 30, 1998, of obtaining the specified currency to meet the
obligation of the contracts. The unrealized loss is a measure of the net
exposure to the Company of its use of forward contracts after any netting
agreements given current rates of exchange.
The credit risk associated with the above derivative financial instruments
relates to the potential for non-performance by counterparties. Non-
performance is not anticipated; however, in order to minimize the risk of
loss, management monitors the creditworthiness of its counterparties. For
forward contracts, the counterparties are principally banks which must meet
certain criteria according to the Company's investment guidelines.
(ii) Duration management and market exposure
Futures
A portion of the Company's investment portfolio is managed as synthetic equity
funds, whereby equity index futures contracts are held in an amount equal to
the market value of an underlying portfolio comprised of short-term
investments and fixed maturities. This creates an equity market exposure
equal in value to the total amount of funds invested in this strategy. Each
index futures contract held by the Company is rolled over quarterly into a new
contract with a later maturity, thereby maintaining a constant equity market
exposure. The value of the funds invested in this strategy was $633 million
and $286 million at September 30, 1998 and 1997, respectively.
Exchange traded bond and note futures contracts may be used in fixed maturity
portfolios as substitutes for ownership of the physical bonds and notes
without significantly increasing the risk in the portfolio. Investments in
financial futures contracts may be made only to the extent that there are
assets under management, not otherwise committed.
20
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
8. Commitments and contingencies (cont'd.)
a) Financial instruments with off-balance sheet risk (cont'd.)
(ii) Duration management and market exposure (cont'd.)
Futures contracts give the holder the right and obligation to participate in
market movements, determined by the index or underlying security on which
the futures contract is based. Settlement is made daily in cash by an amount
equal to the change in value of the futures contract times a multiplier that
scales the size of the contract. The contract amounts of $1,041 million and
$380 million reflect the net extent of involvement the Company had in these
financial instruments at September 30, 1998 and 1997, respectively.
Options
Option contracts may be used in the portfolio as protection against
unexpected shifts in interest rates, which would thereby affect the duration
of the fixed maturity portfolio. By using options in the portfolio, the
overall interest rate sensitivity of the account can be reduced. An option
contract conveys to the holder the right, but not the obligation, to
purchase or sell a specified amount or value of an underlying security at a
fixed price. The price of an option is influenced by the underlying
security, expected volatility, time to expiration and supply and demand.
For long option positions, the maximum loss is the premium paid for the
option. To minimize the risk of non-performance, all brokers and dealers
used as counterparties must be approved. Additional performance assurance is
required where deemed necessary. The maximum credit exposure is represented
by the fair value of the options held. For short option positions, the
potential loss is the same as having taken a position in the underlying
security. Short call options are backed in the portfolio with the
underlying, or highly correlated, securities and short put options are to be
backed by uncommitted cash for the in-the-money portion.
Summarized below are the notional amounts, the current fair values and the
unrealized gains of the options in the portfolio as at September 30, 1998.
<TABLE>
<CAPTION>
Contractual/
Notional Unrealized
Amount Fair Value Gain/(Loss)
------------ ---------- -------------
<S> <C> <C> <C>
(in thousands)
Options held $ 735,200 $ 1,517 $ 926
Options written (121,000) (677) (303)
</TABLE>
The fair value of the options represents the market price of the options at
September 30, 1998. The unrealized gain represents the difference between
the fair value and the premium paid (received). The notional amounts
summarized in the above tables are not representative of amounts exchanged
by parties and, therefore, do not measure the exposure to the Company of its
use of derivatives.
b) Concentrations of credit risk
The investment portfolio is managed following prudent standards of
diversification. Specific provisions limit the allowable holdings of a single
issue and issuers. The Company believes that there are no significant
concentrations of credit risk associated with its investments.
21
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
8. Commitments and contingencies (cont'd.)
c) Credit Facilities
In December 1997, the Company arranged certain syndicated credit facilities.
J.P. Morgan Securities, Inc. and Mellon Bank N.A. acted as co-arrangers in the
arranging, structuring and syndication of these credit facilities. Each
facility requires that the Company and/or certain of its subsidiaries comply
with specific covenants, including a consolidated tangible net worth covenant
and a maximum leverage covenant. The facilities provide:
. A $200 million 364 day revolving credit facility and a $200 million five
year revolving credit facility which together make up a combined $400
million committed, unsecured syndicated revolving credit facility. At
September 30, 1998, the five-year revolving credit facility has a $150
million letter of credit ("LOC") sub-limit (increased from $50 million
during September 1998). As discussed below, the Company drew down $385
million on the revolving credit 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).
. A syndicated fully secured five year LOC facility totaling approximately 154
million ($262 million) which is used to fulfill the requirements of Lloyd's
to support underwriting capacity on Lloyd's syndicates in which the Company
participates.
. A syndicated $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 was LIBOR plus an applicable spread. As
of September 30, 1998, $250 million was outstanding under this facility. The
average interest rate for the period January 2, 1998 through October 5, 1998
was 6.24 percent.
On October 27, 1998, ACE US Holdings, Inc. ("ACE US") refinanced the outstanding
$250 million term loan with the proceeds from the issuance of $250 million in
aggregate principal amount of unsecured credit sensitive senior notes maturing
in October 2008. Interest payments, based on the initial fixed rate coupon on
these notes of 8.63 percent, are due semi-annually in arrears. The indenture
related to these notes includes certain restrictive covenants applicable to ACE
US. The senior notes are callable subject to certain breakage costs, however,
ACE US has no current intention of calling the debt. Simultaneously, the
Company has entered into a notional $250 million credit default swap transaction
that has the economic effect of reducing the cost of debt to the consolidated
group, excluding fees and expenses, to 6.47 percent for 10 years. Certain
assets totaling approximately $90 million are pledged as security in connection
with the swap transaction. In the event that the Company terminates the credit
default swap prematurely, the Company would be liable for certain transaction
costs. However, the Company has no current intention of terminating the swap.
The swap counter-party is a major financial institution with a long- term S&P
Senior Debt Rating of AA- and the Company does not anticipate non-performance.
Tempest Re is not an admitted reinsurer in the United States. Accordingly, the
terms of certain reinsurance contracts require Tempest Re to provide letters of
credit ("LOCs") to Tempest Re's clients in respect of reported claims. Tempest
Re has facilities for the issuance of LOCs of up to $50 million. At September
30, 1998, LOCs outstanding amounted to $15.2 million. Investments with a market
value of $17.5 million were pledged as collateral for these LOCs. The Company
also maintains an unsecured, syndicated revolving credit facility in the amount
of $72.5 million. This facility was put in place by CAT prior to its
acquisition by the Company and in September 1998, was assigned to Tempest Re.
At September 30, 1998, no amounts have been drawn down under this facility.
22
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
8. Commitments and contingencies (cont'd.)
d) Lease commitments
The Company rents office space in The ACE Building in Hamilton, Bermuda under a
lease which expires in 2000, with one five year renewal option. The ACE Building
is 40 percent owned by the Company through a joint venture agreement. During
1994, the Company financed the cost of an addition to The ACE Building and
entered into a supplemental lease for the additional space for 14 years
effective October 1, 1994. The cost of the addition is being amortized as rent
expense over the period of the lease. The Company also rents additional office
space in Hamilton, Bermuda under two separate non-cancelable leases which expire
in 2001 and 2003. Tempest Re leases office space in Hamilton, Bermuda under a
non-cancelable lease expiring in 2003 with a three year renewal option. ACE
Global Markets leases office space in London, England for its principal offices,
under two leases that expire in 2008. ACE USA leases office space in Georgia,
USA for its principal offices under a lease that expires in 2002. ACE USA also
leases additional office space in California, USA under a lease that expires in
2004. ACE USA also leases office space in New York, USA under a lease that
expires in 2009. Total rent expense was approximately $4.8 million in 1998, $4.9
million in 1997 and $2.5 million in 1996.
Future minimum lease payments under the leases are expected to be as follows (in
thousands):
<TABLE>
<S> <C>
Year ending September 30, 1999 $ 7,625
2000 9,749
2001 8,467
2002 6,893
2003 5,945
Later years 33,339
-------
Total minimum future lease commitments $72,018
=======
</TABLE>
9. Shareholders' Equity
a) Shares issued and outstanding
Following is a table of changes in Ordinary Shares issued and outstanding for
fiscal 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Ordinary Shares
---------------
<S> <C>
Balance at September 30, 1995--as previously reported 138,333,555
Adjustment for pooling-of-interests 14,328,010
---------------
Balance at September 30, 1995--as restated 152,661,565
Shares issued in Tempest Re acquisition 39,999,741
Repurchase of shares (3,805,800)
Exercise of stock options 3,000
Cancellation of non-vested restricted stock (18,231)
---------------
Balance at September 30, 1996 188,840,275
Shares issued under Employee Stock Purchase Plan 29,403
Shares issued under SAR Replacement Plan 184,092
Repurchase of shares (9,093,000)
Exercise of stock options 254,394
Cancellation of non-vested restricted stock (7,500)
---------------
Balance at September 30, 1997 180,207,664
Shares issued 16,500,000
Shares issued under Employee Stock Purchase Plan 27,517
Repurchase of shares (3,521,100)
Exercise of stock options 378,438
---------------
Balance at September 30, 1998 193,592,519
===============
</TABLE>
On April 14, 1998, the Company sold 16.5 million Ordinary Shares for net
proceeds of approximately $606 million.
23
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
9. Shareholders' Equity (cont'd.)
b) Share repurchases
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 first two quarters of fiscal 1998, the
Company repurchased 3,521,100 Ordinary Shares under the share repurchase program
for an aggregate cost of $107.6 million. No shares were repurchased after March
31, 1998. 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. During 1997, the Company repurchased 9,093,000 Ordinary Shares
under share repurchase programs for an aggregate cost of $182.6 million.
c) General restrictions
The holders of the Ordinary Shares are entitled to receive dividends and are
allowed one vote per share provided that, if the controlled shares of any
shareholder constitute 10 percent or more of the outstanding Ordinary Shares of
the Company, only a fraction of the vote will be allowed so as not to exceed 10
percent. Generally, the Company's directors have absolute discretion to decline
to register any transfer of shares. All transfers are subject to the restriction
that they may not increase to 10 percent or higher the proportion of issued
Ordinary Shares owned by any shareholder.
d) Dividends declared
Dividends declared amounted to $0.34, $0.27 and $0.21 per Ordinary Share for
fiscal 1998, 1997 and 1996, respectively.
e) Options
(i) Options outstanding
Following is a summary of options issued and outstanding for 1998, 1997 and
1996.
<TABLE>
<CAPTION>
Year Average Options for
of Exercise Ordinary
Expiration Price Shares
---------- -------- -----------
<S> <C> <C> <C>
Balance at September 30, 1995 2,056,500
Options granted 2004-2005 $12.47 1,227,600
Options issued to holders of Tempest options 2004-2005 $ 7.90 1,338,267
Options exercised 2003 $ 9.17 (3,000)
Options forfeited 2003-2004 $ 8.55 (105,000)
-----------
Balance at September 30, 1996 4,514,367
Options granted 2006-2007 $19.74 2,231,550
Options issued under SAR Plan 2002-2003 $21.33 950,400
Options exercised 2003-2004 $ 9.33 (254,394)
Options forfeited 2003-2007 $10.09 (307,500)
-----------
Balance at September 30, 1997 7,134,423
Options granted 2007-2008 $31.64 2,489,900
Options exercised 2003-2007 $11.21 (378,438)
Options forfeited 2006-2008 $27.51 (261,155)
-----------
Balance at September 30, 1998 8,984,730
===========
</TABLE>
Of the outstanding options at September 30, 1998, 5,148,264 were vested.
24
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
9. Shareholders' Equity (cont'd.)
e) Options (cont'd.)
(ii) SFAS 123 Pro Forma disclosures
In October 1995, FASB issued Statement of Financial Accounting Standards No.
123 "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123
establishes accounting and reporting standards for stock-based employee
compensation plans which include stock option and stock purchase plans. SFAS
123 provides employers a choice: adopt SFAS 123 accounting standards for all
stock compensation arrangements which requires the recognition of
compensation expense for the fair value of virtually all stock compensation
awards; or continue to account for stock options and other forms of stock
compensation under Accounting Principles Board Opinion No. 25 ("APB 25"),
while also providing the disclosure required under SFAS 123. The Company
continues to account for stock-based compensation plans under APB 25. The
following table outlines the Company's net income and earnings per share had
the compensation cost been determined in accordance with the fair value
method recommended in SFAS 123.
<TABLE>
<CAPTION>
1998 1997
------- --------
(in thousands, except
per share data)
Net Income
<S> <C> <C>
As reported $560,151 $502,725
Pro Forma $550,894 $495,556
Diluted earnings per share
As reported $ 2.96 $ 2.69
Pro Forma $ 2.91 $ 2.65
</TABLE>
The fair value of the options issued is estimated on the date of grant using
the Black-Scholes option-pricing model, with the following weighted-average
assumptions used for grants in 1998 and 1997, respectively: dividend yield of
1.41 percent and 1.45 percent; expected volatility 24.9 percent and 26.2
percent; risk free interest rate of 5.61 percent and 5.92 percent and an
expected life of 4.0 years and 3.5 years.
10. Employee benefit plans
a) Pension plans
Substantially all of the Company's employees are covered by defined contribution
pension plans which are non-contributory. Contributions are based on a
percentage of eligible compensation. Pension expenses amounted to $5 million,
$2.2 million and $1.7 million for 1998, 1997 and 1996, respectively.
b) Options and Stock Appreciation Rights
In February 1996, shareholders of the Company approved the ACE Limited 1995
Long-Term Incentive Plan (the "Incentive Plan") which incorporates stock
options, stock appreciation rights, restricted stock awards and stock purchase
programs. There are 6,900,000 Ordinary Shares of the Company available for
award under this Incentive Plan. Prior to the adoption of the Incentive Plan,
the Company adopted the Equity Linked Incentive Plan, which incorporated both a
Stock Appreciation Rights Plan ("SAR Plan") and a Stock Option Plan ("Option
Plan") which will continue to run off. Under the Option Plan, generally,
options expire ten years after the award date and are subject to a vesting
period of four years. Stock options granted under the Incentive Plan may be
exercised for Ordinary Shares of the Company upon vesting. Under the Incentive
Plan, generally, options expire ten years after the award date and vest in equal
portions over three years. During 1998, 2,489,900 options were issued under the
Incentive Plan. During 1997, 2,231,550 options were issued under the Incentive
Plan. In addition, 950,400 options were issued under the SAR Plan. During
1996, 1,227,600 options were issued under the Incentive Plan and 1,338,267
options were issued with respect to the Tempest Re acquisition (see note 9 (e)).
25
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
10. Employee benefit plans (cont'd.)
b) Options and Stock Appreciation Rights (Cont'd.)
With respect to the SAR plan, certain stock appreciation rights were forfeited
in return for cash during 1997. All remaining stock appreciation rights were
exercised in return for options and cash and/or shares of the Company under the
terms of the Replacement Plan which was implemented in 1997 pursuant to the
Equity Linked Incentive Plan. Total expenses incurred during 1997 relating to
the SAR plan, including those incurred under the Replacement Plan, amounted to
$5,500,000. In 1996, compensation expense of $6,023,000 was recorded. The SAR
Plan entitled participants to the right to receive cash equal to the
appreciation in value, as provided for in the plan, of the rights represented by
the grant. Rights vested over a period of up to six years from the date of
grant. Participants were entitled to receive cash payments equal to the amount
of dividends paid on an equivalent number of shares. Compensation expense was
accrued and recorded based on the change in the value of the stock appreciation
rights during the year and the applicable vesting period.
c) Employee Stock Purchase Plan
In February 1996, shareholders of the Company approved the ACE Limited Employee
Stock Purchase Plan. Participation in the plan is available to all eligible
employees. Maximum annual purchases by participants are limited to the number
of whole shares that can be purchased by an amount equal to 10 percent of the
participant's compensation or $25,000, whichever is less. Participants may
purchase shares at a purchase price equal to 85 percent of the closing market
price of the Company's shares on the last day of each subscription period.
Subscription periods run for six months. With respect to the year ending
September 30, 1998, 27,517 shares were subscribed for, resulting in an expense
of $143,000 to the Company.
d) Restricted stock awards
During 1998, 264,000 restricted Ordinary Shares were awarded to officers of the
Company and its subsidiaries. These shares vest at various dates through
November 2002. In addition, 14,952 restricted Ordinary Shares were awarded to
outside directors of the Company under the terms of the 1995 Outside Directors
Plan ("the Plan"). These shares vest in February 1999.
During fiscal 1997, 149,175 restricted Ordinary Shares were awarded to officers
of the Company and its subsidiaries. These shares vest at various dates through
November 1999. Also, during fiscal 1997, 15,084 restricted Ordinary Shares were
awarded to outside directors of the Company under the terms of the Plan. These
shares vested in February 1998. Also during 1997, 7,500 restricted Ordinary
Shares were forfeited due to resignations by officers of the Company and its
subsidiaries. During 1996, 27,000 restricted Ordinary Shares were awarded to an
officer of the Company. These shares vest at various dates up to July 1999.
Also during 1996, 20,202 restricted Ordinary Shares were awarded to outside
directors of the Company under the terms of the Plan. These shares vested in
February 1997. All non-vested restricted Ordinary Shares issued to directors
prior to approval of the plan, in February 1996, were canceled upon approval of
the Plan. Subsequently, two directors resigned resulting in the forfeiture of
their restricted Ordinary Shares awards. All restricted stock awards contain
restrictions relating to, among other things, transferability and forfeiture
under certain circumstances.
At the time of grant the market value of the shares awarded under these grants
is recorded as unearned stock grant compensation and is presented as a separate
component of shareholders' equity. The unearned compensation is charged to
operations over the vesting period.
26
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
11. Earnings per share
The following table sets forth the computation of basic and diluted earnings per
share for the years ended September 30, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ------------
(in thousands, except
share and per share data)
<S> <C> <C> <C>
Numerator:
Net Income $ 560,151 $ 502,725 $ 327,619
Denominator:
Denominator for basic earnings per share -
Weighted average share outstanding 185,130,479 184,148,641 162,153,091
Effect of dilutive securities 4,150,696 2,660,382 1,615,803
------------ ------------ ------------
Denominator for diluted earnings per share -
Adjusted weighted average shares
outstanding and assumed conversions 189,281,175 186,809,023 163,768,894
============ ============ ============
Basic earnings per share $ 3.03 $ 2.73 $ 2.02
============ ============ ============
Diluted earnings per share $ 2.96 $ 2.69 $ 2.00
============ ============ ============
</TABLE>
12. 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 exempt 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.
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 rates equal to the statutory income tax rate in each
jurisdiction.
The income tax provision for the years ended September 30, 1998, 1997 and 1996
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -------------
(in thousands)
<S> <C> <C> <C>
Current tax expense $ 3,265 $ 8,451 $ 14,547
Deferred tax expense 16,775 16,730 11,996
------------ ------------ ------------
Provision for income taxes $ 20,040 $ 25,181 $ 26,543
============ ============ ============
</TABLE>
29
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
12. Taxation (Cont'd.)
The components of the net deferred tax asset and net deferred tax liability as
of September 30, 1998 and 1997 is a follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(in thousands)
<S> <C> <C>
Deferred tax assets
Loss reserve discount $ 50,581 $ --
Unearned premium adjustment 3,874 --
Uncollectable reinsurance 5,185 --
Other 49,646 3,012
--------- ---------
Total deferred tax assets 109,286 3,012
--------- ---------
Deferred tax liabilities
Deferred policy acquisition costs 3,741 --
Unrealized appreciation of investments 9,282 --
Other 43,696 40,508
--------- ---------
Total deferred tax liabilities 56,719 40,508
--------- ---------
Valuation allowance 27,303 --
--------- ---------
Net deferred tax asset (liability) $ 25,264 $ (37,496)
========= =========
</TABLE>
13. Statutory financial data
Under the Bermuda Insurance Act 1978, (as amended by the Insurance Amendment Act
1995) and Related Regulations the Company's Bermuda-based insurance and
reinsurance subsidiaries ("the Bermuda subsidiaries") are required to file an
annual Statutory Financial Return and Statutory Financial Statements and to
maintain certain measures of solvency and liquidity during each year. Statutory
capital and surplus of the Bermuda subsidiaries was $2,785 million, $2,265
million and $1,885 million at September 30, 1998, 1997 and 1996 and statutory
net income was $592 million, $489 million and $301 million for 1998, 1997 and
1996, respectively. Statutory capital and surplus and statutory net income
include the results of Tempest from July 1, 1996, and CAT from April 1, 1998,
the dates of acquisition by the Company. The principal difference between
statutory capital and surplus and statutory net income of the Bermuda
subsidiaries and shareholders' equity and net income of the Bermuda subsidiaries
computed in accordance with GAAP relates to deferred acquisition costs of the
subsidiaries and goodwill.
There are no statutory restrictions on the payment of dividends from retained
earnings by any of 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.
The Company's US Insurance Subsidiaries are subject to various state statutory
and regulatory restrictions that limit the amount of dividends that may be paid
without prior approval from regulatory authorities. These restrictions differ
by state, but are generally based on calculations incorporating statutory
surplus, statutory net income, and/or investment income. The US Insurance
Subsidiaries' combined statutory surplus amounted to $252 million at September
30, 1998. The combined statutory net result of the US Insurance Subsidiaries
was a loss of $98 million for the nine months ended September 30, 1998.
The payment of any dividends from the Company's UK subsidiaries would be subject
to applicable UK insurance law including those promulgated by the Society of
Lloyd's.
28
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
14. Condensed unaudited quarterly financial data
<TABLE>
<CAPTION>
1998 First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Adjusted for pooling-of-interests
Net premiums earned $205,330 $221,475 $246,350 $221,148
Net investment income 63,672 78,283 93,011 89,288
Net realized gains (losses)
on investments 27,493 145,616 69,448 (54,172)
-------- -------- -------- --------
Total revenues $296,495 $445,374 $408,809 $256,264
======== ======== ======== ========
Losses and loss expenses $122,255 $129,780 $146,233 $118,624
======== ======== ======== ========
Net income $122,210 $247,901 $176,528 $ 13,512
======== ======== ======== ========
Diluted Earnings per share $ 0.72 $ 1.48 $ 0.96 $ 0.07
======== ======== ======== ========
As originally reported
Net premiums earned $167,821 $184,746 $213,126 $221,148
Net investment income 58,413 73,129 88,151 89,288
Net realized gains (losses)
on investments 27,492 145,616 68,791 (54,172)
--------- -------- -------- --------
Total revenues $253,726 $403,491 $370,068 $256,264
======== ======== ======== ========
Losses and loss expenses $109,161 $116,265 $134,305 $118,624
======== ======== ======== ========
Net income $112,816 $236,205 $171,463 $ 13,512
======== ======== ======== ========
Diluted Earnings per share $ 0.67 $ 1.41 $ 0.95 $ 0.07
======== ======== ======== ========
1997 First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(in thousands, except per share data)
Adjusted for pooling-of-interests
Net premiums earned $206,919 $199,150 $202,965 $196,338
Net investment income 62,867 61,160 64,303 65,110
Net realized gains (losses)
on investments 41,580 (2,480) 45,788 $ 42,814
-------- -------- -------- --------
Total revenue $311,366 $257,830 $313,056 $304,262
======== ======== ======== ========
Losses and loss expenses $123,019 $117,350 $123,900 $121,871
======== ======== ======== ========
Net income $138,443 $ 87,676 $139,915 $136,691
======== ======== ======== ========
Diluted Earnings per share $ 0.72 $ 0.46 $ 0.76 $ 0.74
======== ======== ======== ========
As originally reported
Net premiums earned $164,400 $158,641 $163,605 $158,192
Net investment income 59,738 58,094 59,545 60,446
Net realized gains (losses)
on investments 41,723 (2,339) 45,786 42,812
-------- -------- -------- --------
Total revenues $265,861 $214,396 $268,936 $261,450
======== ======== ======== ========
Losses and loss expenses $110,150 $105,290 $111,380 $109,121
======== ======== ======== ========
Net income $125,741 $ 77,949 $130,038 $127,626
======== ======== ======== ========
Diluted Earnings per share $ 0.71 $ 0.45 $ 0.77 $ 0.75
======== ======== ======== ========
</TABLE>
29
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (cont'd.)
15. Condensed unaudited pro forma information relating to the acquisitions of
ACE USA and CAT
The following pro forma information assumes the acquisitions occurred at the
beginning of each year presented. The pro forma financial information is
presented for informational purposes only and is not necessarily indicative of
the operating results that would have occurred had the acquisition been
consummated at the beginning of each year presented, nor is it necessarily
indicative of future operating results.
<TABLE>
<CAPTION>
1998 1997
------------ ------------
(in thousands, except per share
data)
Pro forma:
<S> <C> <C>
Net premiums earned $ 988,847 $ 1,054,060
Net Investment income 337,603 308,836
Net income 581,310 448,791
Diluted earnings per share $ 3.07 $ 2.40
</TABLE>
30
<PAGE>
Exhibit 21.1
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
Jurisdiction
of Percentage
Name Organization Ownership
---- ------------ ---------
<S> <C> <C>
A.C.E. Insurance Company, Ltd. Bermuda 100%
ACE London Group Limited United Kingdom 100%
ACE Capital Limited United Kingdom 100%
ACE Capital III Limited United Kingdom 100%
ACE Capital IV Limited United Kingdom 100%
ACE London Holdings Ltd. United Kingdom 100%
ACE Capital II Ltd. United Kingdom 100%
ACE London Investments Limited United Kingdom 100%
ACE London Aviation Limited United Kingdom 100%
ACE London Underwriting Limited United Kingdom 100%
ACE Underwriting Services Limited United Kingdom 100%
ACE London Services Limited United Kingdom 100%
ACE Staff Corporate Member Limited United Kingdom 100%
Methuen Group Limited United Kingdom 100%
Methuen Holdings Limited United Kingdom 100%
Methuen Europe Limited United Kingdom 100%
Methuen Investments Limited United Kingdom 100%
Methuen Limited United Kingdom 100%
Methuen Services Limited United Kingdom 100%
Methuen Systems Limited United Kingdom 100%
Methuen Underwriting Limited United Kingdom 100%
Underwriting Systems Limited United Kingdom 100%
ACE Reinsurance Company Europe Ltd. Ireland 100%
ACE Insurance Company Europe Ltd. Ireland 100%
Corporate Officers & Directors Assurance Ltd. Bermuda 100%
Oasis Real Estate Co. Ltd. Bermuda 100%
Scarborough Property Holdings, Ltd. Bermuda 40%
Tripar Partnership Bermuda 100%
ACE Insurance Management Ltd. Bermuda 100%
ACE Realty Holdings Ltd. Bermuda 100%
ACE Services Ltd. Cayman Islands 100%
ACE US Holdings, Inc. USA (Delaware) 100%
ACE Strategic Advisors Inc. USA (Delaware) 100%
ACE USA, Inc. USA (Delaware) 100%
Industrial Excess & Insurance Brokers USA (California) 100%
Industrial Underwriters Insurance Co. USA (Texas) 100%
CRC Creditor Resources Canada Limited Canada (British Columbia) 60%
Rhea International Marketing (L), Inc. Malaysia 60%
Westchester Fire Insurance Company USA (New York) 100%
Westchester Surplus Lines Insurance Co. USA (Georgia) 100%
Westchester Specialty Insurance Services Inc. USA (Nevada) 100%
Oasis Insurance Services Ltd. Bermuda 100%
Oasis Investments Limited Bermuda 100%
Oasis Personnel Limited Cayman Islands 100%
Tarquin United Kingdom 100%
ACE Capital V Limited United Kingdom 100%
Charman Group Limited United Kingdom 100%
Charman Underwriting Agencies Limited United Kingdom 100%
Charman Trustees Limited United Kingdom 100%
Tempest Reinsurance Company Limited Bermuda 100%
CAT Limited Bermuda 100%
Hamilton Services Limited Bermuda 100%
</TABLE>
39
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in (i) this annual report on
Form 10-K; (ii) Registration Statements on Form S8 (Nos. 333-1404, 333-1402,
333-1400, 33-86146, 333-4301) and (iii) Registration Statement on Form S3 (No.
333-60985) of our report dated November 4, 1998 on our audits of the
consolidated financial statements of ACE Limited as of September 30, 1998 and
1997, and for each of the three years in the period ended September 30, 1998,
from page 43 of the 1998 Annual Report to Shareholders of ACE Limited.
New York, New York
December 17, 1998 PricewaterhouseCoopers LLP
40
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACE
LIMITED 1998 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 5,056,807
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 189,717
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 5,883,360
<CASH> 317,714
<RECOVER-REINSURE> 57,225
<DEFERRED-ACQUISITION> 76,445
<TOTAL-ASSETS> 8,788,753
<POLICY-LOSSES> 3,737,869
<UNEARNED-PREMIUMS> 773,702
<POLICY-OTHER> 129,692
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 8,066
<OTHER-SE> 3,706,204
<TOTAL-LIABILITY-AND-EQUITY> 8,788,753
894,303
<INVESTMENT-INCOME> 324,254
<INVESTMENT-GAINS> 188,385
<OTHER-INCOME> 0
<BENEFITS> 516,892
<UNDERWRITING-AMORTIZATION> 105,654
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 580,191
<INCOME-TAX> 20,040
<INCOME-CONTINUING> 560,151
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 560,151
<EPS-PRIMARY> 3.03
<EPS-DILUTED> 2.96
<RESERVE-OPEN> 2,745,225
<PROVISION-CURRENT> 534,021
<PROVISION-PRIOR> (17,129)
<PAYMENTS-CURRENT> 246,354
<PAYMENTS-PRIOR> 337,422
<RESERVE-CLOSE> 2,678,341
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<PAGE>
Exhibit 99.1
SUMMARY OF TAXATION OF ACE, ITS SUBSIDIARIES AND ITS SHAREHOLDERS
The following summary of (i) the taxation of ACE and its subsidiaries and
(ii) the taxation of ACE shareholders is based upon current law. Legislative,
judicial or administrative changes may be forthcoming that could be retroactive
and could affect this summary. The tax treatment of any particular shareholder
may vary depending on such shareholder's particular tax situation or status. The
following summary is for general information only and does not purport to be a
complete analysis or listing of all tax considerations that might be applicable
to ACE and its subsidiaries or a holder of ACE Ordinary Shares, including
persons who may be subject to special tax rules (e.g. tax exempt entities or
dealers in securities) or shareholders who are not U.S. persons. A U.S. person
who holds ACE Ordinary Shares as capital assets will be referred to herein as a
"U.S. ACE Shareholder." Each prospective shareholder is urged to consult his or
its own tax advisors as to the particular tax consequences to such shareholder
of owning ACE Ordinary Shares.
Taxation of ACE and its Subsidiaries
Bermuda. CODA, ACE Insurance, Tempest Re and CAT have received from the
Minister of Finance of Bermuda an assurance under The Exempted Undertakings Tax
Protection Act, 1966 of Bermuda, to the effect that in the event of there being
enacted in Bermuda any legislation imposing tax computed on profits or income,
or computed on any capital asset, gain or appreciation, or any tax in the nature
of estate duty or inheritance tax, then the imposition of any such tax shall not
be applicable to ("the Bermuda Insurance Subsidiaries") or to any of their
operations or the shares, debentures or other obligations of the Bermuda
Insurance Subsidiaries until March 28, 2016. This assurance does not prevent
the application of any such tax or duty to such persons as are ordinarily
resident in Bermuda, nor does it prevent the application of any tax payable in
accordance with the provisions of the Land Tax Act 1967 of Bermuda or otherwise
payable in relation to the property leased to the Bermuda Insurance
Subsidiaries." ACE, as a permit company under the Companies Act 1981 of Bermuda
(the "Bermuda Act"), has received similar assurances which are effective until
March 28, 2016. The Bermuda Insurance Subsidiaries under current rates, pay
annual Bermuda government and business fees. ACE also pays certain annual
Bermuda government fees. In addition, all entities employing individuals in
Bermuda are required to pay a payroll tax to the Bermuda Government. For the
fiscal year ended September 30, 1996, ACE paid approximately $776,000 in payroll
tax. Currently there is no Bermuda withholding tax on dividends paid by the
Bermuda Insurance Subsidiaries.
Cayman Islands. Under current Cayman Islands law, ACE is not obligated to
pay any taxes in the Cayman Islands on its income or gains. ACE has received an
undertaking from the Governor-in-Council of the Cayman Islands pursuant to the
provisions of the Tax Concessions Law, as amended, that until the year 2005 (i)
no subsequently enacted law imposing any tax on profits, income, gains or
appreciations shall apply to ACE and (ii) no such tax and no tax in the nature
of an estate duty or an inheritance tax shall be payable on any shares,
debentures or other obligations of ACE. The Cayman Islands currently imposes
stamp duties on certain categories of documents; however, the current operations
of ACE do not involve the payment of stamp duties in any material amount. The
Cayman Islands currently imposes an annual corporate fee upon all exempted
companies; at current rates ACE pays fees of approximately $1,750 per annum.
<PAGE>
United Kingdom. The effect of taxation on the Company as a result of its
operations in the Lloyd's Market are set out on pages 21-22 of the Form 10-K.
Although ACE has a representative office in London, ACE has been advised that it
is not deemed to be doing insurance business in the United Kingdom and therefore
is subject only to minimal tax in the United Kingdom.
United States. Except as provided below with respect to ACE's corporate
subsidiaries that are Lloyd's corporate members, ACE USA and its US insurance
subsidiaries, ACE and its subsidiaries do not conduct business within the United
States and thus are not subject to net income tax imposed by the United States.
However, because definitive identification of activities which constitute being
engaged in a trade or business in the United States is not provided by the Code,
regulations or court decisions, there can be no assurance that the IRS will not
contend successfully that ACE or one or more of its subsidiaries is engaged in a
trade or business in the United States. A foreign corporation deemed to be so
engaged would be subject to U.S. income tax, as well as the branch profits tax,
on its income which is treated as effectively connected with the conduct of that
trade or business unless the corporation is entitled to relief under the
permanent establishment provision of the Bermuda Treaty, as discussed below.
Such income tax, if imposed, would be based on effectively connected income
computed in a manner generally analogous to that applied to the income of a
domestic corporation, except that a foreign corporation can anticipate an
allowance of deductions and credits only if it files a U.S. income tax return.
Under regulations, the foreign corporation would be entitled to deductions and
credits only if the return is filed timely under rules set forth therein. ACE
and its subsidiaries have in the past and expect to continue filing protective
tax returns to ensure that it and its subsidiaries would be entitled to
deductions and credits if they are considered to be engaged in a U.S. trade or
business. The highest federal tax rates currently are 35% for a corporation's
effectively connected income and 30% for the branch profits tax. The branch
profits tax is imposed on effectively connected net income after subtracting the
regular corporate tax and making certain other adjustments and on interest paid
or deemed paid from the U.S. branch to persons outside the United States.
Pursuant to a Closing Agreement between Lloyd's and the IRS, ACE's corporate
subsidiaries that is a Lloyd's corporate members are treated as engaged in
business in the United States and subject to net income tax in the United States
on their U.S. source income.
Under the Bermuda Treaty, the Bermuda Insurance Subsidiaries are subject to
U.S. income tax on any income found to be effectively connected with a U.S.
trade or business only if that trade or business is conducted through a
permanent establishment in the United States. No regulations interpreting the
Bermuda Treaty have been issued. While there can be no assurances, ACE does not
believe the Bermuda Insurance Subsidiaries has a permanent establishment in the
United States. Neither the Bermuda Insurance Subsidiaries would be entitled to
the benefits of the Bermuda Treaty if (i) less than 50% of such subsidiary's
stock were beneficially owned, directly or indirectly, by Bermuda residents or
U.S. citizens or residents, or (ii) such subsidiary's income were used in
substantial part to make disproportionate distributions to, or to meet certain
liabilities of, persons who are not Bermuda residents or U.S. citizens or
residents. While there can be no assurances, ACE believes that no exception to
Bermuda Treaty benefits will apply after the Amalgamation.
Foreign corporations not engaged in a trade or business in the United
States are nonetheless subject to U.S. income tax on certain "fixed or
<PAGE>
determinable annual or periodic gains, profits and income" derived from sources
within the United States as enumerated in Section 881(a) of the Code (such as
dividends and certain interest on investments). The amount of such taxes paid by
ACE has not exceeded $1.7 million in any fiscal year.
Effect of the Amalgamation. ACE believes that the Amalgamation will not
cause ACE or its existing subsidiaries to be subject to tax in the Cayman
Islands, Bermuda or the United States (except to the very limited extent noted
above that they are currently subject to tax in those jurisdictions), and it is
expected that the ACE Reinsurance Subsidiary will be taxed in a manner similar
to ACE's other subsidiaries. Accordingly, the foregoing description of the tax
treatment of ACE and its operating subsidiaries by Bermuda, the Cayman Islands,
the United Kingdom and the United States should remain unchanged after the
Effective Time and should, where applicable, apply equally to the ACE
Reinsurance Subsidiary.
Taxation of ACE Shareholders
Cayman Islands. Dividends paid by ACE are not subject to Cayman Islands
withholding tax.
Bermuda. Under current Bermuda law, there is no Bermuda income tax,
withholding tax, capital gains tax, capital transfer tax, estate duty or
inheritance tax payable by the respective shareholders of ACE with respect to an
investment in ACE Ordinary Shares.
United States--Taxation of dividends. Subject to the discussion below
relating to the potential application of the "controlled foreign corporation"
and "passive foreign investment company" rules, cash distributions made with
respect to ACE Ordinary Shares will constitute dividends for U.S. federal income
tax purposes to the extent paid out of current or accumulated E&P of ACE. U.S.
ACE Shareholders generally will be subject to U.S. federal income tax on the
receipt of such dividends. Generally, such dividends will not be eligible for
the corporate dividends received deduction. To the extent that a distribution
exceeds E&P, it will be treated first as a return of the U.S. ACE Shareholder's
basis to the extent thereof, and then as gain from the sale of a capital asset.
United States--Classification as a controlled foreign corporation. Under
Section 951(a) of the Code, each "U.S. 10% shareholder" (as defined below) that,
on the last day of foreign corporation's taxable year, owns, directly or
indirectly through a foreign entity, shares of a foreign corporation that is a
"controlled foreign corporation" ("CFC") for an uninterrupted period of 30 days
or more during any taxable year must include in its gross income for U.S.
federal income tax purposes its pro rata share of the CFC's "subpart F income"
for such year, even if the subpart F income is not distributed. In addition, the
U.S. 10% shareholders of a CFC may be deemed to receive taxable distributions to
the extent the CFC increases the amount of its earnings that are invested in
certain specified types of U.S. property. "Subpart F income" includes,
inter alia, (i) "foreign personal holding company income", such as interest,
dividends, and other types of passive investment income and (ii) "insurance
income," which is defined to include any income (including underwriting and
investment income) that is attributable to the issuing (or reinsuring) of any
insurance or annuity contract in connection with property in, liability arising
out of activity in, or in connection with the lives or health of residents of, a
country other than the country under the laws of which the CFC is created or
organized, and which (subject to certain modifications) would be taxed under the
<PAGE>
insurance company provision of the Code if such income were the income of a
domestic insurance company ("Subpart F Insurance Income"). A recent legislative
change expands the definition of insuance income that is not treated as "Subpart
F income" to include income from certain non-U.S. insurance companies that are
regulated in the country where they are organized and are entitled to issue
insurance policies to persons in that country. However, Subpart F
income does not include any income from sources within the U.S. which is
effectively connected with the conduct of a trade or business within the U.S.
and not exempted or subject to a reduced rate of tax by applicable treaty.
Therefore, all of ACE's income, and all income of ACE's operating subsidiaries
that is not attributable to a permanent establishment in the U.S., is expected
to be Subpart F income.
Under Section 951(b) of the Code, any U.S. Person who owns, directly or
indirectly through foreign entities, or is considered to own (by application of
the rules of constructive ownership set forth in Code Section 958(b), generally
applying to family members, partnerships, estates, trusts or 10% controlled
corporations) 10% or more of the total combined voting power of all classes of
stock of a foreign corporation will be considered to be a "U.S. 10%
shareholder." In general, a foreign corporation is treated as a CFC only if its
U.S. 10% shareholders collectively own more than 50% of the total combined
voting power or total value of the corporation's stock on any day (the "50%
Test"). However, for purposes only of taking into account Subpart F Insurance
Income, a foreign corporation will be treated as a CFC if (i) more than 25% of
the total combined voting power or total value of its stock is owned by U.S. 10%
shareholders and (ii) the gross amount of premiums or other consideration in
respect of risks outside its country of incorporation exceeds 75% of the gross
amount of all premiums or other consideration in respect of all risks (the "25%
Test"). It is anticipated that the gross premiums of each of the insurance
subsidiaries of ACE in respect of Subpart F Insurance Income will exceed 75% of
its gross premiums in respect of all risks so that the 25% Test, rather than the
50% Test, will be applicable with respect to its Subpart F Insurance Income.
However, the 50% test will continue to apply to ACE itself.
After the Amalgamation, all the capital stock of ACE Insurance, CODA, and
the ACE Reinsurance Subsidiary will be owned directly or indirectly by ACE. In
determining the U.S. 10% shareholders of ACE Insurance, CODA, or the ACE
Reinsurance Subsidiary, U.S. Persons who are shareholders of ACE are considered
as owning proportionately the stock of ACE Insurance, CODA, and the ACE
Reinsurance Subsidiary. After the Amalgamation, U.S. Persons who own, directly,
indirectly or by attribution under the rules of Section 958(b) of the Code, more
than 10% in value of the stock of ACE will not own more than 25% of the total
combined voting power or value of the stock of ACE. As a result, none of ACE
Insurance, CODA, or the ACE Reinsurance Subsidiary, will be a CFC under the 25%
Test. However, depending on the future ownership of ACE stock, any U.S. Person
who subsequently acquires 10% or more of the stock of ACE may be required to
include their share of the Subpart F income of ACE and its subsidiaries in their
U.S. taxable income. It is not expected that ACE itself would ever be a CFC
under the 50% test, so U.S. persons are not expected to have to include any of
ACE's Subpart F income in their U.S. taxable income.
United States--RPII companies. A different definition of "controlled
foreign corporation" is applicable in the case of a foreign corporation which
earns related person insurance income ("RPII"). RPII is defined in Code Section
953(c)(2) as any "insurance income" (as defined above) attributable to policies
of insurance or reinsurance with respect to which the person (directly or
indirectly) insured is a "U.S. shareholder" of the foreign corporation or a
"related person" to such a shareholder. For purposes only of taking into account
RPII, and subject to the exceptions described below, an insurance subsidiary of
ACE will be treated as a CFC it its "RPII shareholders" (as defined below)
collectively own, directly, indirectly, or by attribution under Code Section
<PAGE>
958(b), 25% or more of the total combined voting power or value of such
subsidiary's stock on any day during a fiscal year. If an insurance subsidiary
of ACE is a CFC under the special RPII rules for an uninterrupted period of at
least 30 days during any fiscal year, a U.S. Person who owns, directly or
indirectly through foreign entities, shares of shares of such subsidiary on the
last day of such fiscal year must include in its gross income for U.S. federal
income tax purposes its allocable share of RPII for the entire taxable year,
subject to certain modifications. For purposes of inclusion of RPII from an
insurance subsidiary of ACE in the income of U.S. Persons who own ACE Ordinary
Shares, unless an exception applies, the term "RPII shareholder" includes all
U.S. Persons who own, directly or indirectly through foreign entities, any
amount (rather than 10% or more) of the ACE Ordinary Shares. Generally, the term
"related person" for purposes of the RPII rules means someone who controls or is
controlled by the RPII shareholder or someone who is controlled by the same
person or persons which control the RPII shareholder. Control is measured by
either more than 50% in value or more than 50% in voting power of stock, with
respect to corporations, or more than 50% of the beneficial interests, with
respect to partnerships, trusts, or estates, applying constructive ownership
principles similar to the rules of Section 958 of the Code. The term "related
persons" also includes, with respect to insurance policies covering liability
arising from services performed as a director, officer or employee of a
corporation or a partner or employee of a partnership, the person performing
such services and the entity for which the services are performed.
The above RPII rules do not apply if (A) direct and indirect insureds and
persons related to such insureds, whether or not U.S. persons, are treated as
owning less than 20% of the voting power and less than 20% of the value of the
stock of ACE's insurance company subsidiaries, or (B) the RPII of each of ACE's
insurance subsidiaries, determined on a gross basis, is less than 20% of each
such subsidiary's gross insurance income for the taxable year. ACE believes that
the RPII income of each of ACE Insurance and CODA has been, and should be for
the foreseeable future, less than 20% of such subsidiary's gross insurance
income for the taxable year and, based in part on information provided by
Tempest, it is expected that the ACE Reinsurance Subsidiary's RPII income will
constitute less than 20% of its gross insurance income for future taxable years.
As a consequence, the special RPII rules should not apply, and U.S. Persons
owning ACE Ordinary Shares should not be required to include in gross income any
RPII income under the special RPII rules. The IRS may assert, however, that
ACE's reinsurance subsidiaries indirectly reinsure shareholders of ACE. ACE does
not expect any of its subsidiaries to enter into reinsurance arrangements where
the ultimate risk insured is that of a holder of ACE Ordinary Shares that is a
U.S. person or person related to such a U.S. person at a level which would cause
any subsidiary to have RPII income of 20% or more of its gross insurance income.
However, unless final Treasury Regulations under Code Section 953 provide that
this rule would apply only if the reinsured entity is fronting for another
party, it may be difficult for ACE to obtain and, if requested of ACE or a
shareholder by the IRS, provide shareholders with enough information to document
and be certain that each of ACE's subsidiaries providing significant reinsurance
have satisfied the 20% test. ACE believes that it is unlikely that enough of the
underlying reinsured parties will own sufficient ACE Ordinary Shares to cause
the RPII income of any of ACE's subsidiaries to be 20% or more of their gross
insurance income and ACE will endeavor to avoid failing the 20% test. However,
the ultimate application of the RPII rules and the proof that will be required
to establish compliance thereunder is uncertain and each prospective investor
should consult their own tax advisor with respect to this issue.
<PAGE>
United States--Passive foreign investment companies. Code Sections 1291
through 1298 contain special rules applicable to foreign corporations that are
"passive foreign investment companies" ("PFIC's"). In general, a foreign
corporation will be a PFIC if 75% or more of its gross income constitutes
"passive income" (the "75% Income Test") or 50% or more of its assets produce,
or are held for the production of, passive income (the "50% Asset Test"). If ACE
were to be characterized as a PFIC, its U.S. shareholders would have to make an
election (a "QEF Election") to be taxable currently on their pro-rata shares of
earnings of ACE whether or not such earnings were distributed, or would have to
make an election to market their shares of ACE at the end of each tax year, or
they would be subject to a special tax and an interest charge at the time of the
sale of, or receipt of an "excess distribution" with respect to, their shares,
and a portion of any gain may be re-characterized as ordinary income, which for
an individual would be taxed at the highest marginal rate of 39.6%.
In general, a shareholder receives an "excess distribution" if the amount
of the distribution is more than 125% of the average distribution with respect
to the stock during the three preceding taxable years (or shorter period during
which the taxpayer held the stock). In general, the special tax and interest
charges are based on the value of the tax deferral of the taxes that are deemed
due during the period the U.S. shareholder owned the shares, computed by
assuming that the excess distribution or gain (in the case of a sale) with
respect to the shares was taxed in equal portions throughout the holder's period
of ownership at the highest marginal tax rate. The interest charge is computed
using the applicable rate imposed on underpayments of U.S. federal income tax
for such period. In general, if a U.S. Person owns stock in a foreign
corporation during any taxable year in which such corporation is a PFIC and such
shareholder does not make a QEF Election, the stock will be treated as stock in
a PFIC for all subsequent years.
For the above purposes, "passive income" is defined to include income of a
kind that would be characterized as foreign personal holding company income
under Code Section 954(c), and generally includes interest, dividends, annuities
and other investment income. The PFIC statutory provisions contain and express
exception for income "derived in the active conduct of an insurance business by
a corporation which is predominantly engaged in an insurance business . . ."
"This exception is intended to ensure that income derived by a bona fide
insurance company is not treated as passive income. Thus, to the extent such
income is attributable to financial reserves in excess of the reasonable needs
of the insurance business, it may be treated as passive income for purposes of
the PFIC rules. The PFIC statutory provisions also contain a look-through rule
that states that, for purposes of determining whether a foreign corporation is a
PFIC, such foreign corporation shall be treated as if it "received directly its
proportionate share of the income . . . "and as if it "held its proportionate
share of the assets . . ." of any other corporation in which it owns at least
25% of the value of the stock.
In ACE's view each of its direct and indirect insurance subsidiaries
(including the ACE Reinsurance Subsidiary, after the Effective Time) is
predominantly engaged in an insurance business and does not have financial
reserves in excess of the reasonable needs of its insurance business. Under the
look-through rule, ACE would be deemed to own its proportionate share of the
assets and to have received its proportionate share of the income of ACE
Insurance, CODA, and the ACE Reinsurance Subsidiary for purposes of the 75%
Income and 50% Assets Test. However, no regulations interpreting the substantive
PFIC provisions have yet been issued. Therefore, substantial uncertainty exists
with respect to their application or their possible retroactivity. Each U.S.
<PAGE>
Person who holds ACE Ordinary Shares should consult his tax advisor as to the
possible effects of these rules.
Information Reporting. Every U.S. Person who "controls" a foreign
corporation by owning directly or by attribution more than 50% of the total
value of shares of all classes of stock of such corporation, for an
uninterrupted period of 30 days or more during a fiscal year of that
corporation, must file IRS Form 5471 with its U.S. income tax return. However,
the IRS has the authority to, and does require, any U.S. Person treated as a
U.S. 10% shareholder or RPII shareholder of a CFC that owns shares directly or
indirectly through a foreign entity to file a Form 5471. In addition, U.S.
Persons who own more than 5% in value of the outstanding stock of ACE or its
subsidiaries at any time during a taxable year are required in certain
circumstances to file Form 5471 even if neither corporation is a CFC. A tax-
exempt organization that is treated as a U.S. 10% shareholder or a RPII
shareholder for any purpose under subpart F will be required to file a Form 5471
in the circumstances described above. Failure to file Form 5471 may result in
penalties.
Dispositions of ACE Ordinary Shares. Subject to the discussion elsewhere
relating to the potential application of the CFC and PFIC rules, gain or loss
realized by a U.S. ACE Shareholder on the sale, exchange or other disposition of
ACE Ordinary Shares will be includible in gross income as capital gain or loss
in an amount equal to the difference between such holder's basis in the ACE
Ordinary Shares and the amount realized on the sale, exchange or other
disposition. If a U.S. ACE Shareholder's holding period for the ACE Ordinary
Shares is more than one year, any gain will be subject to the U.S. federal
income tax at a current maximum marginal rate of 20% for individuals and 35% for
corporations.
earnings and profits during the period that the shareholder held the shares
(with certain adjustments). Code Section 953(c)(7) generally provides that
Section 1248 also will apply to the sale or exchange of shares by a U.S.
shareholder in a foreign corporation that earns RPII and is characterized as a
CFC under the RPII rules if the foreign corporation would be taxed as an
insurance company if it were a domestic corporation, regardless of whether the
shareholder is a 10% shareholder or whether RPII constitutes 20% or more of the
corporation's gross insurance income.
ACE believes, based on the advice of counsel, that Code Section 1248 will
not apply to dispositions of ACE Ordinary Shares, so long as ACE is not a CFC,
because ACE is not directly engaged in the insurance business. There can be no
assurance, however, that the IRS will interpret proposed regulations under Code
Section 953 in this manner or that the Treasury Department will not amend the
proposed regulations under Section 953 or other regulations to provide that
Section 1248 will apply to dispositions of shares in a corporation such as ACE
which is engaged in the insurance business directly on indirectly through its
subsidiaries. If the IRS or Treasury Department were to take such action ACE
would notify shareholders that Code Section 1248 will apply to dispositions of
Common Shares.
Foreign Tax Credit. Because it is anticipated that U.S. Persons will own a
majority of ACE's shares after the Amalgamation and because a substantial part
of the insurance business of ACE's subsidiaries includes the insurance of U.S.
risks only a portion of the RPII and Subpart F inclusions (if any) and dividends
paid by ACE (including any gain from the sale of ACE Ordinary Shares that is
treated as a dividend under Code Section 1248) will be treated as foreign source
<PAGE>
income for purposes of computing a shareholder's U.S. foreign tax credit
limitation. Except in the case of U.S. 10% shareholders it is likely that all
of the RPII and Subpart F inclusions (if any) and dividends that are foreign
source income will constitute either "passive" or "financial services" income
for foreign tax credit limitation purposes. Thus, it may not be possible for
certain U.S. shareholders to utilize excess foreign tax credits to reduce U.S.
tax on such income.
Other. Dividends paid by ACE to U.S. corporate shareholders will not be
eligible for the dividends received deduction provided by Code Section 243.
Except as discussed below with respect to backup withholding, dividends
paid by ACE will not be subject to a U.S. withholding, tax.
Information reporting to the IRS by paying agents and custodians located in
the U.S. will be required with respect to payments of dividends (if any) on the
ACE Ordinary Shares to U.S. Persons or to paying agents or custodians located in
the U.S. In addition, a holder of ACE Ordinary Shares may be subject to backup
withholding at the rate of 31% with respect to dividends paid by such persons,
unless such holder (a) is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact; or (b) provides a
taxpayer identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. The backup withholding tax is not an additional tax and may
be credited against a holder's regular Federal income tax liability.
Sales of ACE Ordinary Shares through brokers by certain U.S. Persons also
may be subject to backup withholding. Sales by corporations, certain tax-exempt
entities, individual retirement plans, REITs, certain financial institutions,
and other "exempt recipients" as defined in applicable Treasury regulations
currently are not subject to backup withholding. Holders of ACE Ordinary Shares
should consult their own tax advisors regarding the possible applicability of
the backup withholding rules to sales of their ACE Ordinary Shares.
The foregoing discussion (including and subject to the matters and
qualifications set forth in such summary) is based on current law and is for
general information only. The tax treatment of a holder of ACE Ordinary Shares
for U.S. federal income, state, local or non-U.S. tax purposes may vary
depending on the holder's particular tax situation. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could be
retroactive and could affect the tax consequences to holders of ACE Ordinary
Shares. PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS
CONCERNING THE FEDERAL, STATE, LOCAL AND NON-U.S. TAX CONSEQUENCES TO THEM OF
OWNING THE ACE ORDINARY SHARES.
