UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______________ to _______________
Commission File No. 1-11778 I.R.S. Employer Identification No. 98-0091805
ACE LIMITED
(Incorporated in the Cayman Islands)
The ACE Building
30 Woodbourne Avenue
Hamilton HM 08
Bermuda
Telephone 441-295-5200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES __X__ NO _____
The number of registrant's Ordinary Shares ($0.041666667 par value)
outstanding as of November 12, 1999 was 194,059,295.
<PAGE>
ACE LIMITED
INDEX TO FORM 10-Q
Part I. FINANCIAL INFORMATION
- ------------------------------
Page
No.
----
Item 1. Financial Statements:
Consolidated Balance Sheets (Unaudited)
September 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations (Unaudited)
Three Months and Nine Months Ended
September 30, 1999 and 1998 4
Consolidated Statements of Shareholders' Equity (Unaudited)
Nine Months Ended September 30, 1999 and 1998 5
Consolidated Statements of Comprehensive Income (Unaudited)
Nine Months Ended September 30, 1999 and 1998 6
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 1999 and 1998 7
Notes to Interim Consolidated Financial Statements (Unaudited) 8
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition 17
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 32
2
<PAGE>
<TABLE>
<CAPTION>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30 December 31
1999 1998
---- ----
(in thousands of U.S. Dollars, except share
and per share data)
<S> <C> <C>
Assets
Investments and cash
Fixed maturities available for sale, at fair value
(amortized cost - $9,478,887 and $4,784,412) $ 9,338,437 $ 4,866,366
Equity securities, at fair value (cost - $749,461 and $196,375) 756,102 220,843
Short-term investments, at fair value
(amortized cost - $670,595 and $757,788) 667,800 757,804
Other investments, at fair value (cost - $366,779 and $128,119) 366,382 129,331
Cash 735,780 240,556
------------ ------------
Total investments and cash 11,864,501 6,214,900
Accrued investment income 174,445 54,491
Insurance and reinsurance balances receivable 2,318,832 347,810
Accounts and notes receivable 564,768 --
Reinsurance recoverable 8,924,000 1,159,270
Deferred policy acquisition costs 374,251 67,502
Prepaid reinsurance premiums 590,288 201,529
Goodwill 2,664,886 535,920
Deferred tax assets 977,273 42,796
Other assets 890,939 210,087
------------ ------------
Total assets $ 29,344,183 $ 8,834,305
============ ============
Liabilities
Unpaid losses and loss expenses $ 17,198,095 $ 3,678,269
Unearned premiums 2,128,389 705,712
Premiums received in advance 67,856 62,671
Insurance and reinsurance balances payable 1,493,248 72,993
Contract holder deposit funds 196,338 --
Accounts payable, accrued expenses and other liabilities 1,475,928 137,383
Dividend payable 21,347 17,700
Short-term debt 1,449,279 --
Long-term debt 1,049,334 250,000
Trust preferred securities 400,000 --
------------ ------------
Total liabilities 25,479,814 4,924,728
============ ============
Commitments and contingencies
Shareholders' Equity
Ordinary Shares ($0.041666667 par value, 300,000,000 shares authorized;
194,063,128 and 193,687,126 shares issued and outstanding) 8,086 8,070
Additional paid-in capital 1,773,825 1,767,188
Unearned stock grant compensation (10,889) (15,087)
Retained earnings 2,193,461 2,040,664
Accumulated other comprehensive (loss) income (100,114) 108,742
------------ ------------
Total shareholders' equity 3,864,369 3,909,577
------------ ------------
Total liabilities and shareholders' equity $ 29,344,183 $ 8,834,305
============ ============
See accompanying notes to interim consolidated financial statements
3
<PAGE>
<CAPTION>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended September 30, 1999 and 1998
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------------------------------------------------------------------
(in thousands of U.S. Dollars, except per share data)
<S> <C> <C> <C> <C>
Revenues
Gross premiums written $ 1,544,458 $ 317,053 $ 2,488,952 $ 1,034,703
Reinsurance premiums ceded (633,554) (140,478) (845,114) (306,879)
----------- ----------- ----------- -----------
Net premiums written 910,904 176,575 1,643,838 727,824
Change in unearned premiums 42,047 44,573 (105,349) (38,851)
----------- ----------- ----------- -----------
Net premiums earned 952,951 221,148 1,538,489 688,973
Net investment income 163,060 89,288 334,338 260,582
Net realized gains (losses) on investments (58,493) (54,172) (15,932) 160,892
----------- ----------- ----------- -----------
Total revenues 1,057,518 256,264 1,856,895 1,110,447
----------- ----------- ----------- -----------
Expenses
Losses and loss expenses 632,910 118,624 1,045,262 394,637
Policy acquisition costs 137,681 24,001 203,505 80,826
Administrative expenses 201,332 85,846 297,131 146,110
Amortization of goodwill 17,474 4,336 26,408 10,563
Loan interest expense 44,068 12,881 52,745 24,098
Other non-insurance expenses 2,932 0 2,932 0
----------- ----------- ----------- -----------
Total expenses 1,036,397 245,688 1,627,983 656,234
----------- ----------- ----------- -----------
Income before income taxes 21,121 10,576 228,912 454,213
Income tax expense (benefit) 6,328 (2,936) 15,978 16,272
----------- ----------- ----------- -----------
Net income $ 14,793 $ 13,512 $ 212,934 $ 437,941
=========== =========== =========== ===========
Basic earnings per share $ 0.08 $ 0.07 $ 1.10 $ 2.34
=========== =========== =========== ===========
Diluted earnings per share $ 0.08 $ 0.07 $ 1.08 $ 2.29
=========== =========== =========== ===========
See accompanying notes to interim consolidated financial statements
4
<PAGE>
<CAPTION>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
September 30
1999 1998
------------------------------
(in thousands of U.S. Dollars)
<S> <C> <C>
Ordinary shares
Balance at beginning of period $ 8,070 $ 7,406
Ordinary Shares issued 0 688
Issued under Employee Stock Purchase Plan (ESPP) 1 1
Exercise of stock options 15 14
Repurchase of Ordinary Shares 0 (43)
----------- -----------
Balance at end of period 8,086 8,066
----------- -----------
Additional paid-in capital
Balance at beginning of period 1,767,188 1,161,932
Ordinary Shares issued 0 605,211
Cancellation of restricted stock award (371) 0
Issued under ESPP 1,420 954
Exercise of stock options 5,588 3,801
Repurchase of Ordinary Shares 0 (6,637)
----------- -----------
Balance at end of period 1,773,825 1,765,261
----------- -----------
Unearned stock grant compensation
Balance at beginning of period (15,087) (4,250)
Stock grants awarded (1,922) (5,428)
Stock grants forfeited 312 0
Amortization 5,808 3,497
----------- -----------
Balance at end of period (10,889) (6,181)
----------- -----------
Retained earnings
Balance at beginning of period 2,040,664 1,452,634
Net income 212,934 437,941
Dividends declared (60,137) (46,561)
Repurchase of Ordinary Shares 0 (24,460)
----------- -----------
Balance at end of period 2,193,461 1,819,554
----------- -----------
Accumulated other comprehensive income (loss)
Net unrealized appreciation (depreciation) on investments
Balance at beginning of period 102,271 173,428
Change in period, net of tax (208,482) (45,583)
----------- -----------
Balance at end of period (106,211) 127,845
----------- -----------
Cumulative translation adjustments
Balance at beginning of period 6,471 1,199
Net adjustments during period (374) (1,474)
----------- -----------
Balance at end of period 6,097 (275)
----------- -----------
Accumulated other comprehensive income (loss) (100,114) 127,570
----------- -----------
Total Shareholders' Equity $ 3,864,369 $ 3,714,270
=========== ===========
See accompanying notes to interim consolidated financial statements
5
<PAGE>
<CAPTION>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
September 30 September 30
1999 1998
---- ----
(in thousands of U.S. Dollars)
<S> <C> <C>
Net income $ 212,934 $ 437,941
Other comprehensive income (loss)
Net unrealized appreciation (depreciation) on investments
Unrealized appreciation (depreciation) on investments (190,344) 64,848
Less: reclassification adjustment for net realized gains
included in net income (54,308) (101,149)
--------- ---------
(244,652) (36,301)
Cumulative translation adjustments (374) (1,474)
--------- ---------
Other comprehensive income (loss), before income taxes (245,026) (37,775)
Income tax benefit (expense) related to other comprehensive income items 36,170 (9,282)
--------- ---------
Other comprehensive income (loss) (208,856) (47,057)
--------- ---------
--------- ---------
Comprehensive income $ 4,078 $ 390,884
========= =========
See accompanying notes to interim consolidated financial statements
6
<PAGE>
<CAPTION>
ACE LIMITED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
September 30
1999 1998
---- ----
(in thousands of U.S. Dollars)
<S> <C> <C>
Cash flows from operating activities
Net income $ 212,934 $ 437,941
Adjustments to reconcile net income to net cash used for
operating activities:
Unearned premiums 165,294 69,617
Unpaid losses and loss expenses, net of reinsurance recoverable (304,304) (82,804)
Prepaid reinsurance premiums (99,254) (100,175)
Net realized gains (losses) on investments 15,932 (160,892)
Amortization of net discount on fixed maturities (6,009) (21,663)
Amortization of goodwill 26,408 12,403
Deferred acquisition costs (18,280) (28,767)
Insurance and reinsurance balances receivable (384,759) (98,337)
Deferred income taxes 9,515 45,652
Premiums received in advance 5,185 10,489
Insurance and reinsurance balances payable 230,301 49,939
Accounts payable, accrued expenses and other liabilities (38,885) (164,843)
Net change in contract holder deposit funds (1,591) 0
Other (97,858) (20,464)
------------ -----------
Net cash flows used for operating activities (285,371) (51,904)
------------ -----------
Cash flows from investing activities
Purchases of fixed maturities (14,522,815) (6,457,837)
Purchases of equity securities (226,511) (132,419)
Sales of fixed maturities 15,185,241 6,195,585
Sales of equity securities 298,773 602,724
Maturities of fixed maturities 425,163 134,093
Net realized losses on financial futures contracts (16,568) (17,974)
Other investments (200,490) (53,188)
Acquisition of subsidiary, net of cash acquired (2,592,632) (967,758)
------------ -----------
Net cash flows used for investing activities (1,649,839) (696,774)
------------ -----------
Cash flows from financing activities
Dividends paid (56,219) (42,224)
Repayment of bank debt (198,816) (385,000)
Proceeds from bank debt 998,697 635,000
Proceeds from short term debt 1,280,118 0
Proceeds from issuance of trust preferred securities 400,000 0
Proceeds from exercise of options for Ordinary Shares 5,603 3,817
Net proceeds from issuance of ordinary shares 0 605,899
Repurchase of Ordinary Shares 0 (31,140)
Proceeds from shares issued under ESPP 1,051 955
------------ -----------
Net cash flows from financing activities 2,430,434 787,307
------------ -----------
Net increase in cash 495,224 38,629
Cash at beginning of period 240,556 279,085
------------ -----------
Cash at end of period $ 735,780 $ 317,714
============ ============
See accompanying notes to interim consolidated financial statements
</TABLE>
7
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The interim consolidated financial statements, which include the accounts
of the Company and its subsidiaries, have been prepared on the basis of
accounting principles generally accepted in the United States of America
and, in the opinion of management, reflect all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of results for
such periods. The results of operations and cash flows for any interim
period are not necessarily indicative of results for the full year. These
financial statements should be read in conjunction with the consolidated
financial statements, and related notes thereto, included in the Company's
1998 Annual Report on Form 10-K.
On July 2, 1999, the Company changed its fiscal year-end from September 30
to December 31. This change will be implemented retroactively to December
31, 1998 so that the 1999 fiscal year will be the twelve month period
ending December 31, 1999. This change is reflected in the quarter ended
September 30, 1999, and the Company is reporting results for the three
months ended September 30, 1999 and 1998 and for the nine months ended
September 30, 1999 and 1998. The results reported at December 31, 1999 will
be for the twelve months ended December 31, 1999.
On July 2, 1999, the Company completed the acquisition of the international
and domestic property and casualty businesses of CIGNA Corporation ("CIGNA")
for $3.45 billion in cash (the "ACE INA Acquisition"). Under the terms of the
agreement the Company, through a newly created U.S. holding company, ACE
INA Holdings Inc. ("ACE INA"), acquired CIGNA's domestic property and
casualty insurance operations including its run-off business and also its
international property and casualty insurance companies and branches,
including most of the accident and health business written through those
companies. The ACE INA Acquisition has been recorded using the purchase
method of accounting and accordingly, the consolidated financial statements
include the results of ACE INA and its subsidiaries from July 2, 1999, the
date of acquisition. Approximately $1.75 billion of goodwill was generated
as a result of the acquisition.
Under the terms of the ACE INA Acquisition agreement, CIGNA agreed to
provide a guarantee to ACE to indemnify against unanticipated increases in
recorded reserves for losses and loss adjustment expenses of certain
subsidiaries being acquired by ACE. CIGNA had the option to replace its
guarantee with reinsurance obtained from a mutually agreed upon third party
reinsurer. Contemporaneous with the consummation of the ACE INA
Acquisition, CIGNA exercised its option and replaced its guarantee with
reinsurance by directing certain subsidiaries being acquired to transfer
$1.25 billion of investments to National Indemnity Company, a subsidiary of
Berkshire Hathaway Inc., for aggregate coverage of $2.5 billion. This
coverage attaches at an amount equal to the net recorded reserves of the
certain subsidiaries acquired, on the closing date, minus $1.25 billion.
On October 26, 1999, ACE and Capital Re entered into an amended and
restated merger agreement. This agreement replaced the Agreement and Plan
of Amalgamation entered into by ACE and Capital Re on June 10, 1999. Under
the new agreement, Capital Re stockholders will receive 0.65 ordinary
shares of ACE for each share of common stock of Capital Re at closing plus
a cash payment equal to the difference between the market value (as defined
in the agreement) of 0.65 of an ACE ordinary share and $14.00. In no event
will the cash payment be less than $1.30 (approximately $41 million in the
aggregate) or more than $4.68 ($150 million in the aggregate) per share of
Capital Re stock. Subject to SEC review, it is hoped that the transaction
will be completed before the end of calendar 1999, subject to customary
closing conditions, including approval of the merger by Capital Re's
shareholders.
For the nine months ended September 30, 1999, approximately 60 percent of
the Company's premiums written came from companies headquartered in North
America, 16 percent came from companies headquartered in Europe, 6 percent
came from companies headquartered in Australia and New Zealand, 3 percent
came from companies headquartered in Latin America, and 15 percent came
from companies headquartered in other countries.
8
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Significant Accounting Policies
a) Comprehensive Income
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income"
("SFAS 130"), which is effective for fiscal years beginning after December
15, 1997. SFAS 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. As of October 1, 1998, the Company adopted SFAS 130;
however, the adoption of this statement had no impact on the Company's net
income or shareholders' equity. SFAS 130 requires unrealized gains or
losses on the Company's available-for-sale securities and cumulative
translation adjustments, which prior to adoption were reported separately
in shareholders' equity, to be included in other comprehensive income.
Prior year financial statements have been reclassified to conform to the
requirements of SFAS 130.
b) New accounting pronouncements
In 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
fiscal 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. Because SFAS 131 is not required to be applied to interim
financial statements in the initial year of adoption, the Company is not
required to disclose segment information in accordance with SFAS 131 until
its December 1999 annual report. In the Company's March 31, 2000 report,
and in subsequent quarters, it will present the interim disclosures
required by SFAS 131 for both 1999 and 2000.
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"), which is effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. 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 2001. 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.
In 1998, the AICPA issued SOP 98-7, "Deposit Accounting: Accounting for
Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk."
SOP 98-7 provides guidance on the deposit method of accounting for
insurance and reinsurance contracts that do not transfer insurance risk.
Implementation is required by the first quarter of 2000, with the
cumulative effect of adopting the SOP reflected in net income in the year
of adoption. The Company has not yet determined the effect or timing of
implementation of this pronouncement.
9
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Commitments and Contingencies
A number of the Company's insureds have given notice of claims relating to
breast implants or related components or raw material thereof that had been
produced and/or sold by such insureds. The Company has made payments to
date of approximately $610 million with respect to breast implant claims,
which include payments of $140 million made during the nine months ended
September 30, 1999. These payments are made pursuant to agreements reached
with most of the Company's significant breast implant insureds. Those
agreements have the effect of limiting the Company's exposure to breast
implant claims related to those insureds to amounts which were anticipated
in the Company's loss reserves. Although uncertainties concerning the
ultimate amount of the Company's financial exposure to breast implant
claims continue to exist, the Company believes that the possibility of a
material financial impact in the future as a result of breast implant
claims is unlikely.
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.
4. Restricted Stock Awards
Under the terms of the 1995 Long-Term Incentive Plan, 44,750 restricted
Ordinary Shares were awarded during the nine months ended September 30,
1999, to officers of the Company and its subsidiaries. These shares vest at
various dates through November 2003. In addition, during the period, 23,618
restricted Ordinary Shares were awarded to outside directors under the
terms of the 1995 Outside Directors Plan. These shares vest at various
dates through June 2000.
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 income over the vesting period.
10
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Earnings Per Share
The following table sets forth the computation of basic and diluted
earnings per share.
<TABLE>
<CAPTION>
========================================================================================================================
3 Months Ending 9 Months Ending
September 30 September 30
1999 1998 1999 1998
---- ---- ---- ----
(in thousands of U.S. dollars except share and per share data)
<S> <C> <C> <C> <C>
Numerator:
Net Income $ 14,793 $ 13,512 $ 212,934 $ 437,941
============ ============ ============ ============
Denominator:
Denominator for basic earnings per share -
Weighted average shares outstanding 194,061,171 193,539,724 193,935,790 187,341,947
Effect of dilutive securities 2,011,481 4,231,764 2,981,338 4,150,696
------------ ------------ ------------ ------------
Denominator for diluted earnings per share -
Adjusted weighted average shares outstanding
and assumed conversions 196,072,652 197,771,488 196,917,128 191,492,643
============ ============ ============ ============
Basic earnings per share $ 0.08 $ 0.07 $ 1.10 $ 2.34
============ ============ ============ ============
Diluted earnings per share $ 0.08 $ 0.07 $ 1.08 $ 2.29
============ ============ ============ ============
========================================================================================================================
</TABLE>
6. Credit Facilities
In June 1999, the Company arranged certain syndicated credit facilities.
Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan
Securities Inc. acted as lead arranger and co-arranger respectively and
assisted in the arranging, structuring and syndication of these credit
facilities. Each facility requires that the Company and/or certain of its
subsidiaries maintain specific covenants, including a consolidated tangible
net worth covenant and a maximum leverage covenant. The facilities provide:
11
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Credit Facilities (cont'd)
o A $750 million, 364-day revolving credit facility with ACE
Limited, ACE Bermuda Insurance Ltd., Tempest Reinsurance Company
Limited and ACE INA Holdings Inc. as borrowers and guarantors. The
initial purpose of this facility was to provide interim financing
for the ACE INA Acquisition. However, after certain conditions were
met, up to $500 million of this facility could remain in place for
general corporate purposes. As of September 30, 1999 these conditions
have been met and the limit on this facility has been reduced to
$500 million.
o A $250 million, five-year revolving credit facility with ACE
Limited, ACE Bermuda Insurance Ltd., Tempest Reinsurance Company
Limited and ACE INA Holdings Inc. as borrowers and guarantors.
This facility is for general corporate purposes and has a letter
of credit sub-limit of $250 million.
o A $2.05 billion, 364-day revolving credit facility with a one-year
term out option with ACE INA Holdings Inc. as borrower and ACE
Limited, ACE Bermuda Insurance Ltd. and Tempest Reinsurance Company
Limited as guarantors. This facility was arranged to provide interim
financing for the ACE INA Acquisition. As of September 30, 1999,
$881 million remains available under this facility.
Each of the above facilities may be used as commercial paper recourse
facilities (see further description under Note 8 - Debt).
Tempest Re also maintains an uncollateralized, syndicated revolving credit
facility in the amount of $72.5 million. At September 30, 1999, no amounts
have been drawn down under this facility. The facility requires that
Tempest Re comply with specific covenants. ACE Limited added its guarantee
to this facility in June 1999.
In November 1998, the Company arranged a syndicated, partially
collateralized, five-year LOC facility in the amount of (pounds)270 million
(approximately $450 million) to fulfill the requirements of Lloyd's for the
1999 year of account. This facility was arranged by Citibank N.A., with ING
Barings and Barclays Bank PLC acting as co-arrangers, and replaced the
facility arranged in December 1997. This LOC facility requires that the
Company and/or certain of its subsidiaries continue to maintain certain
covenants, including a minimum consolidated tangible net worth covenant and
a maximum leverage covenant. On June 30, 1999, certain terms of this LOC
facility were renegotiated and the facility is now uncollateralized. The
Company expects to renew this facility towards the end of November 1999 to
fulfill the requirements of Lloyd's for the 2000 year of account.
In December 1997, the Company had 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
facilities. During fiscal 1999 each of the facilities under this
arrangement have been cancelled and replaced. The facilities provided:
o A $200 million 364-day revolving credit facility and a $200 million
five-year revolving credit facility which together made up a
combined $400 million committed, uncollateralized syndicated
revolving credit facility. The five-year revolving credit facility
had a $150 million letter of credit ("LOC") sub-limit. A new
multi-year liquidity facility has been arranged as an additional
part of the new syndicated credit facilities described above.
12
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Credit Facilities (cont'd)
o A syndicated fully collateralized five-year LOC facility totaling
approximately (pounds)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.
As discussed above, this facility was replaced on November 27, 1998.
o 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 discussed under Note 8 - Long
Term Debt, this term loan was refinanced on October 27, 1998.
7. Trust Preferred Securities
In connection with the completion of the ACE INA Acquisition, on June 30,
1999 ACE RHINOS Trust, a Delaware statutory business trust (the "Trust"),
sold in a private placement $400 million of Auction Rate Reset Preferred
Securities (the "Preferred Securities"). All of the common securities of
the Trust are owned by ACE INA Holdings Inc.
The Preferred Securities mature on September 30, 2002. Distributions on the
Preferred Securities are payable quarterly at LIBOR plus 125 basis points,
adjusted quarterly, provided that the Trust may defer such payments (but no
later than September 30, 2002, or, if there is a remarketing, the maturity
date of the remarketed securites), with such deferred payments accruing
interest compounded quarterly, if ACE INA defers interest on the
Subordinated Notes (as defined below). If the trading price of ACE's
Ordinary Shares declines to 66-2/3 percent of the closing price of the
Ordinary Shares on June 30, 1999, or approximately $18.83 per Ordinary
Share, the holders of a majority of the Preferred Securities will have the
option to require Banc of America Securities LLC as the Remarketing Agent
to remarket the Preferred Securities. If remarketed, the maturity of the
remarketed securities will be reset as the later of September 30, 2001 or
one year from the date on which the remarketed securities are issued. The
coupon will be reset pursuant to a bid process to value the remarketed
securities at 100.25 percent of the face amount thereof. If Banc of America
were unable to remarket the securities, the holders of a majority of the
Preferred Securities would have the right to require ACE INA to repurchase
them at a purchase price equal to the face amount of the securities plus
accrued and unpaid distributions, which obligations would be guaranteed by
ACE Limited. ACE's Ordinary Shares have traded below the trigger price
described above during and after the quarter ended September 30, 1999,
although the holders of the Preferred Securities did not exercise their
remarketing rights at that time.
The sole assets of the Trust consist of $412,372,000 principal amount of
Auction Rate Reset Subordinated Notes Series A (the "Subordinated Notes")
issued by ACE INA. The Subordinated Notes mature on September 30, 2002.
Interest on the Subordinated Notes is payable quarterly at LIBOR plus 125
basis points, adjusted quarterly, provided that ACE INA may defer such
interest payments (but no later than September 30, 2002, or, if there is a
remarketing, the maturity date of the remarketed securities), with such
deferred payments accruing interest compounded quarterly. If under certain
circumstances the Trust is dissolved and the holders of the Preferred
Securities directly hold the Subordinated Notes, then the remarketing
provisions described above will be applicable to the Subordinated Notes.
13
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7 Trust Preferred Securities (cont'd)
In connection with the issuance of the Preferred Securities, the Company
has agreed with Banc of America Securities to use its reasonable best
efforts to complete one or more firm commitment underwritings with an
aggregate public offering price of $400 million on or before June 30, 2002.
The Company has agreed to maintain an effective shelf registration
statement with availability for the issuance of up to $400 million Ordinary
Shares (exclusive of any amounts to cover over-allotments).
8. Debt
At September 30, 1999 and December 31, 1998, the Company's short-term and
long-term debt consisted of the following:
<TABLE>
<CAPTION>
===============================================================================
September 30, 1999 December 31, 1998
(in millions of U.S. dollars)
<S> <C> <C>
Short-term debt
ACE Limited commercial paper $ 425 --
ACE INA commercial paper 855 --
ACE INA money market loan 169 --
---------- -------
$ 1,449 $ 0
---------- -------
Long-term debt
Senior Notes $ 250 $ 250
Notes due 2004 400 --
Notes due 2006 299 --
Debentures due 2029 100 --
---------- -------
$ 1,049 $ 250
---------- -------
===============================================================================
</TABLE>
In June 1999, the Company arranged certain commercial paper programs for
ACE Limited and ACE INA Holdings Inc. The programs use the existing
revolving credit facilities (as discussed in Note 6) as recourse facilities
and provide for up to $500 million in commercial paper issuance for ACE
Limited and up to $2.05 billion in commercial paper issuance for ACE INA
Holdings Inc. At September 30, 1999, short-term debt consisted of $425 million
and $855 million of commercial paper issued by ACE Limited and ACE INA
respectively. The commercial paper rates currently range from 5.6 - 6.2
percent, depending on maturity. On July 2, 1999, $425 million and $1.65
billion were drawn down under these programs by ACE Limited and ACE INA
Holdings Inc., respectively to partially finance the ACE INA Acquisition.
In June 1999, ACE INA Holdings Inc. arranged a short-term money market
facility in the amount of $225 million for general corporate purposes. This
facility is guaranteed by the Company and/or certain of its subsidiaries
and requires that the Company and/or certain of its subsidiaries maintain
specific covenants, including a consolidated tangible net worth covenant
and a maximum leverage covenant. At September 30, 1999 $169 million of this
facility was utilized. In November 1999, this facility was cancelled and
repaid with proceeds from the commercial paper programs described above.
14
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. Debt (cont'd)
As part of the permanent financing plan for the ACE INA Acquisition, in
August 1999, ACE INA issued $400 million of 8.2% Notes due 2004, $300
million of 8.3% Notes due 2006 and $100 million of 8.875% Debentures due
2029. Interest on the debentures and notes is payable on February 15th and
August 15th of each year beginning February 15, 2000. The notes and
debentures are not redeemable before maturity and do not have the benefit
of any sinking fund. The notes and debentures are uncollateralized and rank
equally with all of ACE INA's other uncollateralized senior indebtedness.
The notes and debentures are guaranteed on a senior uncollateralized basis
by the Company.
In October 1998, ACE US Holdings, Inc. ("ACE US") refinanced the
outstanding $250 million term loan co-arranged by JP Morgan Securities,
Inc. and Mellon Bank N.A with the proceeds from the issuance of $250
million in aggregate principal amount of uncollateralized 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 events of
default for ACE US. The senior notes are callable subject to certain call
premiums, however, ACE US has no current intention of calling the debt.
Simultaneously, the Company entered into a notional $250 million 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
collateral in connection with the swap transaction. In the event that the
Company terminates the 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.
9. Discontinued Operations
In accordance with Emerging Issues Task Force ("EITF") 87-11 "Allocation of
Purchase Price to Assets to Be Sold," and ("EITF") 90-6, "Accounting for
Certain Events Not Addressed in Issue No. 87-11 Relating to an Acquired
Operating Unit to Be Sold", the Company has presented Commercial Insurance
Services ("CIS"), a division of ACE INA, as a discontinued operation. The
Company planned, as part of its July 2, 1999 acquisition of the CIGNA P&C
business, to dispose of the CIS operations. Following the July 2, 1999 ACE
INA acquisition, the company sold the renewal rights for all of its CIS
business going forward. The Company still owns the assets and liabilities
pertaining to the historical book of business as well as the in-force book
of business. This portion of CIS is still for sale.
15
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Discontinued Operations (cont'd)
In accordance with EITF 87-11, the Company recorded a net liability as of
July 2, 1999 of approximately $170 million which has been recorded in
accounts payable and accrued liabilities. The Company has reduced the
consolidated balance sheet for the following items that pertain
specifically to CIS: $900 million in investments and cash, $100 million in
insurance balances receivable, $30 million of net assets comprised of
various assets and liabilities, $1.1 billion in net loss reserves, and $100
million in unearned premiums. The historical and in force business,
including the estimated proceeds on sale and estimated operating results
over the twelve months from July 2, 1999, is represented by the net
liability of approximately $170 million. Any income items pertaining to CIS
through July 1, 2000 will not appear in the consolidated income of the
Company, but will be posted against the $170 million net liability. When
the CIS business is sold, any gain or loss on sale would reduce or increase
goodwill accordingly.
If the remaining CIS business is not sold prior to July 2, 2000, the
Company will be required to expand the net liability into each of its
constituent parts in the balance sheet and any resulting income or loss
from that book of business from that point forward would be included in
income.
10. 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 three months and nine months ended
September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
====================================================================================================================
Three months ended Nine months ended
Premiums September 30 September 30
1999 1998 1999 1998
---- ---- ---- ----
(in thousands of U.S. dollars (in thousands of U.S. dollars
except share and per share data) except share and per share data)
<S> <C> <C> <C> <C>
Premiums written
Direct $ 1,074,833 $ 296,157 $ 1,604,255 $ 679,544
Assumed 469,625 20,896 884,697 355,159
Ceded (633,554) (140,478) (845,114) (306,879)
----------- ----------- ------------ ----------
Net premiums written $ 910,904 $ 176,575 $ 1,643,838 $ 727,824
=========== =========== ============ ============
Premiums earned
Direct 969,987 $ 258,988 $ 1,443,493 $ 663,169
Assumed 520,872 30,465 829,891 256,964
Ceded (537,908) (68,305) (734,895) (231,160)
------------ ------------ ------------ -------------
Net premiums earned $ 952,951 $ 221,148 $ 1,538,489 $ 688,973
============ =========== ============ =============
====================================================================================================================
</TABLE>
16
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Reinsurance (cont'd)
The Company's provision for reinsurance recoverable at September 30, 1999
and December 31, 1998 is as follows:
<TABLE>
<CAPTION>
================================================================================================================
September 30, December 31,
1999 1998
---- ----
(in thousands of U.S. dollars)
<S> <C> <C>
Reinsurance recoverable on paid losses and loss expenses $ 818,618 $ 58,806
Reinsurance recoverable on unpaid losses and loss expenses 8,891,811 1,184,978
Provision for uncollectible balances on unpaid losses and loss expenses (786,429) (84,514)
----------- ------------
Total reinsurance recoverable $ 8,924,000 $ 1,159,270
============ ============
================================================================================================================
</TABLE>
11. Taxation
Under current Cayman Islands law, the Company is not required to pay any
taxes in the Cayman Islands on its income or capital gains. The Company has
received an undertaking that, in the event of any taxes being imposed, the
Company will be exempted from taxation in the Cayman Islands until the year
2013. Under current Bermuda law, the Company and its Bermuda subsidiaries
are not required to pay any taxes in Bermuda 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.
Income from the Company's operations at Lloyd's are subject to United
Kingdom corporation taxes. 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. 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.
ACE INA and ACE US Holdings, Inc. is subject to income taxes imposed
by U.S. authorities and will file consolidated U.S. tax returns. Certain
international operations of the Company are also subject to income taxes
imposed by the jurisdictions in which they operate.
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 ACE INA at rates equal to the statutory income tax rate in each
jurisdiction.
The Company currently conducts its business so as not to be subject to
taxation in the United States or elsewhere, other than as stated above.
There can be no assurance that there will not be changes in applicable
laws, regulations or treaties which might require the Company to change the
way it operates or become subject to taxation.
17
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Taxation (cont'd)
The income tax provision for the three and nine months ended September 30,
1999 and 1998 is as follows:
<TABLE>
<CAPTION>
==================================================================================================================
Three months ended Nine months ended
September 30 September 30
1999 1998 1999 1998
---- ---- ---- -----
(in thousands of U.S. dollars)
<S> <C> <C> <C> <C>
Current tax expense $ 7,812 $ 937 $ 11,496 $ 1,203
Deferred tax expense (benefit) (1,484) (3,873) 4,482 15,069
--------- --------- -------- ----------
Provision for income taxes $ 6,328 $ (2,936) $ 15,978 $ 16,272
========= ========= ======== ==========
==================================================================================================================
</TABLE>
The components of the net deferred tax assets as of September 30, 1999 and
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
================================================================================================================
September 30, December 31,
1999 1998
---- ----
(in thousands of U.S. dollars)
<S> <C> <C>
Deferred tax assets
Loss reserve discount $ 670,000 $ 47,649
Foreign tax credits 111,000 -
Uncollectible reinsurance 129,000 6,685
Net operating loss carryforward 84,000 33,849
Unrealized depreciation on investments 36,170 -
Other 153,691 36,626
----------- ----------
Total deferred tax assets $ 1,183,861 $ 124,809
----------- ----------
Deferred tax liabilities
Deferred policy acquisition costs 40,000 3,753
Unrealized appreciation on investments -- 5,379
Other 91,588 46,247
----------- ----------
Total deferred tax liabilities 131,588 55,379
----------- ----------
Valuation allowance 75,000 26,634
----------- ----------
Net deferred tax assets $ 977,273 $ 42,796
============ ===========
==================================================================================================================
</TABLE>
18
<PAGE>
ACE LIMITED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. Summarized Financial Information
The following is consolidated summarized financial information for ACE INA,
a wholly owned subsidiary of ACE Limited.
==============================================================================
Selected Financial Data
ACE INA
September 30, 1999
(in thousands of U.S. dollars)
Selected Statement of Operation Data
Total Revenues $ 795,356
Net Income 8,676
Selected Balance Sheet Data
Total Investments and cash 7,707,970
Total Assets 23,087,009
Unpaid losses and loss expenses 14,698,525
Total Shareholders' Equity 1,494,507
==============================================================================
Separate financial statements of ACE INA have not been presented as
management has determined that such information is not material to holders of
ACE INA's debt securities.
13. Reclassification
Certain items in the prior period financial statements have been
reclassified to conform with the current period presentation.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
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 or amending or revoking any laws,
regulations or treaties affecting the Company's current operations), (ii)
the occurrence of catastrophic events or other insured or reinsured events
with a frequency or severity exceeding the Company's estimates, (iii) legal
developments, (iv) the uncertainties of the loss 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, related trends and associated pricing pressures, (x) the
impact of mergers and acquisitions, including the ability to successfully
integrate acquired businesses and achieve cost savings, competing demands
for ACE's capital and the risk of undisclosed liabilities, (xi) the impact
of Year 2000 related issues, (xii) developments in global financial markets
which could affect the Company's investment portfolio, (xiii) risks
associated with the introduction of new products and services and (xiv) the
outcome of the Capital Re transaction. The words "believe", "anticipate",
"estimate", "project", "plan", "expect", "intend", "hope", "will likely
result" or "will continue" and variations thereof 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
The following is a discussion of the Company's results of operations,
financial condition, liquidity and capital resources as of and for the
three and nine months ended September 30, 1999. The results of operations
and cash flows for any interim period are not necessarily indicative of
results for the full year. This discussion should be read in conjunction
with the consolidated financial statements, related notes thereto and the
Management's Discussion and Analysis of Results of Operations and Financial
Condition included in the Company's 1998 Annual Report on Form 10-K.
On July 2, 1999, the Company changed its fiscal year-end from September 30
to December 31. This change will be implemented retroactively to December
31, 1998 so that the 1999 fiscal year will be the twelve month period
ending December 31, 1999. This change is reflected in the quarter ended
September 30, 1999, and the Company is reporting results for the three
months ended September 30, 1999 and 1998 and for the nine months ended
September 30, 1999 and 1998. The results reported as at December 31, 1999
will be for the twelve months ended December 31, 1999.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT'D)
General (cont'd)
ACE is a holding company incorporated with limited liability under the
Cayman Islands Companies Law. ACE maintains its principal business office
in Bermuda. ACE, through its various subsidiaries, provides a broad range
of insurance and reinsurance products to insureds in the United States and
47 other countries. In addition, ACE provides 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. ACE operates through five main business
units which are: ACE Bermuda Insurance Ltd. ("ACE Bermuda"), Tempest
Reinsurance Company Limited ("Tempest Re"), ACE INA Holdings Inc. ("ACE
INA" including "ACE USA" and "ACE International"), and the operations of
the Company in the Lloyd's market which are collectively referred to herein
as "ACE Global Markets". "ACE USA" includes the domestic U.S. business of ACE
INA together with the original ACE USA division acquired on January 2, 1998
("ACE US Holdings"). ACE INA's international operations are presented
separately and are referred to as "ACE International". ACE International is
divided into four regional areas: ACE Europe, ACE Far East, ACE Asia
Pacific and ACE Latin America.
On July 2, 1999, the Company completed the acquisition of the international
and domestic property and casualty businesses of CIGNA Corporation ("CIGNA")
for $3.45 billion in cash (the "ACE INA Acquisition). Under the terms of the
agreement the Company, through a newly created U.S. holding company, ACE
INA, acquired CIGNA's domestic property and casualty insurance operations
and also its international property and casualty insurance companies and
branches, including most of the accident and health business written
through those companies. In connection with the ACE INA Acquisition,
National Indemnity, a subsidiary of Berkshire Hathaway, is providing $1.25
billion of protection against adverse development with respect to the loss
and loss adjustment expense reserves of the operations acquired. The
Company financed this transaction with a combination of available cash, a
hybrid trust preferred security and the remainder with commercial paper.
The Company repaid a portion of the commercial paper with the proceeds of a
$800 million debt offering in August 1999 and intends to pay the remaining
commercial paper with a combination of newly issued ordinary shares,
additional long-term debt and trust preferred securities (see "Liquidity
and Capital Resources").
The ACE INA Acquisition is recorded using the purchase method of accounting
and, accordingly, the consolidated financial statements include the results
of ACE INA and its subsidiaries from July 2, 1999, the date of the
acquisition. As a result, the analysis presented below is not comparable.
The Company expects to continue evaluating 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.
21
<PAGE>
<TABLE>
<CAPTION>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT'D)
Results of Operations - Three Months ended September 30, 1999 (cont'd)
==================================================================================================
Premiums Three months ended % Change
September 30 from
1999 1998 Prior Year
---- ---- ----------
(in millions)
<S> <C> <C> <C>
Gross premiums written:
ACE Bermuda $ 120.9 $ 101.6 19.0%
ACE Global Markets 183.4 115.0 59.5%
Tempest Re 31.3 32.9 (4.9)%
ACE USA 746.9 67.5 N.M.
ACE International 462.0 -- N.M.
-------------- ---------- --------
$ 1,544.5 $ 317.0 387.2%
============== ========== ========
Net premiums written:
ACE Bermuda $ 97.1 $ 64.1 51.5%
ACE Global Markets 110.4 76.4 44.5%
Tempest Re (1.4) 7.1 (119.7)%
ACE USA 373.0 29.4 N.M.
ACE International 331.8 -- N.M.
-------------- ---------- ----------
$ 910.9 $ 177.0 414.6%
============== ========== ==========
Net premiums earned:
ACE Bermuda $ 121.2 $ 81.2 49.3%
ACE Global Markets 99.8 71.7 39.2%
Tempest Re 39.0 46.5 (16.1)%
ACE USA 342.7 22.1 N.M.
ACE International 350.2 -- N.M.
-------------- ----------- ----------
$ 952.9 $ 221.5 330.2%
============== =========== ==========
N.M. - not meaningful
==================================================================================================
</TABLE>
The Company had significant increases in gross written, net written and net
earned premiums during the current quarter due primarily to the inclusion
of the results of ACE INA for the first time this quarter. Gross premiums
written increased 387.2 percent to $1.5 billion for the quarter ended
September 30, 1999 compared with $317.0 million for the same quarter last
year. Although the Company continues to face competitive pressures in most
of the markets in which it operates, the diversification strategy of the
Company has been key in maintaining growth during these difficult market
conditions. The Company is beginning to see a slowdown and bottoming out of
premium rates in certain areas of its business.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT'D)
Results of Operations - Three Months ended September 30, 1999 (cont'd)
The changing mix of business written by ACE Bermuda helped to offset the
effects of a continuing soft market. Gross premiums written by ACE Bermuda
during the quarter ended September 30, 1999 increased 19.0 percent to
$120.9 million from $101.6 million for the same period last year. The
primary reasons for the premium increase are significant new business in
the tailored risk solutions (formerly financial lines) division and the
political risk division which experienced strong growth. The excess
property division at ACE Bermuda also grew modestly as it continued to
attract new accounts. This growth was partially offset by declines in excess
liability and the professional lines business due to continued market
pressures.
Gross premiums written by ACE Global Markets increased over last year due
to increased participation in the syndicates under management. Gross
premiums written increased by $68.4 million or 59.5 percent for the quarter
ended September 30, 1999. The non-marine market has stabilized while the
aviation market has been in a state of flux with mixed results in both
renewals and rates. The marine division has experienced very difficult
market conditions with industry consolidations adding to rate reduction
pressures and decreased business. Introducing new products, such as the
bloodstock line, should help offset some of the market pressures on the
existing business.
Tempest Re saw a moderate decline in the gross premiums written this
quarter as a result of changes in anniversary dates on two large contracts.
Although Tempest Re is still facing a competitive environment,
opportunities to write new business at firmer rates are being seen and a
modest upturn in the property catastrophe premiums is anticipated in the
future.
At ACE USA, gross premium written were $746.9 million and, on a comparable
basis, were slightly ahead of last year and in line with the Company's
expectations for the first quarter of the combined U.S. company.
ACE International had gross premiums written of $462.0 million for the
quarter ended September 30, 1999, slightly exceeding the Company's forecast
for this period. All markets for commercial property and casualty remained
highly competitive although ACE International is seeing a slowdown in the
rate erosion that has persisted for the past 2-3 years.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT'D)
Results of Operations - Three Months ended September 30, 1999 (cont'd)
Net premiums written increased to $910.9 million for the quarter ended
September 30, 1999 compared to $177.0 million for the same quarter last
year, an increase of 414.6 percent. As with gross premiums written, the
increase is due to the inclusion of the ACE INA business. Net premiums
written at ACE Bermuda increased 51.5 percent to $97.1 million for the
quarter ended September 30, 1999 compared to $64.1 million for the quarter
ended September 30, 1998. The increase is due primarily to increases in the
tailored risks solutions division, the political risk division and the
excess property division. The Company has significantly increased its
participation in the syndicates managed by ACE Global Markets. This has
resulted in an increase in net premiums written by ACE Global Markets of
44.5 percent for the three months ended September 30, 1999 compared to the
three month ended September 30, 1998. Net premiums written by Tempest Re
decreased by $8.5 million during the current quarter. This decrease is the
result of Tempest Re's aggressive use of retrocessional cover with the
majority of Tempest Re's retrocessional coverage renewing during the
current quarter. ACE USA and ACE International contributed $373.0 million
and $331.8 million respectively, to net premiums written. ACE USA's net
premiums written decreased 6 percent compared to the business it
experienced last year due to some shifting in the business mix to lines
that have lower net retentions. Net premiums written at ACE International
were $331.8 million, an increase of 7 percent as reported, 4 percent on a
fixed currency basis. As discussed earlier commercial property and casualty
markets remain highly competitive, although there is a slowing of rate
erosion in certain areas.
Net premiums earned increased to $952.9 million for the quarter ended
September 30, 1999 compared with $221.5 million for the same quarter last
year. As with gross premiums written and net premiums written, the increase
is due to the inclusion of ACE INA. Net premiums earned by ACE Bermuda
during the current quarter increased 49.3 percent to $121.2 million from
$81.2 million for the same period last year. As discussed previously,
increases in the tailored risk solutions division and the political risk
division contributed to the increase in net premiums earned at ACE Bermuda
during the current quarter. The increased participation in the Lloyd's
syndicates managed by ACE Global Markets resulted in an increase in net
premiums earned by ACE Global Markets during the current quarter of 39.2
percent compared to the same quarter last year. Tempest Re experienced a
decrease in net premiums earned of 16.1 percent during the current quarter
compared to the same quarter last year as a result of the decline in net
premiums written. ACE USA and ACE International contributed $342.7 million
and $350.2 million respectively to net premiums earned.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT'D)
Results of Operations - Three Months ended September 30, 1999 (cont'd)
===============================================================================
Net Investment Income Three months ended % Change
September 30 from
1999 1998 Prior Year
---- ---- ----------
(in millions)
Net investment income $ 163.1 $ 89.3 82.6%
========= ========== ========
===============================================================================
Net investment income increased to $163.1 million in the quarter compared
to $89.3 million in the quarter ended September 30, 1998. This increase is
primarily a result of a larger investable asset base resulting from the ACE
INA Acquisition at the beginning of the current quarter.
===============================================================================
Net Realized Gains (Losses) on Investments Three months ended
September 30
1999 1998
---- ----
(in millions)
Fixed maturities and short-term investments $ (33.6) $ 22.9
Equity securities 7.0 (1.0)
Financial futures and option contracts (32.7) (72.9)
Other investments 1.0 0.0
Currency (0.2) (3.1)
----------- --------
$ (58.5) $ (54.1)
============ ========
===============================================================================
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 other
comprehensive income.
Sales proceeds for fixed maturity securities were generally lower than
their amortized cost during the quarter, which resulted in net realized
losses of $33.6 million being recognized on fixed maturities and short-term
investments compared with net realized gains of $22.9 million during the
same period last year.
Positive returns in international equity markets resulted in net realized
gains on sales of equity securities of $7.0 million in the third quarter of
fiscal 1999 compared with net realized losses of $1.0 million in the third
quarter of fiscal 1998.
Exposure to declining domestic equity markets through the Company's equity
index futures contracts generated net realized losses of $32.6 million
during the quarter. Fixed income futures contracts contributed $0.1 million
to net realized losses. Net realized losses on financial futures and option
contracts in the third quarter of fiscal 1998 of $72.9 million were
generated primarily by losses recognized on equity futures contracts.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT'D)
Results of Operations - Three Months ended September 30, 1999 (cont'd)
===============================================================================
Combined Ratio
Three months ended
September 30
1999 1998
---- -----
Loss and loss expense ratio 66.4% 53.6%
Underwriting and administrative expense ratio 34.9% 49.7%
-------- -------
Combined Ratio 101.3% 103.3%
======== =======
===============================================================================
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
administrative expense ratio. A combined ratio under 100 percent indicates
underwriting income and a combined ratio exceeding 100 percent indicates
underwriting losses.
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, 1999. Since such provisions
are necessarily based on estimates, future developments may result in
ultimate losses and loss expenses significantly greater or less than such
amounts.
The combined ratio for the three months ended September 30, 1999 was 102.0
percent compared to 103.3 percent for the three months ended September 30,
1998. During the current quarter, the insurance and reinsurance markets
sustained a large number of catastrophe losses including major earthquakes
in Taiwan, Turkey, Greece and Mexico, Typhoon Bart in Japan and Hurricane
Floyd in the U.S. Each of the Company's subsidiaries had combined ratios
below 100 percent for the quarter including the catastrophe losses, except
for ACE USA which had a combined ratio of 109.4 percent. The effect of
these catastrophe losses on the Company during the quarter amounted to $34
million after tax. Excluding this effect, the loss and loss expense ratio
would have been 61.7 percent and the combined ratio for the three months
ended September 30, 1999 would have been 97.3 percent.
The underwriting and administrative expense ratio decreased to 35.6 percent
for the quarter ended September 30, 1999 compared with 49.7 percent for the
same quarter last year. The underwriting expense ratio increased to 14.5
percent from 10.8 percent for the current quarter primarily as a result of
higher underwriting ratios at ACE INA. The administrative expense ratio
decreased to 21.1 percent for the quarter ended September 30, 1999 compared
with an administrative expense ratio of 38.8 percent for the same quarter
last year. Included in the administrative expense ratio for the quarter
ended September 30, 1998 are approximately $52 million of non-recurring and
transaction related expenses with respect to the acquisition of Tarquin
which was completed in July 1998. The Company recorded $6 million of
non-recurring expenses in connection with the ACE INA acquisition during the
current quarter. Excluding these non-recurring expenses, the administrative
expense ratio would have been 20.5 percent and 19.0 percent in 1999 and
1998, respectively. These one time expenses include, for the most part,
expenses related to the integration of the ACE USA operations, as well as
one time expenses related to such items as policy holder notifications,
reprinting policy forms and reprinting stationary. The Company has
initiated several cost reduction initiatives at ACE INA. These include
staff reductions at ACE INA, outsourcing the IT operations at ACE USA and
consolidating numerous ACE USA field offices. The Company anticipates that
the full financial effect of these changes will impact subsequent quarters.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT'D)
Results of Operations - Nine Months ended September 30, 1999 (cont'd)
===============================================================================
Premiums Nine months ended % Change
September 30 from
1999 1998 Prior Year
---- ---- ----------
(in millions)
Gross premiums written:
ACE Bermuda $ 422.0 $ 394.1 7.1%
ACE Global Markets 530.5 356.4 48.8%
Tempest Re 193.8 124.0 56.3%
ACE USA 880.7 160.2 N.M.
ACE International 462.0 0.0 N.M.
---------- ----------- ------
$ 2,489.0 $ 1,034.7 140.6%
========== =========== ======
Net premiums written:
ACE Bermuda $ 335.8 $ 302.1 11.2%
ACE Global Markets 376.6 253.7 48.4%
Tempest Re 159.0 93.5 70.1%
ACE USA 440.6 78.5 N.M.
ACE International 331.8 0.0 N.M.
---------- ----------- -------
$ 1,643.8 $ 727.8 125.9%
========== =========== =======
Net premiums earned:
ACE Bermuda $ 390.1 $ 280.2 39.2%
ACE Global Markets 289.0 217.1 33.1%
Tempest Re 116.5 123.2 (5.4)%
ACE USA 392.7 70.8 N.M.
ACE International 350.2 0.0 N.M.
---------- ----------- -------
$ 1,538.5 $ 691.3 122.6%
========== ============ =======
N.M. - not meaningful
===============================================================================
Gross premiums written for the nine months ended September 30, 1999
increased 140.6 percent to $2.5 billion compared with $1.0 billion for the
same period last year. This increase is due primarily to the inclusion of
the results of ACE INA during the current period. However, each of the
Company's business units reported increases in gross premiums written
during the current period compared with the corresponding period last year.
Gross premiums written at ACE Bermuda increased by 7.1 percent to $422 million
for the nine months ended September 30, 1999 from $394.1 million reported
for the same period last year. The majority of the premium growth over
last year is attributed to significant increases in ACE Bermuda's tailored
risk solutions and to new products covering political risk which offset the
negative effects of a continuing soft market. The aviation and excess
property divisions showed slight increases over the same nine month
period last year. This growth was partially offset by declines in excess
liability and the professional lines business due to continued market
pressures. In addition, premiums in the satellite lines business during
the nine month period decreased due to a reduction in launch activity and
downward rate pressures.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT'D)
Results of Operations - Nine Months ended September 30, 1999 (cont'd)
ACE Global Markets recorded an increase in gross premiums written during
the nine months ended September 30, 1999 of 48.8 percent to $530.5 million
from $356.4 million recorded for the nine months ended September 30, 1998.
This increase is due to the Company's increased participation in the
Lloyd's syndicates under management. This upward trend will continue as the
Company has increased its capacity on Syndicate 2488, its integrated
Lloyd's underwriting vehicle, to 84 percent of total capacity for the 2000
year of account. The Company's focus for ACE Global Markets in 1999 has
been to protect earnings by restructuring the broad portfolio of specialty
business that it writes to both maximize available profitability and to
lessen its exposure to less profitable lines. The non-marine market has
seen rates stabilize over the nine months while the aviation's market has
been in a state of flux with mixed results in both its renewals and rates.
The marine division continues to experience very difficult market
conditions. Continued industry consolidations exacerbate the existing rate
reduction pressures and decreased business in the Lloyd's market.
Tempest Re is continuing to see opportunities to write new business at
firmer rates in several areas. Gross premiums written at Tempest Re
increased 56.3 percent to $193.8 million for the nine months ended
September 30, 1999 from $124.0 million reported in the same period last
year. The Company acquired CAT in April 1998 and therefore results for the
comparative period include the results of CAT for six months compared to
results for nine months for the current fiscal period. A few areas of
business continue to see declines due to consolidation among the insureds.
Overall, however, the competitive environment is less adverse than it has
been in the last couple of years and Tempest Re expects moderate
improvements in the future.
Gross premiums written at ACE USA increased to $880.7 million for the nine
months ended September 30, 1999 from $160.2 million reported in the same
period last year, an increase of 449.8 percent. This increase is due primarily
to the inclusion of the results of the new business purchased in July 1999.
ACE International's results reflect the three month period ended September
30, 1999 and are reviewed under the three month results discussion.
Net premiums written increased by $916.0 million to $1.6 billion for the
nine month period ended September 30, 1999 compared to $727.8 million for
the nine month period ended September 30, 1998, an increase of 125.9
percent. As with gross premiums written, the increase is due primarily to
the inclusion of the results of the newly acquired ACE INA business
although increases were experienced in all business units. Net premiums
written by ACE Bermuda increased by 11.2 percent in the period compared to
the same period last year, the result primarily of increases in the net
premiums written in the tailored risk solutions division and the excess
property division. The Company's increased participation in the Lloyd's
syndicates managed by ACE Global Markets resulted in an increase in net
premiums written for that segment of $122.9 million or 48.4 percent.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT'D)
Results of Operations - Nine Months ended September 30, 1999 (cont'd)
Net premiums earned increased by $847.2 million to $1.5 billion compared to
$691.3 million last year, an increase of 122.6 percent. As with gross
premiums written and net premiums written, the increase is due primarily to
the inclusion of the results of the newly acquired ACE INA business. ACE
Bermuda, ACE Global Markets and Tempest Re experienced increases in net
premiums earned during the period as well, as discussed for both gross and
net premiums written. The tailored risk solutions division at ACE Bermuda
contributed significantly to the increase due to the commutation of a
tailored risk solutions contract and the writing of significant contracts
during the period which generated immediate one time earnings.
===============================================================================
Net Investment Income Nine months ended % Change
September 30 from
1999 1998 Prior Year
---- ---- ----------
(in millions)
Net investment income $ 334.3 $ 260.6 28.3%
========= ========= ========
===============================================================================
Net investment income increased by $73.7 million in the current period, as
compared with the nine month period ended September 30, 1998. The primary
reason for this is an increase in the size of investment assets due to the
CAT and the ACE INA acquisitions. The previous period includes the results
of CAT for only six months following its acquisition on April 1, 1998 compared
to results for the full nine months of the current fiscal period, and ACE INA
results are included for the first time this quarter.
===============================================================================
Net Realized Gains (Losses) on Investments Nine months ended
September 30
1999 1998
---- ----
(in millions)
Fixed maturities and short-term investments $ (65.2) $ 36.9
Equity securities 35.8 161.2
Financial futures and option contracts 16.9 (18.0)
Other investments 1.7 0.0
Currency (5.1) (19.2)
---------- ---------
$ (15.9) $ 160.9
========== =========
===============================================================================
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT'D)
Results of Operations - Nine Months ended September 30, 1999 (cont'd)
The Company's investment strategy takes a long-term view and the portfolio
is actively managed to maximize total return within certain specific
guidelines, which minimize risk. The portfolio is reported at fair value.
The effect of market movements on the investment portfolio will directly
impact net realized gains (losses) on investments when securities are sold.
Changes in unrealized gains and losses, which result from the revaluation
of securities held, are reported as a separate component of shareholders'
equity.
The Company uses foreign currency forward and option contracts to minimize
the effect of fluctuating foreign currencies on the value of non-U.S.
dollar holdings. The contracts used are not designated as specific hedges
and therefore, realized and unrealized gains and losses recognized on these
contracts are recorded as a component of net realized gains (losses) in the
period in which the fluctuations occur, together with net foreign currency
gains (losses) recognized when non-U.S. dollar securities are sold.
Sales proceeds for fixed maturity securities were generally lower than
their amortized cost during the period. This resulted in net realized
losses of $65.2 million being recognized on fixed maturities and short-term
investments during the nine months ended September 30, 1999 compared to net
realized gains of $36.9 million for the same period last year.
Positive returns in the international equity markets contributed to net
realized gains on the sale of equity securities of $35.8 million in the
first nine months of fiscal 1999, compared with gains of $161.2 million for
the same period last year. The liquidation of two domestic stock portfolios
and the sale of a portion of the non-U.S. dollar equity securities
contributed significantly to the net realized gains on sales of equity
securities in the first nine months of fiscal 1998.
Certain of the Company's external managers of fixed income securities use
fixed income futures contracts to manage duration exposure, and losses of
$16.0 million were recognized on these during the nine months ended
September 30, 1999. Net realized gains generated by the Company's equity
index futures contracts amounted to $32.9 million during the period. Total
net realized gains attributable to the financial futures and option contracts
amounted to $16.9 million, compared to losses of $18.0 million in the
nine month period ended September 30, 1998.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT'D)
Results of Operations - Nine Months ended September 30, 1999 (cont'd)
===============================================================================
Combined Ratio
Nine months ended
September 30
1999 1998
---- ----
Loss and loss expense ratio 67.9% 57.3%
Underwriting and administrative expense ratio 32.5% 32.9%
-------- -------
Combined Ratio 100.4% 90.2%
======== =======
===============================================================================
The underwriting results of a property and casualty insurer are discussed
frequently by reference to its loss and loss expense ratio, underwriting
and administrative expense ratio and combined ratio. Each ratio is derived
by dividing the relevant expense amounts by net premiums earned. The
combined ratio is the sum of the loss and loss expense ratio and the
underwriting and the administrative expense ratio. A combined ratio under
100 percent indicates underwriting income and a combined ratio exceeding
100 percent indicates underwriting losses.
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, 1999. Since such provisions
are necessarily based on estimates, future developments may result in
ultimate losses and loss expenses significantly greater or less than such
amounts.
The combined ratio for the nine month period was 100.4 percent compared to
90.2 percent in 1998. There have been several significant catastrophes
during the nine month period ended September 30, 1999. In April 1999, a
hailstorm caused extensive damage in New South Wales, Australia. In early
May 1999, several tornadoes struck the United States, resulting in
significant loss of lives, as well as substantial property damage. From
July to September 1999, there were major earthquakes in Taiwan, Turkey,
Greece and Mexico, a typhoon in Japan and Hurricane Floyd in the U.S. The
effect of these catastrophe losses on the Company during the nine month
period was $89 million. Excluding the effect of these significant
catastrophes, the loss and loss expense ratio for the nine months ended
September 30, 1999 would have been 62.2 percent and the combined ratio
would have been 94.7 percent. Also, in the quarter ended June 30, 1999 ACE
Bermuda recorded a large tailored risk solutions contract that was booked
at a very high loss ratio.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT'D)
Results of Operations - Nine Months ended September 30, 1999 (cont'd)
The underwriting and administrative expense ratio remained relatively flat
at 32.5 percent for the nine months ended September 30, 1999 compared with
32.9 percent for the same period last year. The underwriting expense ratio
for the nine months ended September 30, 1999 was 13.2 percent compared to
11.7 percent for the same period in 1998. The administrative expense ratio
decreased to 19.3 percent for the current nine month period compared to
21.2 percent in for the same period last year. Excluding the non-recurring
expenses in 1999 and 1998 discussed previously, the administrative expense
ratio would have been 18.9 percent in 1999 and 14.5 percent in 1998. The
increase in administrative expenses is partly due to the costs associated
with the continued growth and diversification of the ACE Group and the
higher operating expenses of the ACE INA group. Other factors contributing
to the increased administrative expenses are the Company's activities
during 1999 to establish the ACE brand on a global basis through an
integrated communications program. The Company has initiated several cost
reduction initiatives at ACE INA. These include staff reductions at ACE
INA, outsourcing the IT operations at ACE USA and consolidating numerous
ACE USA filed offices. The Company anticipates that the full financial
effect of these changes will impact subsequent quarters.
LIQUIDITY AND CAPITAL RESOURCES
As a holding company, ACE's assets consist primarily of the stock of its
subsidiaries as well as other investments. In addition to investment
income, its cash flows currently depend primarily on dividends or other
statutorily permissible payments from its Bermuda-based operating
subsidiaries (the "Bermuda subsidiaries"). There are currently no legal
restrictions on the payment of dividends from retained earnings by the
Bermuda subsidiaries as the minimum statutory capital and surplus
requirements are satisfied by the share capital and additional paid-in
capital of each of the Bermuda subsidiaries. However, the payment of
dividends or other statutorily permissible distributions by the Bermuda
subsidiaries is subject to the need to maintain shareholder's equity at a
level adequate to support the level of insurance and reinsurance
operations. During the nine months ended September 30, 1999, ACE Bermuda
and Tempest Re declared dividends of $650 million and $300 million,
respectively. The majority of these funds were used to complete the ACE INA
Acquisition.
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. No dividends were received from ACE
Global Markets during fiscal 1998 or during the first nine months of fiscal
1999 and the Company does not anticipate receiving dividends from ACE
Global Markets during the remainder of fiscal 1999. ACE INA has issued debt
to provide partial financing for the ACE INA Acquisition and for other
operating needs. Cash flow requirements to service this debt are expected
to be met by upstreaming dividend payments from ACE INA's insurance
subsidiaries. Under various U.S. insurance laws to which ACE INA's U.S.
insurance subsidiaries are subject, ACE INA's U.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 have been received from ACE INA through September 30, 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.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT'D)
LIQUIDITY AND CAPITAL RESOURCES (Cont'd)
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 nine months ended September 30, 1999, the
Company's consolidated net cash flow from operating activities was $(285.4)
million, compared with $(51.9) million for the nine months ended September
30, 1998. 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. For the nine month periods ended
September 30, 1999 and 1998, net loss and loss expense payments amounted to
$1.5 billion and $457.4 million respectively. Net loss and loss expense
payments amounted to $583.8 million, $421.9 million and $115.0 million for
the twelve months ended September 30, 1998, 1997 and 1996, respectively, of
which approximately $120 million and $250 million in fiscal 1998 and 1997,
respectively, related to breast implant payments.
A number of the Company's insureds have given notice of claims relating to
breast implants or related components or raw material thereof that had been
produced and/or sold by such insureds. The Company has made payments to
date of approximately $610 million with respect to breast implant claims,
which include payments of $140 million made during the nine months ended
September 30, 1999. These payments are made pursuant to agreements reached
with most of the Company's significant breast implant insureds. Those
agreements have the effect of limiting the Company's exposure to breast
implant claims related to those insureds to amounts which were anticipated
in the Company's loss reserves. Although uncertainties concerning the
ultimate amount of the Company's financial exposure to breast implant
claims continue to exist, the Company believes that the possibility of a
material financial impact in the future as a result of breast implant
claims is unlikely.
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 $17.2
billion at September 30, 1999 includes $9.1 billion of case and loss
expense reserves. While the Company believes that its reserve for unpaid
losses and loss expenses at September 30, 1999 is adequate, future
developments may result in ultimate losses and loss expenses significantly
greater or less than the reserve provided.
At September 30, 1999, total investments and cash amounted to approximately
$11.9 billion, compared to $6.2 billion at December 31, 1998. The increase
is due primarily to the inclusion of ACE INA's cash and investments
portfolio of $7.2 billion acquired by the company on July 2, 1999. The
Company used $1.0 billion of available cash and investments in the ACE INA
acquisition. The Company's investment portfolio is structured to provide a
high level of liquidity to meet insurance related or other obligations. The
consolidated investment portfolio is externally managed by independent
professional investment managers and is invested in high quality investment
grade marketable fixed income and equity securities, the majority of which
trade in active, liquid markets. The Company believes that its cash
balances, cash flow from operations, routine sales of investments and the
liquidity provided by its credit facilities (discussed below) are adequate
to allow the Company to pay claims within the time periods required under
its policies.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT'D)
LIQUIDITY AND CAPITAL RESOURCES (Cont'd)
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
facilities. During fiscal 1999 each of the facilities under this
arrangement have been cancelled and replaced as discussed below. The
facilities provided:
o A $200 million 364-day revolving credit facility and a $200 million
five-year revolving credit facility which together made up a combined
$400 million committed, uncollateralized syndicated revolving credit
facility. The five-year revolving credit facility had a $150 million
letter of credit ("LOC") sub-limit. A new multi-year liquidity facility
has been arranged as an additional part of the new syndicated credit
facilities discussed below. As of September 30, 1999 these conditions
have been met and the limit on this facility is now $500 million.
o A syndicated fully collateralized five-year LOC facility totaling
approximately (pounds)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. As discussed
below, this facility was replaced on November 27, 1998.
o 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 discussed below, this term loan was refinanced
on October 27, 1998.
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 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 events of
default for ACE US. The senior notes are callable subject to certain call
premiums, however, ACE US has no current intention of calling the debt.
Simultaneously, the Company entered into a notional $250 million 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
collateral in connection with the swap transaction. In the event that the
Company terminates the 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.
In November 1998, the Company arranged a syndicated, partially
collateralized, five-year LOC facility in the amount of (pounds)270 million
(approximately $450 million) to fulfill the requirements of Lloyd's for the
1999 year of account. This facility was arranged by Citibank N.A., with ING
Barings and Barclays Bank PLC acting as co-arrangers, and replaced the
facility arranged in December 1997. This LOC facility requires that the
Company and/or certain of its subsidiaries continue to maintain certain
covenants, including a minimum consolidated tangible net worth covenant and
a maximum leverage covenant. On June 30, 1999, certain terms of this LOC
facility were renegotiated and the facility is now uncollateralized. The
Company expects to renew this facility towards the end of November 1999 to
fulfill the requirements of Lloyd's for the 2000 year of account.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT'D)
LIQUIDITY AND CAPITAL RESOURCES (Cont'd)
As previously noted, on July 2, 1999, the Company completed the ACE INA
Acquisition for $3.45 billion in cash. The Company financed the transaction
as follows:
(a) $1.025 billion of available cash;
(b) $400 million from a hybrid trust preferred security. The interest rate
on this security is LIBOR plus 125 basis points. ACE simultaneously
entered into an agreement relating to the future issuance of $400
million of ACE ordinary shares in a public offering prior to June 30,
2002;
(c) and the remainder with commercial paper issuance with a current
annualized cost of in the range of 5.3 - 6.2 percent. The commercial
paper offerings are backed by line of credit facilities, which were
arranged in connection with the ACE INA Acquisition.
In August 1999 commercial paper outstanding in (c) above was reduced by
using the net proceeds of the senior debt issued, which amounted to $794
million.
Ultimately, it is anticipated that the balance of the commercial paper
it noted in (c) above will be replaced with a combination of newly issued ACE
ordinary shares, senior debt and trust preferred securities at the time
when ACE considers market conditions to be most suitable for issuance. The
Company and certain of its subsidiaries and related trusts have an
effective shelf registration statement covering up to $3.2 billion of equity
and debt securities that may be issued from time to time.
In June 1999, the Company arranged certain syndicated credit facilities.
Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan
Securities Inc. acted as lead arranger and co-arranger respectively and
assisted in the arranging, structuring and syndication of these credit
facilities. Each facility requires that the Company and/or certain of its
subsidiaries maintain specific covenants, including a consolidated tangible
net worth covenant and a maximum leverage covenant. The facilities provide:
o A $750 million, 364-day revolving credit facility with ACE
Limited, ACE Bermuda Insurance Ltd., Tempest Reinsurance Company
Limited and ACE INA Holdings Inc. ("ACE INA") as borrowers and
guarantors. The initial purpose of this facility was to provide
interim financing for the ACE INA Acquisition. However, after
certain conditions are met, up to $500 million of this facility
could remain in place for general corporate purposes. As of
September 30, 1999 these conditions have been met and the limit on
this facility had been reduced to $500 million.
o. A $250 million, five-year revolving credit facility with ACE Limited,
ACE Bermuda Insurance Ltd., Tempest Reinsurance Company Limited and
ACE INA Holdings Inc. as borrowers and guarantors. This facility
is for general corporate purposes and has a letter of credit
sub-limit of $250 million.
o A $2.05 billion, 364-day revolving credit facility with a one-year
term out option with ACE INA Holdings Inc. as borrower and ACE
Limited, ACE Bermuda Insurance Ltd. and Tempest Reinsurance
Company Limited as guarantors. This facility was arranged to
provide interim financing for the ACE INA Acquisition. As of
September 30, 1999, $881 million remains available under this
facility.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT'D)
LIQUIDITY AND CAPITAL RESOURCES (Cont'd)
In June 1999, the Company arranged certain commercial paper programs for
ACE Limited and ACE INA Holdings Inc. The programs use the above facilities
as recourse facilities and provide for up to $750 million in commercial
paper issuance for ACE Limited and up to $2.05 billion in commercial paper
issuance for ACE INA Holdings Inc. On July 2, 1999, $425 million and $1.65
billion were drawn down under these programs by ACE Limited and ACE INA
Holdings Inc. respectively to partially finance the ACE INA Acquisition. At
September 30, 1999 the balances under these programs were $425 million and
$855 million respectively.
In June 1999, ACE INA Holdings Inc. arranged a short-term money market
facility in the amount of $225 million for general corporate purposes. This
facility is guaranteed by the Company and/or certain of its subsidiaries
and requires that the Company and/or certain of its subsidiaries maintain
specific covenants, including a consolidated tangible net worth covenant
and a maximum leverage covenant. At September 30, 1999 $169 million of this
facility was utilized. In November 1999, this facility was cancelled and
repaid with proceeds from the commercial paper programs described in
Note 8 to the unaudited financial statements.
Tempest Re also maintains an uncollateralized, syndicated revolving credit
facility in the amount of $72.5 million. At September 30, 1999, no amounts
have been drawn down under this facility. The facility requires that
Tempest Re comply with specific covenants. ACE Limited added its guarantee
to this facility in June 1999.
As discussed above, on October 26, 1999, ACE and Capital Re entered into an
amended and restated merger agreement. This agreement replaced the
Agreement and Plan of Amalgamation entered into by ACE and Capital Re on
June 10, 1999. Under the new agreement, Capital Re stockholders will
receive 0.65 ordinary shares of ACE for each share of common stock of
Capital Re at closing plus a cash payment equal to the difference between
the market value (as defined in the agreement) of 0.65 of an ACE ordinary
share and $14.00. In no event will the cash payment be less than $1.30
(approximately $41 million in the aggregate) or more than $4.68 ($150
million in the aggregate) per share of Capital Re stock. Subject to SEC
review, it is hoped that the transaction will be completed before the end
of calendar 1999, subject to customary closing conditions, including
approval of the merger by Capital Re's shareholders.
The use of $1.025 billion of available cash from the Bermuda companies'
investment portfolios will result in reduced investment income from the
Bermuda operations. It is anticipated that the commercial paper issued by
the Company, which may be rolled over from time to time, could ultimately
be repaid with proceeds from the issuance of the ACE ordinary shares, from
internal funds or from proceeds of the senior debt and trust preferred
securities when issued. Payments on both the senior debt and the trust
preferred securities, which were issued by ACE INA will be tax deductible.
The majority of markets in which the Company currently operates are
experiencing softness in pricing and expanding coverage terms. This may
result in reduced premium volumes and to some extent increases in the
combined ratios. The Company continues to maintain its underwriting
discipline in these markets and focus on profitable underwriting. This
underwriting discipline together with the Company's increased use of
reinsurance may result in lower underwriting and operating income for the
Company's current books of business if the current insurance market
environment remains unchanged. The Company anticipates that the impact of
this situation, if unchanged, will be lower operating income than the level
otherwise expected from our current books of business for the remainder of
fiscal 1999 and fiscal 2000.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT'D)
LIQUIDITY AND CAPITAL RESOURCES (Cont'd)
On October 16, 1998, January 15, 1999, and April 16, 1999, the Company paid
quarterly dividends of 9 cents per share to shareholders of record on
September 30, 1998, December 15, 1998 and March 31, 1999. On July 16, 1999
and October 15, 1999, the Company paid quarterly dividends of 11 cents per
share to shareholders of record on June 30, 1999 and September 30, 1999.
The declaration and payment of future dividends is at the discretion of the
Board of Directors and will be dependent upon the profits and financial
requirements of the Company and other factors, including legal restrictions
on the payment of dividends and such other factors as the Board of
Directors deems relevant.
Fully diluted book value per share was $19.72 at September 30, 1999,
compared with $20.18 at December 31, 1998.
The Company's financial condition, results of operations and cash flows are
influenced by both internal and external forces. Claims settlements,
premium levels and investment returns may be impacted by changing rates of
inflation and other economic conditions. In many cases, significant periods
of time, ranging up to several years or more, may elapse between the
occurrence of an insured loss, the reporting of the loss to the Company and
the settlement of the Company's liability for that loss. The liquidity of
its investment portfolio, cash flows and the credit facilities are, in
management's opinion, adequate to meet the Company's expected cash
requirements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT'D)
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 adverse 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 that 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, a "Group Year 2000 coordinator"
was appointed for the ACE Group and 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
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 Company's Year 2000 project is divided into four sections:
Underwriting; Information Technology; Trading Partners; and Physical Plant.
The project is substantially complete, although certain activities, notably
the monitoring of trading partners, the continuation of prudent
underwriting and the refinement and possible invocation of contingency
plans will continue until December 31, 1999 and beyond.
The Year 2000 projects of those parts of CIGNA acquired by ACE on July 2,
1999 have now been incorporated into ACE's Year 2000 project.
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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT'D)
IMPACT OF THE YEAR 2000 ISSUE (cont'd)
Information Technology
Each ACE subsidiary has a plan intended 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 were prepared of all such components, and appropriate action
was decided. By September 30, 1999 almost all of these actions had been
completed. ACE's management anticipates no difficulty in finalizing those
few remaining activities before the end of 1999.
With only one exception all business-critical applications in the ACE
Group are now Year-2000 compliant. A compliant vendor product will replace
the non-compliant application which performs a reporting function. This
replacement is expected to be in production prior to the potential failure
date of the non-compliant application.
Testing of hardware and network components is virtually complete, although
a few minor items remain outstanding. Testing of other software, such as
operating systems and PC desktop applications is almost complete, though in
a few cases the Company is relying on assurances from established software
manufacturers that their systems will process correctly.
Trading Partners and Physical Plant
The trading partners' section of the project focuses on Year 2000 issues
relating to the Company's trading partners. 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.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (CONT'D)
IMPACT OF THE YEAR 2000 ISSUE (cont'd)
All material trading partners and those vendors and service providers
connected with physical plant were inventoried and questionnaires were sent
to them soliciting information about their Year 2000 readiness. Responses
have now been provided in almost all cases, ACE has assessed those
responses that have been forthcoming. Most of these responses appear to
give evidence of satisfactory progress and a few do not. In those cases
where additional follow-up fails to provide satisfactory responses,
contingency plans are now in place 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 original estimated cost was
approximately $6.55 million, which includes approximately $2.55 million
representing the additional cost associated with the absorption of ACE INA.
Total expenditure to date on the whole project is approximately $2.45
million. Although some of the unused budget will be used for settling
expected expenses for making IT systems Year 2000 compliant, and some may
be used for execution of actions in contingency plans, it now appears that
the project will be completed well within its originally estimated cost.
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. The Company's management believes that 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
and covered by ACE's insurance policies, are expensive to pay, or if not
valid, expensive in defense litigation costs.
The Company has prepared contingency plans to address various identified
risks associated with the Year 2000. These plans were substantially
complete by July 31, 1999, but will continue to be updated and refined
throughout the remainder of 1999.
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ACE LIMITED
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
1) Exhibits
10.1 ACE Limited 1999 Replacement Long Term Incentive Plan*
27 Financial Data Schedule
*Management Contract or Compensation Plan
2) Reports on Form 8-K A
The Company filed a Form 8-K current report and a Form 8-KA current
report (date of earliest event reported: July 2, 1999) pertaining to
the completion of the acquisition of the U.S. domestic and international
property and casualty insurance businesses of CIGNA Corporation
submitting unaudited pro-forma financial information for the business
combination.
41
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACE LIMITED
-------------------------------------
November 15, 1999 /S/ Brian Duperreault
-------------------------------------
Brian Duperreault
Chairman, President and Chief
Executive Officer
November 15, 1999 /S/ Robert Blee
-------------------------------------
Robert Blee
Chief Accounting Officer
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<PAGE>
EXHIBIT INDEX
-------------
Exhibit Numbered
Number Description Page
- ------- ----------- --------
10.1 ACE Limited 1999 Replacement Long Term Incentive Plan*
27 Financial Data Schedule
*Management Contract or Compensation Plan
ACE LIMITED
1999 REPLACEMENT
LONG TERM INCENTIVE PLAN
ARTICLE 1
Statement of Purpose
The ACE Limited 1999 Replacement Long-Term Incentive Plan (the "Plan") has
been established by ACE Limited (the "Company") to award substitute
restricted stock awards in satisfaction of its obligations under Section
5.3(b) of the acquisition agreement dated as of January 11, 1999 by and
among the Company, CIGNA Corporation ("CIGNA") and CIGNA Holdings, Inc.
(the "Acquisition Agreement") and to provide selected individuals
substitute restricted stock awards in replacement of certain CIGNA
equity-based awards which terminate or expire in connection with the
closing of the transaction contemplated by the Acquisition Agreement (the
"Transaction").
ARTICLE 2
Definitions
For all purposes of this Plan, except as otherwise expressly provided or
defined herein or unless the context otherwise requires, the terms defined
in this Article shall have the following meanings:
2.1 "Board of Directors" or "Board" means the board of directors of
the Company or any duly authorized committee of that board.
2.2 "CEO" means the Chief Executive Officer of the Company.
2.3 "Change of Control" means the occurrence of any one of the following
events:
(a) 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;
(b) 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;
(c) the Company adopts any plan of liquidation providing for the
distribution of all or substantially all of its assets;
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(d) 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
(e) 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).
2.4 "Code" means the Internal Revenue Code of 1986, as amended.
2.5 "Committee" means the Committee selected by the Board of Directors
or any successor committee with responsibility for compensation.
2.6 "Company" means ACE Limited, a Cayman Island company.
2.7 "Deferred Compensation Account" means a separate account
established pursuant to a Deferred Compensation Plan.
2.8 "Deferred Compensation Plan" means a deferred compensation plan or
other arrangement of the Company or a Subsidiary which has been
designated by the Committee as a "Deferred Compensation Plan" for
purposes of this Plan.
2.9 "Disability" means permanent and total disability as defined in Code
Section 22(e)(3).
2.10 "Eligible Employee" means any person who (i) is entitled to
substitute restricted stock awards pursuant to the Acquisition
Agreement or (ii) is holding CIGNA equity awards that terminate or
expire in connection with the closing of the Transaction and is
selected by the Committee to receive Substitute Restricted Stock
under the Plan.
2.11 "Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.12 "Fair Market Value" means 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.
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2.13 "Ordinary Shares" means the ordinary shares, par value $0.041666667
per share, of the Company.
2.14 "Participant" means an Eligible Employee to whom any one or more
of the awards authorized by this Plan shall have been granted.
2.15 "Plan" means this ACE Limited 1999 Replacement Long-Term Incentive
Plan, as it may be amended from time to time.
2.16 "Restricted Period" means the period during which Ordinary Shares
awarded under Article 5 are subject to restrictions on sale,
transfer, assignment, pledge or other disposition.
2.17 "Retirement" means the occurrence of a Participant's Date of
Termination with the consent of the Participant's employer after
the Participant is eligible for retirement under the ACE Limited
qualified retirement plan the individual is participating in at
the time; provided, however, that the Committee may impose such
additional conditions or restrictions on Retirement as it
determines to be appropriate.
2.18 "SEC" means the Securities and Exchange Commission.
2.19 "Subsidiary" means any corporation of which more than 50% of the
total combined voting power of all classes of stock entitled to
vote, or other equity interest, is directly or indirectly owned by
the Company; or a partnership, joint venture or other
unincorporated entity of which more than a 50% interest in the
capital, equity or profits is directly or indirectly owned by the
Company.
2.20 "Substitute Restricted Stock" means Ordinary Shares granted to a
Participant under Article 5 while it remains subject to a
Restricted Period.
2.21 "Termination for Cause" means, unless otherwise defined in the
particular agreement evidencing the grant of a Substitute
Restricted Stock award, termination by the Company or a Subsidiary
due (i) the willful and continued failure by the Participant to
substantially perform his duties with the Company (other than any
such failure resulting from the Participant's being Disabled),
within a reasonable period of time after a written demand for
substantial performance is delivered to the Participant by the
CEO, which demand specifically identifies the manner in which the
CEO believes that the Participant has not substantially performed
his duties; (ii) the failure by the Participant to execute or
materially conform to the ACE Limited Code of Conduct, within a
reasonable period of time after a written demand for compliance
with the Code of Conduct is delivered to the Participant by the
CEO, which demand specifically identifies the manner in which the
CEO believes that the Participant has failed to execute or
materially conform to the ACE Limited Code of Conduct; (iii) the
willful engaging by the Participant in conduct which is
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demonstrably and materially injurious to the Company, monetarily
or otherwise; or (iv) the engaging by the Participant in egregious
misconduct involving serious moral turpitude to the extent that,
in the reasonable judgment of the CEO, the Participant's
credibility and reputation no longer conform to the standard of
the Company's employees. For purposes of this section, no act, or
failure to act, on the Participant's part shall be deemed
"willful" unless done, or omitted to be done, by the Participant
not in good faith and without reasonable belief that the
Participant's action or omission was in the best interest of the
Company.
2.22 "Termination of Employment" means the termination of the
Participant's active employment relationship with the Company and
the Subsidiaries, unless otherwise expressly provided by the
Committee.
2.23 "Termination Upon a Change of Control" means a termination of
employment upon or within two years after a Change of Control (i)
initiated by the Company or a Subsidiary or a successor other than
a Termination for Cause or (ii) initiated by an Employee after
determining in his reasonable judgment that there has been a
reduction in his authority, duties, responsibilities or title, any
reduction in his compensation, or any change caused by the Company
or a Subsidiary in his office location of more than 35 miles from
its location on the date of the Change of Control.
ARTICLE 3
Participation
3.1 Participation. Subject to the terms and conditions the Plan,
participation in the Plan shall be limited to Eligible Employees.
ARTICLE 4
Authorized Incentive Awards
4.1 Authorized Awards. Substitute Restricted Stock Awards may be granted
under the Plan.
4.2 General Powers of the Committee. Subject to the requirements of
applicable law the Committee is authorized and empowered to grant
Substitute Restricted Stock Awards in replacement of certain CIGNA equity
awards which terminate or expire in connection with the closing of the
Transaction.
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ARTICLE 5
Substitute Restricted Stock Grants
5.1 General. The consideration for a grant of Substitute Restricted Stock
may be solely in the form of the recipient's services rendered to the
Company and the Subsidiaries, or may be such other lawful form of
consideration as the Committee shall determine.
5.2 Restricted Period. Except as expressly provided below, Substitute
Restricted Stock shall not be sold, transferred, assigned, pledged or
otherwise disposed of by the Participant during the Restricted Period(s)
established by the Committee. The Committee may establish different
Restricted Periods and different restriction terms applicable to such
number of the shares of Substitute Restricted Stock evidenced by a single
grant as it deems appropriate.
5.3 Issuance; Voting Rights; Dividends. Substitute Restricted Stock granted
to a Participant shall be issued by the Company as of the date of the
grant. During the Restricted Period, the Participant shall be entitled to
vote the shares. The Committee may provide for the current payment of
dividends on shares of Substitute Restricted Stock to the holders of such
shares. Shares issued as a consequence of stock dividends, splits or
reclassifications shall be issued subject to the same limitations,
restrictions and provisions applicable to the Ordinary Shares with respect
to which they are issued.
5.4 Termination of Employment.
(a) In the event of Termination of Employment of a Participant during a
Restricted Period, except Termination Upon a Change of Control or
termination by reason of death or Disability, ownership of the
Substitute Restricted Stock at the date of Termination of Employment
and all rights therein shall be forfeited to the Company, unless
otherwise expressly provided by the Committee. In the event of
Termination of Employment by reason of Retirement of a Participant
during a Restricted Period, the Committee or its designee in the sole
discretion of either may provide, before the Participant's Retirement,
that the Restricted Period applicable to any outstanding Substitute
Restricted Stock at the date of Retirement shall lapse immediately
upon the Participant's Retirement.
(b) In the event of Termination Upon a Change of Control or
Termination of Employment by reason of death or Disability of a
Participant during a Restricted Period, the Restricted Period
applicable to any outstanding Substitute Restricted Stock at the
date of Termination of Employment shall lapse immediately.
5.5 Leave of Absence. The effect of approved leaves of absence on the
running of applicable Restricted Periods shall be determined by the
Committee, provided, however, that no Restricted Period shall lapse during
an approved leave of absence unless expressly provided by the Committee.
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ARTICLE 6
Shares Authorized under the Plan
6.1 Maximum Number Authorized. The number of Ordinary Shares authorized to
be issued pursuant to Substitute Restricted Stock awards under this Plan is
1,939,100.
6.2 ACE Limited 1999 Replacement International Stock Unit Program. The
Company maintains the ACE Limited 1999 Replacement International Stock Unit
Program which provides for distribution of Ordinary Shares. Subject to the
terms and conditions of such program, Ordinary Shares to be delivered under
that program shall be distributed under this Plan.
ARTICLE 7
Antidilution Provisions
Except as otherwise expressly provided herein, the following provisions
shall apply to all Substitute Restricted Stock awarded under this Plan:
7.1 Stock Dividends, Splits, Etc. In the event of a stock dividend, stock
split, or other subdivision or combination of the Ordinary Shares, the
number of Ordinary Shares authorized under this Plan will be adjusted
proportionately by the Committee. Similarly, in any such event there will
be a proportionate adjustment by the Committee in the number of shares of
Substitute Restricted Stock outstanding.
7.2 Merger, Exchange or Reorganization. In the event that the outstanding
Ordinary Shares are changed or converted into, exchanged or exchangeable
for, a different number or kind of shares or other securities of the
Company or of another corporation, by reason of a reorganization, merger,
consolidation, reclassification or combination, appropriate adjustment
shall be made by the Committee in the number of shares and kind of
Substitute Restricted Stock awarded under this Plan, to the end that the
proportionate interests of Participants shall be maintained as before the
occurrence of such event, provided, however, that in the event of any
contemplated transaction which may constitute a Change of Control of the
Company, the Committee, with the approval of a majority of the members of
the Board of Directors who are not then Participants, may modify any and
all outstanding Substitute Restricted Stock, so as to accelerate, as a
consequence of or in connection with such transaction, the lapsing of the
Restricted Periods for shares of Substitute Restricted Stock.
ARTICLE 8
Administration of Plan
8.1 General Administration. The Plan is to be administered by the
Committee, subject to such requirements for review and approval by the
Board of Directors as the Board of Directors may establish.
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8.2 Administrative Rules. The Committee shall have full power and authority
to adopt, amend and rescind administrative guidelines, rules and
regulations pertaining to this Plan and to interpret the Plan and rule on
any questions respecting any of its provisions, terms and conditions.
8.3 Decisions Binding. All decisions of the Committee concerning this Plan,
participation and awards shall be binding on the Company and its
Subsidiaries and their respective boards of directors, and on all Eligible
Employees, Participants and other persons claiming rights under the Plan.
ARTICLE 9
Amendments
All amendments to this Plan shall be in writing and shall be effective when
approved by the Board of Directors. Unless otherwise expressly provided by
an amendment or the Board of Directors, no amendment to this Plan shall
apply to grants of Substitute Restricted Stock made before the effective
date of the amendment. A Participant's rights with respect to outstanding
Substitute Restricted Stock grants may not be abridged by any amendment,
modification or termination of the Plan without the Participant's consent.
ARTICLE 10
Other Provisions
10.1 Effective Date. This Plan is effective as of the Closing Date, as that
term is used in the Acquisition Agreement (the "Effective Date").
10.2 Duration of the Plan. The Plan shall remain in effect until all rights
granted under this Plan have been satisfied by the issuance of Ordinary
Shares no longer subject to restriction, or terminated under the terms of
this Plan.
10.3 Early Termination. Notwithstanding the provisions of Section 10.2, the
Board of Directors may terminate this Plan at any time; but no such action
by the Board of Directors shall adversely affect the rights of Participants
which exist under this Plan immediately before its termination.
10.4 General Restriction. No Ordinary Shares issued pursuant to this Plan
shall be sold or distributed by a Participant until all appropriate
listing, registration and qualification requirements and consents and
approvals have been obtained, free of any condition unacceptable to the
Board of Directors. In no event shall the value, amount or form of
consideration for any award under the Plan be less than the value or
amount, or in other than the form, required by applicable law.
10.5 Withholding Taxes. Upon the vesting of any Restricted Stock, the
Company and the Subsidiaries shall have the right at their option to:
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(a) require the Participant (or personal representative or
beneficiary) to remit an amount sufficient to satisfy federal,
state and local withholding taxes; or
(b) deduct, from any amount payable, the minimum amount of any taxes
the Company or the Subsidiary may be required to withhold with
respect to such transaction.
The Committee may require, or permit, the Participant to remit such amount
in whole or in part in Ordinary Shares, provided such amount is not in
excess of the amount necessary to satisfy the minimum applicable tax
withholding requirements. If the Committee permits a Participant to elect
to remit such amount in Ordinary Shares, any such election shall be made on
or prior to the date the withholding obligation arises and be subject to
the disapproval of the Committee. The Committee may establish such
additional conditions as it deems appropriate. If the Participant remits
such amount in Ordinary Shares, the number of Ordinary Shares delivered to
or on behalf of a Participant shall be reduced by the number of shares so
remitted. Ordinary Shares so remitted shall be valued using the Fair Market
Value of Ordinary Shares as of the date the withholding obligation arises.
10.6 Safekeeping of Certificates. The certificate evidencing Ordinary
Shares awarded by a Substitute Restricted Stock grant shall be retained for
safekeeping by the Company or a Subsidiary, or by a custodian appointed by
the Company or a Subsidiary, except the Committee may in its discretion
cause the certificate to be delivered to the Participant after a Substitute
Restricted Stock grant. The Company or the Subsidiary will deliver any such
retained certificates that are not subject to a Restricted Period to the
Participant within a reasonable period after a Participant requests
delivery of such certificates.
10.7 Future Participation Not Guaranteed. Participation in the Plan is not
in and of itself to be construed as evidence of a right to participate in
any other equity plan adopted by the Company.
10.8 Termination of Employment. The Company and each Subsidiary retain the
right to terminate the employment of any employee at any time for any
reason or no reason, and an award or grant under the Plan to an Eligible
Employee is not, and shall not be construed in any manner to be, a waiver
of such right.
10.9 Successors. Any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the
business or assets of the Company, shall assume the liabilities of the
Company under this Plan and perform any duties and responsibilities in the
same manner and to the same extent that the Company would be required to
perform if no such succession had taken place.
10.10 Construction. The terms used in this Plan shall include the feminine
as well as the masculine gender and the plural as well as the singular, as
the context in which they are used requires.
-8-
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